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The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: Gree , Leo Title: problems Place: New York Date: 1910 MASTER NEGATIVE # COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD ^,mi,..-nuii,j^ JO iB29 Greendlinger, Leo. Accountancy problems, with solutions, v. 1-2 By Leo Greendlinger ... with introduction by John E. Loomis ... New York city, Business book bureau, IQlO-^llj 2v. 24"=™. C $5,001 "This treatise is the result of contributions made by the author and a number of other accountants to the Journal of accountancy, and now com- piled and rearranged in book form." — Pref. Vol. 1 ia 2d ed. onl. 1. Accounting. iPl 10-6480 Library of Congress B^^ HFS659.G82 ©Feb. 26, 1910; 2c. Mar.2, 191D; A 259030; L. Greendlinger, N. Y., N. Y. 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"<«'. e^ in o 3 i tY' > >^j ^^;^^ ^^^. ^ 5 3 3 K5 o pi^ipl^l^il? ip 00 o- 00 b NO bo In w. .vV^' 1.0 mm 1.5 mm 2.0 mm ABCDEFGHUKLMNOPQRSTUVWXYZ »tx:defghi|klmnopqrsliiuwKyz 1234567890 ABCDEFGHUKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyzl234567890 ABCDEFGHUKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 )is3- 2.5 mm ABCDEFGHUKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 c.^ \ \. & :0^ :0 ^fp m ■^ 4^ ^^ ^^^ k.\r ■ o "^^ ip m o ■o m -o > C w o r^^ r V C 4^ i^ »-• N> CJl O 3 3 3 ,5-0 3 I 3 c o -^ li 13 *^— * W^ O* ^ O*' X. 00 INI Ml ST CS' 2.0 n r-i' 3—0 X is ■00' ^^ T -11 ■■im'i: <;;■■? ,~iif :saf- "if-. .!!¥{; ill -j^-a ■•tiii* il -Xii -1 .S' 21. i ,;; 1 LIBRARY School of Business Accountancy Problems WITH SOLUTIONS VOLUME I By LEO GREENDLINGER, M. C. S. Instructor in Accountancy in New York University School of Commerce, Accounts, and Finance, and Editor of the C. P. A. Question Department of THE JOURNAL OF ACCOUNTANCY With Introduction by JOHN R, LOOMIS, C, P. A. (N. Y.) Ex-President of The American Association of Public Accountants BUSINESS BOOK BUREAU 13 Astor Place, New York City 1910 PREFACE. So far as the author is aware this is the first attempt to put before American students of accountancy solutions to practical problems in any extensive form. This treatise is the result of contributions made by the author and a number of other account- ants to The Journal of Accountancy, and now compiled and re- arranged in book form. The book is divided into four parts, namely : Copyright 19 lo By LEO GREENDLINGER, M. C. S V m X. \r ^ 7? r Press of Andrew H. Kbllogg Co. New York Part I treats exhaustively of the adjustment of part- nership affairs. This branch of accountancy has been so neglected that with the exception of the meagre treat- ment of the subject by Mr. Percy Childs, an English chartered accountant, there is no literature to speak of treating of the adjustment of partnership affairs. Another reason for including this essay is that it dis- cusses a subject that is involved in many of the most difficult C. P. A. questions. Some of these questions are solved in the course of the essay. Part II presents selected American C. P. A. prob- lems, as well as some of the problems set by English societies, and covers the period from 1898 to 1908, inclusive. The selection is made with a view to illustrat- ing practically all the important principles involved in the problems set so far by American examining boards. The following States are represented: New York, Pennsylvania, Illinois, Michigan, Maryland, Washing- ton, Florida and California. In Part III are one hundred and five selected ques- tions and answers on theory of accounts, auditing, and commercial law. In Part IV are presented papers containing the questions (without solutions) set by various State boards of accountancy, on practical accounting, theory of accounts, auditing, and commercial law, with the author's comments on the makeup of these papers. The author gives in this part an introductory essay compar- f ing the New York, Pennsylvania and English standards with some of the other prevailing standards. The author does not claim to put forth any new theories in any part of this work, but has followed the standard forms and practice. Any one familiar with C. P. A. examinations will appreciate that it is a difficult task to solve a problem to suit the fancy of every critic. With almost every accounting problem, various views are possible — due in part to a necessary lack of detail in presenting the problem — ^and each view may bring a different result. The author hopes, therefore, that whatever criticisms of his solutions are offered will be based on an analysis of the problems. The author takes this opportunity to express his indebtedness to the editors of The Journal of Accountancy for their help and assistance, as well as to several members of the profession for valuable suggestions. In particular does he desire to express his thanks and sincere appreciation to Mr. John R. Loomis, and Colonel Giarles E. Sprague. He also desires to express his thanks to the following named gentlemen for their valuable con- tributions: Professor William H. Dennis, for contributing to the solutions of questions 3, 20, and 2y ; Mr. William W. Rorer, for contributing to the solutions of questions 7 and 10 ; Mr. Her- bert G. Stock well, for contributing to the solution of question 35 ; Mr. Stephen A. Ulman, for contributing to the solutions of ques- tions 9 and 12; Mr. Walter A. Bayer, for contributing to the solution of question 8 ; Mr. Gustave Jacobsson, for contributing to the solution of question 13. The author wishes to emphasize, lest he be misunderstood, that he does not fully favor the division of the examination papers into practical accounting, auditing, theory of accounts, and commercial law. He rather advocates the classification of the questions under " General Accounting," and " Commercial Law." In this book he has merely followed the arrangement and terminology used by the State boards. Leo Greendlinger. New York University School of Commerce, Accounts and Finance, 32 Waverly Place, New York. N. Y. December, 1908. "^ PREFACE TO THE SECOND EDITION. The necessity for publishing a second edition of "Accountancy Problems " has afforded an opportunity for a careful revision of the text. The author must apologize to the public for the typographical errors which marred the first edition; in this edition these errors have been corrected. The author wishes to express his thanks to the members of the accounting profes- sion as well as to other classes of readers who were kind enough to send him suggestions and comments; he has made use of many such suggestions. On page 69 an interesting problem (with solution) in adjust- ing a burglary insurance loss, which was set at the June, 1909, New York C. P. A. examination, has been added. A special feature of the revised edition is the inclusion of the 1909 C. P. A. examination questions of New York, Pennsyl- vania, Maryland, Illinois, Michigan and Florida. The author hopes that this edition will receive from the public the commendation which it was kind enough to accord the former edition. L. G. New York University, New York, February, 1910. illiiii '"% INTRODUCTION. I have always been of the opinion that one of the principal needs for advancing the standard of American accountancy is a high grade scientific literature. Our university schools of com- merce, which are now so flourishing, have done, and are doing excellent work in the training of accountants. The American Association of Public Accountants has been successful in solidi- fying the profession, and in gaining general recognition of its merits. Our State legislatures, through the enactment of C. P. A. laws, have also done much to raise the standard of the profession. All of these movements would undoubtedly be accelerated if there were in existence a recognized body of literature, having for its object the exhaustive discussion of accounting principles, as they are understood and practiced in this country. Our schools of accountancy, and the ambitious young men who are striving to fit themselves for the duties and responsi- bilities of a certified public accountant, have had to depend more than appears desirable on English text and reference books. It is true that many of these books are of high value, and that American accountants owe a debt to English writers, which they will perhaps never be able to repay. Yet it remains true that the differences between the two countries in terminology, in account- ing practice, and in the functions of accountants, have a tendency to reduce the value of the English literature of accountancy, and its application to conditions which were not in contemplation by the authors. American accountants have their own peculiar problems and conditions to meet, and have been obliged to work out their own solutions. It is time that these problems and conditions should be adequately treated in a literature of account- ancy, based upon the necessities of American business methods, and coincident legal requirements. I feel that by means of The Journal of Accountancy and two or three works on accounting subjects which have recently appeared, a start has been made in the right direction. The tendency deserves all the support and encouragement that prac- ticing public accountants can supply. Apart from the intrinsic ii!ti It f merits of any particular book or article, the mere fact of its existence gives opportunity for thought and discussion, which can not fail to broaden and dignify the profession of accountancy. It is an especial pleasure to welcome the present treatise by Mr. Leo Greendlinger. The volume is 'the result, I understand, of the author's experience in teaching the principles of account- ancy to the students of New York University School of Com- merce, Accounts and Finance. It comes, therefore, as a con- tribution from the first established and largest university school for the training of accountants. The New York State Society of Certified Public Accountants twelve years ago undertook to assist in organizing and maintaining this school. It was their hope and belief that in the school there would originate many such volumes as Mr. Greendlinger now presents. The expec- tation has been in part met by the treatises of the late Professor Hardcastle, of Professor Sprague, and of Mr. Whitehead, and is now further fulfilled by this present volume. The essay on " Partnership Adjustments," which is Part I of Mr. Greendlinger's book, seems to me of particular value. The problems which confront accountants in connection with the insolvency and dissolution of partnerships, and the conversion of individual firms into corporations arc often complicated and difficult. Perhaps no single class of problems is more frequently met in practice. The author's scientific treatment of the subject, based on correct accounting principles, will no doubt aid many accountants in their labors. Students who are preparing for a career of accountancy, and who have mastered the underlying principles of the science, may be recommended to study thor- oughly, the theories and problems which Mr. Greendlinger here presents. The author, in his endeavor to assist the candidates for the C. P. A. degree in solving practical problems, has accomplished much which has heretofore been neglected by others. There is a peculiar difficulty, and sometimes diffidence, in publishing solu- tions of practical accounting problems, for the reason that any such problem may be soluble in more ways than one, either of which, although constructively correct in itself, may be open to hostile, and perhaps unjustifiable, criticism. It would be out of the question to give all of a number of possible solutions. The most that any man can do is to present the one which in his judg- ment is best. The same difficulty is not manifest in the case of such topics as "theory of accounts," and "commercial law," where anyone may readily resort to standard reference works for information, and may cite authorities to support his views. I am satisfied that any student of accountancy who is suf- ficiently advanced will find it well worth while to work out for himself the solution of each of the practical problems taken up in this volume, and then compare his solutions with Mr. Greend- linger's. The young accountant who follows this plan must bear in mind that the proper solution must be correct, not only as to results, but also as to form. It frequently happens that simple arithmetic will enable any intelligent person to arrive at the right results. The accountant's business, however, — ^and this fact both the student and the examiner should constantly bear in mind — ^is to present the results in a form that is consistent in itself and in harmony with accounting principles. The selection and arrangement of the questions in this volume deserve a few remarks. I observe that the author has included accounting problems, selected from the examination papers of almost all the States in which C. P. A. examinations are held, and in addition, to some extent, from the papers of the English societies. He has endeavored, I understand, to make all his questions and problems representative and to avoid duplications, so that the student may obtain instruction in the widest possible range of subjects. The questions cover a range of ten years, beginning with 1898, and including a number of questions set for the first time in 1908. Such an arrangement has the distinct advantage of enabling students and practitioners to get a general idea of the standards prevailing in the various States. Perhaps among the important results to be hoped for from the standpoint of the profession at large, by the publication of this volume is the opportunity it offers to the State boards of exami- ners to compare their examination papers with those set in other States. The State boards will gain much, I am inclined to think, by becoming more familiar with each other's standards, and by endeavoring to work in harmony. At the present time a question which one board classifies as " theory of accounts," a second board may classify as " auditing," and a third board again as " com- mercial law." While such confliction prevails, it is difficult for a student to properly direct his studies, and it may prove more or less a matter of chance whether he passes his examination or not. We need a more rigid and logical classification of examina- tion topics, and I hope that this volume will aid in bringing about such a classification. In the C. P. A. examinations it is to be regretted that many questions should be frequently repeated, with perhaps slight changes in terminology. The repetition of ques- tions, even though they are good in themselves, naturally encour- ages students to cram for the examinations rather than devote their time to a broad and thorough study of accounting science. If this book serves no further purpose, it will have performed a distinct service to accountancy in making public a large number of questions, and thereby eliminating them from future exami- nation papers. These last remarks are not written in a feeling of unfriendli- ness to accountants who serve as members of the State boards of examiners. On the contrary it must be borne in mind that they serve usually at a sacrifice to themselves, and are working unself- ishly for the good of the profession. They are themselves the first to recognize the flaws in the present system of C. P. A. examinations, and are endeavoring to remedy such defects, as far as lies in their power. Within the last few months they have founded a National organization, the purpose of which is to secure uniformity of standards in the various States, and to broaden the scope of the examination papers. The movement in that direction, having met with far reaching approval, makes this volume by Mr. Greendlinger particularly opportune and valuable. John R. Loom is, C. P. A. (N.Y.) PART I. " :" (' New York, November 30, 1908. .Y>\ The Adjustment of Partnership Accounts/ The English Partnership Act of 1890 defines a partnership as " the relation which subsists between persons carrying on a busi- ness with a view of profit." The New York Statute provides : " A partnership as between the members thereof is the association, not incorporated, of two or more persons who have agreed to combine their labor, property and skill, or some of them, for the purpose of engaging in any lawful trade or business and sharing the profits and losses as well between them." While the two definitions are synonymous, the latter for accounting purposes is clearer; and in treating the subject of " Adjustment of the Accounts of Partnerships," it is of greater importance, inasmuch as the language of the latter assists in the solution of problems. In no branch of accounting (Executors' Accounts excepted) is a knowledge of law so essential, as in the adjustment of part- nership accounts. It is to be regretted that, in some instances, the law is so framed that modern principles of accounting cannot be applied — unless upon agreement by the partners — without a violation of the law. From the formation to the dissolution one must necessarily be guided by the Statutes, and it is right at the formation of the partnership that proper care must be taken to obey the law and at the same time not to defeat the objects of the partnership, or, what is more important, to carry out the exact intentions of the partners. This phrase, " to carry out the exact intentions of the partners," suggests the necessity of a written rather than an oral agreement. The Statute of Frauds requires the agreement to be in writing only when the partner- ship is to continue for more than one year, but business men now recognize the necessity for such an agreement to be in writing, regardless of the time that the partnership is to last. To frame such an agreement, to protect the interests of all ♦Accepted by the Faculty of New York University School of Commerce, AccounU and Fmance m fulfillment of the requirements for the degree of Master of Ccmimercial science. r Accounting Problems and Solutions. parties concerned, and at the same time to comply with the law, is not an easy matter, and many an expensive litigation could have been avoided, if lawyers, who unfortunately in most cases drew up such articles of co-partnership, had had a knowledge of accounting. It often happens that, were an accountant to follow the articles of co-partnership, he would do just the thing partners do not want, — not through fault of his, but because the party who drew up the agreement was ignorant of the effect it would produce on the books of the concern, if followed to the letter. In one case, for instance, A., a practicing attorney of New York City, drew up a partnership agreement for the firm of B., C, and D., in which among other clauses was one which read as follows: It is mutually agreed that if any of the partners fail to invest the agreed sum of $3,000, his account is to be charged with 6 per cent, interest per annum on that deficiency. The partners continued in business for about nine months when they asked their bookkeeper to make up a Profit and Loss Statement. The latter was also given the agreement and told to use it as a guide. As the Ledger showed that C. had invested only $2,000 he prepared the Profit and Loss Account shown on the following page as well as a copy of the respective Capital Accounts. To this C. objected, stating that " this is an equal partnership, and all profits or losses occurring in the business must go through the Profit and Loss Account proper, in which case I would share in the $45.00, and this was my understanding of the clause in the agreement." The other partners objected, adding that they failed to see what difference it would make, yet protesting vigor- ously against any change in the arrangement. All this trouble could have been avoided if the attorney could have foreseen the ambiguity such a vague clause might cause. This trouble might have been prevented by adding to, or better by completing, the unfinished clause with a statement defining clearly a treatment of this point, i. e., whether the partner's account or the Profit and Loss Account was to be credited. It would then have been impossible for a misunderstanding to result. It is just such incomplete statements as these that cause troubles when the dissolution of a partnership is sought. Another drawback, usually met with in adjusting partnership u 3§ 8 % NO &> >» 9i JS O u u < < o 888 en en en -«J -4-) 4-> U5y3tG poo u u u VM M_| «4_| 000 U U V u u w. cQ n) c4 en en en CO en (O » •» ^ mud ;t: o o o Qhhh Partnership Adjustments, u 6 »o8 «M 0\ NOO o m |0 10 o G &> •V* o tC bo ti u ^ en U O ;? o u c o 4, Jtl « t E ^ 2 en ^ w 5* «" #« tsct c o s U a o 4.* § P o c m n < i &4 • 10 • NO < M t>4 to u C4 « «*3 t/3 «r ^ 8^ 8 CO •*^ O u O. S 2 en (n pq :? O U U < < u C/3 CO u o C ys o C a> O'c en cQ *■> u c c "* rt ^S o tM> O 8 CO o u u < •J < I— ( < U O NOD <*3 o 10 U C V iC •a en u c o bo u CO jj- en U O ■4-> Q, c 4_l«4_l O O en I— 4 M\ M o 10 u o o »o Accounting Problems and Solutions. accounts, is that business men do not sufficiently provide for con- tingencies which may occur during the existence of the partner- ship, or at its dissolution. As the partnership agreement is to be used as a guide, not only for the partners themselves, but for accountants who may audit their books, the agreement should contain, not only important provisions, but minor ones also. In the absence of such provisions the law must be resorted to and, as already stated, this may result in a construction opposed to the intention of the partners. The intention of the partners at the formation of the agreement is to be the sole guide, even though the wording may not warrant it, provided, of course, that it is for the benefit of the whole concern. Lord Justice Lindley in his work on Partnership and Com- panies says in regard to this: In order to solve questions arising at an adjustment, regard must always be had to the terms of the partnership articles; but an express agreement with reference to the taking of accounts may be, and frequently is, only applicable to the ca«e of a continuing partnership, and may not be intended to be observed on a final dissolution of the firm, or even on the retirement of one of its members ***** that which has been done for the purpose of sharing annual profits or losses is by no means necessarily a precedent to be followed when a Partnership Account has to be finally adjusted. FORMATION OF PARTNERSHIPS. The usual clauses in articles of co-partnership are as follows : (i) Name of firm. (2) Place of business. (3) Nature of business. (4) Date of commencement and the duration of the partnership. (5) Capital to be invested. (6) Provision in regard to interest on capital invested. (7) Provision in regarci to allocation of profit or loss. (8) Provision in regard to withdrawals and how to treat them. • (9) Provision in regard to admitting a new partner and how to *' adjust the affairs on admission; especially if the goodwill is to be taken into consideration, which usually is the case. (10) Provision for the correct keeping of records of all business transactions, and the making of periodical balance sheets. (11) Provision for procedure in case of dissolution. In connection with the tenth clause, Dicksee, in his Auditing, «ays: It should not only be provided that " proper accounts are to be kept." but that these should be kept upon some adequate system of double entry. They should be balanced at stated intervals and audited by a professional accountant, and provision made that after the audited accounts have been signed by the parties they are binding upon each individual partner, except where some manifest error has been discovered within a reasonable time — say, three months. Partnership Adjustments. The fifth provision is probably the most important clause; it is a clause on account of defects in which many a business con- cern has been ruined and many a partnership dissolved before its time. The clause should state the proportions in which the capital is to be contributed, and the proportion in which it is to be shared at dissolution, or on the admission of a new partner. The fact that nothing is mentioned on this point is no prima facie evidence that the assets are to be divided according to investments ; on the contrary, if nothing is stated, the assets— minus capital— will have to be divided equally among the partners, based on the prin- ciple that accretions of assets are the result of profits, which, according to the New York Statute, are the result of combined labor, combined skill, etc., of all partners alike. The ninth clause deserves attention. If nothing is provided, the cash received from the incoming partner in respect of good- will may be treated in various ways, and the view taken will make quite a difference when expressed on the books of the con- cern. To illustrate : ^ A. and B., who have been partners for five years, decide, in order to mcrease their business, to admit C. as an equal partner; the latter to invest a sum equal to 1/3 of their (A.'s and B.'s) capital as shown by the books, and, m addition, $2,000 in lieu of goodwill. Nothing further being stated, this goodwill may be adjusted in one of the following ways : Cash Dr $2,000 To Goodwill Cr $2,000 For this sum received from C, in lieu of goodwill on being admitted to the firm as a partner. This entry would ultimately be adjusted by a charge to the Good- will Account and a credit to the Profit and Loss Account. Or : Cash Dr $2,000 To A., Cr $1,000 To B., Cr i^ooo For the cash received from C, on being admitted as a partner. In the latter case only the original partners share in the good- will which C. paid in, and rightly so, while in the former case C. would ultimately also share in it; it is therefore of great importance to have a provision for the treatment of this goodwill. Dicksee in his Advanced Accounting suggests that in addition 5 V ffl iijii "" ~ Accounting Problems and Solutions. to the clauses ordinarily found in articles of co-partnership the following be inserted: (i) That the firm's accounts shall be periodically audited by a Chartered Accountant. It is desirable where practicable that the name of the accountant selected should be inserted in the partnership deed, as then a majority of the partners cannot change the auditor, although, of course, he can still be changed by the unanimous decision of all the partners. (2) The accounts to be kept upon a proper system of Double Entry, to be approved by the auditor. (3) All differences or disputes upon matters of account to be referred to the auditor, whose decision shall be binding upon all parties. (4) Provision should be made for the charging of interest upon drawings in excess of the prescribed amount, and for allowing of interest upon any excess of the authorized drawings over the actual amount withdrawn. (5) On the death or retirement of a partner it is necessary, under the general law, to take stock and to balance the books in order to ascertain the respective positions of the partners. To avoid trouble and incon- venience that this would cause, it is generally desirable to insert a clause providing that the share of the outgoing partner in the profits of the current broken period shall be computed upon the average of the three preceding years. A clause to this effect should, however, only be inserted when the profits do not fluctuate considerably, as otherwise serious injustice might be done by excluding the results of the broken period. (6) The exact mode of paying out the outgoing partner should be provided, and, where practicable, this amount should be payable by instal- ments extending over such a period as not to seriously cripple the busi- ness; or, in the alternative, a policy of "survivorship insurance" should be effected at the cost of the firm. PARTNERSHIP DISSOLUTION. A partnership may be dissolved for one of the following reasons : (i) By the expiration of the time originally fixed for the continuation, or by the completion of the act for which the partnership was created. (2) By later agreement, annulling the first agreement by which the partnership was created. (3) By the objects of the partnership becoming illegal or impossible. (4) By assignment of a partner's interest unless it be with the con- sent of all partners. (Partnership being a personal relation, only the parties that originally entered into that relation can continue, but they cannot assign any of their interests without the other partners' consent; (5) By death of any one of the partners. (6) Other occurrences, while not dissolving the firm, ipso facto, give the right to certain partners to dissolve, if they so desire. Such cases arc: Insolvency or bankruptcy of one or more partners, insanity, etc. In adjusting the accounts of partners, losses ought to be made good, first, out of profits of the firm, next, out of the capital of the firm, and finally, by the partners individually contributing the deficit according to their respective shares. Partnership Adjustments. The assets of a partnership should, at a dissolution, be applied as follows: (i) Firm debts to outsiders. (2) Advances or loans made by partners individually to the firm. (3) Settlement of capital. (4) Ultimate residue, if any, to be divided as profit, according to the agreement for sharing profit and loss; if there be no agreement to this effect, then equally. FIRST PROBLEM IN PARTNERSHIP ADJUSTMENTS. To adjust partners' accounts when the books have been kept by single entry : X., Y., and Z. were partners in a trading concern, having articles of agreement among them in writing, and among other clauses there was a provision that profits or losses were to be divided, two-fifths to X., seven-twentieths to Y., and one-fourth to Z., and furthermore: In the event of the death of one of the partners during the existence of the partnership the two survivors are to continue the business, and the deceased partner's share is to be paid to his executor or administrator within five years after his death in five equal annual payments, each unpaid balance to bear 6 per cent, interest The accounts were kept by single entry and were made up quarterly, to March 31, June 30, September 30, and December 31, The final statements were signed by each partner who thus acknowledged the correctness of the statements and its agree- ment with the terms of the articles of co-partnership, and thereby that the profits shown by the statements were those earned during each fiscal period mentioned. The net profits of the twelve quarters to December, 1907, were, as acknowledged by the three partners, as follows : To March 31,1905 $936.50 To June 30, 1905 876.00 To Sept. 30,1905 1,150.00 To Dec. 31, 1905 1,032.70 To March 31, 1906 ^.00 To June 30, 1906 800.00 To Sept. 30, 1906 895.00 To Dec. 31,1906 960.00 To March 31,1907 1,012.00 To June, 30.1907 763.60 To. Sept. 30, 1907 945.00 lo Dec. 31,1907 575.00 ^ A Accounting Problems and Solutions. xn frw' to CO VO I 8 «9- 1 I ro t= 0:5 CQ •— » *^ W u a a H t— I < V) M >-• •J n < o rt fc (A o r>. lo o i-i >-i I-* >i CO n . cj N < H W CO < O W M H < {/3 ir, o VO 00 1-4 CO H U (/) (O < — o 8i? I 8 3 ••-• (11 C *-' S c 8 0) > CO p5^ „ o Partnership Adjustments. In January, 1908, the clause making provision in case of the death of one of the partners was amended to read as follows : In the event of the death of one of the partners during the existence of the partnership, the surviving partners are to continue the business, and die deceased partner's share is to be determined by the balance shown to his account in the Ledger. In addition to this his share of goodwill is to be taken into consideration, the latter to be the sum of the net profits of the business for three years preceding such partner's death, including in such calculation the broken period. The deceased partner's share is to be paid out to his executor or administrator within five years after his death, in five equal annual payments, each unpaid balance to bear 6 per cent, interest. X. died on February 28, and it is agreed that the partnership terminated as of that date. The condition of the affairs of the business on December 31, 1907, and on February 28, 1908, respectively, was as shown on the preceding page and on page 11. From the various business and financial papers of the concern the following results of operation are shown for the period cover- ing the last two months, January — February, 1908 : Purchases during the two months were $6,986.50. Sales were on a basis of 40 per cent, profit, the inventory of goods on hand being $3,568.00. The firm has in its possession notes receivable amounting to $1,985.10; it discounted with the bank notes receivable amounting to $1,800.00, less discount $27.00. The out- standing accounts as per Ledger amount to $1,410.80. Cash pay- ments were as follows: Salaries $400.00 Rent 150.00 X., for personal use 125.00 Y., for personal use 75.00 Z., for personal use 75-00 Repayment of Loan Payable 1,350.00 Notes Payable 600.00 Sundry Creditors 3,225.00 t • * • •• It was further ascertained that the heaviest sales were usually made during the first quarter of the year. It is now desired to adjust and determine the respective Capi- tal Accounts of the partners as of date of February 28, 1908, and the amount due by the surviving partners to the estate of X., or his legal administrator, payable yearly as per existing agreement. SOLUTION. Our first duty is to determine and verify the cash balance, and for this purpose we will prepare the Statement of Receipts and A / ' I'ttt i _ I 't|i Accounting Problems and Solutions. 8 »o 1^ §8 8 -I In. in ro ^ 8*5 to mioio O Q tn *^ CO «l (A H :^ < Q < m H I— I M U M 0^ O Ir^ M fx) < I- C/1 CO en • i_ (Z4 a} 3 c pes in eg >^*N — *> 5 Coo rt ♦? o •o c JS c o u c j2 13 PQ 8 to CO tx 1^ > V < c 3 o U en .£: 3 V o u u to en 8 IN. (l4 O :z: (X) < CO Partnership Adjustments. g»8°- 8 «9- 8 9, m s. mm Cm OS 3 eo •-• 8v8 8v »4 uS CO CO «9- i J n >* pq D O u u < ^ 8 CO « ! 8\ «5 u 8 o u u < 1-1 < PU < u CO <^ e S Ctt PQ 3 C P o u u < OS 3 8\ « 8 ? 8 tn ^ Pk < U CO N In 2^ §,8 CO »-• lom Ov"-" 1-4 •-• lO CO CO CO c a V CO u c CO -I CO CO S ^ C CO 3 0) O J? <-' s > u V CO pj en en V •-4 O 4-* c > V CO •o c at u o H s CS eg 0\ m O •A 3 C cs t 2 CO 3 C C9 10 II A -4 IIIIIIH^^^^ H ) o PQ >» PQ mod < m m On ^^ t-t 1A- ^ ctf &s c w H rt n >» /.* u p gH k • •s^ t^ ^ V >» ^b tm « . «^ 3 i*^u^ Partnership Adjustments. t ♦9- VO PI K ;jyQ O U U < t/5 8v^ 8^ O u O .00" 00 0* 111 en »-« cd U u , t 13 8 ♦9- VO w ro 0) u C a PQ >» PQ a vi 1^ 8v^ vS- tN. CO m- 0. 8 kt H O U u < < < u c/} N gvS ts.VO O CO cn ■*mt o So - CI >» ^ m ei o JS bo ^> t M- vS 00 m CO m- u c PQ (J 8v8 v8 "^00 IS. m W- CO •-• CO J? V3- 1 ' ifE 'ill iii ''.ii i tlH' Accounting Problems and Solutions, H 25 D O U u < < 111 < U C/3 8 NO •-• • • • »-«oo *o m- o o c o •o en n :1 T3 O O ^ u o O > c en to JES E 8& N Q •-4 O^ *^\0 1 t in O R) t-* CO bo -I e '^ ^fe Partnership Adjustments. We know now what the Capital Accounts of the respective partners amount to. Adhering to the amended provision in regard to goodwill in case of death we must first of all determine the net profits for three years preceding the partner's death, including in such calculation the broken period. For this purpose we add the net profits for eleven periods from June, 1905, to and including December, 1907. As this addition does not give us the full three years, and as we have furthermore also to consider the broken period, we are to find the approximate net profit for one month, i. e. the month which the last quarter lacks. According to the information given, this quarter (January—March) contains the heaviest sales; hence we must, in this instance at least, in an indirect way find this sum. We proceed to do this as follows : We add to the net profits of the last period (January— Feb- ruary) all the first quarters (January — March), viz.: March, 1905 $936.50 March, 1906 98000 March. 1907... .**.;;; 1,012.00 Last period (Jan.-Feb.) 1,450.40 Making a total of $4,378.90 This we divide by the number of months comprising these sums of net profits, i. e., eleven, and so arrive, approximately, at the probable March profits. Adding this sum so derived to the profits of the last (January— February) period we get the net profits for the last (twelfth) quarter. This added to the eleven quarters gives us a total of $11,837.78, which sum represents the value of the goodwill, of which sum X. is entitled to two-fifths. X.'s Capital Account will now appear as shown on the preceding page. On our books we now have an additional account, thus : J?o8 GOODWILL. March i, To 2/5 of total value paid to X's Ad- ministrator as per agreement $4,735.11 The other Capital Accounts ( Y.'s and Z.'s) remain unchanged. There are some accountants who in such cases prefer placing the entire value of the goodwill on the books of the concern, and to credit the Capital Accounts of the partners with their respect- ive shares. This procedure is not only unscientific, but illog 'cal. IS Ill Ill 3" ** oo o*' "f **2 Accounting Problems and Solutions. CO 00 in t-l 00 (Ml CO in in 00 pi t-4 CO %n 49- R o o ^ in hi 8. ^ in oc eg CO in oc 00 R ¥h Partnership Adjustments. If goodwill represents an asset it surely cannot show legitimately greater value than the figure placed on a proportionate share at this time. We have on this point a legal opinion in the English case of Stuart v. Gladstone, in 1879, in which the presiding justice remarked : 13 c s *^ m m J3 S lull o u u < X «0 Cfl c ^ >» 00 CI ^ *-• X £ O rt *-"ri u 3 •0 ■4^ t/!' I-. «J rt t-^ "rt >> w « PQ oo"" «s< ^ 1-4 U r 1 3 • • « . u • • c • • rt - . _C8 . • • ■ n • 1 s. ■ Si 3 • grs : &c : S 3 ■ Ok ^ c • rt ; 3 , . n » ^ •*i ^ 2 -M t» C c/} u c « C cn c v c c Ji c C « C xst a Inter Balai cd ej C3 Wi-tPQ « 5; rt 0,0 000 000 M ■» •• ^4 ^M »1 »N ^« ».< «h ak «« M »4 »« • u , V u u . u u u Ok U b. u Q l4 c4 CO ^ ^ >« »i OS CQ Ctf IM W. Im u M cQ ra ca • u s • •0 V •*->■ trt C i2 "rt ■«-» PQ »— 1 >» >» P PQ M ^ l>4 •-• X J3 . . •I v- W »- <-• a ^ cS mm N 00 w "^ in \0 H-vo 00 -^ m CO 00 m 00 m ix Q ""i- CO 00 I- w CO ^ m I-" in 00 CO Q <^ ^ a5 co-^ coco •-' m 00^ in 006 -! CO c* t>. *9- pm to IT) O \rt 00 t>.oq C»vO(» CO «-" CO 51 *9- • 9 • "53 u PQ PQ PQ 00 N I- co^ mm 00 00 CO 00 o fO • V • u • c • rt • .a C .rl s a g.3 rt o 3 en u ** *- rt O mi 000 JCJSJB . u u u M u w< i«i »^ ca c9 c4 c Xi cv 0/ >•« E Qu >.c (« 3 a ,_ C rt 3 C en c o; 01 u 0) '4^ c mt-t HH •k K M m ^JS . u U eo fc- b. M OS M S^SS Then is it fair construction of these articles to assume that in taking the annual accounts of the profits of the concern, the partners were going to put a value upon the Goodwill, so as to allow each partner to take year by year out of the partnership the amount of his share of the increase in the value of the goodwill? Now one cannot help feeling that no mer- cantile man ever dreamt of such a thing. The goodwill is not an avail- able asset in the sense that you can draw upon it, or that you can turn it into money, or pay it out to the partners, and I should say with some confidence, not only relying upon my own experience, but having appealed to the bar in this case, that no one ever saw such a thing in a merchant's accounts. Having arrived at the total to which X.'s administrator is entitled, we desire to find the sum due this representative yearly. In doing this we must take into consideration that each unpaid balance is to bear 6 per cent, interest. This will be best shown by a continuation of X.'s Capital Account, but changed from pro- prietorship to that of one representing a true liability of the firm of Y. and Z., as shown on the preceding page. If the surviving partners should on February 28, 1908, decide to deal with the period's transactions on the double entry prin- ciple, and in consequence thereof furnish the administrator with a Profit and Loss Account and a Balance Sheet, it would be desirable to express such a change in the books of the concern. We have then to take into consideration all the facts that occurred during the period from December 31, 1907, to and including February 28, 1908. The procedure in such a case would be as follows : Incorporate by means of journal entries the facts disclosed by the Statement of Assets and Liabilities and which are not con- tained in the ledger. Journalize the subsequent transactions (there being no necessity, for our purpose at least, to make the various entries) ; raise the necessary ledger accounts, and make closing entries for the various nominal accounts ; prepare a Profit and Loss Account, and the Balance Sheet. If the firm followed this method the Profit & Loss Account and the Balance Sheet would appear as follows : 16 17 %w ■# Accounting Problems and Solutions. ^ % ^■ ^ 5-, lO K t^ ts. tN ^ 9 M t^ tN. 9. O rr "^ i> H < D ■4-> 3 0^ i-J . 3 O m w tn (i4 P < nl 2 • • CO < yable Pay; ceiva G, '• • •-< I- . N P-I ti on o . «« en 3 a> O a . . . • ohJ O 2X>HN >< ;? < :^ (1h S8 po d tx O^ to d 00 >-> fOM CO H H CO CO < .3 en rS U V > o 6^3 ■*;; en 3 goo > O «j 8.8 8v O to l-H to ro <*0 *9- 8v 8 to lO to en •a CTJ t-i o > en «p^ I-i en 3 > 3 en •3 3 u i8 19 Accounting Problems and Solutions. To adjust partners* accounts when the books have been kept by double entry: Mr. Whatley in his Accountants* and Bookkeeper/ Vade- Mecum states that frequently in a final adjustment of the accounts the assets are insufficient to meet the liabilities as well as claims of the partners themselves, and in consequence the position of affairs will be one of the following: (i) Either the assets realized are not sufficient to pay the debts and liabilities of the firm in full; (2) Or the assets realized are sufficient to liquidate the claims of creditors, but insufficient to repay the advances of partners ; (3) Or the assets are sufficient to pay the debts and liabilities of the firm and the advances of the partners, but insufficient to repay each partner his respective capital. Accordingly Mr. Whatley proceeds to work out various prob- lems showing how the adjustment should be made in any one of the three possible cases, and adds: There is no need here to take into consideration a case where the assets realize their full value, for the accounts would be closed in their natural order without any difficulty. This, however, is not always the case. On the contrary, when accounts are adjusted at a dissolution, unless insolvent, (because then the partners have no benefit in view over which to raise trouble) there will always spring up a number of points over which disagreement will arise in adjusting the final affairs. One partner may claim that he understood this clause in one way while the other will claim a different construction. We will, then, take in addition to the cases mentioned the following SECOND PROBLEM IN PARTNERSHIP ADJUSTMENTS. The assets to have realized their full value, but the retiring partner to be entitled to goodwill, as stated in their articles of co-partnership. A., B., C. and D. arranged on January i, 1905, to become part- ners in a manufacturing enterprise for a period of five years. They signed Articles of Co-Partnership, the latter containing among the ordinary clauses incidental to a partnership the follow- ing essentials : Partnership Adjustments. A., B., and C. are each to contribute $5,000, while D. is to bring in the sum of $10,000, the combined capital of the partnership to be $25,000. Interest at the rate of 6 per cent, to be allowed to any partner whose investment may exceed the sum which he is required to bring in into the business. On the other hand interest at the same rate is to be charged to any partner whose investment is below the required sum. In either case these respective debits or credits are to be carried through the Profit and Loss Account and adjusted to the partners' accounts according to their agreement as regards the division of profits or losses. Each partner is allowed to draw the sum of $100 per month, which sum so drawn is to constitute a charge to the Salaries Account. This account is to be finally charged up as a loss. The profits or losses of the business are to be divided in proportion to each partner's capital and the time such capital was employed in the business. It is the right of each and every partner to ask for a dissolution of co- partnership at the expiration of three years from date hereof, provided he gives reasonable notice of such intention to his associates. If any member of the firm desires to take advantage of the last men- tioned clause, he is entitled, in addition to the net balance shown to his account in the ledger, to a quarter of the Goodwill of the business, the latter to be based on the last year's net profits, and to be one and one-half times that sum. If a partner retires, the remaining partners are not obliged to pay him in cash more than two-thirds of his capital. They may pay the balance by giving a promissory note, which shall not run for more than six months. The firm of A., B., C. and D. continues in business to Decem- ber 31, 1907, when D. expresses his desire to retire. The other partners having no objection, an accountant is called in to adjust the affairs of the concern and to prepare the proper financial and business statements, as well as the respective Capital Accounts. Upon examination the following facts are discovered: While the books have been kept on the double entry principle, the nominal accounts have never been closed, no Profit and Loss Statements were ever prepared, and in some instances errors were nade in charging improperly items to Expense which should have been charged to Plant and Machinery. Upon consultation with the members of the firm, the latter instruct the accountant to prepare yearly statements of their respective standing for the period of their partnership (three years) and then to adjust the accounts as per existing agreement,. 21 Accounting Problems and Solutions, subject to the following changes concurred in by all members of the concern : A reserve is to be created for bad debts, $200.00 per year ; a reserve is also to be created of $200.00 per year for depreciation ; the clause relating to interest charges or allowances is to be ignored entirely as the members believe that each partner has maintained his required investment. The affairs of the concern as disclosed by the books and infor- mation are as follows: Purchases of raw material during the year 1905 were $29,500.00. Of this sum $200.00 has been returned. Sales dur- ing the same period were $57,300.00, of which $400.00 were re- turned. Labor expenses were $11,200.00; rent of factory $1,000.00. Other incidentals in the manufacture were $200.00. The inventory of raw materials was $9,600.00. $1,600.00 was paid in commissions, and $450.00 in sundry trade expenses. Rent for office and salesroom was $600.00. Salaries were $6,800.00. Repairs and renewals to plant and machinery were $275.00. The firm borrowed of the bank $5,000.00, on which there was a dis- count of $150.00. General expenses, such as stationery, printing, etc., were $455.00. The partners' accounts disclose the follow- ing state of affairs: A.'S INVESTMENTS. 1905. January i $3,000.00 March i 1,000.00 April I •• • 1.000.00 October i 1,000.00 A.'S WITHDRAWALS. 1905. February i $500.00 July 1 500.00 B.'S INVESTMENTS. 1905. January i $5,000.00 July 1 2,000.00 , B.'S WITHDRAWALS. 1905- April I $1,500.00 August 1 500.00 22 Partnership Adjustments. C'S INVESTMENTS. 1905. January i $2,000.00 March i 2,000.00 June 1 1,000.00 September i 1,000.00 October i 500.00 C'S WITHDRAWALS. 1905. February i $200.00 April 1 1,000.00 July 1 500.00 D.'S INVESTMENTS. 1905. January i $8,000.00 April 1 2,000.00 July I 1,000.00 September i 500.00 D.'S WITHDRAWALS. 1905. March i $1,500.00 June 1 500.00 August 1 1,000.00 I I ii . These withdrawals do not include salaries to which the part- ners were entitled ; these were paid monthly and charged through the Salary Account. In 1906 conditions were as follows: Purchases, $21,700.00. Sales, $61,300.00. Inventory of raw materials on hand at the end of the year, $3,700.00. Inventory of finished goods, $1,200.00. Labor and wages, $15,400.00. Sundry factory expenses, $3,100.00. Selling expenses, $3,200.00. Salaries, $7,200.00. General office expenses, $450.00. An item of $200.00 which properly should have been charged to the Plant and Machinery Account was incorrectly debited to Selling Ex- penses. Interest and discount on loans amounted to $150.00. Partners' Accounts remained unchanged excepting that the profits were not actually withdrawn. These had never been determined and no nominal accounts had been closed. I '■ 'J ^ lO G < m u 03 o IS fx3 o H O u < o •J < O a. Accounting Problems and Solutions. ^t cq 8888888 8tC28^c? (M CI (N fO 8 m Q Q O O' Of/'" o\ • 1-1 c ^ O u ^ — ' •y. ^ > -"^ ,^ -! _ 1> O r: . • • *"" ■ >> %. O E . ^ o . i: u ^ F '- *w «*# ^* W '"'''"" MM c^ ^ ^ O ■*- ^ fS r: '^ ^ c c c c. o rt 4> 3 o 0-1 u 8 8 8 8 8 8 8 R ID «r> »ri lO o o OJ W r>» t^ cj ^ Ov ro (O VO VO Tf \o Tf -^F N-^ hH Tf '^ lO .^ M CI CI 1-4 •■4 ««■ ««■ ««- w- «^ m- «^ vS^ TSfT" o IT) I/} t/5 n o c X V «" ''^ w^ o ^ bop *i'2 • S o o,«- m o o m o m c« o u Oh .s 3 c o OQ o ho s o o 888 to 8 IN 88 lOtN, 1-1 d 8 ifi a c« O I- C C S3 c^ t^ o c S c o *- o '34 1 Partnership Adjustments. The state of affairs in 1907 was as follows : Purchases, $26,800.00. Sales, $58,500.00. Inventory of raw materials on hand, $5,200.00. Factory expenses were $16,900.00, inclusive of labor, rent, etc. Selling expenses were : Advertising $6oo.cx) Rent of salesroom 500.00 Commissions 1,500.00 Freight and cartage 200.00 General salaries were $7,100.00. General expenses, $400.00. Partners' Account were as follows : 1907 June I, D. withdrew $4,000.00 October i, he reinvested 2,000.00 March i, B. withdrew 1,500.00 March i, A. withdrew 1,500.00 August I, he reinvested 1,000.00 The condition of Assets and Liabilities on December 31, 1907, as disclosed by the books and various data, was as follows : ASSETS. Plant and machinery $3,700 Real estate 8,000 Cash on hand and in bank 11,570 Bills Receivable 20,000 Accounts receivable 37,ioo Horses, harness and wagons 1,200 Investments 5,000 Patents and patterns i[6oo LIABILITIES. Bills payable $20,500 Accounts payable 27,500 It is required to adjust the Partners' Capital Accounts and to find the amount due by the remaining partners to the retiring one. SOLUTION. As a Profit and Loss Account had never been prepared during the existence of the partnership, our first step must be that of preparing a Profit and Loss Account for the respective years of the partnership, and to take into consideration the various points covered by the agreement, not forgetting the amendments made with the consent of all. Accordingly we prepare the Profit and Loss Account shown on the preceding page. 25 r \ .■■KJ >■ 'J Accounting Problems and Solutions. 8 8 o ^ 00 0©" M < 8 ^ lo ro nil X. X NO o o\ to *9- en H iz; a H II II II II N O CN to xxxx «^ Ml IS. «-< f- 88 H 2; o O u U u u < i < I/} m < 00 n 01 D5 Q o (- o o nil XX 88 VO & ^ l-l in H (■: II II XX § ^« 8 8 NO ■«? to M < ro INI II NO XX X • II 8 D o u u < C/3 u NO* CO H S5 : : : : ; H s »^ I I : ; .' en * * * . Si S5 : : : : . •— « II II II II II « O r^-^f eo xxxxx «b ■«, •« M N « l-l ^ a6 8 in §8 O »o « «o I Q Boo H 5 O ^ in CO INI O t^ ^3 If) o u u < XX 88 in tn *9- lO II X VOOOVO « en H H H in II II II II W 0\N0 ^ xxxx «l «k M Partnership Adjustments, Having ascertained the net profit for this year (1905) wc have to allocate the same in accordance with the partnership pro- vision as well as in accordance with the amended clause. This clause, it will be recalled, provided for a yearly reserve of $200.00 against bad debts, while the agreement proper called for the adjustment of the net profits according to the capital invested and the time that such capital had been used in the business. Lisle in his Accounting in Theory and Practice gives the fol- lowing rule in regard to such adjustment : To divide the profits of a co-partnery according to the amount of each partner's capital and the time it has been in the business, multiply the sums on the credit side of each partner's account by the portion of time from the date of payment to the close of the account, and deduct from the sum of these products the sum of the products of the debit side formed in the same way. This will give the products (net) for each partner, and the profit to be allocated should be divided according to these products. Following this rule we have the result shown on the preced- ing page. Hence, 40, coo „ c6,ooo^, -^^ — Xi4.o7o=2,827.7i; -^ Xi4.o7o=3.i9902; 246,300 240,300 42,300,, , 98.500^, ^ >- o "^ X 14,070=2,416.42; J^ ;; X 14.070^^5.626.85 246,300 246,300 making the respective shares as follows : A $2,827,71 B 3»i9902 C 2,416.42 D 5,626.85 We are now prepared to arrange the Profit and Loss Appro- priation Account for 1905 as shown on page 28. We proceed then to determine the results of the operation for the next year (1906) and prepare the Profit and Loss Account for 1906 as shown on page 29. 27 1* II I! J": 8 R Accounting Problems and Solutions, 8 o u &4 8 5^85^^ MOO •- "^VO O O u u < O < OH o < O -J : : : : : Q ; ; i ; ; ^ ^g^ • ■ • • • ^1 •■•'•• H : : : : : t-4 f^ : : : : : O oj : : : : : a. • • • • • <■*<■•• en • • . « '*?'' ■ • • • x> . . . . Qw en t/i tn « tctcvcvn o o o o ' V«/ |m» Vx Ib^ tii< Wrt Gi 0< CU Oi «44 MX «4-l *M l_ o o o o •S V Qj 0^ (U h '- ^ b fi w rt rt Co E, «n in c/j en Sj M tn eoJ» Jl J •* Ok «M ■* o I Q\ O -n- to ^^ HI M H4 M 8 m ''ISP'' < fa o D4> tn en • CO __ O O f\ o *^"# Vipi4 Uk^ "•"^ u O O o O «S V O O V u u ^ u t) JS 2 rt 2 u tn tflw « in J" tn «« «** * , " akk «iL ^ 5^ ^ • • — i." o 28 8 8 1 1 10 «9- 1^ o O u o On < m ■«-> o 0) C/3 o flBIII|. fa o 8 2*s»^<;? » • • • • »>« i-4 HH Q i^ M M h4 01 8 m en ■*->.... J2 en tn tn en ^ ■*->■»-> -t-t -t-t 0000 u u u u T? Q« Oi Oi Oi QQ «4-l t^ «4H MH 0000 O a> oj o V •^ w. u u «- ,, rt ct rt ctf ."* en en en to u M .5" ^« jc« J" t fa o oi t-i fa fa fa o H ^: D O u u < O Q < H fa o fa Partnership Adjustments. 8 8 10 8 M 1-4 4«- 8 d CO 8 8 8 g 10 CI 10 10 CO 10 10 «/)- V»- o u fa 0] 2 o ±» y= • w u e fa > en en •S '«<• ^ en m = n PQ >» ^ u C C8 >» >t « m 88888 88888 >0 •'ti-i w M t^irjco VO 8 8 to 8 8 4^ 1-4 8 888 8' d d to to W rr to ^9- to CO |8 toS •1 -^ <^ to 8 d to to to 88 cotx I-* CO CO £fa u O c > c CO w wfa bo en r; rt G § •otti.2 o u' o vgt^ s « S? ^ ^ o o« o HJfaQO en U5 en C u 0, 4-( fa X c tn fa 4> 01 6 ■*-» en 3 a» bo en 3 4^ •opq (/2 (0 >t ,1111 , u u 2 C3 C 4^ 4J •o H X-o w W'u OS CO i-M ai a> (« u »-• 4) 5 cj a> CO worn c a o •o rt y= o en Ou u a> ■<-• 1^ 29 Accounting Problems and Solutions. 8 8 8 8 to 1^ <^ vO t-i w- «^ t bit O' 'ClB' X H b o < m (A Q ;f]L| 8| 8 8 8 8 1 vd «o r^ ^4 •-4 M «9^ «9- • M^ 8 ' \ s : \ A4 ; \ 3 ■ \ e \ ws t! \ a "§ \ n \ ^ \ flS (#1 \ c s \ ^ c v *- o \ ^ >% \ >» PQ \ « 8 8-8 8 88 8 888 8 41 8 ^4 8 II 1 M «*) ^d t«s lO «*) 4^m t~< «9- H4 «^ W^ "^^ m- 8§ low O lO 888 to to N J; «n O c« .So* CimI' s > c C • JS *> - C O w o u » '^ ??• o fcPO s o o fa en tC3 O CO M V e en 5J en V en C V c/3«o C o 2- ^ H '^ c g 5 4> .10 Partnership Adjustments, Observing the same method for the present (1906) year, we add to the previous balances (shown in 1905 to the Capital Accounts) the profits allocated to each partner's account, and we find the following results : A. is entitled to $1,089.22 B. is entitled to 1,140.89 C. is entitled to 1,004,16 D. is entitled to 1,96573 of the total net profits, available for allocation among the part- ners as per agreement. We prepare then the Profit and Loss Appropriation Account for 1906 on page 28. The next step in our solution is to determine the result of the operation of the year 1907. Following the former routine we prepare the Profit and Loss Accotmt for 1907 shown on page 30. In accordance with our adopted rule we take into considera- tion the various shiftings that take place with regard to capital, and arrive at the following results : A. is entitled to $1,171.13 B. is entitled to 1,172.05 C. is entitled to 1,190.98 D. is entitled to 2,065.84 of the total amount of the net profits available for allocation. We have then the Profit and Loss Appropriation Account for 1907 as shown on page 28. From the data given we are able to verify these results by pre- paring a financial statement, which will show the Balance Sheet and Partners' Capital Accounts (page 32 to 36, inclusive). In accordance with the provision in regard to goodwill, we would make the following journal entry: Goodwill Dr $2,100 For one-quarter of the total value, credited to D.'s account as per agreement. To D., Or $2,100 For his share in the total value of good will, based, per agreement, at one and one-half times the sum of last year's ( 1907) net profits. 31 ,1 ' Accounting Problems and Solutions, 8 R 9. m u m T 88 ?< CI 8R ^8 CO 00 t-4 o 01 N %^ «e- m- w w it H •-) PQ < U 5 Clil a. s «5 O VM-4 tj > C c IS S o u ^4 "^ .Tm U •-• m ^^ «^ VO IT) 1-4 I-4 u in C o c S 8 W- ts. §1 IS, V3- CO ■«-» a n u O **^ — i3 .>« V V (J en p:: «§ en C/} CO O V =3 W r2 o »4 e o 9 «< O w ^ rJ 4> C c o u V &' l> u CO rt > en tn 4_t (/I c « cn w pes 32 Partnership Adjustments, o 8 .J < o CO o o o o M O O O O t^ O O O O t^ o o o o « O O O O 00 M M W M M N CO t^ t>»« ON ^«. *^ o VO w w OO M 00 OO o ON 00 r^ M oo" «» «» €^ •4^ +J +J a c c V V (U ass 4-> +J +J Ui Vi Ui >: ^ > a a a CO 2 I 8 C/3 VO oJ^ On COM o o «>. • • • O O t^ OOP! *o moo CO CO o o o M „ M On CO O CO vO ON O M o vO O M 00 M O tx. 00 0\ O M o_ 00 M m" M m^ M m VO o 00 00 ii il vA CO § a* O ^ O (h CO A) cs 0) s; aJ PS^ CO M CO CO t>. Ov Ov • • • r^, VO VO C« M M 00 On On 00 00 CO m m «» PQpqpci CO U l|a ot— »<1Q On OvO O O O 00 O 00 lOli^ M On I jQQj 00 oj ot-» On M NO O « 00 00 o «1 I J3 l| o o o CO U ^a CO c> Q On J3 Accounting Problems and Solutions. o o « o o o O O Ov o o o\ O O M^ to w to o ON o\ M o M m M 0\ O 00 o o On ■* M M 00 M Ov CO On OnO fO I«» On •-• 10 :«^ c e; '^ o >; aJ I— 1(— t w PQPQPQ c«0 * lEl ^ o M ro O O eg (h PQPQ ro O § (A to "OS'S IS o o o to a> ON un O On ON K to ON to CO fO I 43S OS 34 0) u i ^ 1 cS 6 p O o Oh- >(— iQ o6 Janu Dece -is o On On On < M M HI con ei H M o o vO 5 GOO o ON O O ON On ^ • * • O O On • ON Ov Os O M M O O On o ro ro O M M o to lO M M CO «o lo o w> M oo" 6 On cf^ M 0» o" CO i» M «» «» «» M 00 < o>- On < 1-4 €0 Partnership Adjustments. o o o o o W o o o O O "*• W NO 00 to 00 00 to On NO »o NO to O O O O O VO O O O O O M O O O O »0 tJ- VO M On NO •* M O N O o CI o o W On « M M M M M M M H H W 00 00 00 H On On 43 4^ 4J s s s 4» 4J 4i CO to W 0) v 0^ > > > a p! n Oi 4J +a fl a as' CO to > OJ « «^ — 1>— I to to i J2 I. npqpQpqpqpq ro ni^ a « g o I— ,S !—»(/) O Q On o o O P« 0"* • • • • O O OnO o O O M N O to « a> pqpq to u NO rti* OH-^Q On ft)' U § Q cS 2 pq-S PQPQ •o u a <^ Ot— « On -3 n m S 00 ot OS M 00 00 ^ NO • to to to to NO o o M M M M « M M On C« « Tt- Tt 00 00 00 On ^ «^ «» ^ «» €» . • 1 to CO to w—t — -I — H oi cO ci] ^^ ^ 2 2 2s 4J 43 ^^ •"H 'th ••-« ^3 o o o o HHHH to •-' • r' s^ ft^ On 8 a t— I pq o H to 3 o oQ On 35 Accounting Problems and Solutions. Partnership Adjustments. o o < < I— t < O m Q o o o o »o O O O O 00 o o o o o O O O O w O O O "^^O 00 M t^ 'Vrr xn irj ii->rO 00 00 O "* « 00 00 t>. IT) »i^ O 00 ^ vO \0 m « N O »n 00 N w \0 as o o o \r> t-t M O^ o o o o M r«. "* M o vO w w o M t-» M M M «» m «» «» m J Q p. c P! c a 0) ID O HI £ > > > t> 0$ a a a ax pM^lf pi^i^ pBBHI paw^ \jfj on on oo qq qq ^^^^ ^^^^ ^^^^ i^^^l ^^^^ li^ cti a' 3 a> ^ IT) «) _u ^ 1: /^ 0\ O O O »i^ O O O 00 O O O vO o o o « lO lO o >^ 0) a CJ tfl W U) ^ ^ ^ cij ni cS I-i Wi t-i •^" -t-* •'* rt o o o o i^^ ^^^ ^^^ ElaBrt ^^^^ ^^^^ ^^^^ ^^^^ u lOi X o ^s gg)8 S rs o ON 00 M M o m ■ a o o CO ti PQ « PQn CO p 00 N o_ 4> a cU n X u ON 00 to • U ex <=! » oiX v3 SOW ^ M O Oi oAoQ O W o ^ ooo o tn ° " •— » cd 4->X o o «*5 ON fl ■<*■ oc M vo" M 1^ s IJM' n 00 Ol ON M ra 00 M o" which entry when posted will show the retiring partner's account as follows: D.'S CAPITAL ACCOUNT. 1908. January i. By Balance. $16,158.42 January i, By % share of total valuation of goodwill 2,100.00 The retiring partner is therefore entitled to the sum of $18,258.42, to be paid in accordance with the agreement. There is no necessity for proceeding, as Mr. Whatley states, to work out the various possible cases (page 20), for the simple reason that in any of the mentioned instances there is a deficiency. A deficiency of capital should, and must, be treated as a loss, which is to be borne according to the provision the partners have made with regard to sharing profits or losses. Let us assume that, for the purpose of dissolution, an appraisal and revaluation of all affairs is made, and assume that the liabilities remain unchanged, but the actual realizable value of the assets (after taking into consideration the reserves) is as follows : Cash $6,570.00 Investments 1,000.00 Bills receivable 16,000.00 Accounts receivable 18,500.00 Inventory 2,200.00 Horses, harness, etc 800.00 Patents and patterns 600.00 Plant and machinery 900.00 $46,570.00 As our former balance sheet showed a total of assets amount- ing to $92,170.00, we have a deficiency of capital to the extent of $45,600.00, which deficiency is to be adjusted among the partners according to the original provision of dividing profits or losses in proportion to the capital invested, and according to the time such capital has been employed in the business. Suppose that the firm dissolves, and sells the assets as per valuation, entailing a cost on the realization of $500.00, we would then prepare a Realization and Liquidation Account and Partners' Capital Accounts as shown on pages 38 and 39 respectively. 37 Accounting Problems and Solutions. 8 ¥>■ O o u < o < a a 3 o < o It* < N t— I •-1 M CKS V tfi o o o;s S w 5 c ^ c > S o^ o q H Hi-4 888 8 8 t 3 N o CO m 00 C *o o •o i» bo rs CQ c '^ 3 " M O "rt M "rt "rt "t; CO >■ > > O V O rt o O O ^ 3S Partnership Adjustments, 0\ in -^ C o 'S. X en i-i O ■4-> o 8 O 1= c« O eo 4^ C .2 • *-« X O U u G o u •^ . .5 «« *- ^ e.ti 13 >M ^ - - bO en O •4-» •*■* 9 rO W ^ c o C3 O w a> c c $; c «^ h S *3 o 8 < o I o 00 O U u < < »— ( Ph < u rt C ^, CO *^ rt -^ w '^ Ui H "en a- w cin 3 o rt "2 i; ■«-» mm a> en O ■t-t Xi 1 ^ 00 O lO O G O '■*-> X o >-• TT '^ t^ t>. l£> lO Q o '^ Tl- ^ ^ m o u < < U in G O (J en y c CO r 01 p u S cnT3 ^ G G " — m m v •a u CO 2 Xi G O fi^l ■^ P. o <« CO %1 O o u < < 13 t^'H CO o S o c« u c 3 CO T3 m^m" s R ei m' -SJ (^ 00 <» ^ ^ • to I ^ ^% \o < ^ i 1/5 vd" m • Cij i Z I tn m O O u m IS § i 1 m pi! o o H !-• o |ih| 30 Accounting Problems and Solutions. This state of affairs, showing a sudden shrinkage, is, of course, rather strained, but for the purpose of illustrating the adjustment of Partners' Accounts under such conditions it is permissible. We will then adjust this shrinkage in proportion to the last bal- ance on each partner's account. The total capital, as per balance sheet, was $44,170.00, while the total deficiency was $46,100.00, hence the loss per cent, is 104.3609. The respective Capital Accounts will accordingly appear as given on the preceding pages, showing the amount each partner is to contribute to make up the total insolvency of $1,930.00. This treatise may not be exhaustive enough to enable an accountant to find in it material covering every detail that may arise in adjusting partnership accounts ; yet the writer will have attained his end if it serves the practitioner as a general guide for this class of accounts in the cases that are of more frequent occurrence. BIBLIOGRAPHY. Partnership Accounts, by Child. Bookkeeping Exercises, by Dicksee. Accountant's Compendium, by Dawson. Philosophy of Accounts, by Sprague. Accounting and Banking, by Nixon. Accountant's and Bookkeeper's Vade-Mecum, by Whatley. Partnership, by Hardcastle. English Statutes, American Statutes. New York Statutes. Partnership and Companies, by Lindley. Partnership Law, by Parsons. Corporation Accounting and Auditing, by Keister. Accounting in Theory and Practice, by Lisle. Advanced Accounting, by Dicksee. Auditing (American Edition), by Dicksee. Various C. P. A. Problems. The Accountanfs Journal (English). The Journal of Accountancy. The Accountanfs Manual (English). The Accountanfs Manual (American). 40 I PART II, HI i Question 1. (New York Examination, December, 1898.) The trial balance of a manufacturing firm taken January i, 1897, is as follows : Capital A B Plant and machinery Purchases , Sales Stock on hand January i, 1896 Labor , Salaries Traveling expenses Interest Stationery and printing Rents and taxes Discounts and allowances Fuel Insurance (one year from July i, 1896) Freight General expenses Bank overdraft Creditors Accounts receivable Rent of steam power Cash on hand Loan account $35,000 38,000 15,000 24,000 6,000 2,500 600 1,200 3,500 1,250 3,000 1,150 1,500 600 25,000 200 7,000 $40,000 20,000 OSfiOO 5,000 4,000 1,500 $165,500 $165,500 Stock on hand January i, 1897, $23,000; each partner to be credited 6% on his capital for one year before profits are ascertained; 3% to be written off book debts for discount; 10% to be written off machinery and plant for depreciation; unexpired insurance to be taken into account; net profit to be divided 2-3 to A and 1-3 to B. Draft journal entries for closing the books and prepare final balance sheet and profit and loss account. 43 ! Accounting Problems and Solutions. Solution. Manufacturing Account To Inventory (January i, 1896) Purchases of raw materials Freight ( inward) Labor (productive) Depreciation on plant and machinery. . Rents and taxes of factory Fuel Insurance (six months only) To close the respective accounts. Rent of steam power To Manufacturing Account To close the former account. Inventory Trading account (cost of goods sold) To Manufacturing Account To close the latter account. Sales Account To Trading Account Transfer of former account. Trading Account To Reserve for discount on b/d Discounts and allowances Traveling expenses Profit and loss account (bal.) To close debit account and the sec- ond and third of the credit items Interest Account To Capital A If -D 6% interest on capital invested viz: A. $40,000; B. $20,000. Profit and loss account To Salaries Interest Stationery and printing General expenses Capital A. 2/3 of net profits " B. 1/3 " " " 44 $89,075 $1,500 $23,000 64,575 $95,000 $30,425 $3,600 $25,925 $15,000 38,000 1,500 24,000 3,500 3,500 3,000 575 $1,500 $87,575 $95,000 $750 1,250 2,500 25,925 $2,400 1,200 $6,000 4,200 1,200 600 9,283.33 4,641.67 00 m w o w Q m < o ^. w o O CJ o < CO CO o < O Practical Accounting Problems. to t«» NO >o >o o\ *r 3 o o o o o 10 o o o o o o t^ o o o »oo «o»o to o o o o o o^ tOOO M PO O ^ eocow o o o o o o eo CO fO to « !§ to CO . (U o ^ijd CO O ^ OCOP^ a O o fu-S t— • 15 o o CO o CO to o^ o o u CIS '4* a c4 l-H a o CO too O t^ o to to to c« ^ cI" M O to »o c* to 3 u I a o «» O CO 'd •§ o M ^ P! (oS O CJ cJ y to 0)0 Q § o *-• C o o CO bO a ■§ o 45 .S el o 0) > o o tol 01 O O O to o o o c« O M ^0 I-) lO M 00 to « to 4» o •d 8 rt O O 4^ •rj O O Q Ou'l- w 5 to O O to u <0 a o M ^ o o o o 6 6 o o 9. 9. u> u to o PQ O m in n ei »o to tC NO* r« 00 «*5 t^ fO « «n M 00 t « 00 li< 10 l#> « «»' o O fO t>. H • o q ro ^q •4 6 6 fo 6 6 M < o O 00 '^ ^ q ■* « 0^ « vO t^ o n o^ 0" M ^ ^ O • • • • • * > * ! 4» : (O I •«-» : 6 . «C1 i est. s pr ^ est. pro S bi 'o V IR T? 6 iJ.i3 a la •4^ a ^ •M CO 0) -• -^ (0 1 g >vO o > SSS »-^ ^ 4S H-t ^0 o pa CO o o Ml O O o »o q «^ c« n q o o «n o o »*■ 9. 9. "^ o o in M o o o o q »o Pi (0 U fl) - a d i2 8 8 S o u u < a o CO CO CO -< Q pa X 4) a 3 C a> > a 10 t-1 >-t »— I o S u Pi 1-4 Practical Accounting Problems, f . 0000000 0000000 o o o too o o O to to O tOOO M c« o\ tow o o 10 pcJpL to to tOM to c« VO «o M n Ov « «» to to « ■k •» «b *t 1000 to « 00 M «» «» 00 On 00 LI >< f3 ^ PS r^u o •• u o a 3 oj » 2 rt ri ™ O «« W ttJ .U3 w aJ d 0) to ^ « *-H r* CO :3 I o o bo ol > u Wi rt r>co 09 O rj a a ^ q> a> O _ > o u a > g a eS O •♦-I bflM 000 000 000 o o to •3 O 5 a o a u CO a o o o c> «o to O o to^ O eo O o o to On a o y y (A cj 2 o S y u >%^ P CO "^ 8^ "cS s o 47 y ** CO CO §1 Xi.C y ^ 2 . 00 y o u +J y 53 T? y y y y rt •^ o4 ■*■* **-• y t:< ^ »'-* fe J5 a» K o ce « S fl a o y cd u y^ o CO oS oS •^^ is ?"2 *s y CS O w—t aj !SSy 6y C £ y c«j *« y m Accounting Problems and Solutions, Solution. (First Form.) Assets: Real estate Plant and machinery Horses and wagons Inventory Accounts receivable Agency investments Cash in bank Net increase of assets Increase $2,000.00 16,000.00 15,000.00 $33,000.00 Decrease Liabilities: Accounts payable Notes payable Mortgage Net decrease of liabilities Decrease $30,000.00 $30,000.00 $8,500.00 2,250.00 2,000.00 850.00 $13,600.00 19,400.00 $33,000.00 Increase $1,000.00 25,000.00 $26,000.00 4,000.00 $30,000.00 The profits earned, amounting to $23,400, are accounted for as foUows: Increase of Assets $19,400.00 Decrease of Liabilities 4,000.00 $23,400.00 Practical Accounting Problems. u o CO 8 >^ CO H S < o o 0) a Q g 00 00 00 m M H 1-4 •-] n < o Q 00 o\ 00 00 CO H CO CO < O O O O CO O O o^ o" O o o o o o^ to o o o o ° ° o o o o 9. 9. o" tC O M CI »o c< 0\ to o o (> 10 « o o o o o o o 9. 9. ©"vO o" O M CO o o 10 d »o o o xn 8 O rt o o ! *^ ! to CO «j ca s> rt §^2J o o 2 CO u v o o O to »o c« 00 « o o o^ o o o z* ^ ►H ^ o o o o o o^ 10 00000000 OOtOOOOOtO Oto»>.ioOOOM cTvo « o to fo to t-T tor^M «\o fOM « 000000 o o o o o o o o q q o to o o q O to to o 0\ to cT tooo w « •«*■ to « (U CO s u <« w 5 tH CO -JJ -M wee CO ^ •^•^^2 «J d 5f CO Ci CO K^ W)ca CO OS (-4 o 49 o o o^ o' o o o^ o' o o q to 0^ to to vd l>« t>» « « «» «» to 00 \o ■* to On to M M to €» «» to to to to «» m On Ovj to to 0\ Or « M €» m to to vO VO t^ t^ « « «» «» I v/ I i o o d o t 9. d ^ CO O CO c3 u o 'd 0} §*^ o o o CO « u cd o o to CO O ° O o 6 o "^ to M •d a CO 250, B. K— $4*625, C $4,625. Profit and Loss Appropriation Accoijnt. A.'s Capital Account for interest: Interest on his ac- count for the year $10,000 Deduct proportion of $18,500 being i of total interest .. 9.350 I750 $750 B., Capital Account for interest: Proportion of $18,500 being i of total interest $4,615 Deduct interest on his accoimt for year. 4.500 C. Capital Account for interset: Proportion of $18,- 500. being i of total interest $4,6a5 Deduct interest on his account for year. 4,000 $IS5 Practical Accounting Problems. This method holds good when the division of profits and the capital invested have the same ratio. The result is the same as that of the regular method. Loss and Gain. A. ^ of profits. B. t of profits. C. t of profits. 750 375 375 $1,500 B.'s Capital Account: 5% on $100,000 .... Deduct 5% on his account $90jOoo. . .'s Capital Account: 5% on $100,000 .... Deduct 5% on his account $80,000. . $5,000 4. 500 $S.ooo 4,000 $500 1,000 $1,500 %l Accounting Problems and Solutions. Question 4. (New York Examination, June. 1900.) The following trial balance is handed you, with the request that you prepare a revenue account and a balance-sheet : A, B's capital $20,000.00 A, B's personal account $1,000.00 Bank of North America 600.00 Cash in hand 90.00- Merchandise account 8,600.00 Repair account 87.50 Bills receivable 6,400.00 Bills payable 4.000.00 Real estate i,350.oo Bank stock 1,566.00 General expenses 1,860.00 Freight 1,000.00 Accounts receivable 8,000.00 Accounts payable io,oos.oo Profit and loss 3>446.SO $34,000.00 $34,000.00 If all the information required is not presented in this trial balance, supply what is wanting and submit the statements called for. Solution. Statement of Profits and Losses of the firm of A, B, as on 190. . . Inventory of Merchandise on hand $15,000.00 Less excess of Merchandise debit side 8,600.00 Gross Profit $6,400.00 Losses: Repair account $87.50 General expenses 1,860.00 Freight 1,000.00 2,947.50 Net Profit for the year $3.452-5o Deduct debit balance of P. & L. Account 3,446.50 Net profit for the period. $6.00 BALANCE SHEET OF THE FIRM OF A, B, AS ON 190 Assets : Cash $90.00 Cash in Bank 600.00 Bank Stock Notes Rec. .$6,400.00 Acc'ts Rec. . 8,000.00 Mdse. Inventory. Real Estate $690.00 1,566.00 14,400.00 15,000.00 i;35o.oo $33,006.00 Liabilities: Notes Pay. . $4,000.00 Acc'ts Pay. 10,000.00 $14,000.00 Capital: Investment. $2 0,000. 00 Net Profit.. 6.00 $20,006.00 Less withdraw's. 1,000.00 19,006.00 $33,006.00 Practical Accounting Problems. Question 5. (New York Examination, June, 1903.) John Doe died January 15, 1901, leaving a small estate, and in his will made Richard Roe his executor. The will provided that a legacy of $5,000 should be paid to Mary Doe, sister of the testator, and that the residuary estate should go to the testator's wife and two daughters, share and share alike. The estate consisted of the following: Cash in the Dime Savings Bank $348.50 One month's salary (due the testator from his employer) 250.00 10 Union Pacific R. R. Co's. first mortgage 5 per cent. gold bonds of $1,000 each 10,000.00 One first income bond, Central R. R. of Georgia 1,000.00 Demand note of John Smith 100.00 At his death the testator owed two months' rent $50.00 Acker, Merrall & Condit, household supplies . . 81.50 The appraiser appointed by the Surrogate inventoried all securities and accounts due the estate at their face value. The executor received $348.50 from the Dime Savings Bank, with $14.25 interest. He sold the Union Pacific bonds at 102 and two months* interest, the Central of Georgia income bond for $875 flat, and paid M. J. Senior, undertaker, $541 for funeral expenses; Arnold, Constable & Co., $185 for mourning apparel of widow and children. He also paid for legal and other expenses incidental to the probating of the will, $125. John Smith was bankrupt, and his note proved to be worthless. The executor deducted his commission and distributed the funds of the estate according to the terms of the will. From the above statement of facts prepare (a) the executor's inventory of the estate, (b) the executor's summary statement and schedule for presentation to the surrogate's court in final accounting, (c) a statement of the account of commissions to which the executor was entitled, (d) a statement of the amounts paid to each beneficiary. Solution. Statement of the Inventory of the executor of the estate of John Doe, who died January 15, 1901. Cash in Dime Savings Bank $348.50 Salary due testator 250.00 10 shares Union Pacific R. R. first 5 per cent. Gold Bonds at $1,000 .* 10,000.00 I Income Bond Central R. R. of Ga 1,000.00 Notes Receivable (John Smith) • 100.00 (i) Sales: Schedule A. $11,698.50 10 U. P. R. R. bonds at 102 $10,200.00 I Income Bond of C. R. R. of Ga. . . . 875.00 (2) Debts collected: $11,075.00 Dime Savings Bank $348.50 Salary collected 250.00 (3) Interest collected : 598.50 On deposit in Dime Savings Bank... $14.25 On U. P. Gold Bonds 2 months at 5 per cent 83.33 97.58 $11,771.08 53 Accounting Problems and Solutions. Schedule B. Uncollected Debts: Demand note of John Smith Uncollected as the same is bankrupt. Schedule C. Expenses : M. J. Senior, for funeral expenses $54100 Legal and probating expenses 125.00 Schedule D. « Creditors' claims : Acker, Merrall & Condit $81.50 Rent 50.00 $100.00 $666x)o $131.50 Schedule E. Payments to legatees : Advances to widow and daughters by paying their bills at Arnold, Con- stable & Co $185.00 Mary Doe, sister of deceased 5,000.00 Widow 1/3 of remainder, in accord- ance with the will 1^26.95 Daughter 1/3 of remainder, in accord- ance with the will 1326.96 Daughter 1/3 of remainder, in accord- ance with the will 1,826.96 $10,665^7 Schedule F. Names and addresses of legatees omitted, as they are not given in the problem. Schedule G. Richard Doe, executor, for commission. $30771 $11,771.08 54 Practical Accounting Problems, Statement of Executor's Commission. Inventory $11,698.50 Net increase 72.58 $11,771.08 5 per cent, commission on first $1,000= $50.00 2l4 per cent, commission on first $10,000= 250.00 I per cent, commission on balance $771.08= 7-7i $307.71 SUMMARY STATEMENT OF THE EXECUTOR OF THE ESTATE OF JOHN DOE, WHO DIED JANUARY 15, 1901. I, Richard Doe, executor, charge myself, as follows : With amount of Inventory $11,698.50 With net increase, as shown by Schedule A 72.58 $11,771.08 I credit myself, as follows : With expenses, as per schedule C $666.00 With payments to creditors, as per schedule D i3i-50 With advances and final pa)rments made to legatees in accordance with the will as per schedule E. .. 10,665.87 With commissions deducted by myself 307-71 $11,771.08 STATEMENT OF PAYMENTS MADE TO BENEFICIARIES. Mary Doe, sister of deceased $5,000.00 Widow 1/3 of the remainder 1,888.62 Daughter 1/3 of the remainder 1,888.62 Daughter 1/3 of the remainder 1,888.63 $10,665.87 (This problem can also be solved by the Charge and Discharge metho4 as adopted in many States; this solution, however, is in accordance widi the requirements of the Surrogates, in the County of New York.) 55 v» Accounting Problems and Solutions. Question 6. (Illinois Examination. November, 1903.) Brown and Jones begin a partnership business January i, 1902. At the time of closing the books, December 31, 1902, an examination of the accounts revealed the following: January i, Brown paid in $9,000.00 May I, " " " 2,400.00 June I, " drew out 1,800.00 September i, " " " 2,000.00 October i, " paid in 800.00 January i, Jones paid in 3,000.00 March I, " drew out 1,600.00 May 1, " " " 1,200.00 June I, " paid in 1,500.00 October I, • 3.000.00 Their Merchandise Account was Dr. $32,000, Cr. $27,000. Balance of Merchandise on hand per inventory, $10,500. Cash on hand, $4,900. Bills Receivable, $12,400. Chas. Green owes on account $250; F. Draper owes $700 ; Wm. Clark owes $650 ; F. Hart owes $850. They owe on their notes $i,8giD. They owe A. Reed on account $240; owe C. Smith $500; owe A. Clark $100. Their Profit and Loss Account shows before closmg, entries, Dr. $866; Cr. $1,520; Expense Account is debited $2,520. Com- mission Account is Cr. $2,760; Interest is debited $480; Cr. $950. The gain or loss is to be divided in proportion to each partner s capital, and in proportion to the time it was invested. Prepare (i) Asset and Liability Statement; (2) Merchandise Account closed; (3) Profit and Loss Account closed; (4) each partner's account closed; (5) Balance Sheet. Solution. STATEMENT OF ASSETS AND LIABILITIES OF THE FIRM OF BROWN & JONES, DECEMBER 31, 1902. Assets. Cash on hand $4,900 Bills Receivable 12,400 Accounts Receivable: Chas. Green $250 F. Draper 700 Wm. Clark 650 F. Hart 850 Merchandise Inventory $2,450 10,500 Liabilities. Notes Payable $1,890 Accounts Payable: A. Reed $240 C. Smith 500 A. Dark 100 $840 Notes Receivable Dis- v'^*" counted 7,556 MERCHANDISE ACCOUNT. Dt. . . To Purchases, etc $32,000.00 Dec. 31, To Profit and Loss 5,500.00 $37,500.00 Or. By Sales, etc.. $27,000.00 Dec. 3 1 , By Inventory 10,500.00 $37,500.00 56 Practical Accounting Problems. Dr PROFIT AND LOSS ACCOUNT. ^^ 1902 1902 To vSundries . . $866.00 BySundries.. $1,520.00 Dec. 31, To Expense. . 2,520.00 Dec. 31, By Commis- Dec. 31, To Interest.. . 480.00 sion 2,760.00 Dec. 31, To Brown's Dec. 31. By Merchan- share of net disc 5,500 .00 profits 5,386.43 Dec. 31, By Interest... 950.00 Dec. 31, To Jones' share of net profits. . . . . 1.47757 $10,730.00 $10,730.00 Dr BROWN'S CAPITAL ACCOUNT. ^^ 1902 1902 June i,To W i t h - Jan. i,By Invest- drawals.... $i,Soo.oo ment $9,000.00 Sept. i,To W i t h - May i,By Invest- drawals.... 2,000.00 ment 2,400.00 Dec. 31, To Balance.. 13,786.43 Oct. i, By Invest- ment 800 .00 Dec. 31, By share of profits. . . . . ■ 5.38643 $17,586.43 $17,586.43 1903 Jan. I, By Balance... $13,786.43 Dr. JONES' CAPITAL ACCOUNT ^^ 1902 1902 Mar. i,To W i t h - Jan. i,By Invest- drawals.... $1,600.00 ment $3,000.00 May i,To W i t h - June i, By Invest- drawals.... 1,200.00 ment 1,500.00 Dec. 31, To Balance.. 6,177.57 Oct. i, By Invest- ment 3,000.00 Dec. 31, By share of profits.. . .. 1.477-5 7 $8.977-57 $8,977.57 1903 Jan. I , By Balance. . $6,177.57 BALANCE SHEET OF THE FIRM OF BROWN & JONES, AS AT DECEMBER 31, 1902 Assets: Liabilities: Cash on hand $4,900 .00 Notes Payable. . $1,890 Bills Receiv- Accounts Pay- able $12,400 able 840 Accounts Re- $2,730.00 ceivable. . . . 2,450 14,850.00 Notes Receivable Dis- Merchandise Inventory 10,500 .00 counted 7.556 .00 Capital : Brown.... $13,786.43 Jones 6,177.57 . — 19,964.00 $30,250.00 $30,25 0.00 57 i '.I Question 7. (Pennsylvania Examination, May. 1905.) The Cambria Company was incorporated with a capital of $500,000, divided into 5,000 shares of $ioo each, to take over the assets and liabili- ties of the firm of John Martin & Co., and Chas. Burton & Co. John Martin and Henry Scott, his partner, each contributed $20,000 in cash to the company, and received in payment stock of the company at par. Chas. Burton and Thomas James, his partner, each contributed $15,0000 in cash to the company, and received in payment stock of the company at par. The net assets of the firm of John Martin & Co., were purchased by the company at 75% of their ledger values and full paid stock of the company given therefor. The net assets of the firm of Chas. Burton & Co. were purchased by the company at 60% of their ledger values, and full paid stock given by the company in payment therefor. The condition of the ledger accounts of the vendors were as follows: ASSETS AND LIABILITIES OF JOHN MARTIN & CO. Assets. Cash $5,000.00 Real estate (factory site) 15,000.00 Machinery and tools 7,500.00 Raw stock, lumber, etc 1,000.00 Raw stock, steel, brass, wire, etc 8,000.00 Goodwill 4,500.00 Accounts receivable 80,000.00 Liabilities. Accounts payable $27,000.00 Bills payable 70,000.00 John Martin, capital account 18,000.00 Henry Scott, capital account 6,000.00 $i2i,ooaoo $i2i,ooaoo ASSETS AND LIABILITIES OF CHARLES BURTON & CO. Assets. Raw stock $25,000.00 Manufactured stock 20,000.00 Accounts receivable 110,000.00 Goodwill 45,000.00 LlABILinES. Thomas James, capital account $150,000.00 Chas. Burton, capital account 50,000.00 $200^000.00 $200,000.00 Practical Accounting Problems. It was agreed that all the assets and liabilities acquired by purchase should appear upon the books of the company at the values shown in the "vendors" ledgers until the close of the third year, at which time goodwill should be charged to profit and loss account. And, it was stipulated that in the event the legitimate profit of any year from trading exceeded $20,000, the individual members of the firm of Chas. Burton & Co., were to receive 30% of said excess, and expense account be charged therewith but if the profits were less than $20,000 they were to pay the deficiency to the company, and expense account be credited therewith. The profit and loss account showed legitimate profits from trading, for the first year amounting to $27,000, and the second year amounting to $40,000, and the third year amounting to $15,000, before adjusting the claim arising from above stipulation as to the $20,000. The entire profits, irrespective of their source, were then paid to stockholders of issue, a§ dividends in full paid stock. Submit statement as follows: First. Give aggregate of net assets at the close of the first, second, and third years, assuming all debts to have been paid. Second. Give the amount due to each of the parties in interest in stock and undivided profits at the end of the first and second years respectively, assuming profit and loss account as being adjusted at these periods, and the amount of stock held by each stockholder after the actual adjustment of the profit and loss and dividend accounts, at the end of the third year. Third. Use given assets and liabilities throughout, with an additional account entitled " Increase," and submit balance sheets for the close of each period. Soluti* on. BOOKS OF THE CAMBRIA COMPANY Opening Entries Subscription $70,000.00 Unsubscribed stock 430,000.00 Capital stock $500,ooox)0 John Martin subscribes for 200 shs. @ $100 $20,000.00 Henry Scott " 200 " 100 20,000.00 Chas. Burton " 150 " 100 15,000.00 Thomas James " 150 " 100 15,000.00 Cash $70,000.00 Subscription $70,000.00 50 1 Accounting Problems and Solutions, John Martin $20,000.00 Henry Scott 20,000.00 Chas. Burton 15,000.00 Thomas James 15,000.00 $70,000.00 Real estate — factory site $15,000.00 Machinery and tools 7,500.00 Raw stock — lumber, etc 1,000.00 Raw stock — steel, brass, wire, etc 8,000.00 Goodwill 4,500.00 Accounts receivable 80,000.00 Accounts payable $27,000.00 Bills payable 70,000.00 John Martin & Co 13,000.00 Contingency 6,000.00 The book value of assets and liabilities acquired from John Martin & Co. . $24,000.00 Purchase price, 75% face value, payable in capital stock of company 18,000.00 Cash $5,000.00 " John Martin & Co $5,000.00 Transfer of cash included in purchase. Subscription $18,000.00 Unsubscribed stock $18,000.00 John Martin & Co 18,000.00 Subscription 18,000.00 Allotment of capital stock for equity in business of John Martin & Co., as per agreement : John Martin, 135 shs. @ $100... $13,500.00 Henry Scott, 45 shs. @ $100 4,500.00 $18,000.00 Raw stock $25,000.00 Manufactured stock 20,000.00 Accounts receivable 1 10,000.00 Goodwill 45,000.00 Chas. Burton & Co $120,000.00 Contingency 80,000.00 The book value of assets acquired from Chas. Burton & Co $200,000.00 Purchase price, 60% face value 120,000.00 Payable in capital stock of company. Subscription $120,000.00 Unsubscribed stock $120,000.00 Chas. Burton & Co 120,000.00 Subscription 120,000.00 Allotment of capital stock for equity in business of Chas. Burton & Co., as per agreement: Chas. Burton, 300 shs. @ $100. . $30,000.00 Thomas James, 900 shs. @ 100.. 90,000.00 $120,000.00 Practical Accounting Problems. PROFIT AND LOSS. (first year.) po expense — Chas. Burton & Co. 30% excess profits, $7,000. Due Chas. Burton, 54 sh $525.00 Due Thomas James, ^ sh... 1,575.00 (first year.) $2,100.00 By profits from trading $27,000.00 Net profit for j^ear. 24,900.00 $27,000.00 (second year.) To expense — Chas. Burton & Co. 30% excess profits, $20,000 Due Chas Burton, % sh $1,500.00 Due Thomas James, ^ sh... 4,500.00 Balance brought down (second year.) $6,000.00 By profits from trading ^et profit — two years. (third year.) To goodwill — charged off ^et profit — three years 58,900.00 $64,900.00 $49,500.00 115,400.00 $164,900.00 'o stock dividend: John Martin (185 shs.) $18,500.00 Henry Scott (135 shs.) 13,500.00 Chas. Burton (249 shs.) 24,900.00 Thomas James (582 shs.) 58,200.00 'o cash dividend: John Martin . . . Henry Scott . . . Chas. Burton .. Thomas James . 86.06 92.79 66.35 54.80 $115,400.00 $27,000.00 $24,900.00 40,000.00 $64,900.00 $58,900.00 Balance brought down (third year.3 By profits from trading $15,000.00 By Chas. Burton & Co 5,000.00 Due by Chas. Burton, ^ sh. . .$1,250.00 Due by Thomas James, ^ sh. . 3,750.00 By contingency — absorbed . Balance brought down. 86,000.00 $164,900.00 $115,400.00 $115,400.00 N0TE.--T0 maintain the original ratio of holdings of stock, the balance of dividend is apportioned )y cash payments from treasury. * 61 i ■liafeji V "I Accounting Problems and Solutions, BALANCE SHEET. COMPARATIVE EXHIBIT OF ASSETS AND LIABILITIES Assets. First Year, Cash $75,000.00 Real estate 15,000.00 Machinery and tools — 7,500.00 Raw stock 34,000.00 Manufactured stock 20,000.00 Accounts receivable 190,000.00 Second Year. $75,000.00 15,000.00 7,500.00 34,000.00 20,000.00 190,000.00 Third Year. $75,000.00 15,000.00 7,500.00 34,000.00 20,000.00 i90,ooapQ Increase $341,500.00 $341,500.00 $341^00.00 27,000.00 67,000.00 82,000.00 Less old debts paid $368,500.00 $408,500.00 $423,500.00 97,000.00 97,000.00 97,000.00 Less Chas. Burton & Co. $271,500.00 $311,500.00 $326,500.00 2,100.00 8,100.00 3,100.00 Net assets (exclusive of goodwill) $269,400.00 $303,400.00 $323,400.00 Goodwill 49,500.00 49,500.00 Unsubscribed stock 292/xx).oo 292,000.00 292,000.00 $610,900.00 $644,900.00 $615,400.00 Liabilities. First Year. Capital stock (authorized) $500,000.00 Contingency 86,000.00 Undivided profits ( see profits & loss) ♦ 24,900.00 Second Year. Third Year. $500,000.00 $500,000.00 86,000.00 58,900.00 115,400.00 $610,900.00 $644,900.00 $615,400.00 * Apportionment of undivided profits. Due to stockholders: First Year. John Martin $4,010.34 Henry Scott 2,932.93 Chas. Burton 5.38702 Thomas James 12,56971 Second Year, $5475.96 4,004.81 7,355.77 17,163.46 Third Year $9,099.76 6,655.0s 12,223.56 28,521.63 $24,900,000 $34,000.00 $56,500.00 STOCK LEDGER. JOHN MARTIN. HENRY SCOTT. Capital stock (for cash) 200 shares Capital stock (for cash) .......... " (for old business).... 135 (for old busmess). . . " •• (dividends) 185 " *' " (dividends) Total at end of 3 years 520 shares CHAS. BURTON. (for cash) 150 shares (for old business).... 300 (dividends) 249 Capital stock M U M « it Total at end of 3 years THOMAS JAMES. Capital stock (for cash) (for old business)., (dividends) II u M Total at end of 3 years 699 shares Total at end of 3 years. 62 200 45 135 shares 380 shares 150 900 582 share^ M M 1.632 shares Practical Accounting Problems, Question 8. (New York Elxamination, January, 1906.) Walter Hopkins, while perfectly solvent and doing a profitable manu- facturing business, had so tied up his capital in plant and materials that he was unable to pay his debts and was on the point of suspending for want of funds to pay for labor, and his creditors were preparing to com- mence legal proceedings to enforce a settlement. The condition of his affairs at this time was as follows: BALANCE SHEET. Assets. Plant Cash Materials, raw and partly finished 40,400 Finished goods 6,070 Accounts receivable 3^50 Liabilities. $25,198 Creditors $20,230 212 Capital 50,000 Surplus 4,900 $75,130 $75,130 At a meeting of creditors he said that while his plant was entirely cflScient, it was all of special character and would realize on forced sale only the value of scrap, that the unfinished goods would require the em- ployment 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 re- cuperation of the business. The subsequent operations under the supervision of the trustee were as follows: Purchases on book account, charged to materials $5,ioo, 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, $(500. 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 ac- count, (c) balance sheet of the estate as restored to Walter Hopkins. Solution. (a) Realization and Liquidation Account. fj*"t •: $25,198 Creditors $20,230 Materials 40400 Loan from creditors 5,000 Finished Goods 6,070 ^^^ Accounts Receivable 3,250 $25,230 $74,918 63 |i n Y Accounting Problems and Solutions. Practical Accounting Problems, Expenses 4»350 Labor 12,500 Plant 600 Creditors (new and old) . . . 42,030 134,398 liabilities not liquidated. Creditors 400 Net profit • 3>370 $138,168 Assets realized. Accounts Receivable (new and old) 58,100 83,330 Assets not realized. Plant 25,798 Raw Material 4,ooo Finished Goods 22,388 Accounts Receivable 2,652 $138,168 (b) Trustee's Cash Account. Amount on hand (W. Hop- kins) ?2I2 Loan from creditors 5,ooo Accounts Receivable 58,100 $63,312 Labor 12,500 Expense 4,350 Plant «» Creditors 42,030 W. Hopkins, drawings 3,ooo Balance on hand 832 $63,312 (c) Balance Sheet. Cash (Trustee) $832 Creditors - ■■■v'-— ^4°*^ Accounts Receivable 2,652 Capital & Surplus . . $54,900 Finished Goods 22,388 Realization & Raw Materials 4/x» Liquidation Plant 25,798 Net P. &L $3,370 Less Hopkins' drawings ... 3.000 370 55.270 $55,670 ^5.670 Question 9. (New York Examination. January. 1906.) I. The Parker Construction Company is unable to meet its obligations and is forced into liquidation. At the time the receiver takes charge of its affairs the following trial balance is prepared from the company's books : Cash $500 Land and buildings. 10,000 Mortgage on land and buildings Plant and equipment 20,000 Creditors Completed contract accounts (losses) 18,000 Capital Uncompleted contract accounts (outlay) 30,000 Securities acquired in settlements 15,000 Debtors* accounts for completed contracts 6,000 Expenses 6,500 Inventory of materials 2,000 Profit and loss (deficiency) 9,400 $117,400 $8/x» 59.400 50,000 $117,400 The sureties on the unfinished contracts estimate that a further outlay of $20,000 will be required to complete the work and realize the contract price of $40,000, and their offer to take over the materials on hand for $1,500, as part of said cost, is accepted by the receiver. Of the securities acquired $5,000 is pledged to secure $11,000 due creditors, and $10,000 is pledged to secure $9,000 due creditors. The company owes for taxes on real estate $100 and for salaries and wages of employees $1,200. which sums do not appear on the books. The company has dis- counted customers' notes for $3,000, of which subsequent advices indi- cate that $1,000 will be dishonored, and a debtor owing $1,500 on un- secured account has failed and disappeared. It is estimated that the amount realized on land and buildings will be sufficient to satisfy the mortgage only, and that plant and equipment will realize only 6% of the book value. Prepare a statement of affairs and deficiency account 65 I Accounting Problems and Solutions. Solution. (First Form.) STATEMENT OF AFFAIRS Total Schedule Expected to Liabilities No. J^^"*^ $8,000.00 Mortgage f $8/)OO.oo 59,400.00 Creditors : Secured $15,000.00 Unsecured 44^00.00 44,400.00 1,000.00 Endorsement 1,000.00 1,300.00 Preferred Creditors; deducted from Assets Wages $1,200.00 Taxes 100.00 ao/)00.oo Sureties on Contracts 20,000.00 Contingent liability for endorsements 2,000.00 $73400.00 $89,70000 _ _„,„„ Nominal Schedule Expected to Assets No. Produce $500.00 Cash on hand $500.00 15,000.00 Securities: Pledged with creditors 6,000.00 Accounts Receivable 4,500.00 2/xx}.oo Materials 1,500.00 30,000.00 Uncompleted Contracts 40,000.00 10,000.00 Land and Buildings 8/X)0.oo 20/xx>.oo Plant and Equipment 1,200.00 $55,700.00 Deduct Preferred Creditors i>3oo.oo $54,400.00 Balance (deficiency) 19,000.00 . $73,400.00 $83,50000 - — DEFICIENCY ACCOUNT Capital at beginning of Receivership $40,600.00 Deficiency as per Statement of Affairs 19,000.00 $59,600.00 Expenses prior to Receivership: Expenses ^,500.00 Losses 18,000.00 Wages 1,200.00 Taxes ^^-^ Endorsement 1,000.00 $20,800.00 Shrinkages : Land and Buildings $2,000.00 Plant and Equipment 18,800.00 Accounts Receivable 1,500.00 Materials 500.00 $22,800.00 Loss on Contract 10,000.00 $ 59,600.00 tt6 r V t Total Liabilities $39,400.00 11,000.00 9,000.00 8,000.00 3,000.00 20,000.00 1,300.00 $91,700.00 Practical Accounting Problems, Solution. (Second Form.) STATEMENT OF AFFAIRS Expected to Rank Creditors unsecured $i3g^4oacx) r ^* partly secured $11,000.00 X Securities at estimated value 5,000.00 6^ooaoo r " fully secured 9,000.00 Securities at estimated value 10,000.00 Surplus to contra $1,000.00 Mortgage— Fully secured by Land and y i Buildings 8,000.00 ^ Land and Buildings expected . to produce 8,000.00 l^ Customers' notes discounted i/xxxoo Sureties on uncompleted contracts for Cash to be advanced to complete. . 20,000.00 Less stock of materials on hand taken over at 1,500.00 Fully secured by "Contract Price" — Deducted Contra 18,500.00 ^ Preferential Creditors: Wages and Salaries 1,200.00 ^ Taxes 100.00 ^ Deducted Contra $1,300.00 $46,400.00 Nominal Assets $500.00 Cash on hand 10,000.00 Land and Buildings, deducted contra. . 6,000.00 Sundry Debtors: Good Bad 15,000.00 Securities in hands of creditors: Partly secured Fully secured $8,ooaoo t^ 1,500.00 Expected to Produce $500.00 5,000.00 10,000.00 4,500.00 l^ Surplus from securities Ig O OOuOD 67 Y Accounting Problems and Solutions. 2,000.00 Materials on hand, turned over to Sure- ties at $1,500.00 1^ 20,000.00 Plant and Equipment 6% ? 1,200.00 r 30,000.00 Cost of Uncompleted Contracts. Con- / / tract Price 40,000.00 ^ > / Less Cash required to complete...... 18,500.00 y 21,500.00 V $28,700.00 Deduct Preferential Creditors i>3000Q $27,400.00 Deficiency 19.000.00 $83,500.00 $46400.00 Practical Accounting Problems. Question 9a. (New York Examination, June. 1909.) A firm manufacturing but one grade of cloaks, insured against bur- glary, claims to have been robbed on the night of September 10. The proof of the loss filed by the assured contained two items for 600 cloaks, $12,000; silk, 1,000 yards, $1,500. An inventory of stock on hand, consisting of cloaks, cloth and silk, had been taken January i, amounting to $118,500, the particulars of which have been lost or destroyed. An analysis of the firm's books produced the following information: Purchases of cloth, 37,500 yards at $1.00 " silk, 10,000 yards at 2.00 6,000 cloaks were manufactured, consuming cloth, 40,000 yards at $1.00 silk, 10,000 yards at 2.00 9,000 cloaks were sold between Jan. i. and Sept. 10 Cost of sales, per cloak, for material $10 .00 " '* for labor and sundries 7 . 00 $17.00 Inventory, September 11, 2.500 cloaks, at $17 .00 12,500 yards cloth at i . 00 5,000 yards silk at 2 .00 Prepare a report proving or disproving the claim. !"■' I"' €^ 69 Accounting Problems and Solutions. o o o o q 00 i^i'V o o o o o o o o o o o o o o o o m v> o O oo « • o o o o o o ■> • • 14 CI t^ 'H.-S8 - ~ « 3 2 '^ o o o $ o§ o o o too O Q ♦a .S t<. O >0 ^ llll o o o o q 00 o o • o o o « to o o * o o q lO o o o q q o o o o o o o io»oq « « o ^ M M o o to o o o o o o • • • o ^ o o« 2 3 IJ rt .>* •»-• i . o o o ►»o o o JH I0»0 O « « lO o o u CIS C3 bo •c o o o o o \n 00* OT to •d'd ° 2 o o o »o « • o o o r^ o o O q^vj d « CO O O CO o« o o o o M 3 (-1 cs d cn< 70 to o o q »o 000 000 q q^ q^ d >od o o in « O O 000 000 10 q q CO w ►^ 000 000 O >o»o -a Qm> Practical Accounting Problems. Question 10. fu,J (The following problem which was submitted to students in the Evening School of Accounts and Finance, University of Pennsylvania, is closely similar to several C. P. A. problems in partnership adjustments.) / ri Harvey French and Andres Deyo were partners in the business of manufacturing lathes, sharing profits equally. Deyo was the financial man, having charge of the books and accounts; French had invented the lathe and knew the practical part of the business. On January i, 1899, Deyo retired from the concern. The capital accounts of the two partners on that date stood ; French $15,000, and Deyo $16,000. French agrees to pay Deyo for his half interest in the business the sum of $20,000. Of this amount $5,000 was paid in cash (from the funds of the firm) and for the remainder Deyo accepted French's note which was secured by a mortgage on French's dwelling house. Because of French's lack of knowledge regarding accounts, the cash payment alone appeared oii his books. French conducts the business himself for five years. He was not aware of the fact that Deyo had regularly depreciated machinery 10 per cent per year (on the reducing basis) and failed to take depreciation into considera- tion when closing his books. The Profit and Loss Account on his books shows profits for these five years to have been $5,000, $5,300, $6,750, $8,500 and $10,600. French has withdrawn over and above salary $16,250. Elmer Savage, a friend of French, also a practical machinist, has come into possession of a large inheritance. He knows the flourishing condition of French's business and wishes to buy a half interest. The premises which French had been occupying were poorly adapted to the needs of the business. They both are of the opinion that a modem factory building would very materially reduce the cost of production, and also facilitate prompt delivery. They agree that the good-will is worth three times the average profits for the last five years.. Savage is to obtain a half interest in the business and good-will, by investing cash equal to the capital account of French on January i, 1904, also cash equal to half the good-will. French's bookkeeper, on January i, 1904, makes up the following state- ment : Cash, $150; Machinery, $45,000; Accounts Receivable, $14,000; Fin- ished Lathes (20) costing $500 each, selling price $750; Half-finished Lathes (10) costing $325 each; stock of Bar Iron, Ostings, Wheels, Extras, and other supplies, $3,500 ; with liabilities in the shape of Accounts and Bills Payable amounting to $30,000. The above figures do not take into consideration depreciation on machinery. French has bought machinery for plant during the five years as follows : $3,000, $3,500, $4,000, $4,500, $5,000 respectively. It is desired to place the full value of the good-will account on the books. Savage is admitted as of January i, 1904, on the above terms and according to the figures given above. Show the entries necessary to giv*,**. effect to the wishes of the partners. 71 'V K .-7 K ;.| / I i /t Accounting Problems and Solutions. On March i, the Garvin Machine Company instructs French to deliver Jwojiiachines which French had been holding for shipping instructions since September, 1903. The bookkeeper then awakes to the fact that these had been charged on his books on September 20, 1903 ; that he had over- looked this charge and had included them in his inventory. The partners /' agree to make the correct adjustment at the end of the year. Being, how- ever, unable to arrive at an agreement at that time they call in an account- ant who finds the following facts recorded on their books: Cash, $1,000; Machinery, $50,000; Building and Real Estate, $40,000; Accts. Rec. Good, $9,000; Sales, $122,480; Purchases from January I to date, $50,000; Wages, $36,000; Rent, $3,000; Mfg. Expenses, $10,000; Selling and Adminis. Exp., $6,000; Accts. Pay., $4,000; Expense of mov- ing machinery, $7,375; Good-will, (?); French Capital Acct, (?); Savage Capital Acct, ( ?) ; Stock on hand: 5 finished lathes at $500 cost, 14 half finished at $325, and raw material and supplies amounting to $8,000. While moving the machinery from the old building to the new factory it was necessary to work overtime in order to get out lathes to fill orders for customers, for which wages were paid at the rate of time and a half. The amount of such overtime was $9,000 and is included in the $36,000 mentioned above. Both partners are fair minded; neither desires to obtain an advantage ^vcr the other. Both agree on a depreciation from January i, 1899, at the rate of 10 per cent, on the reducing basis ; also agreeing that a con- tribution shall be made by the partner having the lesser capital to bring ^his interest up to that of the other, also that in distributing the profits */ for the present year an allowance of 6 per cent, interest on excess capital invested during the past year shall be made. Make a statement to be given to the partners and show on this state- ment the amount necessary to be contributed, also the division of profit for 1904 and make any correcting entries you think necessary. Solution. > To give effect to the wishes of the partners the following entries should be made on the books of Freiich and Savage : * Jan.i. Goodwill,!]^ $21,690.00 To French CapitafTVccount $21,690.00 Value of Good Will as agreed upon by French and Savage, viz. : Total Profit Jan. i, i^, to Dec. ^i. 1903 $36,150 -^ Average Profit one-fifth, or $7,230 Value of Good Will as agreed upon by French and Savage (three times aver- age profit) .,,*., 21,690 72 - / -y I ■■■■ Practical Accounting Problems, Jan. 1", Cash, Dr $56,745-00 To Savage Capital Account. .St $56,745-00 Investment of Savage: One-half Good Will $10,845 French Capital Account 45,900 $56,745 Jan. I. French Capital Account, Dr $5,422^0 To Savage Capital Account $5,422^50 To equalize the interests of the part- ners in the Good Will. The following correcting entries are necessary on the books of French and Savage: Sundries, lOr. to Good Will $9,665.36^^ AFrench Capital Account $5,249*02 ^Savage Capital Account 4,416.34 , Correcting the valuation of Good Will as follows: Value placed on books Jan. i, 1904 $21,690.00 Revised valuation after taking into con- sideration depreciation on machinery, and the error in inventory: Profit for five years, $20,041.07. Good Will will be three-fifths, or 12,024.64 • Excess charged back $9,665.36 «^ French's Capital Account received credit for three- fourths; of the original valua- tion, or $,16,267.50. Of -the revised valuation his account should receive credit for the value ' / of the Good Will on Jan. i, i899-($8,-*^ / / 000.00), plus th ree-four ths tl;ie increase in value of Good Will ($3,018.48), making a total credit of $11,01^4^. The difference ($5,249.02) between the amount first credited ($16,267.50)," ' and the above figures ($11,0 18.48) ^ust J , ,^ , be charged back. , Savage's Capital Account received credit for one-fourtli7of the original valua- tion, or $5,422.50. Of revised valua- tion he should obtain credit for one- fourth the increased valuation since ^ Jan. I, 1899, or $t,oo6j6. Difference to be charged back, $4416.34. 73 A' ■mil ft* "^W ■C .) Illf^^ II pill &. Accounting Problems and Solutions. French Capital Account, Dr To Reserve for Depreciation on Machinery Depreciation. 1899 $2,800.00* " 1900 2,870.oot " 1901 2,983.00.x " 1902 3»i34-70' 1903 3,321.23* $15,108.93 Merchandise $16,108.93 15,108.93 $i,ooaoo Error in Inventory of Finished Lathes, two machines which were charged to Garvin Machine Co., Sept., 1903, being included in the list of finished lathes at $500.00 each. / French's Capital Account on January i, 1904, should have shown a balance of $37,791.07. This amount is reached by deducting from $45,900 the amount charged back per above entry and adding the value of Good Will as of January i, 1899, $8,000.00. - The amount which Savage should have invested according to the revised valuations is $39,803,39. or the sum of $37,79i07 and $2,012.32 (one- half increase in value of Good Will). To adjust the matter of interest between the partners the following entry is necessary: French Capital Account, Dr $508.25 To Savage Capital Account $508.25 Capital Account of French ../ $40,809.55 Capital Account of Savage . . .-?. 57,75i-i6 ^ ' " Total Capital $98,560.71 /!) Savage's capital being $8470.81 in ex- . cess of one-half, he is entitled to inter- f ^ est on this amount, or a credit of $508.25 French's Capital Account as revised being $8,470.81 lower than one-half, he is chargeable with a like amount of interest 74 \ Practical Accounting Problems. Profit and Loss Account— French & Savage, December 31, 1904. Sales $122,480.00'- Inventory, January i, 1904 $I5,750 - : ' ^ '' ^ .'^^ Purchases during year 50,000** £^« $65,750 Inventory, January i, 1905 15,050 * Cost of Material $50,700.00 Wages 36,000-' Less increased cost due to removal to new factory 3,000 33,000.00 Rent 3,000.00 • Manufacturing expenses 10,000.00* Depreciation on Machinery, 1904 3489.11 1 Total manufacturing cost $100,189.11 Gross Front 22,290.89 Selling and Administration Expenses $6,000.00 ^ Removal Expenses to new factory (20% of y total, $10,375) . . (\'})!\'^ 2,075.00^ • » ^ijTT^ 8,075.00 Net Profit for year $14,215.89 S BALANCE SHEET. French & Savage— January i, 1905. Assets. Cash $1,000.00 *— Accounts receivable 9,000.00 *0 row to M 0^ *o to • a 1^ c« o to s o 1#» o o c* o o H o o 31 M »^ r M Q H M o a o H O OS M ^* P« M Q o 2 ^fes ^^ S^ >o o vO -^ 0^ «^ rOOO MOO O M m* O Ov M t^ •o«o i^c« coei 1 o o o o o o o o o •* M t*. VJ M to O O o ^ M t*. ^ o o o lis M3 O u ^ o o o o o o o q q "«? to vO>0 10 S o o- ^ CO • i 4-> o ■M o o -J g N O CO ^ 0) ^ 12 o . toS to.S o ** is ^ a *^ .a (0 CO rt CO V a a o tn to ^5 o M C« o o q ^ to CO o 03 •4-1 O u m ■ O o o >to C4 Practical Accounting Problems. Question 14. (Michigan Examination, July, 1906.) Following is a list of the Accounts appearing on the Trial Balance of a Manufacturing Company which deals in finished Merchandise pur- chased as well as in its own products. From this list, and without using figures, draw up plans of Financial Statements (Balance Sheet, Manu- facturmg Account, Profit and Loss Account, etc.) in the form which you thmk most suitable: Accounts Payable Salaries, Management Capital Stock Bills Receivable Cash Bills Payable Salaries, Office and Store Real Estate Fuel Insurance (Plant) Light Freight (on Merchandise purchased) Machinery and Tools Freight (on Raw Materials) Buildings Sales (own product) Inventory (own products) (Raw Materials) ** (partly Manufactured CJoods) " (Merchandise purchased) ** (Repair Supplies) Sales (Merchandise purchased) Undivided Profits (end of last year) Purchases (Merchandise) Rent, Factory Rent, Store and Office Printing and Stationery Accounts Receivable Advertising Purchases (Raw Material) Machinery Repairs Productive Labor (Factory) Labor (Warehouse) Office Furniture Reserve for Bad and Doubtful Accounts Reserve for Depreciation Insurance (Merchandise) Bad and Doubtful Accounts. Travelers* Expenses and Salaries Management Salary, Factory Management Salary, Office Discounts allowed Interest Payable Depreciation Sundry Factory Expenses Sundry Office Expenses Postage Subscriptions and Donations Discounts Received Rents (Receivable) Insurance unexpired, Plant Insurance unexpired, Merchandise 8s " '' \ » 1 ' n ' u 1 I Accounting Problems and Solutions. Solution. MANUFACTURING ACCOUNT. To Inventory of Raw •> Materials $. Inventory of partly manufact'd goods. . Purchase of Raw Materials Freight on Raw Ma- terials Productive Labor. . . _. To Balance from prime cost $. Fuel Light Machinery Re- pairs Less Inven- tory Repair Sup- plies Depreciation (on Buildings, Ma- chinery and Tools. Insurance on plant Less unex- pired Management Salary Rent of factory Sundry Factory Ex- penses By Inventory of Raw Materials at the end of the period. \ Goods in process of manufacture at the end of the period Balance (First or prime cost of goods manufact'd) during the period By Cost of Production. Practical Accounting Problems. (n^ To Inventory (Mdse. b't.) Purchases Freight Inward Gross Profit on goods bought By Sales (Mdse. b't.), less returns, al- lowances, etc. ... $ . Inventory (Mdse. b't.) at the end of the period PROFIT AND LOSS ACCOUNT. * TRADING ACCOUNT. 5> To Inventory (our own product) Manufacturing Bal- ance Labor (Warehouse). Salaries, Manage- ment Rent, Store and Office Salaries, Store and Office Insurance (Mdse.) Less unex- pired By Sales (our own pro- duct), less re- turns, allow- ances, etc Inventory (our own product) at the end of the period Advertising Travelers' Expenses and Salaries Discounts allowed. . Gross Profit (our own goods) 85 To Management Salary, Office Depreciation of Of- fice Furniture. . . . Printing and Sta- tionery Postage Office Expenses Bad and Doubtful Debts Subscriptions and Donations. Balance, being ordi- nary profit on the business for the By Gross Profit on our own product $. Gross Profit on goods bought current year. To Interest Payable. . . Net Profit for the year To Surplus $. By Balance, being or- dinary profit for the year $, Rents Received Discounts Received By Undivided Profits (last year) $ , Net Profit current year 9r ml Accounting Problems and Solutions. m m m o < 10 M *-• m < z Hi o *.SJ a> • • OS PU >. M cfi CO c tn o u (X) • •^ o o S3 m< 0> H H 09 CO < Si: H Ci a O CO co::2 u < < I o a o Q •d a a -a PQ o > U o CO o 1^ o Q •d •d a a o CO 'O O O 10 •a CO CO o QQ >'0 'd :^ ^d* •2" C CO O « M -d p'«« On ^ O^ 0^ <^ 9fi > CO O 2 •a o «5 o o a c: ^8 nJ'd u CO ^d X- a M H CO CO < Q H •d a cd bin •jag oJ rj •d a a .2 e4 a O 8Q c« CO 'c3 10 Ih cfl a •d a ctf CO "o O H fl Practical Accounting Problems. Question 15. (New York Examination, June, 1906.) The following is the trial balance of the Arlington Manufacturing Co. at the close of business, December 31, 1904, the end of the second nscal year of the company's operations: Cash Land Buildings Machinery Tools and implements Horses, wagons and harness Office furniture Bills receivable Accounts receivable Investments Salesmen's accounts, advances on salaries Organization expenses, $15,000, less 2% Goodwill Bills payable Accounts payable Special accounts — officers and clerks Reserve for bad debts — less accounts written oflF depreciation — buildings 2^% " machinery 6% " horses, wagons, etc. 10% Capital stock 10,000 shares at $100 Sales less returns and allowances Rent of part of business premises Inventory December 31, 1903 Purchases, including furniture and cartage Labor — ^factory pa3rrolls Salaries of officers, clerical force Salaries of salesmen Advertising Taxes ! Interest and Discount Maintenance — ^repairs, buildings, machinery, horses and wagons. / Profit and Loss, 1903, surplus Expenses, stable, office, legal, and unclassified . . II «< II II $25,324 100,000 200,000 300,000 40,430 30,000 5.30I 25,812 163,374 20,000 1,960 14,700 200,000 104,621 395.662 600,400 75.120 60,440 50,300 4,020 2,600 6,500 26,942 • ••••• 29.750 $2,483,156 $42,000 98,511 15.363 112 S.ooo 18,000 3.000 1,000,000 1,240,600 500 60,070 $2,483,156 Note: Inventory December 31, 1904 $270,560 Factory payrolls accrued but not paid. . . 5, 75© Unexpired insurance 912 From the trial balance and notations, prepare a trading account and a Profit and Loss Account, writing off 2% of organization expense. After stating the net profits for the year, make the same reserves for deprecia- tion as were made at the end of the first or preceding year. Show as a final balance at credit of Profit and Loss the surplus available for divi- dends. Also prepare a balance sheet as at December 31, 1904. 89 f * I n I r ill m i' li III i| to Accounting Problems and Solutions. o o Cf o d" CI nil o c o T3 C OS 10 -** a o ^3 •S i CO 03 eo o o M O o MOO Tf O o On O O 00 00 *0 _ _ , M VO t^oo' o ro O o o M (1 O o- H» CO eOO 00 vO O o O tx O O O •'i ■^ *^ o" «n O O o* «o o • (U ■ Q m >> m Im •i) n (0 •M .-tf c^ V o > n 1— 1 a. o ir^ O « O M bo 4) G O o g a o a> C Q -O o S o o a> u u u u u 't:? VQ* > >'-^ li (-■ CO
  • ^ U, r«. o O m oi fO O t* **. t^O fO O M e« «> * •• O '* ^ O M 00 «» M M •» ^1 O o o ■ < tn O Q O O o o •k to o o o o o o *>. O « rt O U^ O O PO M ^ fO tx »0 M lO o' O" OnnO «t c^ to CO C o bo M s o o o Ctf O j-j o a. • « ■ o ■ ' o » : a ■ •*-» •c :^ to 00 C4 00 o u •M o PracUcal Accounting Problems. o CO o « o to q c« « o 00 o o o M « o VO «0 o O M m lOOv O M o •k r^ CO 5 « 4j O CO J3 a> eg p oJsa3 'd a o • .» d B O ■4-> G 9i to ■ 0) CO U I-I Si o o o o CO ed (U - « o '^ 0} c> d t> 8 G 56 OI3 01 Yli I* f I r t Accounting Problems and Solutions. Question 16. (State of Washington Examination, June, 1906.) A and B, who had hitherto been in business separately, decided to enter into partnership on July i, 1905. The Balance Sheets of A and B were on that date as follows: Liabilities. Accounts Payable. .$1,000 Capital Account. . . . 5,000 $6,000 $6,000 Assets. Furniture $ 750 Accounts Receivable (face value) 2 ,500 Merchandise 3>S5o Cash 200 $6,000 B. Liabilities. Accounts Payable . . $ i , 500 Capital Account . . . 3,000 $4,500 $4,500 Assets. Furniture $ 600 Accounts Receivable (face value) 1,500 Merchandise 2,000 Cash 400 $4.5;oo It was agreed that A and B should make over their respective accounts receivable at $200 and $150 less than the face values shown in the Balance Sheets, these amounts to be charged against their Capital Accounts and carried on the partnership books as a reserve for bad and doubtful accounts. Of B*s furniture, only $250 was to be taken over by the partnership. With the above exceptions the assets and liabilities of the parties were to be taken over by the partnership at the Balance Sheet figures except that B was to invest in the partnership, in cash, a sum which, after making the adjustments above referred to, would make his capital account the same as that of A. Draw the Balance Sheet of the A and B partnership on July i, 1905, giving effect to the foregoing provisions. % Solution. BALANCE SHEET OF THE FIRM OF A AND B, AS AT JULY I, 1905. Assets. Cash $2,900 Accounts Receivable $4,000 Less Reserve for bad debts 350 3,650 Merchandise 4t55o Furniture i ,000 $13. TOO Liabilities. Accounts Payable $3,500 A. (Capital Account $4,800 B. Capital Account . 4,800 9,600 $13, too m k* m Practical Accounting Problems. Question 17. (State of Washington Elxamination, June, 1906.) X receives from his customer, Y, a note in settlement of his account This note X discounts at his bank. Draft entries. Solution. X's Books. Notes receivable $- To Y for his . . days' note, in settlement of account. Cash Dr $- Proceeds of discounted note, received from Y. Discount Dr $- on Y's note for . . days. To Notes Receivable Discounted Cr. for Y's note discounted at the bank. Y's Books. X $- To Notes Payable for our . . days' note given in settlement of our account up to date. $- Question 18. (State of Washington, June, 1906.) X and Y enter into partnership, X's capital being $20,000, and Y*« ^15,000. Capital is to bear interest at 10% per annum; profits are to be divided equally between the parties. The profits for the first two years (after charging interest on capital) were: ist year $6,000 2d year 7,5oo and the drawings of the partners (in excess of salaries) were: X $1,500 first year, $1,750 second year Y 1,200 " " 1,500 " At the end of the second year, Z was admitted to partnership, and put into the business the same amount of capital as Y had in the business at that time, and on the same conditions as to interest and division of profits. The profits of the business for the third year were $12,000. and the partners' drawings in excess of salary were: X $1,750 Y 1,600 Z 1,500 Construct the capital accounts of the partners for each of the three years, showing the balance of each at the end of the third year. 93 Il Accounting Problems and Solutions. Solution. X'S. CAPITAL ACCOUNT To Withdrawals $1,500.00 10% Interest on same . 150.00 Balance carried down.. 23,350.00 $25,0 00.00 To Withdrawals $1,750.00 10% Interest on same. 175.00 Balance carried down .27,510.00 $29,43500 To Withdrawals .$1,750.00 10% Interest on same . 1 7 5 . 00 Balance carried down. 32,336.00 $34,261.00 By Investment $20,000.00 10% Interest on same 2,000.00 50% of profits (ist yr.) 3,000.00 $25,000.00 By Bal. brought down. .$23,350.00 10% Interest on same 2,335.00 50% of profits (2d yr.) 3,750.00 $29,435.00 By Bal. brought down. .$27,510.00 10% Interest on same 2 , 7 5 1 . 00 331% of profits'(3d yr.) 4,000.00 $34,261.00 By Bal. brought down $32,336.00 Y'S. CAPITAL ACCOUNT. To Withdrawals $1,200.00 10% Interest on same . 1 20.00 Balance carried down .18,180.00 $19,500.00 To Withdrawals $1,500.00 10% Interest on same . 150.00 Balance carried down . 22,098.00 $23,748.00 To Withdrawals $1,600.00 10% Interest on same . 1 60.00 Balance carried down. 26,547.80 $28,307.80 By Investment $15,000.00 10% Interest on same 1,500.00 50% of profits (ist yr.) 3,000.00 $19,500.00 By Bal. brought down. .$18,180.00 10% Interest on same 1,818.00 50% of profits (2d yr.) 3,750.00 $23,748.00 By Bal. brought down. .$22,098.00 10% Interest on same 2,209.80 33i% of profits (3d yr.) 4,000.00 $28,307.80 By Bal. brought down $26,547.80 Z'S CAPITAL ACCOUNT. To Withdrawals $1,500.00 10% Interest on same 150.00 Balance carried down . 26,657.80 $28,307.80 By Investment $22,098.00 io%Interest on same 2,209.80 331% of profits 4,000.00 $28,307.80 By Bal. brought down $26,657.80 Practical Accounting Problems. Quesrion 19. (New York Examination, January, 1907.) a;J!!L ^^^ ?i* ^^^^^ ^^^*' ^^?^ estate agent, for the year looo, Titles of Accounts Cash Tenants Rents accrued . . . . Owners Clients Trade creditors. . . . Fees Commissions Discounts Expenses Personal drawings . Office furniture . . . Capital Balances Dec. 30, 1905 $9,760.08 1,060 260 $1,060 2,500 5.929 444 Transactions in 1906 500 1,647.08 $11,580.08 $11,580.08 $137,797.62 34.656 34.788 34.610 100.934 4.841.40 $135,893.70 34.788' 34.656 34,788 102.070 5.007.40 125 3. 118.92 180 Balances Dec. 31, 1906 1,000 2,000 $350,627.02 $350,627.02 $11,664 928r 104 1,000 2,000 500 $9a8 2,678 6.909 610 125 3.118.9a 180 1.647.08 $16,196 $16,196 94 An analysis of the books afforded further information as follows : annijfS^^ "^^^^ allowed $71 for repairs made by them, which sum was applied on account of rent and charged to owners. rr^H;f^?^"i.-iT^'? charged for commissions on collections $869.70, trade creditors bills for repairs $3,566 and insurance $52. *°^/"' on salefli^r ^ ^''^^'^' insurance $668, coal $906, fees $125, commissions !Rc J''rn^*'««1^.*'*" presented bills for office supplies $50, insurance written made ^^5-40 ; they were allowed $180 for discount on settlements wer?S^i!f'°"f "^1 ^^^^'' collections, insurance written and coal orders wrs^rtnrfer;ed't^Ex%"n"^^^ ^°""""^" ^^^°"^*' ^^ ^^^^^^^ ^<^--^ .mZ}"^ f^^^ transactions were as follows: Receipts—tenants, $34,717. clients $102,970, commission on sales $1,010.62. Paymentt-^wners &^%^e%5T'"''' '''^' creditors*$4,66i.40, perCaT'^rS Prepare an Articulation Statement, showing in each account the several elements of debit and credit and giving each element the t?tie of the Arttculatmg account wherein the contra credit or charge appears! Solution. cnoi•^^"^^^""f * ^^^^.^'■. ^ "^'^^ ^^«^* °f paper (here divided to economize aS^nf^/'/'K^*' *^°"taining perpendicular columns. The captions of^he SS?ron.'o?fh! ^"^^^""i^ ^'' P^""^ '"^ *^ fi^«* ^^l"'"" to the left the captions of the nominal accounts across the top of the sheet. vnthfL^A^l^^T] ^^«e* »s ji^Vl^^ *"^^ ^^^'^ an> a «< z < o f* as H M m -< t* m X o H < S o Z Is o •2 * 2 "2 . o • o . o ;>q ; a ;« 100 o o . o> o o q . •f> *i d 00 • ^ ^00 « • no M o> ' »o ►« o q o Dr. Balance Dec. 1906 • 00 « 0* «» • M 500.00 1,000.00 2,000.00 q «q M HI o q a M 6 9 . O . O • o ■PO o o ■ o 00 c o M o o * o 00 m .2 ■3. CO ....... • ....... Q v> ; I ; ! I I .'•* q d 0) .2 P. a 3 CO o o o . o . o ■sd o o •»»••• • 00 8 c s o o o o ■ N '00 o o d u u C 2 3 CO . . . ■ M a> O lA l"6 .0.00 . t« . O O ■ » • in4 •*o • « o 00 • H o o o> 00' s '5 & m o o o o • • * •*) *q -3 a V (4 . . . M * . . . . • • ■ 10 • • ■> . . Hi • • & (I O o « o o • o ■ o . . . . • •00 00 • • . . . 10 ■ ■> * . . . . ►* ■ • *l 00 ■ • ■li * • »; c 2 o o • o o o s d to o o • o o 3 oO So I U e So .a a .00 . o d 00 o o 00 82> lil|)!-iB||^ o 4> S •- o g o o • Ok M Ok o o Si HO S It B o 00 o o o ». : o -o • o 00 o d 00 tn G P :^5 • « S g S-l g-a S-i Jl f- Practical Accounting Problems, Questions 20-21. (New York Examination, June, 1907.) (This was one of the required problems and was rated as equivalent to two questions.) The books of a manufacturing concern, operating under a system of cost accounts, show the following conditions at the opening of the fiscal year: Raw materials in storeroom, $15,621.42; factory pay roll, applied and distributed but not paid, 2 days, $831.78; partly manufactured goods, at prime cost, $63,888.44 ; and the further value of $8,037.17, to cover fac- tory burden, also $12,074.92 to cover management charges ; finished wares in stock at total cost of $21,656.01. The financial operations during the ensuing year include: purchases of raw materials, $80,416.45; factory pay rolls, $125,793.90; factory expense including wages not applied to cost accounts, $24,846; manage- ment expenses, $38,100; interest paid on loans, $1,200; income from investments, $5,004. The manufacturing operations during the same year comprehend: raw materials issued on requisition for consumption, $79,820.34; wages applied and distributed to manufacturing cost, $120,250.40, and to factory expenses, $5,959-39 included in the sum stated in preceding paragraph. Finished goods transferred from factory to warerooms, at prime cost, covering materials, $78,542.58, and labor, $ii8,333-75. The trading operations during the same year comprehend: cost of goods sold, $251,949-90; proceeds from goods sold, $302,339.88. At the close of the year the partly completed goods included, in addition to prime cost, the further elements of value to cover factory and management expenses in the amounts respectively of $8,439.02, and $12,678.66, and factory pay roll for three days amounting to $1,247.67, which has been applied and distributed, though not due till the close of the current work. The basis of the apportionment On Cost or Overhead Giarges was as follows: factory expense 20% to materials and 80% to labor; manage- ment expenses 30% to materials and 70% to labor. The transactions of the previous year in round amounts were used in calculating the current year's apportionments, viz: Materials, $75,000; labor, $115,000; factory expense, $24,000; management expense, $36,000. Open the general ledger accounts that control the cost accounts ; show the operation of each and the net profits resulting ; also calculate the per- centage to be added to each $1 of material and of labor to give the total cost. 07 2 a en :tS I I IS < o O o < pq m X H O H o o o < H 03 O U Accounting Problems and Solutions, Practical Accounting Problems. 09 < m ^ fO r« f^ xn 00 O t^ t^ « •-• **) 00 M o OvnO ^0 o « lO «>. '*'♦ 00 > • • Ni ^0 t^ W M to ' NO ■* o «o o o M 00 o* «» «» vo" >4 •4 O (A >* < o u ■< Pk 9B 00 o • • M O 00 n •» d 0^ r* »>» «^ to ■ • • Ov M «>. m •* ■* c> « »o t^ M CI «» f 4* •a p. cd a I pq w> O M 00 O 1^ cd ■8 a I Co a> bo cd c -I n V H CO a -< a: M u O o H U «< w « 00 cd «*5 00 00 « fo S p. oa VM 3 Q b Q ••"I < PC4 'd ?1 M 0^ v0 c^ 00 ^ 00 On 00 m H ' s (3 to 00 00 « 4» O 00 (A H pa N H O -< 2: bfl-gPn-o cd 2 j^^ u cdoS' 99 Of CI CN fO NO vO 00 NO a d ir. «9 s S A o •, • "^ .>• o si ^grt^cd ^ ^ O ^-^ G Ob? ^ cd vii rv (U fO O X gS P^ tc o Cd -Cd '^o \ \ O g C« On O n On ■<* t^ M M 00 eo »0 «» NO 00 M «» OiO a PQ V \ Accounting Problems and Solutions. Practical Accounting Problems. cou^ 00 «O00 M >o «1 o\ roOO to oo o o «k m. »o t^ PO O^ NO M CI «» «» m •0 O o Cms - s C b o Qi oj :i o Out) •2 b& * to 5 o ca 09 o u >^ u o > o C CO 0Q 00 00 00 00 00 o Ov o 00 o OS *o 00 o fO o «o a PC o CO o O vo in c a 8 I g o u •♦J cC V u o ^ •♦^ O Tl c « « C 4) 8Sc O o £ «j i^ 2 „ o - g O to C OiJ ^ teg3 g ^ "» >. b (X4 C0 U I u 2: o u u < CO CO O Q o Oh to C CO s o •M 0» •— « cd CO ctJ O rt u CQm ooo 0^ ON • • Ov On TfOO Ov «o 00 ooo 00 00 O On Ov On o »o fO fO O On On PO . W M PO # w ^. "<1- li^ o 4* to »r) PO •» «» 5:} o 2 < « a •SMC to o S P^ PQ 100 eu lOI I* ' Accounting Probkms and Solutions. Manufacturing operations during the year: Raw Material issued on requisitions $79, 820. 34 Labor applied and distributed to M'fg. Cost... 120,250.40 Year's chcin^e to Prime Cost $200,070, 74 Overhead charges during the year: Factory Expense $24,846. 00 Management Expense 38 , 100 . 00 Year's Overhead charges $62 , 946 . 00 6^,^46 . -31.46187% percentage to be added to prime cost to 200,070.74 make cost of productjon. Finished Goods during the year at prime cost : Raw Material $78 , 542 . 58 / ^*^°^ "8.333-75 3^196.876.33 ' 196,876.33 . • ^ -^ ^-98.40336% percentage of year's prime cost used ia aoo , 079 . 74 tw^-" ■-' finished goods during year. Therefore, $24 , 846 . 00 X 98 . 40336% - 24 , 449 . 30 =- Factory Expense , and ^ $38,100.00 X 98. 40336% -3 7, 49 1. 68 -Management Expense. _^ " Proof: $196,876.33x31. 46187% -61, 940. 98,' and 24,449.30 + 37,491.68 also =61,940.98. Hence , 31 . 46187% is to be added to each dollar of Labor and Material. i Solution. (Second Form.) Assumingr that the manufacturing account is intended to be exactly balanced by the credits of product finished and final inventory, the accounts would be stated as below. The relation between prime cost and expenses cannot be proved for either product finished or final inventory. The product was presumably partly made in the previous year when other percentages for indirect expenses may have been used. The prime cost of the final inventory is not ascertainable separately for materials and labor, and the proportion of each affects the indirect expenses chargeable on the basis given. The figures used for factory expense and management expense in the product finished are therefore merely those which are found to be uninventoried, and therefore presumably previously dealt with in crediting product finished. If in the final paragraph, "calculate the percentages to be added" means on the basis of the figures in the two preceding paragraphs, the percentages are 20.8 to materials and 38.609 (approx.) to labor. mi O u o CO < w < Practical Accounting Problems. « • O t^ 00 « 3§ . . M \0 10 o MOO 00 • to q 00 q o o o o < o t— t P^ O < < (A 8 CO 00 «o 0600 00 n 00 q NO 0) ^ ONO « ^0 ^ooo On r>. •^>q o fl M O c< 00 .2 I 21 u O ■ s Q a G *2J3 O 5 > •no ■^ -* o "t r*5 ^ • ■ ■ 000 O 00 « 10 00 00 « to c> o 1^^ G X ON- 'ft o ^ o o 00 to X PO q 00 o o o 00 • . X C a ^^^% ^Ea^ ^"^ ^^^ ^^*i >N 5 0? (0 00 On * CO ^0 « o to 00 00 to 00 to to o 1/5 00 00 « to 4» 103 Accounting Problems and Solutions. VI to Q O O o w m En O *n «n| aoo t^ • • • o> n fi '^ « t^ Ov Vi ^ •• M 00 o W M oo n Cf o * •a - I : at O o a CO > O C 00 00 to « 00 lOU^vO « • ■ ■ « to "*»© o 00 00 00 « to : >- . o o o^ o^ -v «o 00 o o to o to o »o ir. »o »n •» «» • to • « ..Hi o pJ^ ooc O On O to o o\ "-" "* ctf ^ o •d ■*^ '^ - to o 00 On to o to »o »o Practical Accounting Problems. Question 22. (New York Examination. June, 1907.) .f. ^'^ u ?,?^ ^*.t ^*^ Company, a close corporation, became embarrassed through the failure of a friendly company to whom they had given their accommodation paper, and a trustee was appointed February i, igo6. to take charge of their affairs for the benefit of the creditors. The condition of the estate, when the trustee took charge, was as follows: * * UABILITIES. Mortgage on real estate, maturing Feb. i, 1007.... $15,000.00 Interest, due Feb. i, 1906, six months at 5% 375 00 Taxes due 21000 Book accounts payable 3,9oo]oo Bills payable (including accommodation paperl $5600000) 57,400.00 Capital stock 40,000.00 Surplus, per profit and loss account 3,987.00 $120,872.00 ASSETS. Cash on hand and in bank $650 00 Merchandise ( stock of goods) 25,3io!oo Book debts (including accommodation account^ $56,000.00) 6080000 Bills receivable ^[iia:©© Rea^ estate 30,000.00 $120,872.00 *u ^" ° j^^^ *° complete contracts and so realize to the best advantage on the goods in stock, the trustee purchased merchandise to the amount of $50,000, and during the year collected $100,002 cash from sales. The accommodation account was settled for 60%. The other book debts realized $4,100, and the bills receivable $3,600. Balance lost. The accommodation paper was settled by paying $40,000 cash and re- newing $16,000, entailing legal fees, interest, and petty expenses of $2,200. The other bills payable, the accounts payable, taxes and interest on mortgage for eighteen months, were paid in course of settlement, and the principal of the mortgage was paid off at maturity. The running expenses were as follows: clerk hire, $1,500; office ex- penses, $1,000; allowances to officers, $3,000; trustee's commissions, $3,000. On Februaor i, 1907, the trustee surrendered charge of the company's offices and paid over the cash balances in his hands. On said date there were also uncollected book debts $2,000, and merchandise stock $8,000. ^^I'^^Pr ^ ^l^Jization and liquidation account, a trustee's cash account and a balance sheet of the estate at termination of trust. 104 105 i *t Accounting Problems and Solutions, Solution. REALIZATION AND LIQUIDATION ACCOUNT OF THE FOX & DIX COMPANY February ist, 1907. // V/"^?'^ s'''^ Assets to be Rbalized. Bills Rec'ble. . . $4, 1 1 2 Accotints Rec, (inc. accom) . . 60,800 Mdse. (stock)... 25,310 Real Estate. 30,000 $120,223 Liabilities Liquidated. Taxes $ 210 Int. (6 mos.). Bills Payable Acc'ts Pay... M'tge on R.E 375 41,400 3.900 15,000 $60,885 Liabilities Not Liquidated: Bills Pay $16,000 Supplementary Charges: Pur'ses & Inv. .$67,310 Exp. on Accom 2,200 Interest (i y'r). Clerk Hire. . . . Office Exps . . . Allow 's to offi- cers 3,000 Trust's Comm . 3,000 750 1,500 1,000 $78,760 $275,867 Liabilities to be Liquidated: Taxes (due)... . $210 Interest (due for 6 mos.) 375 Bills Payable (incl, ace.).... 57,400 Acc'ts. Pay 3,900 M'tge on R.E. . 15,000 $76,885 Assets Realized. Bills Rec $ 3,600 Acc'ts Rec 37.700 Mdse. (from stock) 17.310 $58,610 Assets Not Realized: Mdse. (bal.Inv) $8,000 Real Estate.. . . 30,000 $38,000 Supplementary Credits: Cash sales 100,002 Acc'ts Rec 2,000 $102, 00a Loss on Reali- zation 370 $275,867 TRUSTEE'S CASH ACCOUNT Cash Received. Amount on hand $650 Cash Sales 100,002 Bills Receivable 3,600 Accotmts Receivable . . 37,700 $141,952 Cash Paid. Taxes (due) Bills Payable Accounts Payable. . . Interest on M'tge (18 mos.) M'tge on R.E Purch's of Mdse Exp. con. with Accom. Clerk Hire Office Expenses Allow's to Officers . . . Trustee's Comm . , Balance with Trustee. . $aio 41,400 3.900 1,125 15,000 50,000 a, 200 1,500 z,ooo 3.000 3,000 19,617 $141,95* 106 Practical Accounting Problems. BALANCE SHEET Assets. Cash with Trustee. . . Accounts Receivable Mdse. (on hand) Real Estate $19,617 2,000 8,000 30,000 $59,617 Liabilities. Cred. on Notes Pay. . . . $z 6,000 Cap. & Surp . .$43,987 Less loss on Realization.. 370 43,617 S59.617 107 1 Accounting Problems and Solutions, Question 23. (New York Elxamination, June. 1907.) The Montauk Manufacturing Company becomes insolvent, and the re- ceiver appointed to wind up its affairs has a balance sheet prepared from the books, which shows the following values: Balance Sheet. July a, 1906, Montauk Manufacturing Company Assets. Liabilities. Cash $1,402 Bills Payable . . . $30,000 Bills Rec $2,108 AcctsRec 19,740 21,848 Ace' ts Pay Interest on bond 65.460 Raw material... $16, 2 00 Partly man'f 'd goods 5,400 Fin. wares. . . . 13,900 Consumable due July, 1906.. Bonds, issued for factory site and buildiiig. Taxes, wages 2,700 90,000 supplies 300 $3S.8oo etc., due 2.500 Factory site and /^ building 90,000 X Machinery $50,000 X • Tools & Ap 7,000 y^ Boats 8,000 y/^ Horses & Tr'ks. 4,000 / Office fix 600 $69,600 $218,650 72,010 Capital Stock Defic'y losses.. $190,660 X 00,000 ^ $290,660 $290,660 The machinery, boats, and horses and trucks are pledged on chattel mortgage to secure creditors to the amount of $45,000, $6,000, and $3,000 respectively. The mortgagees of the machinery agree to purchase it for $30,000, and the other mortgagees agree to take over the chattels in full satisfaction, which offers are believed to exceed what the securities would realize on forced sale. It is estimated that raw materials, partly manufactured, and finished wares can be sold for $29,000, while the consumable supplies are not in marketable quantities, that the tools and appliances will bring $4,000, and the office furniture $500. The bills receivable are all good, but $1,640 of book debts are uncollectible. Customers' notes to the amount of $7,000 have been discounted, and the maker of one of said notes for $340 has failed. Prepare a statement of affairs and a deficiency account. 108 a o CO o Ov o »— I u H O < < \A o O m < u W) o o d VO VO Ov o rt ^ o CO 3 o (O u ♦-• 10 -; ^ rt "^ £2 hfl^ to o •So 3 +j § CO « wO G y "c5 O ^ o O o o o q OVI-, 1*0" > O 4> rt -^ (0 g g 4) U « I 109 •v^. '^ w* Accounting Problems and Solutions, DEFICIENCY ACCOUNT. ■ * i 1 I I it ii Capital stock . Deficiency. . . . $100,000 6,890 Trade losses . . . Shrinkages: $72,010 / Acc'ts Rec. Mater'ls and fin. goods. . . Machinery Tools and Ap- pliances Boats Horses and trucks Office Fixtures $1,640 6,800 20,000 3.000 3,000 1,000 100 34,540 340 $106,800 Loss through liability in respect of notes disc'd — $106,890 llV no 1 Practical Accounting Problems. Question 24, (State of Washington Examination, September, 1907.) On December 31. 1906, the Trial Balance of the Mukilteo Shipbuilding Company was as follows: Real estate $300,000.00 ^^^[dings 158,000.00 Equipment 847,500.00 GoodwiU 50,000.00 V?^" ••• : 46,474-20 Discount earned Discount allowed 5,600.14 Interest—general 3,300.20 Insurance 3.030.89 Accounts payable Depreciation reserve Common stock Preferred stock Sales Accounts receivable 156,028.75 Inventory of raw materials and work in progress Dec. 31, 1905, 184,567.39 Operating, maintenance and Gen- eral expenses 709,988.65 Depreciation 25,000.00 Purchases 691,98547 Bond interest (one-half year to June 30, 1906) 2,000.00 Taxes accrued (estimated) Bills payable Accrued interest on bills payable. . First mortgage bonds (4%) Surplus $10,120.37 75,871.38 58,272.00 1,000,000.00 500,000.00 I,37M9I.I7 5,300.00 35,000.00 900.27 100,000.00 26,520.50 $3,183,475.69 $3,183,475.69 The inventory of raw materials and work in progress on December 31. 1906, IS valued at $309,062.05. Before the books are finally closed it is determined to (a) make a reserve of i%% of $140,000 of the accounts receivable to provide for possible bad and doubtful accounts, (b) add ?i,ooo to the taxes accrued (estimated) account, (c) carry to depreciation reserve account a further sum of $5,000. Interest on the bonds to December 31st is also to be provided for. It is found that bona fide renewals of equipment, costing $17,500, have be^ charged to operating expense; that repairs to equipment, amounting to $0,000, have been charged to equipment account; that $1,500, proceeds k-ii^r d.™^? "^7 ^^^^' ^^^^ ^^^^ credited to sales account; and that a Diii of $1,560.25 for raw materials received and used, has not been entered on the books. These items are to be taken into account before the books are closed. Three per cent, of the net profits for the year is then to be reserved for special compensation to management. Make journal entries to give effect to the various adjustments above aescribed, and prepare balance sheet and profit and loss account as they will finally appear. Ill I h Accounting Problems and Solutions, Solution. JOURNAL OF THE MUKILTEO SHIPBUILDING COMPANY. Adjustment Entries. Equipment $17,500.00 To Operating, Maintenance and General Expenses $17,500.00 To transfer and adjust bona fide renewals of equipment, having been charged to operating expenses, to equipment account. Operating, Maintenance and General Expenses $6,000.00 To Equipment $6,000.00 To transfer and adjust this amount charged to equipment, yet constituting only repairs to equipment, but no increase. Sales $1,500.00 To Equipment $1,500.00 To transfer this sum constituting a sale of old machinery, charged erroneously among sales. Raw Materials ( purchases) $1,560.25 To Accounts Payable $1,560.25 Constituting a charge for raw materials bought, but which, by oversight, have not been entered on the books. m o :^ w o m Q o o Q pq CO O I— I p O H O o o < CO CO O h4 Q < O Practical Accounting Problems, to o M o O «o to 00 fm4 o\ '* «r) ■^ « t^ fO «» M «^ • • vom ■^ to 00 Ov H VO *o 00 00 O 0\ o 2 •M Co H-iPL, o o o\ Off 1#) w 00 M ds M ro O 6 N W VO o c^ M o u 1:^ O I W (U C o G a ed a S -♦-> (A O) »— • 03 C O '■P'O O w 03 rt O c o o p. -•-»*-• 3s:e CO "3 w 00 00 6 o o o o d d o o O wj o *** .. o '-' •» o 2 •2 • • S ? OS JStS m< m • >> i-S i CD • C! • '. c ° 5 wi O (0 •a to 22 o o u o « 5 o < .2 c o o to q d 00 T M 00 00 to 00 00 to M 00 00 o On CI O o q a 00 "3 1. o g 5»n SS u 00 lO « Mi O to § s; ^ m o r«. o • 00 o « o o M ^o « to o q to ? m lO o O ■k o CO o o o o eo Ci Ci « to O o o N o t^ to « » to eo M O to O o O o • s to o o m o M to 00 ^ ' *• 1 gg ^ •u I • 'SO • CO w.ii o o o o o o o • • • o o o o o o q q to _ doo t^ 42 o to »o a* «OMoo ^ : a 0) pe t 4> Practical Accounting Problems, Question 25. (State of Washington Examination, September, 1907.) A. is the owner of a business with property valued as follows: Real estate and buildings $100,000 Machinery and tools 79,ooo Stock in trade 93,500 A., B., C, D., and E. organize a corporation (F) with an authorized capital of $350,000, divided into 3,500 shares of $100 each, under the following conditions : A. receives 2,725 fully paid shares for his property as above. B. subscribes for 100 shares. C. subscribes for 100 shares. D. subscribes for 100 shares. E. subscribes for 125 shares. 100 shares are placed in the treasury for future disposition, and SO shares of fully paid stock are given to each incorporator for the cash payment of 10% of par value, in consideration of services in the organiza- tion of the company. Each incorporator then donates 30 shares to the company for sale to provide working capital. Draft the necessary opening entries for Corporation p!, giving effect to the above transactions, and prepare resulting trial balance. Solution. JOURNAL OF THE F. COMPANY. THE F COMPANY A CORPORATION DULY ORGANIZED UNDER THE LAWS OF THE State of Washington, with an AUTHORIZED CAPITAL OF $350,000.00, DIVIDED INTO 3,500 SHARES OF $100 EACH. B $10,000.00 C. 10,000.00 ^ , 10,000.00 E. 12,500.00 To subscription $42,500.00 For their respective subscriptions to the capital stock of the Co., viz.: B., C, and D., 100 shares each, and E., 125 shares. Subscription $42,500.00 To capital stock 42,500.00 For 425 shares of capital stock issued to subscribers in accordance with subscrip- tion. Real estate and buildings $100,000.00 Machinery and tools 79,000.00 Stock in trade 93,500.oo To A. (Vendor) 272,500.00 For the surrender to this Co., by vendor his right, title and interest in the above mentioned assets. A. (Vendor) $272,500.00 10 Capital Stock 272,500 00 For 2,725 shares of the capital stock, issued to vendor in payment of the assets transferred by him to this Co. • IIS ,1 ii 4i I 1! Accounting Problems and Solutions, Organization expenses $22,500.00 Cash •••••■••••••••• 2,500.00 1 o Capital Stock 25 000 00 250 shares of capital stock, fully paid up, are given to the incorporators (50 to each) for the cash payment of 10% of par value, in consideration of services in the organization of the company. Treasury stock $15,000.00 To Workmg Capital 15,000.00 ISO shares of capital stock donated by the mcorporators (each 30 shares) to the Co., for sale to provide working capital. TRIAL BALANCE OF THE F. COMPANY. ^^^, : ■ $2,500.00 Stock m trade 93,500.oo Machmery and tools 79,000.00 Real estate and buildings ioo,ooo!oo Treasury stock 15,000.00 Organization expenses 22,'5oo!oo Subscribers 42,500.00 B. $10,000 C. 10,000 D. 10,000 V . 12,500 J^^-^'r^.^^rV^- "y^ $15,000.00 Capital stock (issued) ___^____ 340,000.00 $355,000.00 $355,000.00 ! i Question 26. (State of Washington Examination, September, 1907.) You are instructed to prepare the statement of affairs of John Smith as at August 31, 1907. Following are the particulars: Accounts payable t^ qoo Bills payable ...!.!!! 3500 Loan from Wm. Jones 15000 Bank overdraft ' * i|ooo Accounts receivable ....,'.,..... 2JB00 Furniture and fixtures .1.'...', 500 Real estate and improvements !.*.*!!*..*!.* s 000 Merchandise ^Ioqq Smith has other merchandise to the amount of $5,000, in addition to the $7,000 above stated, $1,200 of which is held by the bank as security for the overdraft, and $3,800 by Wm. Jones as security for his loan. Jones also holds a first mortgage on the real estate and improvements. Of the accounts receivable, $300 are considered bad, and $250 are expected to realize 50% of their face value. These items must be properly dealt with, and the deficiency shown. ^ ^ j h u6 Practical Accounting Problems. Wo rt rt-^ O to > rt 6 0) 117 I >l Ml Accounting Problems and Solutions. Question 27. (New York Examination. October. 1907.) An issue of $250,000 fifty year bonds, dated July i, 1904, is redeemable by a Sinking Fund into which annual cash installments are to be paid by deposit of funds in a Trust Company which allows interest at the rate of 2% per annum, credited January i and July i. Separate books are to be kept solely for recording the sinking fund operations. The fund so created is to be invested in interest-bearing securities, and the income therefrom is to be applied to the reduction of the succeeding annual installments. On July I, 1905, the first installment of $5,000 was paid into the fund and on the same day the following investments therefor were made : Two 5% bonds of $1,000 each, April i and October i, at par and accrued interest. Two 6% bonds of $1,000 each, May i and November i, at $110 and accrued interest. On July I, 1906, the second installment was duly deposited to the credit of the fund, and on the same day the 5% bonds purchased in the previous year were sold at loi and accrued interest, and other invest- ments were purchased as follows: Two 6% bonds of the same issue as those purchased in the previous year at 105 and accrued interest Five 4% bonds of $1,000 each, February i and August i, at 98 and accrued interest. The income from all investments was regularly received and de- posited, and the value of the 6% bonds purchased in 1905 was written down to conform to the value of the bonds of the same issue purchased in 1906 at the time of said latter purchase. Frame journal entries and write up the Sinking Fund ledger accounts showing the amount of the cash installments, payable on July i, 1906. and July i, 1907, and the status of the Sinking Fund at said dates. Solution. TltusT Department. Journal July I, 1905. Sinking Fund Cash $5,000.00 $5,000 deposited with Banking Department. To Sinking Fund $5,000.00 First deposit to create the fund. Sinking Fund Securities $4,200.00 2 — sfo bonds purchased at 100 $2,000 3—6% bonds purchased at no $2,200 To Sinking Fund Cash $4,200.00 Check drawn on banking department in payment of bonds purchased. 118 Practical Accounting Problems, Sinking Fund Income $45.00 Interest accrued, not due on bonds purchased, 2 — s% April I to July i $25.00 2 — 6% May i to July i $20.00 To Sinking Ftmd Income Cash $45-oo Reserve to be deducted from first income cash received. October i, 1905. Sinking Fund Income Cash $50.00 Cash received from in- come. To Sinking Fund Income $50.oq Six months* interest on 2—5% bonds November i, 1905. Sinking Fund Income Cash $60.00 Cash received from in- come. "^^^.S^^^^^S P""^ Income t $60.00 Six months* interest on 2 — 6% bonds. «. , . „ January i, 1906. Sinking Fund Income Cash $8.06 Interest credited by the banking department to the cash account To Sinking Fund Income $8.06 2% interest on deposits, allowed by the banking department. «... April I, 1906. Sinking Fund Income Cash $50.00 To Sinking Fund Income $50.00 Six months* interest re- ceived on 2—5% bonds. -. . . May I, 1906. Sinking Fund Income Cash $60.00 To Sinking Fund Income $60.00 Six months* interest on 2 — 6% bonds. *,. , . July h 1906. Sinking Fund Income Cash $9.16 To Sinking Fund Income $9116 2% interest on deposit balances, credited by the banking department to cash. Sinking Fund Income $192.22 To Sinking Fund $192.29 Balance of income _, , transferred to principal. Smkmg Fund Cash $192.22 To Sinking Fund Income Oish.. / $192.29 Balance transferred from income to prin- cipal. Sinking Fund Cash $4,807.78 To Sinking Fund $4307*23 Second installment to redemption fund, viz : supposed installment, $5,000.00, less income _. , . balance, $192.22. Sinking Fund Cash $2,oi2aoo 119 I I. Accounting Problems and Solutions, ff! ill m I s To Sinking Fund Securities Sale of two 5% bonds at loi and interest. Sinking Fund , profit of 1% on above sale. Sinking Fund Income Cash $25.00 To Sinking Fund Income Three months' accrued interest on 2 — 5% bonds, sold April to July ist. Sinking Fund Securities $7,000.00 To Sinking Fund Cash Purchase of 2 — 6% bonds at 105, $2,100, 5—4% bonds at 98, $4,900. Sinking Fund Income $103.30 To Sinking Fund Income Cash . . . Two months* accrued interest (May- July) on 6% bonds, $20.00. Five months* accrued in- terest (February- July) on 4% bonds, $83.30. August I, 1906, Sinking Fund Income Cash $100.00 To Sinking Fund Income Six months' interest col- lected on 5—4% bonds. November i, 1906. Sinking Fund Income Cash $120.00 To Sinking Fund Income Six months* interest col- lected on 4—6% bonds. January i, 1907. Sinking Fund Income Cash $8.72 To Sinking Fund Income 2% interest on deposit balance allowed by banking department. Sinking Fund Income Cash $220.00 To Sinking Fund Income February i, 1907, interest 5 — 4% bonds, $100, May I, 1907, interest on 4 — 6% bonds, $120. July I, 1907. Sinking Fund $100.00 To Sinking Fund Securities Writing down two bonds from no to 105. Sinking Fund Income Cash $10.90 To Sinking Fund Income Interest on deposit bal- ances at 2%. Sinking Fund Income $381.32 To Sinking Fund Transfer of income bal- ance. Sinking Fund Cash $381.32 To Sinking Fund Income (Tash Transfer of cash bal- ance funds. Sinking Fund Cash $4,618.68 To Sinking Fund Third installment, $5,000.00, less income balance, $381.32. ' 120 .$2,000.00 ...$20.00 ...$25.00 .$7,000.00 .$103.30 .$100.00 .$120.00 .$8.72 .$220.00 $100.00 .$10.90 $381.32 $381.32 .$4,618.68 Practical Accounting Problems. • • • •0 >o 10 Ov *0 - a CO -< • • 00 • 00 u >0 vO M M « • ••••• • 00 Ox t^ lovo tovO «r> z M (» ON »o 00 « CM « M 4» MM MM N • <<»■ 00 '*• 1 - t— » • CO H Z D U i-i a . . . :3 . . . . • d . • • :s . : : • : . . • CJ . . . • c : : . . . • w . . • as < . t— 1 , , . . . :u . . . . • "0 I'd • • I '. '. ''a < . . . . . . . . < . . . . . c • • • fe : : : • • ' a : • . 3 « . . . . ." : bo • fcp ! ! *. '.'.'. ta 2 °4" ' w- . - , c «- - " * . . a x: v. a c . : . 11= = . . . G : : : G < t-HU CO Ococj i^ vO ( « • • • D 'O PI w t^ o> vO u 55 X CO 00 0\ r^ too lOvO ro CO »o 00 « c* « M • 00 Q P < •» 4» MM MM "* «» H s n l-H Z «*3 M 00 00 15 C/3 g 4\':: a . . . CJ . . . • • u Q • (_) » <• >• « . • G §§:::: < a *• • • u Q 0: : r : : : r '. g : M^ ^z z z z z z z I c ..-1 <•••«• le - X! to 1 ^ CO - - jd <3 121 ' 1 I Accounting Problems and Solutions. o m I u if ¥. »' i IH • CO ID Q < >-• o o o M OO O « «^ o O « *N. o O Ox o « O M 00 MOO eOvO • • M CO 00 M *OxO o o o O O o « CO i 03 o o o o o o o o O M o O o o • • o o o o M M On M M «» U3 CO O o o • o o « o o » o o o o o o o • • o o « M X o lO t^ M «» to CO u u w c4 a> c (^ OC0h5cJ X3 coCli CO o o !2-S C ^ .- 3^ oJh eg o c o w';3 01 a c pq a 3 4> 3 U 03 O o o o o o o o o o C4 « On o •t »o M M «» o o o o O o » o o o o o • o o CI o o • o o M o Q •-) CO Pi O I— I 03 O PL< W Q •3 ctf o o o o o o m « 00 O Cf !>« O > • • C4 ts. O Ov O ei M 00 O M 00 «*>xO M 00 00 i-i fO>0 o o o w o o o d CI 00 •d a 3 a 3 ^ C»pL4 CO f^ « bo-;3 bf •;3 « w 8 S.S'C fi'C S ^ d 'H4O3GQCO03H4o3n (0 a a Prctctical Accounting Problems. ^ CO 4J o u bo < CO Q u d C<} PQ Q GO 3 a ■** OS 04 o 00 o o 00 vO M M OX o »o to \o lovo "* o\ t^ On ^ N o 00 lO O PO • ■ • »00 On 00 t^ On 00 CI c« o M «» M M M ON rovO 00 O O M M On CCvO no 00 COO GOO • • • to VO to to o o t^OO 00 NO o CO 00 NO NO NO Ol O O O w • • ■ . *0 CO CO Ct t^ « 00 On 00 On On On O o o o q to o o o o • • o o ION© NO o CO NO o 00 to NO O O NO O O O M CO O O t^ ionO 00 o o o C» c« w On On NO NO o o • • eo 00 »«» M 00 M to «» CI « ON On c« c< On On •*3 CO o u a rs co- OQO CO o 0) Q »o o On w -3" •no ; * o M "^ O y o On M G 123 NO o On m -I I TTF" 'Ml ■ -KM- ii. O H I— J tn O Accounting Problems and Solutions, u fan < to a OS u Q 10 d 3 o ••^ cd CO Q Practical Accounting Problems. 00 o o M >H O • • ■ « IN.00 00 d o o o *^ PO o* O « v» o »o « fO Ov t^ o OO w N M «*5 C>>0 00 M ^ M *O00 vO I °o M o O O O O M M O O t^ t>> tN. ^ Ct O lO •-• M M o Ov O "* -^ '^^ t^ OvOO 00 t^CJO o\ 0\ W « N « O ^ ^ rt ro O O O O M O t^ t^ O O c« 0« O M N 00 ^^ M M M to N 00 O « t^ o * • ■ O O ^ ooo o o o o o o 00 00 W O O O 00 o ^ O O OnnO O O O O O 00 o t^ O « M M n On M M NO 00 ^ _!. ' <«■ I »o O Q N « "* r^ o fO 1^ t^ c> o 00 <» 1 o o o 00 v^ in o o o 00 o 'S to &6 4i3 O to Q o u C CO o o o " « ^ C tti fc NO o j3- '■ • M M O • M M "^ O M o Ch bo>- 3 O o c« S oj '^ Question 28. (Problem set in the Final ExaminaH^^^ Society of Account- ants and Auditors in London, England, June, 1907.) DeImh^^7''fjF'v^''^ ^^^^'^ ^"^"^ *> ^°°^ °^ *^^ A. B. MiUs as at ^ecemoer 31, 1906. You are requested to prepare from them a Trial L^S AccoJft^°.hl^^^^^^ "^"^^^f ' ^ TradingVcount. and r^rofit and Shelt^^ThT^JodTf^^^^^^^^ ^' manufacture. Prepare also a Balance J^lS^^"'^;: ^5.000 Wages ; ^^'^50 Discounts received '..'.'. ^!'5°° Dyeing ^'5°° Power, Light and Heat* .'.*.■.'.'.*".*.'.* "'f °° Boxes and Cases. . . ^* ^ Repairs .* .* .' [ ; ^ '^1° Sundry Expenses (Mills) '.'.'.'.'.'.'. , "fi^ Insurance ' ° Salaries ^^^ Taxes '.'.'.'.'.'.['.'.[[[ *'^°° Depreciation '^'° Advertising ^^^ TraveUng Expenses ...*..' .'.■.*.*; .' f'^J^ Returns. ...... ^'"S Commissions. ...!.'.';.'.'.' ^'2°° Discounts Allowed ^'^^ Interest on Loans . '*^° Cash at Bank and in hand'. '. '.'.'.'. '.'.'. '.'..'.'.'. j. o6c BiUs Payable Jl'°°5 Sundry Debtors . 37.Soo Sundry Creditors.;:: ^f'5°° Fixtures, Fittings. Office : ; : .* : : : : : : ::::::; j'^f ° Capital "^''So Machinery and Plant.: :::::::::: 2f •!?. BiUs Receivable fl'^^S 30,400 %\ 124 MS Yl. lis 111,' I \ II 'Hi Accounting Problems and Solutions. $81,350.00 3,500.00 Solubon. TRIAL BALANCE OF THE A. B. MILLS. DECEMBER 31. 1906. Cash at Banic and in hand $14,065.00 Bills Receivable 38,400.00 Machinery and Plant 65,92 5.00 Fixtures, etc 4,750.00 Yam (used) 25,000.00 Sales Wages 22,500.00 Discounts received Dyeing 12,500.00 Power, Light and Heat 3,1 25.00 Boxes and Cases 1,250.00 Repairs 685.00 Sundry Expense (Mills) 1,060.00 Insurance iSS-o^ Salaries 3,500.00 Taxes 310.00 Depreciation 42500 Advertising 1,350.00 Traveling Expenses 1,125.00 Returns 1,000.00 Commissions 1,875.00 Discounts Allowed 440.00 Interest on Loans 410.00 Bills Payable Sundry Creditors Sundry Debtors 22,500.00 Capital $221,350.00 37,500.00 6,350.00 93.75000 $331,350.00 o •o < 1^ o o o o < o I— • p O < p < Practical Accounting Problems. o o l§I o o I iS| 00 m *o 00 00 IT) 6 00 «» o o o 1 8 1 «^ t>. 00 00 "^ NO •ll Q o 00 NO o o 181 (1 00 to 1 00 CI 1 «k o\ II 00 1 «» 1 000 000 000 000 o io»o «o « « « W M bo O 000 o o q 10 »o 6 « 00 MD Mvo q •4-> cd v w d • ^ ^ • & bp : X o « 5 O m o V) «0 01 10 1^ « M « oc O O I O CO 4) to C CO •S bo's.? o X^-S (0 s *» ^ > 2S 0*0200 o o & o O 126 127 f I Accounting Problems and Solutions, T V '■ o O O O I SSI I o o o 00 00 6\ o o o 00 o o 00 ■^ lO •» «k Ok o\ vO « •» «» o 00 I |-4 o o o a O JS- tig ,1 ;z:q >» o o o o o o o o o o o o o o o o O* On o 00 00 Ok o o o " 00 o o\ OS 00 I f ) I to o o to to O M « M to ro <* (3 O § ' 'rt rt.Si 03 u en a> X ca » bo a o o •4-* m ^ S b b 9 =* Q I . O On to o CO o CO o o o o to io« tC\o CO o o to «* r» M eCOO On «» to n < a> ^§ (0 "a 3 CO 9 ..a£ .tJ"C » CO O o o o o to o o o o* o o o 1 o 1 o o o >o o vow ■* «»« o\ VO * to to «o ^ M •» CO H H CO 03 o o o o Tf to 1 •k «k 00 « to « 1 d a> sag WJ c3 Practical Accounting Problems. Question 29. (Problem set in the Final Examination of the Society of Account- ants and Auditors in London, England, December, 1907.) Diogenes Brown and Eusebius Robinson, having separate businesses agree to a joint venture in a cargo of goods to a newly-established Colony, under the following arrangement: Each supplies $5,000 of his own goods, beside which they jointly purchase $10,000 (net) from other parties. This latter sum is paid by V ;V. ° receives all the goods into his own warehouse, pacl^them. puts them on board ship, and pays all the necessary outgoings. For this he makes a charge of $50, and is entitled to interest at 5 Zer cent, per annum for Cash-out-of-pocket, until the realization. The out-of-poc£t ^^P^^lf^^'- freight and Charges, $175; Insurance, $125; and Packing fif™ 'i^^Vi, I"^ ^"^t?^ Y® ^¥ HP^^ ^"^^^^ ^<^r $25,000 and at the end 0I three months from the start of the transaction a remittance, less charges for Landing Warehousing, Sale Charges and Commissions, etc., $412.25, IS received by E R. Journalize these transactions, and rai^e pro^r Joint Adventtire Accounts in the books of both parties, showing the prSfit made, which is to be equally divided. 5 « h*""" Solution. (Journal op Eusebius Robinson.) •^°'Fnr^?of 7''''! ""^^ i $20,385.00 I'or total cost of a cargo of ^oods shipped to — on joint account of myself and Diogenes Brown. ' To Merchandise (Sales) $5,000.00 For a lot of goods which I supplied. Diogenes Brown 5,000.00 For a lot of goods sup- lied by him. Cash 10,335.00 For additional purchases (paid by me $10,000) and charges on the shipment, viz.: Freight, etc., $175; Insurance, $125; and Packing Cases, $35. Commission 50.00 For handling the ship- -, ment. Net proceeds received* this day for our joint adventure with D. B. To Joint Adventure to $24,587.75 Proceeds of sale of our shipment in Co. with D. - . Brown. Joint Adventure to $120.10 For interest charges on money advanced. To Interest Gained iaQ.19 5% on $10,335 advanced on Joint Adventure for T . three months. Joint Adventure to $4 07 ? 1:6 For profit made on the venture in Co. with D. B. To Diogenes Brown 2,036.78 For his one-half share in the profits. Profit and Loss Account. . 2,036 78 For my share in the profits. It o m ^ o CO H Oi O > Q o en m Pi < cn z CO Q Accounting Problems and Solutions. m Vi **. t^ t^ t^ 00 00 »o »o » ^ -* c« 1 « «» us CO o o O ooooo O M r« r« 00 « c*5 CO ro M O O o c« « 4^ 00 \n H •J -< CO CO »— • Q < o w 1^ o o • o o q to fit O o i I < >< CO CJ> ■2 • a. U CQ es a ^ d gi S 2 ^ << M O o o fl'S O S o CO 0« o o • ft ooo o o o «>. o • • o »o OnO o to O ro o «o O O »o 00 »o o m CO W o o I ^ «0 M Practical Accounting Problems. O o o • o to o 04 o 5 i Oh-i •^ O Is ^2: o t-H CO CO hH O o I a a 00 NO «o o CO P^ i a I CO CO O Q ;2: < o o 4* a > a 4 Q 06 Pi Q 130 131 O • O p CO O H > < 2: a o Accounting Problems and Solutions. 00 o •s PQ ooo O r* do O c*s oo fO o o o d o o at O 00 *d O C4 CO Q u S 7z o CO l-H n o o a o o o < o Q < H o CO o < o Practical Accounting Problems. JOURNAL OF DIOGENES BROWN. Joint Adventure to $s,ooo.oo For my share of prime cost in Co. with E. Robinson, who manages the adventure. To Merchandise (Sales) $5,000.00 For goods contributed by me. E. Robinson For net proceeds of sale as per account of sales rendered. I7.036.78 To Joint Adventure to Representing my original share of prime cost — $5,000, and one-half share of profits. 7,036.78 Question 30. (Problem set in the Intermediate Examination of the Society of Accountants and Auditors in London, England, December, 1907.) You are required to make up from the following particulars the Capital Accounts of each partner in the firm of A, B and C for the six months ending December 31, igo6: Profits are divisible in the proportions A, 4/10; B, 3/10; C, 3/10. Interest at 4 per cent, per annum to be credited on Capital. The net profits before adjustment of interest are $24,380. The partners have drawn on the last day of each month. A. $500: B, $375; C, $375. ' -. *5U". Capital at June 30th, 1906: A, $94,500; B, $52,500; C, $43,750. State also if in your view it is necessary to charge interest on drawings and give reasons. K \ « ^ If (X X33 It "1 11 Accounting Problems and Solutions, o o q o W n MOO o o o o o o o o o o * • o>o NO vO O M M M lOM >o o "^j- r^ M M On o o l» M M o o O »o d o* O H M ^0 o to M « f o o O o to to ■ • o o 0\ ONO NO »0 On rf «k •<> w Ti- t>. to to «» «» Practical Accounting Problems. o to On NO to o o q to to On t>.\0 00 M o to o ' / i i< i It > a . t vestme profits. 1 t O wi 1-4 -^ ^1 M 2 :fz c<3 P o 8 «ol= • < On M •s o 3 '^ n t— 1 IJS i^ o o o COCO ^0M i o o 6 6 o • O o o o q 6 6 6n6 o o O DOOM lO to to to to lO M t^ ON CO o q NO o M 4» ...... s 2' - * - - ^ O: : : - - - M M O M o ,_: €•3 «*5 «*> «*3 t*5 «*> On O u o < •-4 < < o < «» Ol ON c CD o o o o NO NO M M NO NO .h M M O o l-l M «» «» O O o < CI3 o u u i •i o « o o o o o o o o q q q q q to to to to to to to On t^ »» »^ «>. r^ r«.NO CO fO CO PO c*5 CO ON 4# ^ •*» ::::::§ •i 8 % Si (^ • « • • • •"• ^ c3 o- - - - - - H" - - " - " M M o *-• O M ;: *0 CO CO CO CO CO o to ON M « O O u < H < o CO PQ o CO o^« Mh^-jQ o to o a On oJ On On NO NO •«*• '* t^ t>. to to «» «» o to J?: o o o < O :z: o o O o to to O '^ "* to o* ■"I- r^r*. to COTf 00 "«i- -* «» «» o to to 00 o H ^ CO CO d o o o o o o o O O O O O O to • • • • • • • to to to to to to '* t>. l>. t>. t^ t^ t^ On CO CO CO CO CO CO «>• O o 1906 July Dec. o < ^ o <* to H to to • "4 I— • 4 Tf rf p4 "(i- Tf q < to to i>« o 00 00 «» -* •* rn «» «» i pq o C o> cJ ^Sfcut-. o. 8 «» «» a o o o o o o o o to to fr* o o • o IIP Uco ^ o ^ to •6 OS tO+j ^^ 137 CO bo o o o o o q >o ^ «» . • o . oi o 2 :^ 4>i o o o o q q tC to co2 . - S (h ^ S , OS'S « l§« bo t O ;^ u Q I o o tQ a a •o o o'S cr- . « o «2 •^ 2" CO (B •»< ^^^ « S fs •^ 0.2 c8+a c« > • O I n "lit Accounting Problems and Solutions. o ; O o q * \n »o m • »r> e* r* « o M 1^ 00 o M o q in H O q 6 « o o o o • ■ O *n O ro ■^f to EaM o 5- 5 : : K CO o CQ u Q g ? S •"O o o »o m * »«• «^ M M ^O VO M ^ M M «» o o o o o «oo o • > • ' o «>• o o ooooo »« O «^ w "^ U CO ■a S •^' S g « g •6 « «a^.2 y I e en u o in 1^ u o o .S « Q 2 m "en 4) C CO c« en O U 5J O (J u cd en c« en >» •a c o U pq a; <*3 **5 t*5 Wi >-• i« qj 0) a> ^ JQ ^ S £ S O 4J o U U fJ ^ V V Q P Q ttf to bo c c c T3 t3 ta c c c OJ V (U t-i Wi u c4 c4 ctt V V V > c< C CO & o\ o\ .5 s o . „ ^ 43 en •x i-i 1-4 .*i CJ ro «0 *0 fe a> •a en C u VS a QQ bo bo c c c c Wi V* u l-l c 4> a • fi«« Q bo bo Q« .5 G o bo V ca • tM u V •h C3 u 1 i2 CO V* g c8 Q O Practical Accounting Problems. lomio to « c« « c« • • • • NO vO vO vO lO lO »o»o ^ Tj- ^ "Ij- o o q o lO 6 w o 00 q ^ M NO <» «» t3 ount ount O S^ « CO CO o PQ- »-^ H •"• - < CO t— 1 Pi ii-- o S'Q f^ a* p^ < o q m 6 m o o VO a «» ijB CO, cJQ lO to I d o +j to CO CO o CO pq V O co<3 io+» »o « ^ a « O 4) f> w > b Q to a>, V o q d o q vo" t § *§ ft to o ^Q 00 o to Ov On Ov t*5 « tn {h M \0 M \0 O \0 \0 • • t^ t^ •«*■ o o o o ^ ir> oomxoioto M « c« CI M c« « M M M M o q 6 o o pq § +> d •^ 1 • ) T-<4 • ctf • oJ • aJ • :m :pq :pq : • fi '' a ■ a '• • o • o • O • • +a ■4-> . -jj I . CO CO « . «> « ! Wi c y* • OJ V o . • -fj -M +j • • G • a a • • t-H . ^—K 1— t • . v-* ■ >»• . V— / • . 4J . +J -M • u 4) a> V ' 8 6 o o o o ^1 I ? « M to 00 o 00 o • to 00 Vi n § I CO W W fO to O i ^o *o \o >o o fho 6 6 6 6 00 OO 00 00 00 o CI On Ov Os On o • #>..« •* M M M H 0\ «» %i •J. . 1 . • rt • rt • c8 • :m :m :« : • a i a • s • . O . o . o • . ■!>> • 4» • "*i • . CO . tt . w • . «> . « o :i ;^ •^ : • a • a * a • .^^ • HH .1—1 • • 4* • 4> Q> <|3 0> *^ *^ C J3 2 «« ta u CO w :c. :c. iw :Nt:st:st^ o *^8 »og los iJ 0) y Q ^<1 pq- fO ON* o- o 10 O M * » OnO to 10 (A ■t ■a * |"S l§ 10»*N '•O "I toi-fv >w to §N« = ?P ON, 0>' TO 10 n NO o <^ e^ M H • • • • • • On ON C« « to to to to CO « to M M CO » » .k M M H H l-l « » «» •» «» I to O o o p4 < o CO o o • o o to tOtN. « CI M CO t^O 00 00 00 6 06 On r^ r^ ci On NO to e< e« to t^ to M « ^ "1! •-• 10 ^ ■k •k t^ NO NO no" m" «^ «» «» «» «» «» 0} u 60 mo «o a o o u < o G a-s "3 2 no CO O fl ONCtf to • ,; o a g Ml— »H to to c« « t<. 00 • • • • HOO t^ CONO e« COM to -* m mt m> MNO t^ no" l» «» «» I I bo u 4> 1906 Jan. Dec. 00 CO 00 CI NO On to CO 00 to I I i o p ONd CO 00 • On to m fO to m to «o •o 8= O V?- TO O*, v TO NO o o- S'Q o ^ mQ ON« TO NO • o o On, V J^Q 141 I VI. Accounting Problems and Solutions, Practical Accounting Problems. O V) O « o>o O w^ w O \rt On « M OO c« o « M*© 00 O \o t^ • ■ • • • • >o «^o t^ «^o r«. ■Ui M-vi Ov 00 00 NO « •t et to M O^ M M ••m M 4» i» 4* 8 O O • o o o mM « o o >o »*oo »o »ot>» « ■ • * • • • e*j*^ M H r^ o« Tf Ov -* -* M u» o^ t^ t^ f^m M m. •k « eo «*5 w m l» «» •» •» i: *i • 10 • 6 • s « o s to y S^ mO • CQ ■* ImmI 5 OGi CO c« d 3 §1 £ o O (O »o o y ■ S *s. o ° COu_i o "^ o, v Pi| ipBllf O »n o « 6 V3 O 'i^ 00 "^ M >d to c* O *■* ooo 6 i^ O Ov 00 »^ OS t*> o o O t^ o" t^ to M NO »0 o NO O O o < < o tn m o d ONCS ^d ro lO ^ O 0\ o o d o o fO vO d d I PQ* «o o to to On N M O to to o « n VONO fO \0 VO CI 6^6 vd «^d 00 • • »o o vd M ^ »o tO»r> o 00 00 NO too to « CI »o t« 0\ « ••m H •»M M •»M •1 -1 «» o o d o sd" I NO »o to NO w On »o « »o o d Onc8 NO • On «o »o s^ O 3 ** p 01 u 4> O 1- d d »-t -M • •H % loQ >w ^ • «• :H :z: M2 t> to o • o o l^-' -Q O % »i-t ^ ^ OO.OO 56.25 a On Tf ti U |s PQ- to lOM NO NO to On tl • «^ ro e« c^ ffl tooo « • • no 06 »OlO M M M e« •k M m *«» t^« On NO to to tOM NO «» «» «» «» «» On • eo ct 5 u io*N to o y- On, V NO • iTQ On, y ^Q . «9 •i :e : d ' Q • 3 • d ^^ to to w^ X «-4 X *««*- « ti i^ ^0 OS ^ PQ- •o On, 0} S^Q to • • o d « ONrtiJ NO o ONOJ to (U s-.i!ja S..S to to vd to Tt to q M^ M lO qi d d 3 ^ fi 13 m PQ p H' H CO to to «>^ o- to 1 u Uw^ ^3 a ^ +3 ■4-> u m H ' xo ■M § • NO NO On On M M M 06 M ON 06 M On no" to to Nd" 4» no" 1 o 8 < d o QPQ o- 6^ " d n PQ to o y. o»* •o o ^^ ON, o CO o 4 Wi 00 U^ M to 00 00 >o ^ « « to M 0\ e« H «»M ¥4 m „- « «» 4* «• 1 o o o < 2 CO a Itt o to o <0 TO O »n o « o »o O "xt » o ll to iS §2§ ^ cuo C cd ctt o g: : TO 8 to §,8 09 «M 1/1 '"N lO m 1 o o o U o o>o o o o lO o to in o lO o -* o o « o 4» M 4* M M cd o O d HO o ON, Or S-Q o o ■ o o 00 o m to VO NO « o r* r* mo NO o «o CO 00 T^ M o 00 00 NO NO CO 00 NO NO NO o t^ m •» NO m to tOM NO «» «» «» «» 4» ll NO eo pHM O o O ON H Pu O CO § PQ >N PQ o a ONCd 8 I O o a ■CO OnS Practical Accounting Problems. I- 1-04 Capital ... 12-31-04 Interest .. Solution. (Second Form.) Total A B C D $24,500.00 $7,500.00 $4,000.00 $6,200.00 $6,800.00 1,225.00 375-00 200.00 310.00 340.00 Loss $25,725.00 $7,875.00 $4,200.00 $6,510.00 $7,140.00 1,825.00 456.25 456.25 456.25 456.25 1#)tO OnnO to c« e« « t^ M to «* NO NO • NO CO tooo CO c« c< M 00 mnO 00 CO CO MNO 00 NO NO »^ M to NO to to NO NO Drawings I- 1-05 Capital ., 12-31-05 Interest . Profit ... Drawings I- 1-06 Capital .. 12-31-06 Interest . Profits ... $23,900.00 $7,418.75 $3,743.75 $6,053.75 $6,683.75 3,950.00 1,250.00 800.00 900.00 1,000.00 $19,950.00 $6,168.75 $2,943.75 $5,153.75 $5,683.75 997.51 308.44 147.19 257.69 284.19 5,002.49 1,250.63 1,250.62 1,250.62 1,250.62 $25,950.00 $7,727.82 $4,341.56 $6,662.06 $7,218.56 4,400.00 1,300.00 600.00 950.00 1,550.00 $21,550.00 $6,427.82 $3,741.56 $5,712.06 $5,668.56 i»077.50 321.39 187.08 285.60 283.43 7,922.50 1,980.62 1,980.62 1,980.63 1,980.63 $30,550.00 $8,729.83 $5,909.26 $7,978.29 $7,932.62 Drawings .. 4,050.00 1,150.00 650.00 1,050.00 1,200.00 8 : ^ : ^8 CO I- 1-07 Capital .... $26,500.00 $7,579.83 $5,259.26 $6,928.29 $6,732.62 * PROOF: Original Capital . . . .» $24,500.00 Net Profits three years 14,400.00 A's Total Drawings $3,700.00 B's Total Drawings 2,050.00 Cs Total Drawings 2,900.00 D*s Total Drawings 3,750.00 $38,900.00 12,400.00 $26,500.00 «o 8n«' •o 144 145 .ti 111! ' •" I 'a \ i §' ■1 Accounting Problems and Solutions. Question 33. (Michigan Elxamination, June. 1908.) The Western Grain Co. has this day been incorporated under the Laws of this State by the following incorporators : C. H. Benton, J. W. Walters* F. Rowland, and A. B. Miller, all of this city, with an authorized capital of $25,000.00, divided into 250 shares of $100.00 each. The purpose of this corporation is to buy and sell all kinds of grain, and the subscriptions to the stock of the Company are as follows : C H. Benton 60 shares, J. W. Walters 60 shares, F. Rowland 100 shares, and A. B. Miller 30 shares. Pursuant to an agreement between the firms of Benton and Walters and F. Rowland, and the Western Grain Co., the former two individual concerns agree to sell to the latter all their assets, consisting of stock of Merchandise, Real Estate, Accounts and Notes Receivable, Goodwill, etc., etc., in consideration of the assumption by the Western Grain Co., of all the liabilities of the two individual concerns as well as for the payment in capital stock of the Company for the balance which the assets may exceed the liabilities. The Balance-sheet of each individual concern, given on page 147, is taken as exhibiting the exact value of each plant. The Goodwill of Benton and Walters is valued at $1,500.00, while that of F. Rowland is valued at $2,000.00. To enable the corporation to carry out this agreement the original subscriptions of Benton, Walters and Rowland are therefore amended as follows: C. H. Benton subscribing 20 shares, Walters 20 shares, and Rowland 27 shares. A. B. Miller pays in cash for his subscription, and Benton, Walters and Rowland donate each 5 shares of the capital stock of the Company to provide a reserve for contingencies. Draft the necessary journal entries for the opening of the corporation books and all the other facts mentioned above, and create the ledger accounts. 146 H W w E m W u < 1-1 < Pi w H < Q < o :z: PQ Practical Accounting Problems, o o 6 o o_ - • o o\ M 00 000 000 • • • 000 000 ro O M m" 4 ^ a> ^ -?; St V O o o I 1 •^ o 0 o 10 M CI o o d to o q d o 00 «o CO X -d O . > P^(^ ^ to ;^ U <1> o 0) o o o o d o • • M M Nk ■t to M M «» xa O I'lt V t\ m n Accounting Problems and Solutions. Solution. THE WESTERN GRAIN COMPANY incorporated under the laws of the State op Michigan with an AUTHORIZED CAPITAL OP $35,000.00, divided into 250 SHARES OP $IOO BACH. Subscribers: C. H. Benton $6,000.00 J. W. Walters 6,000.00 F. Rowland 10,000.00 A. B. Miller 3,000.00 To Subscription $35,000.00 for their respective subscriptions to the capital stock of the Co., as follows: C. H. Benton and J. W. Walters, 60 shares each; F. Rowland, 100 shares; and A. B. Miller, 30 shares. Plant and Sundry Assets $34,600.00 To Vendors $24,600.00 for the surrender to this Co., of their right, title and interest in all of the assets of their respective firms, including the Goodwill. Subscription |$i5,3oo.oo To C. H. Benton $4,000.00 J. W. Walters 4,000.00 F. Rowland 7,300.00 To enable the Co. to purchase the assets of the vendors the original subscriptions are amended to read as follows: C. H. Benton, 20 shares; J. W. Walters, 30 shares; F. Rowland, 37 shares. Vendors $9,300.00 To Simdry Liabilities $9,300.00 for the asstmiption by this Co. of all the liabilities on open accounts and notes payable, as part consideration for assets acquired. 148 Practical Accounting Problems. Vendors trf- -.«« «« ♦15,300.00 To Capital Stock tr r ,«« ^^ r , ♦15,300.00 for 153 shares of the capital stock of this Co., issued to vendors in pa3mient of balance of consideration for assets bought as per bill of sale dated , Subscription $9,700.00 To Capital Stock •„ _^ ^^ , , ♦9f7oO'Oo for 97 shares of capital stock issued to the subscribers in ac- cordance with amended subscription, viz:— C. H. Benton and J. W. Walters, 30 shares each; F. Rowland, 37 shares, and A. B. Miller, 30 shares. Notes Receivable t? rnft «« . _ ♦3,100.00 Accounts Receivable 9,950.00 Merchandise (Inventory) 3,127.25 Furniture and Fixtures '595 00 Real Estate " * 5,150.00 Unexpired Insurance * 68.7c Goodwill * , - "«^ 3,500.00 To Plant and Sundry Assets $34,600.00 for the purpose of placing the respective assets, under appro- priate headings, on the books of the Co. Sundry Liabilities $9,300.00 To Notes Payable $c 410 Accounts Payable ..............*. .* .' .' .* 3 580 67 Notes Receivable Discounted »'L« J. X .■• - 1,300.00 for the purpose of placing the respective Habihties. under appropriate headings, on the books of the Co. Cash *, $3,000.00 To A. B. Miller «,«««,.« 93iOOO.OO cash pajrment for subscription to the stock of the Co. Treasury Stock $1,500.00 To Reserve for Contingencies $1,500.00 Benton, Walters and Rowland donate each five shares of the capital stock of the Co., issued to them, to serve as a Reserve for Contingencies. 149 Accounting Problems and Solutions, S 8 O o o d o o o 6 o o o o o o o 6 d d o o o o o >o m lO *n -* « « « 1* «» «» ! ' ! f to I o o d o o Q — i O o d o o Vi 6 o • «4 •«i« •»^ -M Q* a ■g CO OD ^ Xi 3 3 CO Si CO >» >% PQ »4 n :^ — o pq o o o d < o o q to © CO — ^ l3 2? w W *2 0) co^:? cii >o o «> woo I'd vj ►■^^ _S '"^ ^. o . «o . . . • CO PQ HI CD CO o ^0 C O J" o o o o o o d d d o o o rot^ o «0 On lO M c« l» «» M < o < lO ON "O ^ M « J «• «• ft o o d o >q •s at O e2 l-ss o ^ » Ml *^ CO ISO Practical Accounting Problems. H o o o o o o o o NO NO •« •t •* 't « Ci «» «» o o d o On O O o o • • o o o o »OOn CO CI) 4) CO CO pq o o o o d d o o C5n»0 «» H o >; o o • g o o i? d o vO •0 o to ■^ di « ^ «» pq o ■3 CO a \^ ••-• •d o CO ^•^ ^ P > CO >^ pq o q d o M o o d to o\ di lO M M I O o a o 151 w Accounting Problems and Solutions, m •0 o o o M o o to o o • o o Practical Accounting Problems. \ > ■ 'I'i r: i li / f o o • M s a D 8 00 5 o o 6 o ^ (^ I 8 I a CO 8 a CO H CO o o d o o •O «0 g I as - a o S o c o ^ CO ¥ ^ g I 1 O o TRIAL BALANCE: ^^sh $3,000.00 Notes Receivable 3,100.00 Real Estate 5,159.00 Furniture and Fixtures 695.00 Merchandise (Inventory) 2,127.25 Insurance (Unexpired) 68.75 Goodwill 3,500.00 Treasury Stock 1,500.00 Notes Payable Reserve for Contingencies Notes Receivable Discounted Capital Stock Accounts Receivable 9,950.00 C. H. Benton 2,000.00 J. W. Walters 2,000.00 F. Rowland 2,700.00 Accounts Payable S3 5. 800.00 $5,410.33 1,500.00 1,300.00 25,000.00 2,589.67 $35,800.00 o o o 152 153 II > r Accounting Problems and Solutions, Question 34. (Michigan Elxamination, June, 1908.) A. Wells, a manufacturer of novelties, is joined by I. M. Anxious in partnership upon the following terms: A. Wells is to receive a monthly salary of $ioo for the first year, which shall be a first charge upon the profit after providing for the usual business expenses and before reckoning 3 per cent upon the Partners* Capital. In the event of such profit during the first year, or any subsequent year, not exceeding 6 per cent, of the total Capital (after payment of the salary), this salary shall be reduced to $75 per month the following year, and remain so tmtil the yearly profit advances to more than 6 per cent, when such salary shall return to $ioa commenc- ing the year succeeding the one showing the required increase of profit. Should the profit in any one year amount to more. than 10 per cent upon Capital, A. Wells shall be entitled (in addition to the salary he received for that year) to a bonus of 33 1-3 per cent, upon any sum in excess up to $1,500, and 25 per cent upon any further excess; and his bonus shall be a charge against profit before allotting the interest at 3 per cent, upon capital. Any profit then remaining shall be equally divided. From the following particulars construct separate capital accounts for each partner for five years. Starting capital: A. Wells $6,000, I. M. Anxious $5,000. Profit before deducting salary, interest or bonus : 1st year $1,750.00 2d year 1,800.00 3d year 4,250.00 4th year 5,000.00 5th year 5»50o.oo No drawings on account Distribution of profits when ascertained. 154 ti ^ D I ^ S CO I Practical Accounting Problems. • d • • • • 00 \ H M '♦ L 0000 0000 6 6 6 6 O PC I-* "-I M 01 ■M I? o c 4^ 09 «0 .- 08 S^-' a a jBf> t*5 o • o « C^, ^P % pq eo o\, (U mQ o o o tolo o « 00 00 O 00 »o »o On PC « c* CO +J 75 CO % a «** o o ■M CO to CO S""^ cd * 10 CO **5 O 00 >o t>. t^ O 0\ CO to »o 0\ »0 •* M M o o d »o ei O G > CO "^^ o"^ O rt fl « Sa (opq^<;^ o ^ •• • • H* ' " • eo' o ^ ' Accounting Problems and Solutions. 5 *€ m 1 9 S G 2 '& C G so 6 3 Vi^/ >^ 1* n » D * § M • la o o o o • o o o o »o lO •» to o o o o o o o o • • a • o o o o O »0 M vO O M M n •t •t «o »o ll» «» g I o o o o o o O O O »o»o o O »0 "^ "^ V^ o O o « '-' *- o « o ^ f*5 o •t «k » «k M MM »o l» «» o o o o o o o o »o»o 6 »o -i- d o o o - o o « \o *^ **■ ■^ ^3 G^ o» •• >• • ^. . - . , to 2. S ■• • "• • ca a? G^ tM (U o c ^ o +j CO to to 3"-^ S O n '^ x^ ■ S : o O >• <• " >• |H- " ' - ^ ■ O "- mQ 156 o o d o o . o G CO V mAQ U Prctctical Accounting Problems. m 10 00 t^ 10 • • • • *^00 vO >o mio t^ « M « VO ' ail A W) «o «» «» «o 00 PO «OeO fO n • • • VO «^ ^ t^ t>.»o OHM M as •k >0 M t^ «» «» CO «0 >o W t-i lO 00 • ■ « • ^ to o> OHM « « fO 10 • •> •k tNi M 00 l» «» 000 00 Ov »0 « 0\»00 « »0 CN «>. »OM Tf CI A » * 00 M •» ■-4 4» ^0 91 o to M mmIjQ «*5 O u oa 01 G 2 " ^■g 2 fo- o G ^z gS2 Sg2 f*5 O G y o\aJ «- H»i^ .2 G^- H M- O G «- H»— iQ O G Oct vd •k VO f PO CO VO VO VO VO »o « ei 00 00 « « VO ^ ■* • On VO sd l^ « CI tN. t^ >o «o 10 CI CI «o t^ 00 00 I <* <» I «» «» 1 «» M t-4 to OS hQ 157 Accounting Problems and Solutions, o o o o o o o o 6 6 6 6 o OOO w O « M M O o d o o O »o m o o i^r* '& o o 'too (T) Oi o « lO t^ ■^ ON « « 00 00 m o O m t^ l^ ^ o « *^ to 1^ • • ■ « • • 0 00 1^ m 1^ O O Ov "^ o 00 o^ ei to 1-4 r^ •k DO M M «» M «» ■ o U u < o H InvestiB Salary.. Interest (0 1 PQ- - «• • • to* :: 1900 Tan. Dec. 4« - c*>0 P5- - - to" to 8 /^^ ^ Practical Accounting Problems. t^ 00 »o • . . • . M "t •1 M to ^ t^ »0 «*5»OlO On »0 »-• 00 to *^ to Ov to • to M M On H Ok M ^■^ ^ to . o ^^ . to OncO Qj.. s-.;^ ^Vw « W W PQ- - - - to* 6S to o to a .«« ■♦* a o o ^^ H & O U u m* - * - o to o to . 4-> >^V CO iS Ui C »-» ■♦r to • .; ONCtfiJ- ^: r - - PQ* - - - 1"^ o a o. , ONCfliJ- • o G On at On ■^ rt 4» J 10 to "«t * to to i^ t^ 00 00 00 00 I to o • 1(5 to o, o ^Q n ON« PQ 1^ to o y On, IS8 ■a 159 Accounting Problems and Solutions. Solution. (Second Form.) TIME. PARTIC- ULARS. TOTAL. ANXIOUS. WELLS. RE- MARKS 1900 January i Capital $11,000.00 $5,000.00 $6,000.00 euo December 31 Salary 1,200.00 1,200.00 .S 31 Interest 330.00 150.00 180.00 -s 31 Profits 220.00 110.00 110.00 5< 1901 a January i Capital $12,750.00 $5,260.00 $7,490.00 December 31 Salary 900.00 900.00 31 Interest 382.50 157.80 224.70 a 31 Profits 517-50 258-75 258.75 JO w 8 1902 January 1 December 31 Capital $14,550.00 S5.676.55 $8,873.45 a Salary 900.00 900.00 Cq 31 Interest 436-50 170.30 266.20 Xi .. 3, Bonus 598.75 598.75 >. 31 Profits Capital 2,314.75 1.157-38 1. 157-37 1: (11 1903 January i December 3 1 $18,800.00 $7,004.23 $11,795-77 Salary i,aoo.oo 1,200.00 31 Interest 564.00 210.13 353.87 TJ 31 Bonus 605.00 605.00 1, i Profits 2,631 .00 1,315.50 1,315.50 ^ 1904 January i Decemoer 31 Capital Salary $23,800.00 $8,529.86 $15,270.14 c 1,200.00 1,200.00 tj* 31 31 Interest Bonus 714.00 605.00 255.90 458.10 605.00 31 Profits 2,981 .00 1,490.50 1,490.50 -i $29,300.00 $10,276.26 $19,023.74 ? PROOF: Original Capital invested Net Business Profits for the five years: (1) $1,750.00 (3) 1,800.00 (3) 4.250-00 (4) 5,000.00 (5) 5,500.00 $11,000.00 18,300.00 $39,300.00 Practical Accounting Problems. Question 35. (This problem so well illustrates the handling of reserves for insurance, that, although it is not taken from a C. P. A. examination, it is included here.) The William Green Company, retail and wholesale grocers, on January I, 1902, decided that instead of paying premiums for fire insurance on the stock carried at its fifty retail stores, and also at the warehouse, it will set aside out of the profits of each year an amount equal to the premiums which would have been paid to the Fire Insurance Companies, and will deposit this amount on January ist of each year with Trust Companies at 3 per cent, interest. The premium paid in 1901 averaged $75-00 on each store and $600.00 on the warehouse. On July i, 1902, they opened ten new stores ; on Janu- ary I, 1903, they opened five additional stores; on January i, 1904, they opened ten new stores; all of about the same size and carrying about the same stock. Figure the insurance at the same rate for the years 1902, 1903, and 1904. Show the accounts which should be opened on the books of the William Green Company, to take care of this new feature and the condition of these accounts on January i, 1905. Solution. 1902. Dec. 31, Profit and Loss, Dr To Reserve for Insurance 50 stores, I yr. @ $75.00 $3,750 10 stores, Vz yr. @ $37.50 375 I warehouse 600 $4,725-00 $4,725.00 $4,725 1903. Jan. I, Insurance Fund, Dr To Cash Investment at 3% interest with. . . the bank as an insurance fund in lieu of premiums hereto- fore paid to Insurance companies Dec. 31, Profit & Loss, Dr To Reserve for Insurance 65 stores I yr. @ $75 $4,875 I warehouse 600 $4,72500 $4,725.00 $5,475-00 $4,725-00 $5475 160 161 R'lH B^H^^^^H^' I'^i^H ■i i: r Accounting Problems and Solutions, Dec 31, Insurance Fund, Dr $i4i-75 To Reserve for Insurance $141.75 37c interest on $4,725, at bank 1904. Jan. I, Insurance Fund, Dr $5.47b-oo To Cash $5,475.00 Investment of 1903 reserve at 3% Dec. 31, Profit & Loss, Dr $6,225.00 To Reserve for Insurance $6,225.00 75 stores, I yr., @ $75 $5,625 I warehouse 600 $6,225 Dec. 31, Insurance Fund, Dr $310.25 To Reserve for Insurance $310.25 3% interest on deposit of $10,341.75. 1905. Jan. I, Insurance Fund, Dr $6,225.00 To Cash $6,225.00 Investment of 1904 reserve @ 3%. Reserve for Insurance. 1902. Dec. 31, By Profit & Loss $4,725.00 1903. Dec. 31, By Profit & Loss $5,475.00 Dec. 31, By Interest on Insurance Fund 141-75 1904- Dec. 31, By Profit & Loss 6,225.00 Dec. 31, By Interest on Insurance Fund 310-25 Insurance Fund (deposited in Trust Co.). 1903. Jm. I. To Cash $4,725.00 Dec. 31. To Interest on Ins. Fund i4i-75 1904- Jan. I. To Cash $5»475.oo Dec 31, by Int on Ins. Fund 310.25 1905. Jan. I. To Cash $6,225.00 160 « Practical Accounting Problems, Notes on Problems. Problem 1. The solution of this problem is based on a solution given in Lisle's ^Accountmg in Theory and Practice," where on page 259 an identical problem is given. At a glance it will be noticed that the solution gives profit and loss account and balance sheet, and not final balance sheet and proht and loss account, as the question requires. In the C. P^A. problems in Practical Accounting, given by the Penn- sylvania State Board in November, 1906, one problem also calls for a bal- ance sheet and profit and loss account, which sequence, however, seems to be improper. It is the balance sheet that verifies the result exhibited by the profit and loss account, and not the latter that verifies the former The profit and loss account is arranged as in Lisle's, with this modi- fication, however, that the result of manufacturing is closed out into the trading section, which again is credited by the sales, thus showing the actual gross profit. It would, perhaps, be more in accordance with theory to subdivide the profit and loss account with proper headings into: Manufacturing, Trad- ing, Admmistration, and Adjustment; each section so subdivided to show results as indicated by their respective headings. The classification in the balance sheet is somewhat different from that given by Lisle in his solution, insomuch that the assets as well as liabili- ties arc divided into current and fixed. While the cash account appears in its proper place, at the beginning, yet It may also be classed last, the reasons being that cash is already reahzed and does not need to be turned over into money; another reason for not placing the cash where it is would be the poor impression that such a small item of cash, which is out of proportion to the other items m the balance sheet, would make upon a party glancing over such a bal- ance sheet. In this particular instance, however, the effect is but slight so the ordinary form was used. Problem 2. This problem is solved in two forms : the first form is that given bv Ijsle m his Accounting in Theory and Practice," where on page 245 an identical problem is given with solution ; the second form is by the Com- parative Balance Sheet. The latter appears to be more suggestive than r Kr.™^l' ^' .'* '^°'^' "°* ^'"^y increases and decreases in assets and liabilities, but gives the full balance sheet, with all increases and decreases appearing alongside one another, and offers statistical advantages for the period under surveillance; furthermore this form affords more detailed mformation, as all the items are included, whether they changed, from one period to another, or not. 163 If I I ,ll • Accounting Problems and Solutions. Problem 4. In this problem we are given a trial balance and asked to prepare a revenue account, etc. The nomenclature in this instance is not used well, as, according to Dicksee, a revenue account is prepared in non- trading concerns, while in trading concerns a profit and loss account takes the place of the revenue account. In this problem it is quite apparent that this is a pure and simple trading concern. Why then a revenue account? Another undesirable expression we find in this trial balance is Mer- chandise Account. If there is anybody at all of the professional brethren who ought to emphasize the importance of keeping the merchandise account subdivided and not agglomerating purchases, sales, returns, etc., it ought to be members of the State Board. By arranging the problems m the shape this one is prepared, bookkeeping and not accounting methods are encouraged. While this problem can be solved in different forms, the method used was adopted for the following reasons : Due to the agglomeration of the purchases and sales, etc., into one account, a statement of profits and losses will give clearer results than a profit and loss account. As the inventory is the chief item missing in the problem this was supplied, in order to complete the statement and make up the balance sheet. The inventory had to be taken at random, as no method could be applied to find out what was the amount of merchandise on hand, for the reason mentioned above. The arrangement of the account in the balance sheet follows the manner in which they would be realized and liquidated. Problems 5 and 6. The two problems, if taken as representative, disclose the difference in standard of requirements of the respective boards, in 1903. The only comment worth making on the New York problem is that the data furnished in the problem are rather incomplete for an intelligent solution of the questions asked. With regard to the make up of the Illinois problem, we notice that the Board asks us to keep the old traditional Merchandise Account. They further show all facts agglomerated and not properly classified. The prob- lem is rather of a bookkeeping than of an accounting nature, and the information given is not only incomplete, but misleading. With regard to solutions: In solving the New York problem, the principles and forms, as sug- gested by Prof. Hardcastle in his Accounts of Executors and Trustees were observed. 164 Practical Accounting Problems. In the solution of the Illinois problem the exact answers, as they are required by the Board, are given, although some of them are rather super- fluous; viz.: There is no necessity for both a Statement of Assets and Liabilities and a Balance Sheet. The profits and losses were distributed according to the capital invested and the time that such capital was employed, using the average method. The reader is referred to page 26 for the method of procedure in averaging accounts. The item of Notes Receivable Discounted was arrived at by an analysis and verification of the Cash Balance, as given. Unless there were some other Cash Receipts, in addition to those mentioned, there would be a debit instead of a credit balance, which is hardly possible. It must follow that some of the Notes Receivable were discounted, a sufficient amount ($7,556) to prove the balance shown in the problem. Problem 8. The solution to this problem is in a very ordinary form. It merely gives the answers required, without any explanatory notes. In the solu- tion of some other similar problem (pages 105-107), is given a more elaborate form, containing additional information. Further comments are also given on pages 171-172. Problem 10. The Balance Sheet as constructed from the figures appearing in the statement made by French's bookkeeper on January i, 1904, shows capital investment of French to the amount of $45,9oo. The total profit as shown by French's books for the five years is $36,150, making the average yearly profit according to his books $7,230. Three times the average profit amounts to $21,690, which is the value of the Good Will according to the plan adopted by French & Savage. By the terms of the agreement Savage was obliged to invest $45,900 plus $10,845, or $56,745. Good will is to be placed on the books at its full value. The entry necessary to effect this will be to charge Good- will and credit French's capital account with $21,690. When Savage makes his payment of the $56,745, the entry will appear in the cash book on the debit side and will be posted to Savage's capital account. Since Savage obtained one-half interest in the business, including Good-will, French's capital account should be charged and Savage's capital accoimt should be credited with just the amount necessary to make his interest equal to that of French or $5,422.50. The problem is silent on the point of an understanding between French and Savage regarding the value between themselves of the finished lathes on hand January i, 1904. Under ordinary circumstances the proper value to place on finished goods at inventory periods is, of course, the '' cost price, provided this is lower than the market value. In the event i6s ■■■:\ #, ""1 Accounting Problems and Solutions. of a change in the partnership it is, under certain circumstances, justi- fiable to anticipate a portion of the profits on the machines which are finished and ready for shipment. Nothing is stated regarding such an agreement between French and Savage and the machines are conse- quently listed at cost price. f We now take up the situation as found by the accountant. French on January i, 1899, bought out Deyo's interest in the business, amount- ing to $16,000, and paid therefor $20,000, part in cash and the balance by a personal note secured by a mortgage on his property. The problem states that the cash transaction alone appeared on his books. This cash disbursement must have been charged to Deyo's capital account and the balance of his capital account transferred to French's capital account. This is shown by the fact that when the profits for the five years, amount- ing $36,150, are deducted from the capital as shown January i, 1904, $45,900, a balance of $9,750 is left, to which must be added the withdrawals of $16,250, making the total capital at the beginning of the five years $26,000, which is the amount of French's capital account ($15,000) plus the balance of Deyo's capital account of $11,000.. The investment of Deyo while larger than- that of French so long as the concern continued to run produced *to Deyo a profit equal to that of French only. Inasmuch as French paid $20,000 for a $16,000 invest- ment he must have considered the value of half the Good-will to be $4,000. It would therefore seem that the correct entries for French to have made on his books to record properly the purchases of Deyo's interest would have been, first to charge Good-will account with $8,000 and credit half to his own capital account and the remaining half to the account of Deyo; charge the cash payment of $5,000 to Deyo's capital account; make a journal entry charging Deyo's capital account with $15,000, and crediting Bills Payable with $15,000, making an explanation that this note was secured by a mortgage on French's dwelling house. This would leave the capital account of French stand at $19,000, and would show among the assets the account of Good-will valued at $8,000 which, as stated above, is the valuation placed upon the Good-will by French when buying out Deyo's interest. Taking up the question of depreciation, we find that on January i, 1904, the machinery account stood on the books at $45,000. The problem states that purchases of machinery for the plant during the five years amounted to $20,000, consequently the Machinery Account on January i, 1899, must have shown a balance of $25,000. The purchases during the year 1899 amounted to $3,000, making the total balance on December 31, $28,000. Ten per cent, depreciation on this figure amounts to $2,800 and leaves the value of the Machinery Account $25,200. On December i, 1900, the Machinery Account would stand $25,200 plus $3,500» or $28,700, on which the depreciation would amount to $2,870. In this manner we find the depreciation for the remaining three years to amount to $2,983, $3>i34-70> and $3>32i-23 respectively. The depreciation for the five years amounts to $15,108.93, leaving the machinery stand at a valuation of $29,891.07. 166 Practical Accounting Problems. The revised Balance Sheet of January i, 1904, showing machinery at its depreciated value, $29,891.07, an^ the stock on hand at the correct 'figure $15,750, also including the item of Good-will, $8,000, shows the capital of French on January i, 1904, to amount to $37,791.07. From the profits of the five years as shown by French's books the depreciation on machinery must beideducted in order that .the real profit may appear. We must also deduct $1,000 from the profits of 1904 because of the error in the inventory. We find that the correct profits for the five years were $2,200, $2,430, $3,767^ $5,365.30, and $6,278.77 respectively. On this basis we find the value of tl^ Good-will to be $12,024.64. The agreement between the new partners was that Savage should invest an amount equal to the capital account of French on January I, 1904, also a sum equal to half the Good-will. According to the view taken above, the Good-will of the business on January i, 1899, was valued by French at $8,000 and we have brought the item into his capital account as of January i, 1904. At the present time the value of the Good-will according to the method determined upon by Savage and French is $4,024.64 higher than on January i, 1899. The increased value of the Good-will has been due to the effotts of French in building up the busi- ness. In admitting a new partner he would be justified in crediting the full amount of the Good-will at the date of admission of the new partner ^ to his account and requiring the new partner to invest a sum of money equal to the balance of his capital account after Good-will has been credited. In this case he appears to have allowed as an inducement to Savage that but half the value of the Good-will should be credited to his account and the remainder distributed in equal shares between himself and the new partner, thereby allowing a premium to Savage of one-fourth the Good-will. ^ ' Inasmuch as an item of Good-will amounting to $8,000 already appears in French's capital account it would seem that the agreement between the partners would be more nearly equitably carried out by crediting to French's capital account half of the increase of the value of Good-will ($4,024.64), amounting to $2,012.32, making the total amount which Savage should contribute $39,803.39. The remaining half of the increase in Good- will would have been distributed between the partners, making the capital account of each stand at $40,809.55. Savage's investment as made by him amounted to $56,745. According to the figures given above the correct amount for him to have invested is $39,803.39, making excess capital invested by him to the amount of $16,941.61. In considering the Balance Sheet of January i, 1905, the following questions arise: How shall the expense of moving the. machinery from the old factory to the new building be treated? Qearly this is not an expense chargeable against plant under conservative management. Another item for study is the over time amounting to $9,000. According to the statement of the problem the work which was gotten out as a result of the expenditure of $9,000 could have been produced by an outlay of $6,000 under normal conditions. It would therefore seem that the ex- 167 . '\ i \,''. Accounting Problems and Solutions. penses of wages during the current period were $3,000 higher than they should have been, due to the removal of machinery. These two items may properly be treated by opening an account called " Removal Ex- penses to New Factory" and charging the total $10,375.00 against this account, and writing off the amount over say five years. Problem 13. Mr. Jacobsson, in solving this problem in The Journal of Account- ancy, states: "A great thinker has said that a man can accomplish almost anything to which he directs his attention, providing he is possessed of the dual qualification of faith and hard work. The candidates who undertook to solve this unscientific problem needed an infinite quantity of faith and hard work. Percentages as a basis of comparison ought to be calculated on a given base, but here they relate to a statement of experience which does not work out at all, hence the explanation of discrepancy. It is a well known fact that the examiners, who are all practicing accountants, fall into the greatest temptation to draw upon their own professional experience for difficult problems. Our problem under review will defy the best accountants in practice to work out within the time limit. It is all very well to test the candidate's analytical ability, but the test must be scientific, fair, and square, and the examiners should not draw too freely on their professional experience." Any one familiar with C. P. A. examinations will agree with Mr. Jacobsson that examiners draw freely upon their experience for difficult problems, but there would be no great objection to the practice, provided they would present all the facts of the case, and provided, as stated in Mr. Jacobsson's comments, that these facts were scientific and fair. In most of such cases, however, this is not so. The comparison of profits by means of percentages based upon selling prices is certainly unscientific. To quote Dawson on this subject: "In taking the selling price as the base, the profit is necessarily included therein — thus the base will vary with the profits, although the underlying motive of comparison by means of percentages is to reduce results to a common base." This variation is, moreover, uncontrolled by any principle, being, in the case of a large proportion of profits, entirely disproportionate to the variation caused by a smaller rate of profits. As an instance, 10 per cent of profit computed upon the cost price is equal to 9 i/ii per cent, when the same result is taken upon the selling price, but if 50 per cent, of profits on cost prices be computed on selling prices it will only show 33 1/3 per cent. Furthermore, as the selling price is composed of the cost price and the profit, the latter cannot exceed the selling price, from which it follows that a profit based upon selling prices cannot equal or exceed 100 per cent. ; if the goods have cost anything at all. 168 Practical Accounting Problems. That this is also in accord with economic principles is shown by the following extract from John Stuart Mill's " Political Economy *' : " The capitalist, then, may be assumed to make all the advances and receive all the produce. His profit consists of the excess of the produce over the advances; his rate of profit is the rate which that excess bears to the amount advanced." A State Board of Accountancy ought to present problems which should be scientific, and which could be solved according to rules, especially in a mathematical problem of this kind. Problem 14. In the solution of this problem, the results of the various departments are shown separately; thus the Manufacturing Account is arranged to show, Prime Cost and Cost of Production ; the Trading Account, to show Gross Profit on goods manufactured and also to show separately Gross Profit on goods bought. In this solution it was very convenient to dissect the Inventory, as it rightly should be, into the various elementb it is composed of, namely: Inventory of Raw Materials, Inventory of Finished Goods, etc. In the Trading Account such expenditures as Advertising, Insurance on Mer- chandise, etc., have been classed in the first section showing Gross Profit on our own goods, as from the question it is difficult to draw the line and indicate how much of it belongs to the section dealing with our own goods, and how much of it belongs to the section showing the result of goods purchased. Problem 1 5. The final part of the question reads: "After stating the net profits for the current year, make the same reserves for depreciation, etc,," which is somewhat ambiguous. Depreciation is a charge against profits, while net profit is arrived at, after all charges are deducted. With regard to the solution: The Trading Account is arranged to show gross profit on goods sold, regardless of such charges as advertising, salesmen, expenses, etc. All other charges, though some of them are rather directly connected with sales, are carried to the Profit and Loss Account, where the final net profit for the current year is shown. This being a manufacturing concern, it is fair to arrange the Trading Account as it is, while were it a pure trading concern instead of a manu- facturing, and the question called for a Trading and a Profit and Loss Account such expenditures as advertising, salesmens' charges, etc., would probably have to be classified with the trading account and not with the profit and loss account. In the Balance Sheet reserves are deducted from each particular asset, against which exception was taken, instead of enumerating them in the liability side of the Balance Sheet (as some prefer), to avoid ambiguity. 169 d Vi.l I i i '>■ m R '""- h HI [V' ^'11 H| ^■: V ■ 1 HBj|| \'^ml Accounting Problems and Solutions. The problem is silent about the deduction or creating of a reserve for depreciation on tools and implements as well as on furniture, so no charge has been made, nor a reserve created. The problem further fails to mention anything in regard to a reserve for bad debts, so none is cre- ated, although in this particular instance, losses through bad debts having occurred, — as by the terms of the problem, the reserve for that purpose has been encroached upon, — a 3% reserve would be desirable. Problems 16-18. Not much comment is called for upon the solution of the sixteenth problem, except the change in arrangement of assets and liabilities. Why should a Washington State Board, or for that matter any other State Board, in the United States, follow the English form, as laid down in the Companies Act (England) of 1862? To quote Lisle on this: " The fundamental idea of a Balance Sheet is that it is a statement show- ing how the Ledger Accounts of a concern stand at a particular moment of time. It would be unnecessary if we could see and comprehend at one view the contents of a set of ledgers. As we are unable to do this we prepare a Balance Sheet, but why in the process the assets which are on the debit side and the liabilities which are on the credit side, as according to the principles of accounting they ought to be, should change places, it is impossible to justify." In the solution of the 17th question, Notes Receivable Discounted has been credited and not Notes Receivable (as some prefer), for the reason that there remains a contingent liability; if Y does not pay for the note X must make it good, and this contingency should be recorded in X's books. When Y pays for the note at maturity, we debit Notes Receivable Discounted and credit Notes Receivable, thus wiping out the contingency previously recorded. In regard to the solution of the i8th question, it has been assumed that the profits ($12,000), in the third year, are obtained after charging interest as was the case in the first and second years. Interest is charged on withdrawals, as the problem emphasizes that these withdrawals are in excess of salaries allowed, hence decrease the investment, and if the investment is credited with 10% interest, it is but fair that withdrawals should be charged with 10% interest. Problems 20-21. With all due respect to the New York State Board of Accountancy for setting a high professional standard for C. P. A. examinations, one cannot help speaking a few words in favor of the accountant student. A perusal of Bulletin 15, June, 1903 (C. P. A. Syllabus), of the Uni- versity of the State of New York will reveal the fact that the syllabus calls for Manufacturing Accounts and not Cost Accounts. It reads: " Accounts to indicate causes of loss by a firm whose sales and cost 170 ^ ^ ' Practical Accounting Problems. calculations indicated a profit Manufacturing and Loss and Gain Accounts, and Balance Sheet," etc. Reading this paragraph in the syllabus the candidate for the C. P. A. degree certainly does not expect to be surprised with such a problem as Question 1-2, especially when on page 240 of the above mentioned syllabus it is stated that the outline of the latter is also "to serve as a limitation to those who prepare the questions/' It is true that Cost Accounting is becoming a prominent feature of the accounting profession, yet this is no reason why the accountant student should not find at the C. P. A. examinations what he expects to find according to the C. P. A. syllabus or else have the latter revised. Similarly with Question i (October, 1907), one can hardly tell under what section of the subject of Practical Accounting this would come. Surely not under that of "accounts involving bonds and other securi- ties," as the syllabus does not disclose in the least the stress put by the State Board in this given problem, the solution to which, to be accurate, and this the Board certainly requires, would take three or four hours' work by the experienced practitioner. How then shall the candidate solve it in much less time? With regard to the solutions it will be noticed that although the final results in both cases (Forms I and, II) are the same, each solution showing a net profit of $54,193-98, yet in the presentation of the solutions as well as in the technique there is no doubt that Solution I is clearer. The answer in the latter, relating to the percentage to be calculated and added to each $1 of material and labor to give total cost, appeals to us more than the percentages arrived at in Solution II. At least in Solution I, proof is furnished for the given answer. The opening statement as given in Solution II, is superfluous. In the first place the question does not call for it, and, secondly, the assumption that the capital at the beginning consisted of the inventories only, as given in Paragraph I of the question, is quite strained. The attention of the reader is also called to the fact that in Solution I, Factory Expense Account has $24,444.15 and Management Expense Account $37,496.26, while according to percentages shown the respective accounts should have $24,449.30 and $37,491.60. The latter figures are more correct, but the problem requires us to use the former, hence the difference. Both solutions are presented in order to give the reader a choice be- tween the two opposing views. Problem 22. The adopted form, dividing the realization account' into four oarts, brings out many important features ; viz. : By addin;; assets realized with assets not realized we find the total to be $96,610.00, which total, subtracted from assets to be realized, leaves a difference of $23,612.00, which is a loss on the realization prcper. If this total is added with the item expenses in connection with accommodation account, $2,200.00, we have the total gross 171 1 1 t \t } V \ I Accounting Problems and Solutions. loss on the realization, namely, $25,812.00. Adding liabilities liquidated with liabilities not liquidated, the total equals the total sum of liabilities to be liquidated. The last part, Supplementary Charges and Supplementary Credits, shows the trustee's subsequent operations, viz.: Charges $76,560.00 (de- ducting $2,200.00 of expenses connected with accommodation account) against credits $102,002.00, leaving a gross gain on trustee's operation of $25,442.00, which sum, deducted from losses on realization ($25,812.00), leaves a net loss of $370.00. The interest paid on the mortgage is divided; as the first payment for six months belongs to a period preceding the trusteeship, while the latter for one year belongs to the trusteeship period. Expenses on accommodation are classed with supplementary charges, as it was not a liability to be liquidated, and hence could not be classed anywhere else but with supplementary charges. Problem 23. The item factory site and buildings, $90,000, is omitted from the realization column on the asset side, as the bond is supposed to be covered by a mortgage on the same; for the same reason are the other three items, viz., machinery, boats, and horses and trucks, omitted. The item taxes and wages, $2,500, is deducted from the assets, as this is a preferred claim, and must be miet from the total assets before any of the creditors can realize. From the accounts payable on the liability side are subtracted $39,000, viz., $30,000 for the amount realized on the sale of the machinery; $6,000 for the amount realized on the sale of the boats; $3,000 for the amount realized on the sale of the horses and trucks, all being subject to a chattel mortgage to secure accounts payable so deducted. As the sale of the machinery does not cover the amount due the mortgagee, although the problem is silent as to the fact, yet, from the construction and wording of the average mortgage instrument, the mort- gagor is liable for any deficiency. This is also true from a legal standpoint in bankruptcy matters. So the mortgagee is permitted to share in the re- maining assets pro rata with the other creditors. Interest on bonds, although scheduled, could not legally be enforced, as other creditors could insist that the same be covered from the security — the factory site and buildings — unless surrendered, instead of from other assets, for the simple reason that every mortgage reads that the security covers both, capital as well as interest. Problems 24-26. There are a few details in the make up of the problems which deserve comment. In the 24th question the accounts in the Trial Balance are arranged in rather hap-hazard shape. It would be more desirable to have them 179 Practical Accounting Problems. arranged so as to facilitate the preparation of business and financial state- ments, viz. : Real Accounts, Nominal Accounts, Customers and Creditors, or some similar arrangement. In the 25th question, the language, reading: "100 shares are placed in the treasury for future disposition . . . ," and. " Each incorporator then donates 30 shares," etc., is misleading, especially when one considers that there is no class of stock so ill defined as " Treasury Stock !" From the wording one would infer that the board acknowledges in this instance 250 shares as treasury stock, which would not be consistent with modem accounting principles. In the 26th question not all the facts are presented, resulting in omission of the Deficiency Account, which account would be desirable in order to prove the accuracy of the Statement of Affairs. With regard to the solution of the 24th question, the amounts appearing in the Profit and Loss Statement as well as in the Balance Sheet, are those arrived at after the adjustment entries are respectively added or subtracted. In solving the 25th question no attention was paid to the stock put aside for future disposition, as it is merely unsubscribed stock. To quote Rahill on this : " It is clear that the amount of stock the incorporators or promoters reserve to be sold at some future time as the needs of the company may require is not an asset, but is issued against an asset; its issue involves the creation of a liability in proportion to the asset exchanged for it," hence we cannot call it Treasury Stock. In the solution of the 26th question no Deficiency Account is given for reasons mentioned above. Problems 28-29. In presenting these problems the monetary system was changed in order to render the solution more easily comprehensible by American readers. The make-up of the problems is in rather a haphazard form, and, to some extent at least, impractical. If the examination is supposed to be in Practical Accounting the questions, surely, ought to be practical. The first question, while rather a good test problem, is lacking the finishing touch which would make it as though it were taken from actual practice. There is no item of rent included, which is rather strange. Whether the Mill owns Real Estate or not, there surely ought to be a charge for rental. Another unpractical arrangement we can observe in the item "yam (used)". The question begins: "The following figures are taken from the books of the A. B. Mills," etc., and the first item is certainly not shown directly on the books, but arrived at after taking into consideration various elements, such as Purchases, Retiu-ns, Inventory, etc. It would be better to give all the accounts that result in the figures, showing how much yarn was used. For the preparation of a Balance Sheet, as required m the problem, we necessarily desire to know the inventory of goods on 173 !tf!yiif'*ffll!f^ Accounting Problems and Solutions. Practical Accounting Problems. iiiii hand. A going concern, such as this is supposed to be, surely has some stock on hand. There are no comments to be made regarding the make up of the 29th question. What attracts our particular attention in the make up of the paper of this examination is, that the problems are of a general character, as they should be, and not very specialized. The accounts in the Trial Balance are arranged in the following order: Real, Nominal, Personal, and Capital. The respective debits or credits of each of the accounts were arrived at by an analysis of the nature of each account. Proper division of the nominal accounts into the various sections of the Profit and Loss Account was made, with the exception of Insurance, Taxes, and Depreciation, which were not charged to Manufacturing, but to the Profit and Loss section. The wording of the problem is not clear enough for an apportionment of these items, hence they are shown as of a general nature. In solving the 29th question it was inferred from the phrasing of the question that Eusebius Robinson was the manager of the adventure, hence the reason why a full record of the adventure is kept in his books, from the time of shipment until the final remittance is received, while such is not the case in Brown's books. Problems 30-32. It will be noticed that the monetary system in which the questions were originally given (English) is changed into American. The form in which the questions appeared was also slightly modified to make it more in accordance with American ideas and customs, and thus make the solutions more easily comprehensive by American readers. The 32d question is rather incomplete. Surely the intention of the examining board was not only to ask for "crediting each partner with interest on Capital," but a good deal more. From the wording, however, the inference would be merely to credit partners' accounts with interest. We see that our examining State Boards are only a type of the average examining bodies. It is noticeable that examining boards everywhere do not prepare the examination questions with the care which they should use. The wording of problems in many instances calls for one thing while common sense will indicate an entirely different construction. This am- biguity tends to confuse the candidate taking the examination. In solving the 30th question, before appropriating the profits to the partners' accounts, the interest charges on capital were deducted. No interest was charged on Partners' Withdrawals for the following reasons : THese drawings were made in the same proportion that each partner shared in profits or losses, namely, 4/10, 3/10, and 3/10, respectively, so that no one of the partners is affected in any way. Secondly, they were made at the end of the month against profits which were already earned, and to which the members of the firm were entitled. 174 Finally, they do not exceed the profits made, but, on the contrary, the latter are a great deal in excess of the former. With regard to the solution of the 31st question, the American method has been followed for both the Statement of Affairs and the Deficiency Account. It will be noticed that the item " Z's Household Furniture '* is included in both the Statement and the Deficiency Account, in order to have the complete facts, yet it is omitted in the " Nominal Value " column, as this column represents book values, and this item, surely, was not on the books of the firm. In the 32d question the accounts are so arranged as to show the final balances on January i, 1907. The Profit and Loss Appropriation Account is given for the purpose of charging the interest on capital against the net profits on trading. This act is justified from the wording of the problem : "The trading for the three years has resulted," etc. In the solution of the 30th as well as the 32d question a separate account was opened for current operations under the heading "Drawing Account " and another account under the heading " Capital Account," the former being charged with Withdrawals or Losses and credited with all*" sources of income. The balance was carried to the Capital Account, which, if a debit balance, was charged against the investment ; if a credit balance, it was added to the previous capital, the final balance showing Capital or Present Worth of the Partners. Problems 33-34. With regard to Solution 33, it will be noticed that each subscriber is charged for his respective share to the subscribed stock. While this method of treatment may be at variance with some authorities, the author thinks it brings out the facts of the transaction much more clearly. The 34th question is solved in two different forms. The first solu- tion is the exact form as required by the Board, the second is what is called a " Statement Form." The result is the same in either case. The bonus is calculated after deducting, from the profits, the salary and 10% of the combined capital, as per wording of the problem. Thus in 1902 the bonus is arrived at in the following way: Profits, before adjustments $4,250 00 Less salary allowance $900.00 10% of capital ($14,550.00) 1,455.00 2,355.00 Remaining balance (excess) $1,895.00 From this figure the bonus is reckoned thus: Excess balance $1,895.00 32iyo of 1,500.00= $500.00 25% of 39500= 98.75 Total bonus $598.75 175 m ii I Accounting Problems and Solutions, Interest has been charged on yearly balances, ignoring the fact that the salary was not drawn. Wells had a right to draw this sum any time he desired, and, consequently, cannot claim interest on this current item. This problem could, perhaps, be solved in many more ways, depending on the interpretation given to the wording. The method adopted here is such as a candidate, considering the time limit at examinations, could safely follow in solving the problem. Interesting in this connection is the requirement of the present Board in strictly carrying out the Rules of the Board with regard to the following : " Any applicant before being entitled to receive a C P. A. Certificate must have had at least two (2) years continuous practical experience in public accounting immediately preceding the date of application." " In the event of the applicant failing to pass the examination, he may be re-examined in accordance with the law and rules of the Board, after one (i) year upon the payment of an additional fee of $25.00." "Applicants, when required, must appear in person before the Board to answer any question, or produce any evidence to sustain such facts as may be necessary to determine the qualifications of the applicant as pre- scribed by the law and rules of the Board." Under the first and last rule, the Board debars bookkeepers who have never practiced. The advisability of the second rule is questionable. Surely six months would serve the purpose just as well. Problem 35. The first step to be taken in the problem is to charge the Profit and Loss Account with the amount necessary to be set aside, crediting the amount to the Reserve account, which then represents profits set aside for this specific purpose and not available for dividends. The next step is to invest the cash in some interest bearing security or (as in the prob- lem before us) deposit it in a special account. When interest on the investment is received it becomes a credit, not to the regular Interest account or to the Profit and Loss account, but to the Reserve account. As soon as the interest credits become large enough to make an invest- ment, securities should be purchased and the amount charged to the In- vestment account. In business where the sinking funds reach larger propor- tions the interest is sometimes carried in a special account called " Interest on Investments of Sinking Funds." The interest is not under any circum- stances a credit to the Investment account. PART ill 176 : ! it- i! I!:' ,*■■• \ III. ^ j,..,„^3ajj- f),/f ,°'^'"^'""^^^^®'=*^'^''"^'*'°ns ^ith answers on each of ComJercraT! /w ' tI' ^ ^^'°^ °' ^^^°'-''^*^' Auditing and Sric PennsviTni. l^r ^"'\*^°'l' ^""^ ^^'^^^^^^ from thi New York, Fennsylvania, Illinois, Michigan, Maryland, Washington ^9ollZ\T^'' ^"^ ^'^^"^'^ -^--^-'^ P^^Pers oiTo6: Theory of Accounts. Questions. rt, K^ J^''f '' ^ ''"''*"^ *""^- ^°" should the account be treated on the books of a corporation? treatea on ,tn/lf ^J^r""" *' T''°'^ °* determining the number of shares of capital stock both common and preferred, held by each of the several stockho d e s of a corporation, giving fully the titles of the books wherein the fa" are registered and stating how the books are opened and operated iJ^Z TT^TJ'' °''S^°'«d with an authorized capital ' stock of $50,000 of which only $40,000 is sold, and stock certificates issued therefor The conflictmg methods of recording the capital stock on the books are r„rri\ ! the following: (a) Fixed assets and fixed liabilities (b) Current assets and current liabilities. """"les. ^D; shoufi b^k^^"''"^''""''" ^^^°'""" '"' ''="^ "- ■•" y°- opinion it (7) What is the purpose of the following acrnnntc or, A u« .i. created on the books: (a) Sinking Funds f (b) Reserve FuL,7 t"< Depreciation? (d) Goodwill? ''^- W Reserve Funds? (c) (8) Name the various forms of Capital Stock, with full explanations. sheet" and "111' ^''^7'"" '" """"'"« ^^'^^'" '^^ t^™^ "balance sneet, and statement of assets and liabilities." =.n/'°^v"'' ^ ?'^ ^^ *° P™""^^ f°' controlling accomits of debtors ^^ibTelntf ° '°' """ '•" -"— ' "'""^ -eitblf^n-d «, rll'^ rf""'* * ^"""P^ny «'"«' on Jones & Company for an account of &he r'"^ ' r ""*• '"^°""*- ^' •"''*""«y ">« acceptors borrow Ive^ fintlf "T' !f °° 1° '''*'* *'■" '" ""^^''"S the draft, which is, how" loan'of tl""""'" '° '^ """•"'<*• J°"- '^ Company repay $300 'of t^e trant:o:sVr:tLprer '" ^^ '°°'' °' ""'' * ^""''-^ '^^^ ^' booLLeUr '°"'''"'' *"' """"*"" °* ""^'' '"''^ ""'* °* """"^ '°'^ 179 1 1 i I iit;,'" iNi^ I Accounting Problems and Solutions. (13) A owes B $1,000 and B draws on liim for the account at 60 days. The draft is accepted by A, whereupon B takes it to the bank for dis- count. The bank discounts the paper 57 days before maturity, at 6 per cent, per annum. Show the entries you would make in the books of B. (14) Define and differentiate your understanding of a trial balance; a balance sheet; statement of aflfairs; trading statement. (15) Outline your understanding of the most approved method of keep- ing a merchandise account, and give titles of subdivisions you would suggest. (16) Define your understanding of (a) Reserve Account. (b) Reserve Fund. (c) Income and Expenditures. (d) Receipts and Disbursements. (e) Good Will. (/) Income Bonds. (17) Corporation X makes a practice of charging to expense and car- rying to Depreciation Reserve account every half year a certain per- centage of the book value of its plant and machinery. What, in your opinion, is the correct method of dealing in this case with repairs and renewals: i. e., should the latter be charged to Profit and Loss, or can they properly be charged to Depreciation Reserve Account? Give reasons for your answer. (18) What do you undersUnd to be the meaning of the term " Secret Reserves?" Give some examples of Secret Reserves, and state your opinion as to the propriety or otherwise of the creation of such reserves, giving reasons. (19) What is meant by the voucher system of bookkeeping? Describe the voucher record book. (20) Describe the different methods of determining the loss or gain of a business. How is the loss or gain of a business determined from books kept by single entry? State the usual mode of procedure when the books are kept by double entry. (21) What is understood by the term "net profit?" State the final disposition of net profit in the books of a partnership ; of a corporation. (22) What is a stock ledger? Explain the nature of its records and describe the manner in which they are made. What relation does this book bear to the general books of a corporation? (23) You are requested to open the necessary books for recording the organization and business operations of an incorporated company having three forms of Capital Stock. (a) State what books are necessary. (b) Name the various forms of Capital Stock and how created, stating the rights and privileges of each. ^ (24) A corporation has an issue of preferred stock entitled to cumu- lative dividends of 7% a year. The dividend payments are in arrear. Should the arrears of dividends appear on the balance sheet, and if so, Low should they be stated? Questions in Theory of Accounts. (25) How should inventories be treated in closing the ledger at the end of a fiscal year? Is the common practice of adding the inventory of goods on hand to the credit side of a merchandise account theoretically correct? Explam fully. ' (26) In case a manufacturing company having purchased a large stock of material during the year at low prices, but at time of annual in- ventory values had increased. How in your opinion should the inventory be valued, at cost or prevailing market price? fJV.^!^^^ '"^ ^^^ ^°''" °^ ^'°"'"^^ ^"^"^^ *^^ following transactions: KO) installment notes given on purchase of real estate, the face of said notes including interest charges up to maturity of the notes W Loss by fire of buildings, fixtures, and merchandise; loss sustained by owner over and above the insurance carried and the amounts due and collected from the insurance companies. (c) Increase in valuation of real estate. (d) Note of a customer returned with a protest charge from the bank where it had been left for collection. (28) A merchant who has been in business for twenty years decides to put a valuation on the goodwill of his business and carry same as an asset on his ledger, the entry being to charge goodwill and credit surplus An- other merchant five years later buys the entire business including the goodwill, and after making a careful inventory finds that the actual net resources exclusive of goodwill, amount to $5,000.00 less than the sum he paid for It. Discuss the subject of goodwill in respect to the above cases, and state the correct manner of dealing with same. (29) Describe the use and operation of a Clearing House (30) What is meant by the term "Hire Agreement"? Is there any difference between a Hire Agreement" and a "Hire and Purchase Agreement" ? (31) Differentiate between consignments, adventures, and joint accounts How should consignments received, to be realized for and on behalf of .«^^/..r. be best treated? How should the manager treat joint trans- actions in his books? t.hl-f^^ ^T ^""'l "\^">/Iasses are the expenses of a manufacturing es- tablishment usually divided? Name 5 sub-classifications of each clafs of expenditures. (33) What are the distinguishing features of a Mortgage Bond \ Collateral Trust Bond Income Bond (34) Describe the usual method of procedure in determining the net profit or less of a business the books being kept by: (a) Single entry. (b) Double entry. (35) What general principles should be observed in differentiatinir between capital and revenue expenditure? 181 ■4' J^:4fli£^ ' I i I 1 Y ».. I \ m V ^■' \ ji ! Accounting Problems and Solutions, (36) What differences in books and accounts would exist between a partnership and an incorporated company carrying on a similar business? (37) Rule a form of cash book suitable for a charitable institution. (38) What is meant by the term "depreciation"? Give three examples of its application. Theory of Accounts. Answers. (i) When a government or a corporation undertakes to pay a debt due at a certain time, it is necessary to do this either by a series of appropria- tions, or by setting aside out of available cash periodically sums which invested, usually by purchasing its own debentures, or other form of in- debtedness, so that at the end of this time, provision will be sufficient to pay the debt. Dr. Price was the originator of the idea, and he recommended it to the elder Pitt, as a means of paying off the national debt of England. His is the idea, which has been adopted by mathematicians, and it may be stated thus : Find such a sum, which is to be set aside periodically, and instantly made to bear a fixed rate per cent, per period, the amount of these invest- ments at the maturity of the indebtedness will exactly equal thac indebted- ness. The term sinking fund is applied to a sum periodically set aside, and not to the amount of the investments. The interest on the debentures is paid to the persons holding the debentures, whether outsiders, or repre- sentatives of the corporation. The term Sinking Fund began to be used after a time in a looser man- ner, to the amount of irregular sums set aside to meet an obligation, the sums set aside being invested. In this latter sense it is a reserve. As given above, it is created to redeem a fixed liability, and is a debt account. Later on, the term began to signify a fixed charge taken out of revenue, duly invested periodically at a fixed rate per cent., to provide for the inevitable fixed shrinkage of certain assets, as in the case of a bond pur- chased above par to meet the shrinkage of the premium. The account in which the sinking fund with interest enters is a credit account. The creation of sinking funds requires such a knowledge of annuities as may be found in Prof. Sprague's recent work on investments. (2) The books of such a corporation are kept by a secretary, and are : 1. Stock Certificate Book for common stock, and Stock Certificate Book for preferred stock. 2. Transfer Book. 3. Stock Book. 4. Stock Ledger. I. The Stock Certificate Book is made up of blank certificates of stock bound together and numbered consecutively, attached to stubs from which each one is easily separated by perforations. The one for common stock and the one for preferred are similar, but the numbering is distinct. On the issuing of stock to the shareholder, these certificates are Ifc Answers in Theory of Accounts. filled in by the secretary or other authorized person, and signed as di- rected by the By-laws. On the back of the certificates is a blank assign- ment, ready to be filled in when the assignment is made. On the stub of original stock," under the heading, « Issued against surrendered cerUfi- cate No. — ' should be entered "Original Issue." The owner of stock will sometimes sell a portion of his stock, represented by the certificate and m that case the assignment wiU be filled out only by the number of shares transferred. The secretary would then cancel the old certificate and issue two new certificates, and deliver both to the original owner, un- less he receives instructions to deliver them otherwise. When a transfer has thus been made, the surrendered certificate should be canceled, so as to render it incapable of being again used. 2. The Transfer Book is made up of a number of blank assignments. They are intended to be filled out and signed by the transferrer, and are the authority of the secretary to issue new Stock Certificates. 3 and 4. The Stock Book and Stock Ledger are practically one and the same in contents. The La^s of the State of New York call for the keeping of a Stock Book, which shall contain the following elements: 1. Names of stockholders arranged alphabetically. 2. Residence of stockholder. 3. Number of shares held by each. 4. Time stock was acquired. 5. Amount paid thereon. 6. From whom received and to whom transferred. If we combine the Stock Book and Stock Ledger, it will contain the following columns: 1. Names and residences. 2. Date. 3. From or to whom transferred. 4. Full paid or what part paid. 5- Certificate numbers. 1. Taken out. 2. Surrendered. 6. Number of shares. 1. Disposed of. 2. Acquired. 7. Balance. The Stock Certificate Book and Transfer Book contain all the infor- mation required for entry into the Stock Ledger. (3) I do not regard the two methods as conflicting, but rather that the first method presents a fuller statement than the second. It surely can not be a fault to give extra information, provided that this information is of value. However, in the Balance Sheet the elements contained in the question should appear thus: Issue of Stock $50000 Less unissued 10,000 Stock issued ^0,000 183 *4» oo« — ■■'S-M- .-■•■ ii ■i I i|l Accounting Problems and Solutions, (4) In addition to the ordinary books used in mercantile houses, which will vary according to the nature of the business, the following auxiliary books are necessary, in order to properly record all the transactions of an Incorporated Company: 1 Minute Book. 2 Subscription Book. 3 Installment Book. 4 Installment Scrip Book. 5 Stock Certificate Book. 6 Stock Ledger. 7 Stock Transfer Book. 8 Dividend Book. The Minute Book contains a record of all the meetings of the stock- holders, also of all the meetings of the board of directors. This book is usually kept by the secretary of the corporation. tie Subscription book is used for the purpose of recording the subscriptions of stockholders. It contains the date of record, the names and addresses of subscribers, the number of shares, and the amount subscribed for by each stockholder. The Installment Book is made up from the Subscription Book, and contains the name of each subscriber with the amount paid on each installment, a record being kept with each installment. The Installment Scrip Book is more or less a receipt book for mstallments made. It is a book of blank receipts with stubs, to be filled out and signed by the secretary and treasurer as the installments are paid, the receipt being given to the subscriber, and the stub retained by the secretary. Upon the payment of the last installment the scrip is exchanged for certificates of stock. The Stock Certificate Book contains blank certificates with stubs to be filled out and signed, usually by the president and secretary of the corporation; for convenience these certificates are numbered consecu- tively. The stockholder signs the stub as a receipt when the certificates are issued to him; a transfer form is always printed on the back of the certificate to facilitate the transfer or sale of stock. The Stock Ledger contains an account with the capital stock, debited at par value, and with each stockholder, credited for the amount of his stock at par value. When stock is sold the seller is debited and the buyer credited, thus preserving the equality of the ledger. The Stock Transfer Book is used to record the transfer of stock and contains the permanent records, which are finally posted to the Stock Ledger. The last two books are absolutely required by New York State laws. The Dividend Book, or more properly, The Dividend Receipt Book, is used for the purpose of recording each dividend declared and paid. It contains a record of each dividend, the shares held by each stockholder, and the amount of dividend thereon, with the signature of the stockholder as a receipt of his dividend. 184 .. %--v Anszvcrs in Theory of Accounts. (5) (a) Fixed assets is a term given to capital invested in a business in the form of plant, machinery, buildings, etc. Fixed lia- bilities is a term given to obligations of a concern which are not usually paid for a long time to come, such as : bonds and mortgages, and which are constant and do not fluctuate. (b) Current assets is a term given to assets which may be^-*^ -^"^Mssi^ii sold or realized without interfering with the plant of a business or its - - * operations, such as: Goods, Accounts and Notes Receivable, etc. The current assets form the working capital of a business. Current liabilities is a term given to claims of creditors which will have to be met within a short period of time, such as: Accounts and Notes Payable or Bank Overdrafts. (6) Merchandise account is a term given to an account show- ing for a given period the transactions, connected with goods, which have taken place during the period. As ordinarily kept, the debit side contains: stock on hand at the beginning of the period, purchases during the period, and merchandise returned by customers; the credit side con- tains : sales made to customers, merchandise returned to creditors during the period, and the amount of stock on hand at the end of the period, the latter being added to this side when closing the books. If kept in this old fashioned way the account is hardly classifiable, in fact we may say it is no account at all, because we cannot get a resultant from it. The true way is to keep three accounts, namely : Merchandise, Purchases, and Sales. The first to represent the Inventory at the beginning, and hence an asset, the second to represent additions to the asset, i. e., the debit side, to show Gross Purchases and the credit side to show Returns, the resultant would be the Net Purchases, which would be carried to the Merchandise Account (Inventory). The Sales Account would be equal- ized in the same way to show the result which we would call Net Sales. In this way each balance is a definite resultant, and can be used for statistical purposes. (7) (a) The purpose of a sinking fund account is to show the amount set aside out of net profits, to provide for the repayment of loans falling due at some future time. It is created on the books by debiting Net Profit Account and crediting Sinking Fund Account, but as the fund is invested another entry is made whereby Cash is credited and Sinking Fund Investment Account is debited. Income derived from such investments must be debited to Cash and credited to Sinking Fund Account and then again reinvested. (b) The purpose of a Reserve Fund is to show the amount set aside to meet contingencies. It is created on the books by debiting Reserve Fund and crediting Cash Account. (c) The purpose of a depreciation account is to show the amount set aside out of profits for the maintenance or replacement of assets when such replacement is required by the circumstances of the case. The effect of charging against revenue a provision for depre- ciation is to retain in the business a certain amount of assets, which in 185 ;« t 1 ! \ A': Accounting Problems and Solutions. the course of time will replace assets that have depreciated. It is created on the books by a charge against revenue, which is credited to the Depreciation Account (or to the asset itself). (d) The purpose of a Goodwill account is to show the amount paid by the Vendee to the Vendor for the reputation and connections of the established concern. It is created on the books by a charge to Goodwill along with Sundry Assets and credited to Sundry Liabihties. (8) Preferred Stock and Common Stock. The former entitles the holders to a fixed rate of dividend out of the profits before the common stockholders can receive any at all; it may be cumulative or non-cumula- tive, that is, the dividend may become a charge against profits for the next fiscal period, if not earned in one fiscal period, or the dividend may merely be passed, no liability being created. The circumstances which give rise to Preferred Stock are varied, and are generally based upon equity. Thus a corporation may be distressed for money, and to relieve the company certain stockholders may advance the money needed, for which they receive Preferred Stock. It may also be issued in the re-organization of a corporation for the purpose of obtaining working capital to carry on the company's business. The latter (Common Stock) is the ordinary share capital of a corpo- ration and entitles the holder to a share in the profits in the form of dividends that are declared by the directors of the corporation. (9) " A Balance Sheet is a concise statement compiled from the books of a concern which have been kept by double entry, showing on the one side all the liabilities, and on the other side all the assets of a con£ern at 1 a particular moment of time." (Lisle.) O^ ^^Ws * S-^^ X^JkA ^ v»X^ oCVi^'^^ A Statement of Assets and Liabilities deals with the same subjects, but may be compiled from any data, not necessarily from books. The latter is the proper title under which the resources and liabilities of a concern whose books have been kept by single entry, might be arranged. (10) Dr. CASH BOOK 190 Cr. 5*0 Is u lii a .9 a c "p. X 2: c 3 O . usually called by the name of * Depreciation.' " This definition makes it quite clear that ordinary repairs, necessary to maintain the property in a condition to earn revenue, should be charged to Profit and Loss, because, if they are charged against the Depreciation Reserve Account, the reserve is depleted and the wear and tear of the property remains unprotected. (i8) The term " Secret Reserve " is applied to a reserve, created by mak- ing charges against revenue which are unnecessary, and which reserve does not appear upon the book accounts, and either inflates the liabilities or undervalues the assets. As examples of Secret Reserves may be stated: Appreciation of real estate not shown on the books, or the value of same may be carried at a nominal and not real figure; stock which has been "taken low" may be written up; excessive provision for bad and doubtful debts may be made, etc. It is rather difficult to give an exact opinion as to the propriety or 189 'i%,.*-»j-ii I.' * 1 •i! Accounting Problems and Solutions, impropriety of a Secret Reserve; considering, however, the many abuses to which such a reserve is liable, one would think it improper, because, unless the utmost confidence can be placed in the managers, there is great risk. Subordinates can be induced to certify false valuations of assets, for the benefit of principals, by alleging that it is necessary to write up this asset, and that the " Secret Reserve " will cover it, while as a matter of fact the " Reserve " may not exist any longer. (19) By the "Voucher System of Bookkeeping" is meant a plan by the use of which the keeping of accounts with creditors whose invoices are promptly settled is avoided. The voucher has appended the invoice and at the same time a receipt for the pa3rment of the account as well as a classification of the accounts to which it should be charged. Where the Voucher System of Bookkeeping is used a "Voucher Rec- ord Book" is kept. This book contains columns for the following: Date, Voucher No., Name of Creditor, For What, Folio, Personal Accounts, Terms, Date, Amount and Mode of Payment, Distribution of Items, Total, and Sundries. /^qN There are two methods by which the loss or gain of a business may be determined, namely: The Resource and Liability method, and the Loss and Gain method. By the former the loss or gain is found by a comparison of the condition of the Resources and Liabilities of one period, with their condition at another period; if the Resources have increased, and the Liabilities remain unchanged, or if the Liabilities have decreased, and the Resources remain stationary, the result will show a gain, other- wise a loss. By the second method we consider each item of loss or gain (shown by the nominal accounts) and determine the profit or loss on each account separately. The Resource and Liability method would be the method adopted to determine the loss or gain of a business whose books were kept by single entry, the Loss and Gain method would be the form used to determine the loss or gain of a business whose books were kept on the double entry principle. (31) Net profit is a term given to the net result shown on a Profit and Loss Account, and arrived at after charging up all expenses, including Interest, Depreciation, etc. In the case of a partnership the net profit is disposed of by being credited to the partners' respective Drawing Accounts, from which it is carried, after deducting withdrawals, to the Capital Accounts. In the case of a corporation it is carried to a Surplus Account, while in banks and other financial institutions this account is called "Undivided Profits.'^ (22) A Stock Ledger is an auxiliary book designed to show the amount of the individual holdings of a corporation. Whenever stock is issued it is posted from the stock certificate book to the credit of the respective individual accounts. It is advisable to have a Capital Stock Account and 190 Answers in Theory of Accounts. to debit same for stock issued. When stock is sold by a former holder, the seller is debited and the buyer credited, thus preserving the equality of the ledger. It has no direct connection to the general books except furnishing the names and the amounts of stock held by stockholders, the total of which must be the same as the amount credited to the Capital Stock account in the General Ledger. While there are various forms of stock ledgers, yet the nature of the records and the modus operandi will be best illustrated by an example. Dr. (From Kcister's Corporation Accounting.) FORM OF STOCK LEDGER Or. Date Certificates <_ CO O £> Par Value Date Certificates Install- ments Par Value (23) a. In addition to the ordinary books of account, which will vary according to the nature of the business, the corporation will require the following auxiliary books: 1. Minute Book. 2. Subscription Book. 3. Installment Book. 4. Installment Scrip Book. 5. Stock Certificate Book. 6. Stock Ledger. 7. Stock Transfer Book. 8. Dividend Book. The three forms referred to in this question could probably be: common stock, preferred stock, and guaranteed stock. All forms of capital stock are created by the receipts of funds from the subscribers to the stock with which to finance the company, and in lieu of which cer- tificates of capital stock are issued. The holders of common stock have the right to vote and receive profits in the form of a dividend, declared by the board of directors. Preferred stock differs from the common stock in that a certain pref- erential dividend is to be paid upon it before any dividend can be paid upon the common stock. The holder of this form of capital stock has the right to receive dividends out of profits, which dividends, according to the form of stock, may be cumulative or non-cumulative. r. \ 191 It r\ \ * I 1 1 'IH'''' *' , f h il ! '- '. W Accounting Problems and Solutions. Guaranteed Stock is practically the same as " cumulative stock." It is a form of stock on which a certain dividend is guaranteed, and which dividend must be paid before any other dividends are paid. The holder of this form of stock has, however, no claim against the assets of the company, but on profits. (24) The arrears of dividends should not appear among the liabilities of the balance sheet. A corporation's liability for dividends on preferred cumulative stock is contingent on their being earned, but not against the assets of the company. It is, however, advisable that the attention be drawn by a foot note in the balance sheet. This procedure is adhered to in order to protect prospective common stock purchasers, who, by a suppression of such facts, may find themselves at a disadvantage. (25) By opening an account merchandise or merchandise inventory and debiting to this account all goods on hand. Theoretically, this practice is incorrect, for as Professor Sprague states in his " Philosophy of Ac- counts " : An Account which needs to be made over is one which ought to have been made differently at first. If we add the inventory to the credit side of what we call " Merchandise Account" we are mixing different elements into one mass, and have to rearrange things to get at the result. The modern practice is to separate the merchandise account into three: Merchandise (inventory), sales, and purchases. The arrangement would be to debit the merchandise (inventory) ac- count for balance of merchandise on hand at the beginning of the period. Purchases made and returns by us would be respectively debited or cred- ited to the Purchase account. Sales made and returns to us would be respectively credited or debited to the Sales Account. The Purchase account would then be closed into the merchandise (inventory) account, leaving only two accounts, merchandise (inventory) and sales. By subtracting from the debit side of the merchandise account the inventory on hand we arrive at the cost of goods sold. This merchandise account we then close by journal entry Sales to Mdse. The debit side of the sales account contains then the actual net cost of goods sold, while the credit side contains net proceeds of sales, the difference representing the profit made. (Advocated by Prof. Sprague.) (26) In the first place we must distinguish between valuing an inventory for the purpose of finding its value as an asset, and the valuing of it, for the purpose of showing profits made or loss sustained during a given period. . . . It is wrong in principle to value it at market price as it interferes with the correct showing of the profit and loss account. If we take the in- ventorv tor any reason, not for the purpose of rendering a correct profit and lo<. account for any given period, we are at liberty to use either form, cost or market value, but when we take inventory for the purpose of ascer- 192 Answers in Theory of Accounts. taining the cost of sales, for the purpose of showing a correct profit and loss account, we must figure it at cost price only. (27) (a) Real Estate Interest advanced To Notes Payable (with proper and sufficient explanation) (b) Cash To Buildings Fixtures Merchandise (sales) (with proper and sufficient explanation) (c) Increase in valuation should not be taken into consideration at all. Sometimes, however, the increase is of a permanent nature, and not desiring to have a secret reserve it is shown. In such case the entry should be : Real Estate To Reserve (of some nature) It is not advisable to credit it to surplus account directly. It is quite usual, where notes are left for collection, not to have them credited until collected. In this case we would debit the customer and credit cash for protest charges only. I (28) The absurdity of the first instance is perhaps well illustrated in the case of Stewart v. Gladstone where the presiding Justice decided that the clause " all particulars that might be susceptible of valuation should be stated in ihc ai.nual accounts" does not comprise goodwill. This intangi- ble asset has only a value when the business is sold. With regard to the other case, where the merchant overpaid for the goodwill, the sum which he overpaid is to be written off. This may be done in one sum or distributed for a period of say, two or three years. (29) The Clearing House, though its connection with other clearing houses, unites all ihr banks of the city and of the country into one bank. By means of the clearing houses and the check system the community is enabled to transact the bulk of its business without the risk or annoyance of the handhng of actual money to any great extent. If we consider that in New York City alone the daily clearings of checks will approximately average over $150,000,000.00, we can readily perceive the advantages that the Clearing House affords. Formerly each bank was obliged to settle with each other bank, this often required the carrying of large sums of money by messengers. Now the settlements of the debtor banks are made to the Clearing House, and the Clearing House settles the credit balances. These settlements are now made in Clearing House gold cer- tificates, gold coin and United States notes, in all of our large cities. In 193 %- i|»^ -V' Accounting Problems and Solutions. New York the payments are nearly all made in clearing house gold cer- tificates, representing gold coin on deposit in the Clearing House vaults. In addition to this convenience the Clearing House fills another very important place. By the frequent bringing together of the officers of the hanks important financial questions are discussed to the benefit of all. By their systems of records of all clearings, by the recording of -Aorn staicments of the various banks, and by their powers to examine any bank which IS a member of the association, a very close watch is kept upon the condition of each bank. In various financial crises the clearing houses have proved themselves of inestimable value. The expenses of running the clearing houses are generally paid from a fund raised by an assess- ment upon the banks which varies in different cities. In New York all members pay an entrance fee in proportion to their capital, the sum rang- ing from $5,000.00 to $7,500.00. In Philadelphia each bank, upon becoming a member, is obliged "to deposit securities with the Clearing House in pro- portion to its capital, as collateral for its settlements. Each bank is characterized by a number, known as the clearing house number, which number is used on all checks that the bank presents for clearing, as well as on all clearing house blanks. The books of record, kept by clearing houses in general, are : Ledgers, statement books, and registers. In the ledgers are kept accounts with each bank to which are posted daily all the amounts entered on the proof sheet. Statement books are divided into weekly and quarterly and are made up from the statements of each bank. In the registers is kept a record of the balances paid to or received from the banks in settlement of daily ex- changes, and also the kind of money. There are also, of course, record books of the several committees, and the few necessary books (;f the clearing house. (Based on Barrett's Modern Banking Methods.) (30) While the two terms are synonymous there is a distinction with regard to the legal part of the different agreements. Dicksee makes no distinction whatever between a " Hire " or '* Hire and Purchase Agreement". In fact throughout all of his books he calls it **Hire and Purchase Agreement" and defines it as follows: " The general nature of a contract of this description is that, if the 'tenant' (the hirer) makes the necessary periodical payments regularly, the manufacturer agrees to hand over the ownership of the articles in question to him, at the end of the prescribed term upon the payment of a further nominal sum." As a matter of account this definition is very correct and no further distinction is necessary. From a legal point of view, however, there is quite a difference. Dawson in his "Accountant's Compendium," differ- entiates between the two terms as follows: " Under a hiring agreement no property in the goods, so hired, passes to the hirer, but under a 'Hire and Purchase Agreement' a distinction 194 Answers in Theory of Accounts. ■nm- must be drawn between those which involve an agreement to buy, and those which do not. There is an agreement to buy, if the hirer is bound to pay the whole of the agreed sums for hire, whether he returns the subject-matter before the expiration of the agreed period or not." (31) There are two classes of consignments, namely: Inward or out- ward. Consignments inward may be for the merchant's own account, or toey mav he on the account of another. In the former the merchant is the principal in the latter he acts as agent. Consignments outward are chiefly on account of the consignor. Consignments for a merchant's own account are more properly termed Adventures. Similarly, transactions in which the merchant is a co- partner with others, are termed Joint Accounts or Ventures. Consignments received to be realized for and on behalf of another arc best treated as follows : * On receipt of the goods no entry is made in the books of account, with the exception of a memorandum. All charges, however, paid on the con- signments are entered to the debit of a " General Consignment Account," to which account would also be charged advances made to the consignor. All sales are to be credited to a " Consignment Sales Account." When the consignee renders an account sales, the "Consignment Sales Account" is charged for outlay and net proceeds, while the " General Consignment Account " is credited for charges and advances transferred, the net pro- ceeds being credited to the "Consignor's Account." Joint transactions are best treated by the manager in one of the two ways : (o) To open an account under the heading " Joint Adventure to ,*• and to charge it with total cost, including all incidentals. This account to be credited with the gross amount realized ; the balance, if any, to be transferred to " Profit and Loss Account " and the partner's personal account for the respective shares of loss or gain. (t) To open an " Adventure Account " for the manager's share of cost, and for partner's share of costs, and to divide gross proceeds after realization in the same manner. (Advocated by G. E Stuart Whatley.) (32) The expenses of a manufacturing establishment are usually divided into three classes, viz.: "Manufacturing Expenses," "Selling Expenses," and "General Ex- penses " or " General and Administrative Expenses." Five sub-classifications of manufacturing expenses arc : (a) Maintenance of real estate, or rent of factory. ib) Power, light, and heat, (r) Depreciation, (rf) Repairs. ( 11 'i Accounting Problems and Solutions. ^ Auditing. Questions. (i) How would you determine the profits for a given period from a set of books kept on the single entry system, the capital at the be- ginning of the period being known? (2) In the construction of a large building the proprietors issue $800,000 20-year 6 per cent, bonds which are disposed of to the con- tractors at 85 per cent, of their face value. You find, upon examination, that the discount of 15 per cent, has been charged to Construction Account in the first place, and then into Building Account. State whether you consider the final entry legitimate or not, and give reasons. (3) You are elected the auditor of a corporation by the holders of both common and preferred stock and it is your duty to safeguard the interest of both classes of stockholders. The preference stock bears 7 per cent, and is non-cumulative. Mention what precautions you would adopt to safeguard the interests of the preference shareholders, giving reasons therefor. (4) Explain the various measures which you would adopt to verify whether or not all cash received has been duly accounted for on the books of the concern you were auditing. (5) A corporation has sold its first mortgage bonds at a premium and its second mortgage bonds at a discount. How should the premium and discount be dealt with on the books? (6) After auditing the books of a manufacturing company for a period of ten years you are asked to give a certificate as to the net earnings of the business for those ten years, for the purpose of a sale based on the earning capacity of the property. What items of expense heretofore charged annually through the Profit and Loss Account may be properly eliminated in the preparation of your certificate, and why? (7) Describe in detail the method that should be used to verify the securities representing the investments of a company under audit, in the case of (a) Real estate. (b) Mortgages on real estate. (c) Certificates of stock. (d) Railway bonds. (8) Under what circumstances, if any, would it be proper to open an account with Good Will? On finding a Good Will Account on the ledger of a business for which you are to prepare an account statement, how would you treat the account, or what special adjustment would you sug- gest in regard to it? (9) As an auditor what authority would you require for the passing of vouchers in payment of directors' fees ? 200 Qttestions in Auditing, (10) Acting as an auditor of a manufacturing company, state briefly the essential points to be considered in ascertaining the correct profits so far as the inventories are concerned. (11) If a company, duly organized, acquires several plants that are found to be in a " run down " condition and to require extensive outlay for repairs and renewals to bring them to the required state of efficiency, should such outlay be charged against Capital or against Revenue? Give reasons. (12) If asked to give advice concerning the proper rates per cent, to be adopted in providing for the accounts for depreciation on buildings, machinery, tools, etc., what would you recommend? (13) What method would you recommend in the conduct of a cash account to facilitate a speedy and thorough audit thereof? (14) In auditing the books of a building and loan association what would be your procedure to enable you to verify the correctness of the same? (is) What are the most important things to which an auditor is expected to certify in (a) The Balance Sheet. (b) The Profit and Loss Account? (16) To what extent may the "organization expenses" of a corpora- tion be regarded as a permanent asset and how should this account accordingly be dealt with? (17) State the general principles governing the discrimination between what constitutes proper charges against capital and what constitutes proper charges against revenue. (18) Is there any reason why the goodwill carried as an asset on the books of a prosperous and growing manufacturing concern should be depreciated, amortized or otherwise written off, and if so what would be the effect of such depreciation amortization or writing off? (19) In making up the annual balance sheet of a manufacturing business, what values should be stated in the inventory of completed product on hand, product in process, and unconsumed materials, assuming that average conditions prevail with respect to market prices of material and labor? (20) What do you understand by the term "Secret or Hidden Re- serves"? Mention four (4) bona-fide uses of a secret reserve and state your opinion as to the propriety or otherwise of the creation of such " reserves," giving reasons. (21) In a case where the preferred shares of a company are issued under a provision that the annual dividends to which they shall be entitled shall be "cumulative," would you consider it necessary to show any arrears of dividend as a liability upon the balance sheet, or how would you deal with it? 201 ■ M i I f'l I II I If t" ; ^ till ll^ i » Accounting Problems and Solutions. (22) In the preparation of a manufacturing and trading account and • balance sheet, state on what basis the following assets should be valued: (a) Raw materials. (fr) Product in process of manufacture. (c) Manufactured product. (d) Bills receivable. (e) Accounts receivable. Give fully your reasons. (23) Give a brief description of the books of a corporation that should be examined and inspected by the auditor, and state the reasons why such examination or inspection should be made. (24) In making an examination for an intending purchaser of a busi- ness, what are the principal matters that should be looked into? (25) State the different kinds of audits and describe them. (26) How would you verify bills discounted for customers in auditing the accounts of a bank? (a) Those in hand at the date of the balance sheet. Co) Those re-discounted. (27) What steps would you take to satisfy yourself that the book debts of a trading company were fairly stated in the balance sheet submitted to you for audit? (28) What do you consider the proper way to handle cash in accounts? What advantages are there, if any, in banking each day the exact receipts of the previous day? How would you verify the correctness of a cash book, and insure the entry of all cash received ? (29) Give at least two (2) examples of contingent liabilities, and state how they should be treated in the books, and on the balance sheet. (30) What duties and responsibilities has an auditor in connection with inventories of goods on hand? (31) How should a leasehold be treated in the accounts of a company and how should it be shown on the balance sheet? Auditing. Answers. (i) In Single Entry Bookkeeping the transactions of a business are re- corded only in so far as they effect changes in assets and liabilities, so that profits or losses must be determined by a comparison of the financial condition at the beginning and ending of a period. The capital being known at the beginning of a period it is important to find out whether any increases or decreases of such capital took place. It also would be 203 Answers in Auditing. necessary to appraise values and take stock at the end. The difference would be profit in case of an increased showing and loss in case of a decreased. There is no proof upon the work, as the scheme of revenue accounts peculiar to the double entry system, which in itself shows the results from a period of operations, is lacking. (2) If the proceeds of these bonds were to be applied for construction, and in all probability they were, the cost of disposing these bonds, e. g., the discount should be charged to construction account. The reason is that the construction work has cost not only the amount actually ex- pended thereon, but also the discount lost. If, on the other hand, only part of the proceeds were used for construction purposes, then to that extent the discount is to be charged to construction. The discount on the balance is to be spread over the life of the bonds. (3) Due care must be observed in examining various charges for depreciation and renewals ; that is, there should not be created a greater reserve for the wear and tear of the assets than the actual conditions demand. Preferred stockholders do not benefit much by heavy charges for depreciation, as long as the dividends on their stock are non- cumulative. Each increase in the provision for depreciation means a greater advantage to common stockholders and a corresponding dis- advantage to preferred stockholders. The auditor must also watch for proper classification of accounts, e. g., that capital expenditures are not charged to revenue accounts. (4) To verify whether or not all cash received had been duly accounted for on the books of the concern the auditor should proceed as follows : "The debit side of the Cash Book should be checked with the most independent source the Auditor can find available— for example, the counterfoils of Receipt Books, a Counter Cash Book, the Customer's Pass Books of a Bank." "The items on the credit side of the Cash Book should be checked with the vouchers for the payment." (Pixley.) (5) When bonds are sold at a discount it is best to charge that dis- count to the account for which the funds were to be raised, as this is an additional item of cost. When they are sold at a premium the surplus should be credited to a Reserve Account. This would also be the case with discounts, when the bonds sold are not for any definite, but for a general purpose. In either case it would be an ultimate source of income or expenditure. It is, however, advisable to spread the discount over the life of the bonds. (6) For the purpose of sale the following charges might be properly eliminated. Interest charges on loans or notes, as these are charg.-s that do not relate to trading directly, but disclose insufficiency of capital. With adequate funds available for conducting the business these expenditures would not have beeti incurred. Interest on capital should also be eliminated, as, in the case of a cor- 203 I 1 i f Accounting Problems and Solutions poration, this item would be available for dividends. Excessive reserve charges, or management salaries, extraordinary and unusual losses, as well as losses on account of accidents, should also be adjusted. (7) a. Real estate would be verified by the production of deeds as well as vouchers of payment for same, showing original cost and by search of title records. Any other charges unless they represent additional capital expenditure in improvements or acquisition of property should be eliminated. h. Mortgages on Real Estate should be verified by presentation of the checks paid for them and the deeds, examining also their recording as well as the matter of interest. c. and d. Certificates of Stock as well as Bonds should be verified by the production of the securities and determining their market value. It is also advisable to look into the genuineness of the securities. (8) Whenver a vendee firm has paid a sum of money for the acquisition of a business, in excess of the real value of the assets, or where heavy expenditures have been made in establishing a trade, it is proper to charge it to a good will account. In preparing an annual state- ment the item should be separated from the other assets appearing on the balance sheet. The special adjustment that an auditor might suggest would be to write it off by distributing the sum for a period of years and charging a due proportion of it yearly to Profit and Loss account. (9) The best authority in such a case would be the minute book of stockholders' general meetings and the by-laws of the corporation. (10) The auditor should satisfy himself of the existence of the inven- tories by getting a certificate from some one in authority as to quantity and figures. It is important to see that the inventory should be taken at cost and not at market price. If the inventory is to be used for the pur- pose of preparing a profit and loss account, in such a case it should be at cost. (11) Such outlays should be charged against capital. It is presumed that the plants are acquired in the condition as described and the pur- chasing price paid for same must have been only to the extent that these assets are worth. Otherwise, if any excess of the value was paid, it was not paid for the asset proper, but most likely for the good will attached ; hence, any additional extensive outlay for repairs and renewals was for the purpose of bringing it to a point of efficiency to earn greater revenue, and therefore it is a legitimate capital expenditure. "Expenditure which is incurred with a view to completing or im- proving the equipment of the undertaking, and thus increasing its capacity to earn revenue, may be properly charged as capital expenditure." (Dicksee.) (12) The following rates would be approximately proper allowances for depreciation: Buildings from 2 per cent, to 5 per cent., to be deducted annually. 204 Answers in Auditing. Machinery from 7 per cent, to 10 per cent., annually from resulting balance. Tools revalued. Boilers from 10 per cent, to 15 per cent, per annum. Engines from 5 per cent, to 7 per cent, per annum. Horses from 15 per cent, to 25 per cent, on starting balance. Furniture and fittings revalued. (13) To facilitate a speedy and thorough audit of the cash account, it is best to have all cash receipts, of whatever nature, deposited in the bank, and make payments by check only. Petty expenditures may be taken care of by making the petty cash clerk directly responsible to the general cashier, to whom he is to render a periodical statement of his disbursements in voucher form, receiving in exchange a check for the total of same. It is also well to use a counterfoil receipt book for pro- ceeds of cash sales and other income. (14) To make the audit complete in every detail one should: 1st. Verify all extensions and footings in the books of original entry. 2d. Check each item in the Members' Pass Books with the Con- tribution Book and Stockholders' Ledger. 3d. Check each entry in the Contribution Book with the Stock- holders' Ledger. 4th. Check each entry in the Withdrawal Book with the Stock- holders' Ledger. 5th. Check each entry in the Contribution Book and Withdrawal Book with the Cash Book. 6th. Check the Treasurer's Receipt Book with the Contribution Book. 7th. Check the Treasurer's Cash Book with the Withdrawal Book. 8th. Check the totals of the Cash Book with the totals in the Gen- eral Ledger. (Keister.) (15) a. In the balance sheet the auditor is expected to certify that the assets and liabilities are neither over- nor under-stated ; and that it is a correct and complete statement of the financial position of a concern at a particular time. b. In the Profit and Loss Account the auditor is expected to certify that the earnings are correctly stated, and that all items of income or expenditure have been included. (16) "Organization expenses" should not be regarded as a permanent asset because it is not a capital expenditure for the acquisition of assets, but is more closely connected with revenue. It is desirable to write oflF the amount within the first few years. (17) If the expenditure incurred, has been of such a nature as to im- prove the earning capacity, in such case the charge should be against capital. 205 r y.i I i f I lii Accounting Problems and Solutions. If on the other hand it was of such nature as to merely renew the wasting asset, to bring it back to that condition that it was at the beginning of a given period, it should be charged against revenue. (i8) There is no definite rule by which one can be guided whether to amortize and depreciate goodwill or not. Opinions differ as to the method to pursue. We have, however, an English decision in the case of Wilmer V. McNamara, 1895, where the Court has decided that even where the goodwill has actually declined in value it is not necessary to charge the shrinkage against profits. The basis of this decision was that goodwill is "fixed" capital, and there is no doubt that goodwill is the most permanent of all assets. The soundest and most conservative policy would be to write it off annually. It is quite true that by so doing a secret reserve is created, the propriety or impropriety of which is entirely a different subject, and is considered in connection with another question. (19) If the firm had a cost system that would show the cost of the goods in process, to which we would add a portion of the overhead charges, although this is usually held back till the goods are completed. Product on hand should be valued at cost, while unconsumed material, if the market price is lower than the cost price, it should be valued at the former, otherwise at the latter. Provision may, however be made for increase or decrease by creating a reserve for this purpose. (20) By the term " Secret or Hidden Reserves " is meant a reserve created by making excessive charges against revenue which are not justi- fied, and which reserve does not appear on the books of the concern. Such reserve cither undervalues the assets or inflates the liabilities. The bona- Ude uses of " Hidden Reserves " can be divided as follows : (0) To equalize apparent profits and dividends. (&) To extend the scope of the business. (c) To consolidate the undertaking. (d) To provide against unforseen losses. One of the chief arguments against the creation of " Secret Reserves *' is that they rob the present generation of stockholders at the expense of posterity. A more powerful argument is that they open a loophole for fraud. It is very difficult to give an exact opinion as to the propriety or other- wise of " Hidden Reserves ". Considering the many abuses to which such a reserve is liable, and to which it is usually subject, one would think it improper, because unless the utmost confidence can be placed in the managers, there is great risk. Dicksee well states: This most debatable subject is approached with considerable diffidence. Very much can be (and has been) said on both sides of the question, making it a most difficult thing to say what is really 206 9P^w Answers in Auditing. the correct course to adopt in any particular case; and, if the question be complicated, even where a particular case is judged upon its own merits, how much more difficult is it to lay down any general rules of uni- versal application." (21) Arrears in dividends in the case of cumulative preferred stock need not be shown among the liabilities of a balance sheet. Such arrears are only claims against profits earned, but not against the assets of a corporation. It is, however, advisable to append a foot note, stating this fact so that prospective purchasers of common stock should not be misled. {22) (a) Cost price, provided market value is not lower than the cost price; otherwise market price. (b) At cost of production. (c) At cost of production. In both b and c should "overhead" items be added. The reason is that as these values are for the purpose of showing cor- rectly the profit or loss for the period, cost value, or market value, if the latter is lower should be figured. {d and e) They should be divided into good, doubtful and bad, so that each asset is carried only at that figure which it will reasonably realize. (23) In addition to examining and verifying the ordinary books the auditor is to examine and inspect the following record books : (a) The minute book. In this book he will find the by-laws by which the corporation is governed and also all resolutions adopted and whether they have been properly carried out. (b) The subscription book, which will disclose how much stock was subscribed for and by whom. {c and d) The stock ledger and transfer book. They will show the holding of each stockholder, or any of his transfers, and subse- quent holders. By this means he will be in a position to verify whether the stock issued has been paid for, and whether in cash or property, and furthermore whether it was in accordance with the wishes of the directors and stockholders. (24) To see whether the assets or profits have not been fraudulently overstated, making the accounts unduly favorable. To see whether the liabilities or losses have not been undervalued, which would also result that the accounts would appear unduly favorable. In general to see whether the business of the vendor is worth pur- chasing, and if it is worth the price he asks for it. (25) The principal kinds of audits are as follows: .(^) The Periodical Audit. This kind of audit covers a statistical period and that is why it is called " Periodical ". Continuous Audits are the same as periodical ones, but they are taken up at shorter intervals. i 207 Accounting Problems and Solutions. (t) Completed Audits. By this is meant an audit begun after the trial balance has been completed. There are, of course, investigations such as : For the benefit of a prospective purchaser, endeavoring to find the exact value of the concern. For the benefit of a retiring or incoming partner. {26) (a) By actual inspection. (&) By tracing the transaction through, and becoming satisfied that the bank has received credit in respect of the bills re-discounted. It is also necessary to sec that provision is made for contingent liabili- ties in respect of bills discounted and which are outstanding. (27) Compare the list of book accounts with the corresponding ledger balances, noting any irregularities of payment that may suggest disputes. Consult the managers of the concern with regard to accounts in doubt. In some cases it is advisable to select a few accounts, or take them at random and make up a statement, which is to be forwarded to the cus- lomci askmg him to O. K. the same and return to the auditor. (28) The proper way to handle cash accounts is to have all cash re- ceipts, of whatever nature, deposited in the bank and make all payments by check only. Petty cash expenditures to be handled by the " Imprest " system. The advantages derived from banking each day arc: (a) That it facilitates a speedy audit, and (6) Enables to trace receipts with the deposits. To verify the correctness of a cash book, and insure the entry of all cash received, one should check the entries of the cash book with the most independent source that the auditor can find available — say,. counter- foils of receipt books, bank pass books, etc. (29) Two examples of contingent liabilities are: \,a) Notes receivable discounted. (b) Accommodation instruments. Properly they should appear in the books of accounts and also on the balance sheet. In some cases they are omitted from the books of ac- count, but included in the balance sheet by a foot note- (30) He has to get a certificate from some one in authority as to the correctness of the inventory and on what basis it was valued. To see that the same is cost value, or where the market value is lower, it is the market value. (31) A leasehold may be regarded as the purchase money paid for an annuity terminable at some definite time. It is then advisable, especially in short-term leases, to charge a proportionate part of the term against revenue each year. Leases for a long term of years should be treated under sinking fund plan. In the balance sheet the original cost, less the depreciation should be shown. 208 I Questions in Commercial Lazu. Commercial Law. Questions. (i) What is a corporation? Describe the procedure necessary for the formation of a business corporation and show what is required as to (a) number of incorporators, (b) number of directors, (c) capital to be paid in. (2) What is a contract? If a man give his note for $1,000 to a friend simply as a gift, can the payee of that note collect it at maturity? Give reasons for your answers. (3) In the law relating to corporations the term "ultra vires" is fre- quently employed. Tell in a general way what you understand by this and how acts that are ultra vires are regarded in the law. (4) What are " days of grace " as understood in the law relating to commercial paper? (5) By whom are the directors of a corporation usually selected and by whom are its officers generally chosen? (6) If a note is signed by N. R., president, and A. N., secretary, with- out disclosing the corporation for which they act, are they personally liable on the note? (7) If a bank pays a check drawn on it by a depositor, after payment has been stopped, can the depositor recover the amount so paid? (8) What is (a) an express contract, (b) an implied contract? (9) What is (a) a promissory note, (b) a bill of exchange, (c) an acceptance ? (10) Distinguish clearly between public corporations and private cor- porations. (11) What is the statute of frauds? What contracts must be in writ- ing in order to be effective? (12) What is a contract of guaranty? How does it differ from a contract of suretyship? (13) Name and describe two principal classes of partners. (14) a. What is a corporation? b. How is a corporation dissolved? c. What is a stockholder's right as regards voting and investi- gation ? d. What is a stockholder's liability? (15) a. What courts have jurisdiction over bankruptcy cases? b. What is the difference between voluntary and involuntary bankrupts ? c. May a corporation become a voluntary bankrupt? d. May a partnership become a voluntary bankrupt? (16) a. Give the essential requisites of negotiable instruments. b. What words make a note negotiable? 209 if* I Accounting Problems and Solutions. (17) What is the liability of the parties to a certified check? Give reasons for your answer. (0) What is the effect of an alteration of a negotiable instrument? (18) What is the object of passing bankruptcy laws? (a) At the first meeting of creditors in the bankruptcy of Smith, all of the creditors, who had proved their claims, voted for Jones, as trustee. To this the bankrupt Smith objected, on the ground that Jones was not competent, and furthermore being his personal enemy, would act mahciously towards him. The referee, there- upon, disapproved of Jones and appointed another Trustee. Can a motion be made to set aside this appointment? On what grounds? Explain fully. (19) State the essential feature of a partnership. Must each partner have an interest in both profits and losses? (20) (a) Define a negotiable promissory note. (6) W'hat is the liability of a general endorser on a promissory note? (21) Define a corporation and name the different kinds. (22) Define a contract and state what contracts must be in writing. (23) A owes B $500.00 and offers his note for the amount for four months. B demands security and C, at his request, signs the following paper : " I agree to become responsible as surety for the payment of A's note for Five Hundred Dollars ($500.00) dated this day. When the note becomes due, A pays $100.00 on account and gives B a new note for $400.00 at four months. This last note is not paid, and B sues C on the above contract Can C make any defense, and if so, what? (24) Is the following instrument a negotiable promissory note? Chicago, April 8, 1908. Thirty days after William H. Taft is elected President of the United States, I promise to pay to the order of William J. Bryan Five Hundred Dollars, at the First National Bank of Chicago, for value received. (Signed) Joseph G. Cannon. Give reasons for your answer. (25) Must the stock of an Illinois corporation be paid in wholly or in part before certificate of complete organization is issued, and, if so, in what may such payment be made? (26) What is the statute of limitations and on what policy is it founded ? Explain fully and mention three ways that will prevent the statute from running against an ordinary debt. (27) State the procedure necessary in New York State for dissolving a corporation. 210 Questions in Commercial Law. (28)^ Goods are delivered to a buyer " on approval " or " on sale or return ". When does the property in such goods pass to the buyer? (29) Give a brief account and show the connection between : Law merchant, common law, statute law. (30) What is usury? Give the legal rates of interest in Florida, and state the result of an agreement to pay more than the legal rate. (31) Define partnership. How many kinds of partnership are there and wherem do they differ from one another ? * Commercial Law. Answers. (i) A corporation is an artificial person created by law. It exists only ^''ir^I'f,.^.^ *^^ permission of the State, and has only such power, rights and liabilities as the State accords to it. The corporation is a legal entity entirely distinct from the natural persons who may be its members A corporation is formed generally as follows : A certificate of incorporation must be executed and acknowedged in duplicate by the incorporators • one duplicate must be filed in the office of the Secretary of State and the other m the office of the clerk of the county where the main business office of the corporation is to be located, the proper fees and taxes must be paid to the Secretary of State, the State Comptroller and the County Clerk; a meeting of the incorporators must be held accepting the charter thus granted, and the directors must meet and elect officers. The number of mcorporators must not be less than three, which is also true of the direc- tors. At least $500.00 must be paid in at the time of filing the certificate, this being the only restriction on the total amount of authorized capital. All this is found in general business and stock corporation laws. Any answer must be based on knowledge of the several sections of the above laws applicable. (2) A contract is an agreement beteween two or more persons, com- petent to act, founded on a sufficient and legal consideration, to do or not to do some particular thing. No : he can not collect, on account of lack of consideration. " A valid consideration is necessary to support any contract and the rule applies with equal force in the law of negotiable instruments, when the question of consideration is open to inquiry." (Tompkins.) (3) When a corporation performs acts beyond its express or implied powers, the acts are said to be "ultra vires/* In law ultra vires acts are not binding upon the parties, unless the corporation can be estopped to set up its lack of power, in which case it is bound. 211 f *'i EH Accounting Problems and Solutions. (4) By the term "days of grace" was meant three days that were added to the time stated in which the instrument should become duo. This was done for the purpose to give the maker or acceptor an oppor- tunity to arrange for payment. It has, however, been abolished by statute in most of the states. (5) The directors of a corporation are usually selected by the stock- holders, while the officers may be chosen either by the directors or stockholders. (6) They are personally liable. The note should bear the corporation's name first, in order that its officers may free themselves from personal liability. In this case their signatures indicate them as principals; the adding of the words (president and secretary) does not release them in the least. (7) Yes, he can recover. (8) a. An express contract is such an agreement as arises from the words of the parties, whether written or oral, showing an intention to be bound. b. An implied contract is such as reason and justice dictate and which the law presumes that every man undertakes to perform. If I employ a person to perform for me any labor, the law implies that I contract to pay him the reasonable value for his work. (9) a. A promissory note is an unconditional written promise made by one or more persons to pay to another or his order or bearer a sum certain in money on demand or at a specified time. b. A bill of exchange is a written order from one person to another to pay to a third party or his order a certain amount of money at sight or at a specified time. c. An acceptance of a draft or bill of exchange is the signification by the drawee of his assent to the order of the drawer. (10) Public corporations are government institutions, created for the administration of the public affairs of the community. States, counties and municipalities are examples of public corporations. Private corporations are associations formed by the voluntary agree- ment of their members, for the purpose of making profits. Examples of this kind of corporations are: Railroads, Banks, Manufacturing or Trading concerns, etc. (11) The Statute of Frauds is a term given to the statutory enact- ment which provides that certain contracts must be in writing or they cannot be enforced at law. The following contracts must be in writing in order to be effective : 1. A contract which, by its terms, is not to be performed within one year from the making thereof. 2. A contract to answer for the debt for another person. 3. A contract in consideration of marriage. 4. A contract promising to pay a debt already discharged in bankruptcy. 212 Anszvers in Commercial Law. 5. A contract for sale of lands or any interest in them. (12) Contracts of guarantee and suretyship are often used as synony- mous terms, and while similar in many respects, the contract of a guarantor differs from that of surety in the following particulars: The surety is bound jointly with the principal, and often by a contract entered mto at the same time and upon the same consideration, and may be sued jointly with the principal. A contract of a guarantor is a separate tmdertaking often made upon separate consideration, and upon which he must be sued alone. (13) Public and secret partners. A public partner is an active mem- ber of a firm who participates in the business and is known to the world as such. A secret partner is one who in reality is a partner, but who conceals the fact from the public as well as from the customers of the partnership. (14) a. A corporation is defined to be a collection of individuals united by authority of law into one body, under a special name, with the capacity of perpetual succession and of acting in many respects as an mdividual. (Gano.) b. A corporation is dissolved: 1. By the expiration of its charter. 2. By the surrender of its charter, provided the State consents to it 3- By the repeal of its charter by the legislature. 4. By the forfeiture of its charter, for misuse of its powers. c. Each stockholder is entitled to a vote, according to his holding (one vote for each share), in person or by proxy. The stockholders usually have the right of examining the books, but the by-laws may deprive them of that privilege. d. A stockholder's liability is only to the extent of the amount due on his subscription, excepting, of course, national bank stock. (IS) a. The United States District Court has exclusive jurisdiction of bankruptcy, although some States have, also, laws under which assign- ments may be made by insolvent debtors. b A voluntary bankrupt is one who files a petition in bankruptcy an involuntary bankrupt is one against whom a petition in bankruptcy is filed by his creditors. c. A corporation may not become a voluntary bankrupt. d. A partnership may become a voluntary bankrupt. (16) a. The essential requisites of negotiable instruments are as follows : 1. The instrument must be in writing, and signed by the maker or drawer. 2. It must contain unconditional promise or order to oav a sum certain in money. f j « 3. It must be payable on demand, or at a fixed or determinable future time. 4. It must be payable to order or to bearer b. "Order" or *' Bearer." 213 I I i 1 p k ■ r I ■f^ Accounting Problems and Solutions. (17) If the holder secures the certification the drawer is discharged from any liability, the bank becomes then the principal and only debtor. The check becomes the check of the bank and is good as long as the bank is solvent. This, however, is not the result if the drawer himself procures the certification before the delivery of the check. In such case he, the drawer, is not released from further liability. An alteration in a negotiable instrument without authority after it had been signed, destroys its validity. That is true, however, only in case of a material alteration. (18) The object of passing bankruptcy laws is to protect creditors, and also to help legitimate bankrupt firms to begin business anew, if they prove that the failure was not caused fraudulently. A motion can be made to set aside such appointment. Creditors are the only individuals who have a right to vote in the selection of a trustee. Only if they fail to elect one, the referee can exercise the right to appointment. A trustee may be hostile to the bankrupt, yet this does not disqualify him. ( 19) The essential feature of a partnership is the sharing of profits. Of course, the intention of the parties at the formation is to be taken into consideration. Not necessarily, but generally this is the case. (20) (a) A negotiable promissory note is an unconditional written promise made by one or more persons to pay to another person or to his order or bearer a sum certain in money at a specified time. (&) His liability is that he will honor the instrument if the maker does not, provided it is duly presented for payment and upon refusal is duly protested. (21) A corporation is an association of natural persons, or of artifical persons, or of both together, authorized by law to act as a unit under a corporate name, for the accomplishment of certain definite and prescribed purposes. In general there are two kinds of corporations, viz.: (a) Public, and (b) Private. There are, however, a good many subdivisions such as: Transporta- tion corporations, stock and non-stock corporations, moneyed corpora- tions, etc. (22) A contract is an agreement between two or more persons, compe- tent to act, founded on a sufficient and legal consideration, to do or not to do a certain thing. The following contracts must be in writing : (a) If the contract by its terms is not to be performed within one year from the making thereof. Answers in Commercial Law. (b) Contracts to answer for the debt of another person. (c) Contracts containing a promise in consideration of marriage. (d) Contracts promising the payment of a debt already discharged in bankruptcy. (e) A contract for sale of lands or any interest in them. (23) His defence would be a change in the contract of guaranty, with- out his knowledge or authorization. (24) No; it is not. The most important element of a negotiable in- strument is that the time is determinable. In this case the time is un- certain as William H. Taft may never be elected. (25) One-half must actually be paid in. Payment may be made in cash or property. If in property the same shall be appraised by the commissioners, who have to report the fair cash value thereof. (26) By the term " Statute of Limitations " is meant that the law wiU refuse to enforce any action, not merged in a judgment or discharged by consent within a given time, by reason of the lapse of a certain time, which varies in the different states. Like the statute of frauds it has for its object the discouraging of litigation and the suppression of perjury. The following acts may prevent the statute from running against an ordinary debt: (a) A new agreement, which in some of the states must be in writing. (b) By a payment on account of principal. (c) By paying interest. (27) A special meeting of the board of directors must be called on three days' notice, and a majority of the whole board must adopt a resolution recommending dissolution. The directors then call a meeting of the stockholders which must be not less than 30 nor more than 60 days after their meeting. Notice of this meeting must also be published at kast once a week for three weeks successively next preceding the time appointed for holding the meeting. In order to secure dissolution an approving vole of two-thirds of the outstanding stock must be secured. After this vote is obtained certain forms of dissolution must be prepared and filed with the Secretary of State. When these papers are accepted by the Secretary of State he issues, in duplicate, a certificate of their filing, one copy of which must be published once a week for two weeks, in one or more newspapers. The dissolution of the corporation is then complete. The directors act as trustees for winding up the business. (28) When the buyer signifies his approval or acceptance to the seller, or does any act ratifying the transaction. If he neither signifies his approval nor acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on the expira- 215 i'^„ >l ifi } ^1 if « > , Accounting Problems and Solutions. tion of the time so fixed, or, if no time has been fixed, then on the expiration of a reasonable time. (29) The common law is the oldest form of our law. It was derived primarily from the English law, and established here by the early settlers. It is made up of the rules and customs which were in use from time immemorial and came to be recognized as laws. Most of the common law is now embodied in court decisions. Laws enacted by Congress or the Legislature are known as statute laws. In some instances these statutes change and modify the common law. This is often the case when the condition of the nation or the progress of the community requires it. The law merchant, known also as commercial law is a branch of the civil law, and includes the law regulating the rights and relations of persons engaged in trade or commerce, as the law of contracts or agency. It is a more modern outgrow. (30) The taking of a higher rate of interest than that allowed by the statute of a particular state is called usury. The legal rate of interest in the State of Florida is 8%, the maximum rate is 10% (The penalty for usury is forfeiture of all interest.) (31) A partnership is an association of two or more persons who have ai^recd to combine their labor, property, or skill, for the purpose of engaging in business and sharing profits and losses between them. General and limited. A limited" partnership differs from a general partnership in that the liability of some of the partners is limited. PART IV. w • yi 216 "«„.' ;' "HSPI'HBIwi'i'. ■ >■ -■ _ 11 ^' I I ..^ i III C. p. A. Elxamination Papers. Below is a reprint from The Journal of Accountancy of a contrast and comparison of a few examination papers, given by various State Boards or Institutes of Accoimtants at recent examinations for the C. P. A. certificate, with comments. The following are representative problems of the Pennsylvania exami- nation, held in November, 1907: (Monday, November 25, 1907, 9 A. M. to i P. M.) I. The report to the Comptroller of the Currency by the Blank National Bank on June 15, 1906, and again on July 20, 1907, showed as follows : June IS, 1906, July 20, 1907. Resources. Loans and Discounts $3i55i,i40.20 $3,670,785.13 U. S. Bonds to secure Circulation and U. S. Deposits 547,000.00 450,000.00 Premiums on U. S. Bonds 13,000.00 12,000.00 Bonds, Securities, etc 370,244.25 410,570.75 Banking House Furniture, etc 70,694.16 129,198.80 Due from Banks and Bankers 613,753.18 520,734.39 Royal Bank of Dublin, Ireland 36,215.48 42,486.15 Due from Approved Reserve Agents 537,456.91 472,646.47 Checks and other Cash Items 24,247.54 83,411.83 Exchanges for Clearing House 281,933.18 199,179.10 Notes of other National Banks 2,850.00 200.00 Fractional Currency, etc 495-55 1,974.61 Lawful Money Reserve in Bank 411,218.15 522,225.80 Redemption Fund with U. S. Treasurer 20,250.00 24,250.00 Total $6,480,498.60 $6,539,663.03 Liabilities. Capital Stock paid in $600,000.00 $600,000.00 Surplus Fund 500,000.00 550,000.00 Undivided Profits, less Expenses, etc 115,754.47 109,566.46 National Bank Notes Outstanding 408,000.00 400,400.00 Due to Banks and Bankers 956,437.76 1,119,598.80 Individual Deposits subject to Check 3,463,436.50 2,802,915.26 Certificates of Deposit 33,665.00 15,585.56 Certified Checks 6,226.71 4,124.50 Cashier's Checks Outstanding 142,978.16 402,472.45 United States Deposits 144,000.00 45,000.00 Bonds Borrowed 1 10,000.00 Notes and Bills Discounted 490,000.00 Total $6,480,498.60 $6,539,663.03 219 V I taJH ;i ;) li Accounting Problems and Solutions. Accounts current received from the Royal Bank of Dublin show a credit balance in favor of the Blank National Bank on June 15, 1906, of £7^624—8—4, and on July 20, 1907, of £9,337— H—^- a You are retained by the Board of Directors of the bank to make an examination on July 20, 1907, and to make an audit in connection therewith of the accounts from June 15, 1906. State how you would propose to carry out these instructions, describing your process m the order in which you think the several steps should be taken, and discussing carefully each item shown on the foregoing statements, together with such other accounts appearing in connection with your answer to part id) of this question as you think should be examined. b Do the Ledger balances against the Royal Bank of Dublin show the correct status of this account? How would you prove that they do; and if you found the balances stated above to be wrong, what entry would you make to correct? c. Describe more fully the "Liability Ledger" (or what is known in some banks as the " Credit Ledger " and in others as the " Lme Ledger ) and state whether you think it should prove with any General Ledger Account, or be kept by single entry purely. If the former, show how yon would accomplish your purpose. d. From the foregoing and your knowledge of banking : Outline a system of accounts suitable for the Blank National Bank, describing (in sufficient detail to indicate your understanding) the prin- cipal books and blanks used in the several departments, but showing no forms. 2. Describe the use and operation of a Clearing House. 3. State briefly the sources of Income of,— National Banks State Banks Savings Banks Trust Companies Building Associations. (Tuesday, November 26, 1907, 2 P. M. to 5 P. M.) II. You are retained by the Appliance Manufacturing Company to audit its accounts for the year ending June 30, 1907, and to prepare the Balance Sheet, Trading and Profit and Loss Accounts for the year. You are expected to write a brief report of not less than 200 and not more than 400 words dealing with your audit, showing its scope and discussing any matters relating to the accounts which may seem to you to be of interest. The company was incorporated on July i, 1906, and its Balance Sheet on that date showed as follows: $227,537-27 $227,537.27 $16,922.81 240,172.56 C, P. A. Examination Questions. Assets. Cash $12,680.92 Bills Receivable 2,200.00 Book Accounts Receivable I9»50i.33 Merchandise Material on hand 9.554-43 Expenses of Incorporation 500.00 Book Accounts Receivable in Suspense 1,983,40 Good Will 40,000.00 Machinery and Tools 129,355.01 Furniture in Office and Store 11,762.18 Total Liabilities. Bills Payable $10,901.07 Book Accounts Payable 15,617.04 Capital Stock 200,000.00 Reserves for Suspended Accounts Receivable 1,019.16 Total The Trial Balance of June 30, 1907, was as follows: Cash $5,259 80 Notes Receivable 5,048.75 Notes Payable Sales Materials and Supplies 52,088.94 Sundry Merchandise Bought 2,869.80 Selling Wages 22,400.04 Manufacturing Wages 88,317.70 Miscellaneous Receipts Office Salaries 5,802.50 Maufacturing Expenses I5,353i6 Office Expenses 2,496. 14 General Selling Expenses 3, 491.50 Advertising 2.064.33 Light, Heat and Power 3,121.97 Rent of Factory 4,000.00 Rent of Store and Office 1,860.29 Repairs to Machinery, etc 845.78 Delivery Expenses 2,201.01 Interest and Discount 738.40 Commissions 5,089.30 Machinery and Tools 132,817.24 Dividend (paid January 10, 1907) 6,000.00 Furniture, etc., in Store and Office 12,016.45 Book Accounts Receivable 58,935.20 Book Accounts Payable Expenses of Incorporation 500,00 Reserve for Suspended Accounts 320,59 Good Will 40,000.00 Capital Stock Accounts Receivable in Suspense 2,316.84 Total $475,955-73 $475,955-73 221 54920 18,311.16 200,000.00 t' IV 'H'l" ■ 1 1^Mill^l^^^^B 1 i,^H. Tf^T Kiiii; W> I lin iv 1 I I, I i Accounting Problems and Solutions. The Inventory of Merchandise and Material amounts to $12,453-90. You discover the following facts not disclosed by the books : (a) Invoices not entered, — Maryland Steel Co., dated June 15, 1907, for Steel $165.00 York Safe and Lock Co., dated June i, 1907, for Office Safe "O.oo Vulcan Coal Co., dated May 20, 1907, for Coal • 42.50 $317.50 (b) The company made in its shop for its own use five machines, in the construction of which it used material costing $525,00, and the me- chanics' wages amounted to $750.00. 12. A Company is engaged in a business in which it enters mto con- tracts to render certain services for fifty-two weeks for twenty dollars, payable eight dollars in cash and the balance by installments on the first of each month. As an inducement to customers it gives with each con- tract an article costing three dollars, and it allows the agent securmg the contract to retain out of the cash payment a commission of $2.50. Ex- perience shows that the cost of collecting the monthly installments averages ten per cent, of the amount collected. (a) What entries would you make on the books when the contract is secured? ^ ^ u • fU {b) How would the accounts opened be disposed of by the time tne contract is closed? (c) You are asked to change the bookkeeping system and open an entirely new set of books at a date when the records show, among other assets and liabilities, 1,000 contracts in force with an average of twenty- five weeks service to be rendered on each and installments amounting to $7,500 outstanding. What assets, liabilities and reserves would you set up in the new books respecting these matters? It is not necessary to con- sider the question of cancellation or breaches of contract. To contrast and compare these papers with those presented by other boards the following typical problems and questions arc given : PRACTICAL ACCOUNTING, PART I. (New York, February 4. 1908, 1.15 to 4-15 P- M.) I On July 9, 1907, Smash, Slump & Company, bankers, buy from the Atlantic Ocean Bridge Company its first 5 per cent. 50-year gold bonds, dated July i, 1907, interest payable semi-annually, amounting to $10,000,- 000, at 90 per cent, and interest, with a bonus of 50 per cent, in common stock of the Atlantic Ocean Bridge Company. On the same date the bankers form a syndicate for one year to take the bonds at 92/2 per cent, and interest with the common stock as a bonus. They make no charge for expenses. The syndicate is formed as follows: 222 C. P. A. Examination Questions. Jones & Company take $1,750,000 as a participation. Smith Brothers " 6,000,000 " " Reader & Company " 1,250,000 " " Smash, Slump & Co. " 1,000,000 " " On the same date the bankers pay the Atlantic Ocean Bridge Company the total amount due it for the $10,000,000 of bonds, and carry the syndi- cate, the members of which make no payments to the bankers. On February i, 1908, $6,000,000 of bonds are sold on the stock ex- change at an average price of 95 per cent, less one-eighth per cent, com- mission. On April i, 1908, $1,000,000 of bonds are sold on the stock exchange at an average price of 94 per cent, less one-eighth per cent, commission. Prepare statements, as follows, showing the bankers' and participants' accounts as they should appear on the bankers' books at the close of the syndicate : (a) Statement showing the bankers' account for the purchase of the securities, including transfers to syndicate account and profit thereon. (&) Statement of each of the syndicate members' accounts as they should appear on the books of the bankers, July 9, 1908. (c) Statements showing the transactions and profit and loss on the bankers' own participation account, assuming that the bonds are selling at 92^ per cent. In making up these statements, no account need be taken of the coupons paid by the Atlantic Ocean Bridge Company, nor of any interest charges by the bankers to the participants' accounts or to its own partici- pation account, as it may be assumed that the cash received for the coupons by the bankers will be sufficient to reimburse them for their advances to July 9, 1908. 2. The bookkeeper of a manufacturing concern could produce only the following statement from its records on January i, 1907: Manufacturing expenses $4,622.89 Capital stock .' lo^ooo.oo Plant and equipment 17,500.00 Gross sales g ^^g jq First mortgage bonds (due Dec. zi]' i^7)V.'.\V.\\ i5;ooo.'oo Materials and supplies (inventory) 4280^4 Notes payable . ;;^;^ Accounts receivable «i 42^ 2^ Accounts payable .........'.'.'. 2 436 28 Interest on bonds (7 months) ''*.'.' 393 75 Interest on notes and accounts payable 282 40 c^sh ;; 832^4 On January i, 1907, the management changes, and you are later re- tained as a public accountant to conduct an examination and prepare a balance sheet as of January i, 1908. You find that during the preceding year the directors have subscribed in cash to $7,500 additional capital stock and have retired all the notes and old accounts payable, and that no interest was paid on these accounts for the year. You also find that the plant and equipment was revalued at 223 1* It! ■1 ' I' ). h: Accounting Problems and Solutions. $15 000 and 5 per cent, of this amount was charged off to provide for depreciation, while an additional 2/2 per cent, was ordered placed in Reserve Account to cover repairs and renewals, the entire 7V2 per cent, being charged direct to Profit and Loss. The bond outstanding fell due on December 31, 1907, and was paid, principal and interest, in cash. An inventory of materials and supplies places their value at $2,328.19, the practice being to charge all purchases direct to Manufacturing Ex- penses and to credit back the amount of the inventory. The accounts payable (all for material and non-interest bearing) amount to $546.28. ,1*1 Of the accounts receivable January i, 1907. $4,968.18 was collected and the balance charged off as uncollectible. In addition to the material used from stock during the year, and the amount still due for material purchased, the manufacturing expenses were $3,720.52, all paid in cash, the total manufacturing expenses being 31 per cent, of the gross sales for the year ending January i, 1908. Of these 91.3 per cent, were collected in cash and the balance, all of which is considered good, remains on the books in accounts receivable. Produce a comparative balance sheet of January i, 1908-1907, and state the amount of gross sales for the year. THEORY OF ACCOUNTS. (February 5, 1908, 9-15 A. M. to 12.15 P. M., only. Ten questions.) A company issues annually over 10,000 checks on three separate banks, recording each one on the check stub and then transcribing each check in detail on the general cash book. Suggest a change in method that would facilitate the work and point out advantages gained. What do you consider the best way of entering on the books of a manufacturing company the amount written off to profit and loss for depreciation on (o) buildings, (&) large or fixed tools, (c) small or expense tools? j • n- What primary books of account are necessary for the proper and intelli- gent conduct of a small business ? Describe the general form and uses of each book mentioned. . What do you understand by "depreciation," and how should it be provided for on the books of a manufacturing company owning its plant and equipment? Wherein does depreciation differ from renewals and repairs, and can it be avoided through any system of bookkeeping? What is a reserve account? How may it be properly established and for what purpose ? What, if any, contra account should be maintained ? Under what circumstances should these accounts be maintained? Why. AUDITING. (February 5, 1908, 1.15 to 4.15 P- M., only. Ten questions.) In making an audit would you consider it necessary to check in detail the postings of subsidiary ledgers? Explain fuUy. 224 C. p. A. Examination Questions. In examining the books of a railroad company for the purpose of determining the profits for a given period only, what class of expenditures should be carefully examined? State how you would verify such expenditures. Explain fully how you would proceed in inspecting and verifying the bonds and stocks (not valuation) owned by a company whose books you are auditing, stating the principal points you would investigate in connec- tion with the coupons and the names appearing on the stock certificates. Explain briefly what method you would employ to audit the accounts of a firm whose books had been kept by single entry. What is the difference between a reserve and a reserve fund? Give examples of each. Papers set by the Scottish Chartered Accountants' General Examining Board, June, 1907. GENERAL BUSINESS OF AN ACCOUNTANT. (The Theory and Practice of Bookkeeping, including the Preparation of Balance Sheets, Profit and Loss Accounts, and Partners' Accounts; the Principles of Cost Accounts; Joint Adventure and Consignment Accounts.) (Time allowed, for seven questions three hours.) Job Trader, merchant, Greenock, has the following, representing the capital in his business at i January, 1906, viz. : Cash in bank and on hand £432 50 puncheons whisky, valued at 375 4-64ths of SS. Agra, valued at 2,000 Consignments outstanding, estimated to realize 1,265 Office furniture, valued at 40 Book debts, considered good 1,583 ^5,695 Less — due to sundry creditors 715 £4,980 At this date he assumes as a partner James Dealer, who pays into the firm in cash £860, and transfers a stock of 2,000 bolls of maize taken at 22s. per boll. The partners are each to draw a salary of £25 monthly, to be allowed interest on their capital at 5 per cent, per annum, and to share the profits and losses equally. On 31st December, 1906, the trial balance of the firm*s General Ledger is as follows: Purchases account £16,530 Sales account ; £14,998 Consignment sales account 3^264 Charges account 184 225 irr F«\ 'li f .11 't C. P. A. Examination Questions. Another feature to notice in the Pennsylvania examinations is that the papers contain exactly what the syllabus calls for, which is not the case in the majority of the other States, especially in the State of New York. To be sure, the average standard of the recent examination papers of the State of New York is commendable, more so than the standard of some of the other States— although rather specialized than general, chiefly in Practical Accounting. The examinations, however, are not based on the syllabus issued by the State. This method, a syllabus of one standard (1896) and examinations of another standard (1908), is an injustice to the applicants taking the examinations. What was more than enough in the early outline of the scope of examinations in accounting (1896) is not the standard of the present (1908). Compare, for instance, some of the descriptions of the requirements in the New York Syllabus with those of the Pennsylvania Syllabus : New York Syllabus: " Banking.— Treatment of moneys received from depositors; pass books; receiving teller's records; listing check and draft deposits; de- posits from other banks; receiving teller's proof. Paying teller's duties; certified check book; effect of certification on indorsements; limit of certification by national banks; record of paid checks; paying teller's proof. Loans: legal procedure for national banks; offering book; dis- count register; charge ticket; regular dealers, other borrowers; discount tickler; time and 'call' loans; loan tickets; collection; protest; col- lection register; remittance register; certificate of deposit; customs check; cashier's check; bank drafts; third teller's proofs. Procedure of general bookkeeper; general debit and credit books; general balance ledger; dealer's ledger; dealer's balance ledger; the 'Boston' ledger; general ledger; general proof; daily statement. The clearing house. Reserve required for national banks." Pennsylvania Syllabus : "Banking.— (i) National Banking System. (2) State Banks in Pennsylvania. (3) Savings Banks and Building and Loan Associations in Pennsylvania. (4) Trust Companies in Pennsylvania. (5) Private Bankers and Brokers (Stock, Bond, and Note). (6) Foreign Exchange. (7) Clearing Houses (Bank, Stock, and Bond). " (a) Accounting Organization and Administration, (b) Nature of accounts in each and the distinctions between the accounts of the different classes of banking institutions, (c) Nature of Bank audits and method of procedure in each of i to 6, inclusive." New York Syllabus: "Manufacturing Accounts.— Accounts to indicate causes of loss by a firm whose sales and cost calculations indicated a profit; state- ment showing cost per machine of manufactured output, the gross manu- facturing profit and the final net result; manufacturing and loss and gain accounts and balance sheet (writing off for depreciation and making 229 \ 'I : V 4" ,1, • 1 '1* M [1 '-ii 1 1 ^ 1 1 '1 ;■ ■r i Accounting Problems and Solutions. allowance for bad debts) from trial balance and inventories furnished; from the cost sheet suitable for a manufacturing business and detailing the items of expenditure." Pennsylvania Syllabus: "Manufacturing.— (i) Accounting Organization and Adminis- tration of Factories. (2) Financial Accounts of Factories. (3) Manu- facturing Costs. (4) Audits." The descriptions in the New York Syllabus cover the bookkeepmg side, the elementary part, but they certainly do not reach the standard expected of a C. P. A. who must audit a modern banking institution or a modern factory. Although recognizing the difficulty of being original in questions or problems, yet the frequency with which some questions in Theory of Accounts of Auditing recur is to be greatly regretted. Some questions in these subjects at recent examinations in some States put a premium on "cram" work The Pennsylvania Syllabus, however, is not free from errors. In recommending some good text books, treating of elementary principles of accounts, the Board suggest Williams and Rogers' "Complete Book- keeping," Goodwin's "Improved Bookkeeping," etc. A recommendation and official endorsement given to these books is inexcusable, at least in the latter instance. A deplorable practice prevalent with all State Boards is the secrecy they maintain with regard to examination results. We see that in other countries there are published statements about the accounting profession, as well as about examination results, while here the strictest secrecy rules; one f^nds it occasionally difficult even to secure copies of previous examinations. What mystery the Board has to conceal no one can tell. . To sum up then the lesson we could derive from the Pennsylvania and English papers: (1) The time allowed for answering questions should not be too restricted. The analytical ability of an applicant is not disclosed by a strict time limit. (2) Examinations in accounting should rather be treated under one heading than subdivided into three or more divisions; this single heading, however, to include not only accounting proper, but other matter which is pertinent to an Accountant's practice as well. (3) State Boards should from time to time revise their syllabi so as to keep abreast with the commerce and trade of the day. (4) Publicity should be given to all matters regarding the accounting profession as well as regarding the examinations held from time to time, and their results, so as to raise the professional standing and acquaint the public in general with the usefulness of the profession. 230 C, P. A. Examination Questions. Theory of Accounts. New York Examination, January, 1906. Answer 10 questions but no more. Answers in excess of the number required will not be considered. Do not repeat questions but write an- swers only, designating by number as in question paper. Check the number of each one of the questions you have answered. Each com- plete answer will receive 10 credits. Papers entitled to 75 or more credits will be accepted. — ^January 30, 9.15 a. m. to 12.15 p. m. 1 What is a consignment account? How should it appear on the books of the consignor? 2 What is a sinking fund? How should the account be treated on the books of a corporation? 3 In a set of books in which sales book and sales ledger are used, how should a sale of merchandise be treated when an accepted draft for the amount is given by the buyer? 4 Define and differentiate the following kinds of statements: (a) trial balance, (b) balance sheet, (c) statement of assets and liabilities, (d) statement of affairs. 5 State briefly the proper manner of conducting the following kinds of accounts: (a) bills receivable, (b) bills payable, (c) shipment accounts. 6 In what order should the accounts be arranged as they successively appear in (a) a ledger containing all the accounts of a business, (b) a ledger containing accounts of fixed assets and fixed liabilities, as well as special, nominal and summary accounts? 7 Describe the method of determining the number of shares of capital stock, both common and preferred, held by each of the several stock- holders of a corporation, giving fully the titles of the books wherein the facts are registered and stating how the books are opened and operated. 8-9 Describe the process of closing the books of a corporation at the end of a fiscal year, showing a Trading account and a Profit and Loss account, and explaining the treatment of reserves for depreciation and for bad debts, as well as for the surplus or deficiency resulting from the operations of prior years. 10 A corporation is organized with an authorized capital stock of $50,000 of which only $40,000 is sold, and stock certificates issued therefor. Two conflicting methods of recording the capital stock on the books are urged by rival accountants as follows : (a) treasury stock to capital stock $50,000, cash and properties to treasury stock $40,000; (b) cash and properties to capital stock $40,000. Which method is the better and why? 11 Explain the purpose and the manner of keeping a private ledger as part of the financial books of a firm or a corporation. 12 A construction company contracts to erect buildings or works, charg- ing in some instances a fixed price, and in other instances the actual costs 231 Accounting Problems and Solutions. plus a fixed percentage thereon. How should the contract accounts for each stated class of undertakings be conducted on the books of the com- pany, and in what manner should the unfinished contracts at the close of each fiscal year be valued on the balance sheet and treated in the Profit and Loss account? 13. Define and differentiate the following kinds of accounts : (o) real and nominal, (bJ personal and impersonal, (cj current and summary, (d) con- trolling and specific. 14 How may a reserve account and a sinking fund, both relating to the redemption of the same debt be simultaneously operated ? What purpose is accomplished thereby and how do said accounts respectively appear on the balance sheet? 15 A manufacturer makes extensive investments in stocks and bonds, buying and selling from time to time as the market conditions warrant and clearing all such transactions through his regular books of account. How should such transactions be isolated from his manufacturing opera- tions and what books and accounts should he employ to record the details of the principal and income from such investments? Practical Accounting. Answer questions i and 2 and two of the others, hut no more. Answers in excess of the number required will not be considered. Do not repeat questions but write answers only, designating by number as in question paper. Check the number of each one of the questions you have an. swered. Each complete answer will receive 25 credits. Papers entitled to 75 or more credits will be accepted. January 30, 1.15 to 5.15 p. m., only. I. The Parker Construction Company is unable to meet its obligations and is forced into liquidation. At the time the receiver takes charge of its affairs the following trial balance is prepared from the company's books: Cash $500 Land and buildings 10,000 Mortgage on land and buildings $8,000 Plant and equipment 20,000 Creditors 59-400 Completed contract accounts (losses) 18,000 Capital 50,000 Uncompleted contract accounts (outlay) 30,000 Securities acquired in settlements i5»ooo Debtors' accounts for completed contracts 6,000 Expenses 0,500 Inventory of materials 2,000 Profit and loss (deficiency) 9,400 $117,400 $117,400 The sureties on the unfinished contracts estimate that a further outlay of $20,000 will be required to complete the work and realize the contract 232 C.P. A. Examination Questions. price of $40,000, and their offer to take over the materials on hand for $1,500, as part of said cost, is accepted by the receiver. Of the securities acquired $5,000 is pledged to secure $11,000 due creditors, and $10,000 is pledged to secure $9,000 due creditors. The company owes for taxes on real estate $100 and for salaries and wages of employees $1,200, which sums do not appear on the books. The company has dis- counted customers' notes for $3,000, of which subsequent ad- vices indicate that $1,000 will be dishonored, and a debtor owing $1,500 on unsecured account has failed and disappeared. It is estimated that the amount realized on land and buildings will be sufficient to satisfy the mortgage only, and that plant and equipment will realize only 6% of the book value. Prepare a statement of affairs and deficiency account. 2 Walter Hopkins, while perfectly solvent and doing a profitable manu- facturing business, had so tied up his capital in plant and materials that It was unable to pay his debts and was on the point of suspending for want of funds to pay for labor, and his creditors were preparing to com- mence legal proceedings to enforce a settlement. The condition of his affairs at this time was as follows : Balance Sheet Liabilities. Creditors $20,230 Capital 50,000 Surplus 4,900 i Assets Plant $25,198 Cash 212 Materials, raw and partly finished 40,400 Finished goods 6,070 Accounts receivable 3,250 $75,130 $75,130 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 em- ployment 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, $12,000 ; sales on book account, $57,802 ; losses on bad debts, $300 ; cash re- ceipts (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, (&) trustees* cash account, (r) balance sheet of the estate as restored to Walter Hopkins. 233 ISi Accounting Problems and Solutions, 3 The following statements comprise the trial balances of a busmcss at the beginning and the end of a fiscal period, together with the volume of the transactions during said period: Trial Balance, Interim Trial Balance, January i. Transactions. DecemDer 31. , Cash $i.xi5 $24,941 $24,696 $1,360 I Merchandise 5.050 17.665 26.874 $4.iS9 3 Debtors 3.iio 25.135 24."9 4.oi6 i Fixtures 2,800 505 3.505 5 Creditors 1-575 18.922 19,410 2,063 6 Loan (Int. pd. $6) 50o 1,000 1,500 7 Capital 10.000 . ,^ ,„ "•°°** 8 Interest and Discount .. 693 360 333 9 Rent 900 900 10 Insurance , 5 o a II Salaries ''^^o 1,820 la Advertising 900 900 ,3 Carting ,^'705 i.705 14 Expense »'333 1.333 I? Drawings, proprietor ... 2^ 2,000 $12,073 $12,075 $96,569 $96,569 $17,722 $17,722 a The sales book shows sales posted to debtors to the amount of $25,135. , , b The journal shows allowances to debtors for returns of mdse. sales $1,015 and claims on creditors for returns of mdse. pur- chases $230, also application of debtors* balance to settle creditors' account in the amount of $9,500. both accounts being in the name of the same correspondent. c The ledger shows that the nominal accounts entitled Rent, Insur- ance and Office Salaries contain only cash charges, while the nominal accounts entitled Advertising, Cartage, and Expense show cash charges in the total amounts of $100, $200, and ^773 respectively, all other charges therein being by invoice duly posted to creditors' accounts. rf.The Merchandise account shows cash charges of $610 and cash credits of $1,509 for cash purchases and cash sales respectively. e The invoice books shows invoices posted to creditors' accounts to the amount of $19,410. From the foregoing statement of facts write the several accounts dis- played in the trial balance, showing the elements composing each ac- count stated according to the itles of the accounts complementary thereto. 4-5 A corporation issues $100,000 in 20-year bonds, dated January i, 1902, redeemable out of revenue by means of 20 annual sinking fund instalments of $5,000 each. December 31, 1902, $5,000 is reserved out of profits and placed to the credit of Reserve for Redemption and $5,000 is deposited in a trust company @ 2% and charged to Sinking Fund for Redemption. Separate sinking fund books are opened in the ledger m which Cash is charged and Sinking Fund credited with said first mstal- February 2, 1903, investments are purchased for the sinking fund and the principal' thereof is charged on the sinking fund books to separate investment accounts, while the accrued interest is charged to Revenue from Investments. C. P. A. Examination Questions. The investments so purchased are as follows : a Two (2) 5% gold bonds, due 1950, of $1,000 each, interest payable, May I, Nov. 2, (^ par and accrued interest. b.One (i) 6% gold bond, due 1940, of $1,000, Apr. i, Oct. i, @ 120 and accrued interest, f .The company loans on first mortgage $1,400 @ 5% interest, payable Aug. I, Feb. I. The interest is regularly received and deposited in the special account, charged to Cash and credited to Revenue from Investments, which latter account is in turn closed by transfer of balance to Sinking Fund for Redemption. December 31, 1903, the second annual reserve is made in the amount of $5,000, less the net income of the sinking fund for the expired current year as shown by the sinking fund books, and a corresponding deposit is made in the special fund, while the proper entries of the receipt thereof are also made and posted in the sinking fund books. March i, 1904, two (2) 6% bonds of the same issue as purchased in the previous year are bought for the sinking fund @ 116 and accrued interest, one (i) of the 5% bonds is sold @ 103 and accrued interest, and a first mortgage for $3,500 @ 5% March, i and Sept. i, is purchased. The 6% bond bought in 1903 and held at 120 is written down to 116, and the remaining 5% bond held at par is written up to 103 by cross entry between the principal account and the Revenue from Investments account. December 31, 1904, the third instalment is reserved and deposited in the same manner and on the same principle as the preceding ones. Frame the necessary journal entries on both the general and the sinking fund book to give expression to the foregoing transactions; also the accounts affected in both ledgers showing the status of sinking fund at the beginning of 1905. 6 Fredericka Ward dies leaving one daughter, Doris, and two sons, Henry and Arthur, all of age, surviving her. Her will directs that after the discharge of all just claims on her estate there shall be placed in trust for Fredericka Winter, the child of her deceased sister, $50,000, the income of which is to be used for the child's support by the guardian appointed under the trust, and the principal to be paid over to her when she becomes of age. The remainder of the estate is to be divided equally among the testator's three children. The estate consists of cash in a trust company $12,500, bonds and mortgages on real estate $250,000; registered municipal bonds $90,000, household furniture appraised at $20,130, horses and carriages appraised at $3,000, clothing appraised at $2,200 and jewelry appraised at $7,400. One of the aforesaid mortgages, $50,000 @ 5%, is in arrears of interest for one year, and foreclosure proceedings are commenced by the executor with the result that on an immediate settlement the estate realizes the principal and the interest so in arrears and the trust fund is paid over to the guardian of Fredericka Winter. The February and August semi- annual instalments of interest at 5% on the two remaining mortgagees 235 I ^ i^l ^^ fl! 1 ^H 1/ I^B iB Bilnl Accounting Problems and Solutions. of $100,000 each and the January and July interest on the registered 4% bonds are all duly received, and the bonds are forthwilh sold for $90,190. The executor then pays $30,000 to Doris, and $10,000 each to Henry and Walter respectively, on account of their interests. Doris takes, as a part of her legacy, household furniture $5,000, clothing $900, and all the jewelry at the appraised valuation. Each of the sons takes as part of his legacy one of the remaining bonds and mortgages. On the sale of the remaining effects the furniture realizes $15,000, the clothing $1,000, and the horses and carriages $3,200. There is also received from the trust company for interest on deposit, $350. The executor expended for probate $150, funeral $600, monument $1,000, tax on personal estate $350, counsel fees $1,500, fire insurance $32 and sundry claims against the estate $7,201. The allowance for executor's fees was fixed by the will at $2,500. Prepare a summary accounting showing the cash in hands of executor and the amount payable to each of the heirs. Auditing. Atiswer 10 questions but no more. Answers in excess of the number required will not be considered. Do not repeat questions but write an- swers only^ designating by number as in question paper. Clieck the number of each one of the questions you have answered. Each com- plete answer will receive 10 credits. Papers entitled to 75 or more credits will be accepted. January 31— 9.15 a. m. to 12.15 p. m., only. 1-2 A company was organized in February, 1900, for the purposes of constructing and operating two iron furnaces as one plant, and of owning and mining ore properties. An issue of mortgage bonds was arranged for the purpose of providing funds to finance the constructing of the plant and the purchase and development of ore properties. The mortgage provided that the property should be maintained by the company in first class condition. The first furnace was put in blast in May, 1901, and the second in June, 1902. The ore property was developed and mining commenced in April, 1901, at which date the total cost of the property and development amounted to $50,000. The superintendent of the plant reports monthly the quantities of ores and materials received, and also the quantities used at the furnaces. Stores accounts are kept for each kind of ore and material. Piles of ores and materials are cleaned up periodically. The plant superintendent also reports the quantities of pig iron produced monthly and the quantities of pig iron shipped monthly. January 2, 1905, you are appointed in the interest of the bondholders and shareholders to audit the accounts of the company for five years ending February 28, 1905. Apart from the accuracy of the clerical work and bookkeeping, what ire the principal points to be ascertained with regard to (a) expenditures, ih) issue of bonds, (c) maintenance of the properties? State how you 236 C. P. A. Examination Questions. would satisfy yourself of the accuracy of the following assets and liabili- ties at the close of the period of your examination: stocks of ores and materials, stock of pig iron, mortgage bonds outstanding, capital stock outstanding. 3 What is a voucher and what is your understanding of its purpose? 4 How would you determine the profits for a given period from a set of books kept on the single entry system, the capital at the beginning of the period being known? 5 In drawing up a balance sheet is it desirable to show the assets and liabilities by groups, and if so, into what groups would you classify? Give reasons for your classification. 6 You are appointed to audit the accounts of the trustees of the late C D., who were designated in his will. His estate consisted of cash, real estate, U. S. government bonds, shares in various enterprises, mort- gages on real estate and a partnership interest in a manufacturing firm. What documents and records would you need to see in order to satisfy yourself that the accounts were properly stated and the interests of the beneficiaries properly administered? 7 Should inventories of a manufacturing concern be taken at cost value, at market value or at some other value? Give reasons. 8 A factory makes large outlays during a year for alterations to plant. How would you treat such expenditures ? 9 When sales are made on time with the proviso that certain discounts are to be allowed if payment is made on or before specified dates, would you, when auditing the accounts, make provision for such discounts on outstanding accounts? Give reasons and an argument for or against the practice. 10 A contractor engages to erect a building for $250,000, and his esti- mates indicate a profit to him of $25,000 in the transaction. He receives during the fiscal year payments aggregating $85,000 on architect's certifi- cates, showing that $100,000 worth of work has been done. Ought any of the contemplated profits to be carried into the accounts for that year, and if so, how much? 11 What is the responsibility of the accountant who undertakes to examine a going business for the purpose of issuing a certificate showing the net earnings of the business for the preceding five years to (o) the owners, (b) those investing money therein on the faith of the report? 12 In auditing the accounts of a corporation what special precautions would suggest an inspection of the minute books, the stock ledger, the bond register, and a review of certain initial entries relating to the company's formation at a date prior to that covered by the immediate audit? 13 To what extent may the " organization expenses " of a corporation be regarded as a permanent asset and how should this account accordingly be dealt with? 237 I I .u i .■I Accounting Problems and Solutions. 14 Why should the auditor compare all payments with proper vouchers, show agreement between cashbook balance and bank balance and recon- ciliation of check book and bank pass book? 15 Show in a general way what care should be exercised and what work done by an auditor in establishing the accuracy of pay rolls of factory hands or other laborers, schedules of bills and accounts receivable, and schedules of stocks, bonds or other securities. Commercial Law. Answer 10 questions but no more. Answers in excess of the number required will not be considered. Do not repeat questions but write an- swers only, designating by number as in question paper. Check the number of each one of the questions you have answered. Each complete answer will receive 10 credits. Papers entitled to 75 or more credits will be accepted.— ]2in\i?,Ty 31, 1.15 to 4:15 P- "i., only. 1 What is a contract? Mention five requisites of every binding contract. 2 Define insolvency and bankruptcy. Mention (a) two acts of bank- ruptcy, (b) two classes of persons who are exempt from mvoluntary bankruptcy. 3 What is the true nature of the relationship between partners? To what extent has a partner the right to sell the goods of the firm? 4 How may a partner retiring from a firm relieve himself of further partnership responsibility ? 5 Prepare a copartnership agreement that shall provide for continuance for a period of five vears notwithstanding the death of one of the partners in the meantime, and provide also for payment of interest on mvestments, salaries to partners and a method of determining and apportionmg profits and losses. 6 A meeting B on the street tells him to send to his hotel 15 barrels of a certain brand of flour that B is selling at $5 a barrel. The men separate without further talk and the next day the flour is sent to A. Is he obliged to take it? Give reasons. 7 What is a corporation? Describe tW procedure necessary for the formation of a business corporation and show what is required as to (a) number of incorporators, {b) number of directors, {c) capital to be paid m. 8 May directors of a corporation convey the property of the corporation to themselves? Give reasons. 9 For what kind of property may a corporation issue its capital stock m payment? Explain fully. 10 When the capital of a corporation is increased, what persons have the prior right to subscribe for the new stock and in what proportions? May such right be made negotiable and if so, how? C. P. A. Examination Questions. 11 Distinguish clearly and fully between assignability and negotiability. Mention (a) a negotiable instrument, (^7) an assignable instrument that is not negotiable. 12 Prepare the following negotiable instruments, giving the name of the maker or drawer and the payee: (a) promissory note, (&) bill of exchange drawn in New York on a banking house in London, {c) check. 13 C pays a note that apparently bears his signature as maker. Later he finds that the signature was forged. May he recover the money paid? State the principal. 14 Give pro forma illustrations of the following indorsements of promis- sory notes and show the purpose and the effect of each indorsement : (o) in full, {b) conditional (c) restrictive, {d) protest waived, {e) qualified. 15 What is the legal rate of interest on ordinary loans of money in the State of New York? Are bankers empowered to take a higher rate on discounting ordinary paper? Under what conditions, if any, may a banker take whatever rate of interest is agreed on by the borrower ? What are the penalties for taking usurious interest? What is the general rule for computing interest on an account on which payments are made from time to time when no special stipulation has been expressed ? 2^9 :i i i Fit Accounting Problems and Solutions. Practical Accounting. Illinois Examination. May, 1906. Monday, May 7. i9o6, 9-30 a. m. to 12.30 p. m.. and 1.30 p. m. to 4.30 p. m. 75 credits to pass, out of a possible 100 credits. Each complete answer will receive 16 2-3 credits. Do not repeat questions on examination papers, but write answers only, designatmg the questions by number. The intelligence indicated by answers will be considered in marking the applicams. as well as the technical accuracy of such answers. (i) In connection with your general merchandise business, you are a managing partner on a joint account, where your one-half of mer- chandise cost was $15,000.00. Charges posted $150.00. Total Sales $8,000.00, and Joint Unsold Merchandise $13,500.00. Settlement charges were- Storage $60.00. Commission 5% on Sales. Prepare ledger account, and show journal entries closing the ac- count on your books, you giving your partner, Robert Bailey, your note for his one-half of net proceeds. Suppose your one-half first cost was $10,000.00. Charges were $9,000. Sales $4,500.00. Storage $20.00. Joint Property unsold $2,100.00. Commission 5%. . , • ^l Prepare ledger account, and show journal entries closing the ac- count on your books, charging Bailey with his share of the deficiency. (2) A branch office business was started the first of the year, the head office advancing $5,000 cash. During the first year merchan- dise was shipped to branch, invoiced at $75,000.00. An auditor checking up the business at the close of the year, hnds the following:— . r j ^^or Merchandise sales were $60,000.00, with selhng pnce of goods 20% advance on invoice. Proper vouchers were on file duly receipted for following payments :— Rebates and allowances on damaged goods $1,500.00 Salaries and other expenses 4,500.oo Freights 2,500.00 The books also showed :— Remittances to head office $35,000.00 Uncollected accounts 15,000.00 the balance of the sales having been realized in cash, less rebates and allowances as noted. , . .u vu The cash on hand and inventory of unsold goods, together with the foregoing records, properly account for everything. Prepare statement, such as an auditor would make in reporting to the head office, balancing the business of the branch house. (3) John Smith dies on October 15, iQOi, leaving a will in which he names certain legacies, which, in the aggregate, amount to $50,000.00. 240 I C. P. A. Examination Questions. The executors are then instructed (i) to use their best judgment in the disposition of such assets as may be necessary to liquidate all his liabilities; (2) to pay to his widow Mrs. Sarah Smith an allowance at the rate of $8,000.00 per annum from the date of his death to the date of the distribution of the residue of his estate; and (3) to distribute the residue of the estate after all claims and legacies have been met, as fol- lows: — 1-3 to his widow and 2-3 to certain trustees named in the will. After his death the executors drew up an inventory of the estate, which, upon being appraised, shows the following condition: — ASSETS. Real Estate $589,000.00 Corporation Stocks 320,000.00 Bonds with premium added 460,928.00 Bills Receivable 3,482.00 Land Contracts 37,500.00 Interest Accrued on Bonds, Bills Receivable and Land Contracts 7,890.00 Accounts Receivable 2,000.00 Cash 29,000.00 LIABILITIES. Mortgage on improved City Real Estate $ 50,000.00 Bills Payable 150,000.00 Accounts Payable 1,980.00 Funeral Expenses 1,000.00 Interest Accrued on Demand Notes 1,200.00 Smith had endorsed the note of Joseph Stevens for $15,000.00 and had discounted same with his bankers. Upon the note coming due, Joseph Stevens failed to meet same. The bank filed a claim against the estate of John Smith for the amount, which was duly paid by the executors. It is, however, believed that in course of time this note of Joseph Stevens can be realized upon. One year exactly after the death of John Smith, the executors distribute the residue of the estate, and close the books. The following transactions in addition to those enu- merated or suggested above, have taken place during the year. 75 Bonds Par $1,000.00 and inventoried at no were sold at 108 3-4. 300 Shares Par $100.00 and inventoried at 85 were sold at 90. 400 Shares Par $100.00 and inventoried at 90 were sold at an in- crease of 10% of their inventory valuation. The Real Estate which was encumbered by a mortgage of $50,000.00 was sold by consent of the Probate Court and of the widow for a sum of $35,000.00 in excess of the mortgage, the pur- chaser assuming the mortgage. The profits arise from the following sources: Dividends $15,000.00 Interest on Bonds 18,500.00 241 \' i'f.l "if \'m :S I : 4 Accounting Problems and Solutions. Interest on Bills Receivable and Land Con- tracts 2400.00 Net Rentals after paying Taxes, etc 9,000.00 The charges consist of the following items: Office Expenses $5,000.00 Interest on Mortgage and Bills Payable 4,750.00 Premium on Bonds written off 2.000.00 Executors' Fees allowed by G)urt 15,000.00 The accrued interest on bonds, bills receivable and land contracts at the close of the executors' term of office is found to amount to $6,100.00. Set up journal and cash book entries and ledger accounts, and prepare suitable summarized statement of executors' transactions for presentation to the beneficiaries. (4) A manufacturing company that had been in business for a num- ber of years, began operations the first of a certain year in an entirely new plant, built to last 20 years, the building of which was made neces- sary by wear and tear and obsolescence affecting the old plant. The new equipment cost $200,000.00, for which the company issued 10 ob- ligations of $20,000.00 each at 6%, maturing the first of each year fol- lowing the date of their occupancy of the new plant. The old plant has been disposed of at a scrap value of $10,000.00 when it was vacated, at which time the balance sheet of the company showed : ASSETS Plant $225,000.00 Less scrap value 10,000.00 $215,000.00 Other Assets 80,000.00 $295,000.00 LIABILITIES. Capital Stock $200,000.00 Surplus 50,000.00 Profit and Loss 25,000 00 Gross Sales for year $100,000.00 Less Operating Expenses 75,000.00 Floating Debt 20,000.00 $295,000.00 The new plant was at once added to the asset values at $200,000.00, and the company's liability on its obligations shown for the same amount Owing to competition and limited use of the products, the sales have been uniform for a number of years, and could not be expected to in- crease, but the new and improved machinery, with better methods of manu- 242 C.P. A. Examination Questions. facture, saves 10% in operating expenses (including therein 6% interest on the borrowed money) by their method of accounting. The books have shown a net earning of $25,000.00 per year as fol- lows: Gross Sales $100,000.00 Operating Expenses: Manufacturing Expenses Repairs " Selling General " 75,000.0a Taxes Insurance Ground Lease Rentals Net $25,ooo.oa At the close of the first year's operations of the new plant, the bal- ance sheet showed as follows: ASSETS Plant $4i5,ooo.oa Other Assets 112,500.00 $527,500.00 LIABILITIES Capital Stock $200,000.00 Surplus 75,000.00 Profit and Loss 32,500.00 Sales for year $100,000.00 Less Operating Expenses 67,500.00 Notes Payable 200,000.00 Floating Debt 20,000.00 $527,500.00 The balance sheet is submitted, and a dividend declared. Discuss all the foregoing, and illustrate your conclusions, and draw up statement showing what, in your opinion, is the true condition of the company. (5) Two printing and stationery houses decided to combine their businesses for the purpose of reducing expenses. An accountant is called in to examine the books of each company and to report upon the financial condition of each and also upon the past profits. Owing to the fact that corporation A has never separated its purchases as between its retail and its manufacturing department, he finds it im- possible to prepare a combined profit and loss account showing the gross profit of the retail departments and the manufacturing departments of each company. The following statement, however, exhibits a summary of their combined trading accounts: 243 Accounting Problems and Solutions. $372,000.00 Total Sales Cost of Material in Goods Sold $185,000.00 Manufacturing Labor 64,000.00 249,000.00 Gross Profit Less Total Expenses $123,000.00 93,000.00 Net Profit $30,000.00 The amalgamation is effected, and after carrying on the business for twelve months an inventory is taken and the books closed. It is found that instead of realizing a profit of $30,000.00, they have only mad.; a profit of $14,000. An analysis of the various accounts, made by their accountant showed the following summarized statement: — RETAIL DEPARTMENT. Total Sales $176,000.00 Less Cost of Merchandise 1 19,000.00 Gross Profits Retail Department. $57,000.00 MANUFACTURING DEPARTMENT. Total Sales $181,000.00 Less Cost of Material in Mdse $64,000.00 Manufacturing Labor 63,000.00 $127,000.00 II Gross Profits Manufacturing Dep't. Less Expenses $54,000.00 $111,00.00 97,000.00 $14,000.00 As a basis of comparison with the former year's results, the per- centages of corporation B in respect to their retail department and manu- facturing department, may be accepted as applying to the whole of that year's results of the combined companies. These percentages were as follows : — RETAIL DEPARTMENT. Sales 100.0% Cost of Merchandise '. 70.5% Gross Profit '39-5^° 100.0% MANUFACTURING DEPARTMENT. Sales , 100.0% Cost of Material in Merchandise 30.0% " Manufacturing Labor 355% 65.5% Gross Profit 34-5% 244 C, P. A. Examination Questions. From the above information work out by percentages and show the causes affecting the reduction in profits from $30,000 to $14,000. (6) On the 31st of December, 1905, the books of the A and B Co. showed the following Trial Balance before making closing entries: Inventory, Jan. ist, 1905 $125,000.00 Sales $1,280,658.00 Cash on hand and in Bank 75,120.00 Petty Cash Accoimt 27.00 Purchases 820,500.00 Returns 5,31500 Goods on Consignment with Euro- pean Agents at selling prices $17,000.00 Freight, Insurance and expenses on same 1,500.00 18,500.00 Salaries 12,600.00 Wages 135,418.00 Rent and Taxes 19,820.00 Factory Expenses 64,582.00 Accounts Receivable (Subject to 5% Discount at one month) 400,625.00 Accounts Payable (Subject to 2% Discount at one month) 85,200.00 Bills Payable 25,000.00 Furniture and Fixtures 26,000.00 Premiums paid on purchase of Lease (Lease acquired January ist, 1905, expires Dec. 31st, 1914) 29,500.00 Miscellaneous Expenses 27,825.00 Surplus as at Jan. ist, 1905 133,920.00 3,000 Shares in the "O. K." Company (at cost) 300,000.00 Capital Stock 500,000.00 Dividends on Investments 36,000.00 $2,060,805.00 $2,060,805.00 Prepare Profit and Loss Account and Balance Sheet after taking into consideration the following matters and making any adjustments in the accounts which you consider advisable: The inventory of merchandise on hand Dec. 31, 1905, amounts to $117,850.00. The amount of bills payable, $25,000.00, falls due March 31st, 1906, and was discounted Oct. ist, 1905, $625.00 being charged to miscellaneous expense for discount as at that date. The last dividend on the "O.K." company Stock was received in May, 1905, and was at the rate of 6% for the year ending April 30, 1905. 245 ll N 1 1' ■ •I Accounting Problems and Solutions. Theory of Accounts. Tuesday, May 8, 1906, 9.30 a. m., to 1.30 p. m. 75 credits necessary to pass, out of a possible 100 credits. Each complete answer will receive 10 credits. Do not repeat ques- tions on examination papers but write answers only, designating the questions by number. The intelligence indicated by answers will be considered in marking the applicants, as well as the technical accuracy of such answers. (i) Special Trustees are named in a will to administer ten separate trusts, the terms of which are that the beneficiaries named in each trust shall receive the income on certain specific amounts on a 4% basis. The trustees after making an appraisal of various securities left by the decedent, turn over to each trust certain securities which on a 4% basis will make the amount specified in the will. They open one set of books to take care of all transactions affecting the ten trusts. Prepare the opening entry or entries on the Journal, and describe the best form and rulings for keeping these trusts in one set of books. (2) Describe briefly a simple system of bookkeeping for either: — (a) A proprietor or lessee of a theatre, who receives all profits ac- cruing from the production of plays in such theatre after paying to the theatrical company a certain percentage of the gross receipts. (b) A village, town or city in respect to keeping accurate records of special assessments. (3) Discuss the term "Income and Disbursements" as used on An- nual Reports of Life Insurance companies furnished to various State insurance departments. What do Non-Ledger Liabilities and Non-Ledg- er Assets include in such reports? What dangers, if any, may be an- ticipated by a method of bookkeeping where certain liabilities and assets are not carried on the books of account? (4) Describe the various methods which you have met with for writing off the premium on bonds purchased, pointing out their weak- nesses or advantages. What is the most scientific method of dealing with premiums paid and upon what principle is it based? (5) Sketch forms of disbursement voucher and journal voucher. What method would you use to insure prompt return of vouchers sent out, and what is your method of filing all vouchers for ready reference? (6) Name the various methods of distributing "Factory Expense" or "Factory Burden," so as to apportion same to the cost of the article or articles manufactured, stating advantages of each in various kinds of business. (7) Explain how you would install for a large concern a system of book-keeping arranged so that only the proprietor or officers of the company, together with their auditor (a certified public accountant), shall be cognizant of its financial condition and annual profits or losses. (8) A Land Company or Association is incorporated and pur- chases fifty acres of land which it sub-divides into blocks and lots. It 246 C. P. A. Examination Questions. then negotiates the sale of first mortgage bonds on the whole prop- erty, from the proceeds of which it makes the streets, lays the sewers and side-walks and carries out other improvements, after which it places the lots on the market for sale. Wherein do these bonds differ from those secured by a plant? Describe the journal entries you would expect to make on the sale of one of these lots sold on a contract. The con- tract provides that when one-half of the purchase price has been paid, title will be given to the purchaser subject to a mortgage for the unpaid portion. What entries would you then make? How would you close the books at the close of each fiscal year? (9) Describe fully what procedure and methods you would adopt, if called upon to introduce and install an entirely new system of book- keeping (not cost accounting) into the office of a large manufacturing concern. (10) Draw up a form of "Check Register" to be used in conjunction with a complete Voucher System, it being intended that the Check Register shall take the place of the disbursement side of the Cash Book and shall also record the deposits and withdrawals in three different bank accounts. Discounts on goods purchased to be handled through the Voucher Journal. Commercial Law. Tuesday, May 8, 1906, 1.30 p. m. to 4.30 p. m. 75 credits are necessary to pass, out of a possible 100 credits. Each complete answer will receive 10 credits. Do not repeat ques- tions on examination papers, but write answq-s only, designating the questions by number. The intelligence indicated by answers will be con- sidered in marking the applicants, as well as the technical accuracy of such answers. (i) What are the advantages of incorporating a business^ For what purposes may corporations be formed in Illinois ? Name exceptions if any. ' (2) Must each share be paid for in full by each subscriber to an Illmois Corporation before a certificate of stock may be issued to him? May capital stock be paid for in property? (3) Stock certificates issued to the original subscriber bearing the printed words "Fully paid and non-assessable," when in fact it was only partly paid for; subsequently it is sold and assigned to a purchaser without notice of the fact that it is not paid for in full. What remedy has a creditor of the corporation against the original subscriber and against the transferee? (4) Has the holder of a single share of stock the right to inspec- tion of the books? If so, when, where and under what circumstances? (5) How should an agent execute negotiable paper in order that it might be binding on the principal and not upon himself? 247 I y Accounting Problems and Solutions. (6) When is an acceptance by mail or telegraph of an offer com- plete? When can an offer be withdrawn without liability? (7) When goods are ordered of a New York Corporation by a Chicago business house, whose agent is the carrier? Who can bring suit if the goods are lost in transit? (8) The date of maturity of a note is changed by the payee with the consent of the drawer. How does it affect the surety on the note, if the alteration makes the note due at an earlier date? At a later date? (9) A shoemaker sells out his business to a corporation and agrees not to go in business in the State of Illinois for a period of 25 years. Ten years later he establishes himself again in business in Illinois. Has the corporation a right to recover in an action for damages for breach of his contract? (10) What is the Hability of a bank in reference to negotiable paper left with it for collection, which it is necessary to send to another city for collection? ^___ Auditing. Wednesday, May 9, 1906, 9.30 a. m. to 12.30 p. m. 75 credits necessary to pass out, out of a possible 100 credits. Each complete answer will receive 10 credits. Do not repeat ques- tions on examination papers, but write answers only, designating the questions by number. The intelligence indicated by answers will be con- sidered in marking the applicants, as well as the technical accuracy of such answers. (i) You are called upon to audit the books of a "Holding Com- pany," owning 90 per cent, of the stocks of six large manufacturing companies scattered over the United States. From the books of the "Holding Company" you are requested to prepare a Certified Balance Sheet and Profit and Loss Account, it being stated that it is not to be used for publication, but will be mailed to one of the shareholders who appears to be disgruntled. Balance Sheets and Profit and Loss Accounts of the subsidiary companies signed by their respective Secre- taries, are produced for your inspection but you are refused access to the actual books of account of these companies. Explain fully what your course of action would be in this matter and your reasons therefor. (2) In an audit stipulating for the examination of all vouchers of every description, what would be proper vouchers for the following: purchases, returned purchases, sales, returned sales, cash receipts, cash payments, journal entries? (3) You are called upon to examine the books of a Life Insur- ance Company. Explain fully how you will verify the fact that all securities carried on the books of account are duly accounted for, and your method of carrying out such verification. 248 C. P. A. Examination Questions. (4) You are called upon to audit the books of account of the executors and trustees of an estate. The executors completed their duties 18 months after the death of decedent. Explain the essential features of an audit of this character. (5) You are called upon to make a balance sheet audit of a National Bank with a Capital Stock of $1,000,000.00 and deposits of $10,000,000.00. Explain fully how you will verify the cash balances. (6) A Construction Company is carrying out work on a number of contracts. At the close of its fiscal year, these contracts are in all stages of completion, from those which are just begun to those which are almost finished. How should you compute their value as an asset in the Balance Sheet? (7) What step would you take to satisfy yourself that the cash receipts of a business for a year are as stated on the books? (8) In determining the result of the operations of a company whose business requires the use of a large number of tools and implements, what general rule would you consider? (9) In presenting a balance sheet, what items are matters of fact and what items are opinions, and taken as a whole, are you establishing a fact or an opinion? (10) Can, or can not, a going concern, employing a salaried manager and superintendents, charge any part of their salaries to cost of improve- ments or extensions that may be added to the plant at intervals? In either view, why? 249 If If Accounting Problems and Solutions. Practical Accounting. Pennsylvania Elxamination, May 21-23, 1906. May 21, 1906, 9 A. M. to 5 P. M. 1. A printing and publishing company has the following depart- ments : — (i) Bindery and G)mposing Room (2) Store (3) Subscription Sales Department (4) Periodical Department (5) General Office The system of accounts under which the business is operated does not classify and arrange the various parts of the business and the ac- counts relating to each in such a way as to render possible an easy grasp of the general situation. The difference between the assets and liabilities and the final net profit for the year are shown, but the various consti- tuent elements entering into these final results are by no means easily traced. The personnel of the General Office consists of general officers, book- keepers and clerks. This office is responsible for the general conduct of the business, and for the maintenance of the buildings. It also handles and conducts the selling end of the business, negotiates loans and pays taxes. The Bindery Department is conducted as a manufacturing business. It does work for outside customers, and for the Store Department. It purchases its own materials, other than white paper, pays its own wages, maintains its own equipment, and dehvers its own goods. The Store buys white paper for the Bindery, and also buys books from the Bindery and from other publishers. It sells paper and books to other departments, and books to customers. It maintains a selling and advertising organization and a shipping and delivery department. The Subscription Sales Department conducts a subscription sales busi- ness, purchasing books from the store and from outside publishers em- ploying a force of salesmen and placing advertising in various periodicals, also sending out circulars. The Periodical Department publishes and sells two magazines. This department receives subscriptions and advertising, purchases manu- script, maintains an editorial department, advertises the magazines, and defrays the cost of paper, printing, and binding. In all departments there are certain incidental expenses which are not properly chargeable to any one department. Devise a system of accounts for this business, assigning to each de- partment the debits and credits which can properly be traced to it, carry- ing the result thus arrived at into a general profit and loss account. De- scribe and define the use of each account. Prepare a pro-forma balance sheet showing the accounts that you would carry for the assets and liabiHties of such a business, also a pro- 250 C. P. A. Examination Questions. forma trading account for each department, and a pro-forma profit and loss account. Show the accounts and the arrangement thereof omitting figures. 2. The Assets and Liabilities of the Corry CodX G>mpany, January i, 1905, as disclosed in its Ledger at the Main Office, were as follows : — ASSETS. Accounts Receivable $271,500.00 Cash 16,500.00 Mine Account 19,640.00 Machinery 29,610.00 $337,250.00 LIABILITIES. Accounts Payable $147,300.00 Capital 100,000.00 Surplus 89,950.00 $337,250.00 The Mine Books disclosed assets January ist, 1905, as follows: — Cash $1,250.00 Store Supplies 28,900.00 Coal 14,800.00 Wages paid but not earned 4,300.00 $49,250.00 During the year 1905 the transactions of the Company were, as follows : — Coal sold $297,000.00 Store supplies bought on credit 163,000.00 Store Supplies sold for Cash 179,000.00 Store Supplies sold to Wage earners on credit 15,105.00 Wages earned during year paid in cash. . . 116,700.00 Wages earned during year not paid 24,210.00 Cash received on account of Accounts Re- ceivable 434,000.00 Cash paid on account of Accounts Payable 193,500.00 The Mine Books, at the close of the year disclosed Assets, as follows : — Cash $10,410.00 Store Supplies 48,700.00 Coal 16,400.00 $75,510.00 Less Wages due to Men 4,805.00 $70,705.00 These Assets amounting to $70,705.00 were carried in the books of the Main Office at a valuation of $53,410.20. 251 B.) IV, I ill ■* \ i is' "M Accounting Problems and Solutions. Submit balance sheet as of Jan. i, 1906 from the Main Office Ledger; also statement giving the true condition of each Ledger Account assum- ing the Main Ledger Accounts to have been properly revised. 3. A. B. and C. form a Co-partnership. A. contributes $275,000.00 and is to receive 25% of profits. B. " $150,000.00 " " " " 12^% " " C " $575,000.00 " " " " 62^% " " $1,000,000.00 The profits for the first year amount to $300,000.00. A. withdraws $200,000.00 B. ** 50,000.00 C. " 162,500.00 Desiring to embark in a new business A. purchases all but 1-6 of C's interest in the profits for the ensuing year for $370,000, and thereafter sells to B. all but 1-3 of his interest i.i the future profits for $450,000, the amounts thus paid for the interests sold being added to the capital already contributed. Upon the assumption that the balance due to C. on Capital Account increased by the amount received by him from A. equals 1-6 of the amount of the Capital of a new firm, what additional amounts must be contributed by A. and B. to warrant their pro rata of profit of 1-3 and J4 respectively and what would have been the condition of the account of A. B. and C. respectively if the profits for the year amounted to $700,000, also what would it have been had the interest of each in the profits remained on the basis of their interest as stated for the first year to wit: 25%, 125^% and 62j^% assuming interest @ 6% is allowed each on the amount of Capital invested ? 4. The Maryland Street Railway Company wiih an authorized Capital Stock of $1,000,000 consisting of 5,000 shares each of Preferred and Com- mon Stock at the par value of $100 had on January ist, 1905, assets and liabilities as follows: — ASSETS. Real Estate and Building $200,000.00 Power Plant, Machinery, &c 250,000.00 Aerial Construction 200,000.00 Surface Construction 200,000.00 Underground Construction 150,000.00 Rolling Stock 300,000.00 Accounts Receivable 10,000.00 Cash 5,000.00 $1,315,000.00 UABILITIES. Preferred Stock $450,000.00 Common Stock 400,000.00 First Mortgage Bond 5% 350,000.00 Accounts Payable 5,000.00 Surplus 110,000.00 $1,315,000.00 252 C. p. A. Examination Questions. The Deposit Electric Company, with an authorized Capital Stock of $500,000 had on the same day, assets and Habilities as follows :— ASSETS. Real Estate $300,000.00 Power Plant, Machinery 150,000.00 Aerial Construction 125,000.00 Underground Construction 100,000.00 Sundry Assets 15,000.00 Profit & Loss 10,000.00 $700,000.00 LIABILITIES. Capital Stock - $500,000.00 Mortgage 6% 100,000.00 Accounts Payable 100,000.00 $700,000.00 The Maryland Street Kailway Company purchased securities of the Deposit Electric Company in quantities and at prices as follows:— $400,000 of the Capital Stock @ $125 payable in Cash. $50,000 of the Capital Stock @ $130 payable with $30,000 of the pre- ferred stock of the Maryland Street Railway Company @ $150 and cash to balance. $100,000 of the Bonds @ $115 payable in the unissued Common Stock of the Maryland Street Railway Company @ $93 and cash to balance. $10,000 of the Cash payable for the Stock purchased to be passed to the credit of the profit & loss of the Deposit Electric Co. by the Vendors to cancel the charge of like amount to said ac- count. To provide funds to meet the above obligations and also to retire its 5% Mortgage Bonds @ $105. the Maryland Street Railway Company is- sued $1,000,000. of 4% Bonds and sold the entire amount there for Cash at 95%. Assuming that the dividend of the Deposit Electric Company declared during the year 1905 amounted to $25,000. and the profit of the Mary- land Street Railway Company from operating, exclusive of interest on its bonded debt amounted to $100,000. to what extent has the Profit & Loss of the Maryland Street Railway Company been affected, during the year, by reason of its acquisition of the securities of the Deposit Electric Company and of the redemption of its own 5% Bonds. Show also the condition of accounts of the Maryland Street Railway Company at the end of the year. S. ^ The Estate of John Smith, deceased, consists of Securities etc.^ appraised as follows: — APPRAISED VALUE. $100,000 Wabash R. R. 5% Bonds $125,000.00 $200,000 Rio Grand Rwy. Co. 4% Bonds 230,000.00 $200,000 Fort Wayne R. R. 5% Bonds 275,000.00 253 h iff Accounting Problems and Solutions. $400,000 Pittsburgh Traction Co. 3% Bonds 400,000.00 $100,000 Canton Water Co. 3}^% Bonds 100,000.00 Accounts Receivable 375,000.00 Cash 50,000.00 $1,555.00000 also Real Estate subject to mortgage liens of $100,000 @ 5%. The will provides for legacies amounting to $100,000 payable to sundry parties, and directs that Securities be set aside to pay out of the Income derived therefrom an annuity of $10,000 to the Widow to whom shall also be paid one-third of the net income from the Real Estate ; and the Income from Personal Property is made payable one- fourth to Maggie Jones, one-third to Sarah Peters and the balance to James Smith. The residue of the Estate, real and personal, is payable to the said James Smith at the death of the Widow and of Maggie Jones and Sarah Peters. Five years from the death of the Decedent, the Executors Accounts were as follows: — Securities set aside to pay annuity to Widow: — $200,000 Fort Wayne R. R. 5% Bonds Interest received $35,000.00 Interest in Default 15,000.00 RECEIPTS. Accounts Receivable, not appraised in Inventory $17,000.00 Accounts Receivable 60% of value 60,000.00 Accounts Receivable on account 175,000.00 Interest on Securities 177,500.00 Rental of Real Estate 127,000.00 PAYMENTS. Repairs, Taxes, etc. on Real Estate $22,0000.00 Betterments to Real Estate 16,000.00 Decedent's Debts 75,000.00 Widow, (on account of Annuity) 35,000.00 Widow, (on account of Real Estate Income), 6,000.00 Maggie Jones 15,000.00 Sarah Peters 18,000.00 James Smith (on account of Personal property Income) 20,000.00 James Smith (on account of Real Estate Income) 10,000.00 Executors (on account Commissions @ 5%) on Prin- cipal Account 25,000.00 Expenses of Administration 3,000.00 Incumbrances on Real Estate and $23,000 Interest 123,000.00 Prepare Orphans' Court Account with distribution account attached. Theory of Accounts. May 22, 1906, 2 P. M. to 5 P. M. I. Describe a perpetual inventory, how used — its advantages and dis- advantages, if any. 254 C, p. A. Examination Questions. 2. Given a plant employing: 25 yard laborers at $1.15 per day. 70 mechanics at $2.50 to $3.25 per day. 40 helpers in machine shop at $1.50 per day. 30 moulders at $2.75 to $4.00 per day. 10 helpers and 20 laborers in foundry at $1.50 and $1.25 per day. 25 pattern makers at $3.00 to $4.00 per day. 10 helpers in pattern shop at $1.50 per day. 20 foremen and under bosses in all three departments Devise a time keeping system for these various classes of labor and give your reasons in full for the action you take. 3. How would you adjust losses where an inventory and full record of the busmess has not been kept? Describe the practical application of the co-insurance clause. 4. What are the three leading types of corporation consoUdation? Discuss m detail the advantages and disadvantages of each form from the standpoint of the corporation. 5. State fully the value of accounts under the following conditions: First,— When correctly kept. Second, — When incorrectly kept. Third,— As a basis of liquidation. Fourth,— As a going concern. Fifth,— For the purpose of sale of business, giving fully your views as to both Capital and Revenue Accounts, cover- ing above conditions including any change in conditions that you may suggest. ' 6. What is the basis of accounts— (a) In a corporation (b) In a partnership covering in your answer a condition wherein the true basis may be faulty. Describe a Cost System inaugurated by yourself, or with which 7. you are famihar, covering details, and give your views as to its correct- ness or otherwise, and its bearing upon the general books. 8. State the difference, if any, between Department Store accounts and other Mercantile businesses. What is the aim of Department Store accounting? 9. What is the effect on a business of the following accounts : Sinking Fund. Depreciation. Reserve for Depreciation. 10. Give the names and purposes of the general books of a trust company doing a banking business, together with such auxiliary books generally used and any suggestions as to improvement or addition thereto. 255 ftt Accounting Problems and Solutions. Auditing. May 22, 1906, 9 A. M. to i P. M. 1. In making an audit of the accounts of French and Allen, stock brokers, how would you verify, — (a) The stocks and bonds owned or held as collateral for cus- tomers* accounts? In your reply state clearly each step in the process. (b) The stocks and registered bonds in process of transfer? (c) In preparing their Balance Sheet how would you determine the customers' accounts as to whether they should be classed as good, doubtful, or bad? Write a report from one hundred to two hundred words upon such an examination. 2. Describe in detail your method of conducting an audit of, (a) a manufacturing corporation, (b) a commission house. 3. What means should an auditor adopt to ascertain that all remit- tances made by regular customers and receipts from cash sales have been properly entered on the Cash Book? 4. In the case of an audit of the books of a corporation where the volume of transactions is so large that a detailed checking of all post- ings and footings is out of the question, what course should be pursued in the examination in order to insure the correctness of the balance sheet? 5. The machinery used by a firm has been purchased on the instalment plan with monthly payments, and under the stipulation that the title shall pass only when the last payment has been made. At the close of the fiscal year there are yet several payments to be made. The firm also pays a royalty on the output of some of the machines secured on this plan. How should the auditor in his annual statement deal with the machinery, the instalments paid and the royalty? 6. If in examining a manufacturing corporation using a Cost Sys- tem in their shops, you find a large difference between the general books and the cost in the Cost Books, in what accounts would you probably be able to trace the difference? 7. What constitutes a thorough examination of a Bank? Write a report covering such an examination. 8. Is there any difference between a thorough audit and an exam- ination? If so, state fully wherein they differ. 9. Write a report of your audit of a corporation in which the yearly results of your examination show a marked difference from previous years. 10. Give a statement as to the duties of an auditor in relation to the bookkeeper and to his clienLs, and if auditing a corporation, as to the stockholders of the corporation, covering confidences, and personal contact. 256 C. P. A. Examination Questions, Commercial Law. May 23, 1906, 9 A. M. to i P. M. I. Wynne wants to become a special partner under the Pennsylvania Act of 1836. What precautions must he observe to obtain the protection of that act? What is the difference between the Act of 1836 and the Partnership Association Act of 1874? 2. Is the following note negotiable or assignable: "We promise to pay to Peter Burns $60.00 one month after demand, and empower any at- torney to appear for and confess judgn.ent against us for this amount, with 5% commissions for collections. We waive the benefit of all ex- emption laws and give Peter Burns the option of demanding one share of Penna. R. R. Stock instead of $60.00 as aforesaid. In witness whereof, we hereunto set our hands and seals. (Signed) F. X. Williams, J. P. Horton." 3. How are the directors and the president of a Penn'a Corporation, which was formed under the General Corporation Act of 1874, chosen? What is meant by stock proxy? What is meant by the authorized capital? Need anything be paid into the treasury of the company before it starts? If the company fails, to what extent are stockholders liable for its unpaid debts ? 4. Give a definition of " Agency." State in what manner authority may be conferred. 5. State some of the powers, duties, and liabilities of the officers and employees of a bank, including the Board of Directors. 6. (a) What are the powers in general of a Building & Loan As- sociation ? (b) What are the rights of a withdrawing stockholder? 7. How is a corporation created? Give some of the powers, rights and duties, and the general rule as to rights of members. 8. Give Intestate Law of this state. 9. What is a Beneficial Society, and wherein does it differ from an Insurance Company? 10. What action would you take if called upon to open the books of the Smith & Jones Company, which has been organized under the laws of Pennsylvania with an authorized capital of $50,000. The minute book shows that the preliminary requirements have all been met The minute book also shows that the corporation has taken over the going business of William Jones, one of the incorporators, receiving all the assets and as- suming all the liabilities, issuing in full payment thereof full paid non- assessable capital stock of the Smith & Jones Company in the sum of $49,000. Show fully the several steps you would take and the reason therefor. 257 tiii #^ ■ 1 m Mi: I' ■I f. " I' i 'f j Accounting Problems and Solutions. . Theory of Accounts. (New York Examination, June, 1906.) Answer lo questions but no more. Answers in excess of the number required mil not be considered. Do not repeat questions but write an- swers only designating by number as in question paper. Check ( /) the number of each one of the questions you have answered. Each com- plete answer will receive lo credits. Papers entitled to 75 or more credits will be accepted. June 19, 1906— 9.15 a. m. to 12.15 P- m., only. 1 How should money received on account of stock subscriptions and forfeited by nonpayment of instalments as they mature, be treated on the books of the corporation? 2 A is indebted to B on open account to the limit of his credit. He needs further accommodation to the extent of $2,500 and gives as security a draft at three months on C for $5,000, which is $1,000 more than he owes. To adjust this difference C draws at four months on A for $1,000. Assimiing that the drafts are accepted by the respective parties, state what should be the proper entries on the books of A. Show books of original entry and ledger. 3 State as concisely as possible a proper system of factory cost accounts. 4 Mention the methods of bookkeeping in general use. What books are ordinarily kept in each case? How is the profit or loss ascertained by the different systems? 5 Explain the difference between a trading account and a profit and loss account. 6 Devise a system of accounts for an executor. What accounts should he necessarily keep? 7 To what uses should a journal be put? S Distinguish between Revenue & Expenditure Account and Receipts & Disbursements Account. State fully the difference. 9 You are asked to test the correctness of a set of books kept by single entry by applying the double entry system to the entries made. What would you do, without writing a new set of books? Take as a basis the following ledger accounts: Dr. John Doe Cr. 1905 1905 Jan. 2 Balance $1,000 Feb. 2 Cash $600 " 20 Mdse 500 " Discount 12 " Returns 400 Dr. Richard Roe Cr. 190S 1905 Jan. 25 Freight charges $200 Jan. 20 Mdse $2,000 Feb. 2 Acceptance a, 500 ** Mdse returned 300 258 C. P. A. Examination Questions. 10 List the principal books of account of a mercantile concern with which you are acquainted and describe briefly the use of each. 11 Describe a system of accounts suitable for a firm of contractors that does work on contract for a fixed sum and also on cost and per- centage. 12 A grain dealer charges his customers 15 cts. apiece for sacks that cost him 10 cts. He agrees to receive back any sacks returned in good condition at 12 cts. each, calculating that they would be worth 7j4 cts. each. How should these transactions be treated on the dealer's books ? 13 Distinguish between sinking fund and depreciation fund. Show the reason for the creation of each fund and state how each is placed on the books of a company. 14 A and B are friends. A needs funds. B knows C who may be in- duced to accommodate A under certain conditions. For an introduction by B to C, A pays $100. C discounts for A a note for $10,000 due in 6 months and turns over to him $9,000. Frame journal entries covering these transactions. Show how these transactions should appear in a cash book. 15 A railway company sells on October i, 1900, an issue of 5% 20 year bonds dated September i, 1900, at no cts. flat. How should the premium received be treated on the books of the company? Practical Accounting. Answer questions i and 2 and two of the others but no more. Answers in excess of the number required will not be considered. Do not repeat questions but write answers only, designating by number as in question paper. Check (00Q $50,000 $50,000 259 it ?'1 itf I'l M ' mi Accounting Problems and Solutions. At the end of 6 months an accounting is had between the corporation and A. Of the outstanding accounts $4,500 has been collected and applied toward liquidating the indebtedness. It is then agreed that the company shall take over the remaining uncollected accounts and assume the re- maining liability on account of creditors of A. Close the books of A in accordance with agreement of sale and sub- sequent arrangement. Open the books of the corporation. Show the entries in the books of the company as to its transactions for account of A at the time of forming the corporation. 2 The following is the trial balance of the Arlington Manufacturing Company at the close of business December 31, 1904, the end of the second fiscal year of the company's operations: Cash $25,324 Land 100,000 Buildings 200,000 Machinery 300,000 Tools and implements 40430 Horses, wagons and harness 30,000 Office furniture 5,201 Bills receivable 25,812 Accounts receivable 163,374 Investments 20,000 Salesmen's accounts, advances on salaries 1,960 Organization exp. $15,000— less 2% 14,700 Goodwill 200,000 Bills payable $42,000 Accounts payable 98,511 Special accounts — officers & clerks 15,363 JReserve for bad debts — less accounts written off 112 ** "depreciation — buildings 2^% 5,000 *• '* " machinery 6% 18,000 ** " " horses, wagons, etc. 10% 3,000 Capital stock 10,000 shares @ $100 1,000,000 Sales less returns and allowances 1,240,600 Rent of part of business premises 500 Inventory Dec. 31, 1903 104,621 Purchases including furniture & cartage 395,662 Labor — factory payrolls 600,400 Salaries of officers, clerical force 75,i20 Salaries of salesmen 60,440 Advertising 50,300 Taxes 4,020 Insurance 2,600 Interest & Discount 6,500 Expenses, stable, office, legal & unclassified 29,750 C. P. A. Examination Questions. Maintenance — repairs, buildings, machinery, horses & wagons 26,942 Profit & loss 1903 surplus 60,070 jjoTE. $2,483,156 $2,483,156 Inventory Dec. 31, 1904 _ $270,560 Factory pay rolls accrued but not paid 5,750 Unexpired insurance Q12 From the foregoing trial balance and notations, prepare a Trading Ac- count and a Profit & Loss Account, writing off 2% of organization expense. After stating the net profits for the current year, make the same reserves for depreciation as were made at the end of the first or preceding year. Show as a final balance at credit of Profit & Loss the surplus available for dividends. Also prepare a balance sheet as at December 31, 1904. 3 and 4. C, D and E are partners sharing profits in accordance with capital investments. At the end of the fiscal year, after all nominal ac- counts are closed, the books show the following: C^^^ $20,051 P^^"^ ^ 60422 Inventory of merchandise 41,300 Bills receivable 18,028 Book accounts reeivable 70,402 C drawings ,.... 8,400 ^ " 6,000 E " 4,800 Bills payable ^5 211 C capital 100,000 D " ^ 50,000 '^ 50,000 Profit & Loss, undivided profits 24,192 $229,403 $229,403 The partners thereupon incorporate a company with an authorized capi- tal of $250,000. The company so formed purchase the partnership assets and goodwill, 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 ven- dors 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 work- ing 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 m the profits, the partners are charged with the interest thereon in the following amounts, viz. : C $231, D $165 and E $132. 261 i . 1' I 1. i Accounting Problems and Solutions. Frame the necessary entries to close the partnership books and show the amount of cash received by each partner. Referring to question i, 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 operation. 5 December i, 1905, 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 certificate for which the consignee transmits to the consignor together with an account sales for $3,000 dated March i, 1906, and a final account sales for $2,000 dated April i, 1906. 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. 6 Blackman & Co. of New York agree with Whittaker & Co. to ship on joint account a car load of goods on consignment to Seattle. The invoice price of the goods is $4,000 less 5%. Blackman & Co. pay the hauling, insurance and freight charges amounting to $200 and give to Whittaker & Co., March I, 1905, a sight draft on the consignees for $2,000 as part payment for the goods. On May i, 1905, Blackman & Co. receive an account sales from the consignees and their check for $6,000 as the net proceeds of the consignment. They then pay Whittaker & Co. the balance due them. Interest is calculated at 6%. Prepare joint consignment account and the account to be rendered by Blackman & Co. to Whittaker & Co. Commercial Law. Answer 10 questions but no more. Answers in excess of the num- her required zvill not be considered. Do not repeat questions but write answers only, designating by number as in question paper. Check (V) the number of each one of the questions you have answered. Each com- plete answer will receive 10 credits. Papers entitled to 75 or more credits will be accepted. June 20, 1906— 1. 15 to 4.15 p. m. only. 1 What is an executory contract? What is an executed contract? May a contract be executed on one side and executory on the other ? Ex- plain. 2 Is a note or a check invalidated if (i) dated on a legal holiday, (2) dated on Sunday? Explain fully. 3 Define agency. What classes of agents are there? How should authority be conferred on an agent? Has an agent power to delegate his authority? 4 How may agency, duly created, terminate? 262 C. P. A. Examination Questions. 5 What redress has a principal in case his agent pledges (i) the goods of the principal, (2) negotiable paper of the principal? 6 What is a warranty? What is the rule as to damages for breach of warranty? 7 When does a deed conveying realty take effect? What is the legal presumption in the case ? What is meant by placing a deed in escrow ? 8 What are the elements that constitute a warranty deed? 9 What is a fixture, in the legal acceptation of the term, in each of the following cases: (i) as between buyer and seller, (2) as between landlord and tenant? 10 What is an accommodation note and what are the rights and the obligations of parties thereto? What formalities attend the entering into a contract on the part of a corporation? How does a corporation execute a contract? 12 What is the rule for calculating interest on a note on which par- tial payments have been made from time to time? 13 What is the statute of limitations and on what policy is it founded ? When would the statute begin to run against the holder of a demand note and why? How long would it run? What would be the effect of a par- tial payment on the note at any time during the running of the statute? 14 What is meant by stoppage in transit? Explain the proceedings necessary for such stoppage and the circumstances under which they mav be exercised. 15 What is meant by arbitration and award? Give the general rules governing the proceedings. Under what circumstances is the remedy usually resorted to? Auditing. Answer 10 questions but no more. Answers in excess of the number required will not he considered. Do not repeat questions hut write an- swers only, designating by number as in question paper. Check ( /) the number of each one of the questions you have answered. Each com- plete answer will receive 10 credits. Papers entitled to 75 or more credits will he accepted. June 20, 1906.— 9.15 a. m. to 12.15 P- m., only. 1 In making an audit of the accounts of a corporation for the first year of its existence what method of procedure would you pursue and what records would you want to examine in addition to the books of account ? 2 A mercantile concern carries among its assets a number of accept- ances, some of which are past due. How should an auditor proceed to ascertain the correctness of the account? 3 An employee holding the dual position of cashier and bookkeeper is suspected of dishonesty. Some one has established the agreement be- 263 11 1 " i W ^ f . J t • Y 11 V> SI fl'\ .| I 11 Accounting Problems and Solutions. tween his cash book and bank pass book. What should an auditor do if subsequently called in to ascertain the facts? 4 In going over the affairs of a banking institution with branches, state how the following items should be verified: (i) cash at home of- fice and branches, (2) loans secured and unsecured, (3) securities owned. What, if anything, should be done concerning individual deposits accounts ? 5 A construction company has at the close of its fiscal period a num- ber of uncompleted contracts in various stages of progress. How should they be carried into the balance sheet? Mention two other ways in which they might appear in the balance sheet. 6 A company is organized with a capital of $50,000. The stock is is- sued for a " going concern " whose accounts showed it to have a net worth of $45,000. Nothing was said about goodwill when the contracts were made between the owners and the new company. How would you treat the $5,000 difference? 7 Would you regard checks, drawn payable to order and cashed by the bank, as sufficient vouchers for the payments of a mercantile concern? Give a reason for your answer. 8 Is an auditor justified in certifying to a balance sheet in case the books of account are not in balance? Give reasons. 9 In the books of an insurance company are found numerous entries relating to the purchase and sale of stocks and bonds. What proof should the auditor require as to the correctness of these accounts? 10 What is a bank pass book ? How far should one rely on the entries contained therein? 11 Give in substance the rules lately laid down by the State Banking Department regarding accrued interest as related to statements filed with the department by banks. 12 In auditing the accounts of a fiduciary, chargeable with income arising from rents, interest, securities and cash in bank, how should the auditor satisfy himself that a full return was shown by the books sub- mitted ? 13 The statement submitted by the treasurer of a corporation shows receipts of money greatly in excess of disbursements, leaving a balance in hand of more than enough to pay to stockholders a dividend of 6%. The directors declare such dividend pursuant to the statement submitted without asking for any other or further information. Was the act of the directors a prudent one under the circumstances? Give reasons for your answer. 14 Describe your node of procedure in connection with some audit on which you have been engaged. Relate the nature of the business, answer- ing in sufficient detail to enable the examiners to form an opinion regard- ing your knowledge. J64 C. p. A. Examination Questions, 15 How would you proceed to ascertain the net sales, purchases, ex- penses and net profits of a business for a given period when the ledgers, sales books, purchase books and supporting documents have been destroyed by fire, and the only records available are the cash book, bank pass book and book of monthly balances, the latter containing all the ledger balances and annual balance sheets? [It is to be understood that no unusual trans- actions had taken place.] :^5 ■ Il'l r. J!'. r I Accounting Problems and Solutions. Practical Accounting. (Michigan Examination, July, 1906.) Friday, July 27, 1906, from 1 130 p. m. to 6 '.30 p. m. 75 credits necessary to pass, out of a possible 100 credits. Each complete answer will receive 16 2-3 credits. Do not repeat ques- tions on examination papers hut zvrite answers only, designating the ques- tions by number. The intelligence indicated by answers will be considered in marking the applicants, as well as the technical accuracy of such an- swers. I. A corporation is organized under the laws of the State of Michi- gan, with Capital Stock $250,000.00, of which $100,000.00 is preferred and $150,000.00 is common stock, shares $100.00 each. The purchasers of pre- ferred stock at par are to receive an equal amount of common stock free, all the preferred stock is subscribed and paid for, leaving $50,000.00 of common stock imsubscribed. It I3 found that the remaining common stock cannot be sold for sufficient cash for requirements and the holders of preferred stock donate to the Treasury $50,000.00 of their com- mon stock. The common stock is sold at 50c on the dollar. Provide journal entries covering the above. 2. A gas company shows its first year of business : Manufacturing Labor... .$ Boiler Fuel Generator Fuel Oil Purifiers Repairs Works Expense Works Water Insurance Taxes Distribution Labor and Ma- terial Office Expense Stable Expense Repairs Mains Repairs Meters Repairs Services Street Lighting Advertising Maintenance Arc Lainps . . Licenses Discounts General Expenses the following trial balance at the end of 5,400.00 3,200.00 5,400.00 126,000.00 3,200.00 2,600.00 3,900.00 1,500.00 300.00 4,800.00 12,000.00 13,500.00 4,000.00 1,800.00 600.00 700.00 300.00 300.00 1,500.00 1,000.00 34,000.00 5,000.00 266 Capital Stock $ 500,000.00 Bonds 500,000.00 Accounts Payable. 48,000.00 Gas Accounts 342,600.00 C. P. A. Examination Questions. Sundry Debtors Gas 40,000.00 Sundry Debtors Mdse 10,000.00 Cash 29,000.00 Bond Interest 25,000.00 Plant 1,055,600.00 $1,390,600.00 $1,390,600.00 The inventory of Manufacturing Material is $20,000.00 The inventory of Distribution Material is 4,000.00 No other inventories of any description are carried. The amount of gas manufactured during the year was 300,000,000 cubic feet. Amount sold, 270,000,000 cubic feet. Unaccounted for, 30,000,000 cubic feet. Give: ist. The Manufacturing Cost of Gas sold. 2d. The Distribu- tion Cost of Gas Sold. 3ci. Prepare Statement of Operations of the Company and Balance Sheet of Assets and Liabilities. 3. Following is a list of the accounts appearing on the Tvial Bal- ance of a manufacturing company which deals in finished merchandise purchased as well as its own products. From this list, and without using figures, draw up plans of Financial Statements (Balance Sheet, Manufacturing Account, Profit and Loss Account, etc.) in the form which you think most suitable: Accounts Payable. Salaries, Management. Capital Stock. Bills Receivable. Cash. Salaries, Office and Store. Real Estate. Fuel. Insurance (Plant.) Light. Freight (on Mdse. purchased.) Machinery and Tools. Buildings. Sales (own product.) Inventory, own products. Inventory, Raw Materials. Inventory, partly Manufactured Goods. Inventory, Merchandise purchased. Sales (Merchandise purchased.) Inventory, Repair Supplies. Undivided Profits (end of last year.) Purchases ( Merchandise. ) Rent, Factory. 267 it " * ll Accounting Problems and Solutions. Rent, Store and Office. Printing and Stationery. Accounts Receivable. Advertising. Purchases (Raw Materials.) Machinery Repairs. Productive Labor (Factory.) Labor (Warehouse.) Office Furniture. Reserve for Bad and Doubtful Accounts. Reserve for Depreciation. Insurance (Merchandise.) Bad and Doubtful Acounts. Travellers* Expenses and Salaries. Management Salary, Factory. Management Salary, Office. Discounts allowed. Interest Payable. Depreciation. Sundry Factory Expenses. Postage. Subscription and Donations. Discounts Received. Rents (Receivable.) Insurance unexpired, Plant. Insurance unexpired, Merchandise. 4. A manufacturer is desirous of securing a partner and furnishes a statement covering five years' operations as follows: Assets. 2">^^i"gs $20,000.00 Machinery and Fixtures 75,000.00 Inventory Mdse. and Supplies 5000000 Cash 1\. ' . ' 5.000.CX) Accounts Receivable 40.000.00 LIABILITIES. Accounts and Bills Payable $30,00000 Sales average per year *////;/. soo'ooo.oo Wages paid per year 170,000.00 Expense, Selling and General, per year 35,000.00 Material Purchased 260,000.00 Buildings are on leased ground, lease expires in ten years, annual land rental $1,000.00. Buildings revert to owner at expiration of lease. New machinery when installed ten years ago cost $50,000.00. Addi- tions since cost $25,000.00; no depreciation has been charged off. All re- pairs and replacements charged to expense. What, in your opinion, would be a fair price to be contributed for a half interest? Explain fully. 268 C. p. A. Examination Questions. 5. A. and B. each carrying on a similar business agree to form a partnership, the new firm to take over the assets and assume the lia- bilities of each. The following trial balance representing the book ac- counts was presented: — A— Capital 5 40,000.00 Machinery and Fixtures $30,000.00 Cash 2,000.00 Bills Receivable 5,000.00 Accounts Receivable 30,000.00 Inventory Merchandise 25,000.00 Wages 7,000.00 Wages due 250.00 Expense 10,000.00 Bills Payable 10,000.00 Merchandise Account 40,000.00 Accounts Payable 20,000.00 Repairs 1,250.00 $1 10,250.00 $1 10,250.00 — B— Capital Machinery and Fixtures $30,000.00 Cash 4,000.00 Bills Receivable 8,000.00 Accounts Receivable 40,000.00 Wages 9,000.00 Wages due General Expense 15,000.00 Bills Payable Merchandise Account Inventory 32,000.00 Repair Account 2,500.00 Accounts Payable $ 50,000.00 500.00 15,000.00 50,000.00 25,000.00 $140,500.00 $140,500.00 Each partner is to draw half the profits. Formulate opening entries for the new firm. At the end of the year a profit is made of $30,000.00. Create a Trial Balance and Inventory, using your own figures to pro- duce that result ; divide the profit between the partners and make State- ment of Assets and Liabilities. 6. A corporation organizes under the Law of Michigan to conduct a manufacturing business. Authorized Capital $400,000.00, half each common and preferred stock, shares $100.00. Five incorporators sub- 269 t :h v> ( I' < t'- ■i _^r I* *k'L O'ftl I m h' M I 1 /':! If Accounting Problems and Solutions. scribe each for ten shares of common stock at face value. John Smith purchases from three manufacturing companies, their complete plants for $395,000.00 and transfers said plants to the Incorporated Company for the remaining $395,000.00 of common and preferred stock and $150,000.00 of First Mortgage 5% bonds out of a total issue of bonds of $200,00.00, leaving $50,000.00 of bonds in the treasury. Make opening Journal entries and Trial Balance showing the Com- pany's condition after the transactions. THEORY OF ACCOUNTS. Saturday, July 28, 1906, from 8:30 a. m. to 12:00 noon. 75 credits necessary to pass, out of a possible 100 credits. Each complete answer will receive 10 credits. Do not repeat ques- tions on examination papers but write answers only, designating the ques- tions by number. The intelligence indicated by answers will be considered in marking the applicants, as well as the technical accuracy of such answers. 1. Define bookkeeping. State various kinds with explanations. 2. What books are necessary for recording the transactions of an Incorporated Company? State the use of each book mentioned. 3. Define the following: (a) Fixed assets and fixed liabilities. (&) Current assets and current liabilities. 4. Define "Merchandise Account" and state how in your opinion it should be kept. 5. What is the purpose of the following accounts and how are they created on the books: (a) Sinking Funds? {b) Reserve Funds? (c) De- preciation? (d) Good will? 6. Name the various forms of Capital Stock, with full explanations. 7. How would you ascertain the profits of a firm, whose books are kept by single entry? a What is "dividend?" State when and how dividends become ef- fective. State how the declaration and payment of dividends are usually recorded in books of account. 9. State the use of a Private Lock Ledger and its relation to the General Ledger. 10. (o) What constitutes Manufacturing Cost? (6) What consti- tutes Selling Cost? (c) What relation do cumulative preferred stock dividends bear to the cost of operating. AUDITING. Saturday, July 28, 1906, from i :3o p. m. to 5 :30 p. m. 75 credits necessary to pass, out of a possible 100 credits. Each complete answer will receive 10 credits. Do not repeat ques- tions on examination papers but write answers only, designating the ques- tions by number. The intelligence indicated by answers will be considered in marking the applicants, as well as the technical acuracy of such answers. 1. What is the general course for an accountant to follow when called upon to audit the books of any business? 2. How far should an auditor inquire into the work of his prede- cessor ? 270 C. P. A. Examination Questions. 3. What books or records of a partnership or corporation should be examined by an auditor? 4. What are the most important things an auditor has to certify in a balance sheet showing Loss and Gain and the financial condition of a business ? 5. Mention the methods of manipulating accounts which are most commonly resorted to for the purpose of concealing fraud and em- bezzlement. 6. How would you classify the accounts in preparing a statement of the following: (a) Gas and Electric Light Company? {b) Electric Railroad? (c) A Manufacturing Business? 7. What accounts would be affected by depreciation on leased prop- erties ? 8. Should depreciation be written off the accounts of a corporation whose property is of a wasting nature, such as a quarry or a mine ? Give reasons. 9. When books show large additions to buildings and machinery con- sisting of portions of payrolls and materials used, without items of detail, what means should be taken to prove or disprove the accuracy of the charges? 10. State briefly the work done by you in connection with some audit in which you have been engaged. COMMERCIAL LAW. Friday, July 27, 1906, from 8:30 a. m. to 12:00 noon. 75 credits necessary to pass, out of a possible 100 credits. Each complete answer will receive 10 credits. Do not repeat ques- tions on examination papers but write answers only, designating the ques- tions by number. The intelligence indicated by answers will be considered in marking the applicants, as well as the technical accuracy of such answers. 1. What is a contract? (a) Can a contract ever be implied? (6) Can a valid verbal contract be made where the consideration, if any, is merely one promise for another? 2. What is the effect of an endorsement, "without recourse," on a promissory note? (a) Is the endorser of a promissory note relieved from liability where the holder has failed to notify him of the time it became due and the default of payment by the maker? 3. What is a corporation? (o) How does it differ from a partner- ship? (&) How does it differ from a joint stock company? 4. What is the meaning of the word "Stock" in the reference to a corporation? (a) What does it represent? (6) How is it transferred? (c) What right have stockholders in and to the corporate property? 5. What is a receiver? (a) What is his first duty on taking possession of property or trust funds committed to his care? 6. What is a trustee in bankruptcy? (a) How appointed and what are his duties? 7. How much must a debtor owe to enable his creditors to force him into bankruptcy? (a) Is it necessary that he shall have committed an act of bankruptcy? (6) State briefly what is meant by acts of bankruptcy, (c) What is meant by a composition with creditors, and the effect thereof? 8. What are some of the principal features of the statute of frauds ? 9. What is your understanding of the statute of limitations? 10. A general agent of a corporation, for the accommodation of a personal friend endorsed his friend's note, as general agent of the corpora- tion, before it was endorsed by the payee. Is the corporation liable for the payment of the note? (o) Give reason. 271 \m 'I ■ J Wli II Accounting Problems and Solutions. Practical Accounting. (New York Examination. Tuesday, January 29, 1907) Ansiver questions i and 2 and two of the others but no more. Answers in excess of the number required will not be considered. Each complete answer will receive 25 credits. Papers entitled to 75 or more credits will be accepted. I. The books of Robert West, real estate agent, for the year 1906, disclose the following opening and closing balances and intervening volume of transactions. Titles of Accounts Balances Dec. 30, 1Q05 Cash Tenants Rents accrued. . . . Owners Clients Trade creditors Fees Commissions Discounts Expenses Personal drawings. Office furniture Capital $0,760.08 1,060 260 $1,060 a, 500 5.020 Transactions in 1006 $137,797.62 34,656 34.788 34,610 100,034 4,841.40 $135,803-70 34,788 34,656 34.788 102,070 5,007.40 125 3,118.02 180 500 1,647.08 $11,580.08 $11,580.08 1,000 2,000 $350,627.02 $350,627.02 Balances Dec. 31, 1006 $11,664 028 104 1,000 ^,000 500 $ 028 2,678 6,009 610 125 3,118.92 180 1,647.08 $16,106 $16,106.00 An analysis of the books afforded further information as follows: Tenants were allowed $71 for repairs made by them, which sum was applied on account of rent and charged to owners. Owners were charged for commissions on collections $869.70, trade creditors' bills for repairs $3,566 and insurance $52. Qients were charged, insurance $668, coal $906, fees $120, commis- sions on sales $1,004. Trade creditors presented bills for office supplies $50, insurance writ- ten $576, coal $815.40; they were allowed $180 for discount on settle- ments made. Commissions on sales, collections, insurance written, and coal orders were closed into the general commission account, and Supplies Account was transferred to Expense. The cash transactions were as follows: Receipts— tenants, $34,717. clients $102^070, commission on sales $1,010.62 Payments— owners $30,051.30, clients $98,231. trade creditors $4,661.40, personal drawings $2,000, Expense $950. Prepare an Articulation Statement, showing in each account the several elements of debit and credit and giving each element the title of the Articulating account where in the contra credit or charge appears. 2. A, B, C and D enter into partnership with a capital of $100,000. A invests $40,000, B $30,000 C $20,000 and D $10,000. They are to shaje profits or losses in the following proportions: A 35 per cent., B 28 per cent. C 22 per cent and D 15 per cent. They are also to receive stipu- lated salaries chargeable to the business. 272 C. p. A. Examination Questions. At the end of six months there is a loss of $8,000 and meantime the partners have drawn against prospective profits as follows: A $400, B $600, C $600 and B $400. They dissolve partnership and agree to distribute proceeds of firm assets monthly as realized. C and D enter other business and A and B remain to wind up the firm's affairs, it being stipulated that from all moneys collected and paid over to C and D a commission of 5 per cent. is to be deducted and divided equally between A and B for their services in the winding up. The realization and liquidation lasts four months and the transactions are as follows: ist month. 2d month. 3d month. 4th month Assets realized $30,190 50.300 20,010 9.500 $110,000 Liabilities liquidated $7,900 6,100 3,800 2,200 $20,000 Expenses and losses on realization exclusive of commissions $400 750 340 no $1,600 Prepare partners' accounts showing the amount payable monthly to each one. 3. On June 30 Ward & Parker, merchants, announce their inability to meet their obligations and make an assignment for the benefit of creditors. From an examination of their books, supplemented by other informa- tion, their condition appears to be as follows : Liabilities Creditors, unsecured $31,250 ** partly secured 29,875 " fully secured 21,250 Taxes and wages of employes (preferential) 875 Assets Cash on hand 6,875 Chattels 17,500 Bills receivable 5.312 Warehouse receipts and other securities 35,000 Sundry debtors 3.250 Losses Profit and loss account, sundry losses 16,875 Trade expenses, current period 9.250 Personal Ward, Capital account, Cr 12,500 personal drawings, Dr 11,250 Parker, capital account, Cr 20,062 personal drawings, Dr 10,500 Accounts receivable show 3,250 Bad accounts 1,250 Doubtful accounts 750 Expected to produce 250 The securities are in the hands of creditors pledged to secure payment of their accounts, viz:. 273 I 'III IP' S3. 750 31.250 11,250 Accounting Problems and Solutions. In hands of partly secured creditors In hands of fully secured creditors. Ihe chattels are expected to realize. l^repare a statement of affairs and a deficiency account ' * " half oreferrpH cfnit- -ru V'?T'?^', "^ , J?* ^^'^^ ^s common stock and in oavSent of th. «; ^f *°^^^ '^^^^ ^"^ ^'"^'"^^ "^^^ issued to the vendor, m payment of the several properties acquired through him with\' bonus' of ^nf^H"^ ^'"^^'"^ "^ P^^^^^^^^ sfockt"- bankers at par Trefer^ed stock and h 'It n J'''"'"°" '.'°'^ ^°" ^^^^ *^« shares of prererrea stock, and he also sells $400,000 of common stock at qo oer rent The properties are found to be in a "run down" condition t^nrl fhs. KTe Sto f si? ^'/ ^^'-^ ^^^^ f?^'^^' inTnewals tTrepatst f?n n r?!?r /.u ^^'^ °^ efficiency, all of which is charged to revenue On a review of the accounts it appears that only $iqooo of said nntl^v r?a"'fo"nots- '"' ^^"^^^^ '^^^^^°"' ^"^ *^^ -^"^"^ of'thraKemem A. B. C. D. II HI Total, $25,000 75,000 2,000 8,000 $60,000 100,000 5,000 18,000 $110,000 1 $183,000 $85,000 175,000 7,000 25,000 $292,000 , Frame the journal entries necessary to open the books of the mmnati^ m accordance with the above statement. company ;-. ^K "^Ije composition of the values of the books of the three old Ig^i^l^gj^yjh ^ggw company as sta ted in question Vw'rl?'^ compan- Assets Property sold i jg^ Book accounts, not sold. . . . ." .' .' .' ' II 000 1,000 $163,000 3.000 III $81,000 $166,000 Liabilities Bills and accounts settled by old company.. , ^^^^^^^ Undivided profits | *^^',,° Capital stock 2,000 30,000 $100,000 6,000 60,000 $81,000 $166,000 $282,000 S.ooo $287,000 $i8q,ooo 8,000 90,000 $287,000 274 $3,112 14,900 22,750 8,351 28,900 20,000 C. p. A. Examination Questions. Frame the journal entries for closing the books of the old companies according to the above stated values. 6. The following is the trial balance of Bailey & Co. as taken from their ledger December 30, 1905. Cash Bills receivable Accounts receivable Bills payable Accounts payable Loans at 6 per cent Warehouse receipts Merchandise inventory Store property Mortgage on store property at 5 per cent Unimproved real estate Store fixtures Depreciation on store fixtures ( 1904) Horses and wagons Capital stock, 750 shares at $100 Profit and loss, surplus Purchases Sales Discounts Rents, hall over store Taxes Interest Heat and light Salesmen and wages of employees Officers' salaries Miscellaneous expenses and losses 6,000 5,000 2. "00 132,251 156 800 375 4,912 4,000 2,985 $2,006 9,121 5,000 10,000 500 75,000 2,573 152,439 103 250 $256,992 $256,992 Merchandise inventory Dec. 30, 1905, $30,254. Prepare a trading and profit and loss account for the fiscal year 1905 and a balance sheet as at the close thereof. Reserve i per cent, of the open accounts receivable to cover bad debts, a further 10 per cent, from office furniture and 20 per cent, from horses and wagons to cover depreciation. AUDITING. Wednesday, January 30, 1907— 9.15 a. m. to 12.15 p. m., only. Answer 10 questions but no more. Papers entitled to 75 or more credits will be accepted. 1 What meaning attaches to the term "auditing," other than the re- view and verification of accounts of past transactions? 2 Outline in brief your ideas concerning the duties and responsibilities of an auditor of accounts. 3 What do you consider the best method to employ in the review and audit of cash receipts and payments? 4 What method would you recommend in the conduct of a cash ac- count to facilitate a speedy and thorough audit thereof? 5 Give a broad definition of vouchers as a means of verifying items entered in books of account. 6 On undertaking the audit of the accounts of a company in what condition would you expect to have the books, documents and records when submitted to you ? 275 h m II ;|i 4 I Accounting Problems and Solutions, 7 State the general principles governing the discrimination between what constitutes proper charges against Capital and what constitutes proper charges against Revenue. 8 If the cash on hand at the date of a balance sheet had not been verihed at that time, how should the auditor satisfy himself as to its correctness before signing the certificate? 9. To what detail should an auditor first direct his attention in be- ginning a general review and audit of the books of a concern emnloyin- nim for the first time? ' ID What means should an auditor employ to determine the correctness; ot reserves for depreciation and discounts, inventories of raw material goods in process finished wares and factory pay rolls? To what extent IS he responsible for the accuracy of these items as stated in his report? 11 Is there any reason why the goodwill carried as an asset on the Dooks ot a prosperous and growing manufacturing concern should be depreciated amortized or otherwise written off, and if so what would bo the ettect of such depreciation, amortization or writing off? 12 What means should be employed to verify the values of open book accounts receivable, bills receivable, unimproved real estate and investment securities r u ^^1 l^ }^^^^ ^^ -^}y^ advice concerning the proper rates per cent, to be adopted in providing for the accounts for depreciation on buildings machinery, tools, etc., what would you recommend ? 14 When a corporation acquires a number of separate plants, paying a lump sum for each is it necessary for it to show on the books the proportion of the purchase price paid for goodwill, and if so, what would be the proper method of ascertaining and expressing such proportion in the accounts? 15 If a company, duly organized, acquires several plants that are found to be in a run down " condition and to require extensive outlay for repairs and renewals to bring them to the required state of efficiency, should such outlay be charged against Capital or against Revenue? Give reasons. THEORY OF ACCOUNTS. TuESD.w, January 29, 1907—9.15 a. m. to 12.15 P. m., only Answer 10 questions but no more. Papers entitled to 75 or more credits will be accepted. 1 Describe the following books and explain the nature and the objects 01 each : (i) Summary journal (2) Consumption journal 2 Explain the difference in meaning between the terms "balance sheet and statement of assets and liabilities." 3 Show the manner in which controlling accounts are employed in commercial and municipal bookkeeping. 4 Describe the nature and the purpose of each of the following at the closing of a fiscal period: s i v. (i) Adjustment entries (2) Closing entries 5 Describe a way of keeping a bills receivable book as a book of original entry from which only the credits to personal accounts are posted in detail while only the total of monthly charges and liquidations of notes are posted to the bills receivable account. 6 When preparing a Trading and Profit and Loss Account at the end of a fiscal year, in what manner would you treat the following subjects? ** 276 C. P. A. Examination Questions. ( 1 ) Surplus or deficit brought forward from prior year (2) Reserves for depreciation (3) Reserves for bad debts (4) Interest on bonds (5) Dividends on stock (6) Surplus or deficit carried forward to succeeding year 7 In the preparation of a balance sheet for a manufacturing company, what general plan would you follow in determining the order of sequence in which the assets and liabiHties should be stated? 8 When preparing a balance sheet of an industrial company, in what manner would you treat the following items? (i) Outlay on uncompleted contracts (2) Estimated profits on uncompleted contracts (3) Bonded debt and sinking fund accumulations to amortize same 9 What general rule should govern the order in which the accounts should be arranged where only one ledger is operated in a small business? 10 Does any advantage attach to the employment of more than one volume for the ledger of a business requiring only one bookkeeper? Give reasons. 11 Describe a condition in which the use of a few books would not result in simplicity of system while the number of books currently operated could be increased with advantage. 12 Rule a cashbook to provide for controlling accounts of debtors and creditors, also for discounts in settlement of both receivable and payable accounts. 13 Prepare a ruling for an invoice book to provide for total monthly charges to three material accounts and two expense accounts, and also to detail postings to sundry accounts of capital and revenue outlay. 14 Prepare a ruling for a sales book to provide (i) total monthly postings to three goods accounts, (2) the separation of cash sales from charge sales, (3) supplementary distribution of sales among four salesmen's columns. 15 Prepare a form of monthly summary journal entries for the three foregoing books of original entry. COMMERCIAL LAW. Wednesday, January 30, 1907— 1. 15 to 4.15 p. m., only Answer 10 questions but no more. Papers entitled to 75 or more credits will be accepted. 1 Distinguish clearly between public corporations and private corporations. 2 An interest in property is known as an estate; of what may the estate consist? 3 Estates are in their legal character of two kinds, real and personal ; define each. 4 What is a deed? What statements should necessarily appear in a warranty deed of land? 5 What is a contract? Who may legally make a contract? Mention four essentials of an enforceable contract. 6 What is the statute of frauds? What contracts must be in writine in order to be effective? 7 What laws govern the validity and construction of contracts? 8 What is a contract of guaranty? How does it differ from a contract of suretyship? 277 I K k* 1 r Hi 11 n I ■III ' I I ' 1 Accounting Problems and Solutions. 9 What is meant by the rule, "Hearsay evidence is excluded?" Illustrate. State the rules as to admission of books of account as evidence in court. 10 What matters should be specified in articles of copartnership? How are firm assets applied when there are both individual creditors and creditors of the firm? 11 What is meant in law by the term "fixtures?" Does the rule of law differ when the question is between (i) seller and buyer of real estate, (2) landlord and tenant? Explain fully. 12 What is a release? What is a mutual release? Can a mutual release given on adjustment of old accounts be disturbed? Explain. 13 How is a pledge of stock usually made? Must the pledgee return to the pledgor the identical certificate pledged? Has the pledgee the right to sell or to repledge the stock? 14 What is meant by ultra vires as to an act of a corporation? Explain, and give an example of such an act. 15 Define usury and state the penalties for it. Mention the principal exemptions from the operation of the usury laws. Representative Elxamination Qyesbons of the Florida State Board of Accountancy, 1907, with Comments. AUDITING. (2) What do you consider the proper way to handle cash in ac- counts ? What advantages are there, if any, in banking each day the exact receipts of the previous day? How would you verify the correctness of a cash book, and ensure the entry of all cash received? (8) Give at least two (2) examples of contingent liabilities, and state how they should be treated in the books, and on the balance sheet. (10) A new company sells some of its stock at a premium. State how these premiums should appear in the accounts. (12) What duties and responsibilities has an auditor in connection with inventories of goods on hand? (13) A firm has been doing business for ten years during which time no audit has been made, and nothing has been charged off on account of f>ad debts. There are six hundred (600) accounts on the ledger. State how you would verify and classify them. PRACTICAL ACCOUNTING. (2) A land company owns a number of city lots, the price of each of which is fixed by schedule, and offers them for sale under three distinct plans: (a) A cash payment of 25 per cent, of the price, and 75 per cent, in five years, mortgage at 8 per cent, interest payable half-yearly. (b) A cash payment of 10 per cent, of the price in exchange for which a bond for title is given, providing that the purchaser shall make 278 C. P. A. Examination Questions. monthly payments, that unpaid balances shall be subject to interest at 8 per cent, per annum payable half-yearly, and that title shall be given when purchase price and interest are paid. (c) To the purchase price is added an amount calculated to represent the interest, the sum of these is then divided by 120, and bond for title is given providing for payment of the sum in 120 equal payments; on these being made deed is to be executed. Outline the entries for each transaction, especially those relating to the interest. (3) A, B, C, are partners: A is to receive a salary of $2,000 per annum ; B, $2,500; and C $3,000. The balance of profits after payments of salaries is to be divided as to the first $20,000, % to A, and % each to B and C; and profits above $20,000 are to be divided equally among the three. A retires from active business, and gives up his right to salary for 1906. The profits for that year, before charging salaries, amount to $35>ooo. To what extent are A, B, and C, respectively effected by A's concession ? (6) On I St of July, 1905, a company borrowed $100,000 at 4 per cent, per annum, payable half-yearly, and payment of loan to be made at the end of ten years (10 yrs.) at 105 per cent. It was decided to set aside annually out of the profits such a sum as would with interest at 4 per cent, per annum, provide for the payment of the premium on the loan at the end of the term. (12) A client tells you that he is thinking of purchasing a going busi- ness which the owner tells him has earned $50,000 in two years ; there is : Real Estate said to be worth $30,000.00 Machinery and Equipment 20,000.00 Stock on hand 15,000.00 Book Debts 10,000.00 The business has been established for 20 years, and $90,000 is asked for the concern (including the above assets). You are desired to make an examination for your client, who will act on your representation. (14) The following is the trial balance of a land development com- pany which has been in business for a year: Assets Liabilities Real Estate $108,000.00 Capital Stock $75,000.00 Mortgages 96,000.00 ' Bills Receivable 30,000.00 Stock Subscription 12,000.00 Balance due on Real Estate sold on time. . 42,000.00 Mortgage Interest re- ceived 5,000.00 Expenses 6,000.00 Salaries 8,000.00 Preliminary Expenses. . 16,000.00 Taxes paid on Mort- gaged Real Estate.. . 1,200.00 Sundry Debtors 8,000.00 Surveying & Engineer- ing. 4,800.00 Cash in Bank 14,000.00 279 Authorized ($300,000) Bills Payable 20,000.00 Sundry Creditors 15,000.00 Mortgages Payable 18,000.00 Interest & Discount . . 18,000.00 Gains on Sales 25,000.00 11 1 V . t.. t>. t-~ vO t>. t^ 00 CO to 10 po fn • • to vO 0^ « ON 0\ 0\ M o\ M M ">4- t^ Tt o\ 10 t>. t>. c« m « ^ w On C30 O O O O M VO to Q O U o I X PP a TJ o u o Ph CO +-> CO 73 W5 Tj- 00 . o C On d VO O O O O > to to O O v=C M M H 00 O M g" 1 j 1 h ^ ^ •d h3 r> < a pq a t-H a m 1#> CI n 00 to to to ff> vd vd Ov o o t^ O N ■* M « O to ro PO O «0 O to Pi vO VO to W O « M lo d ci vd d M O w Ov W o o ^00 t-o CO to M cs o to •* CO M ^ t^ o 3d p 'o "o ^, CO 0000 O O vO O « M N B < o o (O o o o ;d d J-l Pu pq -d o o a '^ Si w qr: "* o p^ 6 CO o o 000 M to o o 'd -d u u u u o 000 to -"i- o a o CO P3 o 43 CO w ■ c o 1^ ^ O w .— < ^'"^ CO O ■4-> M to I I o W 00 . ,; o a Q 2^ A VO r^ 00 On O M a o o < PQ 293 Accounting Problems and Solutions. C. P. A. Examination Questions. rtti III til >t Ji 1| ■; I;:. 00 o m ■M 03 u a G O O < CJ 33' O ►4 o p o u w o CO o 02 Q P < O O Ik o 00 irt iTi in CO >d >o o o o i^ o « o o N o o o « o lO o o o o o o ■» M ITi "* o 00 l>. M 00 <5 M c« M o M lo o « o 01 oo O o o lO to so >-* o c :si r^ O •d Q r^ o CO OS « d ^ s s. r OS PQ S o o a> e? O g « . •'•^ CD « « 03 +e 1i > C CO p^ Q c« Mo i I I I i^ NO t^ 00 O M o o a «J B 6 "^ o >> o 00 O C! 0\ Ctf «^ "6 >5t M to ^00 O^vOvO t^toM o tn (2| rfMP^ c« Ct co« OsO-* o C i-i Ih 01 ^ O CO TJ ^ "co CO l_l u O (U 'Z o o o o _; cfl 6 Z U o nj -, 03 u 5 {li 'S bO CO c £5 .s ^ 5 o S 6 <3 P 4^ P^ ^ ^ c« !^ P ^3 X M-l CO O CtJ V4 ^ Ph oa 13 J C/3 o o-^ S 8 d« 1^ O O o o Cj M M M M M o o to O ooooooooo tOtoOOOOOOO I I I I M I I I I I I M I M M M« cO>0»>> OOOvOm 00 Q M c OS Q PQ s lO lO o »o »o to to to to to to to ON « «^ IN. o t^ vO r^ t^ r>» t>» t>. t^ **» "«t NO 00 CO o CO O CO 00 CO CO CO CO CO CO H o o o ■^ On On vO On o O On On t^ o H -^ o 00 •* to NO NO ^ O On •

    ^ O O « so On in M On «0 o »n cJ 1^00 ^OlO " Ov On M -St M 00 00 •^00 On O nO tC n h M On "^ 00 o M ^0 m M On ■* tn CI •> «b lo -* CI NO «o Problem 7. (New York Examination, February, 1908.) A corporation was formed with a capital stock of $500,000.00 (of which $200,000 is preferred and $300,000 is common stock), to acquire and consolidate three existing corporations designated as A., B., and C, and having the following status respectively : Book Accounts. Liabilities. Surplus. Deficit. Capital. A $171,000 $56,000 $15,000 $100,000 B 165,000 80,000 $5,000 90,000 C 108,000 47,000 6,0000 55,000 $444,000 $183,000 $21,000 $5,000 $245,000 The several vendor companies contract with the promoter to sell their assets, excluding cash funds, as above stated and including goodwill, at the following prices respectively, viz.: A., $125^000; B., $100,000; C, $75,000, payable one-half in cash and one-half in preferred stock to be issued, therefor, by the new company, which is also to assume all out- standing obligations. The promoter or vendor contracts with the new, or vendee company to acquire the several properties subject to the liabilities as stated and to provide an additional working capital of $100,000.00 cash, and to take in payment therefor the entire authorized stock of the new company, out of which the subscribing incorporators and directors will acquire their stock by purchase from the underwriters. The common stock is undewritten by bankers at 80 per cent, with bonus of one share of preferred to each ten shares of common stock. The bankers are also to take an additional $10,000 of preferred stock at par, as part of their agreement. (a) Frame opening entries and balance sheet of the vendee company, showing the costs respecitvely of assets, goodwill and organization expense on the assumption, that the terms of the several contracts, are known to all the parties concerned and form the basis of the financial values established. (6) Frame closing entries of "A" company, showing cancellation of stock and distribution of proceeds of sale among stockholders. (c) Show promoter's compensation or profit for effecting the consoli- dation. 23 Accountancy Problems and Solutions. Solution. ^^) THE CORPORATION INCOMPOIATID UNDER THE LAWS OF THE State of New York with an AUTHORIZED CAPITAL OF $500,000.00, DIVIDED INTO 2,000 SHARES PREFERRED AND 3,000 SHARES COMMON STOCK, FAR VALUE $100 EACH. Cash $ioopoo.oo working capital provided by the promoter, as per agreement. Plant ANo SuN»Rv Ass^s $444.ooo.oo acquired from: Co. A $171,000.00 £0 B _ 165,000.00 Co. C. 108,000.00 Bonus— Organization Expense $100,000.00 being organization expenses allowed promoter as follows: For underwriting common stock 20% of $300,000......;... $60,000 300 shares preferred stock @ $100. . 30,000 promoter's compensation 100 shares preferred stock @ $100 10,000 _ $ 39,000.00 Goodwill : — ; v f ai« representing excess payments for plants acquired, viz. : Co. A $10,000.00 Co. B 15.000.00 Co. C 14,000.00 To Sundry Liabilities assumed by this Co., viz.: Co. A $56,000.00 Co. B 80,000.00 Co. C 47,000.00 To Capital Stock 2,000 shares of preferred stock 3,000 shares of common stock par value of each $100.00. 24 $183,000.00 $500,000.00 Practical Accounting Problems. BALANCE SHEET OF THE CO.. AS ON Assets Sf^^; "'J'a"\' $100,000 Plant and Sundry assets... 444,000 ^^^w^" 39.000 100,000 $683,000 Organization expenses. . Liabilities Sundry liabilities fig. Capital stock: '*' Preferred stock... $200,000 Common stock... 300,000 500, 000 000 $62,500.00 (b) Goodwill * To Surplus '''':':::::::::::::::::::::::::^''''^'^ being the amount in excess of book values from sale of business to promoter Sundry Liabilities ^ ^^ Promoter .... $56,000.00 To Assei;* ;::;:::;::;:;:;;;;;;;;;;;;;;;; "^'*^~ Goodwill To close above accountson thebi^ks 'and charge promoter with selling price. Preferred Stock (of vendee Co., at par) Cash ^ To Promoter";;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;* ^'500.00 To record settlement as made by promoter* in accordance with agreement. Surplus * ^ ^ $ 2S,ooaoo Capital Stock . T^ Tj r * « ' *. 100,000.00 To Preferred Stock Cash To close all accounts on'bookVof this Ca'and distribute preferred shares of the vendee Co. aud the cash to the stockholders of this Co. Cc} Transactions of promoter, assuming that they are all recorded as and when made or con- tracted for: Sundry Assets * Goodwill $444,000.00 To Sundry Liabilities" Assumed;.;;;;;;;: ^^'"^'"^ Co. A. (Purchasing Price) ;;; Co. B. (Purchasing Price) ;;;; Co. C. (Purchasing Price) showing the assets and liabilities bargained with his liability as recorded in favor of the three Companies respectively; (he has not the cash with which to pay them until he has 2$ $683,000 $10,000.00 $171,000.00 10,000.00 $125,000.00 $ 62,500.00 62,500.00 $183,000.00 125,000.00 100,000.00 75,000.00 'f Accountancy Problems and Solutions. A.A in fretting the shares of the vendee 'Z^^ u"„fe"aten as stated in the question. ) $300,000.00 ^S trra'ss;. of W companies- A.. B !^d C. transferred by the Promoter to the „ew or vendee Co., »483,ooo less $183,000. ^^^^^^ Liabilities • ■ . • • •■■■■_■■ „/ ^^^^ various to close out the accounts ot tn liabilities assumed from Companies A., «.. and C, respectively, as per entry 1 above 1444,000.00 To Sundry Assets 39,000.00 Issets taken over from Company A^^ B., and C. respectively, as per entry above. $200,000.00 Preferred Stock 300,000.00 Common " ".. $400,000.00 To Vendee Company 100,000.00 Profit and Loss I " "t " ''aII Co For entire capital stock of vendee Co. For ^""^^.'^J^^ , over to promoter as per ($5oo,ooo.c«),tm^ne^^^ ^"^ '^'^ agreement, showmg creau if ^^^ for for gross amount allowed the promoter 10 effecting the consolidation. $10,000.00 Cash ; $10,000.00 To Preferred Stoc^ ^ -^ •-• • - ' — ^^^^ ^^ for sale to the bankers Dy mc y 100 shares preferred stock at par, as per agreement of underwntmg. $240,000.00 Cash 90,000.00 Profit and Loss $300,000.00 To Common Stock 30,000.00 for r^lftol balersof theentirecommon 'Zf@l>%. difference being co|t<,f under- pin.; with addit^nal bonus of , sha^o^ preferred stock to each 10 snares u stock. $100,000.00 Vendee Company ''.'.'.'.'.*'.'.'.". $100,000.00 To Cash • '''^nv of the full. 26 Practical Accounting Problems. t Dr. PROMOTER'S PROFIT AND LOSS ACCOUNT. Cm. To expenses borne in ef- fecting consolidation as follows: Bankers charges for un- derwriting common ^^^' ■'-; $90,000 Ifalance (carried down) 10,000 being net profit for ser- vices rendered. |ioo,ooo By gross allowance by Vendee Company for the preliminary costs of consolidation of the various companies into the Vendee Company. . . $100,000 $100,000 Sa^nce Sio.ooo The final accounts of the promoter are : 100 shares vendee Co/s preferred stock @ par value $10,000.00; this being his net profit as per profit and loss account $10,000.00 27 Accountancy Problems and Solutions. Problem 8. Practical Accounting Problems. (New York Eiamination. February. 1908.) A, the senior partner of a firm, dies May 9, at the close of which day the trial balance of the copartnership ledger shows the following items: ^^sh $3,794 Fixed assets 21^36 Trade debtors 92,766 Trade creditors $93f2o6 Inventory, January i 12,005 Purchases 14.160 Sales i9^55g Expenses 5^13 Capital, A 20,000 Capital. B io,ooo Capital, C 5^000 Personal, A 2,310 Personal, B ^50 Personal, C 450 $150,174 $150,174 The inventory of mdse. stock May 9, is computed at $15,200, the unex- pired insurance at $149, and accrued expenses at $207. The division of profits between partners is as follows: A, fifty-seven per cent; B, twenty-eight per cent; C, fifteen per cent No interest is credited on capital, but interest is credited on A, personal $115, and charged to B, personal $6.25, and to C, personal $3.75. The partnership agreement provides in case of A's death for the sale of A's interest to B and C on the execution of a bond by them in favor of A's estate, payable in five yearly installments, and stipulates that the assets are to be taken at book value, excepting one-half per cent, reserve lor bad debts, in compliance with which provision a reserve of $500 is made. A new firm of B, C, and D is formed, in which D invests $S,ooo cash for a one-fourth interest in the business. B withdraws all in excess of $10,000 and C pays in a sum sufficient to bring his capital up to $5,000. The future profits are to be shared in the following stated proportions, vis.: B one-half. C one-fourth and D one-fourth. The new firm executes a purchase mortgage with bond as provided in favor of A's estate for $30,000. and pays over balance of his interest in cash. Prepare the necessary accounts to give expression to the foregoing Kquidation of the firm of A, B and C, and a balance sheet of the firm of B, C and D, as at the beginning of their enterprise Solution. LIQUIDATION OF THE FIRM OF A. B AND C May 9, 1907. Trading Account To inventory Jan. i. . $12,005.00 Purchases 14,160. 00 36,165.00 l^ss: inventory May 9 15,200.00 Cost of mdse. sold 10,965 . 00 Profit and loss, gross profit 8,693 . 00 $19,658.00 % sales $19,658.00 $i9.6s« 00 To Partner A Interest $115.00 M i By Partner B.. Partner C Profit and loss. $6.35 3 75 105 . 00 $iiS 00 _ Profit and Loss lo Expenses.... tr »r>, ^^ r^ «, ExJ^nses accrued: ^lof 00 ^y trading account Interest ill' la -.gross profit $8,693.00 Reserve for bad ^ Unexpired insur- ^ Net profit carried ^°"^ard - 2.817.00 $8,842.00 ^.^ *a o — 90,842 oc A 29 Ill I I I I UM P I II I I IIM ^^^^ t III I B l P i m m l ^ Accountancy Problems and Solutions. To balance. • . f S.ooo oo By capital, firm A, B and C $4.96*> oo Cash invested 31 20 $5,000.00 $5,000 00 Balance $5,00000 Partner D. By cash invested $5,000 00 Cash Account. To balance, firm A, B By B , withdrawal. ... 3251 and C $3,794 00 Estate of A 4.030 69 C, additional in- Balance 4,762 00 vestment 31.20 D, investment. .. . 5,000.00 $8,825.20 $8,825.20 To balance $4f76* 00 Firm op B, C and D. Balance Sheet. May 10, 1907. Assets : Liabilities : Cash t4f762 .00 Accounts payable. . . . $93,200 .00 Accounts receivable Accrued expenses 207 .00 Receivable. $92,766 Bond and mortgage. Less: Reserve payable to estate of for bad debts 500 92,266 .00 Am five yearly m- Merchandise.. 15,200.00 stallments 20,00000 Unexpired in- Capital: surance .... 1 49 . 00 Partner B . . $ 1 0,000 Fixed assets.. 21,036.00 Partner C. 5,000 Partner D.. 5,000 20,000 00 $133,413 00 $133,413 00 Practical Accounting Problems. To profits allocated to partners, thus: A 57 per cent. .. . $1,605.69 B 28 per cent 788.76 C 15 per cent 422.55 $2,817 00 By net profit brought forward $2,817 00 $2,817 00 Partner A. To balance $24,030 .69 $24,030.69 By investment $20,000 .00 Personal account 2,3 10 . 00 Interest 1 1 5 .00 Net profits, 57 per cent 1,605.69 $24,030.69 By balance $24,030 .69 Partner B. To personal account . . $ 7 50 . 00 Interest 62c Balance $10,032:51 $10,788.76 By investment $10,000 .00 Net profits, 28 per cent 788 76 $10,788.76 Balance $10,032 51 Partner C. To personal account. . Interest Balance $450.00 3-75 4,968.80 $5,422.55 By investment $5,000 00 Net profits, 15 per cent 422.55 $5,422.55 Balance $4,968 80 Affairs op B, C and D. Partner B. To cash withdrawn. . Balance * $32 51 $10,000.00 $10,032.51 By capiatl, firm A, B and C $10,032 .51 $10,032.51 Balance $10,000 .00 30 31 I Accountancy Problems and Solutions. Problem 9. (New York Examination. February. 1908.) The bookkeeper of a manufacturing concern could produce only the following statement from its records on January ist, 1907. Manufacturing expenses $4,622 .89 Capital stock 10,000 . 00 Plant and equipment 17,500.00 Cash 832 . 14 Gross sales 8,469 . 10 First mortgage bonds (due Dec. 31, 1907) 15,000 . 00 Materials and supplies (inventory) 4,289 . 34 Notes payable 5,000 . 00 Accounts receivable 51423 . 23 Accounts payable 2,436 . 28 Interest on bonds (7 months) 393 . 75 Interest on notes and accounts payable 282 . 40 On January ist, 1907, the management is changed, and you are later retained as a public accountant to conduct an examination and prepare a balance sheet as of January ist, 1908. You find that during the preceding year the directors have subscribed in cash to $7i500 additional capital stock, and have retired all the notes and old accounts payable and that no interest was paid on these accounts for the year. You also find that the plant and equipment was revalued at $15,000, and 5% of this amount was charged off to provide for depreciation, while an additonal 2j4% was ordered placed in Reserve Account to cover repairs and renewals, the entire 7^/2% being charged direct to Profit and Loss. The bonds outstanding fell due on December 31st, 1907. and were paid, principal and interest, in cash. An inventory of materials and sup- plies places their value at $2,328.19, the practice being to charge all pur- chases direct to Manufacturing Expenses and to credit back the amount of the inventory. The accounts payable (all for material and non-interest bearing) amount to $546.28. Of the accounts receivable, January ist, 1907, $4,968.18 was collected and the balance charged of! as uncollectible. In addition to the material used from stock during the year, and the amount still due for material purchased, the manufacturing expenses were $3,720.52, all paid in cash, the total manufacturing expenses being 31% of the gross sales for the year ending January ist, 1908. Of these 91.3% were collected in cash, and the balance, all of which is considered good, remains on the books in accounts receivable. Produce a comparative balance sheet of January i, 1908-1907, and state tlic amount of gross sales for the year. 92 Practical Accounting Problems, SolutioiL CASH, 1906 Rbcbipts Expenditurbs ^"S^I^^ «^^ . Plant and Equip- Gros" Sk^ «8 .fin ,« «'°.ooo°o ^ ment $17,500.00 nlS^f^' ••■•:• •8.469 . 10 Deduct: Deduct % received. 5.423 . 23 3.045 • 87 Bonds issued.. .. . 15.000.00 $2,500.00 Mfg. labor. 4.6aa.89 Mfg. purchases $12,527.12 Deduct %pay.. $2,436.28 Notes pay.. 5,000.00 7,436.28 5,090.84 ^^^^^^ Balance on Hand 832 . 14 ^'3.045.87 $13,045.87 MANUFACTURING EXPENSE ACCOUNT. 1906. ^^DedSlft-' $".527.12 Cost of Manufacturing carried Dec. 31. inventory. 4.389.34 to trading account l",86o.67 Materials used $8,237.78 ^^^ 4.622.89 $12,860.67 $12,860.76 Cost of goods manufactured . TRADING ACCOUNT, 1906 .$12,860.67 Sales $8,469.10 Gross loss carried to profit and ^^^^^^^ lossaccount 4,391.57 $12,860.67 $12,860.67 Gross loss PROFIT AND LOSS, 1906 InterestonbcindsCaccroedy.'"" *ioVil ^^L}^,''^^^^ *° deficieijcy Interest on notes and S™,;;; ^^^ " ^^ account $5.067 . payable. 72 282.40 $5,067.72 $5,067.72 1906 Dec. 31, net loss. DEFICIENCY ACCOUNT. 1906 1907 $5.067.72 Dec. 31. surplus accounts $5,067. 72 33 ....-i ^-api W I; Accountancy Problems and Solutions, CASH. 1907 jijly , Balance tSja . 14 Accounts payable Ia.436 ■ a» (^pifcalitockto»^ "J'Soo.oo Manufacturing expense. Hoo'to AccoiiiiteiecelvaMe 4.968.18 Notespayable. ^'X'^o *^*.M*t»i- Interest (on notes) 38a. 40 Salm tao.090.16 Bonds payable '5'°?S?c Dedi»ct,%!receiv. ■ 1.747-84 i8.34a.3a ^"**b?l^^°^'Hand. '. *. '. '. ". '. 4.13469 Betngroi.3% col- Sti i6a 64 lected I31.164.64 131,104.04 MANUFACTURING EXPENSE ACCOUNT, 1907 Material on hand f4.a89.34 ^oat of manufactt™ 16 «7 91 Material purchased 5.446. a8 to trading account *^'"^-^' •4.83s -fi* Deduct: Inventory Dec. 31, 1907 1,388.19 Material used. . . |a,so7 -43 Labor 3.7ao.sg «6.aa7.95 $6,997.9$ TRADING ACCOUNT, 1907 Cost of goods maiiiilactiMcd S6.a37.9S Sales i Being i^ Gross profit carried to profit ' 3i and loss 113,863.31 130,090.16 6a37.95 $30,090.16 lao,o9o.i6 PROFIT AND LOSS, 1907 Plant revaluation f a.soo . 00 Gross profit on trading . Kw percent, written off 750 . 00 Ifiirettment on bonds. 075 -oo Business profit carried down . . . 9.937 ai $13,863.31 li3.86a 21 li3,86a.ax DISTRIBUTION SECTION, 1907 a % per cent, reserve for plant. . . B«d debts Balance to surplus account •375.00 455.0$ 9,107.16 $9,937.31 SURPLUS. 1907 Net business profit $9,93721 $9,937.31 Dec. 31. deficiency account $5.067 . 7* Balance 4.039.44 $9,107.16 Dec. 3 <.n«t profit $9,107.16 1908 Jan. 1 — Balance. $9,107.16 $4,039.44 3^ Practical Accounting Problems. 00 o M O o < < O Q O I— I H- 1 > o o m CO O < < > l-H H < 8 CO a> u o Q 00 o 0\ CO n < o 00 o CO H H. m CO o o\ »o o CO M O tn M o «>-vo to NO o « CO M ro 0^0 O O M O ■ • • O t^ to 00*^ 10 M CO t^ c> o 00 o 10 « 4» to to « o CO CO O O O to O O O M d O 0^0 O O On t^ O O 00 vO 10 to M o o 00 vO 10 00 M to -* •* • • • 0\ tr> CO t^ to CO rr o c» O O 00 too O O M w O o o o OvONO O O cot^ O O •^'O o to tow H o H M M «o CO Ov ■* o\ o NO 00 M O ■ • • • ^ t^oo O CO ^ c« to w i>. CO « ^n- « *• » c« o « ^ CO ■* o M « CO O « CO 0\ O CO c« 00 o 00 "^ c* to to'^ tC o CO CO CO 4} .Q 8 2 CO a ja o o a^j^S CO :3 g « c s 0^ o fc 35 o o u CO >> o a O 0) CO *.H CO fr Accountancy Problems and Solutions. 'h I ( Problem 10. (New York Examination. February, 1908.) On July 9th, 1907, Smash, Slump & Co., bankers, buy from the Atlantic Bridge Company its first 5% 50-year gold bonds dated July ist, 1907. in- terest payable semi-annually, amounting to $10,000,000.00 at 90% *nd interest with a bonus of 50% in common stock of the Atlantic Bridge Company. On the same date the bankers form a syndicate for one year to take the bonds at 92^% and interest, with the common stock as a bonus. They make no charge for expenses. The syndicate is formed as follows: Jones & Co. take $1,750,000.00 as a participation. Smith Brothers take $6,000,000.00 as a participation. Rieders & Co. take $1,250,000.00 as a participation. Smash, Slump & Co. take $1,000,000.00 as a participation. On the same date the bankers pay the Atlantic Ocean Bridge Company the total amount due it for the $10,000,000.00 of bonds, and carry the syndi- cate, the members of which make no payments to the bankers. On February ist, 1908, $6,000,000.00 of bonds are sold on the Stock Exchange at an average price of 95% less }i% commission. On April ist, 1908, $1,000,000.00 of bonds are sold on the Stock Ex- cfaaoge at an average price of 94% less %% commission. Prepare statements as follows, showing the bankers* and participants' accounts as they should appear on the bankers* books at the close of the syndicate. (fl) Statement showing bankers' account for the purchase of the secur- ities, including transfers to syndicate account and profit thereon. (b) Statement of each of the syndicate's members' accounts as they should appear on the books of the bankers, July 9th, 1908. (c) Statement showing the transactions and profit and loss on the banker's own participation account, assuming that the bonds are selling at 92^%. In makmg up the statements no account need be taken of the coupons paid by the Atlantic Ocean Bridge Company, nor, of any interest charges hy the bankers to the participants' accounts or to its own participation account, as it may be assumed that the cash received for the coupons by the bankers will be sufficient to reimburse them for their advances to Jufy 9th. 1908. Practical Accounting Problems. tH .3 m CO Q O < H O in CO At O o a Q S (^ < H O O < PC Q m 10 »o M t^ « °L ON (JO ^0 to " M to m CI to ^«HBk ^o to M o\ ei^ (§) M 10 H <> «» <» V 0000 3 COCO I 0000 •h «k Sk w COCO 10 tn o_^ ^ t^ « H ^ M H o" (U m • • ;c» B . & 1 • • e w 9 /fe da CO to .C V a u m ;s a o a a o O 'h 37 OR. Date 1007 Jwiy 9 1908 July 9 BOND INTEREST Explanation Par Value Accrued. , , Transfer to profit and loss account . fio.ooo.ooo.oo Mos. Days Amount 2908 July 9iBrought down 1123.39 S62,S36 . 99 $3,000,000.00 9 $362,660.38 :m^°oT•?Lrrr•'^=v:'°^^^^»^d^'^^^ 36 99 them for their advances. the cash STATEMENT " B " Participants' 'Wk^. JJL. — 1007 July 9 1908 April I July 9 Bonds Par Valua Bought @ -935 f^SS?l Total Debit Debit Balance 11.6x8,771.58 $633,584.08 •458^303.83 X907 July 9 1908 April I July 9 16,000,000.00 S5.550.ooo. 00 $73- 97 115.550,073.971 S5.550,073.97 ta.134.573 97 $'.571.333.97 lfo7 inly 9 1908 April I My 9 $1,350,000.00 $1,156,350.00 $15.41 I $1,156,265.41 $'.156 ,365.41 $444,703.91 •337.359 -16 JONES ft CX>. S.000.000 COMMON STOCK (BONUS) OP THE ATLANTIC $875 000.00 SMITH BROTHERS $3,000,000.00 ACCOUNT* 1 : _ CR. Date Explanation Par Value Mos. Days Amount 1907 July 9 Jones & Company. . . . Smith Bros $ii7So.ooo-oo 6,000,000.00 1,350,000.00 1,000,000.00 10,000,000.00 6,000,000.00 1,000,000.00 3,000,000.00 3,000,000.00 6 I 3 6 9 9 9 9 9 $21.58 73-97 15 41 ".33 350,000.00 35,000.00 13,500.00 75,000.00 36.99 1908 Jan. I Feb. I Apr. I July I July 9 Rieder & Company.... Smash, Slump & Comoanv CouDons Accrued (sold) Accrued (sold) Coupons Accrued (carried down) $363,660.38 received for the coupons by the bankers will be sufficient to reimburse Accounts as they should appear on books of Bankers, July 9, 1908. JONES AND COMPANY Date 1908 Feb. 1 April I Bonds Par Value $1,050,000.00 175.000.00 Sold® 95 94 Gross $997,500 164,500.00 Less Com. $1,313.50 318.75 Net Proceeds $996,187.50 164.381. 35 Par Value Bonds Unsold $700,000 . 00 535,000.00 Debit Balance Carried Down $6223$4.08 458,302.83 Total $x.6i8,77i.s8 633.584.08 SMITH BROTHERS 1908 Feb. 1 April I $3,600,000 . 00 600,000.00 95 94 $3,430,000 . 00 564,000.00 $4,500 . 00 750.00 $3,415,500.00 563,350.00 $3,400.000 . 00 1,800,000.00 $2.134373.97 1.571,323.97 $5,550,073-97 S.I34.S7J.9T RIEDER & COMPANY 1908 Feb. 1 April I $750,000.00 135,000.00 95 94 $712,500.00 1x7,500.00 $937.50 156.35 $7x1,563.50 "7,343.75 $500,000 . 00 375,000.00 $444,702.91 327 359.16 $z.x56. •65.41 444.70a. 91 SMASH. SLUMP AND COMPANY Date Bonds Par Value Sold® Gross Less Com. Net Proceeds Par Value Bonds Unsold Debit Balance Carried Down l^ital 1908 Feb. z April z $600,000.00 xoo,ooo.oo 95 94 $570,000.00 94,000.00 $750.00 135.00 $569,350.00 93.875.00 $400,000 . 00 300.000.00 $355,762.33 261,887.33 $935.0" -33 355.763. S3 OCEAN BRIDGE CO.. shared as follows among sjmdicate members: RIEDER & CO. $635,000.00 SMASH. SLUMP & CO. $500,000.00 39 Accountancy Problems and Solutions. o o* c ► 0^ o « • " ct 15? e «o O M •^ 00 O tf «o O O t Ov o^ « 10 •» m M « . «» Ml , § : ^ * • • o • wt • m * 3^ P 0) boS •O u *c§ n a .^ """^ a 8g o^ •H a I S'*^ 1 ^ 5 c ^ o c <« ca 55 o^ 00^ P SL>* 9 >k o 2^ 23 < t-> Ot O O Q O O O O O • • • • o» X • • • • • < to O O O O O O C) lo «o « t^ »o o M * o o tn 1^ 10 00 *^ o O »0 « 00 ei »o «o to o o W t^ Ov Ok s Wft IT) M vO 1 «» •a ; c4 . U3 . >* ■ ' • too w^O /a : . 10 100 « t^ •d . • 1^ « M W>»0 i * : 00 00 to 00 10 ^ rN. nterest — coupons nterest (accrued) bonds $996 , z 711.5 569.2 « « fOOO • cd CB CO oTo ^ roe*, eo >0>0 H Os 1 nterest (accrued nterest coupons. O -M • «•<« «iM iM iimi: 'W* .M •2 4) a a « m •§•§ 1 Ol ^ rt '3 (4 m (QPQCO OQ PQpq n o% H M »4 H M M 0\ r% 00 MS i-i cd -8 • 1 1 >> 00 Practical Accounting Problems. STATEMENT "C"-Showing Banker's Own Participation Account with Inventory at Estimated Value. ^ccouni [SMASH, SLUMP AND COMPANY Date Explana- tion Amount Date Explana- tion Amount Less Com. Net 1908 July 9 Balance as per acct. un- der State- menf 'B"... Est. Propt. to P. and L. . . Brought down $261,887.33 15.337.67 1908 July 9 Inventory off 300.000 par bonds & 925 (es- timated).... :$377.500.00 $375.00 $377,135.00 $277,125.00 $a77,ias.oo T..t.. _ $277,125.00 July 9 BANKER'S PROFIT AND LOSS ACCOUNT Credit Date 1907 July 9 1908 July 9 July 9 Explanation Proftt on transfer to Syndicate Statement Earned Bond interest net Estimated profit as per Statement' "C".' .' .' Net profit earned. Net profit earned and estimated. $250,000.00 363,536.99 •61,253-99 Estimated $iS.a37.67 Total $627,774.66 CONDITION OP SYNDICATE APPAIRS, ETC.. AS PER BANKERS' BOOKS, JULY 9. Z908 Due from syndicate members, viz* IZI%Z":T' ■ »4S8.3«.83 Rieder & Company .■.■.;. '. lll'll^ " ?2 Smash. Slump &^pany.: ::;::: Ill-MV.lt $MiM73..9 Bond interest accrued July i to 9. 1908 ,^ Cash on hand to be repaid to bankers Hr^r^.S'^^ 6,993,750.09 <9.6ia.66o.a8 Original advances made by Smash, BankJrjJofit'^P^'^^ '^ '^^ ^^^^^^^ «9.ooo,za3 . .9 6za,536.99 $9.6ia,66o.a8 41 TMM Accountancy Problems and Solutions. Practical Accounting Problems. Problem II. (New York Elxamination, February, 1 909.) Senior partner. A, desires to retire from active business life. He has confidence in the ability and integrity of his partner, B, and both have a like regard for their sales manager, C, and their works* manager, D, who have accumulated considerable means. In this situation B proposes to organize and to continue the business as a corporation, under his executive management, and to bring in sufficient capital from C, and D, in equal parts to pay off the principal of a real estate mortgage falling due at the end of the year, and sufficient capital from E, who is not connected with the business, to pay off the principal of the firm's notes payable. It is contemplated that E shall be made the treasurer of the corporation and that the five parties shall be the incorporators and constitute the first board of directors. In the discussion between A, and B, it is agreed that the net worth of the business, exclusive of the good-will which has never been repre- sented on the books, shall be converted into preferred stock of the corporation, and that the good-will shall be valued at one-half of the net worth and be converted into common stock; also that the cash capital contributed by C, D, and E, shall be paid to the firm, used by it for the purposes proposed by B, and converted into preferred stock for account of the three parties respectively. Thereupon A, proposes and agrees to surrender one fourth of his share of the common stock on the condition that it shall be distributed as follows: two parts to C, two parts to D. and one part to E. These matters are all covered by written agreement of the five parties, in which agreement it is provided that A, and B, shall convey to the corporation all the property, business and good-will of their co-partner- ship, and that all the transactions and stock distributions provided for shall be carried through and be closed out in the books of the co-part- nership, including the sum of $5,000, which shall be advanced to enable the incorporators to pay fully their subscriptions for 10 shares each of the common stock of the corporation. A certified public accountant is engaged to make an examination of the books and accounts at the close of the year just approaching, to procure appraisement of the property and to close the books after providing therein for his compensation. On the completion of his work the books show the following conditions : ASSETS. }f!t $50,000.00 S"»^^»n«s 200,000.00 Machinery, etc 100,000.00 Fmished products, product in process, materials and supplies 150,000.00 Notes receivable 100,000.00 Accounts receivable loo^oooxx) ^^^ 100,000.00 Total assets LIABILITIES AND CAPITAL Real estate mortgage $ioo,ooaoo Accrued interest on real estate mortgage 2,5oaoo Notes payable on demand 50,000.00 Accrued interest on notes payable 1,000.00 Accounts payable ].' asioooioo Accrued taxes ^^^^ Reserve provision for uncollectible accounts 15 000 00 ^'^ *=^P'*^^ 400W00 ^' *^^P*t*l 200,000.00 Total liabilities and capital |8oo,ooaoo $8oo/x)aoo Prepare cash book and journal entries' to be placed on the books of the co-partnership to represent properly thereon the carrying out of «U the matters provided for in the agreement of the five parties and to close said books. 42 43 >«■&■«»«■■«■ Accountancy Problems and Solutions. o 8 m O O o 6 o o o o o o o o o • • • ■ o o o o o o o o «oo o »n M d M >d O O 6 8 o o • o o o o o 6 o o o o o o o o o o o » ^ o 00 «n n «» M O O m « o , I f :S :-S :> •1 O w O u (0 S a o S>g,t3 o o o o o o o o o o • • • • • o o o o o o o o o o o o o o o ctt . ** . . o X ■ * . r* «B M (0 S9 •0 « a> S ?* P t4 V4 C ^ Wi oa M K Q o o o o o ^^ M M ^^ M M o o .^ ai u u u it *•> ^ CI O O o .o O g rt • " r J" - o > Ui v^ ViM vO ^^ «» ■ • • «k M m V) Mm m «» to V •«4 > M ^ W CO a ♦» 1 3 • 8 ^ w H o o • o o u o O g 'S3 o fi g o o 10 o "O o » o % '" Q «^ •8 m o in d o B B o O o o • o o in $37,500-00 $15,000.00 15,000.00 7,500.00 D t I To Common Stock Donated distribution as per agreement dated 190. . Thb^'X. Y. Company for expenses connected with the organiza- tion and incorporation. To Advances to Incorporators Accountant's fees as per agreement. . 15,000.00 7,500.00 $37,500.00 • • ss .J* "* 10 10 IOh M •» . * • ss •« «k «b 010 10 iom VO M «» & s 2 § r 10 u A •*■» ca « u 1 • 0^ •O 10 < i/> I o U o o o o • • o o §§ o o ^ o o o o o . . S o 00 o o o • o o q o o o q d o q o* On O o o • o o § ft o «e o o g o m o o V) $6,000.00 $5,000.00 1,000.00 fl • • • S •" •« «k 2 ® 1/) to < n H •J < H t* 0. < r 1 • • >J 03 /Y\ _f "» n 10 10 JS *^ tn c» «» M • • m »o M m t* t>. 10 »o €« «» • 10 »o -T "^ t^ «^ m to ^ «» o o • o o ^ I d o a S 5 § o o o «^ 47 mnntrni Accountancy Problems and Solutions. 8 < H. t 8 ■JPgt z o o o q d o o o o o o O o o o • o o 8 m -^ 8 a w M U U M •J A -< < CO H as & o u o o o 8SS O o o H 6 6 o o o 2 o o o o o Z3 O O V> lO Vi o u o-o"i^ 1^ « o io<^ 00 4» < ^ M lO «» 4^ iJ •< h o 0. coo o o "< ODD o s O • • • coo o o o o o o tn com VO lO < cot* !>. J2 o mro 00 m 3" 8 80' O o <^ S5 ^ o a *i» # o o o o o n S 2 8 *^ (Ml H » U & M q C' o O o Sz: o o o M O ^ o at o o o m < to m 8 8 o 9 !2: 8 CO s H 7i o • o S H g 8 •• < o < '2pii o o o O' o o 8 H o u o O 10 O H « m H B CO o o 6 o o o » (0 Q 88 O o Si o o O O 4'3 o M n W m o o o q § o 2 o o <> qs So" o q o" J? M o q d o M q n tn CO M O o o o lO in n n o q d o o O M o H > m 01 H o o • o o o V) M o o d o CO »o 2 TV' T"'' the various items in their proper divisions, and allowing wf^K* ^"'■/'P™^"'"" °f office furniture and fixtures, for Plant and Machmery $2,500.00. and 5 per cent on the amount of the real estate baLT ^7 V" *1* '"i '"'"""=^> ^°' f'-^'-y -"t- Also construct a SVlf. showing what was due to the deceased's estate, and what caprtal stood to the credit of each of the surviving partners. The inventory at December 31, igo5, was $125,000.00. Bills receivable 4B 49 ■MmK -pp" ■~: ~-» . ' ' M l -I. in I I! . - Accountancy Problems and Solutions, Practical Accounting Problems. Trial Balance, December 31, 1905 $iao,ooo.oo A, Capital account " " 110,000.00 B, Capital account 100,000.00 C, Capital account ' 90,000 .00 D, Capital account ' ' •*^' ^ . Si 2. 000. 00 A, Drawing account -o., *^*« .4. . . 12,000.00 B. Drawing account .000.00 C. Drawing account ,'',000.00 D, Drawing account ,00 000 00 Inventory. December 31. 1904. -y ^° ' Purchases during the year after crediting ****^ I 77c.000.00 Bought returns *'' '^. "^^ o 2c0.000.00 Factory wages and salanes. ••••••••;•• ^ ' ^o.ooo .00 Balance of Discount received and allowea. . Sales during the year, after debiting Sold ,,xio.ooo.oo returns Cash on hand and at bank 16 000 00 Bad debts. ^. • ••; ' ;^o BiUs receivable ^^^^ ^^ Office salanes 3,500.00 General office expenses ,,/ono 00 •Lt . . 414.000.00 Accounts receivable ' « «« 10,000.00 Travelmg expenses j 000 00 Taxes factory....^.. • aiooo.oo Rent and taxes, office 60,000.00 Real estate. .. .^ " ,-000.00 Plant and machinery « coo 00 Office furniture and fixtures ».5o • ^^^ooo .00 BiUs payable 150,000.00 Accounts payable ■ _ - .00 00 Interest and bank discount paid ^'^ ■ $2,750,000.00 $2,750,000.00 10 o ^ X o »^ Q H M < ^ go < ■0 o o o 1 o o o m o v> O o o o o o 10 ' u »o 10 ^0 c^ M H M M c« o o o o 00 O 10 O t^ tn «o «N. w 00 H ■h H «» o o o o o 10 o o q o ov CO d 10 o •o •c o 2 •4.1 CO to GO tn a 1 •0^ § iS -^ a CO 6b« «> o •' o o g«8.2 :gS o o o g.a 6 +» rt efl rt « " rt*^ I OT O O bo t5 o o CI) CO 5 8 a w CQ 8 o 51 t t ■ ■ ■■ ■ HIHlc . r " y iflP Accountancy Problems and Solutions, Practical Accounting Problems. o & s 1 o 1^ 1 o •» CU ■ s 6 ^ 1 H •n H I 1 o n •i a a S o o o o o o m irt 2 o o o o M S o. o. •« o °. o o *»« * s iml' g o o o o o ;t o. •: in OP N OOO o o o o o d ooo o'lO'^ 00 00 00 (•MM «o«o« in CO v) m (4 J2 pi I O .0 I M ss 66 o o o o mm « o K o 00 o « w> Ot N 00 00 Ot to « 4» 1 1 i .a O xt S .3 I ••S .1 I O O O ^ O O O tx . * ■ . O O O <*} O O ^N O O INN O «O00 o 2 «». I ^1 c o I - t 5 CI) •♦o \o o OjO com o o tx d doo o o « o o ^ d"No« o o\ « eo o o « o « o *o 00 n 1* 9 00 •» I a o + " 8 3 lO « >* 3 O « s a . .« S u o Q« rvio « "^U •. V O V »o o o 00 ls,0 o o\o O O tx lO o tv.O 00 o « o o ooo O O N o «n* 00 o M O ao d dad COM O >n'«- . . 00 o M O 0\0 ©"lovd" O M Ok M o n «•■ M- «»■ ««■ o 0\ u ■» bo a u o Ok Q U inc/2 m ■Sow CO I, -M > +j o C Q !; •• .S « Q, o Ot c hi h) ? o 2 •«-' U3 _ O M mil eg u T3 PQ to s I Si 4 s o lA 1^ SS • • o o o o mo o o o o • • o o o o o o I o o o o 2° o c o o o o • o m e o o o • • o e o o mo 2^ 00 •#> o o o o . O m •» mn «; ft *3 4» O O o o • ■ o o o o o m mci e a «• a 9 O u at c« ^ a ts s3 S C C rt 3 2 •- > « gcgS •5 S.S « I V CO 9 e u t% 9*0 |§ 9 O u n Oi-l o at M CO W -3 73 o S3 S^ ti ■■ii !! fi Iji.t I Accountancy Problems and Solutions. Problem 13. (Illinois Examination. May. 1909.) Two professional linns, consisting of two partners each, agree to amalgamate. Jones and Robinson have accounts receivable, $12,500.00, and other assets taken as net, $1,250.00. Sikes and Wilson have accounts receivable, $11,000.00, and other assets net, $1,000.00, each finn brmging $2,500.00 in cash and discharging their own liabilities, with an arrange- ment that the partners of each firm shall have a preferential allowance of 15 per cent, on professional fees arising from the connections of each firm. At the end of twelve months the earnings were $49»500.oo, of which $19,000.00 came from Jones and Robinson's introduction, $23,000.00 from Sikes and Wilson's and the rest from neutral ground. The accounts re- ceivable of Jones and Robinson were realized at an average loss of per cent, those of Sikes and Wilson at 5 per cent The expenses were $16,725.00. As at the end of the year, make out the Realization Account of each firm, the Profit and Loss Account of the amalgamated firm, and the Capital Accounts of each partner, allowing interest on the net assets and cash brought in at 5 per cent per annum, but none on the Accounts Receivable. The drawings have been: Jones, $5,000.00; Robinson, $3,250.00; Sikes, $5,500.00; Wilson, $3,500.00, without interest. Profits are divided as follows: Jones and Sikes, three-tenths each; Robinson and Wilson, two-tenths each. The same proportions govern the divisions of assets brought in and the Preferential Allowances. Solution. Jones and Robinson's Realization Account Assets to be realized To «rtimated value of assets: Accounts receiv- able $12,500 Other assets 1,250 Cash. . • 2,500 $16,250 Assets realized By cash proceeds of reali- zation $13,000 By cash brought in 2,500 $15,500 To Jones, % share. . . $9,750 To Robinson, %. share 6,500 $16,250 $16,250 I By loss on realization. . . . By Jones, % share. . . $450 By Robinson, % share 300 I 750 I16.250 Practical Accounting Problems. Sikes and Wilson's Realization Account Assets to be realized To estimated value of assets: Account receiv- able $11,000 Other assets 1,000 Cash 2,500 $14,500 To Sikes, % share.. . $8,700 To W ilson, % share . 5,800 $14,500 $14,500 Assets realized By cash proceeds of reali- zation By cash brought in $11,450 2,500 ♦13.950 By loss on realization Sikes, % share $330 Wilson, % share. . SSo 220 $14,500 Jones' Capital Account Todrawings.... .. $5,000.00 10% loss on realization 450 . 00 To balance down 13,956.25 $19,406.25 By % share of Jones, and Robinsons' reali- R,f^*^^"/ $9,750.00 By % share of prefer- ential allowances .... 1,710.00 By % share of interest . 112.50 By %o share of net profits 7,833 . 75 $19,406.25 By balance $13,956.25 Robinson's Capital Account To drawings $3,250 .00 To % loss on realization 300.00 To balance down 9,387 . 50 112,937.50 By % share of Jones. and Robinson's reali- p^^^^ion $6,500.00 i>y % share of prefer- ential allowances. ... 1,140 . 00 By % share of interest. . 75.00 AO %o share of net prof- ^^ 5,222.50 $12,937.50 By balance $9,387.50 •)*? 55 11 11 Accountancy Problems and Solutions. SiKEs' Capital Account To drawings $5,500.00 To % share of loss on nalization 330.00 To balance down 13,878 . 75 118,708.75 By % share of Sikes. and Wilson's realiza- tion By % share of prefer- ential allowances. . . . By % share of interest. By %o share of net prof- its 8,700.00 3,070.00 105.00 7.833-75 $18,708.75 By balance $12,878.75 Wilson's Capital Account To drawings $3,500.00 To % share of loss on realization 320 .00 To balance down 8,753 . 50 $13,473.50 By % share of Sikes and Wilson's realiza- By % share of prefer- ential allowances. . . . By % share of interest. By %o share of net prof- its $5,800.00 70.00 1,380.00 m 5,332.50 $13,472.50 By balance $8,752.50 Practical Accounting Problems. Problem 14. (New York Examination, June. 1909.) A new corporation, "D," is formed to purchase and amalgamate the busmess of three corporations, "A," "B," and "C." carrying on the same class of business, at December 31st, 1908. There are considerable differences between the capitals, the gross sales the expenses and the net profits of the three corporations. The amount to be allotted to each in shares of the new corporation for its capital and good will is agreed to be referred to you. Using your own figures, construct and give a profit and loss account for five years ended December 31st, 1908, and balance sheet, showing !!1 »'*f^ .'?*^^'" ^^^"^ ^^P^*^^' ^* I>ecember 31st, 1908, for Corporations *t. ^ ' '^'" ^^^strating the foregoing particulars, and assume that Corporation "A" shows a larger profit on a smaUer capital than either of the others. Give the balance sheet of the new Corporation "D" as it will appear as the result of your Report, and state your reasons for the allotment you consider equitable. Solud on. EXHIBIT "A" Balance Sheets as on December 31, 1908 flR| jfi Assets Real estate Merchandise Notes receivable. Trade debtors. . . Cash Totals. Liabilities Capital stock Notes payable Trade creditors. . . Suxplus Corporation "A" $30,000.00 18,000.00 15,000.00 8,000.00 7,000.00 $78,000.00 $50,000.00 6,000.00 14,000.00 8,000.00 Totals I $78, ,000.00 57 Corporation "B" $50,000.00 36,000.00 9,000.00 17,000.00 17,000.00 $119,000.00 $100,000.00 5,000.00 12,000.00 3,000.00 Corporation "C" $90,000.00 50,000.00 15,000.00 46,000.00 40,000.00 $241,000.00 $200,000.00 11,000.00 20,000.00 10,000.00 $119,000.00 I $241, 000.00 Accountancy Problems and Solutions, s s 2 o VO « O %o ^ 00 v^ ■^l- lO H M o o o o o 6 2 o °. o « « '* ft o o o o . • t%, o ^ o « o 10 m I- A 3 . is 8-8 <;2; o o d o o O 10 & 0. CO 5 . ^ a : < o . H O • p« m . a & U CO o o o o 2 o >0 M « M o o • VO VO o o o o o o o o • • • • 5 2 o o o o o o o o o o *k *^ ak «k Ov «^ CO VO B 'B CO '2 H OS CO ^ CO « 2 C8 *^ eg .5 a O « CO .2 tJkdl ^ "a m O 5 «» <«J ^ o Practical Accounting Problems. EXHIBIT "C" Combined Profit and Loss Statement from December 31. 1904. to December 31, 1908 Corporation "A" Accounts 1904 1905 Gross sales Cost of manufacture Gross profits Trading expenses. . . Net profits $100,000 55»ooo 45-000 20,000 25,000 $121,000 80,000 41,000 23,000 18,000 1906 $130,000 82,000 48,000 21,000 27,000 1907 1908 $128,000 $140,000 81,000 90,000 47.000 50,000 24,000 23,000 23,000 27,000 Corporation "B" Accounts 1904 1905 Gross sales Cost of manufacture . Gross profits Trading expenses. . . . Net profits $120,000 80,000 40,000 25,000 15,000 I $125,000 90,000 35,000 21,000 14,000 1906 1907 $130,000 85,000 45.000 30,000 15.000 $100,000 60,000 40,000 26,000 14,000 1908 $140,000 92,000 48,000 36,000 12,000 Corporation "C" r 10,000 Gross sales Cost of manufacture Gross profits .' . . 9^,000 Tradmg expenses 60,000 Net profits $200,000 $250,000 125,000 125,000 70,000 55.000 $240,000 120,000 120,000 50,000 70,000 $195,000 100,000 95,000 55,000 40,000 $300,000 170,000 130,000 75.000 55.000 58 o o m Z O o O CO D < w yQ o O o o o CO H n < CO Accountancy Problems and Solutions. rs O o o o o *l °L °L M 00 00 d Ti W CO ^ «> mm K ^ o 5 o o o 49 s^^fes CI 00 0^ ■^r « P ^e^feS i P4 00 ■* »o S 44 ^ H m S 4> (2:2; o o o o o o o^ o. o. <«*■ ^ o o o °- 00* 00 o o o o o o o o o d d o to O O M' e« o o o o" m CO 5 ? P d d d GOO 4J -^ 4J 2 2 2 coo ^K ^c ^c Q, Qj Qj tr (7 17 cS cS «3 m s u O CO •J < pq X o O o o n S CO •d d •d CO O a 2 (0 • t-« b. C« <§ CO •a o 6o Total Stock CO CO ^ CO CO CO CO CO CO CO CO CO CO CO CO 5t e« 00 » 10 M Stock for Good Will CO ^ CO CO q^ CO CO 0* CO CO m CO CO CO M vO M H M Share of $1,150,000 Stock !>• 1^ t^ «0 vO w\ M 00 00 M CO Annual Good Will as Stated 000 000 °- 0^ m" 00* 00" CI CO o_ VO Stock for Assets 000 000 000 0" 0" d 10 M « u-> CO Corporation "A" Corporation "B" Corporation "C" • ( Practical Accounting Problems. Tbxt op Rbport Chicago, May i, 1909. To THE President of Corporation "D," Chicago, 111. Dear Sir: In accordance with your instructions and for the purpose of a proposed purchase and amalgamationof Corporations "A," "B," and "C," I have made a thorough and comprehensive investigation of the books and accounts of said Corporations in order to determine their annual net earning capacity for the last five years and also in order to verify the valuations of said corporate assets with the object in view of a fair and reasonable distribution of consolidated capital stock. As a result of said investigation, I herewith beg to submit the following exhibits, viz.: Exhibit "A" Balance Sheets of Corporations "A," "B" and "C" as on December 31, 1908. Exhibit "B" Consolidated Balance Sheet as on December 31, 1908. Exhibit "C" Statement of Profit and Loss for the five years ending De- cember 31, 1908, of Corporations "A," *'B" and "C." Exhibit "D" Statement of proposed basis for merger. Exhibit "E" Statement of proposed distribution of consolidated stock. The assets of Corporations "A," "B" and "C" are conservatively stated so as to disclose the true state of affairs. The pure trading profits of the corporations, as stated in exhibit "C," give a reasonable idea of the earnings on the basis of past results for a period of five years. As a basis for consolidation and an equitable distri- bution of amalgamated stock, I respectfully propose the following scheme. In my opinion, a fair basis for the apportionment of capital stock can be established only by a separation of assets and good will. The average net capital for the period under review equals the paid up capital stock of the Corporations; hence, a portion of the merged capital stock may be distributed on this basis alone, as shown in exhibit "E." In order to determine the earning capacity, the assets compared with the earnings are the average net assets for the five years, and such assets of all members of the combination shall be given equal weight. The second portion may be based on the average annual good will on the basis of the excess of earning capacity over a normal income, in this mstance 6%, as shown in exhibit "D." Since the total average earnings are $90,000 per annum, the capi- talization of the merger at 6% would be $1,500,000, of which $350,000 would be apportioned on the basis of the average net capital and $1,150,000 would be distributed on the basis of good will, as set out in exhibit "E," showing the ultimate distribution under this plan. Under the assumption that the future earnings of the merger would be the same as before, or higher, or lower than before, the members of the combination would share the income in the same ratio as before, and an equitable distribution is an established fact. Respectfully submitted, 61 Accountant. i Accountancy Problems and Sohitions. Problem 15. (New York Examination. June. 1909.) John Dickside, a manufacturer's agrent who starts in business with a cash capital of $15,000, receives from the manufacturer $45,000 of goods on consignment, subject to a discount of 5% when he pays for the goods. iJickside pays freight amounting to $1,400, and allows claims for dam- aged goods amounting to $1,500. the total of which is chargeable to the manufacturer. He sells all of the consigned goods for a total of $60,000, and receives $44,000 from his customers, allowing them in settlement of the accounts $400 discount and $600 for defective goods. He makes the following payments: $2,100 for freight, of which $1,400 is chargeable to iLrtu^^^^^^^^ ^'°^^= ^ '''' ^^^--= ^^ ^'- ^^y^ ^^^ Prepare account of sales to be rendered to the manufacturer, balance sucet, statement of profit and loss, and statement of capital account. Solution. • J'!f problem states that Dickside receives a consignment from which he II min r..^ ^'V'f • -"^'''T' "^i!^" emitting. This could be construed ZZ \Tr^^^'^^ '' -''"'"«^ ^^-^ ^°^**^ °" ^ 5 per cent, commission oasis But, If you take into consideration that Dickside pays $700 for freight, allows $400 discount to his customers, and $600 for defective goods, and incurs expenses of $900, none of which the manufacturer is f rnZ^iccflT • ^^ ^^uJ^ "°^ ^" •'"P^"^ "^'^^ t^^ "^"^» procedure of a commission business, but more on the order of commercial transactions that are somewhat along this line. uan^acuons Mr. Dickside is a commission merchant, broker, jobber, retailer or ^nnA/^'l, ■ ^.^ T'"'*' ^^*^ ^ "manufacturer to dispose of a lot of he will «t '^'tL'^u '' ^ ^^"^'S^^T^ent. but the probabilities are that n^rZL I' f u "" ^^a '"^'^***^ ^ memorandum bill, subject to 5 per cent, discount when paid, and I will sell what I can.' They are billed to him at $45,000 as commonlv stated, on mem- orandum, subject to 5 .per cent, discount when paid. He may further d^TLr^T" laZ'T '^ ?' ^'^'^^K-^^^^-^ --^ will surely make claim for any goods damaged in transit or otherwise. Now it has never occurred to him that this is a consignment and that he must account for the amount realized minus certain expenses, commissions, etc. He knows the goods were billed to him at $45,000. less $1,500 foi^ damaged goods, and that he is responsible for that amount less discount and ireight. He sells the goods at the highest price, say $60,000. and on credit. He takes a certain amount of risk, but figures that he will at least more than clear enough to pay the manufacturer and expenses, as his collec- tions later show. This seems to be a reasonable construction, and gives to Dickside a profit more in keeping with the amount involved and the risk incurred. 62 Practical Accounting Problems. r Profit and Loss Account To consignment. . ..$45,000.00 Less damage al- lowed by shippe r 1,500.00 $43.500 . 00 Sales , To allowance made to customers for defective goods . $600.00 $44,100.00 Gross profit $15,900.00 $60,000.00 rht'^i'^f^u---- '^-'oooo Gross profit.. Charged to shipper 1,400.00 $700 . 00 Discount earned .' ." .' Exoense Discount allowed. . . expense . . . . . ^^^ ^^ Net profit 16,075.00 $17,675 00 $60,900.00 $60,000. 33 • • $15,000.00 $2,175. 00 400.00 1.775.00 $17,675.00 Cash Customers . Assets Capital Account giXf/°ient $15,000.00 ^'^fi* 16,075.00 $31,075 00 Balance Sheet Liabilities $18,050.00 Shipper •- -.. „ '^'°°°-°° Capital :::::::::::: T^illol j3MSo^ $33,050.00 Sales Account Consignment 9.- „_„ „„ Less damaged good^ ! . ! '. '. 1 ! 1 '. '*^' ' °° 1,500.00 Charges: 5% discount on $43,500.00 ^""'^^^ 1.400.00 $3.575.00 f I!!**'**l*° slipper. . . . $39,025.00 Less cash paid 37.050.00 Balance due shipper. . . $1,975 .00 Cash Account Capital •, „ T^ . , Customers .$44,400.00 *"'°"'°-'"=' ^^h, »...o<,.oo °"''""" __4oo^o^_44;ooo^ iSSr^.v.::;;:;::;:;;;:;:;- ^.ITo.il To balance. $59,000 . 00 $18,050.00 Balance. 1,805 .00 ?50,ooo . 00 i 63 Accountancy Problems and Solutions. Problem 16. (New York Examination. June. 1909.) A and B are dealers in bonds and share profits in the proportion of A seventy-five (75) per cent B twenty-five (25) per cent A and B engage C to sell bonds, agreeing to pay him a salary equal to twenty-five (25) per cent of the net profits to be divided between the partners. During the continuance of Cs contract the firm purchases one hundred thousand dollars ($100,000) Waterville Traction Company first mortgage 5% bonds on a 3% basis. The bonds have eighteen (18) months to run. interest payable semi-annually (three interest periods). The firm holds the Waterville bonds till maturity. Prepare a statement of the Waterville bond accounts, showing cost interest and amortization. The total profit to be adjusted is ten thousand dollars ($10,000). Show the division of this profit Solution. Operations to find the present worth of a 5% $1,000 bond "on a 3% basis, interest payable semi-annually. OPERATION A. Present worth of $1,000 at .015% for 3 half years: I at compound interest, .015%. 3 terms = i.04568; I -i- 1.04568 = .95632 X 1,000 = $956.32. Present worth of $25. semi-annual cash interest, at .015% for 3 terms • i-M.04568=.95632;i — .95632 = .04368 -^ .015% = 2.9122 X $25 = $7280' 956.32 + 72.80 = 1029.12 for one $1,000 bond; 1029.12 X 100 = $102,912, cost of bonds. Cash rate 2^% Income rate i%% Sinking fund to amortize premiums $2,912. 3- $2500.00 interest 1543 68 interest = $956.32 64 Practical Accounting Problems. OPERATION B. Cash rate .025% z= 25.00 interest Income rate .015% = 15.00 interest Surplus interest = 10.00 ' (I + .015) ^ = $2.91220 .015 and 2.91220 X 10 = 29.1220. + 1,000 1.029 1220 = $102,912.20 .015% = 6.375466. and BoJid rfhhl''*''^ '^' ''"°""' ^^'" *" ^^^^*=^^°^ ^Prague's "Extended OPERATION C .05% = Cash interest .03% = Income basis. .05 -ir .03 = i.6666-f = Stoclc value. i.6666-f — I. o.6666-f- = Stock premium. Present worth of .6666+ due in 3 half years the stock value being 1.6666667 and the difference 0.6375466 the lYz years' value is = 1.0291201 Hence, 1.0291201 X i.ooo = $1,029.12 for one bond @ 1,000. Division of Profits. Total profits, before adjusting Cs salary f lAooonn 2,000.00 XT i- $8,000.00 Wet profits to be divided between A and B = '' '~ As share, 75% ^ B's share, 25%... ^'°^ ^« 2,000 $8,000.00 STATEMENT OF THE BOND ACCOUNTS. 5% Bond of the Waterville Traction Co. Date Total Interest 5% Net Income 3% 1908 Jan. T $2,500.00 July I 2.500.00 1909 Jan. I 2,500.00 $7,500.00 Amorti- zation Si,S43-68 i»529.44 1,514.88 $4,588.00 Cost * 956.32 970.56 985-12 Book Value Par Palue $2,912.00 $ 102,91 2. 00|$I00,000.00 101,955.68 100,985.12 100,000.00 65 Accountancy Problems and Solutions. Problem 17. ^ (This is not a C P. A. problem, but contains some of the important principles involved in corporation accounting, and shows the effect of the panic of 1907 on the Interstate Manufacturing Company.) The trial balance of the Interstate Manufacturing Company, on June 30th, 1907, after closing entries have been made, is given below : P^nts and good will $250,000.00 Office Furmture g y.^ qq Inventory, June 30, 1907 ' Supplies ; ; ; Igll ol Finished goods W.V.'. A2\^6J ' 00 Pettycash iooloo i^^fi: 270,000.00 Buildings i6c,ooo.oo Machinery 235,000.00 Cash subject to check 69 4^1 « 00 Accounts receivable , . 273I842 '. 00 Common capital stock ' ' j-q- q-. Preferred capital stock l^^' [ ^^ Bonds 6 per cent. 50 year ist mortgage issued June 30, 1907 200,000.00 Premium on bonds 20 000 00 Pref . stock dividends payable Aug. 1907. 1 7 * coo 00 Com. stock dividend payable Aug.. 1907 li'.sooloo Reserve for bad and doubtful accounts. . . 8,204 00 Undivided surplus 66^7 c Accounts payable ] . ^^[^^1 [ ^^ $1,403,061.00 $1,403,061.00 During the year ending June 30th, 1908, the company purchased 29,047 tons of raw material at $22 per ton, which was delivered before the books dosed. Of the amount purchased, payment has been made for 26,647 tons. They have also made payments for the following accounts : Accounts payable, $78,392; salaries, $80,360; selling expense, $86,017; labor, $468,932; shop expense, $9,461; taxes, $7,842; repairs and mainte- nace, $30,955; office expense, $2,478, and supplies, $37,637. Customers have paid $1,502,927 in cash, and have been given dis- counts amounting to $i8,39S- Returns and allowances amount to $8,474. Bad debts written off, $2407. Rent, $500, and sales, $1,515,572. Fifty thousand dollars was loaned on call on June 30th, 1908, the market value of the collateral security being $72,100. The inventon/ on June 30. 1908. is made up of finished goods, $20,495; supplies, $8,129, and $2,163 tons of raw material, the market price of which is $24 per ton. The land is estimated to be worth $300,000. Semi-annual dividends of 3^% on the preferred stock and 2^% on the common stock have been paid from the earnings of the half year end- 66 Practical Accounting Problems. ing December 31, 1907. Dividends at the same rate have been declared on the preferred and common stock for the last half of the fiscal year, payable in August, 1908. You are asked to set up a balance sheet dated June 30, 1908, and ac- company it with a business statement which will show correctly the condi- tion of the company. The following annual rates of depreciation are to be assumed. Buildings, 3% ; machinery, 75^% ; office furniture, 10%. It is also as- sumed that there should be a reserve for bad and doubtful accounts equal to 3% of the balance of accounts receivable. b Solution. PROFIT AND LOSS AND INCOME STATEMENT FOR THE YEAR ENDING JUNE 30th, 1908. ^^J-®^- • • 1 • ■ • $1,515,572.00 Less returns and allowances 8,474.00 $1,507,098.00 Prime Cost and Overhead on Goods Manufactured. Raw Material 674,695.00 ^^^% 468.932.00 |;jPP^l|S 34.440.00 Shop Expense 9,461.00 Repairs and Maintenance 30,955.00 Depreciation of machinery 17,625.00 Depreciation of buildings 4^950*00 ^jjjj $1,241,058.00 Finished goods on hand, June 30, 1907. . 42,761.00 Deduct $1,283.8x9.00 Finished goods on hand, June 30, 1908 .. . 20.495.00 Cost OF Goods Sold. $1.263,324.00 Balance, gross profits $243,774.00 Other Income. Rent 500.00 r^ « $244,274.00 General and Selling Expenses. Salaries fro. .^^ „„ filing expense ■.■.•.•.■.■;.•;.•.■.•; *'8°6fox°7.:: Discount on sales t« ,«; «« Officeexpenses All° Depreciation of furniture '..'.'."" ilc'la Taxes ^rs-oo 7,842.00 $195,967.00 Balance ~I~Z $40,307.00 67 Accountancy Problems and Solutions. Deduct. Interest on 50 years 6% Bonds $12,000.00 premium written off 400.00 .f8 I Vi 3% reserve for bad and doubtful debts. . . Balance, net profit Add. Undivided surplus on June 30, 1907 Making a total of Deduct. Dividends for the year: On preferred capital stock s}4% paid February, 1908 On preferred capital stock $}{% payable August, 1908 On common capital stock 2^% paid February, 1908 On common capital stock 23^% payable August, 1908 Balance surplus, June 30, 1908 11.600.00 $36,707.00 7,716.00 $28,991.00 66,375.00 $95,366.00 I $17,500.00 17,500.00 12,500.00 12,500.00 $60,000.00 $35,366.00 68 W X CO o < < pq 00 o o w o CO < < Pi O O o I— t P!l ED O < (^ P=i ^^ M O Practical Accounting Problems. < O Q < CO N >-) •-• .4 CQ O O o o o o o o o o o o •• » o o o o torn o o o^ d o O o o o 00 « 00 to in CO 00 to M o o CO nj o u U S, X) to 10 •k •h •N ei »^ e« Vi M M On O 00* « ^3 VO O «H ftj Ofli ■< O CO Q O »o o to o o o^ o" w 4^ CO Q z O pq o J3 o o a (I) Pu 4J C! o s to o 0) CO :| :> ■•4 .1^ m ^o 2 CX to I CI} c (U V 00 wod o'S o O Q O H 4S M .CO .. o O o •a 'C a a CO P -d D u co^ Q Q CO US 0) Si? " ;2 JS o •Ik to o IN. to 10 to to VO 00 to to -(f ■* to Mk H «» o o o o o^ o o" d tot^ O to O d VO to to M 1^ 00 VO Ov d Cf to NO to CO CO < to ^»^ ~ i'^ to « VO *:r<^ tO"* to t^ 00 VO to M H « m O P bo ^d a w Oi •S *-5 to §•22 V rr* M !:t •"• to Ov VO M \0 Ov C« c» M M Tt M to « l>. «» •«> 00 »^ t^*^ Tt- to woo to o o to H O cT d VO to V to ■M (11 a to cd CO . o • p • bo • S^d to c »i^ ^ OJ " 0) V CO 0) > cd •"a o o cd u to > Cd wcoPm-4 CO U 69 ij Accountancy Problems and Solutions. Problem 18. (Michigan Examination, July, 1909.) X, Y and Z, foundry men, unable to meet their obligations, suspend payment January i, 1908, and appoint a trustee to realize and liquidate for the benefit of their creditors. The books showed the following assets and liabilities : Assets Land and Buildings. . . Machinery & Tools. . . Furniture & Fixtures . Materials & Supplies. . Notes Receivable Accounts Receivable. . Cash , Liabilities $125,000.00 Mortgage on Foundry 75,000.00 Premises $100,000.00 10,000 .00 Notes Payable 135,000.. 00 95,000 .00 Accounts Payable. 105,000 .00 15,000.00 Interest accrued on 115,000.00 Mortgage 1,250.00 450.00 Taxes accrued (esti- mated) 835 .00 Capital 93,365 .00 1435.450-00 $435,450.00 I The trustee's cash receipts and payments during the year 1908 were as follows: Receipts ANotes Receivable (Out- stimding January i, 1908) ♦^Accounts Receivable (Outstanding Janu- ary I, 1908) "•Cash Sales /Notes Receivable (Con- tracted during 1908^. Accounts Receivable (Contracted during 1908) Payments ^Notes Payable $25,000 . 00 v ^Accounts Payable 35,000 . 00 1 $15,000.00 •Interest on Mortgage one year at 5% 5,000.00 •^fTaxes for year 1907 865 . 00 106,500.00 nPiirchase of Material 5.435 -oo and Supplies 98,000. 00 ^.Labor 135,000.00 13,500.00 'Oeneral Expenses 45,000.00 •^Interest on Bills Pay- able to Sept. 30, '08 212,000.00 V' at 5% 2,800 .00 Total Receipts $352,435 00 Total Payments $346,665 .00 70 Practical Accounting Problems. t Other transactions were as follows : Sales on Credit V\: ^^335.000.00 *■ 10,000.00 00 00.00 Bad debts written off accounts prior to Jan. / I, 1908 /*Q -_^ „^ •r> J J^-l . ■.. rr «t$,000 . 00 Bad debts written off accounts subsequent to Jan. I, 1908 y 3^000.00 Discounts and allowances to Customers' Ac-"/ counts prior to January i, 1908 '«^oo Discounts and allowances to Customers' Ac- ' coimts subsequent to January i, 1908 ^3 Notes received from customers Notes given to creditors ($110,000.00 being V^ newals) ^ A Inventory of Materials, becemi3er 31, 1908 . Solution. Realization and Liquidation Account rendered by the Trustee of X, Y and Z. 800 .00 20,000.00 180,000 .00^ 92,000.00 ASSETS TO BE REALIZED: *5Notes Receivable. $15,000 ^Accounts Receivable. Materials & Supplies •^Pumiture & Fixtures, •^Machinery & Tools. "^Laxid & Buildings . . 115,000 95iOoo 10,000 7S,ooo 125,000 $435,000.00 LIABILITIES TO BE LIQUIDATED: •^Notes Payable $135,000* -Accounts Payable. .. lofooo, *• Taxes accrued " g.J r Mortgage loo.oli H interest on mortgage accrued. 1.250^ $34a,o8$.oo LIABILITIES liquidated: ^An^^ Payable $25,000 ' *^ Accounts Payable ... 35.000 •*- Taxes accrued 83s l H s o o o o o o o" d 00 !*• O »o e«oo W • o • • >* " S * * Pi "53 ^ IS O u • o o • Q bo • rrj I'd OS • 55 o "* - «» o CL'd • Vug/ f**l U X M o Cx) M CO oi y CO o n O' CI o o o o M O O Ov o o o o • *© o o 01 o' o' 0000 O^ o_^ 0_^ O^ O" 0"vo" o" O O ro^ O o • o o 0_^ V3 I"* 00 m o 1 .i-i CO OcoPm 0000000 0000000 • •••••• 0000000 0000000 O^ C)^ o o o o o to cToo «^ to ^ cf vO to ^ ro M 10 PO W HI o q d o o_ vo" rs. 00 «» .s - 1^ •d S CO . ^ s CO CO .e • ci CO . V > to • ^ § § "S C.I3 to o 2'5 79 CO 3 to «— ' o 2 O 1 III Accountancy Problems and Solutions. Solution. Journal Entries to Close Books of Jones and Jackson Consolidated Manufacturing Company $ c 2 7 .000 . 00 To real estate and buildings ... f ....... . ^^^ $246.000 . 00 Pl^^t 137,000.00 Cash 28,000 . 00 Bills receivable 76,000 . 00 Accounts receivable ^^ 000 00 ff , - if J, www. w Horses, wagons and harness 7,000 . 00 Transfer of existing assets to Consoli- dated Manufacturing Company as per contract. Consolidated Manufacturing Company .... 513,000 . 00 To Goodwill 513,000.00 Excess valuation represented by Goodwill, transferred to Con- solidated Manufacturing Com- pany, as per contract. Billspayable 50.000.00 To Consolidated Manufacturing Com- P^'^y 50,000 . 00 Assumption of existing liability on outstanding notes, by Consoli- dated Manufacturing Company, as per contract. Preferred Capital Stock 400,000 . 00 Common Capital stock 600,000.00 To Consolidated Manufacturing Com- pany J 000 000 00 Representing the receipts of 4,000 shares of preferred capital stock and 6,000 shares 01 common capital stock, par value of each, $100, from the Consolidated Manufacturing Company, in settlement of purchase contract. Goodwill 513,000 . 00 To Jones' drawing account 256,500 .00 Jackson's drawing accoimt a56,'5oo. 00 Representing the transfer of the excess valuation placed on the assets of our firm by the Con- solidated Manufacturing Com- pany. Tones* drawing account 248,500.00 Jackson's drawing account 251,500 . 00 To Jones' capital account 248,500.00 Jackson's capital account 251 ,'500 00 Representing the transfer of the drawing accoimt to the capital account in order to close the former. Jones' capital account 548,500 . 00 Jackson's capital account 451, '500 . 00 To Preferred capital stock ' ^oo 000 00 Common capital stock Sooiooo '. 00 Representing the closing of the capital accoimt as the stock is issued to the individual owners of the business. oO $1,050,000.00 1,540,000.00 Practical Accounting Problems. Journal Entries to Open Books op Company THE CONSOLIDATED MANUFACTURING COMPANY Incorporated Under the Laws of the State of New York with an AUTHORIZED CAPITAL OF $2,500,000.00 Divided into 10,000 shares of preferred stock, 15,000 shares of common stock, par value, $100.00 each Plant and sundry assets $2,590,000.00 To Jones and Jackson Independent Manufacturing Com- dany For the transfer to this company by the above mentioned ven- dors their right, title and in- terest in all the assets, includ- ing Goodwill, fully set forth in the bill of sale, dated pursuant to the resolution of the Board of Directors, re- corded in minute book, page . . . Tones and Jackson 50,000 . 00 Independent Manufacturing Company. ; . . 40,000 . 00 To Simdry liabilities Representing assumption of the liabilities of the respective firms, mentioned above, by the Consolidated Manufacturing Company, in part consideration for assets acquired. Tones and Jackson .... 1,000,000.00 Independent Manufacturmg Company.. . . 1,500,000 . 00 To Preferred capital stock Common capital stock ] . ] * For 4,000 shares of preferred capital stock and 6,000 shares of common capital stock issued to the firm of Jones and Jack- son and 6,000 shares of pre- ferred capital stock and 9,000 shares of common capital stock issued to the Independent Company in final payment for assets bought, as per bill of sale dated 81 90,000.00 1,000,000.00 1,500,000.00 ■v„: II [ft Accountancy Problems and Solutions. Real estate and buildings |6x j ,000 . 00 ^v:::. 389.000.00 Bills receivable: ] ." ." .' ." ." .' .' ." .' .' .' .' .' .' .' .' .* ; .' ; * AtTooTa Accoimts receivable ." ic8 ooo oo Horses, wagons and harness 16000 00 Goodwin J 227 '000 * 00 To Hant and sundry assets * For the purpose of placing the respective assets, under appro- priate headings, on the books of the company. Sundry liabilities -,0 -„- -,., To Bills payable ] ] .' ." ; 9o.ooo.oo Loans For the purpose of placing 'the respective liabilities, under ap- propriate headings, on the DOOKS of the company. Treaswy stock 150,000.00 To Reserve for Working Capital Representing 1,500 shares of common capital stock donated to the company by the stock- holders. S^®^- * - ; •. ao.ooo.oo Reserve for workmg capital ,0,000 00 To Treasury stock jo.ooo.oo Representing the sale of 500 shares of common capital stock held in the treasury at I40.00 per share. Cash Discoiiiit oA bonds.: : .* : : : : : : : : : : : *?o ooo oo Reserve for working capital ; ; ^5,000 ;oo To First mortgage bonds payable Treasury stock Representing the issue" and sale of $500,000.00, first mortgage bonds at 90, and also the issue of 750 shares of common stock, held in the treasury, as a bonus on the sale of the bonds. 82 $2,590,000.00 50.000 . 00 40,000.00 150,000.00 50,000.00 500,000.00 75,000.00 Practical Accounting Problems. o m a l-l l-l PQ IS < :^ o o 1-4 "^ O < < a w < Q O CO O o w Cm O 1^ W w M CO CO < o o O O • • o o o o q q o o" ON O «» to • • • »o 10 Tf TO 10 H ■k .» CI f <0 Q, Q4 . CO « H H «o m 0000 0000 * • . ■ 0000 0000 °i °L o q^ ^ coocT vo ^ M to « 000 000 000 000 ° °- o_^ On M \o" 0,000. 7,000. 00 M M 10 « M M 8 2i CO ii CO CO CO ■s| ^ ctf tJ « ^^ CO m a»— I wl n* oJ •^ 83 CO § § .28 Accountancy Problems and Solutions. Probleni 21. (Ohio Examination. March, 1910.) You have made an audit of the books of The Alpha Water Company of Delta, under instructions from The Zed Trust Company. They expect you not only to make an audit and furnish them with the usual report thereon, but ask you to make a thorough examination of the business, and make such criticisms, and call their attention to such facts, as will enable them to determine their policy in reference to their loan. The following is a trial balance from the general ledger of the company: Trial Balance of The Alpha Water Company, December 31, 1909- Plant, Franchises, etc $970,000.00 Consolidated Mortgage Bonds in Escrow to re- tire prior issue 205,000.00 Bonds pledged with The Zed Trust Co., as collateral for loan 250,000.00 Cash— Last days collection not deposited 300.00 Petty Cash Fund 100.00 Cash in Bank 8,200.00 Controlling Accounts Receivable: Meter Rate Ledger Accounts in Dr. $5,000.00 Meter Rate Ledger Accounts in Cr. 500.00 4,500.00 Flat Rate Ledger Accounts in Dr. 100.00 Flat Rate Ledger Accounts in Cr. 150.00 $50.00 Inventory Account 3,100.00 Personal Account— A 500.00 Personal Account— B 2,000.00 Controlling Accounts Receivable: Meter Sales Ledger 200.00 Meter Repairs Ledger 5000 Miscellaneous Accounts Receivable 60.00 Prepaid Insurance 100.00 Meter Rate Earnings— Accrued 3,000.00 Flat Rate Earnings— Prepaid 1,500.00 Mortgage Bonds: Consolidated Mortgage Bonds... $500,000.00 Prior Mortgage Bonds 205,000.00 ■ 705,000.00 Guarantee Deposits— to guarantee meter bills. . 800.00 Bills Payable — as per schedule 210,000.00 Accounts Payable 20,500.00 Profit and Loss Account— Surplus at January I, 1909 3,000.00 84 Practical Accounting Problems, Capital Stock Bond Interest Accrued Unpaid Payroll Interest Accrued on Bills Payable Taxes Accrued Construction Account 2,000.00 Land Rental Accrued 200.00 Meter Account — Profit from sale of meters Meter Repairs — Profit Discounts — Taken - . Hydrant Rental Meter Rate Earnings Flat Rate Earnings Miscellaneous Interest on Bonds 12,500.00 Interest on Bills Payable 12,600.00 Insurance 150.00 Wages — Pumping Station 6,500.00 Fuel 12,000.00 Repairs to Machinery 1,300.00 Oil Packing and Waste 150.00 Repairs to Buildings 100.00 Repairs to Tools 150.00 Miscellaneous Pump House Expense 600.00 Repairs — Water Supply 250.00 Repairs — Pipe System 1,650.00 Office Expense 1,300.00 Office Rent 600.00 Salaries of Management 7,000.00 Stationery, Printing and Postage 250.00 Stable Expense 300.00 Miscellaneous Expense 1,150.00 Maintenance and Operation of Filtration Plant 3,500.00 Maintenance and Operation of Stand Pipe 100.00 Taxes 5,000.00 $1,5 15*960.00 Schedule of Bills Payable. The Zed Trust Co $190,000.00 Demand note at 6% interest The Delta National Bank 10,000.00 Note due February i, 1910 $5,000 Note due March i, 1910 5,000 Both for four months at 6% The National Filtration Construction Co 10,000.00 Note for one year — due March i, 1910, at 6% $210,000.00 85 500,000.00 1,000.00 500.00 900.00 2,500.00 I,200.0C» 90.00 20.00 8,000.00 50,000.00 9,400.00 1,000.00 •IM $1,5 15*960.00 Accountancy Problems and Solutions. Practical Accounting Problems. The company furnishes water to consumers on meter connections which are payable on readings at the end of every three months; also to other customers at flat rates payable in advance every six months. The company buys meters and sells to users at some increase over cost. The company keeps meters in repair and makes repair charges to con- sumers. The company, under its franchise, furnishes free water for all municipal and charitable purposes, except a fixed rental per annum for each fire hydrant, for which the city pays. The franchise provides that when the annual gross earnings from water shall equal $65,000 the company shall pay into the treasury of the city one per cent, of such gross earnings. No such pa3rment has been provided for. Your audit has revealed the fact that water rates accrued are greater by $2,000.00 than shown on the books, as per the above trial balance. You have also found, not set up on the books, current unaudited invoices payable chargeable to the year 1909, as follows: Chargeable to Construction $1,000.00 Machinery Repairs 150.00 Fuel , , 300.00 Total — $1,450.00 You have, in the course of your examination figured the duty on the pumping engines, and have found that as compared with the average well equipped plant such engines have only 50% of the efficiency of the more modem pumping engines. Prepare a balance sheet in detail and a condensed balance sheet. Prepare an income and expense account in detail and a condensed income account. Indicate as well any supporting schedules you would make supporting the balance sheet or income account. Cover in your report such matters, under the instruction from your clients, to which you deem their special attention should be directed, and make such suggestions to them as your examination would warrant, giving good reasons for any criticism or suggestions you may have to make. CIwjP Solution. BALANCE SHEET The Alpha Water Company of Delta (December 31, 1909) Assets : Cost of Property— Plant, Fran- chise : Book Value, January i, 1909 $970,000.00 New Construction during the year— Schedule 3,000.00 $973,000.00 Bonds : Bonds Alpha Water Co. — Held in Escrow 205,000.00 Bonds Alpha Water Co. — Pledged as Collateral 250,000.00 455.0QOOO $1,428,000.00 Cash: In Bank 8,200.00 Petty Cash Fund 100.00 On Hand for Deposit 300.00 8,600.00 Accounts Receivable: Meter Rate Ledger 5,000.00 Flat Rate Ledger 100.00 Meter Sales Ledger 200.00 Meter Repairs Ledger SO. 00 Miscellaneous Accounts Receiv- able 60.00 Personal Account B 2,000.00 7,410.00 Accrued Accounts Receivable: Meter Rates Accrued 5,000.00 Land Rent Accrued 200.00 5,200.00 Unexpired Insurance 100.00 Inventory— Schedule 3,100.00 24410.00 Total Working Assets $1,452,410.00 Liabilities : ^ Capital Stock $500,000.00 Mortgage Debt — Consolidated Mortgage : S°"*^%:-: ••••• $500,000.00 Prior Mortgage Bonds 205,000.00 705,000.00 Total Capital & Mortgage Debt $1,205,000.00 Bills PAYABLE-Schedule 210,000.00 Accounts Payable: Unpaid vouchers— Schedule 21,950.00 Meter Rate Ledger— Cr. Balances 500 00 Flat Rate Ledger— Cr. Balances. 15000 Unpaid Pay Rolls 500 00 Personal Account — A 500 00 City of Delta-i% franchise tax 694.'oo 24,294.00 87 Accountancy Problems and Solutions. AcciUED Accounts : Bond Interest Accrued 1,000.00 Interest Accrued Bills Payable . 900.00 Taxes Accrued 2,500.00 4AOO.00 Prepaid Water Bills— Flat Rate Ledger 1,500.00 Guaranteed Deposits oQQ. 00 Total Working Liabilities Surplus 240,994.00 6410.00 $1,452410.00 CONDENSED BALANCE SHEET The Alpha Water Company of Delta (December 31, 1909) Assets : Total Invested and Deferred Assets : Excluding Bonds Pledged and Held in Escrow $973,000.00 Total working assets 24,410.00 $997410.00 Liabilities : Capital Stock 500.000.00 Bonds— Prior Issues $205,000.00 Bonds— Consolidated Mortgage 500,000.00 705,000.00 Less— Bonds Pledged... $250,000.00 Bonds in Escrow. 205,000.00 455»ooo.oo 250,000.00 Total Capital & Mortgage Debt 750,000.00 Total working liabilities 240,99400 990,994.00 Surplus $6416.00 INCOME ACCOUNT The Alpha Water Company of Delta (For year ending December 31, 1909) Income : From Sale of Water— Meter Rates $52,000.00 From Sale of Water— Flat Rates 9,400.00 From Sale of Water— Fire Hydrants.. 8,000.00 $69,400.00 Meter Sales 1,200.00 Meter Repairs 90.00 Discounts Taken 20.00 Miscellaneous Earnings (as per schedule) 1,000.00 Gross Earnings 88 $71,710.00 Practical Accounting Problems. Expenses : Operation — Pumping Station : Wages $6,500.00 ^uel .•••;••..; 12,300.00 Repairs to Machinery 1450.00 Repairs to Buildings 100.00 Repairs to Tools 150 00 Oil Waste & Packing isoloo Misc. Fump House Expense. 600.00 21,250.00 Repairs Pipe System i 6co 00 Repairs Water Supply 2^0 w Operation & Maintenance Filtration Plant'!;;; 3.500' 00 Maintenance of Stand Pipe loo'oo Stable Expense ;;;;: 300.00 27,050.00 General Expenses: Office Expense 1 onn n^ OfficeRent 6^^^ Salaries of Management .[.'. 7mn'nn Stationery, Printing & Postage ; ; ; ' " ^'2^0*00 Miscellaneous Expense-Schedule ; ./sp]^ ,0.300.00 TaxeT?.^. '''':';^' ^^^"^^ • V, 00000 ^^^^^ Insurance ;; ^^'?^'^ ^50. 00 5.150.00 Total Operation, Taxes, Insurance. . ~ ^2,500, 00 Net Earnings from Operation ~ ,,^ ^ Interest on Funded Debt . . i. cnn no ^^^^^'^ Interest on Unfunded Debt ; ; iJfiSS'^ I per cent Franchise Tax 'fi^SS oe^o. 094.00 25,794.00 Net Income for 1909 "" ~ — Surplus-Forwarded jknuai^ i',' igi^".:::::: '. It^'^ ^'Sheet""^^""'^^'" ^'* '^' ^' P^*" ^^^^"*^^ ~^ '~~ $6,416.00 Note :-No provision made for depreciation. ' CONDENSED INCOME ACCOUNT The Alpha Water Company Income: d^ecember 3,, 1909) Earnings from Sales of Water *<^. Earnings from Other Sources $09400.00 2,310.00 Gross Earnings . Expenses. $71,710.00 Total Operating Expenses, Taxes & Insurance. ... ^ ,00 00 Net Earnings from Operation ^'^ "^ Interest on Funded Debt 29,210.00 Interest on Unfunded Debt 12,500.00 I per cent Franchise Tax . 12,600.00 694.00 25,794.00 Net Income ^ — — $3»4i6.oo 89 ~~ Accountancy Problems and Solutions. Practical Accounting Problems. II ■1' Problem 22. (Illinois Examination. May. 1910.) A. B and C engage in business, A contributing $io.ooo capital; B $5,000, and C undertakes to take the active management at a salary oi $3 000 a year, to be paid to him monthly. After providing 5 per cen Serest on capital they are to divide the net results m the proP~s of s. 3. and 2. At the end of i8 months they ascertam the position to be unfavorable and decide to wind up. The assets are ^g^^ed to be worth $12,500. of which A takes $io,ooo. and B $2,500. There are no liabilities except for the capital and simple interest thereon, and one month's salary due C State the position of the three partners to each other. Solutioii. Ascertainment of profit or loss for the period, before charging interest 00 capital Joint Capital Account of A, B, and C To capital at end $12,500.00 " C, cash, salary 17 mos. 4,250.00 $16,750.00 I By capital at beginning . $1 5tOOO . 00 •' profit for period 1,750.00 $16,750.00 Profit and Loss Account at End of Period To Partners' Interest: A- 5%;if ^os. on $10,000 #750 B, 5% 18 mos. on $5,000 J75 $1,125.00 C, salary for 18 mos 4,500.00 $5,625.00 To balance fVd I3.87500 By profits $i,750.oo •' balance, net loss 3»875-00 $3,875.00 $5.625.00 By Division of Net Loss: A's share, 5-10 $1, 937 -50 B*s share, 3-10 1,162.50 C's share, 2-10 775- 00 $3.87500 A's Capital Account To assets taken over. . . . $10,000.00 " loss, 5-10 shares 1.937- 50 $".937 50 To balance $1,187.50 By investment $10,000.00 " interest, 5% 750.00 balance 1. 187. 50 $".937.50 B's Capital Account To assets taken over .... $2,500 . 00 " loss, 3-10 shares 1,162.50 "balance 1,712.50 $5,375.00 By investment $5,000.00 " interest, 5% 375-00 $5,375-00 By balance $1,712.50 C's Capital Account To salary paid, 17 mos , " loss, 2-10 share ... ,250.00 775 00 $5,025.00 To balance $525.00 % salary, 18 mos $4,500.00 balance 525-00 $5,025.00 90 91 Accounmncy Problems and Solutions, Problem 23. (New York Examination. June, 1910.) ^ it^ romt>anv was organized January i. 1906. to Tlie Homes Realty Company wa s manager under an „ Jld seU suburban lots. «nd .s operated by a m g .g^ent of which the foUow.ng .s a digest. ^^^^ ^^^ ^^ The company is to furnish and "^^int^" Xrbs of Philadelphia, and the^Ue ?f ^t'ir^^rW^^rX^^ ^Ti^anager is to rece.ve 3% also to pay salaries ot cierKs^auu conunission on the sales. beginning of each year by The property is to l^^^^^^P^^^bl^SV^re of the property unsold at addine to the account 4% o" *"® "i jli%v adding the amount of any ttfbL^ning of the P'^'^^drng year and by aaai g additions for {^^f Sch U ,b-f„-ts™t yea&T^el Le made up by profit, losses to be can^lf^.'^^r^ pirated over the reraainmg Jots for sale^ 1^1 fhrman^geffslt^n^JtC^U any property at less than the book lijjure* The books have been kept for two y^ t^^f^^^^^^t^T^V entries and the accounts show the foUowmg figures Property account (originalpurchasesof ..000 lots of equal value) Capital stock « New York office expense Philadelphia office expense ••■■•■ Salesmen's salaries inA^S-^^ Sales 220 lots for ^' 'a ' 215 .00 Deposits on account of sales not yet closea - ■ • • ^^^^^^ ^^ Mortgage held on property sold ■ • 49,096 .43 Cash '' f \ . . ^4^3 ■ 75 ^tors' accounts (for office supplies) ^ ^^^^ Interest on mortgages received There is »!«> an amount of ^"^^::^T$J^CTl^^^' and $»35.oo «=^ed interest on mortgages at Decemo 3 and sales appear up to December 31. '9o6: $400,000 . 00 400,000 . 00 3,085.00 5,178.3a 17.500°** These figures for expenses 1,435.00 3,647.82 8,500.00 39,000.00 New York office expense Philadelphia office expense ....*.*... Salaries of salesmen Sales, 60 lots for . detailed exhibit of operations, also balance sheet as at the d O X s. 4 9 m Ai O S 6 D O u u < o 5 m Practical Accounting Problems. 00 10 S8 88 d o o 5 o »o 2 9.S! o 000 6 lobl 00 -^vO 00 N to f-4 I a> •c o :3 J>»o U a ^ ^ 5 pG a. - o o o **-• en M tn a)'?3 •C ' aJ 1 ." to C" a ca •-J CO CO I(r4 tn Si, S a >^ r! !S ^ "S^JOJ^-S cBkO' ^11 to u o 8 93 8 10 00 : 888 m O N $ m (U ,0 ca .IOCO O 00 \o vO O ■32 O "^ »■♦-• 13 -r-i O \l OS W M N fO ■2 In. CO to a o ^ CO o o ^^ CO WW) "C § cd CO o -"."' 2 a c« CO = - 5 vA" o O Co o |3 2«2 Co ^tH fc,~ •*-» p* «o 8vS Accountancy Problems and Solutions. Practical Accounting Problems. i i Homes Realty Company Exhibit C Balance Sheet January j, iqo8 Assets Cash on hand and in bank $491096.43 Mortgage receivable 38,000.00 Interest " Due $125 .00 Accrued 235.00 360.00 Property account, as per Exhibit B $343,623 .47 Less reserve for earnings on investment 31,623.47 312,000.00 Total assets l399>456.43 Deficit 4,745.07 $404,201.50 Liabilities Accounts payable $643 . 75 " " (manager) 3.342-75 Deposits on sales 215.00 Total $4,201 . 50 Capital Stock Authorized issue (| \ Issued and outstanding 400,000.00 $404,201.50 P* CD oo 95 94 I ll Accountancy Problems and Solutions. Problem 24. (New York Examination. June, 1910.) The trial balance of the Vincent Manufacturing Company as of December 31, 1906, is given below. Inventory December 31, 1906, $90,000.00. Prepare a statement of profit and loss and income, showing (a) cost of manufacture, (b) cost of selling, (c) cost of administration, (d) net profit (e) surplus. TRIAL BALANCE Discounts, trade $4,030.00 Entertainment of customers 2,000.00 Machinery inventory December 31, 1906. . . 40,000.00 Tools, inventory December 31, 1906 8,500.00 Patents inventory December 31, 1906 21,000.00 Patterns inventory December 31, 1906 12400.00 Merchandise consumed • 410,000.00 Bills receivable 3,050.00 Accounts receivable 250,000.00 Insurance : Machinery, tools and patterns 500.00 Merchandise 650 .00 Employer's liability premiums 4,000.00 Taxes, personal property • 1,000.00 Interest, general 4,470.00 Cash 45,000.00 Labor, productive 300,000.00 Labor, unproductive 35,000.00 Power 21,000.00 Repairs, machinery 1,310.00 Factory expenses 3,010.00 Office pay roll 18,000.00 Inventory January 1, 1906 75,000.00 Merchandise sales $1,048,500.00 Allowances 10,900.00 Office furniture and fixtures 5,700.00 Salaries, officers* 15,000.00 Postage 2,000 .00 Telegrams and telephones 1,800.00 Collection and exchange 700.00 Stationery and printing 3.050.00 Freight, in 23,000.00 Freight, out 10,000.00 Cartage and express, in 3,75O.0O Bonding of employees (office) 250.00 Traveling expense (salesmen) 17,500.00 Salesmen's commission and salaries 40,000.00 96 Practical Accounting Problems. Bills payable $99i050-oo Accounts payable 43.000.00 Surplus 43.520.00 Capital stock 200,000 . 00 Directors' fees $1,500 . 00 Cartage, out 4,300 . 00 Discounts, trade 6,300 . 00 Return sales account 41,000.00 $1,440 ,3 70 • 00 $1,440.370 00 Solution. The Vincent Manufacturing Company Income and Profit and Loss Statement for the Period Ending December 31, 1906 Gross sales $1,048,500.00 Less return sales 41,000.00 $1,007,500.00 Deductions from sales: Trade discounts $4,030.00 Allowances 10,900.00 Cartage outward 4,300.00 Freight 10,000.00 Total deductions from sales 29,230.00 Amount realized from sales $978,270.00 Cost of Manufacture: Prime Cost: Raw material consumed $410,000.00 Freight inward 23,000.00 Cartage and express inward 3,750.00 Gross cost of materials $436,750.00 Less increase in inventory: Inventory, i2/3i/'o6 $90,000.00 i/i/'o6 75,000.0 T, , ,. ^ $15,000.00 Trade discounts 6,300.00 21,300.00 Cost of materials ^atc akh no Productive labor i:.:::;: i^:^;S Total prime cost €7, e AZn nn Factory overhead charges: *7i5.450.oo Unproductive labor $35,000.00 Power 21,000.00 Factory expenses 3,010.00 Repairs to machinery 1,310.0 Total factory overhead charges 60,320 . 00 Cost of production --'-^^75J70^ Gross profit on sales ; ^202,500.00 Cost of Sales: Salesmen's commissions and salaries . . . $40 000 00 " traveling expenses [" 17 'coo 00 Entertainment of customers .' a.'Soo.'oo 59.500.oo Selling profit "li^i^;^^^ 97 fill I I f 11! I I I 1*1 ' Accountancy Problems and Solutions, Cost of AdministraHon: Officers' salaries . fj b ooo oo Tvil!r jI/V 18,000.00 Telegrams and telephones 1,800.00 S«?i^® i ■ • L 2,'ooo.oo IXMlection and exchange ^qo 00 Stationery and printing " ' , oso 00 Bonding of employees, office 2?o 00 Director's fees ;; i.gSoioo Total administration expenses. ~ $42,300.00 Income from sales i7nft «MVrt ^ Owiges against income: ^loo./oo.oo Insurance: Machinery, tools and patterns. . . I500 . 00 E,^W^v1!fK;i- ; • ^50.00 I1.150.00 ISmployer s hability premiums 4 000 00 Interest, general T a-jo no Taxes, personal ;;;;;;; tioo.'oo Total charges against income ] ] ,0 620.00 Mm Profit «II~fl Surplus January 1. 1*9^6;;: .'.'.*.'.*:::;:;::;:::;;;:: i^i^o.^ Sm^m January j, igof I133.600.00 Practical Accounting Problems. *^ The Vincent Manufacturing Company Balance Sheet, December 31, 1906 Assets Machinery, at inventory value $40,000.00 Patents " " *• 0,500.00 Patterns, " " *' ;•;•*• is^w Office furniture and fixtures, at inventory value ,. ... 5,700 . 00 $87,600 00 iitxounis 250,000 253,050.00 Cash on hand and in bank 45,000.00 xSS oso 00 ^475.650.00 Liabilities m^^^m^mmmm Notes payable «qq ocn nn Accounts " »99.050.oo ™^ " 43.000. oo$i42,o5o. 00 Capital and Surplus Capital stock, issued and outstanding $200 000 00 Surplus as per statement of profit and loss i33',6oo'.oo 333,600.00 I475.650.00 98 Problem 25. (New York Examination, June, 1910.) A partnership was formed July i, 1907 to act as factory selling agents, with capital invested by A, $5,000.00; B, $7,000.00; C, $8,000.00; profits and losses to be shared in proportion to original capital invest- ments, no interest to enter into partners' accounts. On December 31, 1909, the books, which had been badly kept, showed the following balances, which were not disputed by any of the partners: A, net credit, $3,000.00; B, net debit, $3,370.00; C, net credit, $4,650.00; cash in banks and on hand, $804.30; expense debit, $4,550.00; interest credit, $250.00; accounts receivable, factories, $2,240.00; investment account, $12,000.00. The firm holds a number of one year sales contracts, under which the minimum guaranteed will net $15,000.00 in commissions, although it is believed that the amount may nm to $20,000.00. The factories make shipments to customers direct and send monthly statements to A, B and C of shipments and commissions. The investment accoimt represents holdings at par of 75% of the capital stock of a company on whose books at the end of 1909 appears a deficit of $2,700.00. A and B have agreed to sell their interest in the business at Decem- ber 31, 1909, including the firm name, to C for 200 cents on the dollar, taking notes covering eighteen months. Prepare a statement showing the settlement between partners at December 31, 1909, and a balance sheet as at January i, 1910, of A, B and C. 99 Accountancy Problems and Solutions. 8 O 00 8 S •^ m OS ■^ •? lO 1^ 0\ :.S 8 1^ 8 Practical Accounting Problems. a B ■4-* a U : 8 :"§ ; at :a : If :^ : « o : 8 ■ g O 'l-l • -c - • - • 5 ^ « ^ * oo o fO CI s m a S Id S» li? **> 9. "^ 00 «*> »o lO 8 « — • 53 JO a .s 5 On « «» 8 00 NO 8 00 vO to Si B «3 c8 *^** On B ■ "1 p-HI 8 S fO I I ^ oo" 00 NO d CO .§ t ONt^ *"* *o 00 «« vO !*• lO M '«*• N4 S lO m ^ •o •2 o ill HO n I M '-' 3 iiii ^ •-> Q X .3 "" " -s. .«! O 8 ? Ji% O t^ Bq !i ?i J o .. o OS n o M ON Jfl •• • • as : : 00 o w 8<2 NO d lo to-* «oi6 00 NO lO 9 00 < M m s o CI ^ I 8 O 6o ffi 5oo 88 88 ^8 O lO 8 8. «4i 5 to lOcO ON to OnIO C4 ON 00 •> lO 1 • •a J) osG ON ^ •si to IPX c 100 li lOI Accountancy Problems and Solutions. Problem 26. (New York Examination, June, 1910.) Tlie Patent Specialty Company was oi^ganized July i, 1907, with a capital of $100,000.00, to manufacture novelties. The following transactions occurred: July I, 1907, one-half of capital stock was subscribed and issued, 10% being called and paid on that date in cash. Legal and other incorporation expenses, amounting to $500.00, were paid. August 20, 1907, patent, covering novelty, was purchased for $50,000.00, payable one-half in stock and one-half in cash; the stock was issued and delivered, $2,000.00 paid in cash and note given for bal- ance, due in one month, 6% interest. The patent was subject to royalty rights, granted to the Novelty Company, which terminated at date of purchase. All accrued royalties were to pass with patent and no royalty rights were granted by the Patent Specialty Company. August 27, 1907, the Village Board of Trade donated a lot, valued at $5,000.00, in consideration of agreement to erect and equip a plant at cost of not less than $25,000.00. September 13, 1907, a further call of 70% was paid. The note was paid at maturity. December 31, 1907, the following facts existed: Pa3nnents on account of salaries, interest, insurance, etc., amoimted to, $2,250.00, with $250.00 accrued; contracts for construction and equipment amounting to $35,000.00 had been given, which were 75% completed and 40% paid; royalties amoimting to $2,725.00 had been received and $190.00 was accrued. ' 1 Prepare journal entries to cover foregoing and statement to display financial condition at December 31, 1907. Practical Accounting Problems. Solution. The Patent Specialty Co.— Journal Entries July I, 1907 The Patent Specialty Co., incorporated under the laws of the State of New York, with an author- ized capital of One hundred thousand dollars ($100,000), divided into shares of the par value of dollars ($ ), each. Date of incorporation 1907 Date of organization July i, 1907 Subscription, Dr. $50,000.00 To Subscribed Capital Stock, Cr. Cash, Dr. 5,000.00 To Subscription, Cr. shares of the capital Stock subscribed to per subscription list accepted by the directors vide minute no for which certificates have been issued, and 10% of amount subscribed, called and paid. Organization expenses, Dr. 500.00 To Cash, Cr. Legal, and other incorporation expenses paid. August 20, 1907 Patent, Dr. To Vendor, Cr. For patent covering novelty purchased by the di- rectors in accordance with the terms of Bill of Sale dated and entered on minute book, vide minute no Vendor, Dr. To Subscribed Capital Stock, Cr. " Cash, " Note Payable, In settlement of amount due him on account of purchase of above patent there have been issued to him shares of the capital stock of this company, full paid and non-assessable. Cash to the amount of $2,000 has also been paid him and a note for $23,000 payable in one month from date hereof, and bearing interest at 6% per an- num has been executed and delivered. 103 $50,000.00 5,000.00 500.00 50,000.00 50,000.00 50,000.00 25,000.00 2,000.00 23,000.00 > Accountancy Problems and Solutions. Real Estate, August 27, 1907 Dr. To Surplus, Cr. Value of lot donated by the Village Board of Trade in consideration of agreement to erect and equip a plant at cost of not less than $25,000 which agreement has been executed by the direc- tors and deed delivered. September 13, 1907 Cash, Dr. To Subscription, Cr. In payment of a call of 70% of amount subscribed made by the directors vide minute no Dr. September 20, 1907 Note Payable, Interest on Note, To Cash, Cr. In payment of Note issued August 20, 1907, with interest at 6% per annum. December 31, 1907 Plant Construction, Dr. To Contractors, Cr. For 70% of contract price, $35,000, of plant and equipment to be erected, which proportion is complete. Cash, Dr. Royalties accrued, ** To Royalties, Cr. Royalties received and accrued. Contractors, Dr. Sundry expenses, ** To Cash, Cr. Payments to contractors, and for salaries, interest, and insurance, etc. Sundry expenses, Dr. To Accrued Expenses, Cr. Salaries, interest, insurance, etc., accrued but not paid. Patent, Dr. To Interest on Note, Cr. Interest paid on note dated August 20, 1907, added to purchase price. Royalties, Br. To Patent, Cr. $5,000.00 35,000.00 23,000.00 115.00 26,250.00 2,725.00 190.00 14,000.00 2,250.00 250.00 115.00 2,915.00 $5,000.00 35,000.00 23,115.00 26,250.00 2,915.00 16,250.00 25000 115.00 2,915.00 I ■ Practical Accounting Problems. Royalties accrued on Patent purchased deducted from purchase price. Organization expenses, Dr. $2,500.00 To Sundry Expenses. Cr. $2,500.00 Interest, insurance, salaries, etc., incurred to date. The Patent Specialty Co.— Balance Sheet, December 31, 1907 ASSETS Real Estate $5,000.00 Plant Construction, value of work completed (75% of contract price ) 26,250.00 Patent 47,200.00 Organization Expenses 3,000.00 Cash on hand and in bank 860.00 Royalties accrued 190.00 $82,500.00 LIABILITIES — ^— — ■ Sundry accrued expenses, salaries, insurance, etc $250.00 Contractors, amount due them 12,250.00 -, . $12,500.00 Capital Stock, authorized $100,000.00 Less Stock unissued 25,000.00 Subscribed Capital 75,000.00 Less amount uncalled 10,000.00 Outstanding Stock 65,000.00 Surplus 5,000.00 $82,500.00 105 Accountancy Problems and Solutions. Problem 27. (New York Examination, June. 1910.) There were purchased December 31, 1907. $100,000 of Brownsville 4i's for $103,39443 ex. interest. On June 30, 1909, half of the bonds were sold for $52418.55 «. interest. Given that the bonds are semi-annual and that the price paid is such as to net the investor the nominal rate of 4% P«r annum, that is 2% semi- annually, determine the profit made from the sale and the mtcrcst rev- enue for the two years ended December 31. 1909. Give an analysis of the Bond Ledger account as it would appear at the close of busmess December 31, 1909. Solution. Bond Lbdger Bond LBDOsm Account |ioo,ooo'Brownsville 4H's of Date Description 1907 — Dec. 31 1908— June 30 Dec. 31 1909 — ^June 30 Dec. 31 Purchasedof X & Co. Amortization It Dr. I103.39443 Sold to Y & Co. Amortization I General Ledger to net 4% interest Cr. I182.11 185.75 18947 51.418-55 96.63 Balance $103,212.32 103.026.57 102,837.10 51418-55 51,321.92 Dr. Date 1909 . June 30 It tf Bond Sales Cr. Description Amount Date Description Amount Brownsville 4^*8 Profit & Loss ajc $51418.55 1,000.00 1909 June 30 Proceeds $50,000 104.8371% $52,418.55 $52418.55 $52,418.55 106 Practical Accounting Problems. Interest Account 1908 June 30 To bond amortization $182.11 Dec. 31 " " " 185.75 1909 June 30 ;; ;; ;; 189.47 Dec. 31 96.63 " " " Profit & Loss a|c 7,221.04 $7,875.00 1908 June 30 By cash Dec. 31 " " 1909 June 30 " " Dec. 31 " " $2,250.00 2,250.00 2,250 . 00 1,125.00 $7,875 00 Profit and Loss Account 1909 June 30 By bond sale $1,000.00 Dec. 31 ' interest 7,221.04 $8,221.04 Analytical Single Column Schedule Bond purchase, $103,394.43 Income rate, 2 % + 2,067 • 89 Cash rate, 23^% — + Bond sale, 50% — 105,462.32 2,250.00 103,212.32 2,064.25 105,276.57 2,250.00 103,026.57 2,060.53 105,087.10 2,250.00 102,837.10 51418.5 5 51418.55 1,028.37 52,446.92 1,125.00 Balance, Dec. 31, 1909 « $51,321.92 107 Accountancy Problems and Solutions. ProDiem 28. (New York Examination, June. 1910.) THE RICHARDSON ENGRAVING AND PRINTING COMPANY The Richardson Engraving and Printing Company, a corporation having an authorized capital stock of $50,000.00, owned by WiUiam Richardson, f 10,000. 00; Silas Johnson, $15,000.00, and Thomas Acton, $35,000.00. The plant was destroyed by fire September 23, 1908. All the books and records were saved except the sales records, which were not written up for September. The insurance companies paid $28,000.00 on the plant and $7,000.00 on the stock, which was distributed to the stock- holders as received in proportion to their holdings. Cash was received from September sales amounting to $13,500.00. On September 30, the trial balance disclosed the following condition: Capital stock $50,000 . 00 Plant $30,000 . oo« Stock on hand June i, 1908 8,750.00 Accounts receivable 19,640.00 Accounts payable 12,590 . 00 Reserve for bad debts 1,350 . 00 Insurance adjustment 28,000 . 00 Cash 3,900 . 00 Engraving 77,600 . 00 Printing 99,35° • <>° September sales, not allocated 24, 1 7 5 • 00 Merchandise purchases 58,800 . 00 W»ges ^. .30.180.00 Rent 1,800.00 Salaries 5,750.00 Profit and loss surplus 855 o© William Richardson 7,000 . 00 Silas Johnson 10,500 . 00 Thomas Acton 1 7, 5oo . 00 $293,820.00 $293,820.00 The accounts receivable realized $18,320.00, and the liquidation ex- penses were $1,850.00. The stockholders turned in their stock for can- cellation and received their proportionate amount of cash. Prepare journal entries closing the books of the corporation and a profit and loss account. Solution. The RicHAiDSON Engraving Co.— Journal Entries to Close Books September 30, 1908 Insurance Adjustment, Dr. $30,000.00 To Plant, Cr. $30,000.00 Book value of plant destroyed by fire September 23, 1908. Cnh, Dr. 18,320.00 To Accounts Receivable, Cr. 18,320.00 108 ( Practical Accounting Problems. ■ 1,250.00 1,920.00 Dr. 77,600.00 99,350.00 23,175.00 u u Dr. 204,280.00 Amount collected from debtors on general book accounts Accounts Payable, Dr. $12,590.00 To Cash, Cr Settlements made with creditors on general book accounts Reserve for bad debts, Dr. To Accounts Receivable, Cr. Transfer of amount reserved to offset loss on reali- zation. Realization and Liquidation account, Dr. To Accounts Receivable, Cr. Net loss on realization of accounts. To Cash, «* Expense of liquidation. Engraving, Printing, September Sales not allocated, To Profit and Loss Account, Cr. To transfer sources of income. Profit and Loss Account, To Stock on hand, June i, 1908, Cr. " Power, " Wages, " Rent, Salaries, To transfer expense of the business. Profit and Loss Acct., j^ To Insurance Adjustment, Cr. " Realization and Liquidation Account, Cr. To transfer additional losses and expenses. Profit and Loss Surplus, d^ To Profit and Loss Acct., Cr. To transfer balance of undivided profits. Capital Stock, To Wm. Richardson, Silas Johnson, " Thomas Acton, For — shares of the Capital Stock of this company held by them and now returned for cancellation. Wm. Richardson, j^^ Silas Johnson, « Thomas Acton, « To Profit and Loss Acct, Cr. For divisions of net loss in proportion to their hold- ings. 109 3,920.00 855-00 Dr. 50,000.00 Cr. M 1,444.00 2,166.00 3»6io.oo $12,590.00 1,250.00 70.00 1,850.00 200,125.00 8,750.00 57,800.00 130,180.00 1,800.00 5,750.00 2,ooaoo 1,920.00 855.00 10,000.00 15,000.00 25,000.00 7,220.00 Accountancy Problems and Solutions. Wm. Richardson. ^^- $^'556.oo Silas Johnson. : ^^^^ Thomas Acton, 3.oy""" ^ ^^^ To Cash, Cr. $7.78o.oo Final distribution of cash. The Richardson Engraving and Printing Co.— Profit and Loss Account September i to 23, 1908 Gross Earnings, June i to September 23, 1908. Engraving $77,000.00 Printinc ...........•.••••■•••••■•*■** 3W»«J3 ^^^ September Saks, not allocated ^3. 1 75-00 $200.125.00 Deduct expenses of operating : Inventory June i, 1908 8,750.00 Wages 130,180.00 Power 57,800.00 Rent 1,800.00 Salaries 5.75o.oo 204.280.00 Loss on operating $4,i55-00 Add loss on fire adjustment: Book value of plant destroyed $30,000.00 Insurance received ^'OOQ^Q ^"^'^ Add loss and expense of liquidation : Book value of accounts receivable $19,640.00 Less reserve for bad accounts. 1,250.00 $18,390.00 Less amount realized 18,320.00 Loss on realization $70.00 Expense of realization ^^SQOO h920.oo $8,075.00 Deduct Profit and Loss Surplus ,. ^^^'^ $7,220.00 Divided as follows : Wm. Richardson, one-fifth $i444-00 Silas Johnson, three-tenths 2,166.00 Thomas Acton, one-half 3.6iaoo $7^20.00 110 Practical Accounting Problems. Problem 29. (Intermediate Chartered AccountaDts* Examination. June. 1910.) 3. X., Y., and Z., are in partnership, and on January i, 1909, their re- spective capitals were £4,000, £2,780, and ii,S90. Y. is entitled to a salary of £250 and Z. to one of £200 per annum, payable before division of profits. Interest is allowed on capital at 5 per cent, per annum and is not charged on drawings. Of the net divisible profits X. is entitled to 40 per cent, of the ii,ooo, Y. to 35 per cent., and Z. to 25 per cent.; over that amount profits are shared equally. The profit for the year ended Decem- ber 31, 1909, after debiting partners' salaries, but before charging interest on capital, was £2,317, and the partners had drawn £800 each on account of salaries, interest and profits. Prepare the closing entries of the Profit and Loss Account and the Partners' Accounts for the year. Solubon. Profit and Loss. . . . £418 ^.10 d.o To X., Drawmg Account £200 s. o d.o 7" u u 139 o o .^'\ 79 10 o for mterest allowed on capital at the rate of 5 per cent, per annum, according to partnership agreement, dated Profit and Loss. ... £1,898 s.io d.o To X., Drawmg Account £69^ ^^q ^ ^ 7" u u 649 10 o - •„ . , 549 10 o for aUocation of profits according to partnership agree- ment, viz.: Of the net divisible profits, first £1,000 o o: X. receives 40%. Y 35%, and Z. 25%, the balance is divided share and share alike. X.. Drawing Account £99 ^^^ ^^ 2,11 " " ^^^ '° ^ ' To X., Capital Accotiit". .'.V.;: .' W. . . . ^ , , , ^, . .*" £99 ,.,0 d.o 7 *' .1 I. 238 10 o Transfer of accounts. ® ° PROFIT AND LOSS STATEMENT ^'^^^''^^^^''^^'^^'^^ former s^Uons £^.767 s.o d.o Partners' salaries: « £250 s.o d.o 200 o o 450 o o Balance. ^2,317 5.0 d.o III Accountancy Problems and Solutions. Deduct: Interest on Capital, X £200 s.o d.o Y 139 o o Z' ^^[ 79 10 o ^4^8 5.10 d.o Balance £1,898 5.10 d.o Allocation of balance (net profits): X.. 40% of £1,000 £400 s.od.o H of £898 5.10 d.o 299 10 o £699 5.10 d.o Y., 35% of £1,000 £350 s,o d.o ji of £8985.10^.0 29910 o 649 10 o Z., 25% of £1,000 £250 5.0 d.o K of £898 i.io d.o 29910 o 549 10 o 1,898 10 o X.'s DRAWING ACCOUNT Drawings Capital Account frransfer). . . . £ s. d. 800 o o 99 10 o £899 10 o Interest on Capital. . . Profit £ s. d, 200 o o 699 10 o £899 10 o Balance. . X.'s CAPITAL ACCOUNT £ s. d. 4,099 10 o Balance Transfer from D/A . £4,099 10 o £ s. d» 4,000 o o 99 10 o £4,099 10 o Balance £4,099 10 o Y.'s DRAWING ACCOUNT Drawings Capital Account (Transfer) Salary Allowance. . . Interest on Capital . Profit Balance. £ s. d. 800 o o 238 10 o £1,038 10 o Y.'s CAPITAL ACCOUNT £ s. d. 3,018 10 o Balance Transfer from D/A. £3,018 10 o £ 5. d. 250 o o 139 o o 649 10 o £1,038 10 o £ s. d. 2,780 o o 238 10 o £3,018 10 o Balance £3,01810 o 112 Practical Accounting Problems, Drawings Capital Account (Transfer) Z.'s DRAWING ACCOUNT £ s. d. 800 o o 29 o o £829 o o Salary Interest on Capital , Profit £ s. d. 200 o o 79 10 o 549 10 o £829 o o Balance. Z.'s CAPITAL ACCOUNT £ 5. d. 1,619 o o £1,619 o o £ s. d. Balance 1,590 o o Transfer from D/A. . 29 o o Balance £1,619 o o £1,619 o o 113 Accountancy Problems and Solutions. Problem 30. (Virginia Examination. November. 1910.) The Gunsaulus Corporation, organized under a general charter of the State of Virginia, operates coal mines, saw mills, a private railroad and have their own timber holdings. All the accounts are kept in one mammoth ledger, with usual books of original entry, at the general office in Norfolk. They engage the serv- ices of yourself to audit the books for the past year (ending June 30, 1909;. The accounts in the ledger have been forwarded back and forth to economize stationery and the trial balance is as follows : Account Debit Credit Plant and Equipment — Mine A $31,955-26 New Plant — Mine 7 62,173 .27 Stumpage — cut for saw mill 7,524.26 Capital Stock $581,500.00 Betterment to Mines 3 and 4 2,783.42 Local purchase logs 51 .66 Saw mill repairs 1,360. 31 Cash 7*436.05 Development — Mine i 3.822.37 Timber and land 240,305.26 Planing mill repairs 34i -43 Accounts Receivable 76,421.91 Mine engineering tools 225.00 Pfetty Cash— mines 75000 Lumber — outside purchase 79.20 Lighterage on Lumber 57-95 Mine administration, salaries and supplies 2,195.22 Petty expenses at mines 1,649.28 Tenant houses at mines 2,117.22 Lumber, logs, etc., on hand 50.853 -60 Saw mill payroll ■ 4.141 -41 Planing mill payroll 2421.95 Commissary merchandise 8,642. 58 Feed and labor, mines stables 925-75 Electric repairs at mines 467-97 Commissary payroll 726.65 L'> ntx Mine store expense and labor 2472.83 Mine store freight .72 98 Saw mill machine shop 2,328.53 Outside investments r'nAn nn »j J *»y4y.iA' Advanced to new corporation t ^71 9-7 ^'"p'f •■• 324,982.92 bales of lumber Sales of lath and shingles Insurance— Mill 85 30 Operation Chicago office j 000.00 Allowances and discount— Coal shipments . . . 637! 40 Repairs and expense, mines stables 124.22 Mine office, salaries and supplies 1,562.23 Mine engineering, salaries and supplies 625.00 Traveling expenses, mines manager 221 .67 Interest — current loans at mines 125.00 General expense g^- g^ Discount on lumber sold j g^j 50 Bills Payable Accounts Payable, audited Special loan Taxes — mines 178. Si Insurance — mines i 271 . u Legal Expense — mines 785 .00 Royalty on coal mined 4,989.77 Mining labor 29!87i. 23 Surplus Sales of wood 115 Credit $246. 17 57.280.78 $28,033.11 2.392.45 172,667.50 24,287.03 35,000.00 195,764.45 186.00 Accountancy Problems and SoiuHons. Account Debit Credit Rent of dwelling and miscellaneeous income. $2;aoo Yardage and tunnel extension at mines $2,743.22 Delivery of coal to tipple 3,571 ,28 Mamtenance of Way— mines 710. 11 Maintenance of Air — amines , 739. 10 Props, ties and caps 497. 17 Mine foreman, salary — 800. 00 Maintenance of mine cars 209.38 Mine machinists' and engineers* wages ...... 1,378.78 Smithing — amines , 672. 10 Fuel—mines power house 297 . 51 Removal of slate 551 .98 Deadwork at mines 47.21 Electric supplies at mines 2,488.55 Insurance during construction of mine plant. 937-97 Norfolk & Western Ry, claims at mines .... 71.59 Repairs to miners' houses 171 . 19 Legal expense— obtaining right of way to mines 342.68 live stock at mines 3,850.00 Taxes during construction of mines plant ... 313 -71 Mine commissary merchandise 8,427.60 Rental from miners' houses ....•.., $1,572.27 Cartage and sale of coal to tenants • . . 70.09 $1,099,277-85 $1,099,277.85 They have agreed to a plan whereby the coal mine operation will be taken over by a new corporation and therefore ask that you separate the lumber and coal accounts, make up a separate set of statements to cover each business (balance sheet, and statement of operation, with sup- porting schedules showing the profit and loss account and surplus account in detail) — ^the capital stock to stand as part of the lumber accounts. You find as follows: That at the beginning of the fiscal year the capital stock issued and paid for amounted to $S75.ooo.oo, John Johnson and Henry Mears, having performed their duties in a way acceptable to the officials, were allowed to purchase for cash 40 shares and 20 shares each of the capital stock fc^pectively, at $125.00 per share (par $100.00), and that the $25.00 pre- mium per share had been credited to Surplus Account. Bills Receivable account was balanced and closed but in going through the accounts you found Bills Receivable, for lumber accounts, renewed from time to time amounting to $2,791.17, which certain customers had not yet paid. Mine No. i is in a state of development and has not been as yet oper- ated. 116 Practical Accounting Problems, In Accounts Receivable $15,180.92 cover coal shipments. In Bills Payable $50,725.00 cover mine investments. Insurance premiums not matured $726.10 on mine policies. Taxes paid in advance $78.53. Of the surplus, before closing the accounts, $98,958.44 arises from mme operation prior to year ending June 30, 1909. $12,790.79 of Accounts Payable Audited cover mine bills. Close their books, showing necessary journal entries to adjust accounts. Ihe Flat Top Fuel Corporation secures a charter and capitalizes with M issue of $250,000.00 preferred stock and $200,000.00 common stock. The preferred stock is subscribed as follows : The Gunsaulus Corporation $150,000.00 (They to transfer all assets and liabilities, as shown by your state- ment covering the mines property, to the Flat Top Fuel Corporation, any equity to apply as a payment on the subscription, balance to be paid on call.) A. Murphy $50,000.00 ($25,000.00 paid in cash, balance on call.) Andrew White $50,000.00 ($25,000.00 paid in cash, balance on call.) Show proper entries to make the transfer in the books of the Gun- saulus Corporation and a balance sheet after doing so; also, entries to open books of Flat Top Fuel Corporation and balance sheet after doing so. The General Manufacturing Co.. Inc., capitalized at $30,000.00 of which the Gunsaulus Corporation owns 50 per cent, the Rock Lumber Company 25 per cent and the Severn River Lumber Company 25 per cent, agree to take over the business of each of the three concerns named for the purpose of increasing the total output and adding new products It ^mg agreed that any difference in holdings appearing in the consolidated Balance Sheet is to be adjusted later. The Gunsaulus Corporation agrees to dispose of its plant for $250- 000.00; reserve its timber holdings and $8,000.00 of Accounts Receivable not considered collectible ; also assume all liabilities excepting such Ac- counts Payable Audited as remain unpaid. The other companies submit the following balance sheets : ROCK LUMBER COMPANY Account j^^^^ Cash on hand and in Bank «t/; ^to Or Bills Receivable jT't Bills Payable .';;' ^*'3i-55 Lumber. Logs, etc 52,176.59 Unexpired Insurance Premiums j -j- -g Mill Supplies and Extras gjg ^ ■^^^s 2W.65 fi7 Credit $77,191.94 w Accountancy Problems and Solutions. Account Debit Credit Standing Timber and Lands $300,000.00 Accounts Payable $15,197.94 Surplus 401,321-76 Mill Plant 60,500.00 Accounts Receivable 67,496.20 $493,711.64 $493,711.64 SEVERN RIVER LUMBER COMPANY Account Debit Credit Cash $438.72 Bills Receivable 6,008.91 Lumber, Logs, etc 97»303.43 Unexpired Insurance Premiums 417-93 Mill Supplies and extras 742-59 Teams 62.50 Bills Payable $39,604.38 Standing timber and lands 42,811 .83 Tugboat 2,019.39 Outside Investments 6,300.00 Mill Plant 30,000.00 Accounts Payable 7,912.84 Surplus 172,093-42 Accounts Receivable 33,505-34 $219,610.64 $219,610.64 Practical Accounting Problems. Solution. THE GUNSAULUS CORPORATION OPERATING STATEMENT— MINES MINING Mining Labor. ... I29.871 • 23 Cost of Mining Car- Machinists and Engi- med Down to ,;°e«^ I1.378.78 Trading Section.. Smithing 672 . 10 Foreman 800.00 2,850. 88 £uel 297. SI Electric Supplies 2,488 . ss Electnc Repairs 467 • 97 3,254 . 03 Props, Ties and Cars . . 497 . 1 7 Deadwork 47.21 Maintenance: Of Air 739.10 Of Way 710. II Of Mine Can 209.38 2,202.97 Removal of Slate 55 1 . 98 i Delivery of Tipple. . . . 3.571 .28 4.123.26 Royalty on Coal Mines 4.989 77 Commissary and Stables: Commissary Mer- chandise 8,427.60 Freight to Store 472 .98 Store Exi)ense and L^bor ........ 2.472 . 83 Feed and Labor Sta- _ We? 925-75 Repairs and Ex- pense — Stables ... 124 . 22 12.423 . 38 ls9.715.S2 *S9.7iS.Sa IS9.7IS.S2 .1 None of the capital stock of the new corporation has been paid for. From the figures you have at your disposal, make a balance sheet show- ing the interests of each company separately and items of the same class in comparison with each other. Draft a balance sheet for the Gunsaulus Corporation to cover its present condition. Cost of Coal Mined.. Administrative Sala- ries and Supplies . . . I2.195 . 22 Traveling Expenses ... 22 1 . 67 TRADING Js9.715.s2 Sales: 9°^lv.; SS7,28o.78 ,>.tA«« LessAllowances.etc. 637.40 Is6.643.38 2,416.89 Coal to Tenants . ,. and Cartage 70.00 Gross Loss Carried Down to Profit * Loss Section S.418.94 162,132.41 I62.132.4x Gross Loss on Trading. Salaries and Supplies. . 5x.s62 . 23 Taxes 100.00 Insurance 1,271.11 Petty Expenses 1,649.28 Interest 125.00 Legal Expensfs 785.00 PROFIT AND LOSS f 5.418. 94 Rental from Miners' _ Houses Si «79 27 L^Repai,^....:::: *'1?J:?J Net Loss Charge- — ABLE to Surplus.. 5.492.62 ^10.911.56 11,401.08 9.S10.48 S10.9x1.56 118 119 Accountancy Problems and Solutions. IN. ^ to m 1 ei" ?^ 00 o qs"? 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Practical Accountins[ Problems. !5 • to • i »<• 7J «o ^ « z •o s 1 8 it B «o l*» «o i CN CO to 6s M M t^ 00 VO vO «o w 00 CO w W lO 00 «» «^ mo o\oo «OM 9 2? fO 5 o\ o^ oo d 00 In. • i w v5 00 •w ^^vO" 4* •o lO « «* 1 s 2 1 I ro S Kl mill 00 SO 00 s M M r^ as »4 vO o lO *9 n in «» N O CO O CO a ci ic to MOO t^ lO to •k 00 ? «^ 00 *? lO 8 lO 'IkI SB' 00 lO vO 9. lOvO 00 -* civd M 4 -*ci •* >m vq tN M ^ 00 ^ M 5« M to CO * * * o (0 fc^ 2 *J » S So COi oS S CO ■^.^ • bft- o 3 (11 •I o CO 3 -d 0) CO 3 ■«l-cO vO CI mto ^5 •- to 4 nT « s ^ b«' £ »So(36 a^£ S Z CO ^ *iS 122 uD'd ctf a> to a ^ ^ O COCA 1e f^-3 >>a Ctf 4> CUfiJ V4 «M4 « ^14 ■ V4 I^S ^^ •f ■«» ►3.3 OS V^ SS33 S taoboo G a a <3 S CO ! o 5 e I Wi>« I t ex i O o H Q M 04 H en CO coH . +» CO to 0) CO en o 2 S O o m o 2; I— I en D O Cx) •J (4 (-> en in _] (Vi PS CO o CO CO o Q § bflM CO o en , O I o 2: I a 8 to to VO 00 o CO 00 lO CO rN. 00 o\ t>. N 00 CO VO lO «» •Oco O lO i-t ov CI ov ao CO Ovt>. tOI>* I^IO VO CO t^gvo VO O 00 »h" « to CI N «o o -*» s : « o o S c S ^ q ^ »— • rt ■*^ nS*" CO S CO cd I 3 _ 9> 73 ei CO "*^ S2 •3 o. H lU CO u 60 2 H g o coO CO oj-r s "^ fe OOco ■M c 3 Qg 13 Oi C X . • »-• ^ 00 to ON lO s; NO m O (« b |i§ ^^ H O -S'C pI ilii il fa o CO s O i On *n Co g « ON lO QN to On t^ON ON lOtO ON On« On ON O M to ON « to « ON !>. ¥^ a co*d > THE GUNSAULUS CORPORATION MINES DEPARTMENT BOOKS JOURNAL ENTRIES The Flat Top Fuel Corporation, chartered under the laws of the State of Virginia, has this day purchased, taken over and assumed all Assets and Liabilities of the " Mines Department " of this (The Gunsaulus Cor- poration) and the same are hereby transferred, set over and assigned to them on the books of this company, as by the following entries will more fully appear, in consideration of the subscription to fifteen hundred shares of the preferred capital stock of the said The Flat Top Fuel Corporation of the par value of one hundred dollars each; the equity appearing in the entries below being applied as part payment on account of the Gunsaulus Corporation's subscription, the balance to be paid on call Plat Top Fuel Corporation Ii55t309 . 29 To Sundry Assets (as per Mines Balance Sheet*) transferred Sundry Liabilities (as per Mines Balance Sheet*) assumed 65,861 .33 To Flat Top Fuel Corporation Surplus (this equity being applied as part pay- ment on accoimt of shares) 89,447 .96 To Flat Top Fuel Corporation >i55»309-29 65,861.33 89,447.96 The Balance Sheet of the Gunsaulus Corporation after foregoing entries would comprise the lumber accounts only and would be the same as " Lumber Balance Sheet " which is given on page 122. * It is not necessary to state items in detail here for the xeason that itemise the Mines Balance Sheet. 120 and lai 125 134 I It ;t Accountancy Problems and Solutions. THE FLAT TOP FUEL CORPORATION JOURNAL ENTRIES The Flat Top Fuel Corporation Chartered Under The Laws Of The State Of Virginia Having An Authorized Capital Stock ci $450,000.00 Divided into $250,000.00 Preferred, And $200,000.00 Common, All Shares Being Of The Par Value of $100.00 Each Gunsaulus Corporation Subscription Accotmt. . . $150,000.00 1 ,500 Shares Preferred at par A. Murphy Subscription Account 50,000.00 500 Shares Preferred at par Andrew White Subscription Account 50,000.00 500 Shares Preferred at par To capital Stock Preferred Account 2,500 Shares Subscribed for as above Q yli. 50,000.00 To A. Murphy Subscription Account ToAndrew White Subscription Account Being the agreed payment to be made at once, t3alance subject to call. $250,000.00 25,000.00 25,000.00 Sundry Assets (as per " Mines Balance Sheet" of the Gunsaulus Corporation*) Transferred . . 1 55>309 • 29 To Sundry Liabilities (as per '* Mines Bal- ance Sheet" of same Company*) As- sumed To Gunsaulus Corporation Subscription Accotmt Being the transfer to this (The Flat Top Fuel Corporation) company of all the assets and liabaities of the "Mines Department" of the Gunsaulus Corporation, as by reference to the formal agreement and transfer will more fully appear, the equity (Surplus) of such assets and liabilities to be applied as part payment for the subscription of the said Gunsaulus Corporation to the preferred shares of this company — ^balances subject toc^. 65,861.33 «9.447 96 ♦Aathese items are full^ detailed on pages lao and lai «• hair* deemed h tumeoeaaarf to tepeat in detail in these entries. 126 Practical Accounting Problems. H M CO O < Z O O o o o H IS X s 8 ••« p M 00 p >o \o Q 00 m- ^ m £ 10 a s 1 M :§ ~ .3 ^ i3 g Mi S£c3 u 8 0\ o m »c 10 :f «*3 to « *^ «o NO 10 00 m 10 M M M .•P ?88 • • • 100 Q 100 O S 10 10 g S 8 a CO • • a .2 s a o J? ":6 s a ,^l i§« w 5 . a CO 127 ilh Accountancy Problems and Solutions. Problem 31. (Chartered Accountants' Examination, December, 1910.) 6. The trial balance of the London office books of the " A " Rubber Com- pany is as follows on 31st December, 1909: £ s. d. £ s. d. Estate Purchase 3.000 o o Estate Development 8,000 o o Estate Produce Stock, ist January, 1909 600 o o Cash at Bank, London 800 o Estate Manager, ist January, 1909 500 o 8 Remittance to Estate Manager 1,000 o o London Office Expenses 400 o Share Capital 12,000 o o Creditors i»9«> ^ Profit and Loss Balance 400 o 8 £14,300 o 8 £14.300 o 8 Practical Accounting Problems. Alter taking out the above balances the accounts to 31st December, 1909, are received from the estate manager as follows (the dollar to be taken at 2s. 4d.) : Balance, ist January, 1909 $4,286- Remittance from London 8,600 Rebates ^3^ Sale of Produce 2,000 Profit on Rice 249 Expenditure on Development $9,000 Expenditure on Purchase of New Land 2,800 Expenditure on Upkeep of Estate i»646 Balance carried forward i320 $15,266 $15,266 Solution. REVENUE ACCOUNT. £ s. d. Sales of Produce 233 6 8 Profit on Rice 29 i o Rebates 15 5 g Inventory Adjustment: i s. d. Stock, January i, 1909 600 o o Stock, December 31, 1909 641 13 4 Net increase Total Deduct — Cost of Maintenance of Estate Balance carried down Add — Profit on Exchange Total London Office Expenses £4cx) 00 Less — ^Returns as above 130 12 8 Net Loss for the period £ s. d. 277 13 4 41 13 4 ^^319 68 192 08 £127 60 3 68 £130 12 8 269 7 4 £400 o o The produce unsold at 31st December, 1909, was valued by the manager at $5,500. You are required to construct the revenue account and balance sheet for presentation to the shareholders. 128 lap ■ i ! I > J Accountancy Problems and Solutions. Practical Accounting Problems. H* I "* •* «o : ::^ o u n m U3 E o *0 tn CO O e in 55 9 t/3 5 tn CO < s< "^ O 00 •««• o «0 O VO *^ O 1i S) f*i o 2 58 N VO 00 T3 O '^ (A O O 3 c E p t) c *j O E< ?! § 130 e SIS s O w 0^ u I g O O U < n C/3 tn u o o o 9> o 8 Ok eo ^ 00 00 O NO 8 8 8 4 VO 00 00 o 1-4 '^ H< 8 > Q c o VM O c» V CO I .5 o w a. w ^ a tig 00 o 00 00 o 00 ,S O O 10 \0 •-• VO to ro 0\ CO M ro cvj t/3 (O 8 8 8 8 8 — ; P» VO •-" Tf 00 01 00 o 8 00 VO H< 8 R 00 «(9- ■ • • • » • ■ v bo . d c ice. . en : £ 0^ w ■ MH s s V nj tn u •*•* a> c -<-> ■4-> ,_ -U ■♦J iS B ^ j^'g C0 Cd tn Im m pei p^ c/} Ph Oi m • Q * S3 c RJ 5 s CO 'C3Q Q 131 Accmntancy Problems and Solutions. Practical Accounting Problems, f r k li Problem 32. (New York Examination. January. 1911.) The following is the trial balance of the X. Y. Z. Coal Mining Com- pany, as of December 31, 1908: TRIAL BALANCE DEC. JI, I908 Cash *- g_ . -Q ^ker and machinerj; ::::::::::::::: 41:0^5:^ Ollice building 1 000 00 Blacksmith shop '.V.V.'.'.V.V.V. I000.00 Inside construction 1567500 Car and mine rail account .* 7,53450 Horses and mules e 600 00 Accounts receivable ::::;;;; 35;! 12:25 Bills receivable 10,000.00 Capital stock— common ...., ' $>;oooooo ^t^^^'r^:::- •■••••■•■ -^'s??- Accounts payable ..........'.'.' iJsoo.oo Depreciation on buildings ' and mkch'^ .' .' .' .' ." .' .' ." .' ." .' .' .' 12'Joo 00 supplies g 240 00 * Pay roll— outside ',[[[[ 24 701 qo Pay roll— inside ' iio!4^4:2'; Salaries— superintendent, etc .".**.'.* 6,00000 Salaries — office clerks 4500 00 Office expense 1,147 « General expense 75000 Qiims for injuries 4,000 00 ter^f i^'^fi-^' ^"^y '' 1909) :::.'; ; 5,500:00 Repairs to buildings 4,075.00 Mepairs to construction 3 445 00 Btrii expense jIjoooq Selling expense 4.500.00 Royalty account 30,500.00 ^^Y 800.00 £,V^* • ois.oo Timber and props 5475.00 $450>099.35 $450,099.35 The total output for the year was 132,300 tons. An examination of the books and records shows that the following charges had not been entered: horses and mules. $2,200; car and mine rail account. $m5o; claims for injuries. $1,000. During the year the bookkeeper tilroiifli error charged to inside construction $3415 instead of to pay roll insiQe. The coal is mined on lease that averages 20 cents per ton. The inven- tory IS as follows: timber and props, $1,500; powder, $555; oil. etc., $175. In preparing the above statements allowance for depreciation on buildings and machinery may be considered at the rate of 5%. Prepare income and profit and loss account and balance sheet, as of the above date, showing gross earnings and net earnings, also the avWage cost per ton. 132 Solution. INCOME AND PROFIT AND LOSS ACCOUNT FOR THE FISCAL PERIOD ENDING DECEMBER 31, 1908. Coal Sales $257,890.00 Cost of Mining: Pay Roll— Inside $113,849.25 Royalty 26,460.00 Supplies 8,240.00 Timber and Props 5,475-00 Less Inventory December 31, 1908: Powder $555-00 Oil 175.00 Timber and Props 1,500.00 $154,024.25 2,230.00 $151,794.25 Cost of Preparation : Pay Roll — Outside $24,701.50 Water goo.oo ^"^^ 93500 26,436.50 Repairs to Buildings ! 4,075.00 Repairs Inside 3,445.00 Barn Expense 1,500.00 Insurance 2,750.00 Depreciation on Buildings and Machinery 7,700.00 Gross Profit Down 60,189.25 $257,890.00 $257,890.00 Gross Profit Management Expenses: Salaries, Superintendent, etc $6,000.00 Salaries, Office Clerks 4,500.00 Office Expense 1,147.35 General Expense 750.00 c ... „ $12,397-35 Selling Expense 4,500.00 Qaims for Injuries 5000.00 Net Profit carried to Surplus Account 38,291.90 $60,189.25 $60,189.25 $60,189.25 Average cost per ton $1.66 Average net earnings per ton 29 133 ■1. r ■ C|0 Oh' u W o w < U' m tHMwar o < Accountancy Problems and Solutions. 8 WW" 8 I I to I 013 3 'IS m 4-1; S o o u < 8fi «> ^'1 o C/3 <^ t-i "2 * * 53 • ^ ■ ■ ^ O »* o p •11 JUGL. o .2 si 'o c (LI ■ — A " Q S c 3 CiQ W »2 "c c« u bo en c OS i-i en • bo • be • u Sw : c m 00 J!2 if} 8 M o CI ci 8 « m 00 8 8 8 8 as m in -^ (M oo' tN 8 O to »0 01 IN. I-I VO «-! O ,«£! ^ O" o o o ■ X m to ■O M 88 IS .5 u J3 cd O O U ; o • o .S t/} 3 .t: W E o ffl £ u o u o o < c ^ >'pi« ' c C f/1 (« (4 O U E < C '53 u ID en C4 > u IIJ C OS 8 ^ > : a : 2 . Pli • T3 : c oj Im ^ - £ O "-' -3 Ph ^^ £"* u e/j V 00 U ^ f s *- >> S «^ o H? Practical Accounting Problems. Problem 33. (New York Examination, January, 191 1.) The A Manufacturing Company incorporated under the laws of the State of New York, with a capital of $100,000, consisting of 1,000 shares of $100 each, all of which has been paid in cash, presents the following balance sheet as of May 31, 1909: ASSETS Cash $125,000.00 Materials and supplies 25,000.00 Accounts receivable 300,000.00 Plant and buildings 400,000.00 $850,000.00 LIABILITIES ^-^— — Accounts payable $20,000.00 Capital 100,000.00 Surplus 730,000.00 $850,000.00 Annual sales, $800,000. ^-^— ^^ The B Manufacturing Company incorporated under the laws of the State of New York, with a capital of $1,000,000 consisting of 10,000 shares of $100 each, presents the following balance sheet as of May 31, 1909: ASSETS Cash $50,000.00 Materials and Supplies 25,000.00 Accounts receivable 200,000.00 Jla"J • • ■ 500,000.00 Goodwill 700,000.00 $1,475,000.00 LIABILITIES ^^— ^— ^ Accounts payable $150,000.00 Capital 1,000,000.00 Surplus 325,000.00 $1,475,000.00 ■■■■■■■■■■■■■■I Annual sales, $600,000. Both concerns are engaged in the manufacture of the same commodity and desire to consolidate for the purpose of maintaining prices, but will continue to operate each plant separately. They organize the United Manufacturing Company with a capital stock of $200,000 consisting of 2,000 shares of $100 each, the members of the A Company agreeing to subscribe for 1,000 shares and to pay for them in cash and the members of the B Company for 1,000 shares also payable in cash; the stock is issued to the following: Comprising the A Company: C— Certificate i for 250 shares D— " 2 " 250 " E— " 3 " 250 " F— " 4 " 250 " 13s Accmmmcy Problems and Solutions. Comprising the B Company: G— Certificate 5 for ^50 shajfes H; " 6 250 |*_ '« 7 " 250 J— " 8 " 250 II ^ . A- ^ A, trMsurv of the United Manufacturing Com- The cash « pa.d mto ^^^X\^ ^^peetive subscribers. p^ on the 'f «J"" 5* ^^^'^^^^^ purchases and pays cash for the The United Manufactnnng ^^"'P*''' P", rtock of materials and supplies °*J°* """^^ f,„„ t^e A Company its The United Manufacturing 5°"^^' '^^°^d in addition thereto pfant ud agrees to pay an annual «"^°*Jf;^„^ ,3^,, of $QO.ooo for win p., the officers """f "8 *'/ ptot an ann ^^ ^^ ^^ Adr serrices. The rent for the » '^^'^^i.^^'o/'ie^ooo. It is agreed «| the officers are t°«<=7'f ,„'"""! ,»aS and maintenance are to AMt aU addi»k.ns to the plants and » ' J'P"" be paid for by the United Manufacturmg Company. ^^ ^ ^^ h„„&^ of both plants ^^^^°^^^^\^ ZoVs of the United «ar May 31. t9io the balances appearmg on tne Mannfactnring Company are as follows: f *g| ^| l ,, Accounts receivable Additions to plant . Acconnts payable . . Capital stock $200,000.00 200,000.00 60,000.00 160,000.00 200,000.00 Tfce trading transactions of the respective mills are as follows: A CX)MPANY*S MILL P«rd»8es-raw materials and supplies . . . - Labor :::::;:;: Ftelory expense • • * ;: ' ; eSS/ and maintenance of plant Olice expense ment of plant ; •;;;; Oficers' salaries Saks $160,000.00 300,000.00 100,000.00 80,000.00 60,000.00 90,000.00 go.ooo.oo 907,000.00 B company's mill -raw materials and supplies . . . $140,000.00 250,000.00 Labor ........'.''.*.•••• 75,ooo.oo Factorv expense .••*,"1 . 70,000.00 Repai7and maintenance of plant • ; ; ; ; ; ^50,000.00 Office expense 60,000.00 Rent of plant ; ] ] [ 60,000.00 Ofcers' salaries " ' ' 778,000.00 The stock as of May 31. iQio. *=<^"^»f*"^,.f $10,000.00 Materials and supplies---A g^^P^Jjy « ^|{ ; ; ' * ' ; ] ] ; . x5.000.00 llaterials and ^"Prt*^^ rom^Svs miU S.ooo.oo Labor due. not paid-A Company s mi ^^^^ Labor due. not paid-B Company s mm — 136 Practical Accounting Problems. Open the books of the United Manufacturing Company; prepare bai- lee sheet as of May 3.. .9.0 and consolidated trading and profit and loss account showing profits for each mill. As the mill! have been iZ m perfect repair no depreciation is to be considered; outstanding ac™ are considered good. Provide for a dividend of 10%. Prepare percentage table of each mill, showing to four (4) decimals prodS '' "' '""• °' '"' '°"°*^'^ ''^""^ "«--* '"' total c"™ of Materials and supplies. Labor. Factory expense. Repairs and maintenance. Rent of plant. Solution. UNITED MANUFACTURING COMPANY. Opening Journal Entries. May 31, 1909. Subscribers To Capital Stock Subscriptions to the Capital Stock of the United Manufacturing Company, incorporated under the laws of the State of New York, authorized cap- ital, 2,000 shares of $100 each, as follows : ^ $25,000.00 E F C H J V.V." V.V.V. $200,000.00 $200,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 ^-^Sil To subscribers . . $200,000.00 Materials and Supplies j. To Cash .7.;;;;;'.*.;;. ■" ^^*''°^*^ Purchased from: A. Company $25,000.00 B. Company ^,5^^^^ $200,000.00 $50,000.00 n7 Accountancy Problems and Solutions < ft.] O u Dm J3 8 8 8 8 8 #.dlfV... PH« 1 pW 8 tfil 8 8 0\ rp^ o a < en < s, s < 'P""""\| H ■.1 C St «> * 4> iy aj 5^ c3 C ?J 3 *i > < Q Jit U O ,^ C/1 Tn 3 a a u rt ^ U C/1 8 8. 8 8 ^1 M ^ . • * c • m • nl (/J . 4> • S-S • *• ^ 'S c • •-i o O ". C ^ '^ •* 13 I ^ ****** HM iK *HI 2 rt a iS 138 Practical Accounting Problems. UNITED MANUFACTURING COMPANY. Consolidated Trading and Profit and Loss Account for the Year Ending May 31, 1910. Purchases alanes of officers .. Dividends .. "'^"^ Interest ... "•^°°'" r^.. 700.00 discount on sales . . ^ ^ .^ , , 2,760.00 Capital stock ^ Surplus $100,000.00 8,972 .00 $723,0 15.00 $723,015.00 Inventory June 30. 1910: — — Raw material t^^^o D ^, ^ . , , $27,698.00 Partly finished goods Fuel 1,200.00 Although machinery and tools are maintained and replaced .% d«.« o-on must be al.owed on them as we,, as s% depreciation! fuiW^^L" f 141 !l ^.ix'l >Mlliti*ii«lllllllilliMM Accountancy Problems and Solutions. Solution, MANUFACTURING AND PROFIT AND LOSS AND INCOME STATEMENT. $540,000.00 gjllgg V • ^'^ ' Amount Received from Sales • • • • • • ^^^^^^^^ ^^^°* ^ Freight and Express Inward 7»433-«> Inventory, 7/i/9 ^^^'£2?? *., ^Ar.nn 9,760.00 $43,240.00 Inventory, 6/30/10 $27,698.00 11,590.00 39,288.00 3,952.00 Cost of Goods Sold ^^'Slw Wages • * ^ *^^ Prime Cost of Material and Wages $439,982.00 Overhead Charges : Fuel ^'"'A^sm Factory Supplies ^'Sl^vl. Maintenance and Replacement.. 3.»30-«> Depreciation, Machinery, Tools and ,0^^800 Buildings 4>90O0O 22,44800 Cost of Producing Goods Sold ^AdO-OO $68.172 00 Gross Profit on Sales. ''"^ Commercial Expenses : Advertising ^1^"^ «^ ,*,««« Traveling 370o.oo $4,370.oo Administration Expenses : ^c^nnfm Office Expenses T5,nIInJI i-rfinooo 2107000 Salaries of Officers • 12,300.00 17,600.00 21^970^00 Profit and Loss Gross Income $46,202.00 Otlicr Income: 476^00 Cash Discounts on Purchases 4>y"J'W Total Income ^50,965.00 Charges against Income: Suspense Account ;f>0790" Less difference between ^^- ^ se rve «pi ,2oo.»ju and 2%' on Accounts Re- $,,7^ ceivabk 918.40 36160 $3i7-40 Interest • •• •• • • • ^7oaoo Interest accrued on Mortgage, two o^r^ months ^7Q-^ ^^"^ Discounts on Accounts Receivable 2,7(^.00 3,947>40 $47,017.60 Practical Accounting Problems. 8 R 8 8" 06 M o 8 8 8 O O II 8 8 R C/3 U ; ^ .2 -^^ ■*.» g C in O u m- c rt ..Ki ta .ii c a3 CtJ bfi .r-l «0 8 to I ■«i. 1-3 t» V .J$ ^ < 8 D O 8 en "o O H c C s u 3 ^ .> cn u < s c o ^O .. ^ -g "C .2 J Wi Ut rm cn (U .g •o ^ {>, u> ^ u V (U re rt j3 > (^ P^ fe cn •4-> cn cn < bo •S , O O •a c c « rt 3 tfl ^ i_J CO ^ .»H '^^ '^ #c^ [X4 cn A . 142 143 Accountancy Problems and Solutions, Problem 35. (New York Exammation. January, 1911.) A corporation's inventory on Jan. 2, 1909, was : Raw materials • • ^^!'1i2 22 PtoJ' .^ !'!''''■::::;::::::::::::::.':.'■■.•: :::::::::: 18:673:18 Made up foods _!9iZ5M7 The corporation suffered a fire loss on May i, 1909; the interim trans- actions affecting mercliandising. manufacturing and plant were as follows: Purchases raw materials ^^ ^^IrS Productive labor paid out eif^'^ Manufactoriiig expenses. ,. ^'i^'ivJ lent of show room and offices -1^ ^c Selling expenses ''?i$'S Advertising A^.'f^ General expenses ^rE? /i^ Sales ^H]n^ Allowances to customers «?i,i^ Returns of customers -^l'^ Plant purchases __jj^^^ The figures ascertained for the years 1906, 1907 and 1908, for the iden- tical items, were as follows: 1906 1907 1908 Purchases raw materials $186,320.16 $104,360.22 $i57.3i[6.20 Productive labor paid out 90.322.24 61.212.06 72.io6.i4 Manufacturing expenses 20,163.12 16,208.17 20,210.23 Rent of show room and offices 1,500.00 1.200.00 ,200.00 Advertising J'?^°2 ,/;^???? J'^^ Selling expenses 28.672.18 16,3 4-^ 22.3 2.18 General expenses 10,750.16 9.746.22 1 1,1 16.20 Sites ... ■ 386,924.12 217.306.01 321.672.18 Allowances to customers bV^^i ^'^ o ,?^;'^ Returns of customers »,oi4.o» 4,100.15 3.10722 Plant purchases Soo.oo 540.22 40900 Inventories beginning of year Raw materials. 39.223.16 31.316.20 334i6.20 Goods in process 6,104.12 3.107.12 ^26. 8 Made up goods 21,223.10 17.306.29 ;|622. 2 Plant..... 17.223.96 17.723.96 18.264.18 You are employed by the assurers; all policies concur under the 80% coinsurance clause and the insured claims his loss is 42!% of the prime cost of his goods and value of his machinery at time of the fire ; the per- centage claim is adjusted at that figure. The amount of insurance in force was as follows : on merchandise stock, $40,000 ; on plant, $12,500. Prepare requisite statements showing the value of the assets destroyed. 144 I Practical Accounting Problems. Solution. Prime cost is here to be understood to mean : 1. Raw materials. 2. Productive labor. 3. Manufacturing expenses. It is necessary to a clear understanding of this problem to ascertain the average amount of raw materials, productive labor and manufacturing expenses used up in the goods actually sold from the last time inventory was taken. For this purpose the figures for the three previous years are given amongst others. Using these, we find the following: Raw Materials Account. Inventory Jan. 2, 1906 $39,223.16 Purchases during 1906 186,320.16 J , ^ $225,543.32 Inventory Jan. 2, 1907 ^^,^^,^,^ Purchases dunng 1907 104,360.22 Deduct: $135,676.42 Inventory Dec. 31, 1906 31,316.3^ Inventory Dec. 31, 1907 ,^^,^^^ T ^ T « $194,227.12 $102,260.22 Inventory Jan. 2. 1908 33^,5^ Purchases dunng 1908 157,316.20 Total: ^^90,732.40 Raw Material used 1906 $19422712 Raw Material used 1907 ,^ 'V* r> nr ^ • 1 J o 102,260.22 Raw Material used 1908 ,^0 ^.. 150,205.22 $454,752.56 Deduct : — ^— -- Inventory Dec. 31, 1908 32,467.18 $158,265.22 145 mm Accountancy Problems and Solutions. Productive Labor Account. 1906. Amount paid therefor $90,322.24 1907. Amount paid therefor - . 61,212.06 1908. Amount paid therefor 72,106.14 $223,640.44 Manufacturing Expenses. 1906. Amount paid therefor $20,163.12 1907. Amount paid therefor 16,208.17 1908. Amount paid therefor 20,216.23 $56,587-52 Sales Account. deductions. Gross Sales. Allowances. Returns. Net Sales, i^ $386,924.12 $1,116.24 $8,614.08 $377,193-80 1907 217,306.01 3,605.75 4.106.18 209,594.08 1908 321,672.18 975.00 3.167.22 317.529.96 $925,902.31 $5,696.99 $15,887.48 15,887.48 21,584.47 $904,317.84 $904*31 784 Average % of Raw Materials used in goods actually sold $454,752.56 $904,317.84 50.28% Average % of Productive Labor used in goods actually sold 223,640.44 904,317.84 24.73% Average % of Manufacturing Expenses used in goods actually sold 56,58752 904,317-84 6.25% Component Elements of Costs in Prime Costs. % to Selling Price. % to Prime Cost. Raw Materials 50.28% 61.88% Productive Labor 24-73% 30-43% Manufacturing Expenses 6.25% 7.69% The same percentages will prevail in goods in process and made up goods. Arriving now at the period where the fire loss occurs, we note that the last inventory taken was on January 2, 1909. 146 ■""'■■•■■■ M..™,f^jsi:4|iih,';ij|i'iiilr" ...,^. ,„,„,^„,„ _^^^^^^ Practical Accounting Problems. Analysis of Inventories Jan. 2, 1909. Component Component Raw Ma- Elements of Elements of Total, terials. goods in process, made-up goods. Raw Materials $32,467.18 $2,606.52 $12,223.45 $47,297.15 1,281.78 6,010.98 7,292.76 Productive Laboi Manfg. Expenses 323.92 1,51904 1,842.96 $32,467.18 $4,212.22 $19,753.47 $56432.87 Construction of Goods on Hand May i, 1909, When Fire Occurs. Raw Productive Manfg. Materials. Labor. Expenses Inventory Jan 2, 1909.... $47,297.15 $7,292.76 $1,842.96' Purchases to May, 1909. .. . 46,375.22 pd. out 21,618.06 pd. out 5,167.20 ^3,672.37 Deduct : Used-up goods actually sold 46,879.66 On hand May i, 1909. . . . $46,792.71 $28,910.82 23,057.56 ■ • $5,853.26 $7,010.16 5,827.32 $1,182.84 Synthesis or Reconstruction of Goods in Process and Manufactured Goods on Hand May i, 1909. The total of Productive Labor and Manfg. Expenses amount to t a q of The total of Raw Material's' amoun't' to ! : ; ! .' .' .' ." ! ! [ [ [ ] ] iJ^" S $18457-77 100.00% n,°f^tf T h"* *"'^'-*/ "' ^"* ^^'"'^'^ ^°«=""^d in P"tly made or totally "ade-up goods from the total Raw Material proper, or $46.- 792.71, we find the total inventory on May i, .909, as follows: Raw Material proper Goods in Process and Made-up Goods. '. $35,37i-04 18,457.77 $53,828.81 The loss adjusted being 42%%, we find the same to be '$22,877.24 The plant, we note as accountants for the assurers, not to have been re- duced by any depreciation for the last three years, nor any reserve set up 147 ft l/^ - — '— ~ " li lHH W " !! Accountancy Problems and Solutions, against it for this purpose, therefore we will allow a yearly depreciation of io% on the diminishing value to prevail, viz. : Plant and Machinery Account. Inventory, Jan. i, 1906 $17,223.96 Purchases. 1906 ^^^ 17,723.96 10% Depreciation i,772AO Value. Dec. 31. i9o6 I5.95i.56 Purchases, 1907 540.22 16491-78 10% Depreciation 1,64918 Value, Dec. 31. i907 1484260 Purchases, 1908 40900 15,251.60 10% Depreciation i,525-i6 Value, Dec. 31. 1908 13J26.44 Purchases, 1909. to May i 301.22 14,087.66 Depreciation, 10% per annum, or 3%% for four months 469-55 Value of Plant May i, 1909 $13.618.11 Loss, 42Vi%, adjusted %5.7^7'70 Practical Accounting Problems. Problem 36. (Illinois Examination, May, 1911.) ipSl'f aHoIWsr "' '"' ^^~""^ "' '"'" ^•"'"' ^' 3.st December. Accounts Receivable Accounts Payable $5,140.00 Bills Payable 2,692.00 Bills Receivable ^^'^ Loan Advanced by J. Smith ^^^'^ Cash on Hand 5^*» Bank Overdraft "^^ Inventory, January i, 1910 " ^'*^5-°o Purchases 3.020.00 Sales 7,386.00 Wages 16,406,00 Office Salaries ... ............'.*. 4.83900 Traveling Expenses 1,045.00 Interest Paid 50300 Stationery ^^^'^ Rent, Taxes and Insurance........*.* ^'^ Discounts and Allowances............." ^^"'^^ Machinery Expense and Fuel 258.00 Freight 264.00 Incidental Expenses 206.00 Commissions 151.00 Rents Received 50.oo Capital .*'**] 329.00 Bad Debts .*' 3.249.00 97-00 $4 8,798.00 Rent $200.00 a year is charged to September 30, loio- repairs to en*„-«. estimated at $90.00, account not yet received ^^ I If 149 Il l I IPI Accountancy Problems and Solutions. Solution. TRIAL BALANCE OF JOHN SMITH. December 31. i9io- . , , . $5,140.00 Accoimts Receivable $2,692.00 Accoimts Payable 658.00 Bills Payable ^^^^ Bills Receivable -^ ^ Loan advanced by John Smith ^'^ Cash on Hand 1,065.00 Bank Overdraft ^^ Inventory, January i, 1910 " 7 386.00 Purchases " " ' ' 16,406.00 S^^^^ 4,83900 Wages ....• ■•;; 1^045.00 Office Salaries $0300 Traveling Expenses * ' " ^^^'^ Interest Paid ' " ^^ Stationery 222 00 Rem, Taxes and Insurance ^ "^ Discounts and Allowances ^'^ Machinery Expense and Fuel J^^ Freight j - j q^ Incidental Expenses ^^ Commissions 329.00 Rents Received • • • • " • ' 3,249.00 Capital 97.00 Bad Debts „ _ $24,39900 $24,39900 ! '{-J Practical Accounting Problems. ''^irl%oTrZ''lZ,'k'''' ^°^^ STATEMENT OF JOHN SMITH FOR THE PERIOD ENDING DECEMBER 3,, ,9," Sales Deduction from sales : $16406.00 Discounts and allowances $,^.00 Reserve for discounts j^ -^ Total deduction from sales. ,0^ 300.50 Amount realized from sales. ^ $16,019.50 Cost of Manufacture : Prime Cost: Inventory January i, 1910 $202^0^ Purchases .... JP3,02o.oo Freight Forward ... ^'^"^ 206.00 Cost of materials jRiofiT^or. Wages ... ?io.6i2.oo 4,839.00 Total prime cost Factory overhead charges : ^S^Sioo Machinery expense and fuel $^4 ^o Repairs to engine 9000 Total overhead charges ~ "" ^ 354.00 Cost of production.. ~ ~~ 15305.00 Gross profit on sales.. ~~ $214.50 Cost of Sales : Traveling expenses Commissions $503.00 50.00 ■ 553-0O SelHng loss $338.50 Cost of Administration : Office salaries Stationery $1,045.00 Incidental expenses 284.00 151.00 Total administration expenses "" ' 1,480.00 Total loss on sales "" — $1,818.50 151 if •■■i ■■III II III . ij iiiiiiiiiiiiiii i ii iii ii iiii n i iM iii Accountancy Problems and Solutions. Practical Accounting Problems, Deduct other income: Rents received Interest accrued on loan (not cred- ited) $329.00 20.00 349.00 $1469-50 8 no re- charges against Income: Rents, Taxes and Insurance $222.00 Rent accrued (not charged) 50.00 Bad Debts Reserve for Bad Debts Interest Paid Total charges against income Net Loss $272.00 97.00 150.00 173.00 692.OD $2,161.50 8 8 8 8 N 00 10 d CO ft, » 8 01 a >o 01 .2 69- < *S '5b (^ 0^ tfl M §.£ Ok CIS M w a, u u M < (^ «o s M IS O OJ 2 X)

  • c o Q > § CO U e pi O (A o !;5 ^ to - *> u «5 g S Q 'g Q eo $50,828.15 Amount of Increase, viz.: Interest on Bonds (accrued at time of death) $600.00 Rent (i month accrued at time of death) • 340.00 —_— 940.00 Total Oarges as to Principal. . . . $51,768.15 Practical Accounting Problems. For Account of Income : Interest on Bonds (2 months after death of testator) $300.00 Rent (2 months after death of testa- tor) 680.00 Total Charges to Income Combined Total Charges We credit ourselves with the following: Payment out of Principal: Testamentary Expenses, viz. : Funetal Expenses $98.16 Probating will and miscellaneous.. 4,697.45 $4f795-6i Debts due by deceased 7i276.S4 Amounts paid to legatees 1 000.00 Specific bequest to the wife of tes- tator Balance to be dealt with by executors 98aoo $52,748.15 I3»07a.i5 $391676.00 lij 15s Acc0wm^ney Problems and Solutions. Problem 38. (New York Eiaminatioii, June, 1911) The cost books of Factory A, the product of which is charged to the office of the X. Y. Z. Co., at factory cost, show the foUowing facts January i, 1910: Cash (imprest fund) $500; raw materials. $17,688.51; wages unpaid and distributed, $2,348.67 ; goods in process, at prime cost, $62,258.61 , plus 111,352.75 for general expenses, and $9,007.50 for management charges; finished goods, $45,290.20. The invoices for purchases of raw materials for the year amounted to $78,375.65; wages paid, $133,041-27; management charges, $53,695; factory expenses, $36,967.08. The cash recepits for one year's rent of loft were $1,200, and for 11 months' sale of power $330, the twelfth month being unpaid. The raw materials consumed during the period amounted to $64,188.33 ; management charges distributed $55,761.90; factory expenses distributed to costs amounted to $43,033.23- There was also a loss on machmery replacements of $ i o 7 . 50 . The finished product output for the year amounted to $324,583-43. in- cluding all costs, and the transfers to the main office were $338,297-90- At the close of the period December 31, 1910, there remained unpaid and undistributed to goods in process the regular factory pay roll for 3 days amounting to $2.85793 and also 1500 hours of operative's overtime mt an average rate of 45 cents per hour, payable on a basis of a^ hours overtime as the equivalent of 3* hours regular time. Raise all the ledger accounts affected and show final trial balance. Main Office Main Office. .... Purchases Solution. Cash Account. $500.00 Raw Materials. . $17,688.51 Manufacturing acc't. 78,375.65 Balance $96,064.16 $64,188.33 $96,064 .16 Balance. ^3^*875 .83 Ijfi Practical Accounting Problems. Capital Accounts. Main Office $107.50 Wages. Main Office $133,041 .27 Balance 3,802.93 $136,844.20 Main Office...... ... $2,348.67 Manufacturing ace t. . 130,692.60 Regular pay roll. . . , . 2,857 93 1 , 500 hours overtime . 94 5 - 00 $136,844 .20 Balance $3,802.93 Manufacturing Account. Main Office $62,258.61 Raw Material 64,188.33 Wages 130,692.60 Management 55,761 .90 Factory gen . expenses 43,033.23 ^^355.934 67 Finished goods $324,583 .43 Balance 31.351 24 *355.934 67 Balance $31,351.24 Factory General Expenses. Main Office ^^i.352-75 Main Office 36,967.08 $48,319.83 R^nt $1,200 .00 Power 330 . 00 Power tenant charge . 30.00 Manufacturing acc't. . 43,033 23 Balance 3,726.60 $48,319.83 Balance $3,726.60 ^— — — Finished Goods. Main Office. $45,290 20 Main Office $338,297 go Manufacturing acc't. . 324,583 -43 Balance 3i!57S 73 1369,873 63 3^.575 73 $369,873 63 Balance $31, 575 73 Tenant. Factory gen. expenses $3 o . 00 Management Charges. Main Office $9,007 . 50 Main Office 53,695 .00 $62,702 .50 Manufacturing acc't. . $55,761 .90 Balance 6,940.60 $62,702 .50 Balance $6,940 .60 157 Accountancy Problems and Solutions. Main Office Account. Wages Ia,348 .67 Rent received 1,200 .00 Power 330 .00 C«i>ital ace' ts (replace) 107.50 Pinislied goods 33^,297 .90 Unpaid pay roH 3,802 .93 Balance. 102,089 . 57 1448,176.57 Sundries $146,097 Raw material 78,375 Wages 133.041 Management 53,695 Factory gen. expenses 36,967 57 65 27 00 08 $448,176.57 Balance $102,089 57 Trial B.\ lance. Raw material Manufacturing acc't. . Factory gen. expenses Management Finished goods Tenant $500 .00 31.875-83 31.351-24 3.726.60 6,940.60 31.575-73 30 .00 ■ — ■ ■ ■■UliO m — $106,000 .00 Capital accotmts Wages Main Office accounts. $107 .50 3,802.93 102,089.57 $106,000.00 158 Practical Accounting Problems. Problem 39. (New York Examination. June. 1911.) Philip Jones, a citizen of New York State, died April i, 1909, leaving a will appointing four executors. The will was probated May i, 1909, showing the following bequests: X i^ share, B }i, C ^ of the entire estate after payment of funeral ex- penses, debts, etc., a specific bequest to the A Hospital consisting of $20.- 000 and a parcel of improved property valued at $50,000. The inventory filed by his executors was as follows: 5% mortgage for $40,000, interest payable semi-annually on June 30 and December 31 ; 500 shares common stock of Industrial Company, par value $100, appraised @ iio; 50-5% first mortgage bonds of A Railway Company, par value $100. appraised @ 104, interest payable semi-annually on March i and September I ; accounts receivable valued at $20,000 ; cash in banks and on hand, $69,- 250; household furniture and effects appraised at $5,500. The executor's transactions were as follows: Cash Receipts. 500 shares of Industrial stock sold @ $115 per share. 45 first mortgage bonds sold July i @ $111 and accrued interest. Accounts collected, $18,500 (balance worthless). 6% dividend on Industrial stock declared May i, 1909. Interest on bank balances $1,300, of which $40o'accrued prior to tes- tator's death. Interest on bonds and also on mortgage duly collected. Rents collected $4,000, of which $1,500 accrued prior to death of testator. The household furniture and effects were taken by X at the appraised valuation. Cash Payments. Ftmeral expenses • Expenses of probating will . . ' ' " ,^? General legal services Rent of safe deposit vault ''°co Care of cemetery lot, etc ^In Premium on executors' bonds f 00 Stationery, postage, etc Debts of deceased . „ o? Taxes '..■.■.'.'.■.;;;: li^^ X on account of legacy * " " " 12*00^ C on accoimt of legacy «^' ° ^ -^ 30,000 The inventory on December 31, 1909, the date on which the executors wish to render an accotmting, is as follows: 5 % mortgoge $40,000. Five 5% first mortgage bonds of A Railway Company. Interest on X s advances amounts to $3 50 and on C's advances $575. 159 f Accountancy Problems and Solutions. Practical Accounting Problems, Prepare (a) a summary statement separating principal and income • (b) a statement showing amounts due beneficiaries, (c)> statement show- ing the commission due executors. Solution. (o) Summary Statement op the Executors op the Estate op Philip Jones, who Died April i, 1909. We charge ourselves First, as to Principal, with— Amount of inventory $194,950 .00 Amount of increase, viz. : Industrial stock $2,500 .00 Railway bonds 3 1 5 .00 Rent and interest accrued prior to testator's death. .. 2,420 .83 5,235 .83 Total charges, as to Principal . . Second, as to Income, with — Amount of dividend on industrial stock. . . Amount of interest on advances Amount of interest on bank balances Amoimt of rent Amount of interest on mortgage Amount of interest on bonds 1 Total charges, as to Income. Combined total charges, principal and in- come. We credit ourselves: First, as to Principal, with — Amount of testamentary expenses, viz, : Funeral expenses $2,ocx).oo Probating of will 335-oo General legal services 1,000.00 Rent of safe deposit vault 50.00 Care of cemetery lot, etc 500.00 Premium on executors' bonds 100.00 $200 .185.83 $3,000 .00 925 .00 900 .00 2,500 .00 1,500 .00 66 .67 8, 891 .67 $209, 077 50 Amount of miscellaneous payments : Debts of deceased $12^65.00 Taxes 1,02500 Amount lost on acc'ts receivable... Amounts advanced to legatees, viz. : X., Cash advances 12,000.00 Interest on advances. 350.00 Household furniture.. 5,500.00 $17,850.00 $3,985.00 13,890.60 $1,500.00 C, Cash advances $20,000.00 Interest on advances. 57500 20,575.00 38,425.00 Total credits, as to Principal $57,800.00 160 Second, as to Income, with Amount of stationery, postage, etc $125.00 Combined total credits, Principal and Income $57,925.1 Balance Deduct : 00 $151,152.50 Executors' commissions as per statement $4,981.72 SpeciHc bequest to "A" Hospital 20,000.00 24,981.72 $126,170.78 Balance available for legatees consists of the foUowmg : A 5% mortgage for $40,000.00 l;^ive 5% mortgage bonds at 104. . 520.00 ^sh 85,650.78 $126,170.78 (b) Statement Showing Amounts Due Beneficiaries Total value as per inventory $194,950.00 Total net increase, viz.: Tn^r^f ^' principal $5.23583 Increase, mcome 8,891.67 T «cc n $14,127.50 ixss— Decrease 1,500.00 12,627.50 $207,577.50 Disbursements, exclusive of advances: Testamentary expenses $398500 Miscellaneous payments 14,015.00 Balance Deduct : 18,000.00 $189,577.50 Executors' commissions as per statement $4,081 72 Specific bequest to " A " Hospital .' .' ." ^Joo.w 24,981.72 Balance available to legatees. Deduct advances Remaining balance for distribution. $164,595.78 38,425.00 $126,170.78 X. IS therefore entitled to %, or $37,015.26 ?>'l^^'^'' 41,148.95 C-**^^'°^ 48,066.57 $126,170.78 161 Accountancy Problems and Solutions. (c) Statement Showing Amounts Due Executors for Commissions Total value of estate as per inventory $I94,95000 Total net increase (as shown in Statement b) 12,627.50 Total amount $207,577-50 Deduct : Specific bequest to " A " Hospital $20,000.00 Inventory on hand at the time of rendering this accounting 40,520.00 60,520.00 Balance on which commissions are to be com- puted $147.05750 Allowing 5% on the first $1,000.00 $50.00 Allowing 2^% on the first $10,000.00 250.00 Allowing 1% on the balance of $136,057.50 1,360.57 $1,660.57 As the value of the estate is over $100,000.00 and there are four ex- ecutors, three single commissions are to be allowed to be divided among the four executors. The total commission is therefore $4,981. 72 and each individual execu- tor's share is $1,245.43. 1O2 •WP Practical Accounting Problems. Problem 40. (New York Examination. June, 19! I.) The Prosperous Company is organized under the laws of the State of New York to conduct a manufacturing business. The authorized capital is $500,000.00, divided into $250,000.00 common and $250,000.00 preferred stock, par value of shares $100.00. Five incorporators subscribe each for one share of common stock at face value. John Peters, one of the incor- porators, purchases from three manufacturing companies their complete plants for $499,5oo.oo and transfers said plants to the Prosperous Com- pany for the remaining $499,500.00 of common and preferred stock and $100,000.00 of First Mortgage 5% bonds out of a total issue of bonds amounting to $150,000.00, leaving $50,000.00 of bonds in the treasurv. The incorporators then pay in cash for their respective subscriptions. The individual assets acquired are as follows: land and buildings, $75,000.00; plant and machinery, $200,000.00; tools, equipment and fixtures' $50,000.00; inventories, $100,000.00; accounts receivable, good, $28,00000' doubtful, $5,000.00; cash, $12,000.00. Prepare (a) opening entries for the books of the Prosperous Company, (b) initial balance sheet showing the Company's financial condition. 163 Accommtancy Problems and Solutions, Solution. THE PROSPEROUS COMPANY. Incorporated under the laws of the State of New Yoek with an AUTHORIZED CAPITAL of $500,000.00. divided into 2,500 shares of common and 2,500 shares of preferred capital stock, par value of each $100.00. Common Stock Subscriptions $500 .00 Unsubscribed Common Stock 249,500 .00 Unsubscribed Preferred Stock 250,000 .00 To Authorized Common Stock $250,000 .00 Authorized Preferred Stock 250,000 .00 for the respective subscription to five shares of the Common Capital stock of this Company by one share each, also to place the authorized issue on the books. Plant, Good Will and Stmdry Assets 599»5oo .00 To John Peters, Vendor $599. 500 00 for the transfer to this Company of his rights, title and interest in all of the assets, including the good will acquired by him from X, Y and Z, Companies fully enumerated in the bill of sale dated , approved by the Board of Directors, as shown in the Minute Book page First Mortgage Treasury Bonds 150,000 .00 To First Mortgage Payable 150,000 .00 in accordance with the resolution of the Board of Directors the Company was authorized to issue $150,000.00 of first mortgage bonds pay- able bearing five per cent, interest. Subscription to Common Stock 249,500 .00 Subscription to Preferred Stock 250,000 .00 To Unsubscribed Common Stock 249,500 .00 Unsubscribed Preferred Stock 250,000 .00 for John Peter's subscription to balance of un- subscribed stock. John Peters, Vendor 599t5oo 00 To Subscription to Common Stock 249,500 .00 Subscription to Preferred Stock 250,000 .00 Treasur)' First Mortgage Bond. 100,000 .00 164 Practical Accounting Problems, for 2,495 shares of common and 2,500 shares of preferred stock and bonds issued to the above in full payment for the assets transftrred to this Company. Cash $500.00 To Common Stock Subscription payment for subscription by the respective subscribers. In accordance with a resolution of the Board of Directors fully recorded in the Minute Book page . . .the following entry is made in order to place the various assets acquired, on the books of the Company. Land and Buildings 75,000 .00 Plant Machinery 200,000 .00 Tools, Equipment and Fixtures 50,000 .00 Inventories 100,000 .00 Accounts Receivable 28,000 .00 Cash Good Will To Plant, Good Will and Sundry Assets. . . . Accounts Receivable To Reserve for bad and doubtful debts. . . . This entry is made in order to record the doubt- ful and bad accoimtsin the controlling account. $500.00 12,000 .00 134,500.00 5,000.00 599,500.00 5,000.00 i6S Accountancy Problems and Solutions. 1 < Pu O U m 9 o pit a *2 m X m o -^ PQ 8 8 O W#"" 8 O ir. < 1-4 < U o Si: < M N - Q 1/1 IT) TaraT Ji : • >• • : J" * . IS • ill' t: g"? o o u 8 8 S 8 V) 8,8 ?S§8 8 ^8S 8 8 5 tn to o "8" a" S i. • m )$i 8 S „ji#i' en s .s *- T3 X C ,•— o ^ ?? "2 > u «a I— I "^ )-J • c : o : tt : IS • S ^ ''S "tt « O £ Practical Accounting Problems. Notes on Problems. Problem 1. The wording in this problem is ambiguous. It reads that repairs and renewals are to be charged to the plant and a depreciation of six per cent, per annum is to be allowed. Repairs and renewals should be charged as a revenue and not as a capital expenditure. The problem does not state whether the repairs and renewals in question were of such a nature as to increase the earning capacity of the concern. With regard to the solution, it will be observed that in charging depreciation on plant the wording of the problem was followed to the letter, and therefore cannot be criticised as incorrect. The interest on loans was distributed respectively between New York, Chicago, and Minneapolis on the same basis as the interest on capital. While this division of interest on loans may be questioned, yet from the wording of the problem nothing else could be inferred. The problem states that " in- terest on borrowed money was to be distributed according to the invested capital at each branch." Whether the capital of which that interest is charged was divided according to the original investment or not the problem does not state. Problem 2. The solution of this problem consists of two statements. The first one, which is a summary accounting statement of the executor, is not made out strictly in accordance with the requirements of the law; no dates are supplied by the examiners and it is, consequently, impossible to distinguish between principal and income. All interest on the bonds and mortgages is considered as principal in this case and is entered under the amounts of increases. The executor has realized on the assets, part of which had been accepted by the legatees as advances; the balance is all cash, to be distributed among the three children according to the separate statements appended, showing clearly the amounts advanced in cash and otherwise, and the balances due to each legatee. It will be noticed that the testator has limited the allowance of the executor in the will; he cannot claim more than $2,500, although the calculation according to the law might have resulted in a larger fee. Problem 3. This is a real problem illustrating the adjustment of partners' capi- tals in a liquidation where it is desired to distribute the assets in install- ments as soon as they are received, thus paying the monthly distribu- tions before the final net profit or loss has been ascertained on the total realization. The question will now arise: on what basis should each in- stallment be distributed? How should the first installment be divided? It should not be apportioned in the ratio of the original investments, that is, 4 : 3 : 2 : I ; neither can it be divided in the proportion the profits or losses are divisible, nor proportionately to the capitals at the dissolu- tion of the partnership. 166 167 M Accountancy Problems and Solutions. The correct method would be to equalize the status of the partners, and justly so for this reason; it is quite impossible to know beforehand how much the remaining assets will realize; ergo, assuming that no more cash will be received, the consequent loss must be borne by the partners in the agreed ratios. Let us therefore illustrate the equalization procedure at this stage of the operations. Net capital at time of dissolution $90,000.00 Deduct : Liquidation expenses, first month $ 400.00 First month's cash installment 21,890.00 22,290.00 Leaving unrealized assets as an assumed loss aggregating.. $67,710.00 Capital balances, after deducting first month's expenses : A B' c D $36,660.00 $27,048.00 $17,552.00 $8,340.00 Division of 35% am 22% 15% losses 23,698.50 18,958.80 14896.20 10,156.50 Eqpaltzcd capitals 12,961.50 8,089.20 2,655.80 ♦1,816.50 ♦Deficit D must bring in additional $1,816.50 to cover his deficit. The first month's cash installment will be: Cash collected for distribution $21,890.00 D's new cash 1,816.50 $23,706.30 Which will be distributed between A, B and C in accordance with Hittr equalized capital holdings, viz.: A . $12,961.50 B 8,089.20 € 2,655.80 $23,706.50 An eminent authority on the correctness of the principle involved in the problem under review, Henry Rand Hatfield, Ph. D., Associate Pro- fessor of Accounting at the University of California, favors the equaliza- tioii method. In his admirable Modern Accounting he says: "The ad- justment between partners having once been made, all further install- ments are to be divided in proportion to the division of losses. This is not because the division of assets is at all the same as the division of profits or of losses, but because this method of treating all unrealized assets as potential losses prevents any one of the partners being over- Practical Accounting Problems. In Dicksee's Advanced Accounting a problem is given, illustrating the basic principle under discussion. Dicksee also favors the solution on the equalization basis. Hence, in any contingency the partners will be paid their just and equitable shares, and the prime object of the distri- bution has been accomplished. The 5% commission should be eliminated from the partnership ac- counts; it is a private agreement to be adjusted by the partners inter se. Suppose, after the equalization of the partners' capitals, D is not pre- pared to produce cash to cover his deficit of $1,816.50, how will then the cash distributions be divided between A, B and C before and after D has made good his deficit? How much will D get after reimbursing A, B and C? In this instance D's deficit must be borne by A, B and C in the ratio 35: 28: 22, thus: First Month's Cash Distribution. A*s equalized capital $12,961.50 Less 35/85 of $1,816.50 747.97 $12,213.53 B*s equalized capital 8,089.20 Less 28/85 of $1,816.50 598.38 7490-82 C's equalized capital 2,655.80 Less 22/85 of $1,816.50 470.15 2,185.65 Total $2 1,890.00 Second Month's Cash Distribution. A*s share, 35% $15,207.50 Add 35/85 of $1,816.50 from D 747.97 $15,955-47 B*s share, 28% 12,166.00 Add 28/85 of $1,816.50 from D 598.38 12,764.38 C*s share, 22% 9»55900 Add 22/85 of $1,816.50 from D 470.15 10,029.15 D's share, 15% 6,517.50 Less his deficit apportioned to A, B, and C 1,816.50 4,701.00 '^^^^ $43,450.00 The third and fourth months' cash distributions will be the same as stated in the solution above. Another solution to this problem may be of interest to the reader: In accordance with Dicksee's method, that where payments are made to partners before all assets have been realized, the partners' accounts 169 Accountancy Problems and Solutions. iliould be brouglit to the ratios in which they share profits or losses, we proceed as follows: Amounts to credit of partners' accounts, after debiting their propor- tions of the loss is $8,000; and the personal drawings arc: A, $36,800; B, $27,160; C, $17,640; D, $8,400. Taking D's credit as 15% of the equalized capital (which, it will be found, is the easiest way), we get, A, 35%, $19,600; B, 28%, $15,680; C, 22%, $12,320; D, 15%, $8,400. As the capital accounts of A, B, and C are all in excess of their equal- ked capital, a sufficiently large amount to reduce their capital to the equal- iied amount should be paid them before any payment is made to D. The cash receipts for the first month are arrived at thus : Book value of assets realized $30,190.00 Less liabilities liquidated $7,900.00 Less loss and expenses 400.00 8,300.00 $21,890.00 If this amount were distributed among A, B, and C in the ratio of 35, 28, and 22, the amounts paid over would be: A, $9,013.53; B, $7,210.82; C, $5,665.65 ; but the amount necessary to reduce C*s captal to the equalized capital is only $5,320. so we adopt this method : Cash receipts $21,890.00 Less payment to equalize C's capital 5,320.00 To ht divided among A and B. $16,570.00 Dividing this amount in the ratios of 35 and 28 we get, A, $9,305.56; B, $7,364-44. But C has to pay A and B a commission of 5% of his share, or $266, which we deduct from the amount payable to him, and credit in equal •mounts to A and B, increasing the amounts of cash paid to them accord- ingly. The cash receipts for the second month, ascertained in the same way as those of the first, amount to $43,450, from which we deduct amounts necessary to equalize A and B's capital accounts, viz. : A $7,994.44 B 4,11556 $12,110.00 leaving $31,340, and all subsequent cash receipts to be distributed to all partners in the ratio of 35, 28, 22, and 15 ; C and D's shares to be subject to the 5% commission payable to A and B. I'TO IS » Practical Accounting Problems. To Drawings $400.00 By Capital Account ** 35% of loss $8,000. . . 2,800.00 Investment $40,000.00 *• Balance 36,800.00 $40,000 . 00 $40,000 . 00 By Balance $36,800.00 To Cash on account $9,338.56 " C }4 commission on " Balance 27,594.44 his share 133.00 $36,933.00 $36,933.00 To Cash to reduce capital By Balance $27,594.44 to rate of 35% $7,994.44 Balance 35% 19,600.00 M $27,594-44 To 35% Loss and expense of liquidation First month... $400. 00 $140.00 Second month. 750.00 262.50 * Cash 11,258.89 * Balance 8,228.50 $27,594.44 By Balance 35% $19,600.00 " C 5^ commission on his share 172.37 " D H commission on his share 117.5a $19,889.89 To 35% Loss and expense of liquidation Third month... $340. 00 $119.00 " Cash 5,701.29 " Balance 2,555.00 $19,889.89 By Balance 35% $8,228.50 " C H commission on his share 87.28 D }4 commission on his share :. 59-51 (( $8,375.29 To 35% Loss and expense of liquidation Fourth month. $110. 00 $38.50 " Cash 2,583.01 $8,375-29 By Balance 35%- -. $2,555-00 C ^2 commission on his share 39-54 D 54 commission on his share 26.97 tt tt $2,621.51 $2,621.51 B Dr. Cr. To Drawings $600.00 By Capital Account 28% of loss $8,000 2,240.00 Investment $30,000.00 Balance 27,160.00 M $30,000.00 $30,000.00 To Cash on account $7497-44 By Balance $27,160.00 " Balance 19,795-56 " C J^ commission on his share 133.00 $27,293 . 00 $27,293 . 00 To Cash to reduce capital By Balance $1 7,795 • 56 to rates of 28% $4115.56 Balance 28% 15,680.00 « $19,795.56 171 $19,795-56 I Accountancy Problems and Solutions. To 28% Loss and expense of liquidation: First month ..$400.00 $112.00 Second month. 750.00 210.00 '* Cash 9,065.10 ** Balance 0,582.80 By Balance 28% $15,680.00 " C H commission on his share 172-37 " T> Yz commission on his share ii7'S3 $15,969.90 To 28% Loss and expense of lii|iiidatioii : Third month.. $340. 00 $95.20 *' Cash 4,590.40 " Balance, 28% 2,044.00 $15,969.90 By Balance 28% $5,582.80 " C Yi commission on his share 87.2^ " D K commission on his share 59'5i $6,729.60 To 28% Loss and expense of liquidation: Fourth month. $110.00 $30.80 $6,729.60 By Balance 28% $2,044.00 " C Y2 commission on his share 39'55 " "D Y2 commission on his share 26.96 $2,110.51 To Drawmgs $600.00 By Capital Account *' 22% of loss $8,000 1,760.00 Investment •• Balance 17,640.00 $20,000.00 To A commission $133... " B commission $133. ■■ $266.00 5% of share " Cash to reduce capital to ratio of 22% S054.00 •' Balance 22% 12,320.00 By Balance $17,640.00 To 22% Loss and eacpense of liquidation First month... $400. 00 $88.00 Second month. 750.00 165.00 ** A commission $172.37 B commission $172.37 344.74 5% of share Cash 6,550.06 Balance 5,172.20 By Balance $2,110.51 Cr. $20,000.00 $20,000.00 $17,640.00 $17,640.00 ff f« ,22% $12,320.00 $12,320.00 To 22% Loss and expense of liquidation Third month . . $340 . 00 $74 . 80 •* A commission.. $87. 28 *• B commission.. 87.29 174.57 5% of cash share " Cash 3,316.83 •* Balance 1,606.00 By Balance $Si72.20 $12,320.00 .2j^ $Si7a.» $5,172.90 I t i i t Practical Accounting Problems. To 22% Loss and expense of liquidation ** B commission.. 39.55 79.09 Fourth month. $110.00 $24.20 * A commission.. $39. 54 5% of cash share " Cash 1,502.71 By Balance $1,606.00 l> Dr. To Drawings $400.00 By Capital Account " 15% of loss $8,000 1,200.00 investment " Balance 8,400.00 $10,000.00 To 15% Loss and expense of liquidation First month. ..$400.00 $60.00 Second month. 750.00 112.50 ** A commission. $117. 52 * B commission. 117.53 235.05 5% of share * Cash 4,465.95 " Balance 15% 3,526.50 By Balance $8,400.00 To 15% Loss and expense of liquidation Third month. .$340.00 $51.00 " A commission. .$59.51 " B commission.. 59.51 119.02 5% of share " Cash 2,261.48 •• Balance 15% 1,095.00 By Balance «. «. T , $3,526.50 To 15% Loss and expense of liquidation Fourth month. $110. 00 $16.50 ** A commission.. $26. 97 " B commission.. 26.96 53.93 5% of share " Cash 1,024.57 By Balance $1,095.00 .22% $1,606.00 $1,606.00 Cr. $10,000.00 $10,000.00 .15% $8,400.00 $8^400.00 15% $3,526.50 $3,526.50 .15% $1,095.00 $1,095.00 173 i Accmnimcy Problems and Solutions. Problem 4 It will be noticed that in soWng this problem the gross profit has beca determined in the trading account without taking into consideration the lelling expenses— advertising and traveling. The assumption in this case has been that the advertising as well as traveling expense have resulted in sales both for the house and lor the agency. II the lacts in the problem were such as to indicate that the general administration expenses Mily were to be apportioned between trading and agency, the results, of course, would be entirely different The gross profit would then be $416^93 and there would not be any net profit Irom trading, but, on the contrary,* net loss on trading amounting to $1,545.62. The final net profit Irom agency and trading would, of course, be the same, $2,907.76. We are also asked in the problem to prepare a statement which would show the percentages of turnover and commission that the total expenses represent By dividing the turnover $54,816.19 into the total expense |io38o.24 we find the percentage of turnover to be I9.8485+* By dividing the commissions $1034100 into the total expense $10,889.24 we get a per- centage of commission equal to 105.2142+. It is noticeable that no resenre liaa been created for depreciation of buildings or furniture and fixture^ nor has there been created any reserve for bad debts. That, of course^ is due to the fact that the problem does not require us to do it While the problem does not call for any balance sheet, yet, to prove that the final net profit is correct, we prepare the balance sheet as shown on the next page. rroolem 3. This problem is an excellent specimen of a situation with which the practising accountant is frequently confronted. Business men when en- gaged in an enterprise other than their regular calling, invariably fail to exercise that discretion and judgment in the matter of details which they display in their own business, and the problem is an illustration of such neglect, which resulted in the over-payment of dividends for which the directors are liable and would have to refund. The solution is very detailed in make-up and form and in the case of a mercantile concern would set forth all the essential facts in order that the operations may be brought down to a percentage basis for the purpose of comparison. Here, however, while these requirements are unnecessary, the solution is nev jrtheless instructive and will afford the student an oppor- tunity of condersing the various statements under general headings and still bring out the points which detailed statements illustrate. The inco-ie and expenditure account, which term is deemed here more appropriate than profit and loss account, is divided into six sections. The first three Aive the classification of revenue and expenditure incurred in conductinAhe business, resulting in a total profit of $228,300; sections IV, V an«VI show the distribution of profits and payment of dividends unearned Jausing a deficit of $5i,7oa 174 Practical Accounting Problems. Problem 6. In the absence of details and specific technical points of the laws of Illinois relating to insurance companies, the solution may be accepted as correct. The only respect in which one versed in the laws of Illinois relating to insurance companies would change the solution would be in the matter of the reserve. One of these technical details which are contrary to accountancy practice, is the fact that the laws do not permit a company to carry its furniture and fixtures as an asset for the purpose of calculating the reserve but they must be charged off as part of the expense of the year in which profits are earned. The reserve may be figured as follows: For all business written for one year or less at the risk of any year 50% is considered as being earned (on the assumption that a company doing a regular business has a num- ber of policies having only one day to run, as it has policies that have run but one day), 50% is considered as being unearned. This system is car- ried out on the second year's business on the same equation of time, viz., if written this year, at the end of the year the proportion earned would be as 6 months is to 24, or one-quarter with three-quarters reserved; and at the end of two years, as 18 months is to 24, with one-quarter reserved. On this basis the unearned premium for the First year would be one-half. $7,500.00 Second year, three- fourths 13,875.00 Third year, five-sixths 28,750.00 Fifth year, nine-tenths 26,550.00 Total reserve , $76,675.00 This is merely an illustration as to how, given all the details of the laws of the various states, the reserve may be calculated. Problem 7. This problem tests a candidate's ability better than any of the highly specialized questions. It would, perhaps, have been better, if the exam- iners had made it compulsory. The question calls [in (a)] for opening entries and balance sheet of the vendee company. The latter is hardly necessary, as the entries disclose the assets and liabilities. Such require^ ment only adds additional labor without testing the candidate, excepting^ perhaps, for the purpose of the make up, so as to examine his technique. Though the solution is not in the best possible form, it is an accurate answer to the problem. The solution should show the subscription to the stock, but, in the present case this cannot be done, as the problem is silent about it; an entry, supplying it would be useless, as the subscription could have been for a part of the capital stock only. In showing the 175 I AccoMMtamy Problems and Soluimis, proinoter's profit for effecting the consolidation (c) the answer is rather elaborate. It not only gives the profit, but traces it step by step from the start to the finish. A further statement could be shown of the cash transactions of the promoter, which would reveal the fact that the promoter made no cash advances whatsoever. Not until he had succeeded in underwriting the stock did he pay out anything. His net profit is, as shown above, repre- sented by the loo shares of preferred stock which, from the wording of the question, we assume he retained, or sold at par, his gain being the same in either case. The problem is also of value for other than the accounting features involved. It illustrates in a concrete manner the method of financing large enterprises which the industrial conditions of the country have called forth by reason of its growth, population and wealth, and the con- sequent necessity of combinations for the purpose of economic manage- ment and operation. For an impartial discussion of the compensation to the promoters of these gigantic undertakings and the risks they assume in underwriting the flotations of these companies, the student is referred to the book on " Corporation Finance," by W. H.. Lough, and similar wOrKs. The solution to this question follows the sequence*' of the problem, namely, in showing the liquidation of the firm of A, B and C; the trad- ing account is prepared first in order to show the gross profit realized on the trade proper. This is followed by the interest account, this account being credited for the interest due by B and C, and charged for the interest due to A, The profit and loss account shows against the gross profit carried forward from the trading accounts, to which the un- expired insurance is added, all the other items that would go under this section, including the interest balance of $105.00, which shows a net profit for allocation among the partners of $2,817. This profit is allocated in accordance with the partnership provision of A, B and C. The partners' capital accounts which follow the profit and loss account, as rightly they should, show the respective balance of each partner in the business. This first part concludes the liquidation of the firm of A, B and C. The second part shows the affairs of the new firm, B, C and D. In accordance with the partnership agreement of the new firm, B withdraws the amount of I32.51, this being the excess of $10,000, as per his account ; C invests an additional $31,20 to make up the $S,ooo which he was supposed to invest; and D invests in cash one-fourth of the capital, namely, $5,000. The cash account is given in order to show the cash balance on hand at the begin- ning of the partnership of B, C and D. It includes the balance of the firm of A, B and C, and the additional investments of C and D, respect- ively. On the credit side it shows the withdrawal by B, and also the payment to the estate of A, leaving a hulance of $4,762. The balance 176 Practical Accounting Problems. ^ ) sheet, which follows, shows the assets of the new firm as well as their liabilities, including, of course, the bond and mortgage, amounting to $20,000, payable to the estate of A in five yearly installments, and verifies the capital of the new firm. Problem 9. The solution gives an analysis of the 1906 transactions, accounting for the cash balance of June i, 1907, amounting to $832.14, and also for the deficiency amounting to $5,067.72. The accounts for 1907 show the result of the operation, with a credit balance to surplus, amounting to $9,107.16, against which is charged the deficiency during the previous year $5,067.72, leaving a credit balance to surplus amounting to $4,039.44. The compara- tive balance sheet in accordance with the requirements of the problem shows all the assets of 1907- 1908 as well as the liabilities of the same periods, with the respective increases and decreases, accounting for the results shown. The solution given probably covers more than the problem requires, but from the point of view of the practicing accountant it is not more than what would be expected of him. As a general proposition, the fewer the records the accountant has at his disposal the more analytical his work has to be in order to be enabled to substantiate his findings. In actual practice the various statements here given would all be called for accom- panied with schedules and exhibits, and the candidate submitting his solu- tion to the problem as it is here given would have no difficulty in demon- strating that he has had actual accounting experience. Problem 10. In solving this problem, all items required in the question should be given in one of the statem nts, but not necessarily repeated in all. Thus the item of common stock received as a bonus is only shown in Statement **B" and is omitted in Statement "A." It will be noticed that while Statement "A" shows a profit of $25o,ooaocii, it includes bankers' own share in the syndicate. To this share there is added a profit of $25,000.00, the difference between purchasing price and the price at which the bonds were sold to the syndicate. Deducting this sum the true profit would only be $225,000.00. The Bond Interest Account is self-explanatory. As the bonds were bought and sold "with interest," the account is debited for the intervening nine days, amounting to $123.29. It is credited for all interest income, in- cluding accretions, not due as yet, showing a net profit after one year of $362,5.^6.99. Statement "B" shows the participants' accounts, that is, the final bal- ance due from each member of the syndicate. As will be recalled no member of the syndicate paid in money. All the necessary funds were ad- 177 Accountancy Problems and Solutions. vanccd by the bankers. Tbe partkipants' accounts have been debited lor their respective allotments, and they have been credited for respective sales, the difference shows balance of stock on hand and consequently the •mount which they owe for such stock remaining unsold. The Common Stock Account tinder Statement "B/* shows the respec- tive share of the stock bonus given to each member of the syndicate, in accordance with his holdinf in the syndicate. Statement **C* shows first the bankers* estimated profit on the unsold bonds, the latter being figured at 925, the selling price to the syndicate. The second part of this statement shows the bankers* profits, earned and estimated. This profit is composed of the following: Profit on transfer to syndicate....... Bond interest (net) Estinuted profit on unsold bonds.... $250,000.00 . 362,536.99 ■ 15,237.67 .$627,774.66 In figuring these profits it must be borne in mind that there is in- cluded $25,000, mentioned above, representing bankers' own participation; fiirthermore that no interest has been considered on the bankers' outlay for purchase of bonds. The cash account shows all cash receipts whether for the sale of bonds or receipts of interest, as well as payments for bonds "with interest." The balance of cash on hand belongs to the bankers. The final statement shows the bankers' profit to have been $612,536.99^ in which figures, however, is not included estimated profit on unsold bonds. The cash account requires some explanation. It will be noticed that although the problem reads that on February i, 1908, $6,000,000.00 worth of bonds were sold at an average price of 95 and on April ist $1,000,000.00 worth of bonds at an average price of 94. the student may be led to sup- pose that the cash book would show the actual amounts received, which in total would average the price stated. As a matter of fact, the amounts entered on the cash book are at the average price of 95 and 94 respect- ively, and the itemizing of the two lots of bonds is merely to show the ratio which each participant's allotment bears to the total, each partici- pant's account being credited with his proportion of the bonds sold. This problem is a fit companion to Problem 7, and illustrates the method of naarkcting securities of industrial corporations. It will be observed that by advancing $9,000,000.00 in cash the syndicate was able to make a profit for the year of less than 7%, that is, on the assumption that the unsold bonds will yield a profit similar to the profit shown on the bonds already sold. As an offset to this small margin of profit, the participants of the syndicate, however, have received as a bonus shares of common stock of the Atlantic Ocean Bridge G>mpany. 178 Practical Accounting Problems. ( i , Problem 1 1 . With regard to the solution, the cash book is self-explanatory except- ing that it may be remarked that the advances to incorporators are shown under one heading and are supposed to be posted as such instead of in- dividually to each subscriber. The journal entries are arranged to carry out the agreement of the parties in exact order, and the explanations accompanying each entry are sufficient to give the reasons for the records. It will be noted that the advances to the incorporators, as well as the accountant's fees, are charged to the corporation; a procedure which, although not required by the problem, can easily be inferred. Of course, the subscription to the ten shares of stock of each incorporator, as well as the receipt of stock, is left out entirely from the partnership books, and rightly so, as they are not pertinent to the partnership records. It may also be remarked that there are some other records given in the journal entries which do not pertain directly to the partnership affairs, yet as they are required in the problem they are given here. The ledger accounts are presented for the purpose of showing the accounts before and after closing. The heavy-faced type indicates adjustment or closing entries, and presents the accounts in complete form. Problem 12. In this problem the Manufacturing and Trading Accounts are com- bined because the question merely requires the preparation of a Manu- facturing and a Profit and Loss Account. As it would not be proper to show sales in a Manufacturing Account, the two (manufacturing and trad- ing) have been combined in order to determine the gross profit realized. It is rather questionable to include the item of traveling expenses in the Profit and Loss Account. This item represents a selling expense and should be included in the Trading Account ; but, as the question does not call for the latter, it is entered in the profit and loss account. It is also questionable whether the credit of factory rent, $3,000.00, should go into the first section of the Profit and Loss Account. When the profit and loss account is divided into sections, that item would appear under the heading of " Income from Other Sources." The Balance Sheet is self-explanatory and every item is given in detail. Problem 13. It is required in this Problem to show the Realization Account, as well as the Profit and Loss Account of the amalgamated firm. Income and Expenditure Account would perhaps be a more correct term for this state- ment. The term Profit and Loss Account should rather be used in con- nection with trading concerns, while Income and Expenditure Accounts should be used in connection with non-trading firms. As the problem cm- 179 : Accountancy Problems and Solutions. phasizes the fact that the firms are professional, the preparation of a Profit and Loss Account would seem inconsistent. It will be noticed that the division of the net profits is made after all preferentials, in accordance with the wording of the problem, are taken care of by allowing to each respective firm the percentage agreed upon. The accompanying Capital Accounts of the members of each respective firm are self-explanatory. rroblem 14. The problem is well selected to test the student's knowledge of corpo- rate finance. The solution consists of five exhibits: Exhibit A gives the separate Balance Sheets of the three amalgamating corporations; Exhibit B consolidates the previous individual Balance Sheets, increasing, how- ever, the capital stock by $1,150,000.00, for which a new asset. Good Will, is created. Exhibit C gives us a condensed Trading and Profit and Loss Account of every concern for the last five years, the figures of net profits varying absolutely and also in proportion to the capital stock, the corpora- tion A showing the highest profits on the smallest amount of capital stock, in accordance with the requirements of the problem. It is now our task to allot equitably the capital stock of the new com- pany. Exhibit D shows the percentage of net earnings on the capital and, if 6% is considered a normal rate of income, the excess of average annual profits may be considered as good will in each of the three concerns. Ex- hibit E contains the distribution of the capital stock of the new corpora- tion; $350,000.00 are allotted in exchange for the old shares; the balance is distributed in the ratio which the good will of each of the merging com- panies bears to the total good will, as exhibited under D. It will be noted that under this plan the corporation A receives, comparatively, the highest allotment, its capital being only one-half of B's and one-quarter of Cs, but its net earnings were comparatively also higher. The report accompanying the solution is addressed to the president of the company and states the result of the investigation and the views of the accountant. Problem 15. The comments to this problem are practically given in the introduction to the solution. For the benefit of the reader, however, we append another form of solution, as given below: Account Sales Sales $45iOOO Charges : Claims and allowances 1,500 Discount — 5% 2,250 5,150 Net proceeds to shipper's account, $39,850 180 Practical Accounting Problems. Balance Sheet Cash $18,050 Creditors $ii9CX} Customers 14,100 Capital 30,250 $32,150 $32,150 Profit and Loss Account Discount lost $400 Discount gained $2,250 Expense 900 Trading 15,000 Freight 700 Balance to capital ac- count 15,250 $17,250 $17,250 Capital Account Cash $15,000 Profit and loss 15,250 $30,250 Problem 16. The solution to this problem may be reached by three methods. The first method, given under Operation A, is a separate valuation of princi- pal (i) and annuity (2) ; the two added give the present value of the bond. Under (3) we find the amounts of interest, income rate and cash rate, and the premium $2,912.00 to be amortized in three periods. The Operations B and C arrive at the same result as A, though by dif- ferent methods; the method under B is the shortest of all. The cash inter- est received is divided into income and surplus interest and the latter only is valued, being considered as an annuity. The solution winds up with a schedule of amortization showing the varying yearly net income and the amortization which reduces the book value of the bond to par at the date of maturity. The division of profits is a simple matter and calls for no comments. I' Problem 17. In stating this problem an effort has been made to avoid ambiguous terms and phrases. In working out the problem care has been taken to show each item in connection with the operation. The trial balance presented in the problem is nothing but a collection of the assets and liabilities as well as the proprietorship of the concern on Jtme 30, 1907- 181 Accountancy Probiefns and Solutions. On operation proper the corporation has earned a net profit of $28,991.00^ but as the dividends declared, paid and unpaid, amount to |6o,ooo.oo, it leaves a deficit for the year amounting to $31,009.00, which deficit has been made up from the surplus of 1907, decreasing that surplus to $35,366.00. The important principle "Valuation of Inventory" is here clearly shown, inasmuch as the market price of the raw material is on date of inventory $24.00 per ton, while the cost of the material is stated at $22.00 per ton. The same principle is illustrated in the item of land, which, while its present value is estimated at $300,000.00, is nevertheless carried at its original cost of $270,000.00. It will also be observed that in stating the payment of interest on bonds the premium is deducted from such interest. This is based on the principle that the premium that the company received on the sale of the bonds is nothing else but a reduction of the rate of interest, and therefore one-fiftieth of that total sum of permium or $400.00 is deducted each year from the interest charges. The dividend declared on preferred and common stock respectively, but unpaid at the present, is treated as a liability. According to the wording of the problem this dividend has been declared, but is not payable until August, and hence a liability at the present. It will be noticed that the current reserve for bad debts ($7,716.00) has been deducted on the asset side from the item accounts receivable. The general reserve for bad and doubtful debts accumulated during previous periods, less the amount of actual losses from bad debts, is en- tered on the liability side of the balance sheet. The result would be the same if both reserves, current and general, were deducted from the accounts receivable. Problem ]S, In the solution the realization and liquidation account is prepared in the ordinary form, showing on the debit side the assets t*o be realized and omitting the item of cash as this is already realized. Comparing tlie total of this heading with the totals of the headings *' Assets Realized" and "Assets Not Realized," we find a difference of $103,500.00. In this balance is included, of course, the item of Materials and Supplies amounting to $95,000.00. Eliminating this item from the debit side (assets to be realized) there is a difference of $8,500.00, which represents the loss on the realization proper, viz.: $8,000.00 by reason of bad debts written off, and $500.00 by reason of discounts and allowances on custo- mers* accounts prior to January i, 1908. In the problem, however, this difference was not carried out, but the supplementary charges and th© supplementary credits respectively have been added and the net result of the trustee's operation shown in one sum. In the trustee's operations proper, under "Supplementary Charges*' and "Supplementary Credits." is shown the result of his operations, viz.: To the total under supplementary charges, $356,695.00, is to be added Practical Accounting Problems. the item of $3,000.00 for materials consumed from the inventory, making a total of $359,695.00. Against this the total of supplementary credits, after all the deductions are made, amounts to $338,135.00. That gives a loss on the trustee's operations, of $21,560.00. If we add to this the $8,500.00 lost on the realization proper, we get a total of $30,060.00, as shown in the last item on the credit side of the realization account. Under payments, the problem gives purchases of materials and supplies as $98,000.00. However, as under the item of notes given to creditors the amount of $180,000.00 is given, and the renewals are only $110,000.00 we must conclude that $70,000.00 worth of material was bought on notes; hence, the figure of $168,000.00 under purchases of materials and supplies, in the Supplementary Charges. The balance sheet proves the condition shown by the realization and liquidation account. The item of cash is determined by adding to the difference found by subtracting the payments from the receipts, the balance of $450.00 on hand at the beginning of the trusteeship. The item of notes receivable is found by subtracting the cash amount received, $13,500.00, from the item $20,000.00, "notes received from customers." In the same way the items of accounts receivable, notes payable and accounts payable are determined. The items "accrued interest" and "accrued taxes," although charged as expenditures for the trusteeship, have not as yet actually been paid and are treated as deferred liabilities. Problem 19. The transactions of the Association and of the Club are numerous but presented clearly so that the solution is not difficult and requires no expla- nation. The journal of the association, in which also the cash transactions are entered, contains a detailed record of its incorporation, its deal in real estate and of the mortgage. The journal of the Fairview Club contains the records of its organization by the association and its transactions, viz., dues received, assessment of members and expenses, resulting in a de- ficiency of $4,500.00. All entries are posted to the ledgers and the final Balance Sheet proves the correctness of our books. Problem 20. A.— On closing entries in books of Jones & Jackson : By drawing proper ledger accounts, it may readily be seen that all of the old accounts in the books of Jones & Jackson, as well as the new ones necessary for the adjustments, are now closed. But two items deserve special mention, viz., the drawing account and the division of good wilt As it is not usual for stockholders to have drawing accounts in their com- panies, or, in cases of this kind, to treat debit balances in such accounts as assets, it appeared desirable to close them into their corresponding 183 Accountancy Problems and Solutions. capital accownts. Regarding good will, the partnership law provides that all profits of a co-partnership, in the absence of a special agreement, arc to he divided equally between the partners. Good will represents a profit on sale to the corporation; hence, the equal division shown. B.— On opening entries in the hooks of the Consolidated Manufacturing Company : The " good will " item of $714000 among the assets of the Independent llimifacturing Co. consists of the original item as per balance sheet sub- mitted ($50,000), plus the item of good will created by the consolidation (|664,ooO') . "Reserve for Working Capital— 150,000/* It is true that no definite value can be assigned to the treasury stock contributed by the stock- holders, for this value depends upon the future price. But as we can easily adjust the amount by subsequent entries at the time when the stock is disposed of, the objection just raised need not be considered any further. Inasmuch as only $20,000 was realized for $50,000 of stock, the reserve account or working capital has suffered a decrease of $30,000, hence the •djustment, previously referred to, is now made. A very interesting question is raised by the next transaction involving the disposal of bonds at a discount. Undoubtedly, had no stock been offered as a bonus, less than 90 would have been realized. Why, then, should not the value of the stock (say about $30,000) be charged to Dis- count on Bonds Account, leaving only the balane ($45,000) to reduce the amount of reserve for working capital? I think this latter solution the better one, though perhaps less usual. The entry becomes : Cash ....$450,000 Discount on bonds. 80,000 Reserve for working capital ., 4S»ooo To first mortgage bonds payable.... $500,000 Treasury stock • • 75iOOO If this suggestion be adopted a few changes would be necessary in the inal 'balance sheet, viz., Discount on bonds, debit $80,000 Reserve for working capital, credit 7S»ooo In case the bonds were issued for some specific construction purpose, Construction Account might be charged instead of Discount on Bonds Ac- count, as shown. In either case, the item should not be carried as an tsset indefinitely, but should gradually be reduced. Problem 21. The problem is practical and interesting from every point of view and contains enough matter not only to test the candidate's knowledge of the subject matter, but also to see how far he will go in anaylsis of similar propositions, and what his conclusions would be. 1E4 Practical Accoimiiyii; Problems. The solution supplied here is purely technical. The first Balance Sheet gives all assets and liabilities in detail ; the condensed Balanced Sheet con- tains the same assets and liabilities by groups, and the securities pledged and held in escrow are deducted. There is the same distinction also be- tween the two Income Accounts, the first one giving the various sources of income and the various expenditures in detail, while the second statement proceeds by groups of accounts ; the results are, of course, identical. It will be noticed that the problem calls also for a written report of the financial problems presented by the question; he would have to call the attention of his client to the various things suggested by a close inves- tigation, viz., a comparison of the inefficiency of the working assets against the current liabilities ; the inefficiency of the power plant, with suggestions as to the possible savings in fuel cost by the installation of more modem machinery; discussion of the overcapitalization of the proposition; ref- erence to the lack of provision for depreciation; the possibilities of a receivership or of a reorganization in the light of the possible inability to pay the fixed charges and the current obligations out of current net earnings. Problem 22. This problem is rather simple. The principles involved are the correct result as to profits and the relations of the partners to each other. The Profit and Loss Account is so arranged as to show first the actual result; it is then closed out by charging each partner for his share of loss and crediting the Profit and Loss and crediting the account for the total The partners' capital accounts show the relation of each partner to the other. A and C have each overdrawn their accounts, respectively. The former to the extent of $1,187.50; the latter to the extent of $52^ making a total of $1,712.50. This amount is due to B, as his account shows a greater investment than the loss and drawings amount to. Problem 23. The solution to the problem consists of three exhibits; namely, the operating account, property account and the Balance Sheet. The operating account is arranged in such a form as to show on the debit side the orig- inal cost of the property, plus the selling and administration expenses. Against this the sales are shown on the credit side, resulting in a loss for the year 1906 amounting to $8,452.82. This loss, in accordance with the wording of the problem, is carried to the property account. By adding up the interest on the capital invested in the lots, as well as the losses sustained during 1906, and distributing it over the remain- ing lots unsold at the beginning of 1907 the book value per lot is shown to be $426.01. We therefore debit the operating account in 1907 for the book value of 160 lots sold at $426.01, to which is added the selling 185 Accountancy Problems and Solutions. md administration expenses, making a total of $83,8i4-85- Against this 18 shown on the credit side the amount realized from the sales of i6o tots, also the interest received, plus that which is accrued by the end of the period, making up the sum of $83,361.00. We also add on the credit side the transfer of $4,161.60 from the reserve for earnings on invest- ment, which represents the credit in current earnings for the amount burdened on the property account, realized by sales of 160 lots at the burdened figure of $26.01. The total credit side then shows $87,522.60. leaving a balance of $3,70775 which represents the profit for 1907 and which is transferred to the property account in accordance with the wording of the problem. The reserve for earnings mentioned before represents the annual charges made to the property account for interest on capital remaining invested, at the rate of 4% Per annum, plus any deficit shown in any year. The offsets against it are profits realized, also any transfer to the property account by reason of realizing any portion of the amount bur- dened to the latter account. The property account shows on the debit side the purchase of the prop- erty, against which, on the credit side, is entered the record of the sales at cost The remaining balance is carried forward to the next period, in 1907 the account is also charged with the interest on the original invest- ment, and the loss sustained on operation in 1906, agamst which the sale— at cost-is credited, the balance being carried over for the next period. To this balance is added again the interest on the remainmg balance ($376,000) while on the credit side is entered the amount of profit real- ized on the operations of 1907, resulting in a balance to the property account of $343,623-47. This balance represents the book value of the 780 lots remaining unsold on January i, 1908. The balance sheet is arranged to show the exact condition of affairs and therefore the amount set aside as a reserve for earnings on investment is deducted from the property account, and results in a balance to that account of $312,000, which, of course, is the original cost of the 780 lots remaming unsold. This results in a deficit of $4475-07 and is so shown. Problem 24. The solution to this problem covers more than is required in the ques- tion which only calls for a statement of profit and loss and income, while the solution in addition to the profit and loss statement gives also the bal- ance sheet, showing the financial condition of the firm, and at the same time verifying the results shown on the income and profit and loss ■tsitcm ent It will be noticed that no provision for the depreciation of the fixed properties has been made, nor has any reserve been set aside for bad and doubtful debts, for two reasons; first, because the values of the fixed property represents inventory valuations, and second, because the problem does not require any provision to be made. 186 t Practical Accounting Problems. Otherwise the grouping in the profit and loss statement calls for no comments; the gross sales are decreased by the amounts of items, inti- mately connected with sales, giving net sales, from which the total cost of manufacture is deducted. The result is gross profits ; if we subtract from it the selling expenses we get the selling profit. From here follows the actual profit and loss statement, the foregoing being rather in the nature of a manufacturing and trading section. To the net profit, which is ob- tained after deducting the administration expenses and other charges, we add the former surplus, thus giving us the total amount available for distribution. Problem 25. Regarding the solution to this problem, we think that it covers a good many points which are not required by the question, and on the other hand omits certain conditions which should be shown. In addition, therefore, we submit another solution which we think complies better with the con- ditions given in the problem: STATEMENT Showing the Settlement between partners at December 31, 1909 Assets: Cash $804.20 Accounts receivable 2,240.00 Investment, original value $12,000.00 Less shrinkage. ^ of $2,700.00 2,025.00 9.975-00 Commissions receivable (earnings on future shipments, mini- mum guaranteed) 15,000 . 00 $28,019.20 Profits: — Partners withdrawals: A $2,000.00 B , 10,370.00 c 3.350^ . . $15,720.00 Assets remaining 28,019 • 20 ^ $43,739-20 Deduct original investment 20,000.00 Net profit 23,739.20 187 Accountancy Problems and Solutions. Practical Accounting Problems. 1 I St g 10 00 00 00 looo vO 00 8 00 00 o to rooj otT^ M O B < m 0' K ^» CD f ji o 8 3 ex <3 u w 6 8 S 00 00 00 ro M P 1^ ^ 8 SI R IB 1 ? i^ CO IS 01 ID < 8 8 Q lO <^ Q. 0. • * . t> • • . bo • • . M • • . •5 : • o : « : *c :'«:'" * '« * o • §fi Si m u S; ^ Q -^l H- 1 1-4 « s * rt f- * > 'tS * V Q * O O cd CO u C ■*"^ O «n C .S tNO O «fl C O •S C m c3 -^ i (4 SS 8S m ■ 000 00 s St 6 t^ «ooo 4} s >» 08 08 -^s* .a V ?^ u:s «o I G 42 I 'S 3 at to t^ """ SJv § o rt CI 6 8 00 O m CO'* 00 NO »o e8 ^2 «'; 1 Accomitatwy Problems and SduHons. ■■hi 'fl 'V 11'% J*" Problem. Zo. In solving the problem the royalties accrued are regarded as a reduc- tion on the purchase price. The question reads: ** The patent was subject to royalty rights granted to the Novelty Company, which terminated at date of purchase. All accrued royalties were to pass with patent and no royalty rights were granted by the Patent Specialty Company." The roy- alties mentioned in the problem as having been received and accrued to December 31, 1907, must have been those which were accrued on August 20, 1907, and therefore form a reduction on the purchase price. It is rather questionable whether the complementary credit to real estate donated should be " surplus." This company has done no business as yet and therefore has no profits for distribution as dividend, which is possible by means of the credit balance that is shown to surplus. A better method, perhaps, would be to credit it to a "reserve" account, properly car-marked. There is no account except "Organization Expenses" to which the insurance, salaries, etc., could have been charged. As there are no opera- tions as yet, all the expenses incurred are for the purposes of organization ; therefore a charge to this account is proper. rrobleiii z/. The solution provides that a portion of the interest collection be cred- ited to the Bond Account as part of the principal, so that at maturity the balance of the Bond Account will equal the face value of the security. The problem does not require this specifically, but in order to render a scientific solution to the question, the premium paid at purchase of the bonds is amortized out of the interest receipts. The principle involved is that bonds as a rule are never perpetual, nor do bonds run for less than one year ; moreover, the purchase price is never the same as the face value of the security, the bond is bought either at a premium or at a discount If at a premium as in this problem, a portion of the semi-annual interest received must be regarded as part payment of the principal and a reserve set up in a separate account, or, as treated in the solution, deducted di- rectly from the bond itself. The Analytical Single Column Schedule illus- trates the arithmetical operation involved, the period being short the process is comparatively simple, but if the security does not mature for a great many years, the arithmetical operation is somewhat complicated and logarithmetic tables have to be employed in the solution. In instances where the securities are purchased at a discount, the cash interest received is regarded as only a portion of the yield, the remainder being deferred until the maturity of the security, in which case the Bond Account is debited and the Interest Earned Account credited. 190 1 u 1; I Practical Accounting Problems. Problem 28. Although $7,000 has been received from the Insurance Company for the stock in hand at the time of the fire it has not been credited to Insur- ance Adjustment account. It is assumed that same was credited to Sept sales not allocated. The question states that cash was received from September sales amounting to $13,500. Allowing $7,000, as above, there remains a balance of $2,675 to be debited to some account. This might have been debited to Reserve for bad debts, but as the balance to credit of the account is equal to over 6% of the accounts receivable outstanding it is hardly likely that this could have been done. It may have been written off the Profit and Loss Surplus, but this course would have been unusual. It is there- fore assumed that the situation was as follows: September sales records have been destroyed, yet there is a figure in the trial balance under this heading. It is therefore most likely that the method of the Richardson Engraving Company was to debit the customer at the time the charge was incurred and to credit the appropriate revenue account at the end of each month. The balance of accounts receivable would thus include the amounts unpaid for September sales as well as all other unpaid terms. This is further borne out by the fact that the allocated sales were $176,950 and unallocated sales $23,175, while the outstandings from customers amount to $19,640 consisting of $16,965 on allocated sales, and $2,675 o^ unallocated sales or about 9 and 11% respectively. As the unallocated sales are of more recent occurrence it seems reasonable to assume that these percentages are accurate and support the supposed methods. It will be noticed that the credit side of the trial balance given adds $293,820 not $292,820. Candidates were instructed to reduce one of the credit items by $1,000 and we have therefore reduced the unallocated Sep- tember sales by this amount Problem 29. This problem is a fair specimen of the work set for the candidates at the Intermediate Examinations of the Institute of Chartered Accountants. The problem is exceedingly simple, in fact, much more simple than the corresponding problems set by the New York State Board of Regents for candidates taking examinations in Advanced Bookkeeping. The solution consists of the Profit and Loss statement, Journal entries and the part- ners' drawing and capital accounts, which is more than what one wouM be led to assume from the wording of the question. In a problem of this kind, bearing in mind that the candidate's general ability is tested, the inclusion of all the statements showing properly the apportionment of the profits, is advisable. The problem is more of a test in accounting tech- nique than anything else. 191 \\\f. Accountancy PmMems' and Soiwiwns, rbyem 30. An accurate solution to this problem, which should correspond in every detail to the official solution, would be probably the result of mere chance rather than hard work, for the reason that many little and intricate de- tails which are of sufficient importance to change the aspect of some of the statements and which would be easily apparent to the man engaged on the work itself, are either left out of the problem, or are not suffi- ciently emphasized to assist the candidate to an absolutely accurate solu- tion. Illustrations in point are the necessity for arbitrarily dividing the inventory at the beginning to give the problem some semblance of plausibility, and a further improbability is the absence of inventory o£ coal and lumber at the close of the period, and such similar details. With this qualification, however, the solution here submitted is correct in every phase of it, and the candidate presenting such a paper would have the satisfaction of knowing that he has proved to the examiners his ability as an experienced accountant. The difficulty of the problem lies chiefly in its length and in the numerous conditions involved while a candidate for the degree, pressed for time and desirous of presenting a neat paper, is likely to overlook some of the minor requirements. The accompanying journal entries are not called for in the problem, toot are given so as to show the complete entries on the books of the corporation. THE GUNSAULUS CORPORATION LUMBER DEPARTMENT BOOKS JOURNAL ENTRIES The entries which follow are made in accordance with an agreement made this day by and between The General Manufacturing Co., Inc., and The Gunsaulus Corporation, and others, whereby The General Manufac- turing Co., Inc.. agrees to take over the lumber business of this company (with certain reservations and npon certain conditions) as by reference to the particular agreement will more fully appear : General Manufacturing Company 1469,646.81 To Sundry Assets (transferred) $469,646.81 Sundrv Liabilities (assumed) 11 ,496 . 24 To General Manufacturing Company 11 ,496 . 24 Stepltis ■ 82,982 . 92 'Losses sustained and allowance made in .sale of lumber business — (To Sundry Assets) 82.982 .92 Allowance made from book value of Mill Plant 74,982 . 92 Accounts Receivable UncoUectihle 8,000.00 Deficiency - 39,986 .67 Net excess of losses over gains. TOiSmiplus 39.986-67 To close the latter account. Xotb: — Tb« entries to be tciiilc upiMi ibt iMwIct al tbe General :li«ralacturiiig Co., .Rock Lttmber Co., Severn River Lumber Co., are not fiveti, since they a,rc not aalced ■for. 193 i^ !f Practical Accounting Problems. Problem 31. This problem is from the English Final Examination Papers of the Institute of Chartered Accountants, held in December, 1910. The diffi- culties presented by the problem are rather slight compared with the examination papers of the different state universities, yet the problem is not devoid of pitfalls, which lie principally in the calculations involved for the conversion of the currencies. The rate of exchange is given as 2s. 4d. to the dollar. The student with only the problem before him is apt to jump to the conclusion that the rate of exchange is a misprint, and thereby wastes considerable time in trying to find a common item, in the two statements given, in order to verify the rate. The superiority of the English papers lies principally in the test they present of the candidate's general education and intelligence, which is wanting in a great many of the American papers. The heading of the problem reads: Trial Balance of the London Office of a Rubber Company. Now, rubber is not raised in any part of the United States or any of its possessions where the United States coins circulate; hence, the inference must be drawn that the dollar sign stands for Mexican currency, which is quite correct. The statements presented in this solution fully cover all the require- ments, and, but for the calculations involved in the converting of the moneys, the problem is easily solved. Problem 32. Though simple, the problem tests effectively the student's knowledge of mining accounts. The solution shows the classification of the revenue accounts so as to bring out (i) the cost of mining, (2) the cost of prep- aration, (3) gross profits, (4) net profits, (5) cost per ton, and (6) net earnings per ton. In the Balance Sheet all fixed assets are grouped under the heading of Plant Accounts, and are placed first, being the most im- portant item in the statement. Among the deferred assets there is a bal- ance of the Royalty account, part of which is charged to the Profit and Loss account (132,300 tons @ 20c), the remainder being carried as an asset to the next period. Problem 33. In solving this problem, the interpretation is based on the wording of the problem. As there are only eight subscribesr to the Capital Stock of the Company, a controlling account, under the heading " Subscribers/' is debited for the full amount of the subscribed stock, and the Capital Stock account is credited. It will be noticed that the initial memorandtim dealing with the legal existence of the Company, etc., is embodied in the explanatory matter to the opening entry in the Journal of the United Manufacturing Company. ,! Accountancy Problems and Solutions, No other entries are given affecting the United Manufacturing Com- pamj that cannot be properly called opening entries. Thus it will be seen that while accrued wages and dividend payable appear on the liability side of the Balance Sheet of the United Manufacturing Company, no entry is made to provide for that. The Consolidated statement is so arranged as to prove and agree with the results shown in the Balance Sheet. The percentage table is prepared after adjusting all possible inventories, etc. In other words, as the heading indicates, consumption is the basis. Problem 34. The solution to this problem will be of interest to the reader on ac- count of the difference in treatment of some of the items. Thus it will be noticed that freight and express outward is deducted from sales rather than listed in some other section of the statement. It will also be noticed that depreciations, on buildings as well as on machinery, are charged in a section prior to determining cost of goods produced. In other words, considering it an element in the cost of goods manufactured. This the reader will find to be in opposition to some of the arguments recently advanced by accountants that such items be excluded in determining cost of goods manufactured. There are a number of other items that the reader will find worth while to analyze carefully and contrast them with similar ones in other solutions, thus benefiting himself by becoming familiar with all possible views. Problem 35. The wording of this problem is not quite clear. It reads "... the insured claims his loss is 42}^% of the prime cost of his goods; . . . the percentage claim is adjusted at that figure." It would be a rather diffi- cult task to determine the total prime cost in this case, and if determined it would not be equal to the percentage given (421/2). The only possible interpretation of the meaning of prime cost in this case is that it em- braces, in addition to the usual elements, raw materials and productive labor, also manufacturing expenses. It is on that basis only that the prob- lem can be solved, and that is the method adopted in the solution. Another element which the problem does not mention is that of de- preciation. As no provision has been made for that item we take the arbitrary percentage of 10% on the declining balance, and by means of this determine the amount of the adjusted loss. As this is a very important and at the same time instructive problem we present another solution. Though the second solution arrives at the same results as the first one, and though the value of the assets destroyed is here also determined by analysis and comparison, there are several noteworthy differences in which the reader will be interested. 194 !l mi< <9 Practical Accounting Problems. SOLUTION (SECOND FORM). Prime cost is here to be understood to mean: (i) Raw Materials, (2) Productive Labor, and (3) Manufacturing Expenses. It is necessary to a clear understanding of this problem to ascertain the average amount of raw materials, productive labor and manufacturing expenses used up in the goods actually sold from the last time inventory was taken; for this purpose, therefore, the figures for the three previous years are given amongst others. Using these we find the following: Raw Materials Account. 1906. 1907- 1908. Inventory at beginning $39,223.16 $31,316.20 $33,416.20 Purchases 186,320.16 104,360.22 157,316.20 Total $225,54332 $135,676.42 $190,732.40 Less Inventory at close 31,316.20 33,416.20 32,467.18 Consumed $194,227.12 $102,260.22 $158,265.22 $454,752.56 Productive Labor Account. 1906 — Amount paid therefor. 1907 — Amount paid therefor. 1908 — Amount paid therefor. $90,322.24 61,212.06 72,106.14 $223,640.44 Manufacturing Expenses. 1906 — Amount paid therefor. 1907 — Amount paid therefor. 1908— Amount paid therefor. $20,163.12 16,208.17 20,216.23 $56,587.52 Sales Account. Deductions. Gross Sales. Allowances. Returns. Net Sales. 1906 $386,924-12 $1,1 16.24 $8,614.08 $377,193-80 1907 217,306.01 3,605.75 4,106.18 209,59408 1908 321,672.18 975-00 3,167.22 317,529-96 $925,902.31 $5,696.99 $15,887.48 21,584.47 $904,317-84 195 $904,317.84 Accountancy Problems and Solutions. Average Per Cent, of Raw Materials used in goods actually sold $454,75256 $904,317.84 50.28% Average Per Cent, of Productive Labor in goods actually sold $223,640.44 $904,317-84 24.73% Average Per Cent, of Manufactunng Expenses in goods actually sold $56,58752 $904,317.84 6.25% Component Elements of Costs in Prime Costs. Per Cent, to Per Cent, to Selling Price. Prime Cost. Raw Materials 50.28% 61.88% Productive Labor 24.73% 30-43% Manufacturing Expenses 6.25% 7.69% The same percentage will prevail in goods in process and made-up Arriving now at the period where the fire loss occurs, we note that the last inventory taken was on January 2, 1909. Analysis of Inventories, January 2, 1909. Component Component Elements of Elements of Raw Goods in Made-up Total. Materials. Process. Goods. Raw Materials $32,467.18 61.88% $2,606.52 $12,223.45 $47,297.15 Productive Labor .. 30.43% 1,281.78 6,010.98 7,292.76 Manufacturing Exp. 7.69% 323.92 1,51904 1,842.96 $32,467.18 $4,212.22 $19,753-47 $56,432.87 Statement of Goods on Hand May i, 1909, When Fire Occurs. Raw Productive Manfg. Materials. Labor. Expenses. Inventory Jan. 2/09, as above $47,297.15 $7,292.76 $1,842.16 Purchases, and labor expenses to May, 1909 46,37522 21,618.06 5*167.20 $93,672.37 $28,910.82 $7,010.16 196 Practical Accounting Problems. Deduct : Consumption in Net Sales of $93»237.I9 Materials 50.28% $46,87966 Labor 24.73% $23,057.56 Mfg. Expenses.. 6.25% Inventory at May 1/09: Total, $53,828.81. Consists of. $5,827.32 $46,792.71 $5,853.26 $1,182.84 Recapitulation. Productive Labor as above, 24.73%, on Sales or on Prime Cost Manufacturing Expenses as above, 6.25%, on Sales or on Prime Cost Raw Materials therefor 30.43% $5,853.26 7.69% i,i82A| 61.88% 11,421.67 Cost of Goods in Process ioo.% $18^57.77 Value of Raw Materials, per Statement of Goods on Hand at May 1/09 $46,792.71 L«j Consumed in Goods in Process 11,421.67 35,371.04 Total Value of Stock, as above. $53328.81 Loss adjusted being 42^^%, we find same to be $22,877.24. The rest of the solution is the same as the original. This form of solution is, as will be seen, briefer, the terminology simpler, and the percentages, used in the recapitulation, show more plainly how the amounts for raw material have been arrived at. Problem 36. This is a very simple problem and consequently the solution does not bring out extraordinary features. As will be seen, some of the balances are of a nature that at a glance it is hard to tell whether they are debit or credit balances, for instance: Discounts and Allowances or Com- missions. In solving a problem of this kind it is therefore advisable to list first all balances about which there can be no question and then proceed with those about which there is a doubt. A good guide in such cases is the division of the total by two ; this will give the total debit and credit. It then remains only to re-arrange doubtful balances. The classi- fication is the same as in other similar problems. 197 Accountancy Problems and Solutions, Practical Accountins: Problems, ProUcm 37. The problem is solved in accordance with the law of the State of New York, which is fairly representative of the laws of all the States of the Union. The examiners require here only a statement, showing the "corpus" to be dealt with by the executors, without distinguishing be- tween principal and income; in the solution, however, the items are so grouped as to exhibit separately the two kinds of charges. It will be noticed that the value of the real property is omitted from the statement,, in accordance with the law which does not consider freehold property an asset to be disposed of by the executor, unless ordered to do so by the will The revenue from the bonds and real estate is divided into principal and income according to the data of the problem. The problem, not being in itself complete should be studied in connec- tion with problems No. 2 and No. 39; only then can the student get an idea of the schedules required for executors' acconnts. Problem 38. This problem compares favorably with a similar problem set by the Board at the June, 1907, examination.* It is a very simple yet logical test problem. In fact, it is the simplicity that makes it desirable for tests of this character. The solution to the problem is self-explanatory with perhaps one or two exceptions. The figures, as disclosed on January r, 1910, are debited to the respective accounts, and the total— unpaid wages excluded— is cred- ited to the Main Office account under " sundries." The unpaid wages are credited in the Wages account and the Main Office account is debited for the accrued figure. The loss sustained on the replacement of machinery is charged to tlie Main Office account, and credited to ** Capital Accounts." As the factory books deal with the cost of materials consumed, etc., and not with all operations, this is the only logical method of treatment of this item. The solution is not at all difficult to the experienced accountancy student The facts given are quite clear, and the candidate needs only follow the steps from the opening Trial Balance, which he is expected to have constructed, to the closing one to arrive at the correct result. There are several novel points to this problem; in the treatment of the factory as a separate entity in so far as its operations are concerned, and also in the calculations for overtime, which, while on the surface appear as rather involved, are nevertheless very simple. The operatives' overtime is at an average rate of 45c. per hour payable on a basis of 2V2 hours overtime as the equivalent of 3^ hours regular time. This rate for overtime is according to recent schedules enforced by Trade Unions in New York City, and on a percentage basis is equal to exactly 40% of the regular time. Tliere are several other accounting features involved in the problem which arc Yery distinctly brought out in the solution, and which the reader will do well to study carefully. ♦ Accotmtaacy Problems, Volume i, page .©7, Problem 39. This problem is rather lengthy— as all estate propositions are bound to be— and therefore it calls only for a summary, but not for schedules. The solution is so arranged and worded as to make it clear and com- prehensive. In Statement (b) in determining each legatee's share, the balance ol $164,595.78 was taken as the basis for distribution; from the distribution share was deducted each legatee's advances. In Statement (c) it will be noticed that the specific money bequest to the "A" Hospital was deducted. This is based on various court decisions where it was held that : " No compensation can be allowed an executor for receiving or delivering a specific legacy." Schenck vs. Dart, 22 N. Y. 420; Matter of Robinson, ^y Misc. 336. That a money legacy can be made specific is indicated by the decisions in the matter of Getman, 128 App. Div. 767 and Matter of Delancy, 133 App. Div. 409. In the above cases it was held that when the money is described by the testator so as to enable the legatee to point it out to the executor as in a particular place, chest, bag or purse, or in some person's hands, so that it can be delivered in specie, it is a specific legacy. In view of the fact that the testator left $69,250.00 in cash with banks or on hand and the problem reads that the bequest is specific, we take it for granted that the money must have been clearly indicated in the will and therefore do not allow commission on it. Problem 40. This problem illustrates the modern idea of consolidation, as weU as the purchasing of assets by means of a stock and bond issue. The solution is very simple and self-explanatory. There are, however, two things worthy the careful attention of the reader, namely : the method of treating the doubtful accounts receivable and the treatment of treasury bonds. In the case of the former a separate entry is made for the doubtful accounts instead of amalgamating them with the accounts considered good. In the case of the latter the entire authorized issue is placed on the books and so is also the corresponding liability on the mortgage. This is based on the theory that the borrowing corporation has issued a mortgage in favor of a third party as trustee for all bondholders and this trustee is the legal lender to whom the corporation is liable ; hence the debit to Treasury Bonds and the credit to the Mortgage Payable. •1 199 MM l|« I ^rt , I' i I Following are selected questions with answers on each of the following subjects : Theory of Accounts, Auditing and Commer- cial Law. The questions are selected from the New York, Rhode Island, Illinois, Michigan, Maryland, Ohio and Florida. Theory of Accounts. Questions. ( 1 ) A has exhausted his credit with B. He needs further accommoda- tion to the extent of $2,500, to obtain which he gives B a three months" ^ draft on C for $2,500. This is $1,000 more than C owes A. To adjust this difference C draws at four months on A for $1,000. Assuming that the drafts have been accepted by the respective parties, state what entries his books would show. (2) Mention the methods of bookkeeping in general use. What books , are ordinarily kept in each case ? How is the profit or loss ascertained by the different systems? (3) Devise a system of accounts for an executor. What accounts must . he necessarily keep? (4) A merchant draws a draft of $1,000 at four months, on a customer who owes him an open account and the draft is- accepted on February 2, . 1909. On March 13, ipog, he discounts the draft at the bank at 6% per annum. What entries should be made on the merchant's books to record the transactions properly? is) How would you deal with items accrued and due (such as rent, ^ commission and salaries) when closing the accounts of a business at the end of a fiscal period? (6) What is a contingent liability? Give examples. In what forms • should liabilities appear in a financial statement? (7) Give the ruling of a stock or shares ledger for a corporation. Show how this book is kept and indicate its relation to the general books of * account. (8) Describe two methods of treating depreciation of machinery on both - the books and the balance sheet. (9) State what constitutes contingent assets and contingent liabilities. Give three illustrations of each. State whether or not, in your opinion, * they should be represented in the books of account and whether or not they should appear in the balance sheet of a going concern, if so, in what manner? 203 0' 1 '^* • I •iC#*"j Accoimtancy Problems and Solufiofis. (lo) What, in your opinion, would be the proper accounting record for > business corporation to make of an appropriation from its snrplus profits lor the amount of a permanent investment in property? (ii) Define the following terms as applied to accounting: (a) nominal, (b) accrued, (c) deferred, (d) net profit, (e) capital. (12) Explain fully in what way, if at all, the following should enter into trading and profit and loss statements, with reasons for inclusion or exclusion: (a) partners' salaries, (b) profit on sale of real estate, (c) partners' drawings, (d) overvaluation of opening inventory, (c) estimated losses in realization of trading assets. ( 13) Explain method by which the net result of a double entry profit and loss accoimt may be proved by use of resources and liabilities. (14) Submit pro forma entries covering an incidental shipment of goods to a factor, prepayment of freight, receipt of advances, receipt of account »les with cash to cover balance due, and closing of account. (15) Define (a) scrip, (b) stock right, (c) amortization, (d) deprecia- tion, (e) consolidated balance sheet. (16) A mortgage provides for a sinking fund to be accumulated in the hands of a trustee from profits prior to dividend payments. Prepare skeleton balance sheet to disclose the state of the fund, dividends declared and payable, appropriation of profits for purpose of the fund and an unap- propriated surplus. What eflFect would losses in excess of such unapprn>- priated surplus have on the sinking fund? (17) State and differentiate, for balance sheet purposes, the rules of valuation that apply in the following: (a) long time bonds bought at a premium for investment, the market value of which has advanced, (b) dividend-paying stocks bought for investment, the market value of which lias declined, (c) long time bonds bought at a discount for speculation, the market value of which has advanced, (d) real estate (land) that has appreciated. (18) State fully reasons for or against the use of cash receipts and pay- ments on account of trading, as a basis for imposition of a tax on corporate Incomes. (19) Define (a) revenue balance sheet, (b) work in process, (c) hf- product, fd) deficiency account in insolvency, (e) final accounting. (20) Show the method and the advantages in cost accounting of the process of articulating the general ledger, factory ledger and stores ledger % summary accotmts. Questions in Theory of Accounts. (21) State the powers of the Public Service Commissions in respect to the accounts of common carriers. What supervision is exercised over additional issues of notes, bonds and stocks ? (22) Outline accounting procedure necessary to prepare schedules in bankruptcy under the United States Bankruptcy Act. State schedules ill their order and give substantially what each should contain. Theory of Accounts. Answers. JOURNAL ENTRIES IN A'S BOOKS. B $2,500 . 00 To C $a,5oo , 00 For a three months' draft drawn on C in favor of B. C. $1,000.00 To Notes Payable $1,000.00 For a four months draft drawn by C on me which I have accepted. A'S LEDGER. B Notes Payable To C's draft $2,500 By Balance $0,000 To my acceptance $1,000 By draft in favor of B $2,500 By four months acceptance $1,000 NOTE: No entry is shown for the additional credit given by B to A for the purpose of which the accommodation paper was made as we do not know what account to debit. We also follow the assumption that A submitted his draft to B, who presented it himself to C for a cceptance. (2) There are two fundamental methods for recording exchanges, or business transactions ; namely, single and double entry. Where the books are kept upon a partial or incomplete system of bookkeeping they are said to -be kept by single entry. Double entry bookkeeping is that method of bookkeeping by which the accounts are kept with all kinds of values received or disbursed. It is assumed that each individual exchange has a two-fold effect. When this two-fold effect is expressed on the books we speak of it as bookkeeping by double entry. Accountancy Problems and Solutions. With regard to the books employed there is hardly any difference, regardless of the system that is employed. A firm may have an elaborate ■et of books and yet keep the accounts on the single entry system. On the other hand it may have but a journal and ledger yet, as all the facts and transactions, expressing the two-fold effect of each exchange would be recorded, it would be on the double entry principle. The books, of course, would vary and would depend on the Une of business and the details that liave to be recorded. Under the single entry system the profit made or loss sustained during a given period would be determined by a comparison of the assets and liabilities of one period with the assets and Habilities of another period. The profit made must represent an increase of assets, a decrease of liabilities or there may be an increase of assets and at the same time a decrease of liabiHties, always provided that the original proprietorship is not changed. We would have to take cognizance of any change in the proprietorship. Under the double entry system the profit or loss is determined by means of the nominal or economic accounts. These accounts are kept for the purpose of showing the economic condition of the firm, to show whether the business is progressing or retrogressing. All the debit bal- ances of such accounts would indicate the outlay or cost, while the credit balances would indicate the income or return. The difference would show the net profit made or net loss sustained. (3) An executor does not need an elaborate system of accounting. He must, of course, keep a journal and a cash book, wherein to enter in chronological order the transactions and affairs of the estate, and a ledger wherein to record in classified form the transactions recorded in the journal and cash book. The executor may find it advantageous to columnarize the journal in order to facilitate not only the posting, but also the preparation of the final accounting. The cash book, however, should by all means be colunmized. The columnization should be in such a form as to facilitate a speedy and thorough accounting. The form of a cash book on page a 07 would be suggestive. He must, of course, keep accounts for the assets of the estate, as left by the deceased. He must have an account for the personal estate, for the transfer tax, for the legacies and administration, as well as funeral expenses, etc. He must clearly distinguish between corpus and income with regard to receipts and payments. Answers in Theory of Accounts, flOw f4 Q m pq * . 1 1 CO i a CO CO < •s § • •-• CO CO 3 C OS Particulars 1 m Q l-H 03 -a m •c CO to 1 bo ,3 09 Q Expenses - - 0) i -3 1 Particulars 1 Q 20^ Answers in Theory of Accounts. I Accountancy Problems and Solutions. (4) The question does not give the date when the draft was drawn. It is, of course, not essential that it should be given, although a meraoran- dtun entry should be made in the journal of the merchants' books to ■how that a draft has been drawn. On receipt of the acceptance the entry would be made in the journal as follows: Notes Receivable $1.000 . 00 To Customer fi.ooo.oo For a four months* draft, accepted by the customer in settlement of his account. When the note is discounted on March the 13th at the bank the proper entry in the cash book would be: DR. SIDE. Date Particulars Net Cash Discount General Ledger 1909 March 13 Notes Receivable Dis- counted (Customer's Note) $986.50 ti3-50 $1,000.00 The notes receivable discount account is debited instead of the notes receivable in order to express the existing contingency on the books. (5) When in closing the accounts of a business at the end of a fiscal period there are accrued items, such as rent, commission, or salaries, ad- justment entries must be made for them. In order to express the exact condition for the period the accrued items must be taken into considera- tion. They would be charged to the profit and loss account and credited to a reserve properly ear-marked thus: "reserve for accrued rent" or "re- serve for commission," etc. On the balance sheet the reserves would appear as liabiHties or they would be deducted from the assets. (6) A contingent liability is a term given to the liabilities of a firm or business when such liabilities are doubtful. A discounted note bearing the endorsement of the firm as long as the note has not been paid by the maker is a contingent liability on the books of the firm endorsing such instrument. Accommodation papers are also examples of contingent liabil- ities ; the firm may at some future time be called upon to make them good. There are two ways of treating such liabilities in a financial statement. One method is to enter it on the books and show it as a liability against which there will always be some asset. In the case of the notes receivable mentioned before the liability of notes receivable discounted would always have the asset notes receivable behind it. Another method of dealing with contingent liabilities in a financial statement is to merely show it as a footnote. The former method is preferable because it expresses the exact condition on the books of the firm. 208 I y y f 00 0) f alance imainin to ofabov ^ E •d A s tn 3 • 1— 1 2 * ! hS 1 p u 1 U 9i n *» ^g 1 1 ! horn Shares dginal issue 1 1 ^0 (0 6C1- • ^ ' to 6S H & •M M u H SJ'O 6 (A „.2xia z f^ Q CIJ & > CO OS tl 209 Accountancy Problems and Solutions. 6 o Q O o m f4 *■« u M ai o • >* c ^2: Q W (M •-4 -< ^ M Q o o < O 1:;: m C/J o l#). >J X Ik o t a "I IK u o CO 5 01 G o < o m P o o o o o O o o O w^ o xntn tTi Ml «k ■h w »oo w « « «» H o o to M o o O M t-l CO tt ^ :mfa : : : C) C w tf) *SbS S 3 a (0 CO 8 § ««o o Ct CI O « « n « SI • . u u u ?ajD vi vi *H ea flj «* * rt OS O On >^ -3 o o o o o o o o IT) M O ' ' o o CO 1 CO *oO O O O to a> ^ ^ •"! 210 ^M,ywff^ in Theory of Accounts. There is practically no relation to speak of that exists between the stock ledger and the general books of account. If the capital stock account in the financial ledger shows only the amount of stock issued and outstanding, not including under it unissued stock, then the stock ledger would contain the individual accounts of the holders, thus reconciling it. In this instance the capital stock account in the financial ledger would be a controlling account for the individual accotmts in the stock ledger. (8) The two methods referred to in the question are the English and the American. The English practice is to provide for depreciation by a charge against revenue and a credit to the asset itself. To illustrate: Supposing the original cost of the plant and machinery were $S,ooo and we have decided to provide for depreciation by charging against revenue seven and one-half per cent, annually on the declining balance. By the English practice the account would appear as follows': Plant and Machinery Original cost $5,000.00 $5,000.00 Depreciation $ 375.00 Balance 4,625.00 $5,000.00 Balance $4,625.00 On the balance sheet the plant and machinery account would appear at a valuation of $4,625.00 By the American method the depreciation is credited to an account headed "Reserve for Depreciation on Plant and Machinery." The asset account is carried at cost, while the reserve account shows the depreciation provisions. On the balance sheet it is shown thus: Plant and Machinery (cost) $5,000.00 Less reserve for depreciation (7 J4%) 375-00 $4,625.00 (9) By contingent assets we mean assets which are doubtful of realiza- tion. By contingent liabilities we mean liabilities, the liquidation of which is doubtful. Suspense accounts, money due the firm on a contract not fulfilled as yet, collateral in the possession of the firm to secure the payment of an obligation, are illustrations of contingent assets'. Notes receivable dis- counted by us, accommodation instruments, and liabilities not recognized by the firm but which are pending in a law suit are illustrations of contingent liabilities. While it is not absolutely essential that such contingent assets and liabilities respectively should be represented in the books, although quite advisable, they should nevertheless appear in the balance sheet. The accountant who prepares the balance sheet should, in a footnote call attention to the contingent assets or liabilities respectively. 211 Accountancy Problewis and Solutions. (id) The proper accotinting record in such case would be to debit the surplus account and to credit an account entitled Reserve for Investment By this method the surplus account is' diminished by the amount of the sum appropriated for investment and, therefore, shows so much the less •▼•ilable for dividends. When the asset is acquired the next record ilioiild be to debit the asset so acquired and to credit cash. (li) (a) Nominal accounts are those accounts which record the transac- tions relating to revenue and expenses and which are closed at the end of a iscal period by transferring the balances to the trading, income or profit and loss accounts. (b) Accrued accounts represent assets or liabilities in course of ac- cumulation but not due at the time of closing the accounts. (c) Deferred accounts represent assets or liabilities which are due at the time of closing the accounts but which will not be settled until some subsequent date. (d) Net profit is the balance to the credit of an account after all proper charges and credits have been posted ; thus net trading profit will be the credit balance in the trading account but net profits are usually under- stood to be the profits before distribution. (e) Capital is the sum of the assets invested in an enterprise. (12) (a) Partners' salaries should be charged to profit and loss, as the remit of trading operations should be arrived at independently, and part- ners' salaries are a part of the expense of administration. (b) Profits on sales of real estate do not enter into the trading account or profit and loss aicount. They are an increase in capital investment and go direct to the surplus account. (c) Partners' drawings do not affect the trading account or profit and loss account. They go direct to partners' accounts, because they are drawn against anticipated profits. (d) Overvaluation of inventory should 1»€ carried to the capital account, otherwise to the surplus account, and not allowed to affect the current profit and loss account (e) Estimated losses in realization of trading assets should be charged to profit and loss direct in order not to disturb the results of current transactions, as these estimates may or may not materialize. (13) The net results of a double entry profit and loss account may be proved by comparing the difference between the assets and liabilities at the beginning and at the end of the fiscal period. The difference will equal the balance in profit and loss account. (14) Factor A. B Co. Dr. To Consignment B. To charge A. & Co. (I) $3,000 Cr shipment- $3,000 y^ 212 Anstvers in Theory of Accounts. (2) Factor A & Co. Dr $100 To Consignment B. Cr $i®o Freight on shipment. (3) Cash. Dr • • • $2,500 To Factor A. & Co. Cr $2,500 Payment on account received. (4) Cash. Dr $1,000 To Factor A. & Co. Cr $1,000 Balance of account sales. (5) Factor A. & Co. Dr $400 To Consignment B. Cr $400 To charge A. & Co. with amount to make up difference between f*rx*..^ ■ v ) *\> ..'f-^''*^*«.. (c) Bonds bought for speculation may be shown at market price, be- cause this will affect the amount available for distribution as dividends or profits, and as this was the purpose of the mirchase it is legitimate to revalue at realizable figures. u*.i ^^i, o^lM^I-^kiX* 1I ■•|ia^". i^ tA,\>^i/_ (d) Land that has appreciated should not in general be revalued ex- cept when the balance sheet is prepared with a view of selling the enter- prise or for some similar purpose. Going concerns should not be revalued except at intervals. (18) A tax on corporate ipcome should not be based on cash receipts and disbursements, as the difference between them is not the measure of the income. Without taking into account the unpaid liabilities and the un- realized assets, the income available for dividends cannot be determined, as it may happen that the cash disbursements exceed the income and vice versa, (19) (a) Revenue balance sheet contains, in addition to regular items noted in the balance sheet, a condensed revenue and expenditure accotmt, showing how the profit or loss for the period was ascertained. (b) Work in process is a term given to partly finished goods that are being manufactured. (c) By-product is a term given to a manufactured article that is made from the waste of materials used in manufacturing the goods for which Hie business is operated. (d) Deficiency account in insolvency is the name used to describe that account which summarizes those items which caused the loss in the busi- ness and show how such loss was incurred. (e) Final accounting is a term used to describe the report rendered by executors, administrators or trustees upon the final winding up and dis- tributing of the estate in their charge or for the period for which they have been appointed. (20) By summary accounts in the general ledger the total of all aggre- gate transactions as recorded in the factory and stores ledgers are car- ried to these controlling accounts in the general ledger. The advantages are that the general ledger shows in summary form the factory and stores accounts, thus relieving the general bookkeeper from detail in connection therewith. The factory and stores accounts as recorded in their respec- \ Answers in Theory of Accounts. tive general records show the details which allow control of all operations and supplies having to do with cost accounting. These records are gen- erally kept at the factory and stores respectively, the clerks in charge giv- ing such summary entries as will enable the general bookkeeper to incor- porate the transactions in total upon his general ledger. (21) The Public Service Commissions exercise general supervision over the accounts of common carriers in order to secure uniformity in the re- ports rendered and to make possible intelligent comparison. They may prescribe the accounts to be kept and the items which shall enter these accounts, but not how much of the income shall be spent for a particular purpose. They may prescribe that depreciation accounts shall be kept, but the rate of depreciation must necessarily vary with different enterprises. Additional issues of securities must be authorized by the commissions, the basis for the new issue being in general the additional value put into the property or increased earning power. (22) The bankruptcy laws state that it is the duty of the bankrupt to file schedules as follows: First, of all his property and where located. Second, of all creditors as to their names, amounts due, consideration given and if they hold any security for their claims. Third, schedule of all property which the bankrupt claims to be exempt under his State laws. The accounting procedure is as follows: First, obtain all books and records. Second, build up the schedules, as heretofore mentioned, from aU sources possible. Third, I think I should prepare a list of prior debts. Fourth, although the laws do not state that a schedule be drawn show- mg cause of bankruptcy, still, if I am employed by the bankrupt, I would draw up such statement, as the laws state that the bankrupt must answer all questions relating to the cause of his insolvency. •J i Accimmifmcy Problems and Solutions, Auditing. Qucstioiii* *(!■) State the objects tO' be attMned by an audit •(a) State the steps necessary to verify the cash receipts and payments for a period, including the resultant cash balance. '(3) Draft instructions for client to follow in monthly reconciliation of I, as basis for your audit i '(4) In the case of an unexplained absence of a bookkeeper who has had the entire charge of a set of partnership books, state the steps that should be taken to detennine whether or not irregularities had been committed. ts) The machinery used by a firm has been purchased on the instalment plin, with monthly payments, and under the stipulation that the title shall pass only when the last payment has been made; at the close of the fiscal year there are yet several payments to be made. The firm also pays a mf9kf on the output of some of the machines secured by this plan. How sboald the auditor in his annual statements deal with the machinery, the imtalments paid and the royalty? (6) State the method and the objects of an analysis of bills payable account. '(7) State, in the order of their importance, ^ve rules for the guidance of a junior in starting on his first audit. ■'(8) Outline working papers and office records necessary to handle dc- tatlci semi-annual audit of a wholesale mercantile house. *(9) State precautions that you would take, in verification requiring sev- eral days' work, of the securities of an insurance company, including both stocks and bonds in negotiable and non-negotiable form. *(lo) A corporation has branches in twenty cities, each selling at retail Its standard product and paying local bills from receipts. State mat- ters on which the traveling auditor of the corporation should report and suggest suitable forms therefor. ' (11) A client who has a beneficial interest in the corpus of an estate employs an accountant to conduct a complete audit State the points on which the accountant should particularly report * (12) In- case it is expedient to have a local accountant audit the accounts of a branch office of a wholesale trading firm for which you conduct the aili Questions in Auditing. general audit, state matters on which you would require a report The branch sells goods, collects from customers, pays all local expenses and remits cash in round amounts to home office. *(I3) In what way, if at all, would you report the fact that a trusted office manager had overdrawn his salary amount at various times, in no case more than $300, all of which had been returned before the time of the annual audit? State reasons fully. 1(14) A balance sheet audit discloses satisfactory conditions with the exception of insufficient allowance for losses in collection of accounts receivable. In case the client should not consent to adjustment, draft form of certificate that would be proper under the circumstances. *(i5) State the arrangement of a report in which it is desired to present balance sheet with supporting schedules of accounts receivable, accoimts payable, bills receivable and bills payable, and profit and loss account, to- gether with comment on extraordinary features of the business. '"(16) An insurance company buys $50,000 7% to year bonds at 116 for investment The bonds will mature at the expiration of 5 years. How should this purchase be entered on the balance sheet? What should be done with the premium? * (17) If in the course of auditing it appeared that the capital expenditures had been charged against profit and loss account, or items of expense charged against improvement account, what should the auditor do in respect to such charges? ''(18) What entry should be made in the books of a company of goods sent out on consignment? When goods have been sold and the consignee sends in his account sales, what entry should be made? '(19) In auditing the books of a corporation the president's salary account was found to have been credited with a bonus of $5,000 for " extra services." Under what conditions would you pass this entry? ^(20) Would the auditor of a firm or corporation be warranted in revis- ing the form or wording of a balance sheet before attaching his certificate? Why? '(21) Is it necessary to verify the stock ledger of a corporation? Why? '(22) Are there in your opinion any reasons in favor of continuous auditing? If so give such reasons. ''(23) Outline the duties and the responsililities of a public accountant as an independent auditor. ^(24) State the process by which the balance of the cash account may be reconciled with the bank pass book. What, if any, confirmation of the bank pass book balance should be obtained ? 217 iiiiinilir'"* \ \ Accountaitcy Problems and Solutions. 'r„.i Whnf meatis should an auditor use to verify accounts representing (25) What means snouiu What should he do in case he is refused access to such records. t*) IB auditing the hooks ^^^^^^^^^tll^^^^^ takes notes from its customers, what, if ^\~^^^^ a to whether or not any of these notes have been discounted, especially a certified balance sheet is desired? \m) Is an ordinary bank check drawn by the the concern whose books yoLte auditieg. to the order of the Receiver of T-es and pro^^^^ dorsed by him, a sufficient voucher for the payment of the taxes ot tnis concern? Give reasons. -(m) Two concerns in similar lines contemplate consolidating their bus^ss; you are requested to examine the books ^^f^"^^ matters germane to the contemplated merger. What data would you probably present in your report? ■''(31) Wherein may an audit differ from examination? 1(32) In making a bank examination would you commence at the start of the business day or at the conclusion of the business day? Uive reasons. *(«) On January 10th, you are instructed to furnish a statement of assets and liabilities of a trading concern as to the previous December 3i8t. No inventory was taken on that date, but you ascertain that the inventory of January 10th. amounts to $7,689.25. The sales ^^^^'\^J^^J^''^^^^^ to Januarv loth amount to $945, of which $300 was shipped but not billed prior to December 31st. The total amount was billed at an average gr^^^^^ profit of twenty-five per cent above cost The goods received between December 31st and January loth cost $678.25. State fully how you would determine the figures for the inventory of December 31st, and show tne amount (u) If the cash in bank as shown by the cash book or ledger is recon- ciled with the amount shown by the pass book or certificate obtamed from the bank, is it necessary to check the pass book with the deposits as shown by the cash book? Give reasons for your answer, stating the nature of a possible irregularity that might be disclosed by such detiil checking. 218 Questions in Auditing, U5) What measures should be taken to ascertain whether or not any notes receivable have been discounted and cleared from the books, notwith- standing the fact that they are not due and at maturity will be subject to demand on the last indorser in case pa3mient is defaulted by the maker? (36) What are the duties of an auditor as to examination of inventories of finished product, product in process, and materials and supplies, which have been taken and appraised by representatives of the client, in case he is not permitted to make tests for the purpose of satisiying himself as to the integrity of the quantities shown? How should he cover such a situation in his report?. Auditing. Answers. (i) A systematic inspection of all books of accounts and subsidiary books, the object being to prove the accuracy of all transactions therein, and to run down all fraudulent entries, technical errors and errors of principle. As fraudulent errors are covered by technical errors, a thor- ough audit is desirable, but where time is limited, by the use of tests, fair accuracy can be attained. (2) The necessary steps to verify cash receipts and payments for a period including resultant cash balance are : First. Verify cash receipts by checking with receipt book, if one is kept, otherwise with record of deposits made as shown by deposit slips or with bank pass books. Second. Verify all payments with proper vouchers. If any are missing checks properly endorsed may be used, but attention should be called to the fact. Third. Foot cash book and reconcile balance with cash on hand and in bank, by counting cash and by proving bank balance as shown by pass book or bank statement (3) All cash received should be deposited and all payments should be made through bank. Petty cash should, when necessary or every month, be reimbursed by check drawn to order of petty cash and charged to petty cash. At the end of the month the bank pass book should be sent to the bank and the balance as shown by the bank at the end of the month en- tered or a bank statement required. Checks paid by the bank during month should be put in order and the list of outstandings drawn off. The bank balance less outstandings should agree with balance shown by the cash book. Balance shown by petty cash book should agree with cash on hand. (4) First a careful examination of the method of keeping the books and accounts should be made in order to determine the most likely means of 219 I It i H ! Accountancy Problems and Solutions. V -i„f,i«rinn The cash balance should be verified by count concealmg » d^^^'f ?°- J^^'b^^k footed and proper vouchers seen for and bank certificate, the casn took iu f compared .™«iHifiires The daUy receipts in the cash book snouio u<= ». y expenditures, i ne ua > ^ obtained from the bank to ascer- with daily deposits, the deposit slips >>"'« "'T'" ° j ,„ cover an old de- tain that the receipts of one day have not «>««» "^ ^^ ^"^^[/^^ ,,„t »„ falcation. In addition, if permitted to do so. statements ~ "f^"^ Mstomers requesting them to confirm the correctness of the balances. ^nr,^nfilation should be obtained of ac«,unts P-^^^ ""f /^^ °^_ Ttrding paper or rediscounts. Other lines of investigation will be sug stanaing vw" " v,,«in«, alwavs bearing in mind the relation gested by the nature of the business, always oear g .,f,,„tio„ fo the cash, as that is almost invariably the medium of a defalcation. (S) Show machinery as an asset at f,/°" 7'^;j';,fi;°:;:Vof other side, full liability for unpaid •^^^'^,'"*" ^^'''^^^^^ course, not be included with other a<=f ""^^Jf ^^^^ , ", J 7° ,. _.( be as a separate item and properly labeled. J^',/^''' ,f ° ~,"° tern shown tadoded with other machinery bat should ^P^"'''^^''"'^"^^ labelled instalhnent machinery or some other 'PP^P^f * ''*'^ . ^^1!^ «m for this is that as a going concern they, to aU mtents and purposes, Z, Ae maciineiY "en Though title has not passed. There is no reason own the •»~P'-^y™ [ I ^i„ „o, the balance and get tiUe. to assume that a going concern wm u^i k j i:,Kiiitv PracticaUy. therefore, they are interested in die amount of th"r l.« for unpaid instalhnents and the total cost of the machinery. The royalties on the output would be a charge against the income from the output. (6) The method would be to trace each debit and credit »» "^ °^'e'™'' source. That would indude the inspection of paid notes charged by Ae S and should also include an analysis of interest paid. The object ^wt to ascertain whether there were any Uabilities on accomit of :^^y.U. that were not shown on the books. When a "^^ w- P-d. as shown by the books, it would be necessary to assure o"*^;/" ^^T ^^ had not been renewed. It should also be ascertamed ''Aether Ae pro- ceeds of notes actually went into the business and were not convertea oy a partner or officer to his own use. (7) (i) Absolute secrecy concerning dient's affairs. (2) Accuracy, not speed, to be sought for. (3) Be tactful (4) Take nothing for granted. (5) When in doubt as to matters of accounting, refer matter to your principal or your office, but not to bookkeeper or dient. (8) It is assumed that a prindpal and at least three assistants are needed. Eadi man should be given a time statement of the job. whi* should show a job number rather than the name of client, "should be ruled so as to provide for different kinds of work, such »' f°°""f f^" book, diedcing to ledger, etc.. showing amount ''P^"' °"^^f ^^ ° work. To the prindpal should be given working papers, which should least contain the following: Anszvers in Auditing. (a) Analysis of audit, showing at top the several months comprised in audit and at the side the different steps to be taken. As each step is completed the initials of man in charge of that transaction, whether prin- cipal or someone designated by him, should put his initials opposite the description and under the proper month. (b) A sheet on which are given the figures of trial balance at end of previous period, so that principal may parallel figures at end of half year. If books are to be closed, additional column should be provided for " clos- ing and adjusting" entries, and finally two columns left for condensed balance sheet (d) Forms for all adjustments made, providing space for a full descrip- tion. These are the main papers. In addition, analysis paper and a con- venient form for notes and memoranda are handy. (9) If possible, obtain full control of all securities, holding them long enough to list them as to date of maturity, name, amount carried on book, interest, rate, par value, whether negotiable or non-negotiable, etc., whether any are used as collateral or deposited with a bank or other in- stitution. Secure a certificate to that effect. They should be verified with stock quotations, and where this is impossible through other sources to obtain their fair value; also that a proper amount has been set aside to take care of bond discount and bond premium accounts. (10) Should report on all matters germane to the company's affairs. Amount of cash on hand and in bank; verify book debts receivable and bills receivable as well as the accounts and bills payable; should examine sales journal or records, purchase receipts and disbursements, checks out- standing, amount of overdue accounts receivable and bills receivable; verify amount of inventory by percentage tests or in other ways; verify all entries ; verify any commissions, pay-rolls, petty cash items, etc., all of which should be embodied in the report in proper form, (11) Accountant should obtain copy of will and inventory, should then prepare an accounting from the check book and other records to verify the executor's accounting. He should see that all items contained in the appraiser's inventory had been duly accounted for and that no property had been wrongfully disposed of. Should see that the terms of the will had been complied with; that all increase in values and securities, and income such as rents, interest on mortgages, etc., had been properly col- lected and accounted for; see that payments for testamentary expenses are properly vouched and not excessive, as well as any expenditures in- curred for expenses of property owned ; should examine particularly the schedule of debts due by the deceased ; verify the amounts, that value was properly received, and whether the bills are properly chargeable to the estate; should examine carefully payments to legatees and next of kin; verify the authority for payments by reference to the will, ascertaining il payments had been made to any one legatee in excess of his share. A 221 r i Accountancy Problems and Solutions. verification of advances account of e^cutor's commissions, etc.. shoaW also be made and the cash balance verified. („) Verification of cash on hand, checks o^tanding ^sh book enti-^. r,j) Tl,. .»li.o, .b«.M be guid^l -i»ly to l.i- i'l^'»"'^S Z . . • 1. G^A. *i,*.f« Where such overdrawing is done witn me cond,t.ons =« ^e fin^ tl^em. JVbe«^-* ,^^, ^^ ^.^^ such knowl- knowledge of the firm the »"*»°'' ™°* »,, ,^ „ jj j^ done without edge, the matter should not be reported at aU_ ^Bere « the knowledge of the firm « would seem as «''°"«Vretu™rnTthe mon^ anxious to have the firm know about ''ll,'""" ^f/ "™Lrch"n^^^^ before the audit In this case the auditor should not take any en . M AuJt^r mention it to the firm and learn whether they are m favor ::t^h aT-^Corwhetr they object to it The matter if brought to the attention of the firm, should m,t be embodied in the wntten report (.4) in our opinion, the profit and '<>- '^tustss'^toXe^rd iU farKed siibstantianv disc ose the progress of the tousmess lo a^tc St'ontthrdafe. with the exception that an insufficient aUowance has been made for losses in collection of accounts receivable. fic') The arrangement of the report will be as follows: Wrst DreseLtion page addressed to client, setting forth the object of First presentauon p-gc » „„„. , „x .,~s of comments and the the engagement and stating the number ot pages «« "' designating letter or nmnber of «ich staten,ent and ^_^^^ Second, comments on extraordinary features of the ^^'^^^^^^^^^^ the order of the items as they appear in the attached statemenU and '^W.'Exhibit A, balance sheet, with reference opposite the respective items to attached schedules. . .^uiw* A sehed- Fourth. Exhibit A. schedule I. accounts ««"'»"'=: '*^'"*f; ,^Mt de n. bils receivable; exhibrt A, schedule III. accomits payable; exhibit A. schedule IV, bills payable. . .,.„,. .i,.^ Fifth. Exhibh B. statement of profit and loss, referring to balance sheet after balance in (he profit and loss account ,. . „ _„» -j.<,t„ what kind of an insurance company fi61 The question does not state wnai luuu «i ~ a-i-. _» Answers in Auditing, which, with regard to investments, vary considerably. Accountants us well as insurance men are not uniform with regard to the valuation of bonds in the financial statement. Some advocate cost, others market value. The argument is always advanced that the purchase of securities does not differ from the purchase of any other asset which would be recorded at its cost value. On the other hand it must be borne in mind that, regardless of the amount paid for the purchase of bonds, at maturity they will not realize more than the par value and therefore the premium paid on the acquisition of bonds should be charged to a separate account, not to the bond account. The latter account is to show the amount which the bonds will realize at maturity — par. The scientific method of treating such purchases on th*; balance sheet is to show on the asset side the par value of the bonds as one item, and the premitmi on the bonds as a separate item. At maturity the bonds wiM realize the par value. The premium paid at the purchase has to be made good from the interest received on the bonds, it has to be amortized. There cannot be any question that if not for the high rate of interest that the bonds bear the company would not pay such a premium, if any at all. That being the case the premium has to be made good out of the interest receipts. Taking it for granted that the interest is paid semi-annually the insurance company would have ten interest periods. At each period the company would collect $1,750, part of which should represent the amortization of the premium paid. To amortize the total premium ($8,000) each interest period as collected or at the end of the fiscal year has to be burdened with its share ($800). Therefore, instead of crediting the interest account with the full sum $1,750.00 collected, $800.00 would be credited to the premium account, the balance of $950.00 would go to the interest account. Another method may be adopted; to credit the interest for the full sum collected and then subsequently to charge the interest account with $800.00 and to credit the premium account with it. The result, of course, would be the same. (17) If an auditor finds a wrong classification of expenditures he must adjust the accounts by means of adjustment entries. If a capital ex- penditure has been charged to profit and loss accotint the profits or losses for the period under review are understated. A secret reserve has by this method been created. If, on the other hand, an expense item has been charged to an improvement account the error is more grave. While, as far as correct accounting is concerned — expressing exact facts — either error must be adjusted, from a conservative point of view, however, the first error can find some justification, but surely not the second. If the auditor has to certify to the condition of the firm, which we must assume he has, he .cannot do so, unless he has made all the adjustments with re- gard to capital and revenue expenditures. (18) When goods are sent out on consignment, a "Consignment Outward" account should be debited for the cost of the goodo shipped. 223 , iccouniancy ProMems and Solutions, Answers in Auditing, 11 This accoiint shotild also be debited far all additional outlays, viz.: cartage, freight, etc. The cofresponding credits should be in the first instance to merchandise sales, in the second case cash, if paid in cash. otherwise to the individual creditor's account. When the consignee renders his account sales we debit the consignee m his remittance (cash), if he remits, and credit "Consignment Sales." We might credit the "Consignment Outward*' account and the result would be the same. It is, however, better practice to so subdivide and classify the accounts that each account would show at any time a definite result* It will be noticed that the consignee's deductions are not treated at aU. To the consignor it does not matter much whether he records that he realized $1,500 for his goods, from which $200 were deducted by the con- signee, resulting in a net return of $1,300. or that his net return is $1,300, regardless of what the deductions were. Another method of recording the account sales is to show the gross sales and charge against it all expenses. The advantage in this case is that the selling expenses of the consigned goods would be recorded,which is not the case in the first method. (19) "Extra Services" could only then be passed by the auditor, when the by-laws of the company provide for such expenditures. If the by-laws do not provide for it, he must find out whether this extra remuneration has been voted by the stockholders in general meeting. The auditor must also verify whether the bonus was not in excess of the provisions for the remuneration, if such provision exists. (20) An auditor of a firm or corporation would be warranted in revising the form and wording of a balance sheet before attaching his certificate. It, ol course, depends on the actual extent of his certification. Thus where he is reasonably assured that the certified balance sheet is only for the use of the owners of the firm, providing that the wording is not mis- leading, he is not warranted in revising it. On the other hand, if the certified balance sheet is to be used for 'outsiders, which is true in the majority of cases, then he must word his balance sheet and arrange it in siicli form m to most clearly show the true financial condition of the firm. (2 1) The auditor has to verify whether the amount charged to the Capital Stock Account, in the stock ledger, does not exceed the authorized issue of stock. He has also to verify that the allotment is valid and that it has been made to bona fide applicants. He must also verify that the stock has been paid for either in cash, property or labor (the latter, labor, in the State of N.Y.). Fraudulent issues of stock may have been made, which would not be disclosed if the auditor were not to verify the stock ledger. The cash received for an issue of stock may not have been recorded, this would be revealed by the verification of the stock ledger. It is, however, questionable whether a full examination of the stock ledger is part of an ordinary audit. (as) Mr. Montgomery in "Dicksee's Auditing" (American edition) gives the following reasons in favor of continuous auditing: (i) The examination occurs sooner, and consequently any errors committed are more quickly detected and rectified. (3) The periodical visits of the auditor keep the bookkeeper closer up to his work. (3) A more detailed audit is practicable. (4) The audit can be completed soon after the closing of the books, without unduly hurrying the examination. (23) The duties of a public accountant as an independent auditor are to make examinations for particular purposes, such as for bondholders, stock- holders, prospective partners; to uncover fraud, and also to make com- plete audits for the purpose of verifying the entries on the books and for the purpose of certifying to the financial condition of the company as evidenced by its balance sheet. The Public Accountant as an independent auditor should not hesitate in making the truth, the whole truth and nothing but the truth, known, no matter whom it may hurt. As an inde- pendent auditor he should be capable of handling all kinds of accounts. He is responsible not only to the concern for whom he is working, but also to the general public for the correctness of his verification. In addi- ton to the duties already mentioned he may also be called in in cases con- cerning receiverships, trusteeships, consolidation of corporations, etc (24) The cash account balance as represented in the cash book is the true balance according to the books. To reconcile the pass hook with that balance you must subtract from the bank balance any checks issued and not yet returned to the bank, and also the amount of the cash in the cash drawer. Thus : Cash Received. Cash Paid. John Jones $1,000.00 John Smith, check No. i . . $500.00 Henry Good, check No. 2. 40.00 Petty cash 20.00 Balance 440.00 $1,000.00 $1,000.00 If check No. 2 was not returned, the bank pass book balance would be $500; from this amount subtract $40 check not returned and $20 in cash drawer, which would give $440 balance as per cash book. The balance in the pass book should be confirmed by a statment from the bank certifying to its correctness. It has occurred many times that pass books have been duplicated and that the auditor has been deceived by believing in its correctness. I (25) In verifying stocks and fcdads owned, the auditor should insist upon their production and a personal examination of the same and, in 225 1 : Accouiiimicy Prablems md Solutions. addition, lie should consider their present market value, and also, if he has any suspicion, examine them as to their genumeness .- , . " Bills and notes receivahle or accounts receWable should ^^ yj"^^^ ^ commtinication with the debtors Where this "^^^^^^.^"^^^^^^^^^ deemed advisable, the next best thing to do .s to examine the notes in the possession of the concern, ascertain whether any "*>!*^^..^*^.%^.^" *^^^ counted at the bank, for which there is a contingent I'^^ilipr ; divide the accounts and notes into good and doubtful and Per^aps ^ad. ^^-^^^ M accounts would be those past due or^long outstanding ^^ J^^^^^^^^^ advisable to communicate with these debtors, because it is possible that a mistake has been made or fraud committed. So ^r as book v^hies and real worth are concerned, we should never certify to the hook values of an account which we considered had and we should not in addition ^^^^Z the full book value of a doubtful account without setting up a reserve for bad debts. (26) In the previous answer we have practically outlined the procedure asked for in this question. In addition to this and in extreme cases il might be necessary to compare the commercial standing of the debtors with a commercial agency guide. A method used by some ^^f^^'^^ ascertain the correctness of accounts receivable is to postpone the audit until the first of the month and then to send statements to the debtors. If the debtors have paid and the money fraudulently used, the df>t«>'- J*»* quickly notify the house of such payment. Before rniy of the above procedure is gone through all the accounts should be checked back frorn the ledger into the books of original entry. A statement should be made by the auditor containing (a) Names and amounts of good accounts; (b) Names and amounts of doubtful accounts; (c) Names and amounts of bad accounts. A sufficient reserve should be set up against loss by reason of bad accounts before the auditor can give his certificate. (27) It is necessary that the auditor should inspect the minutes of the stockholders' and the directors* meetings in order to verify transactions which appear on the books, such as issuance of bonds, increase of stock. salary of directors. The authorization for any entry affecting such items should emanate from the minutes of either stockholders' or directors meetings. If he is refused access to these records he should plainly state these facts in his report Many auditors would not undertake an audit where access to such records would be refused. (28) If a certified balance sheet is requested by a concern that regularly takes notes from its customers in payment of their accounts and which ire sometimes discounted at the bank, it will be necessary to set up a con- tiegent liability. caJied Notes Receivable Discounted, because of the fact 226 Answers in Auditing. that in the event of any of these notes not being paid by the makers at maturity the bank will come to us for payment, and therein lies the con- tingent liability. The journal entries would be as follows: Upon receiving the notes: Notes receivable $100.00 To X $100.00 Upon discounting the notes : Cash $99.00 Discount 1.00 To notes Receivable Discounted $100.00 Then there appears on the debit side of the balance sheet an asset con- sisting of Notes Receivable, $i 00.00, and on the credit side an offsetting contingent liability of Notes Receivable Discounted, $100.00. (29) An ordinary bank check drawn by a concern, payable to the Re- ceiver of Taxes and properly endorsed by him would not be a suflScient voucher for the payment of the taxes of that concern because that check might be for the payment of taxes on other property and not on the prop- erty under consideration. A good voucher in such a case would be a check properly dated and made out, on which it has written, "For payment of taxes on (description of property, at No. 17 X Street, New York City)." A voucher check would be good evidence. (30) The following matters should be presented in the accountant's report : (i) Valuation of the assets, such as plant, machinery, merchandise, accounts and notes receivable of each plant. (2) Liability, fixed and current, of each plant. (3) Statement showing gains or losses for the past five or six years of each plant. (4) Average per cent, of gain or loss on investments of each plant. (5) Statement of the capital accounts of each company. (31) An audit may differ from an examination inasmuch as an audit is a complete official examination of the books and financial condition of a concern, while an examination may be conducted for some special purpose only, as an examination conducted by minority stockholders; a bond- holders' examination for the purpose of ascertaining a man*s interest in a concern; an examination conducted for the purpose of uncovering fraud, etc. (32) in making a bank examination it is better to start at the beginning of the day than at the close of the business day, because, (i) Everything is intact — that is, all the books are written up; all the money has been counted and turned over to the first teller. (2) All the securities and moneys are in the vault untouched. (3) Any changes in the first teller's cash can easily be detected by a comparison with his report of the night previous. 227 Accountancy Problems and Solutions. ,,) The auditor can secure J^-^^^^f^ ^ ^S ^^ S the morning mail -h.ch^^-"! ^ " *^:„^''and securities from it only keeping the »='*<=/*=^*<' ""^.j^^^ Z withdrawal of the same. The after he has made his notttion ot ine .„oants and moneys emoloyees of a bank might very easdy fix up their accoun employees "• « . business day. if the audit began at the close ot tne m. fSrc^%T":rT;"fhissum£ea.the between Uie P-«f^--j; rrhtdTnOe^lS"! which is $7,767.00. give us the amount of goods on nanu The proof of this is shown thus- Inventory December 31st..... Purchases .,.,....••• $7,767.00 678.25 Deduct sales at 'COSt • ■ ' • Present inventory * 8.445-25 756.00 .$7,689.25 (3,) in order to trace the receipts of ^^^^^Z:^^:,:,^ S whL such receipts have been deposited ^Z^^^^^^JZ\h.i^r.m be Ae pass book with t^he cash book. The ™ ^^^ ,„d „„( disclosed by such checking »°";<'^,'r"'l"„'„f ^ep^shed on the same day '^'''' d u^r-by'lCr^c^'ecr^arcat: into the business, such rerr„fwIdXtS by this detailed checking. ^^ (3,) The notes receivable account -°"';!.'^!;?,'° ^'t^f ^otV'has not credU side of this account showed a cred, »«*/";„„„ ,how nuitnred as yet. the ^'=^-.<» 'V^'n^epaYd or d sTounted. If it was dis- whether the note in question w''^ P"?^ °' ^e preparation of financUl ~,..„.fH there is a contingent liability, and in tne prepi ^Xl':; contingent liability should be mentioned. if k advisable for the auditor to have a statement (36) In such case it is f ^'^^^ \^ *^^^^^^^ .^gard to the valuation of signed by the parties who ^-- /"^^^ ''^^^^^^^ .^ate this fact in his the inventory. It is always safer for tne auaiwr report. Questions and Answers in Commercial Law. G)mmercial Law. Questions and Answers. I. What is a corporation? Describe the procedure necessary for the formation of a business corporation, and show what is required as to (a) number of incorporators, (b) number of directors, (c) capital to be paid in. Answer. Lord Coke's definition of a corporation. — " A corporation ag- gregate of many is invisible, immortal, and rests only in intendment and consideration of the law. They cannot commit treason, nor be outlawed, nor excommunicated, for they have no souls, neither can they appear in person, but by attorney. A corporation aggregate of many can't do fealty, for an invisible body can neither be in person nor swear; it is not subject to imbecilities or death of the natural body and divers other cases." In re Sutton's Hospital (10 Coke's Rep. i, 32), decided in 1683. Seymour Thompson's definition of a corporation. — " A private corpora- tion is a voluntary union of persons, joined together by written articles of association or incorporation under legislative authority, or by special statute on proper application to the legislature, to accomplish some pecuniary or ideal purpose authorized by the governing body of a state. Its leading features are that it has a continuous succession during the period prescribed for its existence, an individual name by which it may enter into contracts and sue and be sued, acting as a unit in respect to all matters within the scope of the purposes for which it is created, and a distinct existence or legal entity separate and distinct from the natural persons composing it. The essential idea of a corporation is that it has * The capacity to exist and act within the powers granted, as a legal en- tity, apart from the individual or individuals who constitute its mem- bers.'" (Andrews Bros. Co. vs. Youngstown Coke Co., 30 C. C. A. 293, 86 Fed. 585; I Ky. Corporations, 70.) Thompson on Corporations, Sec- ond Edition, Sec. 2. Chief Justice Marshall's definition of a corporation. — " A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those proper- ties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. Among the most important are immortality, and, if the expression may be allowed, indi- viduality; properties by which a perpetual succession of many persons are considered as the same, and may act as a single individual. They enable a corporation to manage its own affairs, and to hold property without the perplexing intricacies, the hazardous and endless necessity, of perpetual conveyances for the purpose of transmitting it from hand to hand. It is chiefly for the purpose of clothing bodies of men in succession with these qualities and capacities that corporations were invented, and are in use. By these means, a perpetual succession of individuals are capable of act- 229 I Accountancy Problems and Solutions. mg for the promotion of the particiilir object, like one immortal thing." Per Chief Justice Marshall, in Dartmouth College Case, Dartmouth Col- lege vs. Woodward, 4 Wheat 518. A business corporation is formed in New York under the Business Cor- porations Law (Ch. 4 of the Consolidated Laws of 1909) as follows: Prepare three (3) copies of a certificate of incorporation. These cer- tificates should he signed and acknowledged by the incorporators. Send two (2) of them to the Secretary of State, with directions that one (i) be filed and the other be returned as a certified copy of the original. The fees of the Secretary of State are Ten ($10.00) Dollars for filing the cer- tificate, and fifteen (.15) cents per folio for recording; for certifying the copy. One ($1.00) Dollar. At the same time the organization tax should be sent to the State Treasurer. The tax amounts to fifty (.50) cents per thousand dollars of the total authorized capital stock stated in the certificate ; minimum tax, Five ($5-00) Dollars. The State Treasurer will send one receipt to the Secretary of State, who will attach it to the cer- tificate of incorporation, together with a statement of the amount and date of payment of the tax, and will then file and record the certificate of incorporation and will notify the person from whom he received it that it has been filed. The State Treasurer will also send a duplicate receipt to the remitter, which duplicate receipt should be attached to the third copy of the certificate, which is termed a duplicate original— the other original being filed by the Secretary of State. The duplicate original should then be filed in the office of the County Clerk in which the prin- cipal office of the company is to be located. The County Clerk's fees are : Filing fee, six (.06) cents per folio; recording fee, ten (.10) cents per folio. The certificate of incorporation should contain the following clauses: (i) The name of the proposed corporation, which must be in the English language, and must not conflict with the name of any existing domestic corporation or of any foreign corporation authorized to do business in the state. The name should not contain any of the follow- ing words: "Trust," "bank," "hanking,*' "insurance," "assurance," "indemnity,** "guaranty," "guarantee," "title," "savings," "invest- ment," " loan,** " benefit," " college," or " university.*' (2) The purpose or purposes for which it is to be formed. A cor- poration may be formed in New York State for any lawful purposes other than those provided for by the moneyed corporations law, the banking, the insurance the railroad, the transportation corporations law and the education law. Corporations may not be formed in New York to practice law, medicine or dentistry. (Business Corporations Laxv, Sections 2 and 2a.) (3) The amount of the capital stock, and, if any portion be preferred stock, the preferences thereof. Preferred stock may be deprived of voting power. (People vs. Kocnig, 133 App. Div. 756.) (4) The number of shares of which the capital stock shall consist, each of which shall not be less than Five ($5-«>) Dollars, nor more than 230' Questions and Answers in Commercial Law. One Hundred ($100.00) Dollars, and the amount of capital not less than Five Hundred ($500.00) Dollars, with which said corporation will begin business. (5) The city, village or town in which its principal business office is to be located, and, if in New York City, the borough therein in which it is to be located. (6) Its duration, which may be perpetual. (7) The number of its directors, no less than three (3). (8) The names and post-office addresses of the directors for the first year. At least one of the directors must be a resident of the State of New York. The directors need not be incorporators or subscribers for stock. (163 N. Y. 423.) (g) The names and post-office addresses of the subscribers to the certificate, and a statement of the number of shares of stock each agrees to take in the corporation. The incorporators should consist of three or more natural persons of full age, at least two-thirds (%) of whom must be citizens of the United States, and at least one a resident of the State of New York. Each incorporator must subscribe for at least one (i) share of stock. 2. (8) May directors of a corporation convey the property of the cor- poration to themselves? Give reasons. Answer. Three views obtain in the United States as to the validity of contracts between directors and the corporation. I. Such contracts are voidable but not void, and are therefore bind- ing on the directors at the option of the corporation. Bar vs. Ry., 125 N. Y. 263 (1891) ; Veeder vs. Horstmann, 85 App. Div. 154 (1903). No question, therefore, as to the fairness or unfairness of the contract is involved. Munson vs. Ry., 103 N. Y. 58 (1886) ; Carpenter vs. Taylor, 164 N. Y. 171 (1900). Same views obtain in: Indiana — Port vs. Russell, 36 Ind. 60. Wisconsin — Haywood vs. Lincoln Lumber Co., 64 Wis. 639, 26 N. W. 124. California — Wilber vs. Lynde, 49 Ga. 290, 19 Am. Rep. 645. Maryland— Ko&msLn, etc., Co. vs. Cumberland, etc., Co., 16 Md. 456, 77 Am. Rep. 311. n. The second view is not so rigid as the first. The courts that fol- low this view hold that contracts between directors and their corpora- tions are voidable, but are presumptively valid. However, they may be challenged and avoided for any lack of good faith. This view prevails in most jurisdictions : New Jcrsey—Stew3iTt vs. Lehigh Valley R. Co., 38 N. J. L. 505. United Sfofw— Leavenworth County vs. Chicago, etc., R., 134 U. S. 688, 10 S. Ct. Rep. 708, 33 L. Ed. 1064. 231 iliiilllUlilil Accountancy Problems and Solutiom, III. The third view holds that contracts will depend for their validity on the circumstances surrounding each case, though the courts will scrutinize such contracts more carefully than ordinary contracts: iCflfiKM^Thonias vs. Sweet, 37 Kan. 183, 14 Pac. 545- Penmylmma—Uskmmond^s Appeal, 123 Pa. St. 503, 16 Atl. 419. Smith Carolina— GSL Cent. R. vs. Claghorn, i Speers Eq. 545. F^riwaiil— Rogers vs. Danby, etc., Soc, 19 Vt 187. Sometimes contracts between the corporation and its directors are sanc- tioned by by-laws. The by-laws of the U. S. Steel Corporation provide: " Inasmuch as the directors of this Company are men of large and di- versified business interests, are likely to be connected with other corpora- tions with which from time to time this Company must have business dealings, no contract or other transaction between this Company and any other corporation shall be effected by the fact that directors of this Com- pany are interested in or are directors or officers of such other corpora- tions, if, at the meeting of the board, or of the committee of this Company, making, authorizing or confirming such contract or transaction, there shall be present a quorum of directors not so interested ; and any director in- dividtially may be a party to, or may be interested in, any contract or transaction of this Company, provided that such contract or transaction shall be approved or be ratified by the affirmative vote of at least ten di- rectors not so interested." A somewhat late case in New York, Polhemus vs. Polhemus, 114 App. Div. 781, 100 N. Y. S. 263 (1906), holds that there is no presumption of fraud as to the actions of directors in selling corporate property to another director. Under this decision the contract could be avoided, but the stock- holders would have to bear the burden of proving fraud. 3. For what kind of property may a corporation issue its capital stock in payment? Explain fully. Answer. Section SS of the Stock Corporation Law in the State of New York provides: " No corporation shall issue either stock or bonds except for money, labor done or property actually received for the use and lawful purposes of such corporation." It has been held in the case of Rafferty w. Gas Company, 37 App. Div. 618 (1899), that the phrase "lawful purposes" means those purposes which are not foreign to the purposes of the corporation. The phrase. it is said, is to be given a liberal construction. 4. When the capital of a corporation is increased, what persons have a prior right to subscribe for the new stock, and in what proportions? May such right be made negotiable, and if so, how? Answer. The old stockholders have a right to purchase the new stock pro rata before it may be offered to outside investors. However, a price may be fixed, not less than par, and if the stockholders are given an op- portunity to take stock at that price in proportion to their holdings, and 33a Questions and Answers in Commercial Law. the offer is not accepted, the stock may be sold at the advanced price and the stockholders may not insist upon taking the stock at par. "When the stock is issued in pajmient for property purchased by the corporation, the stockholders' right is merged in the purchase, and they have an advantage in the increase of the property of the corporation in proportion to the increase in stock." "And if so situated that he could not take it himself, he was entitled to sell the right to someone who could, as is frequently done." These quotations are from Judge Vann's opinion in Stokes vs. Continental Trust Co., 186 N. Y. 28s (1906). The privilege of purchasing new stock belongs to the remainder-man and not to the life tenant Richwood vs. Richman, 127 App. Div. 117, 108 N. Y. S. 298. The right is made negotiable by the corporation, which sends a negotia- ble notice to each shareholder of the number of shares to which he is entitled. The following notice copied from the Wall Street Journal, issue of November 5, 1909, fully explains the modern method of making subscrip- tion rights negotiable : THE PENNSYLVANIA RAILROAD COMPANY. NOTICE TO STOCKHOLDERS. Philadelphia, Pa., November 1st, 1909. At a meeting of the Board of Directors lield this date the following resolution was adopted : " RESOLVED That, pursuant to the consent and authority given and conferred by appropriate action duly taken by this Company's stockholders for increasing its capital stock, and for the purpose of providing the funds necessary to meet maturing obliga- tions of the Company, and for other corporate purposes, an increase of this Company's capital stock equal to twenty-five centum of the aggregate amount thereof which shall be issued and outstanding at the close of business on the fifteenth day of November, 1909, is hereby authorized and directed, and the same shall be issued and disposed of in manner following: The privilege of subscribing for said stock at par $50 per share, on December 8th, and to and inclusive of December i8th, 1909, on which latter date the privilege will cease, is hereby given to stockholders as they shall stand registered on the books of the Company at the close of business on November isth, to the extent of twenty- five per centum of their respective holdings. The terms of subscription will be as follows: Payments may be made in three instalments, or they may be made in full, viz.: The first instalment, 30 per cent., or $15.00 per share, at the time of making the subscription, between December 8th and December i8th, 1909, . inclusive. The second instalment, 30 per cent., or $15.00 per share, between February ajrd and March ist, 1910, inclusive. And the third instalment, 40 per cent., or $20.00 per share, between May 26th and Jnne ist, 19 10, inclusive. Payments in full at the time of making the subscription, between December 8th and December i8th, 1909, inclusive. 23$ . ( rtH 1 Accotintancy Problems and Solutions, Warrants will be issued by the Treasurer to each f<^^^^^''':.Zfl^,^ amoimt of stock to which he is entitled to subscribe under this P"^^' '^"^^^^^^ privilege may be sold by any stockholder, the warrants to have thereon * ««^"^ ^^ assignment therefore. The warrants, accompanied by the paymen for ^^^ «"* '^ ment. shall he returned by the stockholders to the Treasurer ^'^^'J^^^f^f "™°2^^^ «d December i8th. .909. inchisiw. and if not so returned, and the first mstalment so paid, the warrants shall be void and of no value. „,„„,„* of the fint The Treasurer will issue, on snrrender of the warrants and payment °f »»^« J^"* instalment, receipts which will be assignable and which are to be '^^^^Jl^h^ Treasurer at the time of the payment of the second mstalment whereupon ^««'^*bk receipts covering the first and second instalment payments will be issued, which to be surrendered to the Treasurer on payment of the third instalment. Upon payment of the last instalment there will be issued a f -''_^- "^^^^^l »* the rate of six per centum per annum on the fir«t m.talmcnt from December g h 1909. and on the second instalment from March ist, 1910. all up to June ist. 1910, which will amount to $0.63 per share. ^ e.u a rt^^u-r. .Rth To subscribers making payment in full between December 8th ^"^ ^°«='™};*'" 'f;^^^^ ,909. inclusive, and to those making payment of the last instalment ^f^f".*^^^/"" and June ist, 1910. inclusive, full paid negotiable stock receipts will be issued for whole shares, exchangeable, ten days after payment, for stock certificates carrying all dividends thereafter declared. For fractional shares, full paid stock receipts will be issued upon payments m f u 1 or upon payment of the last instalment. They will not carry any dividend or interest, hnt will be convertible into stock when the fractions presented make whole shares pmvideii such conversion is made on or before October 31st. 1910. ^fter April 30th 1910. such fractional stock receipts issued upon paym«its in full, or after Oc ober 31st, 1910. fractional receipts issued upon payment of the last instalment will he redeemed in cash at the rate of $50 !)er share, without interest. Fractional receipts will pass by delivery. „^^Ua^ The right to receive stock shall accrue to any stockholder under this privilege nnless the terms of subscription are fully complied with and payments made at the dates hereinbefore stated, and no subscription or assignment of the privilege will tie recognized unless made on the forms furnished by the Company. Warrants will be mailed about November 23rd, to stockholders of record November 15th. 1909, who who have filed permanent dividend orders in this office, to the addresses indicated on such orders, and where dividends are collected by bankers brokers or others on powers of attorney or other authority, the warrants will be sent to such authorized parties for delivery to the stockholders, unless other instructions are received relative thereto prior to November ^3rd, 1909. .j,r,iiv ^o O • rt gag ,9 O o ** o m 3 ■A a CO a >».h «.^ S-O t;« 2 o £•= Q * p.- C O 09 o '^.Q a a S ,t; o 3 « ».2 C w « -J c c ? -^S 3 > 1.-S Q 2 a «j3 d) o p — »" "» §|i II ••> CO c •-;«** a> Us C3 U V ri < ♦^ S.W5 ■ena-s-oo a-g§§«. Cg^ • r ** 3 2 U U W B CO 0*2 Ei-t w"^ tt o** 2 a O) ca w a ca CO n 3 ^ O av ^ c o p o J:, C o J5 3rt^.S6 S3 2 «fl ki iX .M "* ■♦* Q O •OJ3 •^c3o Hrt.S.E a t; o «■ § O*— a-a ;aT3 S S V ca^s »oS en ti^ • ■« & o > a a te tn «a wcom.cs a Cd (fl M OS i CIS 3 g cd M as «tj o o*». tp vis «M O . CO 0) ti 241 HI AccouMiamy Problems and SolMti&m. so long as he retaiiis at all times an eqial number of shares of the same class and value to be delivered to the pledgor upon discharge of his obu- gation/' (10 Cyc Bss-^f citing Morton vs. Morgan, 19 N. Y. 170.) IS What is meant by uUra vires m to an ad of a corporation? Explain and give an example of such an act. Answer. ** The contracts of corporations are said to be ultra vires when they involve some adventure or undertaking not withm the scope of their charter, which is their rule of corporate action." {heshtvs, Lorit- lard, HO N. Y. 519.) H. ^^ example, an Illinois corporation contracted to acquire real estate on which to build an office building, not for its own immediate needs, the contract would be ultra vires. (See answer to question 5.) . As to the rights of parties under ultra vires contracts, two rules pre- vail in this country. In the United States courts and m the courts ot Alabama, Massachusetts, Tennessee and some other states an ultra vtres contract cannot be enforced by either side, but if one side has performed its contract it may recover for the benefits the other side has received. In Indiana, Illinois, New York, Pennsylvania and many other states the obligation of an ultra vires contract may not be resisted by a party who has received benefits thereunder. Courts, in general, will not rip open fully executed ultra vires contracts, nor will they lend their aid to the en- forcement of ultra vires contracts wholly unexecuted. 16. Give in a general manner requirements of the law governing the organization of corporations in the State of Rhode Island, and state what class of corporations can be organized under the general laws. A'nswer. The general laws require that in order to form a corporation any number of persons, not less than three, all of lawful age, may file articles of association in the office of the Secretary of State, together with a receipt from the general Treasurer showing that the organization tax has been paid. The Secretary of State then issues a certificate of incorporation. -^ . k Within thirty days after organization, a certificate venfied by the Treasurer or other authorized officer must be filed with the Secretary of State. This certificate must set forth the name of the corporation; the date of organization; the amount of capital stock paid in on organization; the town in which it is located; and the name and address of its treasurer, and if he be a non-resident, there should be filed a copy of a power of attorney duly authenticated appointing some competent person residing in the State as attorney to receive service of process. Manufacturing corporations must record with the town clerk in which the main factory is established a certificate of payment of capital stock within ten days after the last payment Corporations may be formed under the general laws for any purpose, except insurance, banking or for the purpose of trading in bonds, notes or other evidences. By Article IX of the Amendments of the Constitution tA't Questions and Answers in Commercial Law. of the State, no corporation shall be created under the general laws with power to excercise the right of eminent domain or to acquire franchises in the streets and highways of towns and cities. 17. A corporation called The Western Trading Company was in- corporated under the laws of the State of Illinois. A certificate of complete organization was issued by the Secretary of State and everything necessary to constitute this a " de jure " corporation was done except to record the certificates in the office of the Recorder of Deeds of Cook County, the principal office of the company being in Chicago. After the company was thus organized, its president ordered some bonds engraved by the American Bank Note Company, and the bonds not being paid for on delivery, the work thus ordered having been charged to the Western Trad- ing Company on the books of the plaintiff company and bills rendered accordingly, the latter company sued the president of the Western Trading Company for the contract price of the work. The court gave judgment for the plaintiff on the ground that the Western Trading Company, not having filed in the office of the Recorder copy of its articles of incorpora- tion, as required by law, was incapable of contracting and could not be held liable on this contract. Give your opinion in this case. Answer. In Illinois the General Corporation Law, Section 18, provides: " If any person or persons, being or pretending to be an officer or agent or Board of Directors of any stock corporation, or pretended stock corporation, shall assume to exercise corporate powers or use the name of any such corporation, or pretended corporation, without complying with the provisions of this act, before all stock named in the articles o! incorporation shall be subscribed in good faith, then they shall be jointly and severally liable for all debts and liabilities made by them and con- tracted in the name of such corporation, or pretended corporation." On a statement of facts similar to those in the question, it was held, in the case of Loverin vs. McLaughlin, 161 111. 417, that the president was liable. That case was cited with approval in Butler Paper Company vs. Cleveland, 228 111. 128. For the law in most States see answer to question No. 24. 18. Under what circumstances may the directors of a corporation be liable for dividends paid ? Explain fully, and state to whom the direc- tors are liable. Answer. Section 28 of the Stock Corporation Law of the State of New York provides: "The directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation, nor divide, withdraw or in any way pay to the stock- holders, or any of them, any part of the capital of such corporation, or reduce its capital stock, except as authorized by law. In case of any violation of the provisions of this section, directors, under whose adminis- tration the same may have happened, except those who may have caused their dissent therefrom to be entered at large upon the minutes of such 243 Ill iiiiiiiiiii nmtmaiiiiiiiim- ■■«_■■»» I i lii i ii I i llll m l ■- Ul l l l ll illl l lll l lll l i I ii|i|Li T I Accauntancy Problems and Solutions. directors at the time, or were not present when the '^'J'^ h»PP^"'^|^;] jointly and severally be liable to such corporation ""^ » ^^^^'"^ thereof, .o the full amount of any loss sustamed "^J"* .^^^^''^X. its creditors respectively by reason of such withdrawal, division or reddc '"section 604 oi the Penal Law provides in part as *°"7; = " ^ Jj'^f ", of a stock corporation who concurs in any vote or act of Ae *^°'^ °* such corporation, or any of them, by which .t .s intended: To m^e a *v idend, except from the surplus prohts arising from the bu^nes of the corporation, in the cases and manner allowed by law » * * is guilty ot "it^irseen, therefore, that the directors are liable to the corporation, to the creditors and to the State. ,9. State the procedure necessary in New York State for dissolving a corporation. , Answer. Corporations may be voluntarily or i"^***"^*^"^^^^^^^^ The question seems to require the procedure for -'^^^f^'J . f ^^^^^^^^^^ A corporation may be dissolved by voluntary proceedmgs in one of two "^ The first method is governed by Section 221 of the General Corporation Law. which provides as follows : meetinir "The board of directors of any such corporation may, at a meeting called for that purpose, upon at least three days' notice ^^J^"^^^^^^^ by a vote of a majority of the whole board, adopt a '■^^f " «^\ *^*^^ ** is in their opinion advisable to dissolve such corporation forthwith, and thereupon shall call a meeting of the stockholders ^^°^^J^? P"^^^^^^^^^ voting upon a proposition that such corporation be f^""^^'^ ^^f^^^ Such meeting of the stockholders shall be held not less than thirty nor more than sixty days after the adoption of ^^^VrlfT ^'Inr! !hTbe of the time and place of such meeting so called by the directors shall be published in one or more newspapers published and circulating m the county wlierein such corporation has its principal office, at least once a week for three weeks successively next preceding the time appointed for holding such meeting, and on or before the day of the first pubhcabon of such notice a copy thereof shall be served personally on each stockholder, or mailed to him at his last known post-office address. Such meeting Shai be held in the city, town, or village in which the last preecedmg annual meeting of the corporation was held, and said meeting may, on the day so appointed, by the consent of a majority in interest of the stock- holders present, be adjourned from time to time, and notice of such adjourn- ment shall be published in the newspapers in which the notice of the meet- inir was published. If at any such meeting the holders of two-thirds m amount of the stock of the corporation then outstanding shall, m person or by attorney, consent that such dissolution shall take place and signify such consent, in writing, then such corporation shall file such consent, attested by its secretary or treasurer, and its president or vice-president, together Questions and Answers in Commercial Law. with the powers of attorney signed by such stockholders executing such consent by attorney, with a statement of the names and residences of the then existing board of directors of said corporation, and the names and residences of its officers duly verified by the secretary or treasurer or president of said corporation, in the office of the Secretary o! State. The Secretary of State shall thereupon issue to such corporation, m duplicate, a certificate of the filing of such papers and that it appears therefrom that such corporation has complied with this section in order to be dissolved, and one of such duplicate certificates shall be filed by such corporation in the office of the clerk of the county in which such corporation has its principal office ; and thereupon such corporation shaU be dissolved and shall cease to carry on its business, except for the pur- pose of adjusting and winding up its business. The board of directors shall cause a copy of such certificate to be published at least once a week for two weeks in one or more newspapers published and circulating in the county in which the principal office of such corporation is located, and at the expiration of such publication, the said corporation, by its board of directors, shall proceed to adjust and wind up its business and affairs, with power to carry out its contracts and to sell its assets at public or private sale, and to apply the same in discharge of debts and obligations of such corporation, and after paying and adequately provid- ing for the payment of such debts and obligations, to distribute the balance of assets among the stockholders of said corporation, according to their respective rights and interests. Said corporation shall nevertheless continue in existence for the purpose of paying, satisfying and discharging any existing debts or obli^tions. collecting and distributing its assets, and doing all other acts required in order to adjust and wind up its business and affairs, and may sue and be sued for the purpose of enforcing such debts or obligations, until its business and affairs are fully adjusted and wound up. After paying or adequately providing for the debts and obligations of the corporation, the directors may, with the written consent of the holders of two-thirds in amount of the capital stock, sell the remaining assets or any part thereof to a corporation organized under the laws of this or any other state, and engaged in a business of the same general character, and take in payment therefor the stock or bonds, or both, of such corpora- tion and distribute them among the stockholders, in lieu of money, in pro- portion to their interest therein, but no such sale shall be valid as against any stockholder who within sixty days after the mailing of notice to him of such sale shall apply to the supreme court, in the manner provided by Section 17 of the Stock Corporation Law for an appraisal of the value of his interest in the assets so sold unless within thirty days after such appraisal the stockholders consenting to such sale, or some of them, shall pay to such objecting stockholder, or deposit for his account, in the manner directed by the court, the amount of such appraisal, and upon such pa3rment or deposit the interest of such objecting stockholder shall vest in the person or persons making such payment or deposit." 245 ■IIIIH : l> AccoMtmncy Problems and Solutions. Aeotlicr method of dissolving a corporation is provided by the General Corporation Law. Under this method, whenever the management of a corporation is equally divided so that there is a deadlock, or whenever the assets are insufficient to pay all just demands, or whenever the direc- tors deem it benefical to the interests of the stockholders to dissolve the corporation, a petition may be presented to the Supreme Court praying for a final order dissolving the corporation. The petition must set forth in full the financial condition of the company, with an inventory of the prop- erty, of the books, vouchers, securities, indebtedness, etc. An order is then procured requiring all persons to show cause why the corporation should not be dissolved. This order is published at least once in each of the three weeks immediately preceding the time fixed therein for show- ing cause, in one or more newspapers, specified in the order, published in the city or county wherein the order is entered. A referee may be appointed. In a proper case the court will then make a final order dis- solving the corporation and appointing one or more receivers of its prop- 2Xk (a) How are foreign corporations authorized to transact business in Michigan? (b) And what franchise fee is required from them? (c) How is a corporation created in Michigan? (d) And how many in- corporators are required by law? (e) What is the minimum and maxi- iniim authorized capital at which corporations may capitalize in Mich- igan? (f) How may the dissolution of a corporation be effected, and (g) for w^hat particular reason would a corporation's charter be forfeited? Answer, (a) Foreign corporations may obtain authority for transact- ing business in Michigan by procuring a certificate of authority from the Secretary of State. The procedure for obtaining this is as follows: File with the Secretary of State a certified copy of corporation's charter and evidence of the appointment of an agent on whom service of process can be made; pay the requisite recording, filing and franchise fees; file a statement sworn to by at least two of the following officers: President, secretary, treasurer or superintendent. This statement should contain the following facts and be in form substantially as follows : • • • • » 19 To the Secretary of State, Lansing, Michigan: , a foreign corporation organized and existing un- der and by virtue of the laws of the State of , hereby makes the following declaration, pursuant to an act of the legislature of Michigan, entitled " An act to prescribe the terms and conditions on which foreign corporations may be admitted to do business in Michigan," ap- proved June 6, 1901, as amended : I. The location of its principal business is The location of its principal place or places of business The names and addresses of the principal officers are 246 Questions and Answers in Commercial Law, 2. The location of its principal office and the principal place of busi- ness in Michigan The names and addresses of the officers or agents of the company in charge of its business in Michigan are 3. The authorized capital stock of said corporation is dollars ($ )• 4. The total value of the property owned and used by the company in its business, giving the location and general character, and stating separately the value of its tangible property, of its cash and credits, its franchises, patents, trade marks, formulas, good will, is •- 5. The value of property owned and used in Michigan and where sit- uated, showing different kinds, as in item four 6. The total amount of business transacted during the preceding year. 7. The amount of business, if any, transacted in Michigan 8. The particular purpose or particular kind of business for which the company desires to be admitted is the following 9. Its corporate term will expire In witness whereof, said has caused its corporate seal to be affixed and its name to be hereunto attached this day of , A. U. 19 (l. s.) State of , County of , ss. , being duly sworn, depose and say, that they are officers, to wit, the and respectively, of ; that the foregoing statement, executed in the name and on behalf of said corporation, and under its corporate seal, is true. Sworn to before me and subscribed in my presence, this, day of , A. D. 19 My commission expires , 19 Office of the Secretary of State. Lansing, Michigan, , 19 From the foregoing statement made by the said , and from other facts coming to my knowledge, I find the proportion of the capital stock of the company represented by its property and business in Michigan to be per cent, of its authorized capital stock, to wit, the sum of dollars, on which the franchise fee of one- half of one mill on each dollar will be the sum of dollars. Deputy Secretary of State. f it I Hi AccifUMtancy Problems and Solutiom, (b) Foreigii companies are required to pay to the Secretary of State a franchise fee of one-half a mill (.0005) on each dollar of the proportion of their authorized capital stock represented by the property owned and used and business transacted in Michigan. In case such corporations are not at the time of admission carrying on any business outside of Michi- gan, they are required to pay a franchise fee on their entire authorized capital stock. The minimum fee is twenty-five ($2500) dollars. The fees payable to the Secretary of State, in addition to the franchise fee, are as follows: For recording articles of incorporation, twenty cents per folio. For filing same, one dollar. For issuing certificate of authority, twenty-five cents. (c) Corporations may be formed under general laws, but shall not be created, nor shall any rights, privileges or franchises be conferred upon them by special act of the legislature. Section 9 of Act No. 232, Public Acts of 1903, provides: "Before any corporation organized under this act to operate in this State shall commence business, the president shall cause the articles of association to be recorded, at the expense of said corporation, in the of- fice of the Secretary of State of this state, and in the office of the count)' clerk of the county in which such operations are to be carried on, and be- fore any corporation organized hereunder, to operate outside this state, shall commence business, the president shall cause the articles of associa- tion to be recorded, at the expense of the corporation, in the office of the Secretary ol State and in the office of the county clerk of the county in this state where the office of the corporation is located. The Secretary of State and the county clerk in whose office such articles of association shall be recorded, shall each certify upon every such articles of associa- tion recorded by him, the time when it was received, with a reference to the book and page where the same is recorded, and the record, or tran- script of the record, certified by the Secretary of State of this State, and tinder the seal thereof, shall be received in all the courts of this State as ^*fiMi facie evidence of the due formation, existence and capacity of such corporation in any suit or proceedings brought by or against the same. And in case of companies organized under Act Number Forty-one, laws of eighteen hundred and fifty-three and amendments thereto, and whose original articles of association and amendments are filed in the office of the Secretary of State, copies of such articles of association or amend- ments, duly authenticated by the Secretary of State under the seal of the State, shall be received in all courts of this State as ^ma facie evidence of the thingi therein stated." The following is a blank form of articles of association: it AITICLIS OF ASSOaATION OF. • "We, the undersigned, desiring to become incorporated under the pro- visions of Act No. 232, of the Public Acts of 1903, entitled * An act to re- vise and consolidate the laws providing for the incorporation of manu- 248 f Questions and Answers in Commercial Laiv. facturing and mercantile companies, or any union of the two. and for the incorporation of companies for carrying on any other lawful business, except such as are precluded from organization under this act by its ex- press provisions, and to prescribe the powers and to fix the duties and liabilities of such corporations,' and the acts amendatory thereof and sup- plementary thereto, do hereby make, execute and adopt the following articles of association, to wit : 1. The name assumed by this association, and by which it shall be known in law, is 2. The purpose or purposes of this corporation are as fol- lows : 3. The principal place at which operations are to be conducted is at , in the county of , State of 4. The capital stock of the corporation hereby organized is the sum of dollars. 5. The number of shares into which the capital stock is divided is , of the par value of dollars each. 6. The amount of capital stock subscribed is the sum of dollars. 7. The amount of said stock actually paid in at the date hereof is the sum of dollars, of which amount dollars has been paid in cash, and dollars has been paid in other property, an itemized statement of which, with the valuation at which each item is taken, is as follows, viz : 8. The office in the State of Michigan for the transaction of business shall be kept at 9. The term of existence of this corporation is fixed at years from the date hereof. 10. The names of the stockholders, their respective residences and the number of shares of stock subscribed for by each are as follows : Names. Residences. No. of Shares. In witness whereof, we, the parties hereby associating for the pur- pose of giving legal effect to these articles, hereunto sign our names, this • • day of , A. D. 19 Names. Names. ss. State of Michigan, County of , ^"^ ^^^^ What is usually included in the account " organization expenses " in tiie books of the company? How should this account be treated? Give reasons. 10. In a statement of the earnings of a business to be sold on the basis of Its eammg capacity, how should the question of interest paid on ac- counts payable, on notes payable, and on loans be treated? 11. If any money has been received by a company on account of work m process, how should such repairs be treated? 12. Define (a) funded debt, (b) floating indebtedness, (c) fixed charges May interest on floating debt properly be considered a fixed charge? 13. What is a contingent liability? For what purpose and in what form should such liabilities appear in a statement of financial condition? 14 What is a sinking fund? 15 What disposition should be made, by a trustee, of an amount re- ceived by him for the sale of the "rights" to subscribe to stock? Give reasons. Monday, June 27, 1910— 9 a.m. to 1.30 p.m. COMMERUAL LaW Answer questions 16, 17 and four others, but no more. Do not repeat questions, but write answers only, designated by number stated in question paper. i<5. (fl) A and B are partners. A issues notes in the firm's name without B's knowledge and pockets the proceeds. Is the firm liable? If so, why? (b) A firm owes $100,000 and has assets of $50,000. A owes $40,- 000 and has $18,000, B owes $2,000 and has $30,000. What are the rights of the firm creditors and the individual cred- itors, and how should the assets be distributed and why? 17. When is a merchant insolvent under the Bankruptcy Act? What constitutes an act of bankruptcy? 18. Explain the taxation in Massachusetts of (a) a foreign corpora- tion, (b) a domestic corporation, (c) a firm, (1) By whom taxed, method, and rate. (2) Where they have factories in different towns within the state. (3) Where they have factories, some in and some outside the state. (4) Remedies for overtaxation. 274 i-.^ C. p. A. Examination Papers. 19. Define General Partnership and Special Partnership. 20. (a) In organizing how should the capital stock of a Massachusetts corporation be paid? , , (b) A Massachusetts corporation wishes to dissolve. How is it done? 21. Define real property, personal property. 22 Does a dividend on stock, declared before a testator's death but not payable till after his death, become a part of his estate or does it be- long to the life tenant as income? 23. State the difference between a sale and a consignment. 24. Define the following: (o) Contract. (b) Bill of exchange. (c) Promissory note; state essential of same. (d) Chattel mortgage. 25. What constitutes an insurable interest in property? Monday, June 27, 1910— 2.30 p.m. to 6 p.m. Auditing Answer questions 26, 27, 28, and seven others, but no more. Do not re- peat question, but write answers only, designated by number stated m ques- tion paper. 26. What is an auditor? What are his duties and responsibilities? What are the objects to be attained by an audit? 27. Describe the plan of audit of the books of a concern other than a bank, with which you are personally familiar. 28. Describe the steps necessary to make a complete audit of a savings bank. 29. How may the correctness of the following items in a balance sheet be determined : (o) Accounts receivable, (b) securities, (c) inventory of finished stock, (d) inventory of raw materials, (e) bank balances, (f) accounts payable, {g) notes payable? 30. In preparing the balance sheet of a business at the close of a year, how should you treat each of the following items: (a) Bad and doubtful debts, (&) premiums for fire insurance unexpired, (c) interest paid 10 advance on notes payable discounted, (d) discount on accounts receivable, (e) discount on accounts payable, {f) depreciation of plant. 31. Describe the various steps to be taken in auditing the accounts of an executor for the first year after the death of the testator. 32. Describe the steps necessary to make a complete audit of a Trust Company. 275 ■ \; "'■^iic: l! ill t|l Accountancy Problems and Solutions. mat all habUihes bad been brought into the balance sheet? brith t t^T'T'"' T'^' ''''""''" ""'"'""^ »» »^°""t with each l»r«nch in the Ledger and charges to such account all goods sent to the ^ents for stocfc When stock is taken the balance of each branch account » treated as ordinary Accounts Receivable and is included in the General S^m "T" X *' ^ " ^°" »" ""^ °»'J'^<=«°- »° *- -etho^state them, and say how you would deal with the accounts. ^JL ^*"'' K^«""y J">"f views as to what constitutes capital ex- P«iditnre and expenditure properly chargeable against revenue. Under i«te oT"""' """''' "° ""''''°' "' '""''''"' '" "^"^""f *^ «^f- 3& In auditing the accounts at the conclusion of the first fiscal year stjc^'of a^t^p** """"""' ■" '"•''"'™ '° ^'-^ -O-'^ '-''» -0 37- State what means should be adopted to verify (o) cash sales ^h^ .^counts allowed, (c) discomats received, (d) sold goods returned (e) allowances on sales. * ^^ 38. A manufacttirinfir corporation desires a certificate of its averaire annual profits for three years; after charging up all costs, expenses and depreciation, and an allowance for bad debts, it is found that the profits $io.c^'oo ™^^^^^ f''"^"^' ^""^ '^' ^^*^°"^ ^''' ^4,000.00 plus ♦10.500.00 profit on sale of investments, and for the third year $72 000 no plus $8,400.00 profit on the sale of real estate. How luW you'Trk^ jour certificate? ^ » What is the duty of the accountant who imdcrtakes to examine a going business for the purpose of issuing a certificate showing the net eaoiings of the btisiness for the preceding five years to (a) the owners W those investing money therein on the faith of the report? 40. What safeguards in accounting would you suggest to a client to prevent loss of stock by theft? ^ ^^ Wednesday, June 29, i9if>-9 a,m. to 12 m. Pkactical Acxxiunting PAIT I Answer question 41, and one other, but no more. Do not repeat cues ^, bnt wnte answers only, designated by number stated in question ^^L^rfTT^" li T' ^^ ^°"*'^'"« particulars are furnished of Ac position of John Mapleton, insolvent: Factory equipment cost. $15.- ooaoo; estimated to realize. |,o^.oo. Stock of finished goods. ^10,^^; 276 C. P. A. Examination Papers, estimated worth, $7,500.00. Material and supplies, $2,500,00; estimated worth $1,000.00. Furniture and fixtures, $900.00; estimated worth. $200.oa Investments valued at $25,275.00, of which $15,000.00 is held by bankers as security for a loan of $12,000.00. Accounts receivable $6,250.00, of which $2,500.00 are good; $1,250.00 bad, and $2,500.00 estimated to realize $1,500.00. Cash, $575.00, of which $25.00 represents petty expense items not charged up, and $50.00 an I. O. U. of a former employee which is worthless. Accounts payable. $28,500.00. Notes payable, $25,000.00, of which $12,000.00 is due bankers. Wages due, $500.00. Rents due and past due, $1,000.00. Capital on January i, 1907. as shown by the books, $15,000.00. Loss by sale of investment May i, 1907, $5»ooo.oo. Loss m trading account January i, 1907 to December i, 1907. $3,50o.oo. Drawings charged personal account of John Mapleton, $1,000.00. Make up a state- ment of affairs and a Deficiency Account as at December i, 1907. 42. The fiscal year of a manufacturing company ends June 30, 1908. and the bookkeeper presents a statement to the directors made up in the following form: Gross sales • • $285,000.00 Increase of inventory 15,000.00 $300,000.00 Cost of sales: Operating expenses, material and supplies... $257,000.00 Plant expense 12,000.00 Freight on returned goods 600.00 Sundry purchases, finished goods 10,400.00 28o,ooaoo $20,000.00 Other income: Miscellaneous earnings $1,500.00 Profit on contracts 6,500.00 Discount on purchases — 500.00 8,500.00 $28,500.00 Less: Discount on sales $2,875.00 Rebates and allowances 1,125.00 4,000.00 $24,5oaoo You are required to make up a Profit and Loss statement in regular form, using such of the above figures as may be necessary together with these following: Inventory, June 30, 1907. Material, $115,000.00. Supplies, $35,- 000.00. Finished goods, $45,000.00 — Inventory, June 30, 1908. Material, $140,000.00. Supplies, $10,000.00. Finished goods, $60,000.00. Material used in factory during the year, $75,000.00. Wages, $122,500.00. Fuel, $2,500.oa Repairs and renewals, $2,000.00. Other operating expenses, $55,000.00, which includes $25,000.00 supplies used. 277 if * Accountancy Problems and Solutions, 43. A firm of four partners agree to sell their business to a corpora- tioa Tlieir assets and liabilities were as follows : No. i— Capital, $145 - 500.00 ; No. 2— Capital, $123,500.00; No. 3— Capital, $153,000.00; No. 4— Capital, $152,330.00; Building, $125,000.00; Machinery, fixtures, etc, $38,- 33500; Stock, $150,940.00; Accounts receivable, $328,680.00; Bills receiv- able, $37,005.00; Cash, $17,030.00; Horses and wagons, $1,230.00; Unex- pired insurance, $17500; Accounts payable, $124,065.00. It was further agreed that the partners were to be paid for good will, based on a year and a quarter purchase of the last three years' profits] which were respectively $32,620.00, $37,450.00, and $50,650.00. Prepare a Balance Sheet, bringing in the good will as an asset and dis- tributing it among the four. Wednesday, June 29, 1910— 1.30 p.m. to 4.30 p.m. Practical Accounting PART n Answer question 44 and one other, but no more. Do not repeat ques- tions, but write answers only, designated by number stated in question paper. 44. A branch office business was started at the first of the year the head office advancing $5,000.00 cash. During the first year merchandise was shipped to branch, invoiced at $75,000.00. An auditor checking up the business at the close of the year finds the following: Merchandise sales were $60,000.00, with selling price of goods twenty per cent advance on invoice. Proper vouchers were on file duly receipted for following payments: Rebates and allowances on damaged goods $1,500.00 Salaries and other expenses Freights .......* The books also showed: Remittances to head office. . . . , $35,000.00 4.500.00 2,500.00 Uncollected accounts i5,ooaoo 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 account for everything. Prepare statement, such as an auditor would make in reporting to the head office, balancing the business of the branch house. 4S Robert Adams and William Stevens are equal partners. On the night of July 3d, their stock and fixtures were destroyed by fire A trial balance which Adams had at his home, showed the following condition of the l«% tr at the close of business, June 30th : 278 I C. P. A. Examination Papers, Robert Adams I^oo.oo $7,450.00 William Stevens 600.00 7,450.oo Cash 3,30900 Fixtures ^'Soo.oo Merchandise purchases 32,600.00 Merchandise sales •■■ 24^00.00 Notes receivable • • • 1,000.00 Notes payable ^'^'^ Interest I20«> 50.oo Expense • TSo.oo Customers 4,500.oo 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 per cent as the average gross gain on the sales and to pay 66§ per cent on the value of fixtures as shown by the ledger. On the basis of this agreement, state the result of the business and the capital of each partner. 46. The capital of three partners— A, B, and C— in a manufacturing business. January i, 1896, was $26,000.00, of which A owned one fifth. B two fifths, and C two fifths. On December 31. 1896, one year thereafter. the condition was found to be as follows : Real estate, $15,000.00; plant and machinery, $7,000.00; stock on hand, $2,000.00; book debts receivable, $6,000.00; cash in bank. $2,500.00; cred- itors' notes payable, $8,000.00. Partners' withdrawals— A (including interest) .... $1,500.00 B " " .... 1,200.00. <• " C " " 2,ooaoo After crediting up interest on capital at the rate of six per cent, show the net result for the year, and distribute the same, in proper proportions, to the partners' accounts. Prepare individual partners' accounts, showing the condition of each at the end of the year. The following are the Problems and Questions of the Illinois Examination, held in December, 1910. Wednesday, December 21, 1910— 9.30 a.m. to 12.30 p.m. Theory of Accounts Seventy-five credits necessary to pass, out of a possible 100 credits. Each complete answer will receive ten credits. Do not repeat questions on examination papers, but write answers only, designating the questions 279 I Accomiamy ProMefns and Solutions, !1SL In^' '«f i«««^e mdicated by answers will be considered in marking tbe applicants, as well as the technical acairacy of such answer" eouLMZr^''^";/* *' dependent audit by a certified public ac- countant, how would you endeavor to oriranizi. th- i;«,«.«i tiid the system of bookkeeping of a lllTlZo^L^T arrangements might be the best internal check possible? *=°^^^^*°"* ^° ^*^^ ^^^-^^ a. Give an example of that portion of a Balance Sheet of a corooration ^^ttt: :me *'^f ^" ^"' ^^^^^^^^^ ^^^^^^^ A-uir s^n^ set out the same m the proper columns, assuming the followin^x *n^ the position of the Compan/s Share and bebenre ct^f ^''"^ *° ^ Share capital, authorized f ,«o nnn n^ Share capital, issued or subscribed [ «oC'^ Share capital, called up. ... «o.ooaoo Calls paid in advance e!!!*!! Calls in arrear 5.ooaoo Debenture capital, authorized .' .' ,* * .* .' .*.'.'.■.■ * * ' ''!???? Bebenture capital, issued or subscribed. . .' ." .' ." .* .' ' 4^0^"!! Debenture capital, paid up .' ^^Z him^in^rJZ"'^'' """ "'f "*^ ''^'' ^^ ^"^'^^^^ having asked you to give i„,™f T"^"'- '''""K $SOO.ooaoo of Debentures, bearing five per cent interest, which have been in existence fnr «.™. > ■"=«'"8 nve per cent .. . •tuiiurj I, igo7, arranges to provide the necessarv ranlt^l k. *e .ss„e, a, par, of $s«,.ooo.oo four per cent permane^rStuTstU' me half year? Give the reasons upon which your opinion is based. S A irm is in the habit of supplyinir ffoods tm fh*. «,^««:«i t , or return takinir ««„«•«♦- k • "f,*^ •*^*"» «ooas on tfte pnnciple of sale ih-s nZ.1!! r ?^^™r*» ^^ installments covering principal and interest iHf the installments oaid Mn™, ...^..o ^ ^ lorteit- •IMonal sales sh,™ld te en,«^^ T^l you recommend that such con- !•* I- 7. , """*" •'<* entered m the books of the «elliniy firm m^A how should the outstanding amounts be from time to timfv^edr «»»;„?! "=»'"''''♦»" of the percentage of profits is sometimes based upon ^.^ mrthrr" "r 1«^ ^ Which do yon regard as L Z^. oIi« .iV,!f'^\"'T*''*'""« ~°"™ P"'cha«s of material and sun- plies pass through the storekeeper. What «vst,.m nf kJuI. • T check would yon advise to safe-n^rrf ,Z !T? J ^^^^t. (10) Power of attorney Stete the difference between an administrator and an executor. a What 18 a limited partnership under the laws of the State of Illinois? f. What ire the obligations of a bailee for hire? m Wherein does a mortgage differ from a trust deed? Wednesday, December 21, 1910— 1-30 p.m. to 4-3° '•^• Auditing Swenty-fivc credits necessary to pass, out of a possible one hundred *=^h complete answer will receive ten credits. Do not rep«.t questbns «.ramination papers, but write answers only, ^^-^^'^"f "« '^^^^^^^^ by Minber. The intelligence indicated by answers will be ^^onsidtrtdm lirgle applicants, as well as the technical accuracy of such answers. 1. During the audit you are making of the accounts of a corporation you become aware of a claim against the company which you Aink . lidyTbe enforced, but which the directors do not recognize and for wWch they will make no reserve. What would you do m the circum- stances? 2. State shortly the duties of an auditor of a corporation. 3. A corporation is established for working a patent of which ten jjs are unexpired, and for which a sum of money has been paid. How JLid the company deal with this asset, and what is the duty of the auditor in respect of it? . t. 1 r :*„ 4 How should an incorporated coal company estimate the value of ,ts colliery in its Balance Sheet from time to time, first as a Freehold, sec- i»ay as a Leasehold? 5 Write out a short Audit Certificate dealing with a ^«r, ^^^^.^ ".^ wUth sometimes arise in an audit, and have to be specially dealt with by the auditor in his certificate. 4 In the case of an incorporated company making considerably more proit than usual in one year, owing to extensive purchases on a rising iTket. would you advise declaring a proportionately larger dividend. or what would be your recommendation? State your reasons. 7. In auditing the books of an importing and domestic wholesale wine and liquor dealer how would you assure yourself of the correctness of tie inventory as to the bonded stock? a Beyond the mere detailed checking of purchase invoices to the Mm «co«its with dealers, can you suggest any steps that mig^ be tSren which might be advisable with the view of the prevention of fraud f 282 C. P, A, Examination Papers. 9. A corporation invests its Reserves outside its business. On the mndit of the accounts explain what steps you would take to verify the full receipt of the investment income and the safe custody of the trust funds. 10. Upon the audit of the partnership accounts of a manufacturing business the following conditions are revealed: (i) Sales toward the end of the period are unusually large. (2) A large deposit in bank is made on the closing fiscal date, which amount is credited to the bank two weeks later. (3) Machinery sold has been credited to merchandise sales. (4) A loan to the firm has been credited by mutual consent to the capital account of one of the partners. (5) Depreciation or discount from the value of a certain class of the inventory instead of being thirty per cent as in prior years is shown as ten per cent What would you deduce from these facts, and what would you fed called upon to do by way of extended inquiry or report in each of these instances? Thursday, December 22, 1910—9.30 a.m. to 12.30 p.m. Practical Accounting PAST I Seventy-five credits necessary to pass, out of a possible one hundred credits. Each complete answer will receive ten credits. Do not repeat questions on examination papers, but write answers only, designating the questions by number. The intelligence indicated by answers will be considered in marking the applicants, as well as the technical accuracy of such answers. I. Prepare a Trading and Profit and Loss Account from the follow- ing Trial Balance and data for the year, ended December 31, 1909 : The stock of stores and materials at the end of the year. December 3if 1909. was $8,500.00. The rent at the rate of $2,500.00 was paid up to September 30th. Bad debts amounting to $850.00 have to be written off. A provision of $1,250.00 has to be made to meet possible bad debts. Depreciation at the rate of five per cent per annum on the plant at January I, 1909, has to be written off. The wages are paid up to December 27th ; the wages from that date to December 31st amount to $175.00. Interest at five per cent per annum has to be passed on the amount of the partners* capital accounts at January i, 1909. (No interest on partners' current accounts.) Profits to be divided equally between the partners. The neces- sary entries for division of profits and interest, etc.. to be passed through the partners' current accounts. It is assumed that no further entries are required to be made to complete the accounts. 283 /. /" m M I I* Accountancy Problems and Solutions. I&kmon & White, Trial Balance, December 31, Invcstnients ,,.,....• ■ *•• Accounts payable • Stores and materials, January i, 1909 Jolinson's capital Wfiite's capital Purchases Jolinson's current account White's current account Accounts receivable Wages Rent Dividends on investments • • . • • • • Plant, January 1, 1909... Bills payable • . • Bank .^ Office expenses and salaries Installments received on account of work in progress Bills receivable Cash in office Law and accountan<^ Repairs Work in progress, December 31, 1909. Bank charges .......*.• < Sales • charges. 1909 $2,410.00 2,i2aoo 24,225.00 2,310.00 3,91000 13,265.00 27,825.00 1,875.00 44,100.00 2,100.00 40.00 3,670.00 50.00 255.00 330.00 25,905.00 90.00 29,600.00 15,300.00 115.00 4,975.00 975.00 I4t355.00 70,035.00 $154,480.00 $154,480.00 2. Prepare a Balance Sheet and Partners' Current and Capital Ac* counts from the above trial balance. 3. Prepare a statement of the affairs of Messrs. Wilson & Company from the following figures: Cash on hand, $50.00. Debtors good, $2,500.00. Debtors bad, $250.oa Debtors doubtful, $5,000.00, which are estimated to realize $3,750.00. Cred- itors unsecured, $13,000.00. Creditors partially secured, $6,000.00; esti- mated value of security, $4,000.00. Creditors fully secured, $9,500.00; esti- mated value of security, $12,000.00. Landlord, creditor for rent, $i,35aoo^ of which sum he is a preferred creditor for $1,200.00. Factory manager, creditor for salary, $750.00, of which sum he is a preferred creditor for |aso.oo. Liabilities on notes discounted, $3,250.00, all of which are ex- pected to be duly met at maturity. Stock of merchandise cost $4,250.00; estimated to realize, $3,750.00. Interest in a lease of business premises estimated to be worth, $900.oa There is a liability in respect of a con- iCt which the debtors cannot complete, owing to the failure, amount known, but estimated at $i,500xxi. Bills receivable on hand, $375.00; estimated to produce, $100.00. 4. The following statements of account and balance sheets were pro- icntcd to the members of a dub in the two years mentioned. Abstract of receipts and expenditures for the years 1908 and 1909: C. P. A. Examination Papers. Year ended Year ended Dec. 31, '08 Dec. 31, '09 To balance for preceding year $4,000.00 $5,840.00 To entrance fees received 4,98500 5.09500 To subscriptions • 37,870.oo 38,15500 To subscriptions received in advance for 1909 ano jgio 420.00 210.00 To sales of* provisions, etc. 85,52500 76,190.00 To receipts for billiards, cards, cigars, etc o>"o.oo 5.360.00 $138,910.00 $130,850.00 By rents, taxes, etc. $13,76500 $14,055.00 By interest 9,38500 9,995-00 By purchases of provisions, wines, etc 74,900.00 67,190.00 By billiards, cards, cigars, etc 2,315.00 2,ooaoo By salaries and wages 16,240.00 16,15500 By fuel, light, repairs, renewals ; additions to furniture, etc 14,465.00 18,625.00 By club debentures paid off 2,000.00 2,000.00 By balances at bank and in hand: 1908 1909 $20,675.00 $16,450.00 Less: Accounts out- standing, included in expenditure above.... 1433500 15,620.00 5,840.00 830.00 $138,910.00 $130,850.00 Balance Sheet Year ended Dec 31, '08 Year ended Dec. 31, '09 Assets: Club house, furniture, China, glass, etc.... $224,200.00 $224,200.00 Balance, Jan. i, 1908 1909 $30,000.00 $30,915.00 Additions to Dec. 31 4,35o.oo 4,750.00 . . $34,350.00 $35,665.00 Less: Depreciation 3,435.oo 3,S50.oo 30,915.00 32,115.00 Stock of wines, etc 5,115.00 4,87500 Stock of cigars, cards, etc 275.00 375.00 Cash at bank and in hand 20,675.00 16,450.00 $281,180.00 $278,015.00 Liabilities: Year ended Dec 31, '08 Club debentures $219,000.00 Subscriptions received in advance 420.00 Sundry creditors 14,835.00 Balance in favor of the club 46,925.00 Year ended Dec 31. '09 $217,000.00 210.00 15,620.00 45,185.00 $281,180.00 $278,015.00 285 I : 4 I i Accotmiancy Problems and Solutions, State in what respect, as regards information or otherwise, you would consider the above Statements and Balance Sheets incorrect, and un- satisfactory to the members of the dub. 5. Assuming the Assets and Liabilities stated on the above Balance Sheets to be true, and the analysis of the receipts and payments of the year 1909 to be accurate, state the Income and Expenditures of that year in such a way as to correctly show the actual results of the year's opera- UMUSa Thursday. December 22, 1910—1.30 f.m. to 4.30 p.m. FiACTicAL Accounting PART n Seventy-five credits necessary to pass, out of a possible one hundred credit!* Each complete answer will receive ten credits. Do not repeat quea^ tions on examination papers, but write answers only, designating the ques- tions by number. The intelligence indicated by answers will be con- sidered in marking the applicants, as well as the technical accuracy of snch answers. 4 A and B agree to dissolve partnership December 31, 1908. The ■tated Balance Sheet was as follows: Merchandise inventory $57,500.00 Furniture and fixtures 2,000.00 Accounts receivable 85,500.00 BEls receivable (discounted) 14,000.00 Good will 5,000.00 $l64,OOOyll» Lmmtties: Accounts payable ..................' $50,000.00 Bils payable 11,500.00 Bills receivable (discounted) 14,000.00 A's capital account. 53,500.00 B's capital accoimt. 17,500.00 Income account 15,000.00 $i64/xxxoo Profits are divisible, A 4/7, and B 3/7, five per cent being allowed on capital, and no interest charged on drawings, which were upon the baua of $2,5 ......•••• • • • $4»/ ^O'^ Merchandise inventory 7,385-00 Accounts receivable 12,500.00 Profit and loss 2,010.00 Liabiiities: Accounts fiayable $26,605*00 10,000.00 $16,605.00 A charter was obtained from the State of Illinois with an authorized capital of $20,000.00, the balance being working capital, $2,500.00 paid in. Prior to opening up under the new organization the directors deter- mined to write off $1,250.00 from the Accounts Receivable, $210.00 from the plant assets, and $885.00 from the nventory. At the first semi-annual accounting they showed a loss from trading, aside from a depreciation allowance of $600.00. Assuming that all assets and liabilities remain as at the start, subject to the depreciation now allowed, draw up a Balance Sheet as of June 30, COMMENTS About three years ago— in the April, 1908, number— the editor of this department of the Jouknal compared the New York, Pennsylvania, and English examination papers, pointing out the contrasts and differences in standard. To the readers of the Journal, who have followed the work in this department, it will be of great interest to notice the various changes that have taken place. In a sense, limited of course, the examination papers are somewhat a gauge of the professional standard prevalent. In a previous number of the Journal, a part of the New York examination papers was given.* We are therefore now in a position to review to advantage the papers of the three different states — ^New York, Mas- sachusetts, and Illinois. The Massachusetts paper on Practical Accounting is somewhat on the style of the New York paper in the same subject It is divided into two parts, three questions being given in each part, and the candidates are expected to answer two out of the three within three hours* time. One session is held in the forenoon from nine to twelve for the first part of the paper, and an afternoon session of three hours for the second part of the paper. Although the Massachusetts paper is not exactly of the same calibre and standard as the New York or Illinois, it must not be overlooked that this is only the second examination and that the board is drawing upon the early papers of the neighboring State Boards of Accountancy. From the trend of the paper, there is no doubt that it will improve in quality with each successive examination. The Illinois paper, in the same subject, is also divided into two parts with three hours* allowance to each part. Five questions are given at each session, forenoon and afternoon, and the candidates are expected •Part I.,, pp..9»*i«o- to answer all the questions. On this basis the candidate is allowed an average of thirty-six minutes to read each problem, gather the facts and solve it. If we consider that the heading of the paper reads, " The in- telligence indicated by answers will be considered in marking the appli- cants, as well as the technical accuracy of such answers," we think that it is not fair to the candidates. No practitioner, even of exceptional ability and experience, could give an intelligent and technical accurate answer to any of the problems in thirty-six minutes. The eighth problem in the second part of this paper would require half an hour in order to collect the facts, not to speak of solving the problem. There is no doubt that the paper is of a very high and interesting standard and deserves all commendation, but why should the candidates be required to do impossible tasks? Coming in contact with the various members of the State Boards, we are convinced that they are far from intending to put before the candidates impossibilities, and therefore a little consideration of the time allowance when the papers are made up, would be of great help to the candidates and would establish beyond question the fairness of the board With the exception of the first problem in part one, the New York Paper on Practical Accounting is excellent It is very fair, containing problems which the average practitioner has to meet daily; therefore the aspirant should be familiar with them. If a man has pursued a proper course of study, and not merely ** crammed,*' and if he has a little prac- tical experience, he can solve them, without difficulty, in the time allotted. The first problem mentioned before is rather highly technical, and as the mathematical accuracy in that particular instance is of the utmost im- portance, requiring verification and proof, it is questionable whether a greater time allowance should not be given to such a problem. When we review the papers in Theory of Accounts, we find, regarding time allowance, that the criticism that applies to the State Board of Illinois in practical accounting, applies with equal if not greater force, to the State of Massachusetts. There (in Massachusetts) the candidate is allowed four and one half hours in which to answer ten questions in Theory of Accounts, and six questions in Commercial Law. In the first place it is doubtful whether it is advisable to require a candidate to spend continuously four or four and one lialf hours at examinations. In New York, for instance, at the academic examinations given by the Regents, the Board of Health insists that an examinee be not permitted to spend more than five hours in the examination room. That we must remember is not compulsory, but rather elective. If an examinee has completed a paper in a given subject before the time allotted, he may, if he chooses continue on another paper. The hour at which he began the second paper is noted, and he must stop when the total number of hours for the two papers is five. In the case of Massachusetts, how- ever, the candidate is actually compelled to spend four and one half hours, unless he can complete the two papers in less time, which, of course, is not true of the majority. It is also questionable whether the six questions in Commercial Law 28g ■ll'^W'PWiill' ■■III Accountancy Problems ani SoluHons. arc aiiikieiit This is especially important when most of the states require ten, and on its face, it would indicate that the tendency of the Mas- sadinacttt Board is to undervalue the importance of the subject. In the law questions before us, if a man has read something on partnerships and corporation^, and has studied a few definitions, that would be all that is required of him to pass the examination. The paper in theory of accounts in the case of this State, shows that the board has also con- sidered general business aside from "mere theory." The first question deals rather with efficiency of business than theory of accounts, but is ne¥ertheless a very important proposition, and if many more like it were given in examination papers, the aspirants would not only be " account- ants," but efficient ones as well. The paper in auditing is excellent. It dearly indicates that the hoard recognizes the responsibility placed on accoiintants by the recent bill regarding auditing for banks. The papers on Theory of Accounts, Commercial Law, and Auditing given by the Illinois State Board, are of a general character, and indicate a steady progress in the standard. In the case of the Mew York State Board of Accountancy, the board has adopted an interesting procedure in connection with the papers on Theory of Accounts, Qimmercial Law, and Auditing. Each paper is divided mto three respective groups, the candidates being required to answer some questions in each group. The idea of giving a number of questions and asking candidates to select two thirds of them, has its advantages as well as disadvantages. By the method adopted by the New York board at the present, while the candidate still has a choice of questions, he is compelled to know something about affairs in which ordinarily he would not be prepared. The New York board is to be congratulated on the new syllabus just issued by the Education Department of the University of the State of New York, in the preparation of which it undoubtedly must have greatly assisted. The board gives a complete outline of what will be expected from each candidate regarding the four subjects in which he is to he caismined, and if he has prepared himself according to this syllabus, he ought not to have difficulty in passing the examination. An interesting feature of this syllabus is its extensive bibliography. The candidate for cacaminations has always been groping in the dark as to which books he should refer to and consult in preparing for the examinations. In this respect it is quite a step forward. It is of particular importance to notice that in the bibliography are included books which are not strictly on accounting, but which are of great importance to the practitioner; such as, "Anatomy of a Railroad Report," by Woodlock; "Financing an Enterprise," % Cooper; "Funds and Their Uses," by Cleveland; "His- tory of Modem Banks of Issue," by Conant The three papers, as a whole, if compared with the papers ol a few fears ago, tend to convince even the most pessimistic that the influx to the accounting profession is bound to be a healthy one, benefiting the profeisioii at large and placing credit and dignity upon the Certified Pub- 290 C. p. A. Examination Papers. New Jersey C P. A, Examinations 1904-1909. Theory of Accounts. 1. State briefly your view as to a. Single Entry System of Keeping Accounts. b. Double Entry System of Keeping Accounts. 2. Accounts. a. What is an Account? b. What is a Real Account? c. What is a Representative Account? d. What is the purpose of Controlling Accounts? e. When one Controlling Account only is used, what would you call it? f. When two or more are used, name two. g. Cash Account. In what manner does it differ from other Real Accounts ? h. Bills Receivable and Bills Payable. Of what use are they, and how kept so that they may be intelligible? Define and state the uses of the following Accounts : i. Capital. j. Revenue. k. Trading (or Merchandise). 1. Loss and Gain, m. Surplus, n. Deficiency. 3. Trial Balance. a. Describe the same, and its uses. b. Do you consider its use necessary? 4. Balance Sheet. a. Wherein does it differ from the trial balance? b. Is the trial balance essential to the making of the balance sheet, and if so, why? And if not, why not? c. Assuming that there is more than one form of balance sheet, name those that you know of, and state wherein they differ from each other. d. State on which side the assets should be shown; also which side the liabilities should be shown, and state if the same rule applies to all forms of balance sheets, and if not, why not? 5. Assets. a. Define same in general terms. b. Name two kinds. c. Define the first one that you have named. d. Define the second one that you have named. e. Bad or doubtful (accounts)— how should they be treated at the close of a fiscal period? 291 i .: J ' I i t ! ) 1 ■" i 1 1 I ( 1 ^{lliix Accountancy Problems and Solutions. 6. Liabilities. t. Define same in general terms. b. Name two permanent or fixed liabilities. c What is a contingent liability? d. Name one. 7. Fixed Charges. Operating Expenses. a. Define fixed charges, and name three kinds. b. Define operating expenses, and name three kinds. 8. Debit a. Define same in general terms. b. Why is the word To used in connection therewith, and is its use necessary? 9> Credit. a. Define same in general terms. b. Why is the word By used in connection therewith, and is its use necessary? la State your opinion briefly as to the merits or the demerits of a. Bound books of account. b. Loose leaf books of account. c Special rulings in books of account. d. Private ledger. e. General ledger. f. Card ledgers. g. The journal; do you consider its use necessary? Practical Accounting. I. A certain concern, consisting of two partners — Mr. A. and Mr. B. — ^have been doing business for several years, keeping their books by Single Entry. At the close of a certain fiscal period — say July i, 1904 — it was found that the business was worth, or that the net investment was, |l8k548.03. At this time the owners (Mr. A. and Mr. B.) concluded to 0§er the business for sale; also to continue the business until such time as a purchaser may be found. It is not known what the specific interest of each partner is. After failure to find a purchaser who would take over the entire business, Mr. A. sold his entire undivided interest to Mr. C, and Mr. B. sold his entire undivided interest to Mr. D., and it is not known "how much" Mr. A. received from Mr. C, nor is it known " how much " Mr. B. received from Air. u. Messrs. C. and D., the purchasers, " came together," and mutually agreed to become co-partners and carry on the business, each on an equal basis, as to ownership, and also as to the sharing of losses or gains. 292 C. p. A. Examination Papers, Messrs. C and D. " took possession " on August i, 1904, and the book- keeper, on being requested to show "how the business stood" on that date, handed Messrs. C. and D. the following, which he (the bookkeeper) called a financial statement : Bookkeeper's Statement. Value of Real Estate and Buildings $25,000.00 Value Plant, Machinery, Fixtures, etc St^SST^ Prudential Insurance Company- First Mortgage $io,ooaoo Accrued Interest 125.00 I0^I2S00 Samuel Sloane — Second Mortgage $3,000.00 Accrued Interest 56.25 3.056^5 William Wilson- Third Mortgage $3,000.00 Accrued Interest 56-25 3.056.25 Metal Merchandise, per Inventory 6,37775 Wood Merchandise, per Inventory 1,916.28 Stable Supplies, per Inventory 10.00 Cash 198.28 Sundry Customers owe to Messrs. A. and B 7,607.70 Value Horses, Trucks, Harness, etc 1.475-00 Our Notes Outstanding amount to 5.752-32 Messrs. A. and B. owe on Open Account to Sundry Creditors 3,6i5X« $73475.60 Messrs. C. and D. are satisfied as to the items and the amounts in the foregoing "statement," but they desire to have the matter "put in" m clear, concise form, so that a new set of books may be opened and started. Double Entry. They wish to have and to know: First. The assets. a. Properly classed. b. Amount of each class (or debtor), c Gross amount. Second. The liabilities. a. Properly classed. b. Amount of each class (or creditor). c. Gross amount Third. Investment. a. Each partner. b. Total investment. ^w I 'If 1 ' 1 i i w 1 t AccGunlancy Problems and Solutions. Fourth. Between July ist and August ist had the business been run at a 'OSS or a gam, and how much in either case? Prepare a financial statement, such as you consider will meet the qnircments of Messrs. C and D and that will *.«oK1o fi, u ^, mew books on double entry plans. ^ Add to your financial statement a proper certificate and sign the same JOHN DoiL Number (Here put your own number). 2. Trial Balance. ^Messrs. C & D. at the close of business on August 31, 1904: I. 3. 6. Oh la Mr. C. .... Mr. D Real Estate and Buildings $25,000.00 mery. Fixtures J. rucKs ••«.,,,, $ii,iaa96 11,128.9s 39- Plant, Michmciy, Fixtures, etc. 5^. ^ Horses and Trucks.... S^aeST^ Cash M75.00 Metal Merchandise ...V.***.'.'.''.*.'.' -^^-^^^ Wood Merchandise ......'.* Bills Receivable-Notes . .V.V.V.V..* .* ] .* ja Miiuigcfiient (Salaries, etc).. 34. Rent, Heat, Light, Power Factory Expense ..[...'.'.''].*'.'.*.T "' Umce Expense 5>table Expense Insurance , ' * * 56. Interest ., '^^ 58. Discounts for Cash Payments.**] ' ^ Prudential Ins. Ca, Mortgagee....*; ** % Samuel Sloane, Mortgagee * ' " % William Wilson, Mortgagee 6S. Bills Payable— Notes ... 7a Sales of Metal Goods......*.*." " 7^. Sales of Wood Gkwds. Accounts Receivable, Customers;;*.*.'.;;.*.*;;;;;; Accounts Payable, Creditors.... 4a 52. 7,507^62 3,951.10 162.86 963.50 118.40 83.78 164.09 270.03 745.23 38.84 184.31 7,276.89 10,125.00 3,056.25 3,056.25 7,045.57 3,353.94 2400.29 3,788.06 Iiiiriento:ry Shows— Metal Merchandise on Hand.... Wood Merchandise on Hand.... Coal on Hand ][[' Office Supplies on Hand ;;* Siiblc Supplies on Hand..... .., laiurance, Unexpired Premiums! $55,083.27 $55,083.27 $6,000.00 4,000.00 50.00 25.00 25.00 500.00 Total $10,600.00 294, C. P. A. Examination Papers, From the foregoing trial balance prepare : 1. Balance sheets. a. Working paper form. b. Continental or technical or report form. c. Show net gain or loss for August, 1904. d. Show each partner's share of the loss or gain. e. Show each partner's investment. f. Show total investment or capital. 2. Loss and gain statement. 3. Financial Statement, after closing books. 4. Recapitulation, showing: a. Mr. C's investment, before closing books. b. Mr. C's share of the loss or gain. c. Mr. C's investment, on September i, 1904, d. Mr. D.'s investment, before closing books. e. Mr. D.'s share of the loss or gain. f. Mr. D.'s investment, on September i, 1904. g. Net gain or loss for August, 1904. h. Amount of capital invested in the business on September i, 1904. 3. Messrs. C and D. desire that their ledger shall show all the transac- tions with their creditors — i. e., purchases and payments with each creditor. Naturally, the bookkeeper wishes to so arrange his books as to accom- plish the desired end with the minimum of labor. a. What would you recommend? (Use as a basis foregoing trial balance.) b. What would you name your plan? c. What general instructions would you give to the bookkeeper to enable him to properly maintain your "plan" after its installa- tion by you? 4. How would you arrange or prepare a special cash book for this same business or concern to reduce labor, but in no way impair efficiency ? a. Illustrate the arrangement of the debit side. b. Illustrate the arrangement of the credit side. c Give general instructions as to " keeping " and as to " dosing *' the same. 5. Messrs. C and D., finding the business profitable, and wishing to extend or increase the business, are compelled to procure additional cap- ital. Three of their friends— Messrs. E., F. and G.— stand ready to sup- ply the money, but suggest incorporating under the laws of New Jersey, which suggestion is agreed to, and on the following basis : E., F. and G. agree to organize and incorporate a joint stock company, at their own expense, capital $100,000, and buy the entire business from C. and D. 191a ■•513 J ll I I Accmnimcy Problems and Solutions. Capital $icx»,ooo, i,ooo shares, par value $ioo, full paid and non- assessable. C to have lor liis interest in the business 150 shares. $15,000 B. to have for his interest in the business .150 shares. 15,000 E. to purchase for cash at par 150 shares. 15,000 F. to purchase for cash at par 150 shares. 15,000 G. to purchase for cash at par 150 shares. 15,000 All agree there shall be treasury stock 250 shares. 25,000 Pull paid and non-assessable, which at any time may be sold to procure additional working capital. As soon as the company begins business (the incorporators and Messrs. C and D. having so agreed previously) intend to and do pay on Septem- ber I, 1904, the mortgages, the mortgagees each for himself having agreed to the arrangement The cost of incorporating the company amounted to $500.00. All preliminary arrangements were made prior to, and the company came into existence on, September i, 1904. The company immediately paid off the mortgages, opened a new set of books, using the same values as per C & D.'s financial statement of September i, 1904. a. Prepare a financial statement which will show the condition of the company before " starting in to do business," but taking into ac- count the transaction of payment of mortgages. b. How was the full capital stock made " full paid and non-asse»- sable**? c. In what manner is the $25,000 converted into treasury stock? d. Why has good will account been opened ? c. Prepare a list of stockholders, showing holdings of each. 6. Statements. a. Name four kinds, b. Briefly define the first one that you have named. c. Briefly define the second one that you have named. d. Briefly define the third one that you have named. e. Briefly define the fourth one that you have named. 7. .Ledger. You wish to so keep your accounts that at any given time you may readily ascertain the aggregate balances due from your customers and the aggregate balances due to your creditors, without taking the time to list the same (customers and creditors), and at the same time you wish to maintain your ledger in perfect balance. a. How would you arrange your ledger or ledgers? k How would you name the ledger or ledgers? c How would you maintain the balance of the ledgers or make it possible to balance or prove one ledger independent of the other ledgers? C. P. A. Examination Papers. 8. Analysis of a Ledger. a. Give two reasons why the making of an anlysis of a ledger becomes necessary. b. State briefly how you would proceed to make an analysis of a ledger. 9. Banking. a. You have received and deposited a check in your bank. Briefly de- scribe its course through your bank and to its " home bank," and thence to the drawer or maker of the check. Assume the check to be drawn on The Chemical National Bank of New York, but sent by your bank to the American Exchange National Bank, the American Exchange being the New York correspondent of your bank. b. What is the purpose of the discount tickler? c. What is the purpose of the collection tickler? 10. Commercial Arithmetic. a. Define equation or averaging of accounts. b. What is the equated time for the payment of the balance of the following account (30 days to the month and 6% per annum) ? Dr. Henry M. Doremus. Cr. 1904. Mar. 16. Mdse. 4 months.. $444-57 I904' Mar. 30. Mdse. 60 days... 376.82 July i. Cash $400.00 Apr. 20. Mdse. 30 days. . . 712.19 July 20. Cash 37S-<» May 17. Mdse. 4 months.. 628.75 Aug. 16. Cash 700.00 May 28. Mdse. 4 months.. 419.31 Aug. 30. Cash 600.00 c. Henry M. Doremus desires to settle the above account on Sep- tember 13, 1904. What amount of money shall he pay? 11. Building and Loan Companies. a. State briefly the primary objects of building and loan companies. b. What protection does the State afford to such companies? c. To whom are the funds of building and loan companies loaned ? d. Is it customary and necessary to keep an independent ledger ac- count with each member, showing his payments of dues, etc., and dividends, etc.? And if not, why not? Commercial Law. I. Contracts. a. Name the primary elements of a contract. b. What is a valuable consideration? c. How many parties are necessary to the making of a contract? 296 297 Accountancy Problems and Solutions. C. P. A. Examination Papers. IP 1 : 1 f 2. Partnership. a. Who may become partners? k What is a partnership, and how formed? . ^ c. Profit and Loss. In case of no specific agreement as to division, how would the same be divided as between partners? 3. Corporations. a. What is a corporation? k Name the parties to a corporation. c. What is a franchise? d. State briefly how you would proceed to orgamze a corporation in the State of New Jersey. 4. Interest and Discount. a. What is interest? k What is discount? 5. Insurance. Define same in general terms. 6. Distribution of Estates of Persons Deceased, a. What is a will? k How many kinds of wills are there? c Name two kinds. 4 What constitutes the probate of a will ? e. Where there is no will, how is the estate of the deceased cared for and distributed? 7. Legal Terms. Define the following: a. Acceptance, k Accommodation Paper. c. Adjudication. d. Alteration. e. Attorney in Fact f. Blank Endorsement. g. Escrow. k Ultra Vires. a How can interest be calculated on a sealed note in the following words ? I promise to pay to A. B. or his assignee one thousand dollars, for value received, and to pay interest annually. The note is not paid for five years. Does the interest, which is to be paid annually, become principal and bear interest? 9. What is a Receiver?—:, e., define the same. 298 10. Miscellaneous. a. What makes a note or draft negotiable? k Is it necessary under all circumstances to protest a note or draft if not paid when due? c What is gained, if there is any gain, by protesting notes, etc.? d. Can a building and loan company (of N. J.) borrow money? And if so, how? c What is the legal rate of interest in New Jersey? Auditing. 1. The general business public frequently make no distinction as be- tween a bookkeeper and an accountant What is the distinction? Define in your own words : a. A bookkeeper. k An accountant c. An auditor. d. A practicing public accountant and auditor. 2. A business man sends for you and talks to you thus : " I want my books and accounts examined. I am informed and believe them to be all right, but I want to be assured of it beyond doubt I also want to know the condition of my business, as the books show the same, at this date, I also want to know if the business has made money or lost money, and in either case what amount What will the " job " cost me, and how long will it take to find out? '* a. How would you deal with such a case? b.What would you require to have furnished to you so that you could ascertain the facts wanted? 3. Good will. a. What is good will? b. What part does it play in corporations ? 4. Partnership Settlement. Three gentlemen have been associated as partners in a certain manu- fiacturing enterprise. At the close of the year they desire an honest and fair adjustment of the result and division of the resulting gains. They liave agreed to abide by your decision. They furnish you the following liacts: 1. Anderson, Brown & Cristy are equal partners in a manufactttring enterprise. 2. Each partner to receive 6% interest on his average investment 3. Christy, as superintendent, to receive yearly salary of $3,000. 299 \\ ^ I"' I i'"' i Accountancy Problems and Solutions. 4. Brown keeps a general store, at which the operatives deal, and Brown has agreed to allow Anderson and Cristy 5% on his sakt to the operatives. 5. Brown's sales to the operatives amounted to $1,575. 6. Anderson to receive for his services as selling agent 10% on the net profits as existing before his percentage is taken. 7. Anderson's average investment for the year is $9,75a 8. Brown's average investment for the year is $5,750. 9. Cristy's average investment for the year is $5,000. 10. Leaving out the interest, salary and Anderson's and Cristy's per- centages, the net gain for the year is $15,000. What share of the $15,000 is each partner entitled to? Prepare a sheet that will show under separate heads : Accounts, with items, of Anderson, Brown, Cristy. Distribution of the gain. 5. a. How would you "treat and proceed" in an examination of ac- counts receivable as to classing same as good, doubtful, and bad? b. What books and papers would you demand, and how would you "treat" the same, were you called in to make a first audit? c. How would you proceed if called in to make a second or later audft of the same books, etc. ? 6. How would you "treat" such accounts as the following, if closing the books at a certain period, with a view to ascertaining the loss or gaia? a. Insurance premiums paid in advance, b. Real estate, as to taxes, assessments, etc. c. Mortgages, notes and other paper as to interest. 7. What is your idea of the proper and a just charge or compcnsa- tion, just as a. To the employer and the employee, for rour services as a certified public accountant? b. The services of a first assistant? c. Other assistants? a State briefly how you would proceed if called in to audit and render a financial statement of a. A national or State bank of deposit and discount k A savings bank. c. A building and loan association. d. An insurance company. e. A mercantile or manufacturing business (partnership). f. A corporation. 9. a. As a certified public accountant and auditor, what would be your relation with your client? b. To what extent do you consider that you should hold yourself sponsible for your work as an accountant and auditor? 'M f C. P. A, Examination Papers, 10. a. Write such a certificate as you would consider proper where all the facts and figures were at your command and where you had in no way been hampered in your work. b. A certificate, where certain facts had been furnished to you with m ftatement that the certain facts were satisfactory to all parties concerned, and the balance of facts or information you had " gleaned " for yourself. c Write up a letter of introduction to be signed by your client of New York, who has charge of a large mercantile establishment. One of his derks, a man of excellent character and ability, is about to leave him for California. He desires a general letter of introduction. Write a letter which shall be specific as to his qualifications, and general in its appeal ill t i * Accountancy Problems and Solutions. ic State Board of Acxountancy of Washington. Exaimnatioii Questions. AugiMl 6, 7 and 8. 1908. ExiiACT FROM Rules of the Board:— Rule io-" The Board will grant certificates only to those applicanti ... who shall correctly answer at least 75 per cent, of aU the questiom on each and every subject of examination/ iTieoiy of Accounts, numcky, August 6—9 A M. to 12.30 P. M. Answer Six Questions. 1. (a) Define Gross Profit. (b) Define Net Profit. (c) Without using figures, draft a profit and loss account in whkb gross profits are distinguished from net profits. 2. What general principles should be observed in differentiating be- tween capital and revenue expenditure? 3. A corporation having acquired a manufacturing plant, discards, shortly after its acquisition, a large portion of the machinery and replaces It by machmery of a more modem type, (a) What do you consider is the correct method of dealing on the books with the book value of the discarded machinery? (b) Do you consider that it would be proper for the corporation to pay dividends until the book value of the discarded machinery had been written off out of profits? Give full reasons for your iinswers. 4 (a) Arrange a plan for keeping a private ledger with which the general ledger will agree and yet in no way reveal the contents of the private ledger. (b) What matters arc usually recorded in the private ledger? S. Describe the nature of the following accounts: Consignment. Trading. Suspense. Construction. Subscription. 9 C. P. A, Examination Papers. 6. (a) What should be done regarding the books on the admission of a new partner into a firm? (b) What entry or entries should be made (i) when cash is invested in the business by an incoming partner? (2) When a specified amount is paid by an incoming partner to the old members personally for a share in the business? 7. What should be the procedure in ascertaining the value of stock on hand at the time of a fire, the financial books being intact and showing an inventory taken four months before the fire? Without using figures, draft a statement in the form you would consider most suitable for setting forth your findings. 8. After appraisement, a manufacturing corporation increases the book value of its real estate to the appraised figure, carrying the amount of the appreciation to undivided profits account. Shortly afterwards the corpora- tion declares a dividend, to pay which a part of the real estate apprecia- tion is required. Do you consider that the corporation is justified in treat- ing appreciation of real estate as an earned profit (assuming the real estate to be used for the purpose of the business) and in paying that ap- preciation out as dividend? State fully reasons for your answer. Practical Accounting — Part I. Thursday. August 6—2 P. M. to 5.30 P. M. Answer Two Questions. Notice to Candidates: The board has decided, in connection with the practical accounting pa- pers set at the present examination, that correct answers to 66 2-3 per cent (or two out of three) of the questions asked will constitute a pass. I. A. & B. were partners trading under the name of A., B. & Co. June 30, 1908, the following balances appear on their ledger: A., Capital Account $70gOOO B., Capital Account 50,000 Real Estate 22,000 Buildings 20.000 Machinery and Tools 44,000 Furniture and Fixtures 2,000 Accounts Receivable 50,000 Cash 7,000 Materials and Merchandise 53^)00 Accounts Payable 35,ooo Bills Payable 48,000 Bills Receivable 5,000 303 }l I hi Accomiamcy Problems and Solutions. On Jtine 30, 1908, tlie business is incorporated as the X. Company, on me following plan : 1. Capital stock $150,000. 2. X. Company takes over entire assets and liabilities of A., B & Q> mt the book figures as above, except (a) real estate of the book value of ISOOO, which is retained by A.. B. & Co.; (b) the accounts receivable. Which arc taken over at $48,000, and (c) the capital accounts of the pirtners. 3. X. Company pay A., B. & Co. $30,000 for the good will of the busi- 4. Payments to A-, B. & Co. are made as follows : viz., $50,000 in ist mortgage bonds, and the balance in capital stock of the X. Company. 5. After paying off A., B. & Co. the remainder of the capital stock is lold for cash to sundry persons. The real estate which is retained by A., B. & Co. is bought from A., B. & Co. by A. for $7,000 and is to be charged to A.'s capital account. After the completion of the foregoing described transactions A. & B dittolve pannershtp. You are required: (a) To prepare closing entries for the books of A., B. & Co. (b) A statement setting forth the partners' accounts down to their final closing, beginning with the balances shown by the books on June 30, 1908. (c) Opening entries for tlie X Company. a. Smith, Brown and |imc8 tgree to join in partnership for the pur- pose of working a patent The patent is the property of Jones. Smith puts into the business in cash $10,000, and Brown $15,000. Jones ill no cash capital, but his patent and machinery are taken in as the «#iivalent of $7,500. and $2,500, respectively, and are credited to his cap- ital account accordingly. The life of the machinery is estimated at ten fWiTs, and the patent has fifteen years to run. Half of the annual de- preciation on the patent and machinery is to be charged against Jones' towing account. Jones is to draw $100 per month as manager of the Msiness, and is to have one-third of the net profits (subject to deprccia- ^m as above), the remainder of the net profits to go two-fifths to Smith ■ad three-fifths to BrO'Wn. The profits (before charging management salary and depreciation on machmery and patents), and the drawings, are as follows: m ^ri , ^^ '907 1908 i™ , • • $7»Soo $10,000 $2aooo Bwwmgs by Smith ,^ ^y, ,^ ipiwwings oy isrown ..••,,,,,,,,,,, , i|500 1,000 1.240 llwwings by Jones (in excess of salary and be- fore charging him with depreciation) 500 400 450 WgaM C, p. A. Examination Papers. You are required to (a) Prepare final profit for each year, showing distribution of net profits to the partners. (b) Prepare capital accounts of the partners for each year. (c) Prepare patent and machinery accounts for each year. Note.— In answering this question it is not necessary to show journal entries. Interest on capital is not to be considered. 3. The firm of C. & D. carry on business as dry goods merchants at Seattle and Tacoma, and decide to dissolve partnership on Dec. 31, 1907. At that date their balance sheet was as follows : Assets. Cash $!<»•«> Merchandise — At Seattle $12,000 At Tacoma 7»2SO 19,250.00 Accounts Receivable 17,000.00 Furniture and Fixtures — At Seattle $ii700 At Tacoma MOO 2,800.00 Good Will 3,000.00 $42,150.00 Liabilities. Overdraft $1,050.00 Accounts Payable 11,100.00 C's Capital 20,000.00 D.'s Capital 10,000.00 $42,IS0X» The partners divide in proportion to their respective capital investment, and agree that at the date of dissolution C shall take over the merchan- dise and furniture at Seattle, and D. the merchandise and furniture at Tacoma, at the values shown in the above balance sheet. The accounts receivable realize $16,000, and all the liabilities are paid less $300 discount on accounts payable. The realization is completed by June 30, 1908, and you are required to continue all the accounts appearing in the balance sheet up to and includ- ing that date, and to show the final closing of the accounts (including those of the partners). 30s ■Hilllllll ^% iliiM^^^^^^^^^ liilHli uliliiJ III ill Ji tmi li ml i Accomimcy Problems and Solutions, Pmdicti Accountiiig — ^Pait 11. Flaky, Augmt 7—9 A. M. to 12.30. P. M. i< Answer Twa Questions. Motice to Candidates: ^^^J^^ **'''**'*^' " connection with the practical accounting pa- peri Ml at the present examination, that correct answers to 66 2-^ ^r cent (or two out of three) of the questions will constitute a pass. 4 The following balance sheets of the firm of X. & Y. are submitted to you for investigation and criticism by a client who has been invited to purchase an interest in the business : Assets. Fomiture and Fixhires ^'^'i.'?^ Dec 31, .907 50,000 Accounts Receivable Merchandise Ga^sh. $7,000 30,000 25,000 Meal Estatc.V.V.V.V.V.*.*. ^^/^ B"Mngs :i\\*;;:v.v:;:;;;;;: at^ Bills Receivable. J 5>ooo 58,000 8,000 18,000 25,000 10,000 Total Assets , * 113,000 $177,000 LlABIUTIfiS. Capital ......••.,.,,,,,,,,, , Accounts Payable .7. *.*[.]] ] . \ . Real Estate Mortgage... ,. Bills Payable Total Liabilities «,»-.««« * •••• ?ii3,ooo $177,000 M a result of your enquiries you ascertain the following facts : I. The business has been estabUshed under the present ownership four ycHrB. $53,000 $67,000 35,000 65,000 5,000 5,000 20,000 40,000 a. The sales and profits as shown by the books have been : 1 «;iiuii|g Gross Net >ec 31 Sales Profits Profits 1904 $150,000 $22,000 $10,000 190S 230.000 29,000 15,000 1906 270,000 32,000 17,000 1907 340,000 37.000 22,000 30<5 C. P. A. Examimtion Papers. 3. The book value of real estate was written up in 1907 $3,000, which was treated as profit for that year. 4. Of the accounts receivable Dec. 31, 1907, $3,ooo were bad. Of this amount, $2,000 related to 1907 and $1,000 to 1906 business. 5. There was omitted from the Dec. 31, I907, inventory $2,000 of mer- chandise which had been paid for, and there was included in the same inventory $1,000 which had not yet been entered on the books. You are required to make in the profit and balance sheet figures as above stated such adjustments as you may consider necessary, and to ar- range the adjusted balance sheets in the form best calculated, in your opinion, to give a clear view of the condition of the business at the close of each of the two years. You are further required to make a brief report to your client comment- ing on or calling attention to any points you may think it desirable to bring especially before his notice. 5. The Republican Asphalt Contracting Co. is forced into liquidation; and the Receiver, when taking possession, finds the books of account to show: Liabilities. Bills Payable $18,000 Creditors* open accounts 75,500 Mortgage on Real Estate and Improvements I7,500 Mortgage on Contracting Equipment 7,ooo Capital Stock Subscribed $100,000 Less not paid up 2,500 97,500 $215,500 Assets. Cash in Bank and Office $700 Bills Receivable 4,300 Debtors* Accounts 8,200 Bonds and Warrants 23,000 Real Estate and Improvements 35,ooo Manufacturing Plant 24,000 Contracting Equipment 14,000 Uncomplete Contracts (Cost) 41,000 Inventory of Materials and Supplies 3,500 $153,700 The bondsmen on the unfinished contract estimate that an expenditure of $25,000 will complete the uncompleted contract and realize the contract price of $60,000, and their offer of $2,750 for the inventory of material and supplies as part of said expenditure, is accepted by the receiver. The company owes for personal taxes and adjustment of Employer's Liability premiums $175 and $100 respectively, and unpaid labor accounts amount- ing to $1,700, which amounts do not show on the books of account 307 J9 I I' I Accmntancy ProMems and Solutions, l%c blis feccivaMe amotmtiiig to $4,300 are pledged as collateral for ?3.5oo due creditors, and $20,000 of the bonds and warrants have been pwn as security for $33/m due creditors. $1,000 of the bills receivable is tnosequently dishonored. Tic receiver finds that $1,100 of the debtor's accounts is collectible. The sale of real estate and improvements (book value $35,000) realizes «32,soo~manufactunng plant 40 per cent, of the book value, contracting «impment 35 per cent, of book value. Prepare a statement of affairs and deficiency account. li Without using figures, devise forms of periodical financial state- ments (to mclude manufacturing account, profit and loss account, and balance sheet) for any manufacturing business with which you arc Biniiiar. » Auditing. FfikF, August 7—2 to 5.30 P. M. Answer Six Questions. I. What are the fesponsibilities of an auditor and what should be his 'Qtiiiincations ? ^. }^\ ^Z^. ^*™* reasons why a firm or corporation should have pcnodical auditi. (b) What advantage has a firm or corporation in employing a certified public accountant for the work? (c) How far should an auditor enquire into the work of his ore- decessor? *^ 3. Draw up a form of certificate you would give where you found the accounts properly kept. Also where accounts are incorrect. 4. (a) Explain how you would proceed in auditing the affairs of a COfforatioa (b) In an audit where an exhaustive examination of the books is not iMticab e, what arc the particular points to which the attention of an auditor should be directed? S State briefly your duties as an auditor in reference to the foUowiiM matters : ^* (a) Mach.nery. the value of which has not been regularly depreciated. (b) Loans from bankers. (c) Doubtful debts, (d) Good will JOB C, P. A. Examination Papers, 6 How would you, as auditor of an incorporated company, satisfy yourself of the existence of shares or bonds given as security for loans to the company? 7. What important items would you look for in auditing accounts of a county, a city and a school district? 8. A firm of export merchants desire a thorough investigation of the past year's transactions, having reason to suspect fraud. State concisely upon what lines you would proceed to satisfy yourself that: (a) Goods had been taken out of the store on bond in the way shown by the books. (b) They had been shipped to account of proper consignee. (c) That no goods had been removed without being charged (d) That no fictitious entries had been made in the books. Commercial Law. Saturday. August 8—9 A. M. to 12.30 P. M. Answer Six Questions. 1. (a) What is an executor? An administrator? (b) What are the rights of creditors as against the estate of a deceased person ? (c) Define intestate? 2. What do you understand by bankruptcy proceedings, and what effect have they on claims of creditors? 3. What is a garnishment? Who if anybody are exempt therefrom? 4. What do you understand by exemption of a debtor? 5. (a) Define a bill of exchange. (b) What is the difference between inland bill of exchange and foreign bill of exchange? (c) Define acceptance as used with reference to a bill of exchange 6. (a) Define a negotiable promissory note. (b) What is the liability of a general endorser on a promissory note? 7. (a) By whom must all contracts, deeds, mortgages, leases and other instruments binding a corporation be signed? And whence do the signen derive their authority? (b) Explain the manner of issuing and of transferring the capital stock of the corporation, and state the principal rights acquired by stockholdert. (c) What is the limit of a stockholder's liability? 8. State the essential feature of a partnership. Must each partner have an interest in both profits and losses? 309 II I 11 1 I ' ll 1 Accmniancy Problems and Solutions. Tic State Board of Accountanqr of New York. Practical Accoiintiiig — ^Pait I. Tueicky. Fcbniaiy I, 1910— 1.15 to 4.15 P.M.. only. Amwer two quesHons but no more. Answers in excess of the number required wiM not be considered. Do not repeat questions but write answers ml% designating by number as in question paper. Check (O ike number of each one of ike questions you have answered. Each com- plete answer wHl receive 25 credits. Papers entitled to 75 or more credits will be accepted, I. A ire in the office of a firm of traders partly destroyed the books of accoiuit that had been fully posted in anticipation of proving their cor- rectness. The following ledger accounts were found to be legible: Purchases net $23000 Cash discounts lost ...........[[[[ '330 Cash discounts gained . , [ ' [ * j j-q aaies net ....,.,,,,,,,, iRotmi lais receivable... ,7™ upon inquiry the bank balance was ascertained to be 43,000 Bills receivable had been discounted at the bank, amounting to. . ! '. 15*000 An inspection of the checks paid by the bank showed amount paid creditors, including |20,ooo notes payable. 33,000 .J"}^^":^ ^^^^' prepared at the last closing of the books and containing the foUowmg items was produced by one of the partners : Cash , . , Accounts receivable Loans receivable .'*.'.*.**!.'.","!!.*!];.';;;;.;; Real estate. Notes receivable Accounts payable. Notes payable , . . ^^^^^ ....['.* Mortgages payable Inventory '"^ , 12,000 • ••• 84,000 $20,000 42,000 8,000 30,000 14,000 10,000 20,000 ^^P*^^^ The firm stated that the real estate, loans receivable and mortgages payable remained as shown in the balance sheet. An inventory of goods in storage amounted to $15,000 thSS: .r^^x^ ""^ ''' '' "^'^ ^'^^-^"^ ''^ ^^^^-" ^' 2. The directors of a manufacturing company, before the closing and auditing of the books for the half year ending December 31, declar^ out of the net earmngs of the company, a dividend for the half year, of 4% on 310 C. P. A. Examination Papers. 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 Plant and machinery 40,000 Patents and good will .... 80,000 Inventory July i 29,000 Purchases 82,500 Labor 88,000 Coal 6,000 Salaries general 1 1,000 Salaries management 5,000 Insurance 875 Allowances 6,250 Freight 1,500 Discount and interest 750 Cash in bank 8,000 Investments 15,500 Miscellaneous expense.... 4,300 Bank debts 42,000 Pfd. stock in treasury. . . . 5,000 Repairs 1,000 Preferred stock.. Common Stock . Sales Notes payable... Account payable. $100,000 100,000 219,175 26^000 I4fO0Q $459,175 $4g9>i7S Stock on hand $26,500. From the above prepare profit and loss and income statement and balance sheet, giving effect in accounts to deprecia- tion at the rate of 7^% 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. 3. A. B., a commission merchant, doing business on 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, a balance sheet and a detailed cash account. ^^'^^ $22,500 $30,000 ^^^]sht 1^50 TOO Claims and allowances on settled accounts only 300 750 Expense ^^ Customers' accounts 30^000 22,500 Creditors' accounts jgj^^ 19,^5 Z^ "''\ 29,500 2047S Discounts lost 200 3" f H I Iwi I > Accountancy Problems and Solutions. „ , Tkal Balance ^sues .... Krdghi. .:::;:::::;;;;;;:;:;;:::•••••• '^-s* Claims and allowances ^'^^° Expense ^^ Customers' accounts ] ^^ Creditors' accounts... 30,000 Gash ',['.[[',[ ^^'^^^ Wscounts lost * 29,500 Commission account. 5% on |22,sto * .".'*.'.' * ^^ $30,000 700 750 22,500 19,925 20,475 I,I2S Capital $95475 7,500 $^02.975 $102,975 Account Sales Rendered. — ■ ■ ■ •bales Charges: $22,500 Freight Claims and allowances....... ^^^ Commission, 5% * 75o ^»I25 2,575 Net proceeds credited to shipper's account ZZZ 1^^ Practical Accounting— Part 11. Wednesday, FcbruMy 2. 1910^9.15 A. M. to 12.15 P M only Answer two questions but no more A^»„^ • ' * re^^i will not be conJere2DoZTei^l'''''V^ ''' '•«'«^- ^ns^rs only ,esi,natin. By num,ras X ZttnZT^ me number of each om^ iif *i, .- 9uesnon paper. Check (i^\ Purchases from Clearing House Brokers. Carpenter, Bagot & Co An^ km t ^^^ '<» ^ Morgan, Ryan & Co. Z « ' iJ""^^ ^^^'""^'y' ?"« $7.02 J 000 March William Commission Co.V.!.'.;; |^ "■ J" 100 " *• it U I* n i< M 7.21 7-ao 6.90 6.90 312 C. P. A. Examination Papers, Sold to Clearing House Brokers. tt Carpenter, Bagot & Co 400 bbl, January delivery, price Morgan, Ryan & Co 500 " March do 700 " June William Commission Co 100 " July it $7.03 7.22 7.19 6.93 Clearing House Closing Prices. January I7.02 March 7.22 June 7.20 July 6.93 Note — Each barrel is considered as containing 400 lb of oil. Show transaction in all the books and a profit and loss account, taking the inventory at closing prices. 5. The output of the A. B. C Coal Company for the year ending De- cember 31, 1899, was 1,567,833 tons and the trial balance of that date was as follows: Plant, machinery, etc. Construction (jp proc- ess) Bills receivable Accounts receivable... Cash Materials (10% in- ventory) Coal on hand, Jan. i, 1899 Wages Supplies (10% inven- tory) Injuries to persons.... Salaries Insurance Taxes Office expenses Legal expenses Dividends Rentals and royalties. Freight outward Horse and wagon hire Allowances Miscellaneous $5,000,000 85790.50 63,000 21,650.29 98,752.31 145,853.20 12,750.36 1,973,376.89 389,402.20 10,000 45,750 20,482 26,597.40 29.872.50 36,731.09 150,000 262,530.20 361,951.17 109,532.10 94.321.60 8,750.21 Capital stock Sales Accounts payable. $5,000,000 3,857,642.76 89451.26 $8,947,09402 $8,947,09402 313 i" I II Mk Accountancy Problems and Solutions. Coal on hand, per inventory, $15,862.70. From the foregoing prepare a balance sheet, and income and profit and loss account, the latter to show gross earning and net earnings. 6. The Virginia Coal Co. was originated on January i, 1906, began operations about January 7, 1906, and kept an ordinary set of books (by double entry) but did not close their accounts at the end of any fiscal year. After an examination and verification of all accounts stated in the trial balance they are accepted as correct, except that termed " Sinking Fund Payments" ($22,500). The mortgage securing bonds to the amount of $200,000 contains a sink- ing fund clause providing that the company shall deposit semi-annually with the Sinking Fund Trustee 5c per ton on all coal mined ; such pay- ments shall be made to trustee during January and July of each year for the preceding six months' period. Money so deposited is to be applied, as soon as practicable, to purchase bonds at not exceeding 115 and accrued interest; compensation and expenses of trustee are also to be paid from Ac Sinking Fund. Bonds, when redeemed, cannot be canceled but arc to be held by trustee, who shall collect the semi-annual interest thereon and apply to the same purposes as the 5c per ton payments. Bonds are dated January i, 1906, run for 20 years and bear interest at 6% per annum, payable January i and July i of each year. Payments to Sinking Fund Trustees (the (General Trust Co.) have been as follows : July 27/06. Payment for 6 mo. ended 6/30/06, 5c per ton on 120,000 tons $6,000 Jan. 24/07. Payment for 6 mo. ended 12/31/06, 5c per ton on 150,000 tons 7fSoo July 28/07. Payment for 6 mo. ended 6/30/07, 5c per ton on i8o,oootons ^9^ $22,500 On January 30, 1908, the company paid to the General Trust Co. (S. F. Trustee) $5,500 for Sinking Fund payment for the 6 mo. ended Dec. 31. 1907, being 5c per ton on 110,000 tons. Tfcc General Trust Co. submitted statement of receipts and disburse- ments for account of the Sinking Fund to date (January 3h 1908) as follows : Cash Received to Dec 31/07. July 27/06. S. F. deposit for 6 mo. ended June 30* 1906, 120,000 tons at 5c $6,000 Jan. 5/07. Jan. /07 coupons on 5 bonds ^S© C. P. A. Examination Papers. Jan. 24/07. S. F. deposit for 6 mo. ended Dec. 31, 1907, 150,000 tons at sc 7,500 July 3/07. July /07 coupons on 12 bonds 360 July 28/07. S. F. deposit for 6 mo. ended June 30/07, 180,000 tons at 5c 9,000 $23,010 Cash Disbursements to Dec. 31/07. """" Aug. 16/06. Bonds redeemed— 5,000 at no $5i50O Commission at J4% 12.50 Accrued interest 37.30 $S5S0 Feb. 15/07. Bonds redeemed: 4,000 at 108 $4,320 2,000 at no 2,200 1,000 at 112 1,150 $7,640 Commission 17.50 Accrued interest 52.50 $7,710 Aug. 12/07. Bonds redeemed: 9,000 at 90 $8,100 1,000 at par 1,000 $9,100 Commission 250 Accrued interest 70 9420 Dec 31/07. Compensation of trustee $100 Advertising 50 150 $22^30 Cash balance in hands of trustees Dec. 31/07 Received in January, 1908, viz. : S. F. deposit for 6 mo. ended Dec. 31/07, 110,000 tons at 5c 5,500 Jan. /08. Coupons on 22 bonds in S. F 660 Interest allowed on balance to 12/31/08 100 $180 6,260 $6,440 Prepare entries to state properly on the books of the Virginia Coal Co, all Sinking Fund transactions. 314 315 r Accountancy Problems and Solutions. Auditing. Weclieiiliy, February 2, !9I0~I.I5 to 4.15 P. M.. only. Answer lo questions but no more. Answers in excess of the number required will not be considered. Do not repeat questions but write tmswers only, designating by number as in question paper. Check (/) the number of each one of the questions you have answered. Each com^ plete answer will receive lo credits. Papers entitled to 75 or more credits will be accepted. 1. An insurance company buys $50,000 7% 10 year bonds at 116 for investment. The bonds will mature at the expiration of 5 years. How should this purchase be entered in the balance sheet? What should be done with the premium? 2. If in the course of an audit it appeared that capital expenditures had been charged against profit and loss account or items of expense charged against improvement account, what should the auditor do in respect to inch charges? 3. What entry should be made in the books of a company of goods sent out on consigment? When goods have been sold and the consignee sends in his account sales, what entries should be made? 4. A company has caused a revaluation to be made of its plant, ma- chinery and buildings, and the new values are found to be greater than the book values. How would you treat such excess in (a) the balance sheet, (b) the profit and loss account? 5. In auditing the books of a corporation the president's salary account was found to have been credited with a bonus of $5,000 for "extra services." Under what conditions would you pass this entry? 4 An annual audit of the books of a copartnership whose fiscal year dosed with the calendar year, was begun on January 26, 1909. How would you proceed to prove statement of cash as per their trial balance? 7. How should an auditor ascertain if the following assets appearing in balance sheet, have been taken at a fair value: (a) merchandise, (b) machinery, (c) real estate? 8. What account should be charged with discount on bonds sold for BBiistruction and the expense of disposing of such bonds? Give reasons. 9. Is it the duty of an auditor of a bank actually to inspect the ■ecurities representing the bank's investments? Why? 316 12 C p. A, Examination Papers. 10. An auditor who is employed to close the accounts of a firm and prepare a balance sheet, finds that the current work is behind and that no trial balance has been effected for over a year. How should he proceed? 11. Would the auditor of a firm ot corporation be warranted in revis- ing the form and wording of a balance sheet before attaching his certificate? Why? !. Is it necessary to verify the stock ledger of a corporation? Why? 13. The preferred stock of a corporation is entitled to cumulative dividends of 7% a year. The company has paid dividends on this stock at the rate of 5% a year for 10 years. How should the arrears |of dividends appear on the balance sheet? 14. Suggest a system for keeping a petty cash book and petty cash vouchers. Give forms. 15. Are there in your opinion any reasons in favor of continuous audit- ing? If so, give such reasons. Theory of Accounts. Tuesday. February 1. 1910— 9.15 A. M. to 12.15 P. M. only. Answer 10 questions but no more. Answers in excess of the number required will not be considered. Do not repeat questions but write answers only, designating by number as in question paper. Check (*^) the number of each one of the questions you have answered. Each com- plete answer will receive 10 credits. Papers entitled to 75 or more credits will be accepted. Ll\ K^f"' a^d differentiate the following kinds of statements: (a) trail ba ance, (b) balance sheet, (c) statement of assets and liabilities, (d) statement of affairs. ^ Tfirn,^.?^^'" the purpose and the manner of keeping a private ledger of a nrm or corporation. d«ft on C fn « f H*?' *? ^'"^'" "*"* •'' ^""^ B. a three months iudifferLrr*!;*^ ^"L' ■' *''°°° ""^^ *"> C. owes A. To adjust ftl dtrr K "'^ '* ^T """""^ °" A- ^' *'.«»• Assuming hat the drafts have been accepted by the respective parties state what entri.^ his books should show. Pames, sute what entries 317 w Accountancy Problems and Solutions. are or^n!rrt'^\'"'""t °^ ^^^^ms in general use. What book. w4h vrt *! """Ti '^'!f °^ ^"°"« °' =^ '"'^'^"^"tile concern with Which you are acquamted and describe briefly, the use of each. s^ ° o^r.c? r -r^ou- r dira^rbaiT^Tp^ st'a^e wheZr*" '""" M " •"""*''' '""^^^ *°' '^ '""'=="'tile concern and Sg reaso;/°" *°"" "~"""^'"' ""^ "^' »' => '^'"«' »' '"ose leaf book. 10. What is a controlling account? Give an example. #' 11. How would you deal with items accrued and due (such as rent r r rscaTtn "df ^ -"-^ ''°'- ^^ — °' ^ "-^^ - ^e . '^ isVvShTr^f:: *' '""""'"^ appropriations for the year ,904 and Bond redemption Bond interest . ' $2,000 Salaries ®0O Contingent expenses ...!..... ^"^^ Police 500 Poor ...,. ^'^°^ Care of streets 750 Lighting * ] i»20o Education 950 3.000 $13,500 ' ' ■ # Open the village books in accordance therewith. How will collection of taxes be recorded? How will H.«K«rc««« ^ . " collection ot recorrleH? wi,.* n ^ T T disbursements against appropriations be recorded? What will the balances of the accounts at any date show ? 318 C. P, A. Examination Papers. ' 13. What is a contingent liability? Give examples. In what form should such liabihties appear in a financial statement? 14. Is depreciation of plant a legitimate element of the cost of goods produced? Explain the method employed to keep plant in efficient condi- tion out of earnings. *^ 15. Give the ruling of a stock or shares ledger for a corporation. Show how this book is kept and indicate its relation to the general books of account. Commercial Law. Thursday, February 3. 1910— 9.15 A. M. lo 12.15 P.M.. only. Answer 10 questions hut no more. Answers in excess of the number required will not he considered. Do not repeat questions hut write answers only, designating by number as in question paper. Check (f^) the number of each one of the questions you have answered. Each com- plete answer will receive 10 credits. Papers entitled to 75 or more credits will he accepted. 1. What is the meaning of the term " in escrow"? 2. What is a contract? 3. What are the principal elements in every contract ? "4- What is a partnership? *S' What is an executor? 6. Can a partnership hold real estate in its firm name? V mat will be the result if the title to real estate purchased by part- nership funds is taken in the name of one of the partners? J- a What is an accommodation party and what is his liability? alces bl mtde?""' "'"""'^ *' ''"^ '''°"" P"^^"*""** °f d"** or accept- 'la Does the certification of a check discharge the drawer from liability? Jh' ^^' "ability. « any, does a bank assume in paying a check to a holder who claims under a forged indorsement? 319 Accountancy Problems and Solutions. 12. a Will an assignee acting in good faith be protected in his acU i£ the assignment is afterward set aside as fraudulent? b What is the general personal liability of an assignee for damages resulting from his acts or omissions? r What compensation is allowed an assignee? * 13. When may an executor voluntarily present his account and ask that the same be judicially settled? 14. II How many witnesses arc necessary to the valid execution of t Wlllf b What persons under the statutes are permitted to make wills of per- sonal property? of real property? c May any of the formalities necessary to the execution of a will be omitted in the execution of a codicil? *" IS In what cases would the signing of the firm name to a note by one member of a firm without consultation with the other member or mem- bers, bind the firm? 320 C. P. A. Examination Papers. The State Board of Accountancy of Ohio. Examination in Practical Accounting.— Part I * Wednesday. March 9. 1910—8.30 A. M. Time allowance, 4% hours. Problem No. 1. A and B are partners and share profits in proportion to their capital invested. C, D and E are partners, having equal interest in the business. A balance sheet from the books of A and B is as follows : Assets : Accounts Receivable $2,500.00 Cash in Bank 1,000.00 Merchandise as per inventory 2,500.00 $6,000.00 Liabilities : Accounts Payable $1,200.00 A*s investment 1,500.00 B's investment 2,000.00 Bills Payable 500.00 Undivided Profits 800.00 $6,000.00 C, D and E kept no books, but have the following Assets and Liabil- ities : Assets : Cash in Bank $800.00 Accounts Receivable 3,000.00 Merchandise as per inventory 3,000.00 Real Estate— Warehouse 1,200.00 $8,000.00 Liabilities : Mortgage on Real Estate $500.00 Accounts Pa3rable 300.00 $800.00 ♦ For Part Two, Problem No. 4, v. Part I, pp. 84-86. ^^ Accountancy Problems and Solutions. A and B arrange with C, D and E to form a corporation with a caiiital stock of $15,000.00. The corporation to assume all Assets and Liabilities of both partnerships. Each partnership agrees that a reserve of 10 per cent against Accounts Receivable shall be created and charged against their individual partnership holdings prior to the consolidation. The entire capital stock is to be alloted to A, B, C, D and E, in pro- portion to their partnership holdings. The organization expense paid by the new company was $200.00. Make a Balance Sheet for the new company, and give each of the aforesaid partners his allotment of shares. State Board of Accountancy of Ohio. Emminatioii in Practical Accoiinting.-Part I. ProDiem No. 3. A trial balance taken from the books of a company which buys and sells merchandise and also manufactures part of the merchandise it sells shows the following accounts. From the list, and without using figures, construct in the form you consider best a (a) Balance Sheet; (b) Manufacturing Account; (c) Trading Account ; (d) Profit and Loss Account. Advertising; Accounts Payable; Accounts Receivable; Bills Payable; Bills Receivable; Bad and Doubtful Assets; Cash; Capital Stock; Depredation; Discounts Allowed; Discounts Received; Freight— Raw Material; Freight— Merchandise Purchased; Fuel; Furniture and Fixtures; Interest Paid; Insurance— Plant; Factory Supplies; Lttht; 322 C. P. A, Examination Papers, Labor — ^Warehouse ; Machinery Repairs; Insurance — Merchandise ; Own Product Returned by Customers; Office Expense; Machinery and Tools; Land and Buildings— Factory ; Office Salaries; Purchases — Merchandise ; Printing and Stationery; Postage ; Donations ; Raw Material; Rent— Factory; Rent— Store and Office; Reserve for Bad and Doubtful Accounts; Reserve for Depreciation; Sundry Factory Expense; Salaries— Factory Management ; Salaries— Sales Department; Sales — Merchandise Purchased ; Sales — Own product ; Traveling Expense — Sales Department; Taxes ; Undivided Profits End of Last Year; Wages, Factory. Preparatory to closing the accounts the following schedule of inventories has been made: Inventory of Raw Material: Goods in Process; Manufactured Product; Factory Supplies; Merchandise Purchased; Unexpired Insurance — Plant ; Unexpired Insurance — Merchandise ; Examination in Practical Accounting. — ^Part I. Problem No. 2. Trial Balance After Closing Books. 1908. Real Estate $75,000.00 Plant and Machinery J27 qoo 00 Horses and Wagons ][\ 23looo!oo 323 * ■ •- Accoumimwy Problems and Solutions. Patents and Groodwili. $30,000.00 Inventory 7S,ooaoo Accounts Receivable , , 52,000.00 Cash in Bank 33,000.00 Bills Receivable 19,000.00 Capital Stock Accounts Payable Notes Payable Pttifit and Loss:. , $300,000.00 34,000.00 45,000.00 55,000.00 .1 , $434,000.00 $434,000.00 $78,000.00 1909k Real Estate _ Plant and Machinery. 110,000.00 Horses and Wagons 21,000.00 Patents and Goodwill... 30,000.00 Inventory 91,000.00 Accounts Receivable 50,000.00 laJUli in Hank -m 000.00 Bills Receivable 17 000.00 Capital Stock Accounts Payable Notes Payable. Branch House Accounts 25,000.00 Moftgige , ., Profit and Loss $300,000.00 34,000.00 I5i0oaoo 30,000.00 87,000.00 $462,ooaoo $462,oooxx> From the above two trial balances, which show that a net profit of l32jOoo.oo has been earned during the year 1909, prepare an account show- ing what has become of the profits earned in 1909. C. P. A. Examination Papers, The State Board of Accountancy of Ohio. iirr'"""_ Examination in Commercial Law as Affecting Accountancy Tuesday March 8. 1910-7:30 P. M. Time allowance, 2% hours. Note.— Do not repeat questions, but refer to same by number and initial on left-hand margin of sheets. These question papers must be returned to the examiner in charge at the same time that the examination papers ore handed in. 1. (a) What is a corporation? (b) What is a charter of a corporation? (c) Distinguish between a public corporation and a private corporation? (d) How is a corporation organized? (e) Through whom does a corporation act in transacting its business? 2. (a) What are the essential elements of a partnership? (b) What are the articles of co-partnership and are they essential to a partnership ? (c) Can a partner sell his interest in a firm, and if so would the purchaser be a member of the firm? (d) What right has a partner to bind the firm? (e) In the event that the name of a partnership does not clearly show who all of the principals of the firm are, what is necessary for such a firm to do in order to bring suit? (f ) Can a partner bring a suit against the firm of which he is a member, or can the firm bring suit against one of its members for the collection of a debt? 3. (a) What is a contract? (b) What are the essentials of a valid contract? (c) How does every contract originate? (d) Name three or more contracts that must be in writing in order to be enforced. (e) What rights under a contract may be assigned and what rights may not be assigned? (f) When does the statute of limitation begin to run? (g) What is the statute of limitation in Ohio on Notes, Sealed Instru- ments, and Open Accounts? 4. (a) What is a negotiable instrument? (b) What are the words of negotiability? (c) What are the principal classes of instruments which are usually . made in such form as to be negotiable? ABA: 325 ■■■■I I Accountancy Problems and Solutions. (d) What is meant by "accommodation paper"? (c) What are the rights and liabilities of parties to accommodation fiper? 5- (a) What is agency? (b) What is the duty of persons dealing with an agent with reference to the extent of the agent's authority? (c) Where the agent discloses his principal and acts within the scope of his authority, what is the principal's liability to third parties? (d) What remedy has a principal in case his agent pledges negotiable paper belonging to him? 6. (a) What is the difference between an assignee and a receiver? (b) Under what conditions will an assignment for the benefit of cred- itors be set aside ? (c) How must an assignee qualify? id) What is an assignee's duty as to accounting? 7. (a) What is cumulative preferred stock? Wherein does it differ from non-cumulative stock? (b) What are a stockholder's rights with respect to the books of a corporation? (c) Under what theory is a corporation stockholder liable to creditors for unpaid subscriptions to corporation stock? (d) Out of what fund may dividends be paid? (e) If dividends are not paid in accordance with your answer to the preceding question, have the creditors of the corporation any action against the company or its stockholders ? a What are the legal qualifications of a Certified PubHc Accountant in Ohio ? The State Board of Accountancy of Ohio. Examinalion in Auditing. Tuesday. March 8. 1910— 2 A. M. Time allowance, 3% hours. Note.— Do not repeat questions, but refer to same by number and initial m left-hand margin of sheets. These question papers must be returned io the examiner in charge at the same time that the examination papers are handed in. I. In making an audit of the books of a corporation whose transactions ire so numerous as to preclude the practicability of examining all entries In detail or checking all postings, what course would you pursue in your eaomination to insure the correctness of the balance sheet? 326 C. P. A. Examination Papers. •. In making a complete audit how would you determine the cor- rectness of the following items on the balance sheet? (a) Customers' Accounts ; (b) Bank Balances; (c) Bills Receivable; (d) Securities; (e) Inventory of Finished and Raw Materials. 3. Under instructions calling for a complete audit and verification oi all entries, what supporting data would you require for the following:* (a) Purchases; (b) Returned Purchases; (c) Sales; (d) Returned Sales; (e) Cash Receipts; (f) Cash Payments; (g) Journal Entries. 4. On what basis should the following assets be valued in the prepara- tion of a balance sheet? (a) Manufactured Goods; (b) Goods in Process of Manufacture; (c) Raw Material; (d) Accounts Receivable; (e) Stocks, Bonds and Similar Investments; (f) Bills Receivable; (g) Patterns; (h) Patents. $. A salt company has completed a manufacturing plant, the machinery and equipment cost being $250,000.00. It is assumed that because of the nature of the business the entire machinery and equipment will have to be replaced every several years. In such a case how would you recommend that current repair and maintenance charges should be handled? 6. The profit and loss account of a manufacturing company, at the close of the fiscal year, shows on the debit side — stock on hand at beginning of the year, purchases of raw material, manufacturing expenses, general and selling expenses; and on the credit side — sales, stock on hand at the close of the year. Does the balance of these accounts constitute the net profits for the fiscal year, or should other charges be taken into account? If so, what are they? 7. You are sending one of your assistants to make an audit of the books of a company after the close of their fiscal year engaged in wholesale merchandising. In the form of instructions to him state briefly the suc- cessive stepts he is to take in making this audit Also give him m memoranda of what he shall require of the company preliminary to the commencement of his work. r Accountancy Problems and Solutions, Tlic State Board of Accountancy of Ohio. Examination in Theory of Accounts. Tuoday. March 8. 1910—9 A. M. Time allowance, 3% hours. Note.— Do not repeat questions, but refer to same by number and initial on left-hand margin of sheets. These question papers must be returned io the examiner in charge at the same time that the examination papers me handed in. I. (a) In your own language give a short description of the philosophy and the fundamental principals underlying any system of accounts based on theories of double-entry bookkeeping. (b) What is the nature of the accounts on the debit or left-hand side of the ledger? (c) What is the nature of the accounts on the credit or right-hand side of the ledger? a. (a) Distinguish between "Receipts and Disbursements Revenue and Expense." (b) Distinguish between " Fixed Assets " and " Current Assets. 3. What is the meaning of the term and how are the following accounts used? (a) Capital Stock; (b) Funded Debt; (c) Surplus; (d) Dividend; (e) Reserve Accounts; (f) Reserve Funds; (g) Expense; (h) Venture; (i) Suspense. 4 Describe fully the various books and their uses in a business with which you are entirely familiar. 5. Draw up a balance sheet for a business of considerable magnitude, Oilier than a mercantile or trading buiness, having a share capital of several classes of shares, bonded indebtedness, floating debts, depreciation and other reserves. 4 (a) Give a definition of "Depreciation" and state how and why ft C. p. A, Examination Papers. (b) Give at least two methods of treating depreciation on books of TrMake the necessary journal entries to illustrate the two methods of setting up depreciation on the books of account 7. What, on the books of a company, would be the proper method of treating cash accounts, as follows? (a) On capital expenditures. (b) On expenditures for materials for manufacturmg purposes. (c) On discounts allowed to customers on purchases for each, where the trade terms are a fixed date for payment (d) An issue of bonds is made for the construction of a plant It takes two years to erect and put in operation. To what should the interest on the bonds be charged? 8. What are the chief considerations to be kept in mind in formulating an accounting system for any business? 9. What are the general classifications of cost, the sum of which makes up the cost of a manufactured article when sold? 10. On the theory that accounts may fall into the following classifica- tions: (a) Accounts with individuals; (b) Accounts with things; (c) Accounts with forces or ideas; give a number of illustrations or names of accounts in a modem account- ing system under each of these heads. 329 liiiiiL ^ Accountancy Problems and Solutions. Papers Set by The Chartered Accountants Association of Manitoba. Examination Papers. May 13. 1910. htemiecUate.— Mathematics. Time, 3 hours. I. Simplify — ^*^ i (I i/io)a -^(^ 3/5+Q/2.S) f X(i 12/17— ^^/.ti^a fa i/a~i 3 1/2— (3 1/2— I 2/3) [].-^ ^ ^A 3 1/2 + 1 1/6 ^|,\ 279. 8003 X. 0069 2. (a) Extract the square root of .00822649. (b) Extract the cube root of 12812904. 3. What amount will be required to be raised annually at the begin- nmg of each year for five years so that there may be sufficient to provide a sinkmg fund of $25,000 at the end of the fifth year and to pay interest on $25,000 m the meanwhile at 5 per cent, per annum, money being worth 4 per cent. ? 4. $792 56-100 Winnipeg, April 14, 1910. One hundred days after date I promise to pay William Jones or order seven hundred and ninety-two 56-100 dollars, with interest at 7%, at the Bank of Montreal here. Value received. James Thompson. Find the proceeds of the above note discounted on the 23d April at 8%. refiizet Z\Z ' K V"' ^^ '^' Three and-a-half Per Cents at 92K and realzes $18,550. If he mvests two-fifths of the proceeds in the Four Per .hTJ ^' u • '^^ ^"™^'"*^*^^ »" *^« Three Per Cents at 90, find the alteration m his income. vi' I ^ ^rT u"^' "''' P^^ ""^- ^''"'^'' *^^ ^"'^'*^^* ^" which is payable yearly and which are to be paid off at par three years after the time of tTe bonds > """"^^ ^ '^°'"**^ ^ ^^^ ''^"^■' "^^^^ ^"''^ '^*^"'^ ^^ ^^''^^ ^°'* 7. A shipment of cattle was insured at i per cent, to cover the value the premium and $500 additional. The premium was $100. Find the value of the cattle. 330 C. P. A. Examination Papers. 8. A Winnipeg merchant owes 18,000 francs in Paris. He buys a draft on London when sterling exchange is at 8 and when one pound is worth 25 1-5 francs. What does he pay for the draft? 9. Find the due date of the balance of the following account, and what amount will be required to settle it on the ist of May, 1910, interest being charged at the rate of 6% per annum: Dr. To Mdse. at 30 days... $800 .. 500 . 700 . . 600 1910 Jan. I St. Jan. 20th. Feb. ist. Feb. 20th. (( it f€ tt tt tt tt tt ft U tt tt Cr. Feb. I St. By Cash... $500 Mar. 15th. By Cash... 275 Bookkeeping. — Practical and Theoretical. — Paper No. 1. Time, 35^ hours. 1. The position of A. Brown, brickmaker, is as follows : Assets. Plant $50,000.00 Lease 5,000.00 Horses and Equipment 10,000.00 Book Debts 5,000.00 Bricks on Hand 8,000.00 Fuel 2,000.00 Cash 100.00 Liabilities. Sundry Creditors $27,000.00 A. Brown, Capital Accoimt 53,100.00 $80,100.00 $80,100.00 J. Smith, in consideration of his paying $16,550.00 and giving his note for $10,000.00, is to be credited with a half-interest in the business, A. Brown's interest being correspondingly reduced. The note is discounted with the bank for $150.00, it being agreed that the business shall stand the cost Give the necessary journal entries to show these transactions, and thereafter draw up balance sheet showing the position of affairs at the beginning of the firm. 2. What do you understand by the following: Capital Expenditure; Revenue Ebcpenditure ; 331 ■ iiiiBlM^^^^^^^^^^^^^^^^^^ : Accountancy Problems and Solutions, Revenue Income; Loose Plant and Tools; Fixed Plant and Machinery; and give one typical example of illustrating each from any business you may be familiar with, 3. Explain the difference between gross and net profit, and from any business you may be familiar with draw up short accounts to illustrate your answer. 4. The partners in Question One, after two years' operations, decide to close their books, and arrive at a basis of dissolution. J. Smith is en- titled to draw $150.00 a month against his share of the profits. Both have freely withdrawn capital, as the following trial balance shows : Plant Horses, etc Accounts Bricks jj ricicmaKing ...•...,,«.,,,,,,,,,,, Fuel Bank J. Smith, Drawings. Rent A. Brown, Capital Account Wages Bille Receivable (being unpaid amount of origi- nal not granted by J. Smith) J. Smith, Capital Account Expenses Accounts Payable Teaming , , . , $50,000.00 4,000.00 10,000.00 7,000.00 7,500.00 9,000.00 2400.00 1,200.00 15.650.00 8,000.00 5,000.00 $28,500.00 20,000.00 9.750.00 1 5.000.00 40,000.00 6,500.00 $119,750.00 $119,750.00 Write 20 per cent, off plant. 25 per cent, off horses, and value the lease at $2,000.00. The profits or losses are to be equally divided. Dispensing with interest calculations, draw up profit and loss account and balance sheet, and in particular set forth in the latter all figures affecting the re- spective capital accounts. Give the necessary journal entries, including those for the complete closure of the books, in terms of your balance cl>UCi>Cii>l«* 5. What do you understand by an impairment of capital? Where such is met with, does it follow that the undertaking is in a bad way, and if not. illustrate what you consider a justifiable cause for such impairment? 332 C. p. A. Examination Papers. 6. Give in your own words what you understand from the following: Preferred Stock; Deferred Stock; Ordinary Stock; Debentures ; Mortgages. 7. A set of books have to be closed and a number of running expense accounts, such as insurance, taxes, advertising, wages, etc., contain amounts that are properly chargeable against the next year. Would you pass journal entries for these, and if so, give them? Would reversing entries be required, and if so, give them? Explain how the items might be dealt with in the books without the need of journal entries at all Which do you think is the better course? 8. What do you understand by " writing down " of assets and " writing up" of assets? If you can cite any instance where the "writing up" of assets is, in your opinion, justifiable, how would you suggest that such be dealt with in the accounts? 9. Give in your own words a clear description of bookkeeping, and state generally the reasons why all who are engaged in business should keep books. 10. You have been appointed bookkeeper to a wholesale business, the affairs of which, owing to inefficient keeping of accounts, have become in- volved. Apart altogether from systems in the generally understood sense of the terrn when applied to bookkeeping, can you state two fundamentals that should be kept clearly before you in evolving a satisfactory set of accounts ? Bookkeeping-Practical and Thecretical-PaperlNo. 2. Time, 3^^ hours. I. In the trial balance of a set of books you find the following: Depreciation ; Bad Debts; .Suspense ; Bad Debts Suspense; Goodwill ; Profit and Loss Account; Bills Receivable and Payable; Depreciation Fund; Preliminary Expenses; Interest Accrued; Reserve; Capital Account. 333 I ^ Accountancy Problems and Solutions. f .«< Write a few lines describing the nature of each, and how in most busi- nesses the need for these accounts arises. State those that might be either debit or credit balances, and if debit, what does it betoken ? 2. What do you understand by the phrase " the account is in credit." and can you name some accounts in speaking of which the term may aptly be applied? 3. Substituting imaginary figures in any kind of business at all that you may be most familiar with, submit in condensed form a typical trial balance, profit and loss account, and balance sheet of the business or un- dertaking selected. 4. How may a trader who does not draw up trading and profit and loss accounts, but who marshals his assets and liabilities at the end of each year, ascertain his annual gain or loss? Do you recommend this course of ascertaining profits, and if not, as a practical bookkeeper, point out the shortcomings of this method. 5. What do you understand when told that books are in true balance? In your own words, write a short description of what a trial balance con- veys to your mind. 6. You are manager of an agency and exchange business in Costa Rica. At the end of a year's operations you have to report the position of affairs to your principal in London, who handles large consignments of coffee, and on whom much of the sterling paper dealt in has been drawn. The following arc the balances: GOLD BALANCES. Glyn, Mills, Currie & Co., f 5,000 $24^00.00 Seaboard National Bank, N. Y 10,000.00 Otis, McAllister & Co., San Francisco 8,000.00 Alfred Jones, Capital Account $59,ooaoci Balance 16,600.00 $59,000.00 $59,ooaoo CUIUIENCY BALANCES. Working Expenses. $30,600.00 Commercial Bank 146,000.00 Exchange $310,000.00 Advances to Coffee Planters. 150,000.00 Balance 16,600.00 $326,600.00 $326,600.00 ^<3'w C. p. A. Examination Papers. The net gold liability being $16,600.00, provide for this at the rate of $2.00 currency for every dollar gold, and thereafter draw up balance sheet, grouping properly your gold and currency assets and liabilities, showing on profit and loss account the amount at debit or credit of that account. 7. Give in your own words some of the uses of the journal, and illus- trate with three or more typical entries, setting forth the manner in which you think a journal entry should be written and worded. 8. What do you understand by controlling accounts, and illustrate from any business you are familiar with the working of same, stating some of the advantages from the use of such? 9. Draw up a cash book where controlling accounts are kept, and give them, and in addition give three separate headings on both sides of the cash book for incoming and outgoing figures that are of frequent occur- rence throughout the month. What advantages are derived from these columns ? 10. You have been called upon to prepare the profit and loss account and balance sheet of a firm of architects. The only reliable book appears to be the ledger, and the following are the accounts as found therein: PETER SMITH. To Plans, etc $559-20 By Cash To Sundry Cash Outlays By Note on his behalf 8.75 By Allowance. $75.00 50.00 750 A. JONES. To Plans . $750.00 By Allowance $37-50 By Cash 1^50 E. LOCKWOOD. To Drawings To Cash for Sundry Out- lays $300.00 By Allowance $25.00 By Cash 283.30 8.30 E. BROWN. To Plans and Specifica- By Cash, tions for Block $5»7So.oo $2,750.00 To Salaries. SALARIES ACCOUNT. $1,570.00 335 I I i;p Accountancy Problems and Solutions. GENERAL EXPENSES. To Sundry Expenses.... I430.00 ToCash I ••••*•••• r To Deposits. BENT, LIGHT, ETC. $500.00 Via lurvr $3,270.80 By Withdrawals, $2,517.05 Prepare one summary from which may be seen the totals, both as to cash, business placed on the books, allowances and outstanding balances. With the help of such totals, open the necessary additional ledger accounts to throw the ledger into balance. From the resulting trial balance (which give) prepare a profit and loss account, seting aside 5% on the outstand- ing accounts, and draw up a balance sheet showing the profit or loss in equal portions on capital accounts "A." and "B." Partnership,. Time, 3 hours. 1. A., who was formerly the general manager for B., trading under the name of B. & Co., at a salary of $150 per month, entered into a new agreement with B. whereby in lieu of a salary he was to receive one-third of the profits of business. B. & Co. subsequently became insolvent. Had the creditors of B. & Co. any recourse against A.? State reasons. 2. If a partnership is formed for the prosecution of an illegal business, will the Court recognize its existence? (a) By enforcing its claim against others, or (b) By compelling either partner to account to the other for capital and profits in his hands, or (c) By forcing either to contribute his share of the loss to the other. 3. Has one partner authority— (a) To make an assignment to the official assignee of the firm prop- erty without the knowledge of his co-partner? (b) To bind the firm property by chattel mortgage given to secure a §im debt without the consent of his co-partner? 4. (a) Define partnership. (b) State the difference between co-owners and partners. 336 C. P. A. Examination Papers, 5. (a) A. and B. carry on business under the name of X. & Co. A. retires from the firm and gives no notice of his retirement. The old cus- tomers who knew of A.'s connection with X. & Co. continue to deal with it on the faith that A. is still a member of it. Is A. liable to the old cus- tomers? Give reasons. (b) Does A. incur any liability to new customers of X. & Co.? (c) Suppose if, on A.'s retirement, C. joined B., and B, and C. carry on business as X. & Co., and the old customers of X. & Co. go on deal- ing with it without notice of A.'s retirement or C.'s admission, can an old customer maintain an action against A., B. and C. jointly for a debt contracted by X. & Co. after A. retires, or can he elect to sue A. and B. or B. and C? Give reasons. 6. Can an infant be a partner? Whilst he is an infant does he become responsible for the debts of the firm? Can a judgment creditor of the partnership cause an execution to be levied against the infant's share in the partnership ? 7. If a member of a partnership becomes insane, is he responsible for the subsequent misconduct of the other members? Would the insanity of a partner immediately dissolve a partnership? 8. Where a firm in the course of its business receives money belong- ing to other people and one of the partners misapplies that money whilst it is in the custody of the firm, must the firm make it good? 9. Does the person who is admitted as a partner into an existing firm become liable to the creditors of the firm for anything done before he becomes a partner? 10. (a) Can a majority of the partners expel any partner where the partnership agreement is silent on this point? (b) What rights have the legal representatives of a deceased partner with respect to the management of the partnership affairs? Banking. Time, 3 hours. 1. What class of securities other than notes and drafts will a bank make advances upon? Name three, and state fully the nature of each. 2. A. & Co. are doing a large country business, and on the first of each month make thirty-day drafts upon their customers for the previous month's purchases, some of which are accepted and paid and others arc 337 t Accountancy Problems and Solutions. refmcd. All drafts are deposited with the bank as collateral security for Lt^'l"x I- ^T *^' ^°" '^''"^ ^^"^^ ^ '^' best method of keep- ing track of the collateral deposited with the bank. 3. What is the dlffereoce between inland and foreign exchange? 4. What is the difference between a « Demand Draft" a " Siirht Draft " and a "Time Draft"? Give one of each. ^igm uraft tJ'w^.Il !nH ^^^^fV"^"^^""^ of a promissory note for $i,ooo made by K. and endorsed by D., B. and C At maturity the note is protested or non-payment Should P. sue and recover from C, would C Save any r«h s aganist p. and B.? If, however, P. should recover from D., what recourse would D. have as against maker and other endorsers? Give reasons. 6. Give in a few words what you understand by— (a) Bailee Receipt; (b) Warehouse Receipt; (c) Letter of Hypothecation; and in what way are these used in obtaining credit? 7. What is the legal rate of interest in Canada? What is the highest rate of mterest banks can charge? Under the Usury Act what sle highest rate of interest that can be collected? prlsf Howlho'i? '^'' «7;.«rtial to a valid protest and notice of protest How should notice of dishonor be given and within what time? fhf^ ^" ^u^ ^^'^ ""^ ^ ^'■'" '^^^"Sr a bank for advances, if the members of the firm have accounts with credit balances with the firm's tenk^rsc^n the bank apply them in liquidation of the firm^s indebtedn^s? H not ;h^? 10. If a note or a draft is made payable to a particular oerson fnr ^» ample. "Pay John Smith the sum of, etc.," is it neSabl^ If 'sl^^^^^^^ can It be made not negotiable? s u negotiable. If so, how u. A bill is payable at a determinable future time- (a) At sight or at a fixed period after date or sight; wh ch i? certain to hf' ^^t' Tl *'^ °'^""^"^^ ^^ ^ ^P^"^' ^^^ wnicli IS certain to happen, though the time of happening is uncertain wll t ^^r "^''" ^' ^""^ ^'°°- ^- ^^^^^ the draft, payable at a bank. When the bill matures the bank is the holder. Is pres^ntmen necessa^^ If 80, when must it be presented? cniment necessary? C. P. A, Examination Papers. 13. What is a restrictive endorsement? Give two examples of re- strictive endorsements. 14. M. draws a cheque for $500 in favor of P., but the next day he discovers that it should have been for $450, and requests the bank to stop payment. P. in the meantime has presented the cheque and had it marked. Can the bank refuse payment or must it pay the cheque? Give reasons for your answer. Company Law. Time, 3 hours. 1. (a) Under the Manitoba Joint Stock Companies Act, what per- centage of the capital stock of a company must be subscribed and what percentage of the stock subscribed must be paid before the company may commence business? (b) What percentage of the allotted stock of a company must be called in within one year from the company's incorporation? 2. Under the Manitoba Act what voting power is possessed by a share- holder? 3. A company's earnings for a year would enable it to declare a divi- dend of ten per cent The directors decline to declare a dividend, wishing to employ the profits in extending business, and a majority of the stock- holders agree. Can the dissenting shareholders obtain interference at law? 4. A by-law of a company empowered to carry on a general mercantile business provides that the company shall not enter into a contract where the amount involved is over $1,000 unless same is approved by a majority of the directors. The managing director orders goods for a larger amount Is the company bound in the absence of such approval where the seller is ignorant of the by-law? 5- (a) Keeping in mind Section 46 of the Manitoba Act, which pro- vides that each shareholder, until the whole amount of his stock has been paid up, shall be individually liable to the creditors of the company to an amount equal to that not paid thereon, may a company sell its shares as fully paid up at less than the par value thereof? (b) What provision is in the Alberta Act as to selling shares at a discount ? 339 Accountancy Problems and Solutions, 6, May a company incorporated to carry on a general trading business acquire and mortgage real estate for the purpose of its business ? 'Jlu ^r'°" ^ °f ?^ Manitoba Act prohibits a company from engaging Ife! sh^s'L a bal T ""k"" T'" ^ '^-^^"' ^^^ ^^^^^"^ '-- cnases sftares m a bank. Is such purchase valid? fi^ n^^- ^ P^'^^^^^^fP* ^ P^«««nt of shares in a company in considera- tion of his joining the board of directors? 9- Directors of a company indorse its note to enable it to make a loan. InlT 'V ^^^! ^''^ ^"^°"^'- ^' ^^ ^"^^'*^d to full indemnity from the subsequent mdorsers? la May an application for shares in a company be withdrawn before the company sends him notice of allotment? II. The promoters of a company before its incorporation emolov an accountant to prepare its prospectus, which the company makes use of May he recover for his services against the company? 12 Argue for or against the right of a company that is in debt paying dividends out of profits. P^^ymg Final. — ^Auditing. Time, 3 hours. voLhl^l"^ r" '°"'^*'''^ '*^'^"*^' '"^^^ P^y^^^« *° o'-d^^ sufficient Ztr u ^'''"''"' °' ''"*^*^ ^"°""^^? " "°'' «"^-^ what circum- ^7^Zu? '°" '''''' '"'^ ^'^""^^ ^^ "°"*^'^^^' ^"^ ^-^ -hat class r.L^!!!!*^ K "T^^ ^'''P^'"*^ statement of receipts and payments be tht w^H K^- ',f?-'°'; Of - trading company to ascertain whethe^ .l.n„lJ"i!^ *'^'! °^^ '"^""facturing company what classes of expenditure Should enter into the manufacturing or trading account, and what m[o the profit and loss account? temuiiiiig what are the « Divisible Profits " of a company. 340 C. p. ^. Examination Papers. 5. At the close of the year you are unable to attend at the office of a company you are auditor for to count the cash in hand. What steps would you take to enable you to certify to its correctness? 6. What methods would you adopt for the verification or confirmation of the following items: (a) Stock Sheets apd Material on Hand; (b) Book Debts; (c) Investments. Would you be justified in accepting certificates from the managing direc- tor, manager or other official as to their correctness? 7. What is the object of crediting the partners of a firm with interest on their capital before ascertaining the profits divisible between them? 8. In examining the securities (of a company you are auditor of) which consist of inscribed stocks, certificates for shares and bills receiv- able, what would be your procedure, and what main object would you have in view? 9. Would you consider that entries in the directors' minute book of a company were, in all cases, sufficient authority for you to approve all payments or transactions mentioned therein? If not, state some ex- ceptions. 10. Under what circumstances would an auditor of a company be jus- tified in refusing to give any certificate whatever to a balance sheet? 11. Among the assets on the balance sheet of an engineering firm whose accounts you are auditing you find an item of " Work in Progress, $125,000." What steps would you take to verify the correctness of this amount ? 12. What is a " Secret Reserve " ? Give three examples, showing how secret reserves can be formed. Advanced Bookkeeping and Accounts. — First Paper. Time, 3 hours. I. From the following trial balance of the Atlas Manufacturing Com- pany, Limited, compile balance sheet and profit and loss account as at the 31st December, 1909, in the form you would advise the company to adopt: First Call on Stock I500 Second Call on Stock 700 Winnipeg Trust Company (Debentures Deposited as Security for Loan, part of $100,000 issued) 20,000 Accountancy Problems and Solutions. I H, M Preliminary Expenses Property and Plant .'] ' l&chinery and Goodwill .'..,* New Property and Improvemms. .*.'.' ] Interim Dividend Paid Inventory of Stock .......**''* Accounts Receivable '**.,..'.. Interest on Loan and DebentiiVeV 'to 'jis^ December 1900 ' Bank Account Cash on Hand . Capital, 2,000 Shares of $ioo'eadi.\** Debentures ....... !T...". Winnipeg Trust Company Loan. " Accounts Payable '* Premium on Shares . Trading Account Reserve for Discounts and Bad Debts. Profit and Loss Account, after paying * Divi'dend ' ist January, 1908 3,000 200,000 50,000 50,000 9,940 10,500 5,000 4,500 21400 560 $200,000 100,000 15,000 6,500 3,500 50,000 600 $376,100 $376,100 Have you any criticism to make in regard to the trial balancIT by'the'^fbLwtg:' ^'"^ °" "^ ^^""*^' '^' -- $50,000, represented Loans Liabilities, $12,500 Accounts Payable 5^000 were: Assets. Cash in Bank.... trrfi**!- Mock m Hand ii>>n.r»> xxmju 35,000 Fixtures _, g^c Warehouse 10,000 Accounts Receivable ... 10,000 During the year 1909 their transactions Goods Bought Goods Sold ..]......[. $62,000 Paid for Goods by Cheque 80,000 p^Tn'r ^'T 1'^," °^ ^"iJ^sit'edinBai:. ■.■;:; :;:;;; H"^ Faid Cash for Salaries. ... /2,500 ^1?^. '"' i?'".'' '^^"- ^»8'' "a^doffi^' ExpenUs.' .' :;::■■■■ ''^ iJrawn out m Cash by M ^'^^ Drawn out in Cash by B. ''^*** Paid Cash for Traveling Expenses ^^^ Paid ash for Freight on Goods....*.*.'."; ^00 . Discount Allowed on Sales ''^oo 2,000 C. p. A. Examination Papers. Discount Received from Purchases 1,5^3 Goods Returned by Customers 1,250 Goods Returned to Manufacturers 1,500 Paid off Loan and Interest by Cheque 13,125 Paid Cash for Repairs to Warehouse 250 Bank Interest 250 Bank Commission loo Cheques Drawn on Bank to make Cash Payments 11,000 Stock on hand at the end of the year amounted to $33,750, and they owed $150 for freight and $562 for rent and taxes. Unexpired insurance amounted to $188. Allow for discount on accounts receivable $200 and $125 on accounts payable. No interest on capital or partners' salaries was to be charged, and profits were to be shared equally. Make trial balance as at December 31, 1909, and prepare trading and profit and loss accounts, capital accounts and balance sheet. 3. Brown and Jones have dry goods stores near each other. They de- cide that, by amalgamating their business and forming a joint stock com- pany, they can do a larger and more profitable business at less expense. Both have kept their books by single entry. You are called in to give the necessary statements to enable them to ascertain how they stand and to open the books of the Brown-Jones Company, Limited. You find the fol- lowing accounts in the ledgers, viz.: Brown's Ledger. Balances as at the ist August, 1909. Cash on Hand $250 Bank Balance 5,400 Cash Sales Book Debts 25,000 Bills Receivable 3^000 Store and Land 30,000 Fixtures 2^000 Wages and Expenses 4,000 Accounts Payable Bills Payable ....!..!..]!!].]!.!...! Brown's Drawings 10,000 Freight, Duty and Cartage g.ooo Inventory of goods, $8,700; unexpired insurance, $200. Jones* Ledger. Balances as at the ist August, IQ09. Cash on Hand ^^ Bank Balance « -qq Cash Sales .*.'.'.*.'.'.*.' .'..7. ".*.." '.".'.'.". 343 $10^000 6,000 2,550 $12,000 $5,000 3.000 Accmtnioncy Problems and Solutions, Stores and Land ■ • • ■ ■ - • ■ ■ $25*000 Fixtnres ■ • • • ■ ■ ' • ■ ■ i»500 WW affcs ,,,,,•»»••••••••#••••••■••■•••••••••••••••"•***•'■ ' Jones' Personal Account ^'O^o Expenses 1.500 Book Debts ^S-ooo Bills Receivable. ^'°°*' Freight, Duty and Cartage. 5,000 Accounts Payable Bills Payable .••.•••••••••••••••••••••••••••..•.•..•.•... Inventory of goods, $5,800; unexpired insurance, $100. The capital of the company is to be $150,000, in shares of $100 each, of which Brown is to take $70,000 and Jones $50,000. If the capital invested in the business of either exceeds these sums then they are to receive the surplus in cash, but if it is less then they are to pay in the difference in cash. The balance of the stock is subscribed and paid for in cash. Make necessary changes in Brown's and Jones' ledger balances to show standing of firms and capital invested, and give trial balance from com- pany's ledger after opening entries have been made. 4. A. and B. are partners in a business in which each has invested $15,000. They decide to take in a new partner, C, who is to put in $15,000 as his capital and in addition pay $2,000 for goodwill. State the different ways in which the sum paid for goodwill may be treated. Which method do you consider the more correct? Give your reasons. 5. M. and N., general merchants at Reaburn, make an assignment for the benefit of their creditors, and you are requested by the assignee to prepare a balance sheet, statement of affairs and deficiency account. You ind from the ledger that the assets and liabilities are as follows: Cash in Hand ..... $Soo Book Debts 7*000 Store and Land i5»ooo Farm Lands 10,000 Store Fixtures 400 Inventory. Hardware $3,000 Groceries 2,500 Dry Goods, ...... . . . 4,000 Boots and Shoes... 1,100 Liabilities. Bills Payable Accounts Payable Mortgage on Farm Lands. Mortgage on Store....... N. Capital $8,000 6,000 5,000 8,000 12,000 8,000 *s Drawings. ,P.*s Drawings $10,600 2)100 1400 $47,000 m \i C. P. A. Examination Papers. On a valuation of the assets being made, it is found that of the book debts $4,000 are good, $2,000 doubtful and $1,000 bad, and in order to be on the safe side 10 per cent, is to be deducted from the good, 40 per cent, from the doubtful and the bad are not to be taken in. The store and land are valued at 20 per cent, and the farm lands at 10 per cent, less than they stand at in the ledger, the fixtures are only worth 60 per cent, on the dollar and the inventories are to be reduced as follows : Hardware 10 per cent., groceries 15 per cent., dry goods 30 per cent, and boots and shoes 25 per cent. M. has property valued at $1,000 and N. has no assets outside of the partnership. Give statement of affairs and deficiency account $47,000 Advanced Bookkeeping and Accounts. — ^Second Paper. (o) Trustees' and Executors* Accounts. Time, 3 hours. 1. Explain the difference between an executor and administrator, and state by whom each is appointed. 2. What are the first duties of an executor or administrator after the probate of the Will or Letters of Administration have been granted? 3. Unless otherwise authorized by the will, in what securities must the executor invest the moneys intrusted to him? 4. A corporation issues lo-year bonds to the amount of $50,000.00, se- curing 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 pay- ments be made on the ist of January in each year. Give the amount of this annual payment, interest compounded at 6%? 5. In the estate of a certain testator the amount of cash on hand after paying all bequests is $10,000.00. This the executor invests as follows, as at January i, 1909: $5,000.00 in first mortgage on real estate valued at $9,000.00, bearing interest at 6% ; 1,250 shares La Rose Gold Mine Stock at $4.00 (par value, $5.00), dividends at 3% per quarter, payable January 31st and April 30th. On May 31st he sells the 1,250 shares at $3.00 and invests the proceeds, together with dividends paid, in 20 shares Bank of Hamilton Stock at 205, paying commission and brokerage charges of $25.00. On September 30th he sells the 20 shares Bank of Hamilton Stock at 220 and invests the proceeds in first mortgage on real estate valued at $7,000.00, bearing inter- est at 6%, payable quarterly. 345 II m Accountancy Problems and Solutions. Give executor's profit and loss account as at December 31 igoo and show position of estate at that time, payments of interest on 'both mort- mtS^ mwrng been made. (b) Cost Accounts. I. Explain the uses of a cost accounts system and state the advantages to a company employing such a system over a company basing their costs on tlic profit and loss account at the end of the year. Give definitions of the following: Prime Cost; Laid Down Cost; Gross Profit; Productive Labor; Machine Cost 3» What is your interpretation of indirect or overhead expenses? 4. In a manufacturing company employing a cost accounts system what disposition would you make of the following: Depreciation on Plant; Depreciation on Goodwill; Depreciation on Stock; Depreciation on Accounts Receivable; Depreciation on Factory Property. 5. State briefly the duties of an auditor in connection with the cost ac counts system in auditing the books of a manufacturing company employ- ing such a system. ^ ^ ^ empioy Joint Stock and Partnership Accounts. Time, 3 hours. Ji f .T^^"^ *l ^""I"^^^ "^'^^ ^ "^^'^^^ °^ ^'«^'«»' »'n shares of $100 each, ;« t^fee o^^^ the busmess of A., B. & Co. The assets to be acquired arc (I) buildings, $30000; (2) machinery, $18,000; (3) stock. $20,000. ^l Z"^Tr *!: *:^»r.^^« ^^^ d^^^« and discharge the liabilities. fnirZ ^ Pa^d inclusive of goodwill, is fixed at $80,000, payable as ^ $50,000 m cash and as to the balance in fully paid shares of the com- Cl. /'°'^'^*"'t'' 'f'"'"^ ^'^^^""^ 700 shares to the public, payable te per share on apphcation and $50 on allotment; 600 shares are applied Z^Vj^sV^^^ ist February, 1910, on which date the'ven- for sumnLIf I ''^: ^'^''''^ ^*^'°""*^ ^'^ ^^P^ ^y the bank for sums payable on application and allotment. On 28th Februarv the ainoiiiits due on alotment had been paid on 500 shares, and on that date C. P. A. Examination Papers, the sums at credit of the bank accounts were transferred to a general bank account and a cheque drawn in favor of the vendors for $30,000 to account. Prepare entries, in journal form, recording these transactions in the books of the company, and show the various ledger accounts. 2. Prepare a balance sheet as at 31st December, 1909, of the Winnipeg Manufacturing Company, Limited (which may be engaged in any form of manufacturing you please). Insert figures for all the usual items for the business you select, showing in particular the following items, or such of them as you think should appear on the balance sheet: Capital authorized, subscribed and paid up; Amount of calls in arrears ; Amounts received in respect of forfeited shares reissued: Amounts received in respect of forfeited shares not reissued; Contingent liability in respect of bills receivable under discount; Liability in respect of cumulative preference dividend which has been passed for the last two years ; Reserve not specially invested. State briefly the arguments in favor of your method of treatment of the above items. 3. A company borrows $120,000 for a period of ten years to pay off an existing loan at higher rate of interest, paying in connection therewith in brokerage and costs $2,500. State briefly how you would treat this item of $2,500, giving your reasons. 4. (a) Outline the duties of the secretary of a limited company in con- nection with the transfer of the company's shares. (b) Give rulings for a simple form of transfer register and stock ledger. 5. A. and B. are partners, sharing profits and losses in proportion to their capitals, which are: A., $21,000; B., $14,000 — as brought out in the balance sheet. They assume C. as partner on condition — (a) That he accepts the balance sheet as correct, $5,000 to be inserted for goodwill and added ratably to the capital of A. and B. (b) That he pays cash into the new firm sufficient to give him one- fifth share of the whole business, the ratio of A.'s capital to B.'s remain- ing unchanged. Show the entries required to record these transactions and the capital account of each partner as it will stand after the transactions are carried through. Show the amount of cash paid in by C, and state in what pro- portions each partner shares in the profits and losses of the new firm. 6. Brown and Black are partners carrying on a business in Winnipeg. On 31st December, 1909, after adding profits for the past half year, Brown's capital amounted to $15,000 and Black's to $10,000. On that date they take into partnership Green, upon the following terms, viz., he is to bring in capital amounting to $2,500, and each partner is to be credited 347 ?! Accountmcy Problems and Solutions, with interest on his capital at s% per annum. All profits (after debiting interest) up to $5,000 are to be shared by Brown and Black exclusively in proportion to the amounts of their capital at 31st December, 1909. All profits in excess of $5,000 are to be shared equally by the three partners. Accounts are to be prepared and profits and interest credited half-yearly. Green is to be credited with a salary of $1,000 per annum. On 30th June* 1910, the profits divisible after debiting Green's salary, which he has drawn' but before charging interest on partners* capital, amounted to $7,500. The partners' withdrawals, which are not chargeable with interest, were: Brown $2,500, Black $2,000 and Green $750. Draw up partners' separate accounts as they should stand on July i, 1910. The partnership agreement does not make any mention of what is to be done if the profit and loss account shows a loss. Suppose that that the above $7,500 had been a loss instead of a profit. State briefly how you would have treated it and give a reason for your answer. 7. You are called in by two or more persons contemplating partner- ship to meet their lawyer and consult with him as to the clauses to be inserted in the partnership agreement in connection with the keeping of the partnership accounts and the financial relationships of the partners. Mention any points which occur to you which you would suggest being provided for to make the agreement as satisfactory as possible from an accountant's point of view. 8. You are requested by a firm carrying on business in Winnipeg to supervise their bookkeeper in the writing up of the partnership books. You find that A. had $10,000 at his credit at the date of the last balance Sheet and that this has since been reduced to $8,000. You also find that lie has been receiving a share of the profits. You are told, however, that lie is not a partner and that the $8,000 is to be treated as a loan. ' Can tils be the case, and if so how would you expect to find that A. had pro- tected himself from the risk of being treated as a partner in the event of the insolvency of the firm? In the case of such insolvency would A's position diflfer from that of an ordinary lender, and if so, in what way? If A. had been a limited partner, could he legally have made the above feduction in the amount at his credit, and if not, what would you have advised on finding that he had done so? Give reasons for your answer. C. P. A. Examination Papers, 2. Where a debtor refuses to make an assignment for the benefit of his creditors have the creditors any means of forcing him into liquidation? 3. A debtor making an assignment has a burdensome lease and shares in a bank which is being wound up and to which double liability attaches. Is the assignee obliged to take these over with the rest of the assets? 4. Is it necessary that an assignment for benefit of creditors under the act be registered in order that it may be valid? 5. May one partner make an assignment for the benefit of the firm's creditors? 6. What remedy has the assignee or creditors to compel the assignor to make disclosure as to his assets and affairs of his estate? 7. If an assignee before distribution has notice of a claim, but the creditor has failed, though notified to do so, to put in proof of claim, may the assignee distribute the estate without regard to the claim? & Is a payment of money by a debtor to his creditor open to attack as a fraudulent preference? 9. A debtor executed a chattel mortgage in favor of a money lender in consideration of a present cash advance, which, to the money lender's knowledge, was intended to be and was paid to a creditor. Is the chattel mortgage valid as against the other creditors? 10. A solvent trader sold his business to a company consisting of him- self, his wife, two sons and a daughter, he holding all the shares but six. In part payment of the purchase money the company gave to him deben- tures charging all the company's property, both present and future. The company went into liquidation. After paying the debentures there was nothing left to pay creditors, including creditors of the trader. Is the transaction between the trader and the company valid as against his creditors ? Com: mercia IL aw. .Assigmneiits. Time, 3 hours. 1. A trader in insolvent circumstances sold his stock in trade and de- posited the purchase money to the credit of his account in the bank. At the time an overdue note of his was held by bank and he gave the bank a cheque to cover same. Is such payment a preference and void as against Itis creditors? Time, 3 hours. I. A. wrote on September 2d offering to sell wool at a certain price to B. and asked for an answer in the course of post. The letter only reached B. on the 7th, who accepted at once. Before A. received the ac- ceptance he had already sold the wool. What right has A. against B.? Would it make any difference to your answer if the letter had reached B. on the 3d, and he had answered at once, but his letter of acceptance had never reached A.? 348 349 Accountancy Problems and Solutions. C. P. A. Examination Papers. !lll> r I iii J\^ If,.^^*^^"*'*^*^* ^^^^ binding without consideration? If so, when? (c) Without other consideration, when is a smaller sum ever satisfac- tion of a greater? »«i«M«ic 3 A. being in financial difficulties, his creditors, with the exception of f;;r!fr' ''"^' fi% cents on the dollar. As an inducement to B., A. secretly agrees to give him seventy-five cents. B. accepts. What rights talf ctfonT •' '"*^ ^**'' '^''' ^°^^ *^'^ ^°^*^^^t h-ve on the whole 4. Corporations have a limited capacity to contract (a) Why? (b) When can a corporation bind itself on a bill of exchange? Must the corporate seal be attached? (c) Generally, is the corporate seal necessary in contracts by cor- porations? -^ Jn. ^^f "^"^^\*^^ P°«it^°" «f a bom Me holder of a negotiable instru- ZhL for th"i ''''^"'!- "^^ T- ''''^^**^' ^^^^^"*^°" ^" ^^^^ ^^^"^ °f their suing for their respective claims. ^K. wi,^^'* '' ' "^^" ^^ Lading"? Is it negotiable? (b; What is meant by "stoppage in transit"? (c) When is the right defeated ? 7- (a) What is a " del credere agent " ? (b) Is the principal liable for an agent's fraud? If so, when? Jhf ^^^' T "^7^t^"sti« of a " common law lien "? How is the right acquired and how lost? lenderT^'' ""'' '^' ''*'"''^''' ""^ ' ^'^'*^ ''"^''- ^^^* ^'^ ^^^^^ian legal 10. B verbally agrees to buy a motor car for $1,500 from A B re- fuses to take delivery of the car. What rights has aT The State Board of Accountancy of Virginia. Examination in Auditing. November 1 7, 1910— 1.30 P. M. to 5.30 P. M. Answer twelve (12) questions, but no more. Do not repeat questions, but write answers only, designating the questions by number. 1. Give a brief outline of the duties and responsibilities of an auditor. 2. In auditing cash payments, how would you prevent the reproduc- tion and passing of vouchers a second time? 3. In auditing the accounts of a corporation for the first year of ttf existence, what records and documents should be examined, in addition to the books of account and the vouchers? 4. If you had not been present to count the cash actually on hand at the date of the balance sheet, how would you afterwards verify its cor- rectness ? 5. How would you reconcile the balance shown by the bank settlement in the pass book with the balance shown by the check book or cash book? Having done this, is it necessary to check the deposits shown in the past book with the receipts shown in the cash book? 6. In preparing the balance sheet of a corporation, how would you treat arrears of "cumulative" dividends on preferred stock? 7. To what extent is it permissible to carry as an asset the "organ- ization expenses" of a corporation? 8. To what extent do you consider it necessary to verify the following: (o) Inventories; (b) Pay rolls; (c) Discounts; (d) Depreciations. 9. Give a full, detailed account of your procedure in auditing the cask account of a large mercantile corporation. 10. In auditing the books of a concern whose accounts receivable are kept in one or more subsidiary ledgers, with a proper controlling account in the general ledger, what verification, if any, would you make of such accounts ? 11. State how you would verify the following: (o) Purchases; (b) Returned purchases; (c) Sales; (rf) Returned sales; ^e) Cash receipts; (/) Cash payments; {g) Journal entries. 12. State briefly, and in order of procedure, the different steps to be taken in a bank examination. 13. State your method of procedure in auditing the accounts of a build- ing and loan association. 350 351 I ' '■ Accountancy Problems and Solutions, 14 Define and differeetiate capital expenditure and revenue cxoendi. 15. In the case of a corporation which has been in existence for sev- eral years, if you were engaged to audit the accounts for the last year Jrty, would you consider it necessary to inspect the minute book, stock Wger, bond register or any of the entries in the books of account at dates pnor to that covered by your audit? Give reasons. Elxamination in Theory of Accounts. November 1 7. 1910—9 A. M. to 12.30 P. M. Answer twelve (12) questions, but no more. Do not repeat questions, but write answers only, designating the questions by number. 1. State the essential principles of the following forms of bookkeeping and describe the method of determining the profit or loss of a business mder each system: (o) Single entry; (&) Double entry. 2. Define the following : (ffl) Gross profit; (ft) Net profit; {e) Trading account; (rf) Profit and Loss account; (if) Active assets; (/) Fixed assets; {g) Current lia- bilities; {h) Funded debt; (i) Cash discount; (/) Trade discount. 3. Define the following and state what essential difference there is between them: (o) Trial balance; {b) Balance sheet. 4. Define the following and state how eacn should be treated in the oooks of a corporation : (o) Reserve; {b) Sinking fund. S Define the following and state how you would treat them in a bat ance sheet: (n) Prepaid expenses; (6) Contingent liabilities. 6. Define the following and state some of their respective advantages aiid disadvantages: {a} Voucher system; (&) Loose Leaf system. 7. Describe the process of changing a set of books from single entry to double entry. ' 8. State the purpose and describe the process of analyzing a ledger. 9. What are controlling accounts? For what purpose are they era- ployed and how arc they conducted? 352 C. P, A. Examination Papers, 10. Name two methods of distributing the overhead or indirect ex- penses of a factory so as to equitably apportion the same to the cost of the different articles manufactured, and state briefly the advantages and disadvantages of each method. 11. How do the accounts of a corporation and those of a copartner- ship differ in treatment of the following: (o) Capital invested; (&) Distribution of profits. 12. Describe two different methods in ordinary use for writing off the premium on bonds purchased, stating briefly their respective advantages and disadvantages. What is the most scientific way of treating said premiums ? 13. If called in to make an examination of the accounts of a mer- cantile concern which had suffered fire loss six months after the taking of the latest inventory, how would you determine the value of the merchandise on hand at time of fire? What verification of the accounts* if any, would you make? 14. Should a manufacturing concern invoice its goods sent to branch houses (i) at selling price, or (2) at the prevailing wholesale price of the same or similar goods obtainable in the open market, or (3) at cost? State advantages and disadvantages of each method. 15. Define cost accounting, and state wherein manufacturing or factory costs differ from commercial or selling costs. Examination in Commercial Law. November 19. 1910—9 A. M. to 12.30 P. M. Answer ten questions, but no more. Do not repeat questions, but write answers only, designating the questions by number. 1. State briefly the method to be followed in Virginia in each of the following : (a) Forming an ordinary business corporation; (&) Dissolving an ordinary business corporation; (c) Issuing bonds of an ordinary busi- ness corporation. 2. Describe the following stocks and securities issued by corporations; state their leading characteristics, the assets securing them, respectively, and their order of preference in case of liquidation: (a) Preferred stock; (6) Common stock; (c) First mortgage bonds; (df) Promissory notes securing loans. 3. Define the following: (o) Liability of persons associating themselves together and engag- ing in business as a corporation, when the incorporation is defective or 353 ii I ift m Accouniancy Problems md Solutions. Incomplete; (b) Liability of stockholders after perfecting the incorpora- tion; (<•) Public service corporations. 4. Distinguish between State (Virginia) banks and National banks in the following particulars : (o) Method of forming; (b) Minimum capital stock prescribed by law; (e) Liability of stockholders in case of insolvency. 5. Collateral has been deposited with the payee of a promissory note, but with no special contract as to converting same or subjecting it to the payment of the note, which is not paid. How should the payee proceed to convert or subject the coUateral toward the satisfaction of the debt evidenced by the note? 4 Give the order of payment in the distribution of the estate of a decedent 7. When an endorsed promissory note is not paid at maturity: (a) What course should the holder pursue in order to prove that payment has been demanded of the maker of the note? (6) Against whom has the holder a right of recovery? (c) Against whom has an endorser who has been compelled to pay a dishonored note a right of recovery? (d) Under what circumstances is an endorser relieved from liability as such? (r) How may the liability of the endorser be preserved without protest for non-payment? 8. How should the assets of a co-partnership, and the assets of the respective individual members thereof, be applied when the several mem- bers owe individual debts in addition to the debts owing by the co-part- nership? 9. Define general agent and special agent, respectively, and state the general rules as to liability of the principal for acts of each kind of agent. 10. State three ways by which an agency may be created and three ways by which it may be terminated. 11. Name three kinds of partnership recognized under the laws of Vir- ginia; and state, briefly, their distinguishing characteristics. 12. Distinguish between partners in general business and partners in common of a tract of land. 13. What is a contract? Name the essential elements of a valid contract. and state who are legally qualified to make contracts. 14. Mention loan association. the distinctive characteristics of a building and 15. When does the statute of limitations apply in Virginia on: (o) Promissory notes; (&) Bonds; (r) Written contracts; (rf) Contracti under seal; (i) Open accounts; (/) Judgments; (g) Mutual accounU between merchant and merchant? C. P. A. Examination Papers. Examination in Practical Accounting. Friday. November 18. 1910—9 A. M. to 12.30 P. M. Questions 2 and 5 must be answered. Questions i, 3 and 4 optional with the applicant, who must answer two of them, but no more. Question No. 1. Smith Hill and Davis engage in business under an agreement that Smith is to have a salary of 200.00; Hill, $150.00; and Davis, $100.00 per month, respectively; that the earnings are to be determined at any time at the request of any partner and the profits divided on a basis of the amount of business secured by each. They are in business nine months and find their accounts as follows : Smith's business $4,500.00 Hill's business 2,800.00 Davis' business • 3,000.00 Net profits 2,100.00 They then decide to rescind the salary agreement and divide the prof- its shown on a basis of amount of business secured individually, treating the salary drawn as an advance. You find errors during the nine months period, namely : Office furniture, charged to operation $65 .00 Accounts Receivable, Smith's business, uncollectible ... 210.00 Funds advanced by Davis, credited to his earning account 400.00 Items not yet paid nor entered into accounts: Smith's salary $200.00 Hill's salary 150.00 Advertising 27.50 Clerkhire 130.00 Telephone 6.00 Rent 50.00 Stationery expense I5 -OO Show the journal entries necessary to readjust the accounts; make a statement of the Profit and Loss account and each partner's personal ac- count, showing all corrections. Question No. 2. The A. B. Corporation has a dispute with its agents C and D, regard- ing the amount due from the agency account, and asks you to state the account, which all agree to accept as a basis of settlement. On the books of C and D you find three accounts with the A. B. Corporation as follows : 355 U b i pHimiim i Accountancy Problems and SoluHo II iii« M«y i4f 1908. June Ifti908. Mj IS 1908. April 6. 1909 April 17, 1909 April 19. 1909 April 24, 1909 April 29, 1909 May 17, 1909 May 20, 1909 June 8^1909 June 12, 1909 June 19.1909 June 24, 1909 ,., Aug. I, 1909 Aug. s 1909 Sept IS. 1909 Sept 18, 1909 Sept 29, 1909 Nov. I, 1909 Nov. 3. 1909 Dec. 17. 1909 . ns. Old Account I2.500.00 April I, 1908 $59,141.49 13,582.00 May 5,1908 19434.0S 28,781.37 June 5, 1909 7 50 Dec 31. 1909 5»756.o6 New Account $4.976. 50 May 3, 1909 $10,000.00 3,219.86 May 18, 1909 17.000.00 7,111.65 May 18, 1909... 184.66 6.293.21 June 10, 1909 10,000.00 4.915.91 June 20^1909 6,500.00 3.219.73 June 20. 1909 318.44 4,071.11 July 10, 1909 700.00 1,895-19 July 10, 1909 43,7, 3434.26 Aug. 10,1909 7,500.00 2.699.28 Sept 20, 1909 10,000.00 4.115.22 Oct. II, 1909 606.90 2,573.82 Nov. 5, 1909 5,000.00 3.089.74 Dec. 10, 1909 3,500.00 1,576.74 2429.05 5472.82 2^2^.20 2,222.18 21927.54 i J30 IMElliiiiiaiiaimiiiii C, P. A. Examination Papers, Jan. 3, 1910 $1,782.90 Jan. Jan. 7. 1910 2.089." Jan. Jan. 13, 1910 1.016.01 Jan. Jan. 26,1910 4.540.13 Feb. Jan. 28,1910 2,708.68 Feb. Feb. 15,1910 4.817.71 Feb. Feb. 18, 1910 795.31 Feb. Feb. 20, 1910 3.212.SO Mar. Mar. 18,1910 1,834." Mar. Mar. 26,1910 1,752.52 April April 1,1910 1.919.19 April April 9, 1910 1,786.54 May April 15, 1910 2,447.83 May April 24. 1910 3,584.32 June April 24, 1910 138.32 June May 15, 1910 3,497.86 June May 20, 1910 3,690.43 July June 3, 1910 1,477.66 July June 9, 1910 1,548.29 Aug. June 15, 1910 2,180.75 Aug. June 30,1910 3.844.22 Aug. July 16, 1910 4,571.59 Sept. July 23. 1910 2,085.79 Oct July 28,1910 1,787.22 Oct July 29,1910 3,970.87 Oct Aug. I, 1910 2,226.69 Nov. Aug 7, 1910 1,001 .04 Nov. Aug. 14, 1910 3,"2.05 Nov. Aug. 15. 1910 2,026.69 Nov. Aug. 22, 1910 1,138.74 Sept 5, 1910 1,173.08 Sept 7, 1910 2,003.77 Sept 17, 1910 1,933.39 Sept 21, 1910 1,552.70 Sept 23, 1910 1,273.12 Oct 9, 1910 1,284.72 Oct 15. 1910 2,965.19 Oct 25, 1910 2,829.99 Nov. I, 1910 3,149.81 Nov. 7, 1910 3,288.62 Nov. 16, 1910 2,091.50 Nov. 19, 1910 1,082.16 Nov. 22, 1910 1,279.80 IS, 1910 $10,000.00 25, 1910 2,500.00 31, 1910 80.44 I, 1910 5,000.00 3, 1910 123.22 15, 1910 4,000.00 15, 1910 97.88 31, 1910 4,000.00 31, 1910 20.55 10, 1910 5,000.00 30, 1910 5,000.00 20, 1910 7,500.00 20, 1910 36.45 10, 1910 5,000. 00 30, 1910 4,000.00 30, 1910 164.06 I, 1910 7,500.00 24, 1910 5,000.00 I, 1910 5,000.00 20, 1910 4,500.00 31, 1910 102.92 20, 1910 8,000.00 10, 1910 2,000.00 10, 1910 5,000.00 10, 1910 239.81 3, 1910 6,000.00 3, 1910 172.72 17, 1910 5,000.00 30, 1910 27.45 f I I i 357 Ill ^=11 Accotmiancy Problems and Solutions, i AprM April May Jtine July July July Aug. Aug. Sept. Oct Oct. Oct Nov. Dec. 'law Jm. J all. Prcpai lyoy ^ ^yo^ » • . . , 1909 ■lyuy • . . , , 1909 1909 ^909 ■ • . . . ■*yuy» ••••»«,., 1909* • '909 •■••.••.,,. »v09' ■ . . . '909 • • . • , 1909. ....,.,,. 1909. I910. I910 , . INTEWST Account 1185.65 Jan. 82.90 i»733. 68 642.25 527.28 M55-I3 1.019.71 89.56 199.61 1^.29 193.21 317-77 103.82 1,264. 17 686.68 228.92 Jan. Feb. Feb. Mar. April April May May June July July July Aug. Sept Oct Nov. 1910. . 1910. . 1910. . 1910. . 1910. . . 1910. . . 1910. . . 1910. . . 1910. . , 1910. . . 1910, . . 1910... 1910... 1910. . . , 1910.... 1910 1910.... $376.32 324.58 100.00 286.35 1.213.94 203.23 224.00 r.ooo.oo 436.25 339.31 467.22 224.67 245.93 213.33 1.183.59 221.63 37731 Wance,) f„ any yeaf or ^^s oi a v2 TT ^~""'"'^'' °" '""""'ly Not. 30k 191a ^^ °^ ' '""^ ^°' *<: Penod April i, .908. to Quesdon No. 3. The Boulevard Land Corporation is onK.n!,.M • the purpose of acquiring 100 acres of Lh^ • '" ^°"'" '""'"^ "t^ f<"- able lots for residential pj^e,^ ^''- *^'""« «""^ '"<» <>» '"to suit- a»^«stTp^f;Lrb'lt^^^^^ -^-^ !^ -^- 'n equal l3S.O0D.oo; a first mortage bdnT™ h T*" P^P^rty '^ Purchased for »«MW..oopaid in cash, rtf rem2inT*c^ ^or $.5,000.00 and the balance stock being used to aZr^7Zl!^'°°°°°'^""''!'^ '""" ^""^ °f "pital on the market "'^ ^'^^ "P^"=" °^ Pitting the property TIier#» ic I onot. on th: bXrf c";: Z^ Zr^^^ ^:^ *« an owners iZ^f^: '"°''«^«-- =^' -"- >ots being reulraHaff ^//jl^'r the^^uIel?r'?°o;7h,?"''''' '° ''''"' '" '"'' S° ^^et in width, facing A and B are engag^ fe Th ' rea, !« , K '■'" ''"'""' ^'^°"« '° •"■»• holders in this corpomfon In k . , u*"*""'" ^nd are also stock- 11*13 *.wrporation, and by vote of the fitnrithr^u^^^ At general sales agents for the Boulevard 'i^^™"'''*'^^ "e appointed In making an audit of the acrn. mf ^"<'/°^°"t'°n- P-id fesoaoS in releases - $7 o^T tl Ti" ", •""' "" '^""'P'"^ •>" «— leases, *7,ooaoo to release lots purchased by out- 35** M. C. p. A, Examination Papers. siders and $2,500.00 to pay for the release of free lots drawn by A and B as stockholders. Would you have any comment to make regarding this or any adjustments to make in the accounts? Explain in detail. Question No. 4. On account of the inability to make collections or to borrow funds, Johnson, Jones and Jacobs are forced into bankruptcy. Their statement to the receiver is as follows : Assets Property, consisting of factory and land $37.5oo.oo Machinery 12,800.00 Office furniture and fixtures 1,250.00 Cash on hand and in bank 900.00 Stock on hand, raw goods 5,000.00 Stock on hand, finished for sale 10,000.00 Accounts receivable 20,000.00 $87450.00 Liabilities Mortgage on property and plant $40,000.00 Bills payable 25,000.00 Accounts payable 15,000.00 Surplus 7450.00 $87450.00 What accounts would you transfer to the receiver? Open a proper set of books for the receiver covering this business. r Question No. 5. B dies March 23, 1905, leaving an estate consisting of the following property in charge of his executors, X, Y and Z : Cash in bank $10,000.00 Accounts receivable from: I $2,000.00 2 3,000.00 3 1,000.00 4 3,000.00 5 1,000.00 6 4,000.00 7 2,000.00 8 3,000.00 9 4,000.00 10 1,000.00 $24,000.00 359 Accountancy Problems and Solutions, Stocks and bonds: 1. 100 shares Union Bank (par value, $100.00) $12,000.00 2. 40 shares Traders Bank (par value, $100.00) 12,000.00 3. $1,000.00 C. & O. 4's— J. & J 1,050.00 4. $5,000.00 P. R. R. 6's— M. & S 4,500 00 5. $10,000.00 N. Y. C. 3i's-J. & J 10,450.00 $40,000.00 and three parcels of unimproved real estate. Three of his heirs are also indebted to him for money loaned; ^ $5,000.00 ^ 6,000.00 E« • • • 7,000.00 $18,000.00 C. p. A, Examination Papers. The will directs the executors to dispose of the real estate, convert the other assets and distribute the funds, to wit: Widow one-half ''C Children -^D .one-sixth each Up to April 30, 1906, the executors collect all the accounts receivable with the exception of items No. 3. No. 6 and No. 10, on which they realized only $4,500.00, the balance being uncollectible. Bonds No. 3 and No. 5 matured January i, 1906, and bond No. 4 matured March i, 1906, and were redeemed at par. Stock No. 2 is sold at $325.00 and stock No. i at $125.00, both sales taking place on April IS, 1905. The real estate is sold for cash, $5,000.00; and mortgages $10,000.00. Interest has been received on bank balances, $300.00; accounts receiv- able, $50.00; and on each of the bonds at the regular interest periods in full : The executors pay decedent's debts and funeral expenses, $1,000.00. Counsel fees, $500.00; safe deposit box rent, $10.00; and office expenses incident to collection of income, $500.00. The executors waive their claim to commissions, but ask for an allowance to cover expenses in- curred by them of $75.00 each. State the executors' first and final account and prepare a statement for the purpose of guiding the court in directing a distribution to be JDO Intermediate and Final Examinations of the Institute of Chartered Accountants, Held During November and December, 1910. Bookkeeping and Accounts. (Including Partnership Accounts.) I. From the following combined trading and profit and loss accounts of a private firm for the year ending 31st December, 1908, and from the profits of the two previous years, show the amount upon which income tax (due January, 1910) should be paid : Dr. To Stock ^1.200 " Purchases ^'5«> " Wages 5400 " Carriage 550 " Gas and Water, and Municipal Rates 260 " Salaries (Partners) 800 " Bad Debts written off 14© " Repairs to Buildings, cost 300 " Repairs and Renewals of Plant, cost 200 " Income Tax loi " Interest on Capital 250 " Interest on Loan from Bankers 80 " Rent of Works charged at 6 per cent, on cost 300 " Profit 1,110 £19,191 MM—— By Sales £17,511 " Stock 1,600 " Rent from Property included in Works Assessment under Schedule A, at £300 gross 80 £19*191 The amounts of the annual profits, upon which the previous assessment was made, were: for 1905, £2,450; for 1906, £2,950; for 1907, £2,700. 2. You are to be appointed auditor under a partnership deed. The draft articles of partnership are sent to you for your opinion and approval of 361 \^ 11 II AceoMHiancy Problems and Solutions. cJaiises affecting the accotmts. What matters of account would you ex- pect to be mentioned in the draft articles, and state shortly the objects of the clauses. 3. A trading company takes out a capital redemption policy with an in- surance company to provide for a wasting asset, paying £80 per annum premium. The premium is to be provided out of revenue. Give examples showing the entries to be made in the books of the trad- ing company (i) annually, and (2) upon payment of the capital sum by the insurance company. 4. A. and B. carried on business in partnership and divided profits and losses in proportion to their capital, three-fifths and two-fifths On ist January, 1910, A.'s capital was £10,500 and B.'s £7,000. as shown by a bal- ance sheet of that date. They agreed to admit C. as a partner from the same date on the following terms : . , • *t, (1) The assets, liabilities, and capital to be taken as shown m the balance sheet. (2) £2,500 to be added to the assets for goodwill. (3) The amount of goodwill to be added to A.'s and B.'s capital m the proportions in which they divide profits. (4) C to pay to the partnership such a sum as will give him one-fifth share in the business. . State what amount of capital C. has to bring in ; set out the capital ac- count of each partner in the new partnership, and state in what propor- tions the profits will be divided in future. A. and B., as between them- selves, sharing in the same proportions as before. S Herbert Smith and Ernest Jones are in partnership, sharing profits equally and having each a capital of £5.000. It is provided in the articles of partnership that a partner may retire upon giving certain notice to the other and that in the event of a partner retiring he shall be repaid his capital, proportionate share of profits to the date of dissolution, less his drawings— these profits to be taken on the basis of the average profits of the last three completed years, as stated in the balance sheet book signed by both partners— and in addition he shall be paid his share of the good- will, viz., half the goodwill of the business. The goodwill to be consid- ered equal to three times the average profits of the last three completed "jMpUBi''l9| ■"'flu The amount payable to Herbert Smith for capital, profits, less drawings md goodwill, is to be satisfied by giving six bills of equal amounts carry- ing interest at the rate of 5 per cent, per annum from ist October, 1910. The yearly accounts are made up to the 31st December, and Herbert Smith retires on 30th September. 1910. The signed balance sheets show the following profits: Yeir to 31st December, 1907- •• 1900. • . 1909* * * II II u II £10,000 3.000 2,300 C. p. A. Examination Papers, Show what amount is due to Herbert Smith for capital, goodwill and profits, he having already drawn £500 on account of profits, and the amount of each bill with the interest thereon added to it 7. Directors of a Limited Liability Company (having an authorized cap- ital of £120,000) issue a prospectus inviting applications for 100,000 shares of £1 each, and stating that 10,000 shares will be issued in addition as fully paid to the vendor in part payment of purchase money. 2/6 per share is payable on application. 2/6 " " on allotment. 5/_ « " 3 months after allotment. 10/- " " 6 « The capital offered was over-subscribed by 10,000 (ten thousand) shares. The amount due on allotment was received in full. The sum of £24.000 was received in respect to the first and £48,000 in respect to the second call. The purchase money is stated to be £80,000, viz. : Land and Buildings £35P00 Stocks and Works in Progress 15.000 Machinery and Plant 20,000 Goodwill io»«» £80,000 Make the journal entries necessary to open the books of the company and to record the payment of the instalments, stating where the details of calls in arrear should be found. 8. You are asked to complete a balance sheet from books you were unable to balance. What would you do with the difference in figures? What are the dangers attending differences in figures? 9. The following was the balance sheet of a firm upon dissolution of partnership, A. retiring, B. continuing the business. The partners* shares as to capital and profits were; A., three- fourths ; B., one-fourth. Capital, A £9,000 Capital, B 3,000 Loan from A 2,000 Creditors 1,800 Reserve 1,200 £17,000 362 Freehold £12,000 Debtors 3.000 Cash 1,000 Stock 1,000 £17,000 363 w "1" ll ' ih t I m Accountuncy Problems and Solutions, A. agreed to biiy the freehold for £io,cxx}. The stock was taken over by B. at lo per cent, discount. The debtors realked 86 per cent of their value. The costs of the liquidation exclusive of the above deficiencies were What did each partner receive? Show cash account, liquidation account, and the partners' accounts. lo. When preparing the annual accounts of a London firm having branches in New York and Brussels, state generally how you would deal in the London books with the balances appearing in the branch ledgers, and also how the question of the rate of exchange would affect the year's results. Bookkeepbg and Accounts. (Including Elxecutorship Accounts.) 1. Prepare journal entries to record the following transactions in the books of a limited company: 200 shares of ii each, 15s. called up, and on which 5s. per share had been paid, were forfeited and subsequently sold to X. for iijo, credited with 15s. per share paid up. 2. Prepare a balance sheet at 30th June, 1910, and profit and loss ac- count for the year ended that date, of the Shop Company, Limited, from the following particulars, viz. : The authorized share capital is 80,000 5 per cent, preference shares of £1 each, and 40,000 ordinary shares of £1 each, of which 60,000 preference and the whole of the ordinary shares have been issued and fully paid up. Bills Receivable £270 Bills Payable 150 premises Depreciation Account 4000 Cash at Bank and in Office 210 House and Office Furniture 400 Transfer Fees 20 Doubtful Debts Reserve. 300 Bank Charges and Interest 250 Stock at 30th June, 1910. 28,500 Law Costs , 200 Trade Debtors. 13,000 Office Expenses, Rent, Salaries, Audit Fee, etc 2,970 Change Cash M Shops. , , 250 '%! """'If' C. p. A. Examination Papers. Reserve * ^'^ Rents, Insurance, etc., paid in advance 650 Trade Creditors ^2,500 Profit and Loss Account, Credit Balance at ist July, 1909 SS© Freehold and Leasehold Premises 85,000 — 280 Sundry Creditors — Horses, Carts, Vans, etc 2,000 Trading Account (Profit) 12,000 Bills Receivable under discount 270 Provide 10 per cent, depreciation on house and office furniture and on horses, carts, vans, etc. Make a further reserve of £300 for doubtful debts and increase premises depreciation account and reserve account by £1,000 each. What will be the balance of profit to carry forward after providing for the payment of the preference dividend and a dividend of 5^ per cent, on the ordinary shares? 3. Journalize the following transactions of a limited company : The company was registered on the ist January, 1908, with a nominal capital of £120,000, divided into 120,000 shares of £1 each, of which 40,000 were issued as fully paid to the vendor as part purchase consideration, 40,000 offered for subscription to provide working capital, payable as to 5s. per share on application, 5s. per share on allotment, and the remainder in two calls of 5s. each; 40,000 shares to be held in reserve for future issue. The vendor also received £10,000 in 5 per cent, debentures, being the balance of the purchase consideration. 1908. January 5 — Applications were received for 35,000 shares. " 6— Allotment made of 35,000 shares. " 10— Amount due on allotment of 35,000 shares was received. February 10— First call of 5s. per share was made payable on the 24th February. " 10—40,000 fully paid shares allotted to vendor. " 10 — 5 per cent, debentures issued to vendor for £io/xx), balance of purchase money. 4. State briefly the principles governing cost accounts, and give a form of cost sheet suitable for a manufacturing business, entering not less than «ix items of cost relating thereto. 5. John Jones died on the 30th April, 1910, leaving the following estate: Cash in House Jb^ Cash on Deposit at Bank 5,000 Cash on Current Account at Bankers 550 Household Furniture, valued at 365 ■■■■■■■I i III Accountancy Problems and Solutions. Mortgage at 4 per cent, of leasehold premises to secure £4,000. Six months' interest fell due on the 30th June, 1910. 18,000 Consols, 2j^ per cent 640D 14,000 Japanese 4 per cent. Loan 3»70O Half-years' interest payable on the 30th June, 1910. Debts Due to Testator h90O Life Policies and Bonuses 6,000 Sundry Creditors i<» You are required to write up the books and to make out a balance sheet at the 31st October, 1910, ignoring income tax and interest on bank deposit. The widow was to have the use of the furniture for life and an imme- diate legacy of ii,ooo, which was promptly paid. Funeral expenses and testamentary expenses amounting to £7$ »«<* ii,SOO, respectively, had been paid, and the liabilities discharged before the 31st October. The life assurance moneys had been received, as also all interest due on investments, and the debts had been collected, with the exception of £151^ which had proved bad. 6. Explain the difference between a trading account and a profit and loss account, and state in which account you would place the following items, giving your reasons : Purchases. Carriage and Freight. Debenture Interest. Depreciation. Allowances. Bad Debts. Wages. Commission. Advertising. Sales. Stocks on Hand. Returns. Discounts. Fuel. Packages. Directors' Fees. 7. From the following items, appearing in the trial balance of the books of a company at the close of its financial year, prepare a profit and loss account, giving effect to the further remuneration of the directors as men- tioned below: Di..rectof s* Fees ••....•• ■ Dr. 2,000 O O Cr. s. d. .ICcnt ••••••»• Salaries ..... Law Charges. Ore Sales.... Advertising •. Interest ..... 500 350 SO o o o o o o 25 o o 40,500 o o 42010 o 300 C. p. A. Examination Papers. Dr. Cr. £ s. d. £ s. d. « ... 19 10 o Transfer Fees -- ^ ^ Income Tax • ^ ^ Depreciation Audit Fee ^o Sundry Expenses • • • • ^3 The directors are entitled, under the articles of association, to appro- priate and apply, by way of further remuneration in any year m which a dividend is payable (assume the payment of a dividend), a sum equal to 5 per cent, upon the amount of the profits for each year. 8TB died on the 31st May, 1909. possessed of 500 5 per cent, cumula- tive preference shares of £5 each in Robinson's Brewery Company. Lim.. upon which dividends for two years were in arrear. On the 30th June. 1909, the company declared dividends sufficient to pay the preference share- holders for the year ended 30th April, 1909, with arrears. How would you deal with these dividends in the executors' accounts? 9. A limited company goes into voluntary liquidation on the 31st De- cember, 1909, having assets appearing in the books as follows : Works and Other Properties £90,000 Liquid Assets, ^°'°°^ Its liabilities are £20,000, and its capital (paid up) £100,000. The assets are sold to a new company for £50,000, payable in shares of that company of £1 each, credited with iss. per share paid up, and £22,000 in cash, which latter just suffices to pay the liabilities and costs of liquidation. Close the books of the company in liquidation. 10. The undermentioned errors were discovered in the books of J. John- son & Co., affecting the year ended 30th June, 1910: 1910. (i) April 20— A cheque received from W. Brown for £11 was posted to his credit as ns. (2) May 31— A sale of £26 los. was credited correctly but debited to the customer's account as £20 6s. lod. (3) June 20— Goods were returned by R. Carr of the invoice value of £27 los., and were taken into stock at £25, but returns were not entered in the books until the following month. (4) June 29— The acceptance of Badart Freres to Johnson & Co.'s draft for £220, payable in Paris and which had been discounted, was dishonored. The acceptance was worthless and the bankers debited Johnson & Co.'s account on the ist July, 1910. Show how the adjusting entries should be made in J. Johnson & Co.'s books at the 30th June, 1910. 367 tl ¥i I - I Accmmimcy Problems and Solutions. Auditing. I. A special form of accounts is prescribed by statute for: (a) Railway Companies. (b) Gas Companies. (c) Building Societies. Give three salient features out of each form as prescribed. 1. In auditing the accounts of a trading undertaking you find that an •ccoiint is kept in a private ledger for the bought ledger and also for the sold ledger. Both of these accounts are in agreement with the total bal- ances as abstracted in detail from the bought and sold ledgers respectively. You are not required to check the postings of the individual entries in the subsidiary ledgers, but apart from this you are asked to take such ac- tion as shall in your opinion be a check against possible fraud. Set out the work which you would recommend should be done. 3. The A. B. Company make up their accounts to 31st December, 1908. The demand note for income tax for the year ending 5th April, 1909, has been received as follows: £ s. d. Schedule A. Property held on lease at £600 per annum... 25 o o Schedule D. Assessment, ii5,640 782 o o Schedule K Directors 50 o o The following payments have been made, all less income tax : Rent on each quarter-day, four quarters to Christmas, 1908. Directors' fees, ii,ooo. One year to 31st December, 1908. Debenture interest at 5 per cent, per annum on ^50,000, paid 30th June and 31st December, 1908. Interim dividend, 4 per cent., to 30th June, paid 31st August, 1908, on iioo,ooo ordinary share capital. It is proposed to pay a final dividend of 5 per cent, less income tax, on 28th February, 1909, Set out in ledger form the account with the Income Tax Commissioners Dn 31st December, 1908, as you would desire it to be stated. 4 The balance sheet of a company of which you are the auditor con- tains ** inter alia'* the following entries when presented to you: Dr. Debentures at 4 per cent... £30,000 Sundry Creditors: Trade Accounts £12,000 Loan " 5,000 Bank Loan 7,500 24,500 Cr. Investment in Government and other securities 14,240 368 C. P. A, Examination Papers, You ascertain the following facts : The debentures are part of an au- thorized issue of £40|000. The investments consist of the following securities: Consols, £3,000 stock at 80 ^'^ India 3^/4 per cent £2,000 stock at 92 y."*' "^^ The Quick-Burst Gold Mining Company, Urn., 10,000 ordinary shares of £1 each (quoted at is. 6d. per share), cost 10,000 £14,240 The bank holds as security the India stock and £5,000 debentures, addi- tional to the £30,000 shown on the balance sheet. An undertaking has been given by the company to the loan creditor to issue £5,000 debentures to him if called ^or. State what additions or amendments in the balance sheet in respect of the items stated you would desire and your reasons in each case. S The premises of a trading company are held on lease for thirty years. They were acquired at a premium and large sums have been expended on additions and improvements. In the first ten years considerable sums have been set aside in the accounts for leasehold redemption before dis- closing to the shareholders the profits of each year, and the total amount so provided to 31st December, 1908, is largely in excess of the amount necessary to write off the leasehold asset proportionately during the thirty The eleventh year, 1909, is a bad year, the profits have declined, and to enable them to pay the customary dividend the directors determined to make no provision out of the profits of that year for leasehold depre- ciation. State what you would do, as auditor, showing the form your action would take, and give the reasons for your procedure. 6. In auditing the accounts of a manufacturing business you are asked particularly to ascertain that all outstanding accounts have been brought in. How would you satisfy yourself on this point as regards: Wages ? Rates and Taxes? Bought Accounts? And state two other heads which you would investigate. 7. Give the form of report you would make to the members of a Lon- don limited company whose business is carried on abroad, and whose for- eign accounts are audited and certified locally. 8. State briefly the difference in principle between the audit of the ac- counts of a private partnership and a limited company. 369 Accountancy Problems and Solutions. ft You are appointed auditor on the formation of a limited con,n,„, and are instructed to examine the books for the nnrLt. IT .f "^ 7' particulars required for the statuto^ re^L lde?7h r '""'^'i*^ 190a What steps would yon tate o^Iku ? • *' ^""P^"'" Ac^ tiBcate in respert of : ' ^°" *° «'^' ""' ""''"""y «^- (a) Shares allotted by the company. (b) Cash received in respect of such shares. Sm. ^ **' '"'"''™' *" "^ considerable sum is paid for the Give an instance where yon would consider it necessary that vearl, fu7hr?„st« 1, """"" °"* °' -™'"' '° extinguish ^e^asset l^l lunner instance where vou would rnnciH^^ o„-,i, in,i c*^»« ■'^ woum consider such a course unnece<;<;arv and state your reasons ""*ac uunecessary. Find EiiMiiialioii, November-December. I9I0. Bodieepbg and Accounts. (Including Executordiip Accounts.) I. J. Smith's balance sheet showed the following assets and liabilities: Land and Buildings Stock ................ ' ' * • • • • • J^'So.ooo Work in Progress ....*..'.'. 100,000 43.000 55,000 8,000 Sundry Debtors. Patent Rights Cash in Bank '•• Sundry Creditors S.000 Sundry Bills Payable*'*'*."*" '" * 50.ooo 0,000 ch^e"£?urrfoVth'e!„roft::* "''• "r^ *" '"""^^ - ->- nary shares. ^.oo.oco^Jp^erent'rril'^^^'.^''^'*" '" '"'«- tnres, and the balance in cash th! .Z' ' " '*^ "" ""'• ''«'«»- assets of J. Smith (with the ex^'e^LTri T?'."^ *° •"''' °'" ">* ities to creditors. «<=ept.on of the bank balance) and the liabil- TTie registered capital of the company was £400000 rfivM.^ • . ordmary and ,5o,c»o preference shaVes 0^, e^'^ ^'^"^ """ '^■'^ i'ifty thousand ordinary share* a«^ ♦»,« k i \ , were issued for subsc^TionX th"^^^^^^^ ''''"'"'^ ^^^^" plication, 5s. per share on allotment and /oT ' .''' "'' '^'''' °" ^P" allotment allotment and los. per share one month after C. P. A. Examination Papers. The issued capital was fully subscribed, and the shares (including the vendor's shares) and the debentures were allotted by the company on ist March, 1910. , . . ■. t *t. By the 30th June all moneys due thereon had been received by the com- pany except the amounts due on allotment and call accounts in respect of 200 ordinary shares and 100 preference shares, and the directors had dis- charged the company's cash indebtedness to the vendor, paid the pre- liminary expenses of £5,000, and declared the shares forfeited upon which allotment and calls were in arrear. . .• Give the entries which should appear to record these transactions (in totals) in the company's journal, cash book and ledger. '^. A. Andrews & Co., of London, consign goods to the value of £2,000 to their agent, B. Bengalee, in Bombay, and draw on him for £1,500 at three months, discounting the bill at the National Provincial Bank for £1,485. The charges for insurance, freight, etc., paid by A. Andrews & Ca amounted to £70. In due course B. Bengalee rendered an account sales to A. Andrews & Co. for £2,500, less commission, etc, £85, enclosing a sight draft for the balance. Record these transactions in A. Andrews & Co.'s books. 3. " A." and " B." are in partnership as brewers, and the amount of their assessment under Schedule D for 1910-11 has been fixed by the sur- veyor at £1,222 (£1,240, less allowance for wear and tear, £18). The surveyor has disallowed compensation fund charges, £36. "A.," on behalf of the firm, has made a return as under: X roiits 01 1 rade .•••..•••••.•••••«•■•. Less Interest on Mortgages (gross) "A.'s" Share (one-half) £374 "B.'s" Share (one-half) 374 *'# T** £748 370 The separate returns of the partners for purposes of securing abate- ments were as follows: A. B. Profits of Trade £374 ^374 From Property (half each of the Schedule A Assessments of the licensed properties) 119 119 Share Dividends (gross) already taxed 15 NiL £508 £493 371 fli \ri 0' i- II AccounUincy Problems and Solutions. ^'^ ^ "^'' ^\ "^*''"' »«^'"^ *« assessment made MOW the amoont of the firm's nltim.t. . ^ . of fax payable. "^ """» "tuMte assessment and the total amount (i) Assuming the compensation fund rhanr.c ,,- -ii_ a ^Assumi,, the compensation'tdthlSer'a^'rarK 4 On 31st December, igoa the trial h-ilan/.i. ^t u. %r ^ ^ . Company, lim., was m m^vT ' ""^ *^' ^°'°'' ^"^^ 5*000 Ordinary Shares of £1 each 100 s per cent. Debentures of iio each Goodwill " •* Freehold Property. ^.000 Machinery and Tools ^*^^ Fixtures and Fittings... ^^ Hire Cars ^ Sundry Debtors.V, .V.V. .V.V. ^^ ''tel'er'^TZ'""' ''""' ^^^tVorb^' eVc]; aVst'De:* "^^ Cash at ^^::::::::::::::::::- ^^ Sundry Creditors. ^»®S5 Reserve for Bad Debts/aVsrDecember/i^*'''* pZrm' ^"*^'"^« '^'''' ^"^ T"^^^ (urd)::::::;- . Fetrol, Oil. etc. (used).... Cost of Repairing Cars (Wage's and MatcViiis) ?° Charges to Customers for Repairinir Cars Expenses of Hire Qrs Wages (Yardmen, etc).. Charges to Customers for Hire Cars Sales of Accessories, including Tires and' Tub^s Cars Purchased for Resale. ... Sales of Petrol, Oil, etc ^^^^^ Sr'sLt'^^^^^^^^ Management Eip€'nses".".',*.*.V.'.V.V.V " " ' CSarage Rents " 45o Repairs, Plant, etc Bad Debts written off.'.*.'.'.'.';" '» Carriage on Cars Sold ' ^o meermg iSfOOO 1.000 153 80 ,000 550 750 200 800 330 ^1650 750 85 12,000 43 Debenture Interest to 31st December, ,909. ;.'; " ?? Profit and I^ss Account (Balance, 31st DecemWr, 190^) 500 mo ^3*693 i23.693 C, P, A. Examination Papers. The reserve for bad debts is to be increased to $ per cent, on the sundry debtors and 25 per cent, of the net profit for the year is to be reserved for commission to the manager. .... Prepare complete accounts in the form which, m your opmion, is cal- culated to give the greatest amount of information to the directors as to the working results of the business at a glance. 5. X. died on 31st May, 1909, possessed of the following estate : Assets, Freehold Property (let at i6oo per annum, payable quarterly. Rent received to 25th March, 1909) £12,000 Life Policies and Bonuses ^'Soo Cash at Capital and Counties Bank lO-ooo Cash in House ■ ^^ Household Furniture and Effects • i»«» 4% Debentures (interest payable June and December, interest re- ceived to 31st December, 1908) 4»500 Capital in X., Y. and Z. I5i000 Share of Profits in X., Y. and Z. to date of death Soo Liabilities. Debts due at death ^^^ Mortgage on Freehold Property (interest at 4 per cent., payable on usual quarter days, has been paid up to 2Sth March, 1909) 3iOOO By his will X. left his property as under : To his wife A. (an executrix) £50 in cash, his household furniture and effects (both free of duty), and the income from the residue of his estate during her lifetime. To his son B. (an executor) £50 in cash and his freehold property, both free of legacy and succession duty. To his friend C. (an executor) £50 in cash, £500 ** Consols standing in my name at the Bank of England," and £250, " part of my deposit at Paris Bank." To his son D. the capital in the business of X., Y. and Z., free of duty. To his daughter E. £5,000 free of duty and the residue of his estate on the death of her mother. On 31st August, 1909, the executors obtained probate, paid the estate duty, the funeral expenses (£80), the debts due at the death and the executorship expenses (£177 8s). On 29th September, 1909, the mortgage on the freehold property was paid off by the executors, together with interest to date. The legacies and the devise were satisfied and the duties thereon paid. Assume that the assets realized the amounts stated, the debentures be- ing sold on 31st December, 1909, thaf all income due to the estate has been 373 I I H i! I i llrjlii. Accountancy Problems and Solutions. r^erved, aj.d that cm Jamiary. 19,0, the residue of the estate was ^nt ^nS ,^1 *' ''"'' '"""' 3"' M^'^' 'i""' »*« °"t the estate ac- count and the legacy account as they should appear in the executors' M- K«^ and prepare a« mcome account for the year and a balance sheet be''calt;;I:Srrn*r •" '"^'''' '"" '"'''-' ='"<' apportionments .ay & May a trustee legaUy carnr on the business of a testator' If so under what circumstances, and what are his liabilities? 7- A testator with an ample estate, left for the most part upon trust for many years, gave an ammity to a stranger in blood without any specific "s^Ttfr X'" *' '"'"'' *•'"='' *"' t" P"'-''^ »"ch annuit7 »^f y tLs tS'"'' " ^'''' '"^ '™^"^ -^^ """^''^ '" *' o*^- aTe^^tTnd'hrm'l^ ^^1^^ "''^ ""'^ '^ ^' ~' °^ <"'*' 8. "A./* the sole executrix of a deceased testator, " B./' whose will con tamed no mstrtictions as to the investment of his estate, las enUtkdto the whole mcome of the estate for her life only. AJ^TT\f^ ^f ^' '^*''*^ ^ P'^P^^y ^*='d on a long lease, valued at the date of death at ii,ooo, and a mortgage of £2,000 on a freehJrproperi'' tinl!d r'"'"^ "^^Tf '^''' investments to remain unchanged and cL ttc executrix foreclosed, and for some years received the rentals These whi T\ 2^7""' ^'^^^ ^" ^^^^^ ^^^ '"^^««^ <>" the ori^narLrSge wh.ch at the date of the death of the executrix was £150 fn arrear ^ ' thf^'Z^r^T'^t ^T.'^'" '°^*^ ^y ^^^^ P^"*^«s entitled to the capital of estS^and "'^/Xs^^tet"' '"' '"'^^"^ ^^^°^'^"^' '^^^^*^" "^•^" 9. John Jones* profits for the five years ended 30th April 1900 orooerlT assessable for payment of income tax (after allowance of ^Tnc^ch year for schedule A assessment of his business premises) wHsirer: Year ended 30th April, 1905 f . 70^ m u ^ ^ '**** 5.500 •« m M .. ^^^ • 4,700 ^909 3,500 374 C. P. A, Examination Papers. As a director of a limited company John Jones has received £150 in each of the five years. . .■ . * *^ x.^« He owns house property, the gross rentals of which amount to HS^ which are assessed under schedule A at £300 net. His wife has a private income (taxed at its source) of £500 per annum. He pays life insurance premiums upon his own life, amounting to £250 per annum. ^ . , ^t. State the amount of John Jones' total liability for mcome tax under the various schedules for the year ended 5th April, 1910, and the figures you employ to arrive at your results. 10 In what cases is " settlement estate duty " payable ? To what account would you charge the duty in the trustee's books, how would it appear in the annual balance sheet, and by whom would it it eventually be borne? Bookkeeping and Accounts. (Including Parlneiship Accounts.) I. A. and B. carried on business as pottery manufacturers at Hanley, under the style of A.. B. & Co. They dissolved partnership on 31st March, 1909, A. retiring from the business and B. continuing to carry it on under the same style and purchasing A.'s share therein at the amount shown as his capital at 31st March, 1909, after a proper revaluation of the assets. The firm's balance sheet at December 31st, 1908, was as follows: Liahilities, Sundry Creditors £5,000 Bills Payable 1,500 Mortgage on Land and Buildings at 4 per cent.. 7,500 A., Capital i4»5oo R, « 9,500 £38,000 Land and Buildings £10,000 Plant and Machinery 6,000 Loose Plant and Tools . 3,000 Stock-in-Trade 9,000 Sundry Debtors after pro- viding for Bad Debts and Discounts 7,500 Bills Receivable 1,000 Cash in hand and at Bank. 1,500 £38,000 Profits and losses both of revenue and capital were divided in the pro- portion of A, two-thirds, and B., one-third. The revaluations at 31st March resulted as follows: Land and build- ings, £9,100; plant and machinery, £5,600; loose plant and tools, £3,500; stock-in-trade, £8,ooa •37s fi I I' Accountancy Problems and SoluHons. Tlie other assets at that date were agreed as follows : Sundry debtors (after providing for bad debts and discounts). £8,500; biUs receivable, iooo; cash in hand and at bank, i2,ooo; The HabEities were: Loan on mortgage at 4 per cent, £7,500 (interest paid to 3i8t December, 1908) ; bills payable, ii.ooo; sundry crditors, £3,500. Make out the necessary adjustment accounts and balance sheet at list March, 1909. ^ 2. What steps must A., the person referred to in the previous question, take to secure himself from all risk of being held Kable for any of the debts of the firm contracted after his retirement? * /"^'^.r"^^ T" ^""^^^ ^""^^'^ ^''^"*^^ ^^^'^o""* i"* the foUowing cases? (1) Where the rate of exchange is stable. (2) Where the rate of exchange is fluctuating. Explain on what basis you would incorporate the accounts of the foreign branch in the head office books, taking France as an example of a •table rate and Brazil as an example of a fluctuating one. 4. Henry Wilson sold his business to a limited company, but agreed to serve the company as manager for a period of ten years. The directors "1 l^Z ^ Vf xf ^^^ ^'^^P^"^ ^^ '°"^^ "^^^«"^« a«^^"st loss in the event of the death of Henry Wilson, decided to insure his life for £10.000. with- out profits, payable at death or at the end of ten years. How should theamiual premiums on the policy be treated in the accomits of the com- piny ? Give pro forma " journal entries. 5. A.. B.. C and D. carry on business in partnership as engineers and iron founders. They decide to convert their business into a private limited company as on 1st July. 1909. The firm^s balance sheet at that date was as follows: Ltabiiities, Sundry Creditors Northern Bank, Lim.. Capital A c D £7,000 3,000 25,000 15,000 10,000 lO/XX) £70*000 Assets, Leasehold Premises £15,000 Fixed Plant and Machinery 20,000 Loose Plant and Tools.... 10,000 Sundry Debtors 7^000 Stock-in-Trade i2,'ooo Patterns, Trade Marks and Patents 5,000 Cash in hand 1,000 £70,000 ITic company took over the business at the price of £66.000 and in addition paid the firm's liabilities. ' 37© C. P. A. Examination Papers. The capital of the company is £100,000, divided into 35»ooo 6 per cent, cumulative preference shares of £1 each and 65,000 ordinary shares of £i each. The purchase price was discharged by the allotment to A. of 15,000 preference and 10,000 ordinary shares, to B. 15,000 ordinary shares, and to C and D. each 10,000 ordinary shares, all fully paid. The balance of £6,000 was to be paid in cash and divided amongst A., B., C and D., ui proportion to their respective capitals in the firm. The above shares were duly allotted on first July, 1909, and on the same date 5,000 preference shares were allotted to E. and 5,000 to R. in pursu- ance of applications received from them, and A., B., C, D., E., F. and G., who had signed the memorandum of association for one share each, were ordered to be registered in the books of the company in respect thereof, and each of them paid up the £1 due thereon on the same day. On July loth E. and F. both paid up for their preference shares in full, and on July 18th the balance of the purchase money was paid to the vendors. Make the necessary entries in the company's journal and cash book in respect of the above transactions, and open and post up the vendors' account in the company's private ledger. 6. What do you understand by the term " Novation " as applied to part- nerships? Explain fully what is necessary to constitute "Novation." 7. The City and Suburban Gas Company rebuild and re-equip part of their works at a cost of £50,000. The part of the old works thus superseded cost £30,000. The capacity of the new works is double that of the old. £2,000 is realized by the sale of old materials, and old materials valued at £1,000 are used in the reconstruction and included in the cost of £50,000 above mentioned. The cost of labor and materials is 10 per cent, higher now than when the old works were built. Give the journal entries for recording the above transactions in the books of the company, showing particularly what amount you consider should be charged to capital expenditure and stating your reasons for your decision. 8. What is the Bankers' Clearing House? Explain shortly the system on which it is worked, taking for the sake of example four banks. A, B., C. and D. 9. Smith, Jones and Robinson are partners. Robinson has a salary of £200 per annum, and the profits of the firm after paying his salary are divided equally between Smith and Jones until they have received £500 each, after which the balance is divided equally amongst the three. The profits of the firm for the year 1907 were agreed with the Surveyor of Taxes at £1,400, and for 1908 at £1,500. For 1909 the profits after charging Robinson's salary were £800. Smith held £6,000 Midland Railway 3J^ per cent, debenture stock, Jones owned 377 : .1 I jlill 11 Accountancy Problems and Solutions. tile house he lived in vrhi^u Robi«so„ had no o.htl^t oHntre"" " ^ '^°" """'' ''=''«""^ ^■ per r„t '"' ""™" "'^--^ —ted to i^ and Jone,' to ^30 Prepare the firm's return fn mums, claiming abatement anT aTsoT^Vf" '"^ '*^' "^"^'"'^ ''P^^^'- and show what will be the alum t^et^^ winT"' '' ^'™^ ^"^°'"^' upon for the year 1910-19,,. ^'"^ "^^^ ^^^^ *^ P^y «come tax la What do you understand W *u^ * «« basis or bases do ^r^,7 -^ • ^^^ ^^'■™' ^n Cost"? Upon what u«t!,es ao you consider it shnnW k« t 1 j\ *^ "^' reasons. " snoum be calculated? Give your Auditing. I- As auditor to a limited ,-«.««-. (2) Patents. (3) i5,ooo Chinese Bonds. (4) Loan secured by mortgage on freehold property. ai>Pear in .He P"b.i Jhe/ LltTh'eT oTf rpt;°"°"'"« "^"^ ^'''^ Q J Liabilities. Sundry balances and accounts not closed /, o,^ « . P . Assets. ^.679,274 7s. od. oaL^!r ^f T"^ ^'^^"^ appeared amongst the asset, nf . r ,.• Pany, of which you are the auditor : Colhery Com- Short workings. Explain its meaning, and statV "«,'L*i, ", ^^'^^ would allow it to be tf;ated as an al^ef ^"' °" "''^^ --"ditions you 4- The annual accounts of thi. niA d t t . foHowing items: ' ^^^ ^"'"^^^^^^ Bank. Lim., contain the (a) ^ash in Bank of England... (b) ^-^j^fand a„^^^^^^^^ is6o,.54 (c) Money at Call and shori Notice ^72,124 (d) Rebate on Bills not due 72i,s6o To What investigation shonM yo^^ as^ a^diio:.' sn,™;. ;,; ^^^^ ,^ C. F. ^. Examination Papers. 5. What is the difference in principle between the balance of the capital account of a British railway company as shown in the statutory form of accounts and the statement of capital account of a limited company as shown in the annual balance sheet? State briefly your duties as auditor in each case with reference to such accounts. 6. Give four examples of " closing entries " which you, as auditor of a firm, would expect to find in the journal at the annual audit, and state your duties with regard to them. 7. As auditor of a registered building society you are required to certify that, at the audit, you "have actually inspected the mortgage deeds and other securities " for loans granted by the society. To what extent should your inspection go so as to cover your responsibility? 8. Goodwill for a large amount appears amongst the assets of the Barchester Brewery Company, Lim., a company formed during the brewery "Boom." The profits of the company have gradually decreased during the past few years, and, in the years ended June 30th, 1908 and 1909, while the dividend was paid on the preference shares, no profits, were available for dividends on the ordinary shares. The balance at the credit of the profit and loss account for the year ended June 30th, 1910, was sufficient (after satisfying the preference shareholders to pay a dividend of 2^/^ per cent, on the ordinary shares. The directors were divided in opinion as to whether a dividend should be declared or the amount taken to the credit of the goodwill account As auditor to the company you were called in to advise the directors. State briefly the views which you would have submitted to the board. 9. When auditing the books of a firm you find that no bill transactions are recorded in the firm's books until the bills have matured. Give your opinions upon this method, and show how the balance sheet of the firm would be affected. ,0. In auditing the books and accounts of trustees under a will or settle- ment, what special matters have to come under your view that do not occur in the audit of a business concern, and how would you deal with them? 379 I iiiiHin j Accountancy Problems and Solutions, Practical Accountiiig— Part I. Twdaj, June 27, 1911—1.15 to 4.15 P. M. only. <«^rs only. designatinriTnLb.^l 'f"* "'"*""'' '"" "»'"" »*. number of each oToftHeZeZ.T '" T'""" '"'^"'- ^*«* <*') LL':S?I Tcce,Z '' """" ^"''^ -"■«'" '" « - «-' January i. ,9,0: ^ "' '''*°'^ ""''• '^"^ *« 'o"""'"* fact. Cash (miprest fund) $500; raw materials $17,688 «• wa«, .,n„aM . j distributed $z,34a67- irood« in n,„~.o *'7.w».5i, wages unpaid and finished goods ^5,2902^ ***''^ ^" management charges; The invoices for purchases of raw materiale f^^ *u^ $78^7^.6^- wairi.« nTw tr,,I. " ™^**"*** ^or the year amounted to wo,j/3.D5, wages paid ^i33»04i-27: manairement rliar.»Ac «.-,/;«- x _^ ^^^and for xx months' sale of power I330. the twelfth montll 1^^ The raw materials consumed during the period amounted to *6d .88 «• management charees distrihntrrf Sei? •#:,„, * -^ "umcu 10 ♦04,188.33; to costs amounted^ too..! Tlt^'f!' ^f"*^^, ^^P^"^*^ ^»*"»>uted placements of $45 '''"* * ^^'^ ^" '""^^^^^^'^ ^^- « J!?I !"'f "'* ^J"^"^ ^'^^P"* ^^'^ ^^ y^' ^^o-^t^l to $324,583 43 includ iiW all costs, and the transfers to the main office were $3X9^ undL'LleTt^'Jl^^^ "^'"^^ ^'' '^'^ *^^- remained unpaid and averajre rate of ^c^^*!^ u '^ !?" ""^ operatives* overtime at an 7Z^ r . ^, "** '*^'' ''°"^' P*^"^ 0" a basis of 2% hours over- time as the equivalent of 354 hours regular time. Raise all the ledger accounts affected and show final trial balance. 2. A. contracts with a textile establishment to sell the mill's annual output on the following conditions : ^""*' The mill is to bill the output to A at cn^t A .v ♦^ c .t. the i»xfi»fif nf 'reoiL t . . ^°®t- A. IS to finauce the mill to the extent of 75% of cost on receipt of goods. The balance is to be remit- ted by A. as the various shipments are sold, less 5% and advances At the end of a year an analysis of A.'s affairs rev*^k fhl%^Vi . *"*^*'^: ^^ by his books thi. ^r^A. V • 1 J^ ^^^"i reveals the following as shown nurT i^ ' I ^ ^^ ^'^"'^ ^°*** ** ^*>* profit above the factory cost [Mill shipments $7,327,918.18.] lacioiy cost. 380 • C. P. A. Examination Papers. Debits. Credits. Mill advances • • $5f545,938 $5i000,ooo Mill sales 6,400,000 7*840,710 Freight and cartage 90,000 80,000 Customers ••• 7.840,710 7,632,200 Cash 7,610,200 5,635,938 Discounts 22,000 Commission 32Q1OOO Mill account 1,000,000 $27,508348 $27,508348 Prepare A's financial statement. 3. Philip Jones, a citizen of New York State, died April i, 1909, leav- ing a will appointing four executors. The will was probated May i, 1909, showing the following bequests : X. % share, B. J4 share, C. A of the entire estate after payment of funeral expenses, debts, etc., a specific bequest to the A. Hospital consist- ing of $20,000 and a parcel of improved property valued at $50,000. The inventory filed by his executors was as follows: 5% mortgage for $40,000, interest payable semi-annually on June 30 and December 31 ; 500 shares common stock of Industrial Company, par value $100, appraised @ no; 50 5% first mortgage bonds of A. Railway Company, par value $100, appraised @ 104, interest payable semi-annually on March i and Sep- tember i; accounts receivable valued at $20,000; cash in banks and on hand, $69,250 ; household furniture and effects appraised at $5,500. The executor's transactions were as follows: Cash Receipts. 500 shares of Industrial stock sold @ $115 per share. 45 first mortgage bonds sold July i @ iii and accrued interest. Accounts collected $18,500 (balance worthless). 6% dividend on Industrial stock declared May i, 1909. Interest on bank balances $1,300, of which $400 accrued prior to testator's death. Interest on bonds and also on mortgage duly collected. Rents collected $4,000, of which $1,500 accrued prior to death of testator. The household furniture and effects were taken by X. at the appraised valuation. Cash Payments. Funeral expenses $2,000 Expenses of probating will 335 General legal services 1,000 Rent of safe deposit vault 50 Care of cemetery lot, etc. 500 381 lilll^'l li I If lijj I II '! Accountancy Problems and Solutions. Premium on executors' bonds Stationeiy, postage, etc [[[[[ • • • loo Debts of deceased . • • ■ 12c; Taxes 12,865 X. on account of legacy 1*025 C on account of legacy • 12,000 • • • 20,000 S% njortgage, $40,000. ^^S^xTT^' *""'* °* A- ««"*'" Company, merest on X s advances amounts to $350 and on C's"^ advances $575. Frepare (a) a summary statement qi»naraf;«^ ««• • i .statement showing amounts le S arief 'rT' » ?"* '""^'' <"> the commission due executors. '^"*'«='"'«»' (<=> a statement showing Practical Accouniiiig— Part IL W«J.erf^. J„^ 28. 191 1-9.15 A.M. to 12.15 P.M, onl,. Answer ivm questions but nn Mt/>«>« a ""»««•* only, designating by «««a^" '^'"' ««"'«'»•« *«' u>ritf soite Ll;^^''"";^ '™ •^•^"^ »' *'- P»«ners agreed to dis- The original investments contributed Ta«.«^ « A., cash f, 00^000, B., cash C»^ C C^ 'r't"' ""'. "'' '""""'^ cr«Jited with $80,000 and his se^l^'t^' &Lfh/ *=""''»' "r""" *»* as collateral for the same Exchange held by the firm wi*d'rawTo::!^V„rchTr"' T^T.T' ^"'""-r ^"='-- ^- ^ ""-«• to $.5,000 and charge ImeT^ni" Tra'iln H ''"°*"' '" *'*<'^='" and charge same to expense *° withdraw $20,000 ortTt^rsS'eSS ^'^ - — <» original amount, profits ^^T*e interim transactions during the year as transcribed from the blotter Jar^nii'-^ '""'"• ^' ^'"«= '•'«« -«*' 'o^ *'.oos.ooo. maturing C.P. A. Examination Papers. Purchases of stocks for customers, long, 50,000 shares (par value $100) for $4,750,000. Sales of stocks for customers, short, 50,000 shares (par value $100) for $4,625,000. Margin received in cash from customers, long, $500,000. Margin received in cash from customers, short, $500,000. The following loans were made from banks on securities : On bonds $750,000; interest paid in full to Dec. 31, iQio, $32,500. On stocks $150,000; interest paid in full to Dec. 31, 1910, $6,000. To complete transactions for account of customers all stocks were either borrowed or loaned. The earnings comprised, commissions $i7S,ooo received in full, interest receivable $85,000, of which $70,000 was collected. The expenses were $62,500 (exclusive of partners' allowances or interest paid on capital), of which $2,500 remained unpaid at time of dissolution. The partners had withdrawn as follows : A. $16,500, B. $18,750, C. $18,- 500. The market value of the bonds was $1,004,500. The Stock Exchange seat was finally sold to B. for $85,000, the profit therefrom reverting to the firm. Prepare statements, prior to dissolution, showing (a) cash receipts and disbursements and balance on deposit in bank, (b) income and expendi- tures, (c) condition at time of dissolution, (d) partners' respective capital accounts. 5. The Prosperous Company is organized under the laws of the State of New York to conduct a manufacturing business. The authorized cap- ital is $500,000, divided into $250,000 common and $250,000 preferred stock, par value of shares $100. Five incorporators subscribe each for one share of common stock at face value. John Peters, one of the incorporators, purchases from three manufacturing companies their complete plants for $499,500 and transfers said plants to the Prosperous Company for the re- maining $499,500 of common and preferred stock and $100,000 of first mortgage 5% bonds out of a total issue of bonds amounting to $150,000, leaving $50,000 of bonds in the treasury. The incorporators then pay in cash for their respective subscriptions. The individual assets acquired are as follows: land and buildings $75,000; plant and machinery $200,000; tools, equipment and fixtures $50,- 000; inventories $100,000; accounts receivable, good $28,000, doubtful $5,000; cash $12,000. Prepare (a) opening entries for the books of the Prosperous Company, (b) initial balance sheet showing the company's financial condition. 6. From the following figures of net sales, costs and expenses prepare a statement, accounting for the shrinkage in profits in 1910 and showing in dollars and cents what portion of such shrinkage is due to decreased sales 383 I Accountancy PrQbUms and Solutions, ind what portion is occasioned liy the various variations in cost and ex- pense items: Jlf.*^^"f*, ••• 1230,500 $265,335 Direct labor ^g^joo 106,228.75 Indirect labor 6725 8,379 Factory expenses 27,500 26,999 Trading expenses 23,500 20,947.50 Office expenses , , ,0^500 11,637.50 Net sales $390,750 $465,500 N. B.— The solutions to questions 1, 3 and 5 appear in Part I as prob- lems Nos. 38, 39 and 40. Theory of Accounts. Tuesday. Jime 27, f91 1^9.15 A. M. to 12.15 P. M.. only. Answer 10 questions but no more, selecting at least two questions from each group. Answers in excess of the number required will not be con- sidered. Do not repeat questions but write answers only, designating by number as in question paper. Check ( /) the number of each one of the questions you have answered. Each complete answer will receive 10 credits. Papers entitled to 75 or more credits will be accepted. GROUP I. I. What books of account do you consider necessary for the conduct of a small business ? Describe their form and use. ' 2. What general order do you suggest for arranging the accounts when only one ledger is necessary for a moderate business? • 3. Mention the different kinds of ledgers that you would install in a concern where the transactions were large and varied. «■ 4, Describe fully the construction of a profit and loss account. What varioiis meanings may its balance have and how should it be treated in lIMferent organizations under which business is conducted? S At the end of a fiscal year a concern inventoried its raw material at cost. Do you approve of this method? State your reasons fully. J84 C. P. A. Examination Papers. GROUP II. 6 A corporation organized under the laws of the State of New York has a capital of $200,000, viz., 1,000 shares common and 1,000 shares pre- ferred stock, par value $100 each. The patents were bought of the pat- entee for $50,000 common and $50,000 preferred stock. The patentee donated one half of each issue of his stock to the company for its use in securing additional capital. Show entries necessary to record these trans- actions and state what accounts you would set up in relation thereto. ^ 7. A mining corporation has assets comprising among others leases, good will, patents, rent and royalties paid in advance. How would you deal with them in the profit and loss account and balance sheet? •^8. The Hayward Company has declared a dividend of 10% on its capital stock of 100,000, payable July i, 1910; stock books close on June 15, 1910. Describe the accounting procedure incident thereto and state who may participate in the dividends. • 9. In closing the books of a corporation, how would you value goods consigned at selling prices to customers under an agreement by which consignees pay for goods as used? * la The books of a corporation show balances at the debit or credit of the following accounts : rents from tenements, reserve for accounts receiv- able, depreciation on machinery, depreciation on furniture and fixtures, bond redemption account, bills receivable, dividend on preferred stock. State which should enter into profit and loss account and which should appear in balance sheet Why? GROUP III ^11. A fire insurance company's assets include stocks and bonds that it carries at market price regardless of cost Is this in accordance with your views? Give reasons. •^12. Describe the process of closing the books of a corporation at the end of its fiscal year, showing trading account and profit and loss account, caption and allocation being a prerequisite. 13. Describe the method of determining the number of shares of capital stock held by each of the several stockholders of a corporation, giving fully the titles of the books in which the facts are registered and stating how the books should be opened and operated. *I4. A company leases for a term of 50 years certain unimproved property for factory purposes, paying a ground rent of $1,000 per year. The company erects certain buildings thereon for its own use at a cost of 385 Accountancy Problems and Solutions. $40*000, which arc to become the the property of the owner at the expira- tion of the lease. State how you would treat this propositions in the compan/s books of account IS The budget of a municipality includes appropriations for seven separate departments. Set up such accounts as you believe will cover the financial operations incident thereto, with supposed receipts and disburse- ments. w Auditing. ; June 28. 1911—1.15 to 4.15 P.M., only. Anszifer 10 questions but no more, selecting at least two questions from mck group. Answers in excess of the number required will not be con- sidered. Do not repeat questions but write answers only, designating by number as in question paper. Check ( yf) the number of each one of the questions you have answered. Each complete answer will receive 10 credits. Papers entitled to 75 or more credits will be accepted. GROUP h I. Define auditing. 2. If called on to verify the merchandise account of a manufacturing concern, what steps would you take to make the necessary investigation? 3. The cash of a concern had not been proved at any regular period and at the date of the audit the pass book had not been balanced with the bank. How would you proceed to prove the correctness of the cash balance as shown by the cash book ? '4. What would be your procedure in examining the capital stock books of a corporation? What books would you require? Give reasons why such an audit may be necessary. S Give a brief report of the affairs of a small manufacturing concern. What points, in your opinion, call for special attention ? * GROUP 11. #«■ , 6. In auditing the affairs of a railway company, how should the auditor determine whether or not the earnings are correctly stated? '7. An auditor who is employed to close the accounts of a firm and p^ptre a balance sheet finds that the current work is behind and that no trial balance has been effected for over a year. How should he proceed? 386 C. P. A. Examination Papers. *8. Describe the steps necessary to m»ke a complete audit of a savings bank. * 9. A company takes a large number of notes (bills receivable) from its customers and when in need of funds discounts or sells them. What accounts, if any, should appear to care for the contingent liability thus created to satisfy you as auditor? "10. Set forth in detail and in order of importance the instructions you would give an assistant in the audit of an electric railway, a bank, a stock broker. GROUP III. ''ii. State in detail the successive steps to be taken in auditing the - accounts of an executor of an estate. ''la. Give examples of such assets and liabilities not usually found on books of account, as should be considered by the auditor when preparing an income and profit and loss account at the close of a fiscal period. "*" 13. What method should an auditor employ in determining the value of stock, of accounts receivable, of additions to plant and property account? *"i4. Wha^ conditions would influence you in fixing the rate of deprecia- tion on buildings, machinery and tools, fixtures and patterns? JUi. 15. Describe your mode of procedure in connection with some audit on which you have been engaged. Relate the nature of the business, answer- ing in sufl5cie?it detail to enable the examiners to form an opinion regard- ing your knowledge. Commercial Law. Thunday, June 29, 1911-9.15 A. M. to 12.15 P.M., only. Answer jo questions but no more, selecting at least two questions from each group. Answers in excess of the number required will not be con- sidered. Do not repeat questions but write answers only, designating by number as in question paper. Check ( >f) the number of each one of the questions you have answered. Each complete answer will receive 10 credits. Papers entitled to 75 or more credits will be accepted. GROUP I. I. Define (a) insurance, (b) insurer, (c) insured, (d) premium, (e) risk, (f) insurable interest. 387 •* ^ Accountancy Problems and Solutions. 3. Define (a) partnership, (b) ostensible partner, (c) dormant partner d corpora , on (e) stockholder, (f) comm^ stoci, (g) preferreTs^' (h) certificate of deposit picicrrca stock, ^ Classify estates in land with respect to their duration and define (A^ .f^f"^ f' foDowing: (a) will, (b) abstract of titi,^, (c) guardian (d) trust, (e) certified check. Buaruian, GROUP IL ti^ ^r\*f '"^ necessary for the formation of a joint stock associa- wjiat respects does it resemble a corporation? in wriSg? '''"*'^'''' ""^'' '^' ^'^ ^"^^ ^*^*"*« ^^ F^-"ds. must be HatilitTof a'ToiZ"'" '""'" ""^'^ ''"^ ^^ ^ork law? State the liability of a common carrier at common law, under the New York law To what extent can the carrier limit his liability under thTlatter lal? To what special supervision, if any, are common^carriers subjS prLn^em of' ^^^^*^f tt^"'*'"'"'"*' ^"^ ^^^' constitutes a sufficient presen^^^^^^^ '"'''""'^"* '^^ P^^^"*? Where should presentment be made? When may presentment be dispensed with ^ What constitutes a material alteration in a negotiable instrument? lo. Give the substance of the statute providing for the rendering, of financial statements by a corporation to its stockhofders' ^ GROUP III. II. A., the owner of real estate, dies intestate, leaving no children but the child of a deceased daughter. To whom does the real estate descend and in what proportion? aescena iz A. and B. are partners. If C. recovers a judgment airainst A for a personal debt may a firm chattel be sold to sa isfy^Ws ^^Ten^^ U a partner with B. and has he any rights as to an accounting from B? 388 C. P. A. Examination Papers. 13. A. owes B. money on a gambling debt. B. employs C. to collect the same, agreeing to pay him 25% of the amount collected. C. persuades A. to pay the debt, the total amount thereof going to B. in the first instance. Later, C. sues B. to recover his proportion for the coUectioa Will he succeed? Give reasons for your answer. 14. A bank certified a check that had been altered by changing the date, name of payee and by raising the amount, and the bank subsequently paid the same to the defendant. Subsequently thereto, the bank sued the defendant for the amount thus paid. Can it recover ? Or does its certifica- tion of the check amount to a warranty of the genuinenesss of the body of the check as to payee or amount? Explain. 15. May a stockholedr object to an act of his corporation as ultra vires after he has acquired and accepted pecuniary benefit thereunder, when such act is neither malum prohibitum nor malum in se? ^ IM Summary of the Federal G>rporation Tax Law. The Federal Corporation Tax Act, which is given in full in the appen- dix, is one of the most important laws passed in recent years by the Con- gress; it affects, according to the report of the Commissioner of Internal Revenue for 1910, corporations with a total capital stock of $52,371,626,752 and with a bonded indebtedness of $3i,333,9S2,ooo. Every one of those corporations has to make, in accordance with the requirements of the Tax Act, a yearly report, and has to pay an excise tax of one per cent. (1%) on all net income above $5,000. The primary object of the lawmakers was to produce revenue; the title of the Act, however, sets out that one of its objects is to encourage the industries of the United States; according to others, again, the tax was levied solely as the result of a popular clamor for publicity with regard to corporation affairs. Respecting the last two objects, A. W. Machen, Jr., says in his Treatise on the Federal Corporation Tax Law of 1909 : " The industries of the United States are, to a vastly preponderating extent, carried on by corporations which are subject to this tax, and it would be a poor way to * encourage ' them to impose on them such heavy burdens and to subject them on mere suspicion to such inquistorial examination and ruinous publicity as to compel many of them to quit business." It is a well-known fact that many concerns in the United States during the last year have changed from the corporate form of doing business to partner- ships and associations, which is certainly not an illegitimate way of evading the tax. Of special importance, however, is a thorough study of the tax law for every member of the accountancy profession. Their services are needed by the corporation when determining, in accordance with the requirements of the Act, what is the gross income and what deductions may be made legitimately in order to arrive at the taxable amount of net income. It is within his province to interpret the inexact nomenclature of the Act and to reconcile it with the accounting principles with which it is only too fre- quently at variance. To accomplish that task intelligently, it is of prime importance for the practicing accountant to be acquainted not only with the text of the law but also with its interpretation by the courts. Following is a summary of the Corporation Tax Act, followed by a synopsis of decisions relating to it : The chief provisions of the law may be summarized as follows: I. Every domestic corporation, joint stock company, or association organized for profit and having a capital stock represented by shares, shall be subject to a tax of one per cent. (1%) on the entire net income over and above $5,000, exclusive of dividends obtained from corporations on which the tax is imposed, received by it in each calendar year, beginning with the year ending Dec. 31, 1909. 393 Accountancy Problems and Solutions, Every foreign corporation doing business within the United States shall be subject to the same conditions on business transacted and capital in- vested in any state or territory of the United States. In Article i. Appendix, p. 402. lines 9 and 10, we find the words "... a special excise tax with respect to the carrying on or doing business . . ." These words are essential in determining the constitutionality of the law, as this tax resembles greatly an income tax, which is against the Constitu- tion. The courts have decided, however, that the amount of income serves only as a measurement of the tax, the latter being in reality a levy on business. II. Article 2 lays down rules and definitions for determining the gross income of corporations classified as follows: (i) Banks and other financial institutions and insurance companies, (2) transportation companies, (3) manufacturing companies, (4) mercantile companies, and (5) miscel- laneous companies. III. The following deductions, specified in Articles 3 and 4, may be made from the gross income in order to ascertain the taxable net income : 1. All the ordinary expenses actually paid within the year in main- tenance and operations of the business and its properties. 2. All losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for deprecia- tion of property', if any, accrued during the year in the value from exhaus- tion, wear and tear, or obsolescence, when the loss has not been made good by payments for ordinary maintenance and repairs deducted under the heading of expenses of maintenance and operation or in the ascertain- ment of gross income; and in the case of insurance companies the sums other than dividends paid within the year on policy and annuity contracts and the net additions to the reserve as required by law. 3. Interest aciuatly paid within the year on its bonded or other indebt- edness to an amount of such bonded and other indebtedness not exceeding the paid-up capital stock of such corporation outstanding at the close of the year ; in the case of banking institutions, also all interest actually paid within the year on deposits. 4. Taxes paid within the year to the government of the United States, to any state therein, or to any foreign government, as a condition of car- rying on business therein. 5. Dividends received on the stock of other corporations, subject to the tax 4 From the amount of ascertained net income the sum of $5,000. With regard to the use of the phrase "gross amount of income re- ceived," Machen remarks : * " It should be observed that the tax is pro- portioned to income received during the year. This word would seem to exclude income to which the company may be entitled, but which has not been colle cted. Perhaps it would be too broad a statement that the Act * Troatise on the FedecBl Corporation Tax Law of 1909. Summary of the Federal Corporate Tax Law. contemplated only income collected in cash; but at any rate, it does seem to distinguish between estimated income and actual receipts." Equally significant are his remarks on the repeatedly occurring phrase "actually paid": "It is only expenses 'actually paid* which are required to be deducted: a liability which has been incurred but not discharged is not to be included. This is no serious hardship, because the deduc- tion could in that case be made the next, or any subsequent, year; for, as already stated, the deduction is not confined to the expense incurred for maintenance and operation during the year for which the tax is levied. The force of the words ' actually paid * should not be pressed too far. It is not as if the Act had said * actually paid in cash,' although even in that case a set-off by mutual agreement of an existing debt owing to the com- pany would be equivalent to payment. As it is, it would seem that accord- ing to the fair meaning of the words used they are equivalent to actually discharged or satisfied." The discrepancy between the requirements of the law and sound account- ing principles is evident here at a glance; according to the latter an ex- pense or an item of income should be recorded, not when actually received or paid, but when incurred or accrued in a certain period, otherwise the year gets the charge or credit which rightfully belongs elsewhere. IV. Under the authority of this Act forms of return have been pre- scribed, in which the various items specified in the law are stated; blank forms of this return are furnished to every corporation, not exempted from the tax, on or before January i, and each corporation must make an accurate return, under the affirmation of its president or other principal officer and its treasurer, to the Collector of Internal Revenue, on or be- fore March i, setting forth the total capital stock paid up, outstanding at the close of the year, the gross income received during the year and the items, mentioned under III, to be used in computing the net income. Fail- ure to receive the blanks or any notice relative thereto does not excuse a corporation from making the return nor relieve it from penalties for failure to do so. In order to simplify the work of making the returns, every class of corporations, mentioned under II, receives a distinct form on which it must file its report ; the forms for classes 3, 4 and 5 will be found in the Appendix, pp. 409-414, and it will be noticed that the difference is mainly in Note A, which gives the definitions of gross income for the various kinds of corporations. In the form for banks and other financial institu- tions, which is not printed there, the deductions include under 6 (b) the following provision: Total amount of interest paid within the year on deposits. The form for transportation companies is similar to Form No. 638. The regulations of the Act do not call for specific methods of keeping accounts or any particular system of bookkeeping; the requirement is simply that the transactions be so recorded that accurate returns can be made therefrom and verified when necessary. « \ II 394 395 f^ Accoumkmcy ProUewm md Solutions, In view of the fact tliat the language used by the lawmakers in framing the Act was in several instances not entirely clear, decisions have been ren- dered, from time to time, interpreting the meaning of the provisions. A synopsis of those decisions issued hf the Internal Revenue Department follows. (T. D. 1606.) Special excise tax. Synopsis of decisions relating to the tax imposed by section 38, act of August 5, 19091 on corporations, etc, TiEASURY Department, Officer of Commissioner of Internal Revenue, Washington, D. C, March 29. 1910. The following sjpnosis of decisions made, from time to time, on ques- tions relating to the special excise tax imposed by section 38, act of August 5, 1909, on corporations, joint stock companies, associations, and insurance companies, is published for the information of internal-revenue officers and others concerned. . . EovAL E. Cabell, Commissioner, CLASS OF CORPORATIONS^ ETC., SUBJECT TO TAXES. I. The tax imposed by the act applies to all corporations, etc., described, except those speciically exempted, without reference to the kind of busi- ness carried ©«• a. Every corporation, etc., not specifically enumerated as exempt shall make the return required by law, although its net income during the year may not have exceeded $5,000. 3. Corporations claiming special exemption should nevertheles make return (in blank if desired) accompanied by a statement setting forth the ground on which exemption is claimed. 4. Corporations, etc., organized during the year or going into liquida- tion during the year should nevertheless render a sworn return on the prescribed form. The tax imposed, however, is held not to apply to corporations which went out of existence prior to the passage of the act. 5. Where company has dissolved and the required return is not made by its officers, such return will be prepared by commissioner. 6. Where corporation has gone into bankruptcy, returns in such cases to be made by trustee in bankruptcy. 7. Railroad companies operating leased or purchased lines to include all receipts derived thereform, and if bonded indebtedness has been assumed may deduct interest thereon to an amount not exceeding its own paid-up 396 Summary of the Federal Corporate Tax Law. capital stock. If such subsidiary companies receive income in the way of rentals, etc., return to be also made by such companies. 8. Corporations, etc., organized under the authority of the United States or any State or Territory thereof, or Alaska or the District of Columbia, to include in their returns not only the income derived from the business carried on within the confines of the United States, but income received from business transacted in any foreign country as well. 9. Corporations having branch or subsidiary companies to include in their returns the income of all such companies. 10. Foreign companies having several branch offices in the United States should each designate one of such branches as its principal office and should also designate the proper officers to make the required return. 11. Where a consolidation of two or more corporations has been effected during the year, and each or any such corporation subsequent to such consolidation collects prior existing debts, each such corporation should make separate return and include therein all such collected debts, as also all income received during the year prior to the date of consol- idation. 12. " Principal place of business " is held to mean the principal office where the company keeps its books from which the required return is to be prepared and not the place where the operating plant is located. 13. As the law specifically provides that the tax imposed shall be computed on the net income during each calendar year, returns of income based on any period other than the calendar year cannot be accepted. 14. Full amount of stock, as represented by the par value of the shares issued, to be regarded as the paid-up capital stock, except when such stock is assessable on account of the deferred payments, in which case the amount actually paid on such shares will constitute the actual paid-up capital stock of the corporation. 15. Capital stock held to include both preferred and common stock. 16. Surplus and undivided profits not to be included in capital stock 17. Holding companies known as "Voting trusts," receiving only dividends on stock held, and having no capital stock, etc., not liable. 18. Mutual savings banks having no capital stock not liable to tax im- posed. (Opin. Atty. Gen., Feb. 14, 1910.) 19. Co-operative dairies not issuing stock and allowing patrons divi- dends based on butter fat in milk furnished not liable. 20. Foreign steamship companies having no office in the United States, whose vessels only occasionally touch at ports in the United States, net regarded as doing business in this country within the meaning of the statute. 21. Companies organized in Porto Rico and not engaged in business in the United States not subject to tax. 22. Corporations owning sugar or other plantations and disposing of the products thereof not entitled to exemption as agricultural organizations. 23. Corporations organized to sell provisions, etc., to stockholders and others not exempted. 307 Accountancy PmMems and Solutions, Summary of the Federal Corporate Tax Law. t 24 G>rporation5 organized for the purpose of holding real estate, to make return of income derived from the property so held. 25. National banks do not come within any of the exemptions named in the act. 26. '* Agricnltural organizations " held not to come within the statutory exemption, unless their chief object is the promotion or advancement of agricnltural interest, and no part of the net income inures to the benefit of their stockholders. 27. Mutual Hail Association regarded as an insurance company and not as an agricultural association, and therefore liable to tax. 28. Exemption in favor of fraternal beneficiary associations does not apply to mutual fire insurance companies. a5>. Limited partnership, if organized for profit and having a capital stock represented by shares, although no ** certificates of stock " are issued, are liable to the tax imposed. (Opin, Atty. Gen., Feb. 14, 1910.) 30. Building and loan associations not exempt if having a capital and loaning to others than members, i. e., if doing a business akin to banking business. 31. Building and loan associations issuing stock on which dividends are guaranteed held to be liable to tax imposed. 32. Interest received on Government bonds to be included in gross in- come. (Opin. Atty. Gen., Jan. 13, 1910.) 33. Returns should be signed and verified by two of the officers designated in the law. Signing of one person holding two such offices not permitted. Agents for foreign steamship companies may sign the required returns, if so authorized by their companies. 34. Returns not required to have corporate seal affixed. 35 Returns filed with deputy collector regarded as having been filed with collector. 36. No form of protest prescribed. Any form of protest sufficient if filed before payment of tax. Right of protest not to be denied. INVlNTOllESj, ACCOUNTS, ETC. 37, Where an inventory or its equivalent was not taken at the close of the year 1908, a supplemental statement showing such inventory approxi- mately must be submitted with the return on the regular form. Such sup- plemental statement shall be verified under oath by the treasurer or prin- cipal financial officer submitting the same. (T. D. 1578.) 3a Cost of manufactured articles, or articles in process of manufacture, held to include original cost of material used, plus cost of labor, etc. 39. Mortgaged real estate should be inventoried at its full value, and amount of mortgage reported as indebtedness. 40. Profits realized on sale of real estate during year, also increase in value of unsold property, to be included in income. 41. Receipts during year from lands sold on installment to be included in gross income for that year. 30 42. Receipts from sale of patent rights to be included in income. 43. No particular system of bookkeeping or accounting will be required by the department. However, the business transacted by corporations, etc., must be so recorded that each and every item therein set forth may be readily verified by an examination of the books and accounts where such examination is deemed necessary. DEDUCTIONS, EXPENSES, ETC. 44. It is immaterial whether the deductions are evidenced by actual disbursements in cash or whether evidenced in such other way as to be properly acknowledged by the corporate officers and so entered on the books as to constitute a liability against the assets of the corporation, etc., making the return. 45. Mortgage indebtedness on real estate, if assumed by the corporation acquiring such real estate, to be included in the indebtedness of the corpora- tion. But if not so assumed and remains only as a lien on the property, interest paid thereon may be deducted as a charge " made as a condition to the continued use or possession of the property." (Opin. Atty. Gen., Feb. 21, 1910.) 46. Cost of erecting building, if included in lease under which property is held by company, is a proper deduction, to be prorated according to time fixed by lease. 47. General expenses, such as coal, ship stores, etc., of foreign steamship companies, to be prorated as provided in act for interest deductions. 48. Amount received by nursery companies from sales of trees, etc., less amount expended for seedUngs and young trees, to be included in gross income. Amount expended for labor, salesmen, etc., to be deducted as expenses. 49. Commissions allowed salesmen, paid in stock, may be deducted as expense if so charged on books. 50. Sales of stock and bonds are regarded as sales of capital assets and should be so accounted for. (Art. 2, regs. 31.) But proceeds derived from sale of bonds used in defraying ordinary and necessary expenses are a proper deduction in determining the company's net income. 51. Stock issued in payment of property purchased represents capital investments, and notes issued during the year represent indebtedness. Corporate funds applied to the payment of outstanding notes not a proper deduction in ascertaining net income. 52. Amounts expended in betterments or repairs not a proper deduction. A resonable allowance for depreciation of stock, etc., is permissible. 53. Betterments and repairs not proper reductions as expenses, the former being additions to the capital assets of the company, and the latter being offset by allowance for depreciation. 54- Cost of replacing old rails, structures, etc., not regarded as ordinary and necessary expenses. Depreciation during year will be allowed, how- ever, in such cases. 399 fl Accoumiancy Problems and Solutions, 55- Dividends received by corporations on stock of other corporations whose net income does not exceed $5,000 is nevertheless a proper deduction under the law. (Opin. Atty. Gen., Jan. 24, 1910.) 56. Dividends received on stock of foreign corporations not subject to tax not a proper deduction. 57. Dividends paid employees in lieu of wages not proper deduction as expenses. 58. Royalties on patent rights to be reported as income. Allowance for depreciation of patents expiring during year, however, will be allowed. 59. Pensions paid or gifts made to employees are gratuities and not •' ordinary and necessary expenses." 60. Where allowances on account of salaries are deemed excessive and for the purpose of evading the tax due, investigation will be made, and if the facts warrant prosecution will follow. 61. Interest paid on time deposits and deposits subject to check consti- tutes a proper deduction from the amount of gross income during the year. 62. Interest on portions of bonded or other indebtedness bearing diHerent rates of interest may be deducted from gross income during the year, provided the aggregate amount of such indebtedness does not exceed the paid-up capital stock of the corporation. 6$. Interest paid during the year on notes given prior to January i, 1909, to be prorated. But interest on notes given in 1909, and payable subsequent to December, 1909, unless charged on the company's books, is not a proper deduction from the income of that year. 64. Interest or taxes accruing prior to the year for which return is made is not a proper deduction from the gross income for that year. 65. Unearned premiums set aside by insurance companies as reserve not to be included as income until earned. 66. Funds set aside by company for insuring their own property not a proper deduction. 67. As the tax imposed is measured by and is not a tax upon the net receipts of corporations, etc., interest received during the year on Govern- ment bonds is not a proper deduction from such income in determining the amount of tax due. (Opin. Atty. Gen., T. D. 1583.) 6a State, county, or municipal taxes paid during the year a proper deduction in ascertaining the net income of corporations. 6g, Import duties or taxes if included in arriving at cost of goods are not deductible under the head of taxes paid during the year. 70. Bad debts, if so charged off the company's books during the year, are proper deductions. But such debts, if subsequently collected, must be treated as income. DEPRECIATION. Summary of the Federal Corporate Tax Law. 72 Depreciation in value of mines by the removal of ore, if not other- wise' ascertainable, may be prorated as in the case of sales of capital assets 'p ' 71 ' Depreciation in value of mines by the removal of ore, if m excess of t oer cent, of investment, to be explained in return rendered. 74. Estimated depreciation in oil or gas wells, buildings machinery etc, to be stated in detail, if exceeding 5 per cent, of value as previously m- ""^/"corporations leasing mines and paying royalties on ore mined not entitled to deduction for depreciation. But corporations owning mmes arc entitled to allowance for depreciation based on fair estimate, etc 76 Removal of timber from timber lands, while depleting the lands to the extent of such removal, is regarded as a change in the form of assets and not a depreciation within the meaning of the act. ^ ^ , 77. Deduction on account of depreciation of property must be based on lifetime of property, its cost, value, and use. 7& Voluntary removal of buildings, etc, for purpose of improvements not regarded as loss or depreciation, and no deduction therefor should be "^^!* Depreciation of company's stock a loss to the stockholders, but not a loss to the company issuing the same, and therefore not a proper deduc- tion. (Signed) Royal E. Cabell, Commissioner. 71. Where increase or decrease during the year in the value of real estate acquired in previous years, sold or held for sale, can not be accurately determined, such increase or decrease may be prorated, as provided by regulations in cases of sale of capital assets. 400 «l Accountancy Problems and Solutions. APPENDIX. FuD Text of The Coiporation Tax Act. Section 38 n,i;r« *u «** / ance of anv officer nr -«,,.i^ i- '■"*"t'*"J^' ^"a to require the attend- «cc oi any omcer or employee of such corporation, ioint storlr rnrr.^n^» or association, or insurance company, and to tl^ hrte.^^^^^^ reference to the matter required by L t t ^nt^ 1:^^^:^^ 406 Appendix. with DOwer to administer oaths to such person or persons ; and the com- Tssioner of internal revenue may also invoke the aid of any court of the United States having jurisdiction to require the attendance of such offi- cers or employees and the production of such books and papers. Upon thT information so acquired the commissioner of internal revenue may ^end any return or make a return where none has been made. All pro- !Sdings taken by the commissioner of internal revenue under the pro- visionf of this section shall be subject to the approval of the secretary of the treasury. ARTICLE FIFTH. Assessment of tax; penalties by way of additions to tax for false returns and in cases of neglect to make returns; assessments payable annually on or before June 30; penalties for non-payment. All returns shall be retained by the commissioner of internal revenue who shall make assessments thereon ; and in case of any return made with false or fraudulent intent, he shall add one hundred per centum of sudi tax and in case of a refusal or neglect to make a return or to verify the same as aforesaid he shall add fifty per centum of such tax. In case of neglect occasioned by the sickness or absence of an officer of such cor- poration, joint stock company or association, or insurance ^^^mpany, re- quired to make said return, or for other sufficient reason, the collector may allow such further time for making and delivering such return as he may deem necessary, not exceeding thirty days. The amount so added to the tax shall be collected at the same time and in the same manner as the tax originally assessed, unless the refusal, neglect or falsity is ais- covered after the date for payment of said taxes, in which case the amount so added shall be paid by the delinquent corporation, joint stock company or association, or insurance company, immediately upon notice given by the collector. • • 4. * 1, All assessments shall be made and the several corporations, joint stocK companies or associations, or insurance companies, shall be notified of the amount for which they are respectively liable on or before the first day of June of each successive year, and said assessments shall be paid on or before the thirtieth day of June, except in cases of refusal or neglect to make such return, and in cases of false or fraudulent returns, in which cases the commissioner of internal revenue shall, upon the discovery thereof, at any time within three years after said return is due, make a return upon information obtained as above provided for, and the assess- ment made by the commissioner of internal revenue thereon shall be paid by such corporation, joint stock company or association, or insur- ance company, immediately upon notification of the amount of such assess- ment ; and to any sum or sums due and unpaid after the thirtieth day of June in any year, and for ten days after notice and demand thereof by the collector, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum per month upon said tax from the time the same becomes due. 407 1^ Acc&uniamy Pmbiems and S&luHom, ARTICLE SIXTH. All rettims to lie ikd by collectors in office of conimissioner of internal revenue. When the assessment shall be made, as provided in this section, the re- turns, together with any corrections thereof which may have been made by the commissioner, shall be filed in the office of the commissioner of internal revenue and shall constitute public records and be open to in- spection as such. ARTICLE SEVENTH. Unlawful for officials to divulge information. It shal be unlawful for any collector, deputy collector, agent, clerk or other officer or employee of the United States to divulge or make known, in any manner whatever not provided by law, to any person any informa- tion obtained by him in the discharge of his official duty, or to divulge or make known in any manner not provided by law any document re- ceived, evidence taken, or report made under this section, except upon the special direction of the president; and any offense against the foregoing provision shall be a misdemeanor and be punished by a fine not exceed- ing one thousand dollars, or by imprisonment not exceeding one year, or both, at the discretion of the court. ARTICLE EIGHTH. Pumltiet Inifosed upon corporations, joint stock companies and associa- tions for refusal or neglect to make returns and for false or fraudulent returns. If any of the corporations, joint stock companies or associations, or insurance companies, aforesaid, shall refuse or neglect to make a return at the time or times hereinbefore specified in each year, or shall render a false or fraudulent return, such corporation, joint stock company or association, or insurance company, shall be liable to a penalty of not less than one thousand dollars and not exceeding ten thousand dollars. Any person authorized by law to make, render, sign, or verify any re- turn, who makes any false or fraudulent return, or statement, with intent to defeat or evade the assessment required by this section to be made, shall be guilty of a misdemeanor, and shall be fined not exceeding one thousand dollars or be imprisoned not exceeding one year, or both, at the discretion of the court, with the costs of prosecution. All laws relating to the collection, remission, and refund of internal revenue taxes, so far as applicable to and not inconsistent with the pro- visions of this section, are hereby extended and made applicable to the tax imposed by this section. Jurisdiction is hereby conferred upon the circuit and district courts of the United States for the district within which any person summoned under this section to appear to testify or to produce books, as aforesaid, shall reside, to compel such attendance, production of books, and testi- mony by appropriate process. Appendix. Form Wo. 637.— FORM TO BE FILED BY MAKUFACTURHIG CORPORATIONS. This form, properly Med out and executed, must be in the hands of the collector of internal revenue for the district in which is located the principal office of the corporation making the return on or before March i. TO BE FILLED IN BY TO BE FILLED IN BY INTERNAL REVENUE COLLECTORS. BUREAU. List No Assessment List 19 Class Page Line District of Date received 19 UNITED STATES INTERNAL REVENUE. RETURN OF ANNUAL NET INCOME. (Section 38, Act of Congress, Approved August 5, 1909.) MANUFACTURING CORPOR^VTIONS, Return of Net Income received during the year ending December 31, 19 ^ by a corporation, the principal place of business of which is located at in the State of 1. Total amount of paid-up stock outstanding at close of year $ • 2. Total amount of bonded or other indebtedness out- standing at close of year $ 3. Gross Income (see Note A) $. DEDUCTIONS. 4. Total amount of all the ordinary and neces- sary expenses of maintenance and operation of the business and proper- ties of the corporation (see Note B) . $ 5. (a) Total amount of losses sus- tained January i to Decem- ber 31 $ (b) Total amount of depreciation January i to December 31. . $ ' Total (see Note B) $ 6. Total amount of interest January i to December 31 on bonded or other indebtedness to an amount not to exceed amount of paid-up capital at close of year (see 7. (a) Total taxes paid January i to December 31 imposed un- M 409 1 Accountancy Problems and Solutions. der authority of the United States or any state or ter- ritory thereof $ (h) Foreign taxes paid $ Total (see Note B) $ 8. Amount received by way of dividends upon stock of other corporations, joint stock companies, associations and insurance companies subject to this IaJC •■•..........*. Jp Total Deductions 9. Net Income 10. Specific deduction from net income allowed by law . . . 11. Amount on which tax at one per centum is to be cal- I $ $5,000.00 State or. , G>unty or To wit : ........ , President, and Treasurer, of the corporation, whose return of annual net income is set forth above, being severally duly sworn, each for him- self, deposes and says that the foregoing report and the several items therein set forth are, to his best knowledge and belief and from such in- formation as he has been able to obtain, true and correct in each and every particular ; that the amount of gross income therein set forth is the full amount of gross income, without any deduction whatsoever, received from all sources by the said corporation during the year stated, and that the net income therein set forth is the full amount on which the tax is proper to be assessed. SwoEN AND Subscribed to before me this President. Treasurer. [Seal]. •mmimimmimmmiiimKmmm .^ ' Miiiiiii ■ ■ « ■■ ■ ■ ■■iii m iii ■■ ■ ■ , „ , ■ ■ ■■ ■ ■.iiii. — n i — n -i. ■ .i. ,.111. .iii.ii.i.ii..i..iiii.i , ,. , 1. .m.^. _., , „ . Note A. — The gross income received during the year from all sources shall in the case of a manufacturing corporation consist of the total amount ascertained through an accounting that shows the difference between the price received for the goods as m»M and the cost of such goods as manufactured. The cost of goods inaufactured ■liall be ascertained by an addition of a charge to the account of the cost of goods as manufactured during the year, of the sum of the inventory at beginning of the year and a credit to the account of the sum of the inventory at the end of the year. To this amount should be added all items of income received during the year from other sources, including dividends received on stock of other corporations, joint-stock com- panies and associations subject to this tax. In the determination of the cost of goods manufactured and sold as above, such cost shall comprehend all charges for maintenance and operation of manufacturing plant, but shall not embrace allowances for depreciation or losses, which items shall be taken account of under the proper heading above as a deduction. Mote B. — The deductions authorized shall include all expense items under the various heads acknowledged as liabilities by the corporation making the return and entered as such on its book from January i to December 31 of the year for which return is made. Appendix. Worm Ho. 638.— FORM TO BE FILED BY MISCELLANEOUS CORPORATIONS. This form, properly filled out and executed, must he in the hands of the collector of internal revenue for the district in which is located the prin- cipal office of the corporation making the return on or before March i. I \ TO BE FILLED IN BY COLLECTORS. List No. Qass... .District of. TO BE FILLED IN BY INTERNAL REVENUE BUREAU. Assessment List 19 Page Line Date received 19 UNITED STATES INTERNAL REVENUE. RETURN OF ANNUAL NET INCOME. (Section 38, Act of Congress, Approved August 5, 1909.) MISCELLANEOUS CORPORATIONS. Return of Net Income received during the year ending December 31, ig ^ by ^ corporation, the principal place of business of which is located at in the State of 1. Total amount of paid-up stock outstanding at close of year $ 2. Total amount of bonded or other indebtedness out- standing at close of year $ 3. Gross Income (see Note A) $ DEDUCTIONS. 4. Total amount of all the ordinary and neces- sary expenses of maintenance and operation of the business and proper- ties of the corporation (see Note B) . $ 5. (a) Total amount of losses sus- tained January i to Decem- ber 31 $ (b) Total amount of depreciation January i to December 31. . $ Total (see Note B) $ 6. Total amount of interest January i to December 31 on bonded or other indebtedness to an amount not to exceed amount of paid-up capital at close of year (see Note B) $ 410 411 Accountancv Problems and Sohitions. 7. (a) Total taxes paid January i to December 31 imposed un- der authority of the United States or any state or ter- ritory thereof $ _ (b) Foreign taxes paid $ Total (see Note B) $. 8. Amount received by way of dividends upon stock of other corporations, joint stock companies, associations and insurance companies subject to this tax $. Total Deductions $. 9. Net Income $ 10. Specific deduction from net income allowed by law... $5,000.00 II. Amount on which tax at one per centum is to be cal- culated $. State of , County of To wit : • • , President, and Treasurer, of the corporation, whose return of annual net income is set forth above, being severally duly sworn, each for him- self, deposes and says that the foregoing report and the several items therein set forth are to his best knowledge and belief, and from such in- formation as he has been able to obtain, true and correct in each and every particular ; that the amount of gross income therein set forth is the full amount of gross income without any deduction whatsoever received from all sources by the said corporation during the year stated, and that the net income therein set forth is the full amount on which the tax is proper to be assessed. Sworn and Subscribed to before me this. 01 , *9* • - • . President. Treasurer. [Seal], Note A. — Gross income shall consist of the total of the gross revenue derived from the operation and management of its business and properties, together with all amounts of income from other sources, including dividends on stock of other organiza- tions subject to this special excise tax received, as shown by entries upon its books from January i to December 31 of the year for which return is made. Note B. — The deductions authorized shall include all expense items under the various heads acknowedged as liabilities by the corporation making the return and entered as such on its books from January i to December 31 of the year for which return is made. 412 Appendix. Form No. 639.__FORM TO BE FILED CORPORATIONS. BY MERCANTILE This form, properly filled out and executed, must be in the hands of the collector of internal revenue for the district in which is located the prin- cipal office of the corporation making the return on or before March i. to be filled in by to be filled in by internal revenue collectors. bureau. List No Assessment List 19 Class Page Line District of Date received i9--- UNITED STATES INTERNAL REVENUE. RETURN OF ANNUAL NET INCOME. (Section 38, Act of Congress, Approved August 5, 1909) MERCANTILE CORPORATIONS. (Corporations whose principal business is buying and selling.) Return of Net Income received during the year ending December 31, jQ w a corporation, the principal place of business of which is located at m the State of 1. Total amount of paid-up stock outstanding at close of year $ 2. Total amount of bonded or other indebtedness out- standing at close of year $ 3. Gross Income (sec Note A) $ deductions. 4. Total amount of all the ordinary and neces- sary expenses of maintenance and operation of the business and proper- ties of the corporation (see Note B) . $ 5. (a) Total amount of losses sus- tained January i to Decem- ber 31 $ (b) Total amount of depreciation January i to December 31 . . $ Total (see Note B) '. $ 6. Total amount of interest January i to December 31 on bonded or other indebtedness to an amount not to exceed amount of paid-up capital at close of year (see Note B) $ 7. (a) Total taxes paid January i to December 31 imposed un- der authority of the United '"I 413 Accountancy Problems and Solutions. States or any state or ter- ritory thereof $ (b) Foreign taxes paid $ Total (see Note B) $. 8. Amount received by way of dividends upon stock of other corporations, joint stock companies, associations and insurance companies subject to this tax $. Total Deductions Appendix. 9. ICk Net Income Specific deduction from net income allowed by law. $ $5,000.00 II. Amount on which tax at one per centum is to be cal- culated for assessment $. State of , G)unty of To wit : , President, and Treasurer, of the corporation, whose return of annual net income is set forth above, being severally duly sworn, each for him- self, deposes and says that the foregoing report and the several items therein set forth are to his best knowledge and belief, and from such in- formation as he has been able to obtain, true and correct in each and every particular; that the amount of gross income therein set forth is the full amount of gross income without any deduction whatsoever, re- ceived from all sources by the said corporation during the year stated, and that the net income therein set forth is the full amount on which the tax is proper to be assessed. Sworn and Subscribed to before me this day of ,19 President. [Seal]. Treasurer. Note A. — The gross amount of income received during the year from all source* shall in the case of a mercantile corporation consist of the total amount ascertained through inventory, or its equivalent, which shows the difference between the price received for goods sold and the cost of goods purchased during the year, with an addition of a charge to the account of the sum of the inventory at beginning of the year and a credit to the account of the sum of the inventory at the end of the year. To this amount should be added all items of income received during the year from ©ther sources, including dividends received on stock of other corporations, joint-stock companies and associations subject to this tax. In determining this amount no account ■UI be taken of allowances for depreciation or losses, which items shall be taken •eeount of under the proper heading above as a deduction. Note B. — The deductions authorized shall include all expense items under the various heads acknowledged as liabilities by the corporation making the return and entered as such on its books from January i to December 31 of the year for which return is made. 414 Supreme Court of the United States. Nos. 407, 409, 410, 411. 412, 415, 420, 425. 431, 432, 442, 443. 446. 456 and 457.— October Term, 1910. Stella P. Flint, as General Guardian ' of the property of Samuel N. Appeal from the Circuit Court Stone Junior, a minor, Apellant, | of the United States for the y ' ^j. District of Vermont. Stone Tracy Company et al. J J Wyckoff Van Derhoeff, Appellant, | 409 vs. The Coney Island and Brooklyn Railroad Company et al. Francis L. Hine, Appellant, 410 vs. Home Life Insurance Company etal. Fred W. Smith, Appellant, 411 vs. The Northern Trust Company, A. C. Bartlett, William A. Fuller et al. William H. Miner, Appellant, 412 vs. The Corn Exchange National Bank of Chicago, Charles H. Wacker, Martin A. Ryerson et al. Cedar Street Company, Appellant, 415 ^^• Park Realty Company. Lewis W. Jared, Appellant, 420 vs. The American Multigraph Company et al. Joseph E. Gay, Appellant, 425 vs. The Baltic Mining Company et al. Appeals from the Circuit Court of the United States for the Southern District of New York. Appeals from the Circuit Court of the United States for the Northern District of Illinois. I Appeal from the Circuit Court of the United States for the Southern District of New York. Appeal from the Circuit Court of the United States for the Northern District of Ohio. Appeal from the Circuit Court of the United States for the District of Massachusetts. 41S i#» 4ccountaiuy Problems and Solutions. if \ Percy H. Brimdage,, Appellant, 431 vs. Broadway Realty Cornpaoy et. al. Paul Ixcroix, Appellant, 432 FA Motor Taximeter Cab Company et al. Arthur Lyman and Arthur T. Ly- ^ man, as Trustees under the last will and testament of George Baty Blake, deceased, Appellants, 442 vs. Interborough Rapid Transit Com- pany et al. George Wendell Phillips, Appellant 443 vs. Fifty Associates et al. Oscar Mitchell, Appellant, 446 vs. Clark Iron Company. William H. Fluhrer, Albert W. Du- ' rand and Howard H. Williams, Appellants, [ . 45^ vs. New York Life Insurance Company. Katlierine Cary Cook, Harriet Hunt- ] iegton Cook, and Ellenor Rich- ardson Cook, by Anna H. R. Cook, their guardian and next I friend. Appellants, 457 vs. Boston Wharf Company et al. Appeals from the Circuit Court of the United States for the Southern District of New York. Appeal from the Circuit Court of the United States for the District of Massachusetts. Appeal from the Circuit Court of the United States for the District of Minnesota. Appeal from the Circuit Court of the United States for the Southern District of New York. Appeal from the Circuit Court of the United States for the District of Massachusetts. [March 13, 191 1.| Mr. Justice Day delivered the opinion of the Court. These cases involve the constitutional validity of Section 38 of the Act of Congress approved August 5, 1909, known as " The Corporation Tax " law. (Stat. 1909, pp. 11-112-117.) It is contended in the first place that this section of the act is unconsti- tutional, because it is a revenue measure, and originated in the Senate in violation of Section 7 of Article i of the Constitution, providing that " all bills for the raising of revenue shall originate in the House of Represen- 416 Appcndi.r. tatives but the Senate may propose or concur with amendments as on other bills." The history of the act is contained in the Government's brief, and is accepted as correct, no objection being made to its accuracy. This statement shows that the tariff bill, of which the section under consideration is a part, originated in the House of Representatives and was there a general bill for the collection of revenue. As origmally in- troduced it contained a plan of inheritance taxation. In the Senate the proposed tax was removed from the bill, and the corportion tax, ma measure substituted therefor. The bill having properly origmated in the House we perceive no reason in the constitutional provision relied upon whv it may not be amended in the Senate in the manner which it was in this case The amendment was germane to the subject-matter of the bill and not beyond the power of the Senate to propose. In thus deciding we do not wish to be regarded as holding that the journals of the House and Senate may be examined to invalidate an act which has been passed and signed by the presiding officers of the House and Senate and approved by the President and duly deposited with the State Department. (Field vs. Clark, 143 U. S. 649; Harwood vs. Wentworth, 162 U. S. 547; Twin City Bank vs. Nebeker, 167 U. S. 196.) , , . In order to have in mind some of the more salient features of the statute with a view to its interpretation, a part of the first paragraph is here set out, as follows: " Sec. 38. That every corporation, joint stock company or association organized for profit and having a capital stock represented by shares, and every insurance company now or hereafter organized under the laws of the United States or of any state or territory of the United States, or under the acts of Congress applicable to Alaska or the District of Colum- bia, or now or hereafter organized under the laws of any foreign country and engaged in business in any state or territory of the United States or in Alaska or in the District of Columbia, shall be subject to pay an- nually a special excise tax with respect to the carrying on or doing busi- ness by such corporation, joint stock company or association or insurance company equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock of other corporations, joint stock companies or associations or insurance companies subject to the tax hereby imposed; or if organized under the laws of any foreign country, upon the amount of net income over and above five thousand dollars received by it from business transacted and capital invested within the United States and its territories, Alaska and the District of Columbia, during such year, exclusive of amounts so re- ceived by it as dividends upon stock of other corporations, joint stock companies or associations or insurance companies subject to the tax hereby imposed." A reading of this portion of the statute shows the purpose and design of Congress in its enactment and the subject-matter of its operation. It is at once apparent that its terms embrace corporations and joint stock com- 417 Accountancy Problems and Solutions. panics or associations whicb are organized for profit, and have a capital stock represented by shares. Such joint stock companies, while differ- ing somewhat from corporations, have many of their attributes and enjoy many of their privileges. To these are added insurance companies, and they, as corporations, joint stock companies or associations, must be such as are now or hereafter organized under the laws of the United States or of any state or territory of the United States, or under the acts of Congress applicable to Alaska and the District of Columbia. Each and all of these, the statute declares, shall be subject to pay annually a spe- cial excise tax with respect to the carrying on and doing business by such corporation, joint stock company or association, or insurance company. The tax is to be equivalent to one per cent of the entire net income over and above $5,000 received by such corporation or company from all smtrces during the year, excluding, however, amounts received by them as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax imposed by the statute. Similar companies organized under the laws of any foreign coun- try and engaged in business in any state or territory of the United States, or in Alaska or the District of Columbia, are required to pay the tax upon the net income over and above $5,000 received by them from business transacted and capital invested within the United States, the territories, Alaska and the District of Columbia, during each year, with the like exclusion as to amounts received by them as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies, subject to the tax imposed. While the mere declaration contained in a statute that it shall be re- garded as a tax of a particular character does not make it such if it is apparent that it cannot be so designated consistently with the meaning and effect of the act, nevertheless the declaration of the lawmaking power is en- titled to much weightt 9n4 in this statute the intention is expressly declared to impose a special excise tax with respect to the carrying on or doing business by such corporation, joint stock company or association, or insur- ance company. It is therefore apparent, giving all the words of the statute effect, that the tax is imposed not upon the franchises of the corporation irrespective of their use in business, nor upon the property of the corpora- tion, but upon the doing of corporate or insurance business and with re- spect to the carrying on thereof, in a sum equivalent to one per centum upon the entire net income over and above $5,000 received from all sources during the year; that is, when imposed in this manner it is a tax upon the doing of business with the advantages which inhere in the peculiarities of corporate or joint stock organization of the character described. As the latter organizations share many benefits of corporate organization it may be described generally as a tax upon the doing of business in a cor- porate capacity. In the case of the insurance companies the tax is im- posed upon the transaction of such business by companies organized under the laws of the United States or any state or territory, as heretofore stated. 418 Appendix. This tax it is expressly stated, is to be equivalent to one per centum of the entire 'net income over and above $5,000 received from all sources durine the year-this is the measure of the tax explicitly adopted by the statute The income is not limited to such as is received from property used in the business, strictly speaking, but is expressly declared to be uoon the entire net income above $5,000 from all sources, exdudmg the amounts received as dividends on stock in other corporations, joint stock companies or associations, or insurance companies, also subject to the tax. In other words, the tax is imposed upon the doing of business of the char- acter described, and the measure of the tax is to be the income, with the deduction stated, received not only from property used in business, but from every source. This view of the measure of the tax is strengthened when we note that as to organizations under the laws of foreign coun- tries the amount of net income over and above $5,000 i«^ "*i.^^ ^^^^ ;^- ceived from business transacted and capital invested m the United States, the territories, Alaska and the District of Columbia. It is further strengthened when the subsequent sections are considered as to deductions in ascertaining net income and requiring returns from those subject to the act. Under the second paragraph the net income is to be ascertained by certain deductions from the gross amount of mcome received within the year " from all sources " ; and the return to be made to the collector of internal revenue under the third section is required to show the gross amount of the income received during the year " from all sources." The evident purpose is to secure a return of the entire income, with certain allowances and deductions which do not suggest a restriction to income derived from property actively engaged in the business. This interpretation of the act, as resting upon the doing of business, is sus- tained by the reasoning in Spreckels Sugar Refining Co. vs. McClam, 192 U. S. 397, in which a special tax measured by the gross receipts of the business of refining oil and sugar was sustained as an excise in respect to the carrying on or doing of such business. Having thus interpreted the statute in conformity, as we believe, with the intention of Congress in passing it, we proceed to consider whether, as thus construed, the statute is constitutional. It is contended that it is not, certainly so far as the tax is measured by the income of bonds non-taxable under Federal statutes, and municipal and State bonds beyond the Federal power of taxation. And so of real and personal estates, because as to such estates the tax is direct, and re- quired to be apportioned according to population among the States. It is insisted that such must be the holding unless this court is prepared to reverse the income tax cases decided under the act of 1894. (Pollock vs. Farmers' Loan & Trust Company, 157 U. S. 429; s. c, 158 U. S. 601.) The applicable provisions of the Constitution of the United States in this connection are found in article one, section eight, clause one, and in article one, section two, clause three, and article one, section nme, clause four. They are respectively: 419 Accouniancy Problems and Solutions. ** The Coogress shall have power to lay and collect taxes, duties, im- posts, and excises, to pay the debts and provide for the common defense and general welfare of the United States ; but all duties, imposts and ex- cises shall be uniform throughout the United States." ** Representatives and direct taxes shall be apportioned among the sev- eral States which may be included within this Union, according to their respective numbers." " No capitation or other direct tax shall be laid unless in proportion to the census or enumeration hereinbefore directed to be taken." It was under the latter requirement as to apportionment of direct taxes according to population that this court in the Pollock case held the statute of 1894 to be unconstitutional Upon the rehearing of the case Mr. Chief Justice Fuller, who spoke for the court, summarising the effect of the decision, said: "We have considered the act only in respect of the tax on income de- rived from real estate, and from invested personal property, and have not commented on so much of it as bears on gains or profits from business, privileges, or employments, in view of the instances in which taxation on business, privileges, or employments, has assumed the guise of an excise tax and been sustained as such."' (1,58 U. S. 635.) And as to the excise taxes, the Chief Justice said : "We do not mean to say that an act laying by apportionment a direct tax on all real estate or personal property, or the income thereof, might not also lay excise taxes on business, privileges, employments and voca- tions." (p. 637.) The Pollock case was before this court in Knowhon vs. Moore, 178 U. S. 41. In that case this court sustained an excise tax upon the trans- mission of property by inheritance. It was contended there, as here, that the case was ruled by the Pollock case, and of that case this court, speak- ing by the present Chief Justice, said: " The issue presented in the Pollock case was whether an income tax was direct within the meaning of the Constitution. The contentions which the case involved were thus presented. On the one hand, it was argued that only capitation taxes and taxes on land as such were direct, within the meaning of the Constitution, considered as a matter of first impression, and that previous adjudications had construed the Constitu- tion as having that import. On the other hand, it was asserted that, in principle, direct taxes, in the constitutional sense, embraced not only taxes on land and capitation taxes, but all burdens laid on real or personal property because of its ownership, which were equivalent to a direct tax on such property, and it was affirmed that the previous adjudications of this court had settled nothing to the contrary. ** Undoubtedly, in the course of the opinion in the Pollock case it was said that if a tax was direct within the constitutional sense the mere Appendix. erroneous qualifictaion of it as an excise or duty would not take it out of the constitutional requirement as to apportionment. But th.s langv^ge related to the subject-matter under consideration, and was but a state- Lint thlt a tax which was in itself direct, because imposed upon properiy ment tnat a lax wii v, rhaneed bv affixmg to it the solely because of .Isou^nerslup, <=»" .« ol The same view was taken of the Pollock case m the subsequent case of Spreckels Sugar Refining Co. vs. McClain, 192 U. S. 397- The act now under consideration does not impose direct taxation upon property solely because of its ownership, but the tax is withm the class which Congress is authorized to lay and collect under article one, section eight, clause one of the Constitution, and described generally as taxes, du- ties, imposts and excises, upon which the limitation is that they shall be uniform throughout the United States. Within the category of indirect taxation, as we shall have further occa- sion to show, is embraced a tax upon business done in a corporate ca- pacity, which is the subject-matter of the tax imposed in the act under consideration. The Pollock case construed the tax there levied as direct, because it was imposed upon property simply because of its ownership. In the present case the tax is not payable unless there be a carrying on or doing of business in the designated capacity, and this is made the occa- sion for the tax, measured by the standard prescribed. The difference between the acts is not merely nominal, but rests upon substantial differ- ences between the mere ownership of property and the actual doing of business in a certain way. It is unnecessary to enter upon an extended consideration of the tech- nical meaning of the term " excise." It has been the subject-matter of 421 ^m ^ y k Accountancy Probieims ami Solutions, considerable discussion— the terms duties, imposts and excises are gen- erally treated as embracing the indirect forms of taxation contemplated by the Constitution. As Mr. Chief Justice Fuller said in the Pollock case, smpra: "Although there have been from time to time intimations that there might be some tax which was not a direct tax nor included under the words 'duties, imposts and excises,' such a tax for more than one hun- dred years of national existence has as yet remained undiscovered, not- withstanding the stress of particular circumstances has invited thorough investigation into sources of revenue." And in the same connection the Chief Justice, delivering the opinion of the court in Thomas w. United States, 192 U. S. 363, in speaking of the words duties, imposts and excises, said: " We think that they were used comprehensively to cover customs and excise duties imposed on importation, consumption, manufacture and sale of certain commodities, privileges, particular business transactions, voca- tions, occupations and the like." Duties and imposts are terms commonly applied to levies made by gov- ernments on the importation or exportation of commodities. Excises arc "taxes laid upon the manufacture, sale or consumption of commodities within the country, upon license to pursue certain occupations and upon corporate privileges." (Cooley Cons. Lim. 7th ed. 680.) The tax under consideration, as we have construed the statute, may be described as an excise upon the particular privilege of doing business in a corporate capacit>% 1. e., with the advantages which arise from corpo- rate or quasi-corporate organization; or, when applied to insurance com- panies, for doing the business of such companies. As was said in the Thomas case, 192 U. S. supra, the requirement to pay such taxes involves the exercise of privileges, and the element of absolute and unavoidable demand is lacking. If business is not done in the manner described in the statute, no tax is payable. If we are correct in holding that this is an excise tax, there is nothing in the Constitution requiring such taxes to be apportioned according to population. ( Pacific Ins. Co. vs. Soule, 7 Wall. 433 ; Springer vs. United States, 102 U. S. 586; Spreckels Sugar Refining Co., 192 U. S. 397.) It is next contended that the attempted taxation is void because it levies a tax upon the exclusive right of a state to grant corporate fran- chises, because it taxes franchises which are the creation of the state in its sovereign right and authority. This proposition is rested upon the implied limitation upon the powers of national and state governments to take action which encroaches upon or cripples the exercise of the exclusive power of sovereignty in the other. It has been held in a number of cases that the state cannot tax franchises created by the United States or the agencies or corporations which arc created for the purpose of carrying out governmental functions of the United States. (McCulloch vs. Mary- 422 Appendix. land, 4 Wheat. 316; Osborn ... Bank. 9 Wheay38 ; ^'^°^' ^Y^; ^^- i^tnn iR Wall 5; California vs. Central Pac. R. R. Co., 127 ^- ^- i-J T" xamination of these cases will show that in e-h case where Ae taxtas held invalid the decision rested upon the proposition *"* ««= ~^- ^raTion was created to carry into effect powers conferred upon the Fed- crr^vrrrLent in its sovereign capacity, and the attempted taxation 21 an interference with the effectual exercise of such powers. In Osborn vs. The Bank, s.pra. a leading case upon the ^""j^**. -J^'_^» it was heW that the bank of the United States was not a pnvate corpora^ tionlut a public one. created for national purposes, and therefore beyond SietaxLg power of the state. Chief Justice Marshall, m deUvermg the 5n on o? the court, conceded that if the corporation had been ongma^d ? r/Lna»ld "O more ex empf its private business from the operation of that power than it would «empt L private business of any individual employed m the same manner." The inquiry in this connection is: How far do the implied limitations upon the'tax'ng power of the United States over objects whjch wouM otherwise be legitimate subjects of federal taxation withdraw themjrom the reach of the federal government in raismg revenue because they are oursued under franchises which are the creation of the states? In approaching this subject we must remember that enactments levying taxes as other laws of the federal government when actmg within con- stitutional authority, are the supreme law of the land. The Constitution contains only two limitations on the right of Congress to levy excise taxes- they must be levied for the public welfare and are required to be uniform throughout the United States. As Mr. Chief Justice Oiase said, speaking for the court in License Tax Cases, 5 Wall. 462, 471 : ' Congress cannot tax exports, and it must impose direct taxes by the rule of appor- tionment and indirect taxes by the rate of uniformity. Thus hmited and thus only, it reaches every subject and may be exercised at discretion. The limitations to which the Chief Justice refers were the only ones im- posed in the Constitution upon the taxing power. In McCray vs. United States, 195 U. S. 27, this court sustained a tea- cral tax on oleomargarine, artificially colored, and held that while the Fifth and Tenth Amendments qualify, so far as applicable, all the pro- visions of the ConstiUition, nothing in those amendments operates to take away the power to tax conferred by the Constitution on the Congress. In 423 II '\ I Jccouniancy Problems and Solutions, that case it was contended that the snbject taxed was within the exclusive domain of the States, and that the real purpose of Congress was not to raise revenue, but to tax out of existence a substance not harmful of itself and one which might be lawfully manufactured and sold; but, the only constitutional limitation which this court conceded, in addition to the re- quirement of uniformity, and that for the sake of argument only so far as concerned the case then under consideration, was that Congress is re- strained from arbitrary impositions or from exceeding its powers in seek- ing to effect unwarranted ends. The limitation of uniformity was deemed sufficient by those who framed and adopted the Constitution. The courts may not add others. (Patton vs. Brady. 184 U. S, 608, 622. And see United States vs. Singer, 15 Wail, iii, 121; Nicol vs. Ames, 173, U. S, 5«>9. 515-) We must therefore enter upon the inquiry as to implit-d limitations upon the exercise of the federal authority to tax because of the sovereignty of the states over matters within their exclusive jurisdiction, having in view the nature and extent of the power speciiically conferred upon Congress by the Constitution of the United States. We must remember, too, that the revenues of the United States must be obtained in the same territory. from the same people, and excise taxes must be collected from the same activities, as are also reached by the states in order to support their local governments. While the tax in this case, as we have construed the statute, is imposed upon the exercise of the privilege of doing business in a corporate ca- pacity, as such business is done under authority of state franchises, it becomes necessary to consider in this connection the right of the federal government to tax the activities of private corporations which arise from the exercise of franchises granted by the state in creating and conferring powers upon such corporations. We think it is the result of the cases here- tofore decided in this court that such business activities, though exercised because of state-created franchises, are not beyond the taxing power of the United States. Taxes upon rights exercised under grants of state franchises were sustained by this court in Railroad Company vs. Collector, 100 U. S. 595 ; United States w. Erie R, R. Co., 106 U. S. $27; Spreckels Sugar Refining Co.. vs. McClain, 192 U. S. sg^. It is true that in those cases the question does not seem to have been directly made, but. in sustaining such taxation, the right of the federal government to reach such agencies was necessarily involved. The ques- tion was raised and decided in the case of Veazic Bank w, Fenno, 8 Wall 533. In that well-known case a tax upon the notes of a state bank issued for circulation was sustained. Mr. Chief Justice Chase, in the course of the opinion, said: " Is it. then, a tax on a franchise granted by a state, which Congress, upon any principle exempting the reserved powers of the states from im- pairment by taxation, must be held to have no authority to lay and col- icct r mtLmSmm Appendix. " We do not say that there may not be such a tax. It may be admit- ted that the reserved rights of the states, such as the right to pass laws, to «ve effect to laws through executive action, to administer justice through the courts, and to employ all necessary agencies for legitimate TZTes of state govermnent. are not proper subjects for the taxing Lwer of Congress. But it cannot be admitted that franchises granted by Tstate are necessarily exempt from taxation; for franchises are property, often very valuable and productive property; and when not conferred for the purpose of giving effect to some reserved power of a state seem to be as oroperly objects of taxation as any other property. , ^ . . , "But in the case before us the object of taxation is not the j^a^^j^^^*^^^^ the bank, but property created or contracts made and issued «nd«ir the franchise, or power to issue bank bills. A railroad ^^^'"Pf ^'/f^^^V^;^^^ cise of its corporate franchises, issues freight receipts, bills of lading, and passenger tickets; and it cannot be doubted that the orpnization of rad- roads is quite as important to the state as the orgamzation of banks. But it will hardly be questioned that these contracts of the company are ob- jects of taxation within the powers of Congress, and not exempted by any relation to the state which granted the charter of the railroad. And it seems difficult to distinguish the taxation of notes issued for circiUation from the taxation of these railroad contracts. Both descriptions of con- tracts are means of profit to the corporations which issue them; and both, as we think, may properly be made contributory to the public revenue. (pp. 547, 548.) , ^ , . It is true that the decision in the Veazie Bank case was also placed, in a measure, upon the authority of the United States to control the circulating medium of the country, but the force of the reasoning, which we have quoted, has not been denied or departed from. In Thomas vs. United States, 192 U. S., supra, a federal tax on the transfer of corporate shares in state corporations was upheld as a tax upon business transacted in the exercise of privileges afforded by the state laws in respect to corporations. In Nicol vs. Ames, 173 U. S. 509, a federal tax was sustained upon the enjoyment of privileges afforded by a board of trade incorporated by the State of Illinois. When the Constitution was framed the right to lay excise taxes was broadly conferred upon the Congress. At that time very few corpora- tions existed. If the mere fact of state incorporation, extending now to nearly all branches of trade and industry, could withdraw the legitimate objects of federal taxation from the exercise of the power conferred, the result would be to exclude the national government from many objects upon which indirect taxes could be constitutionally imposed. Let it be supposed that a group of individuals, as partners, were carrying on a business upon which Congress concluded to lay an excise tax. If it be true that the forming of a state corporation would defeat this purpose, by taking the necessary steps required by the state law to create a cor- poration and carrying on the business under rights granted by a state 425 I i I Accountancy Pmbiems and Soluti ons. h stattile, tlie federal tax would become invalid and that source of nof,v.«.i reventie be destroyed, except as to the businelt fh! L T . ?f national or partnershio^ u rln««f k ^"« business in the hands of individuals knZTZdlL^Tu '^^^^*^,"«*« ^^t'"ff "icier state authority to thus impair and hmit the exertion of authority whiVti tno.. k» ^.. / 1 . tional existence. «inomy which may be essential to na- iJlT\ "T^f ^" ^""'^ ^'^""* ^^- United States. 190 U S 4,7 is important In that case it was held that the airents of Z 1.. ment. carrying on the busine« of e-.ni- . ^^® ^^*^ Rovern- lialilJ t« ..I fi. 7 owsmess of sellmg liquor under state authority were liable to pay the interna revenue tax imno^M w ♦!,« f^A^ «*"uiuruy, were In the opinion previous case« I fkT T ^ *^ ^^''^'^* government, be d>rf«l^ .^ previous cases in this court were reviewed, and the rule to be deduced therefrom stated to be that the i.ir«.»t,nf;^« If * * ruie to and instrumentalities from n-.Hon!! ? ? exempt on of state agencies «f^;^#i ""<»""es trom national taxation was 1 m ted to those of a «r^Iy governmental character, and did not extend to those used by he state m earning on business of a private character. (,„ U S 460 „™S, T^.""'*' '" ex^Pting from federal taxation the means imd in stnunentalities emploved in carrvmn. „_ «.. uic means and in- the «f=.f. Ti, »'"/™ '" carrying on the governmenta operations of the state. The exerase of snch righte as the establishment of a !.,HW=.™ the employment of officers to administer and exec"e Uws and t^^n7; governmental fm,ctions cannot be taxed by the federal gove™ T^l Collector T,.,. Day, „ Wait ,,3; United States vs R R PnTw 1/ Ambrosini vs. United States. ,87 U. S. i ) ' ' ^""- *" = But this limitation has never been extended to the exclusion „f ,1. though the power to exercise them is derived from ,„ ,.,^7- ' by one of the states. We thereforl rZll . • ' '"^T^"""- fact that the h.„in.„ t, J tnerelore, reach the conclusion that the mere sLte fa thP ™ ', f "^ " '^°^ '" P"""»"ce of authority granted by a state m the creation of private corporations does not exemot it frrl fi,! exe^ise of federal authority to levy excise taxes ^ns^pri^^es' thft ; iLlLTr^ *'' ^="'°" ''^ '" ""«•">' »"«> "bitrary in the fact .0 place , beyond'theT^ri^ 1^""^''^^:^ 'a^ :tt" ^n.^r^an'rin^"" "•"".*^ ='""°"*^ co^rr'^^T^foi^ty'' iTa;" 4 "aT^r-Lrtratirs xzt^: xir^tr b": '^St^° ^"^Jedtd-^J ^^oihout t^irrE^^^^ In levying excise taxes the most ample authority has been reco«,i.ed from the beginning to select some and omit other nL^ti t" ^f ^^o^^zed ation tn celerf /^«t ^-.11 • 7 ? " *^^"^'^ possible subjects of tax- riT; ^ I *'^*'"«^ ^^ ^"^* *"°**'^'-' *o tax one class of orooertv tojhejnargin. decided in this court, upholding the power.* •Hylton w. United St«t«, 3 Dal. ,7, (a t« on cama««i ^h.vi. *u for private tite); Niml w. Ames. 173 U S Z ^ ^rnag^ which the owner kept '^•"w, 173 u. 5. S09 (a tax upon sales or exchanges of Appendix. Many instances might be given where this court has sustained the right of a state to select subjects of taxation, although as to them the Four- teenth Amendment imposes a limitation upon state legislatures, requiring that no person shall be denied the equal protection of the laws. See some of them noted in the margin.* In Bell's Gap R. R. Co. vs. Pennsylvania, 134 U. S. 232, dealing with the Fourteenth Amendment, which in this respect imposes limitations only on state authority, this court said: " The provision, in the Fourteenth Amendment, that no state shall deny to any person within its jurisdiction the equal protection of the laws, was not intended to prevent a state from adjusting its system of taxation in all proper and reasonable ways. It may, if it chooses, exempt certain boards of trade); Knowlton vs. Moore, 178 U. S. 41 (a tax on the transmission of property from the dead to the living); Treat vs. White, 181 U. S. 264 (a tax on agreements to sell shares of stock, denominated " calls," by stock brokers) ; Patton vs. Brady, 184 U. S. 608 (a tax on tobacco manufactured for consumption, and imposed at a period intermediate the commencement of manufacture and the final consump- tion of the article); Cornell vs. Coyne, 192 U. S. 418 (a tax on " filled cheese" man- ufactured expressly for export); McCray vs. United States, 195 U. S. 27 (a tax on oleomargarine not artifically colored, a higher tax on oleomargarine artificially colored, and no tax on butter artifically colored); Thomas vs. United States, 19a U. S. 363 (a tax on sales of shares of stock in corporations); Pacific Insurance Co. vs. Soule, 7 Wall, 423 (a tax upon the amounts insured, renewed, or continued by insurance companies upon the gross amounts of premiums received and assess- ments made by them, and also upon dividends, undistributed sums, and incomes); Veazie Bank vs. Fenno, 8 Wall. 533 (a tax of ten per centum on the amount of the notes paid out of any state bank, or state banking association); Scholey vs. Rew, 23 Wall. 331 (a tax on devolutions of title to real estate); Spreckels vs. Sugar Refining Company, 192 U. S. 397 (a tax on the gross receipts of corpora- tions and companies, in excess of $250,000, engaged in refining sugar or oil); Railroad Co. vs. Collector, 100 U. S. S93 (a tax laid in terms upon the amounts paid by certain public service corporations as interest on their funded debt, or as dividends to their stockholders, and also on " all profits, incomes or gains of such company, and all profits of such company carried to the account of any fund, or used for construction." Held to be a tax upon the company's earnings and there- fore essentially an excise upon the business of the corporation) ; Springer vs. United States, 102 U. S. 586 (a duty provided by the internal revenue acts to be assesseil* collected, and paid upon gains, profits, and incomes, held to be an excise or duty and not a direct tax). * Beers vs. Glynn,, 211 U. S. 477 (a State tax on personalty of non-resident dece- dents who owned realty in the State); Hatch vs. Reardon, 204 U. S. 152 (a State tax on the transfers of stock made within the State) ; Armour Packing Company vs. Lacy, 200 U. S. 226 (a state license tax on meat packing houses. A foreign corporation selling its products in the state, but whose packing establishments are not situated in the state, is not exempt from such license tax); Savannah, Thunderbolt & Isle of Hope Railway vs. Savannah, 198 U. S. 392 (a classification which distinguishes between an ordinary street railway and a steam railroad, making an extra charge for local deliveries of freight brought over its road from outside the city, held, not to be such a classification as to make the tax void under the Fourteenth Amend- ment); Cook vs. Marshall County, 196 U. S. 261 (a state tax on cigarette dealers); Magoun vs. Illinois Trust & Savings Bank, 170 U. S. 283 (upholding the graded in- heritance tax law of Illinois); Bell's Gap Railroad Co. vs. Pennsylvania, 134 U. S. 332 (state tax upon the nominal face value of bonds, instead of their actual value, held, a valid part of the state system of taxation). 427 Accmnimcy Problems and SoiuHons, cbsws of property from any taxation at all, such as churches, libraries, and the property of charitable institutions. It may impose different sue- cific taxes »pon different trade, and professions, and may vary the rates M excise upon various products; it may tax real estate and personal prop- erty in a different manner; it may tax visible property only, and not tax ••curities for payment of money ; it may allow deductions for indebted- ness, or not allow them. All such regulations, and those of like character, so long as they proceed within reasonable limits and general usage, are within the discretion of the state legislature, or of the people of the state in framing their Constitution/' It is insisted in some of the briefs assailing the validity of this tax that these cases have been modified by Southern R. R. Co. vs. Greene, 216 V. S. 400. In that case a corporation organized in a state, other than Alabama, came into that state in compliance with its laws, paid the license tax and property tax imposed upon other corporations doing business in the state, and acquired under direct sanction of the laws of the state a large amount of property therein, and, when it was attempted to subject it to a further tax on the ground that it was for the privilege of doing business as a foreign corporation, when the same tax was not imposed upon state corporations doing precisely the same business, in the same way, it was held that the attempted taxation was merely arbitrary clas- sification and void under the Fourteenth Amendment. In that case the foreign corporation was doing business under the sanction of the state laws no less than the local corporation ; it had acquired its property under sanction of those laws ; it had paid all direct and indirect taxes levied against it, and there was no practical distinction between it and a state corporation doing the same business in the same way. In the case at bar we have already discussed the limitations which the Constitution imposes upon the right to levy excise taxes, and it could not be said, even if the principles of the Fourteenth Amendment were ap- plicable in the present case, that there is no substantial difference between the carrying on of business by the corporation taxed and the same busi- ness when conducted by a private firm or individual. The thing taxed is not the mere dealing in merchandise, in which the actual transactions may be the same, whether conducted by individuals or corporations, but the tax is laid upon the privileges which exist in conducting business with the advantages which inhere in the corporate capacity of those taxed, and which are not enjoyed by private firms or individuals. These advantages are obvious, and have led to the formation of such companies in nearly all branches of trade. The continuity of the business, without interruption by death or dissolution, the transfer of property interests by the disposi- tion of shares of stock, the advantages of business controlled and man- aged by corporate directors, the general absence of individual liability, these and other things inhere in the advantages of business thus con- ducted, which do not exist when the same business is conducted by pri- vate individuals or partnerships. It is this distinctive privilege which is 4^8 Appendix. the subject of taxation, not the mere buying or selling or handling of goods which may be the same, whether done by corporations or individuals. It is further contended that some of the corporations, notably insurance companies, have large investments in municipal bonds and other non- taxable securities, and in real estate and personal property not used in the business, that therefore the selection of the measure of the income from all sources is void, because it reaches property which is not the sub- ject of taxation— upon the authority of the Pollock case, supra. But this argument confuses the measure of the tax upon the privilege, with direct taxation of the estate or thing taxed. In the Pollock case, as we have seen, the tax was held unconstitutional, because it was in effect a direct tax on the property solely because of its ownership. Nor does the adoption of this measure of the amount of the tax do vio- lence to the rule laid down in Galveston, Harrisburg & San Antonio Ry. Co. vs. Texas, 210 U. S. 217, nor the Western Union Tel. Co. vs. Kansas, 216 U. S. 1. In the Galveston case it was held that a tax imposed by the State of Texas, equal to one per cent, upon the gross receipts " from every source, whatever," of lines of railroad lying wholly within the state, was invalid as an attempt to tax gross receipts derived from the carriage of passengers and freight in interstate commerce, which in some instances was much the larger part of the gross receipts taxed. This court held that this act was an attempt to burden commerce among the states, and the fact that it was declared to be "equal to" one per cent, made no difference, as it was merely an effort to reach gross receipts by a tax not even disguised as an occupation tax, and in nowise helped by the words ** equal to." In other words, the tax was held void, as its business and manifest intent was to tax interstate commerce as such. In the Western Union Telegraph cases the state undertook to levy a graded charter fee upon the entire capital stock of one hundred millions of dollars of the Western Union Telegraph Company, a foreign corpora- tion, and engaged in commerce among the states, as a condition of doing local business within the State of Kansas. This court held, looking through forms and reaching the substance of the thing, that the tax thus imposed was in reality a tax upon the right to do interstate commerce within the state and an undertaking to tax property beyond the limits of the state; that whatever the declared purpose, when reasonably interpreted, the nec- essary operation and effect of the act in question was to burden interstate commerce and to tax property beyond the jurisdiction of the state, and it was therefore invalid. There is nothing in these cases contrary, as we shall have occasion to see, to the former rulings of this court, which held that where a tax is lawfully imposed upon the exercise of privileges within the taxing power of the state or nation, the measure of such tax may be the income from the property of the corporation, although a part of such income is de- rived from property in itself non-taxable. The distinction lies between the attempt to tax the property as such and to measure a legitimate Ux upon the privileges involved in the use of such property. ■ jr I I ^ I Accmntamy Problems and Solutions. In Home Ins. Co. vs. New York, 134 U. S. 594, a tax was sustained npon the r%ht or privilege of the Home Insurance Company to be a corporation and to do business within the state in a corporate capacity, the tax being measured by the extent of the dividends of the corporation to the current year upon the capital stock. Although a very large amoimt, nearly two of three millions of capital stock was invested in bonds of the United States, expressly exempted from taxation by a statute of the United States, the tax was sustained as a mode of measurement of a privilege tax which it was within the lawful authority of the state to impose. Mr. Justice Field, who delivered the opinion of the court, re- viewed the previous cases in this court, holding that the state could not tax or burden the operation of the Constitution and of laws enacted by the Congress to carry into execution the powers vested in the General Govern- ment. Yielding full assent to those cases, Mr. Justice Field said of the tax then under consideration : " It is not a tax in terms upon the capital stock of the company, nor upon any bonds of the United States compos- ing a part of that stock. The statute designates it a tax upon the ' cor- porate franchise or business ' of the company, and reference is only made to its capital stock and dividends for the purpose of determining the amount of the tax to be exacted each year." In that case, in the course of the opinion, previous cases of this court were cited with approval (Sooety for Savmgs vs, Coite. 6 Wall, smi Provident Institution vs. Massachusetts. 6 WaU. 611.) In the Coite case a privilege tax upon the total amount of deposits in 1 savings bank was sustained, although $500,000 of the deposits had been invested in securities of the United States, and declared by act of Congress to be exempt from taxation by state authority. In that case the court said • Nothing can be more certain in legal decision than that the privileges and franchises of a private corporation, and all trades and avocations by which the citizens acquire a livelihood may be taxed by a state for the support of the state government. Authority to that effect resides in the state independently of the federal government, and is wholly unaffected by the fact that the corporation or individual has or has not made invest- ment in federal securities." In Provident Institution vs. Massachusetts. supra, a hke tax was sustained. It is therefore well settled by the decisions of this court that when the sovereign authority has exercised the right to tax a legitimate subject of taxation as an exercise of a franchise or privilege, it is no objection that the measure of taxation is found in the income produced in part from property which of itself considered is non-taxable. Applying that doctrine to this case, the measure of taxation being the income of the corporation from all sources, as that is but the measure of a privilege tax within the lawful authority of Congress to impose, it is no valid objection that this measure includes, in part at least, property which as such could not be directly taxed. (See in this connection Maine vs. Grand Trunk Ry 142 U. & 217. as interpreted in Galveston, Harrisburg & San Antonio Ry! Co m. Texas, 210 U. S. 217, 226.) ^ 430 Appendix. It is contended that measurement of the tax by the net income of the corporation or company received by it from all sources is not only un- equal but so arbitrary and baseless as to fall outside of the authority of the taxing power. But is this so? Conceding the power of Congress to tax the business activities of private corporations, including, as in this case, the privilege of carrrying on business in a corporate capacity, the tax must be measured by some standard, and none can be chosen which will operate with absolute justice and equality upon all corporations. Some corpora- tions do a large business upon a small amount of capital; others with a small business may have a large capital. A tax upon the amount of busi- ness done might operate as unequally as a measure of excise as it is alleged the measure of income from all sources does. Nor can it be justly said that investments have no real relation to the business transacted by a cor- poration. The possession of large assets is a business advantage of great value; it may give credit which will result in more economical business methods; it may give a standing which shall facilitate purchases; it may enable the corporation to enlarge the field of its activities and in many ways give it business standing and prestige. It is true that in the Spreckels case, 192 U. S. supra, the excise tax, for the privilege of doing business, was based upon the business assets in use by the company, but this was because of the express terms of the statute which thus limited the measure of the excise. The statute now under consideration bears internal evidence that its draftsman had in mind language used in the opinion in the Spreckels case, and the measure of taxation, the income from all sources, was doubtless inserted to prevent the limitation of the measurement of the tax to the income from business assets alone. There is no rule which permits a court to say that the meas- ure of a tax for the privilege of doing business, where income from property is the basis, must be limited to that derived from property which may be strictly said to be actively used in the business. Departures from that rule sustained in this court are not wanting. In United States vs. Singer, 15 Wall, iii, an excise tax was sustained upon the liquor business, which was fixed by the payment on an amount not less than 80 per cent, of the toul capacity of the distillery. Whether such capacity was used in the business was a matter of indifference, and this court said of such a measure: " Every one is advised in advance of the amount he will be required to pay if he enters into the business of distilling spirits, and every distiller must know the producing capacity of his distillery. If he fail under these circumstances to produce the amount for which by the law he will in any event be taxed if he undertakes to distill at all, he is not entitled to much consideration." In Society for Savings vs. Coite, 6 Wall, supra, and Provident Institu- tion vs. Massachusetts, 6 Wall, supra, as we have seen, the amount of exdsc was measured by the amount of bank deposits. It made no difference that the deposits were not used actively in the business. 431 f I I* ^ll fl i 'V ffi Accountancy Problems and Solutions. In Hasiilton Compiiny w. Massachusetts, 6 Wall. 632, the tax was meas- ured by the excess of the marlcet value of the corporation's capital stock above the value of its real estate and machinery, and in this connection sec Home Ins. Co. w. New York, 134 U. S. supra, where the excise was computed upon the entire capital stock measured by the extent of the dividends thereon. We must not forget that the right to select the measure and objects of taxation devolves upon the Congress and not upon the courts, and such selectioiis arc valid unless constitutional limitations are overstepped. "It is no part of the function of a court to inquire into the reasonableness of the excise, either as respects the amount or the property upon which it is imposed." (Patton vs, Brady, 184 U. S. 608; McCray w. United States, 19s U. S. 27, 58, and previous cases in this court there cited.) Nor is that line of cases applicable, such as Brown vs. Maryland, 12 Wheat- 419, holding that a tax on the sales of an importer is a tax on the import, and Cook vs. Pennsylvania, 97 U. S 566, holding a tax on auc- tioneer's sales of goods in original packages a tax on imports. In these cases the tax was held invalid, as the state thereby taxed subjects of tax- ation within the exclusive power of Congress. What we have said as to the power of Congress to lay this excise tax ii^Kises of the contention that the act is void as lacking in due process of law. It is urged that this power can be so exercised by Congress as to practi- cally destroy the right of the states to create corporations, and for that reason it ought not to be sustained, and reference is made to the declaration of Chief Justice Marshall in McCuUoch vs. Maryland that the power to tax involves the power to destroy. This argument has not been infrequently addressed to this court with respect to the exercise of the powers of Con- gress. Of such contention this court said in Kmowlton vs. Moore, supra: "This principle is pertinent only when there is no power to tax a par- ticular subject, and has no relation to a case where such right exists. In other words, the power to destroy which may be the consequence of taxa- tion is a reason why the right to tax should be confined to subjects which may be lawfully embraced therein, even although it happens that in some particular instance no great harm may be caused by the exercise of the taxing authority as to a subject which is beyond its scope. But this rea- soning has no application to a lawful tax, for if it had, there would be an end of all taxation ; that is to say, if a lawful tax can be defeated because the power which is manifested by its imposition may when further exer- cised be destructive, it would follow that every lawful tax would become unlawful, and therefore no taxation whatever could be levied." In Veazie Bank vs. Fenno, 8 Wall. 533, supra, speaking for the court, the Chief Justice said : " It is iiiitsted, however, that the tax in the case before us is excessive, and so excessive as to indicate a purpose on the part of Congress to destroy the franchise of the bank, and is, therefore, beyond the constitutional power of Coocress. Appendix. "The first answer to this is that the judicial cannot prescribe to the legislative department of the government limitations upon the exercise of its acknowledged powers. The power to tax may be exercised oppressively upon persons, but the responsibility of the legislature is not to the courts but to the people by whom its members are elected. So if a particular tax bears heavily upon a corporation, or a class of corporations, it cannot, for that reason only, be pronounced contrary to the Constitution." To the same effect : McCray vs. United States, 195 U. S. 27. In the latter case it was said : ". . . no instance is afforded from the foundation of the govern- ment where an act, which was within a power conferred, was declared to be repugnant to the Constitution because it appeared to the judicial mind that the particular exertion of constitutional power was either unwise or unjust." And in the same case this court said, after reviewing the previous cases in this court: " Since, as pointed out in all the decisions referred to, the taxing power conferred by the Constitution knows no limits except those expressly stated in that instrument, it must follow, if a tax be within the lawful power, the exertion of that power may be not judicially restrained because of the results to arise from its exercise." The argument, at last comes to this : That because of possible results, a power lawfully exercised may work disastrously, therefore the courts must interfere to prevent its exercise because of the consequences feared. No such authority has ever been invested in any court. The remedy for such wrongs, if such in fact exist, is in the ability of the people to choose their own representatives, and not in the exertion of unwarranted powers by courts of justice. It is especially objected that certain of the corporations whose stock- holders challenge the validity of the tax are so-called real estate companies whose business is principally the holding and management of real estate. These cases are No. 415, Cedar Street Company vs. Park Realty Company; No. 431, Percy H. Brundage vs. Broadway Realty Company; No. 443, Phillips vs. Fifty Associates et al.; No. 446, Mitchell vs. Clark Iron Com- pany; No. 412, William H. Miner vs. Corn Exchange Bank et al.; and No. 457, Cook et al. vs. Boston Wharf Company. In No. 412, Miner vs. Corn Exchange Bank et al., the bank occupies a building in part and rents a large part to tenants. Of the realty companies, the Park Realty Company was organized to " work, develop, sell, convey, mortgage or otherwise dispose of real estate ; to lease, exchange, hire or otherwise acquire property; to erect, alter or improve buildings ; to conduct, operate, manage or lease hotels, apartment houses, etc. ; to make and carry out contracts in the manner specified con- cerning buildings . . . and generally to deal in, sell, lease, ex- change or otherwise deal with lands, buildings and other property, real or personal," etc 433 I I I: i Aecomtancy Problems and Solutions. At the time the MM was filed the business of the company related to the Hotel Leonori, and the bill averred that it was engaged in no other busi- ness except the management and leasing of that hotel The Broadway Realty Company was formed for the purpose of owning, holding and managing real estate. It owns an office building and certain securities. The office building is let to tenants, to whom light and heat are furnished and for whom Janitor and similar service are performed. The Fifty Associates are operating under a charter to own real estate with power to build, improve, alter, pull down and rebuild, and to manage, exchange and dispose of the same. The Clark Iron Company was organized under the laws of Minnesota, owns and leases ore lands for the purpose of carrying on mining opera- tions, and receives a royalty depending upon the quantity of ore mined. The Boston Wharf Company is operating under a charter authorizing it to acquire lands and flats, with their privileges and appurtenances, and to lease manage and improve its property in whatever manner shall be deemed expedient by it, and to receive dockage and wharfage for vessels laid at its wharves. What we have said as to the character of the corporation tax as an excise disposes of the contention that it is direct, and therefore requiring apportionment by the Constitution. It remains to consider whether these corporations are engaged in business. " Business " is a very comprehensive term and embraces everything about which a person can be employed. Black's Law Diet. 158, citing People vs. Commissioners of Taxes, 23 N. Y. 242, 244 '*That which occupies the time, attention and labor of men for the purpose of a livelihood or profit." Bouvier's Law Dictionary, vol I, p. 273. We think it is clear that corporations organized for the purpose of doing business, and actually engaged in such activities as leasing property, col- lecting rents, managing office buildings, making investments of profits, or leasing ore lands and collecting royalties, managing wharves, dividing profits, and in some cases investing the surplus, are engaged in business within the meaning of this statute, and in the capacity necessary to make such organizations subject to the law. Of the Motor Taximeter Cab Company case, No. 432, the company owns and leases taxicabs, and collects rents therefrom. We think it is also doing business within the meaning of the statute. What we have already said disposes of the objections made in certain cases of life insurance and trust companies, and banks, as to income de- rived from United States, state, municipal or other non-taxable bonds. We come to the question, is a so-called public service corporation, such as The Coney Island and Brooklyn Railroad Company, in case No. 409, and the Interhorough Rapid Transit Company, No. 442, exempted from' the operation of this statute? In the case of South Carolina vs. United States, 199 U. S. 437, this court held that when a state, acting within its lawful authority, undertook to carry on the liquor business it did not with- draw the agencies of the state carrying on the traffic from the operation ;• I Appendix. of the internal revenue laws of the United States. If a state may not thus withdraw from the operation of a federal taxing law a subject-matter of such taxation, it is difficult to see how the incorporation of companies whose service, though of a public nature, is, nevertheless, with a view to private profit, can have the effect of denying the federal right to reach such properties and activities for the purposes of revenue. It is no part of the essential governmental functions of a state to provide means of transportation, supply artificial light, water and the like. These objects are often accomplished through the medium of private corpora- tions, and, though the public may derive a benefit from such operations, the companies carrying on such enterprises are, nevertheless, private com- panies, whose business is prosecuted for private emolument and advan- tage. For the purpose of taxation they stand upon the same footing as other private corporations upon which special franchises have been con- ferred. The true distinction is between the attempted taxation of those operations of the states essential to the execution of its governmental functions, and which the state can only do itself, and those activities which are of a private character. The former, the United States may not interfere with by taxing the agencies of the state in carrying out its purposes ; the latter, although regulated by the state, and exercising delegated authority, such as the right of eminent domain, are not removed from the field of legiti- mate federal taxation. Applying this principle, we are of opinion that the so-called pubhc service corporations, represented in the cases at bar, are not exempt from the tax in question. (Railroad Company vs. Peniston, 18 Wall. 5, 33-) It is again objected that incomes under $S»ooo are exempted from the tax. It is only necessary, in this connection, to refer to Knowlton vs. Moore, 178 U. S. supra, in which a tax upon inheritances in excess of $10,000 was sustained. In Magoim vs. Illinois Trust & Savings Bank, 170 U. S. 283, 293, a graded inheritance tax was austained. As to the objections that certain organizations, labor, argricultral and horticultural, fraternal and benevolent societies, loan and building asso- ciations, and those for religious, charitable or educational purposes, are excepted from the operation of the law, we find nothing in them to invalidate the tax. As we have had frequent occasion to say, the decisions of this court from an early date to the present time have emphasized the right of Congress to select the objects of excise taxation, and within this power to tax some and leave others untaxed must be included the right to make exemptions such as are found in this act. Again, it is urged that Congress exceeded its power in permitting a deduction to be made of interest payments only in case of interest paid by banks and trust companies on deposits, and interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other indebtedness not exceeding the paid-up capital stock of the cor- poration or company. This provision may have been inserted with a view to prevent corporations from issuing a large amount of bonds in excess 435 IB Accmmtancy Problems and Solutions. of the paid-up capital stock, and thereby distributing profits so as to avoid the tax. Ill any event, we see no reason why this method of ascertaining the deductions allowed should invalidate the act Such details are not wholly arbitrary, and were deemed essential to practical operation. Courts cannot substitute their judgment for that of the legislature. In such matters a wide range of discretion is allowed. The argument that different corporations are so differently circumstanced in different states, and the operation of the law so unequal as to destroy it, is so fully met in the opinion In Knowlton w. Moore, 178 U. S. supra, that It is only necessary to make reference thereto. For this purpose the law operates uniformly, geographically considered, throughout the United States, and in the same way wherever the subject-matter is found. A liquor tax is not rendered unlawful as a revenue measure because it may yield nothing in those states which have prohibited the liquor traffic No more is the present law unconstitutional because of inequality of operation owing to different local conditions. Nor is the special objection tenable, made in some of the cases, that the corporations act as trustees, guardians, etc., under the authority of the laws or courts of the state. Such trustees are not the agents of the state government in a sense which exempts them from taxation because execut- ing the necessary governmental powers of the state. The trustees receive their compensation from the interests served, and not from the public revenues of the state. It is urged in a number of the cases that In a certain feature of the statute there is a violation of the Fourth Amendment of the Constitution, protecting against unreasonable searches and seizures. This amendment was adopted to protect against abuses in judicial procedure under the guise of law, which Invade the privacy of persons in their homes, papers and effects, and applies to criminal prosecutions and suits for penalties and forfeitures under the revenue laws. (Boyd w. United States, 116 U. S. 632.) It docs not prevent the issue of search warrants for the seizure of gambling paraphernaha and other illegal matter. (Adams vs. New York, 192 N. Y. 585.) It does not prevent the issuing of process to require at- tendance and testimony of witnesses, the production of books and papers. etc. ( Interstate Commerce Commission vs. Brimson, 145 U. S. 447 ; Inter- state Commerce Commission vs. Baird, 194 U. S. 25.) Certainly the amendment was not intended to prevent the ordinary procedure in use in many, perhaps most, of the states of requiring tax returns to be made, often under oath. The objection In this connection applies, when the sub- stances of the argument is reached, to the sixth section of the act, which provides ; •• Sixth. When the assessment shall be made, as provided in this section, the returns, together with any corrections thereof which may have been made by the commissioner, shall be filed In the office of the Commissioner of Internal Revenue and shall constitute public records and be open to inspection as such." Appendix. An amendment was made June 17, 191 o. which reads as follows: "For classifying, indexing, exhibiting and properly caring for the re- turns of all corporations, required by section thirty-eight of an act entitled 'An act to provide revenue, equalize duties, encourage the industries of the United States, and for other purposes,' approved August fifth, nkie- teen hundred and nine, including the employment in the District of Co- lumbia of such clerical and other personal services and for rent of such quarters as may be necessary, twenty-five thousand dollars: Provided, That any and all such returns shall be open to Inspection only upon the order of the President under rules and regulations to be prescribed by the Secretary of the Treasury and approved by the President." The contention is that the above section as orginally framed and as now amended could have no legitimate connection with the collection of the tax, and in substance amounts to no more than an unlawful attempt to exhibit to the private affairs of corporations to public or private inspec- tion, without any substantial connection with or legitimate purpose to be subserved in the collection of the tax under the act now under considera- tion. But we cannot agree to this contention. The taxation being, as we have held, within the legitimate powers of Congress, it is for that body to determine what means are appropriate and adapted to the purposes of mak- ing the law effectual. In this connection the often quoted declaration of Chief Justice Marshall in McCulloch vs. Maryland, 4 Wheat. 316. 421, is appropriate : " Let the end be legitimate, let it be within the scope of the Constitution, and all means which are appropriate, and which are plainly adapted to that end, and which are not prohibited, but are consistent with the letter and spirit of the Constitution, are constitutional." Congress may have deemed the public inspection of such returns a means of more properly securing the fullness and accuracy thereof. In many of the states, laws are to be found making tax returns public documents, and open to inspection.* We cannot say that this feature of the law does violence to the constitu- tional protection of the Fourth Amendment, and this is equally true of * In Connecticut, the requirement is that the tax lists of the assessors shall be abstracted and lodged in the town clerk's office " for public inspection." R. S. Conn. §2310. In New York, notices of the completion of the assessment rolls must be conspicuously posted in three or more public places, and a copy left in a speci- fied place, " where it may be seen and examined by any person until the third Tuesday of August next following." Consol. Laws of N. Y. vol. 5, p. 5859; Laws N. Y. 1909, c. 62, § 36. In Maryland, a record of property assessed is required to be kept, and the valuation thereof with alphabetical list of owners recorded in a book, " which any person may inspect without fee or reward." Pub. Laws Md. vol, 2, p. 1804, § 23. In Pennsylvania, it is provided that from the time of pub- lishing the assessor's returns until the day appointed for finally detcrmininf whether the assessor's valuations arc too low " any taxable inhabitant pf the county shall have the right to examine the said return in the commissioncr't office." Peper & Lewis' Dig. Laws Pa. vol. 2, p. 4591. § 357. In New Hamp- shire, the list of taxes assessed are required to be kept in a book, and also left with the town clerk, and such records "shall be open to the inspection of all persons." Pub, Stat. N. H. 1 901, p. 214 § 5. 437 I t Accountancy Problems and Solutions. the Fifth Amendment, protecting persons against compulsory self-incrimi- nating testimony. No question under the latter amendment properly arises in these cases, and when circumstances are presented which invoke the pro- tection of that amendment and raise questions involving rights thereby secured it will be time enough to decide them. And so of the argument that the penalties for the non-payment of the taxes are so high as to violate the Constitution. No case is presented involving that question, and, more- over, the penalties are clearly a separate part of the act, and whether col- lectible or not may be determined in a case involving an attempt to enforce them. (Wilcox vs. Consolidated Gas Co., 212 U. S. 19, 53.) It has been suggested that there is a lack of power to tax foreign cor- porations, doing local business in a State, in the manner proposed in this act, and that the tax upon such corporations, being unconstitutional, works such inequality against domestic corporations as to invalidate the law. It is sufficient to say of this that no such case is presented in the record. (Southern Railway Co. vs. King, 217 U. S. 525) This is equally true as to the alleged invalidity of the act as a tax 6n exports, which is beyond the power of Congress. No such case is presented in those now before the court. We have noticed such objections as are made to the constitutionality of this law as it is deemed necessary to consider. Finding the statute to be within the constitutional power of the Congress, it follows that the judg- ments in the several cases must be affirmed. Affirmed. if'. 438 1 INDEX Page Accountant Duties and responsiblities of a public 225 Accounts Accrued, definition of 212 Adjustment of, in case of fire . 108 ' Classification and verification of good, doubtful and bad. 226 Deferred, definition of 212 Kept by an executor 206 Nominal, definition of 212 Summary, definition of 214 Verification of , by auditor .. . 225 Account Sales Form of 63, 180 Adjustment of Partnership Ac- counts At the end of the fiscal period 54, III, 187 Basis of 168 Upon the death of a partner . 30, 49 When converted into a cor- poration 41 When dissolving 90. 99 Administration wSection in income and ex- penditure account 16 Amalgamation of Corporations Basis for 60 — Effects on the rights of creditors 264 Journal entries for 24, 8 1 Legal requirements for 263 Problems in 57. 78, 135 Amortization \ Definition of 213 Schedule of 181 Assessments Entries for membership 76 Assets Contingent, treatment in the balance sheet 211 Definition of contingent 211 Estimated realization of 212 On instalment plan, in the annual statement 220 Transfer of 125, 126 Audit Bank 227 Difference between examina- tion and 227 Page Audit — Continued Local, of branches; report on. 222 Of an estate for a client 221 Objects of 216 Of minutes of meetings 226 Reasons for a continuous .... 225 Rules for a junior on his first . 220 Working papers and records for a semi-annual 220 Auditing Answers 219-228 Questions in 216-219 Balance Sheet Definition of consolidated. ... 213 { 13, 19, 22, 25, 30, 53. Form of 7 Bond Ledger Form of 107 Bonus For "extra service," audit of. 224 Journal entry for 24, 46 Book Values Verification of, by auditor — 226 Branch Accounts Combined balance sheet 130 \\ 4» M 'I r Index. Cantiitmd , ■ * * ' foreign with. Brancli Accounti Form of • Pttililem in, money Profit and loss account . - . BnmdieB ^ . Audit by local accountant Report of auditor on Bf ^Prwliict Definition of. Bnge 131 333 314 Page CoTforation — Continued Right to execute a corporate mortgage ; ■ • : ^57 Rights and fees of a foreign . . 246 Procedure for a voluntary dis- solution 244»250 Procedure for formation of. . 230. 238, 242, 248, 259 Powers, rights and duties of . - 238. 254» 257 UUra vires act of a 242, 267 212 223 237 259 261 327 Cftpitml Definition of • • • • • Expenditure, adjustment ot . . Canital Stock . Definition of. authonzed . . . . . Differentiation between bonds and 350 F^r what issued 232, 230 Meaning of -full-paid and non-assessable 230,350 Minimum and maximum. 250. 2G1 Rights of corporation to pur- chase its own • ^57 Cull Account Reconciliation of 319, 335 Verification of, *^9 Cliarter Definition of corporate Forfeiture of , . • • • • *5o« Check . Sufficient as voucher • Commercial Law Questions and answers in . 229-270 Consignments _ Toumal entnes for Problem in Ccnorate Income Tax,, basis of . . . • • ■ Corporation cSittses for mvoluntary solution • • * De fctcto. ...,....•••••••*••• Definitions of ...... . • •• • •; • ■* • Differences between partner- ship, joint stock company Distinction between public and private Federal tax law, decisions re- flating to . . , ■ * • * Federal tax law, full text of . . Federal tax law, summary of . For what purpose may it be form,ed 23o> 243 Municipal, definition of 261 Cost Of administration ^ ' ' 5! Of manufacture 97. ^ 5^ Of mining (coal) Of preparation (coal) • • Of sales 97 133 133 151 Coupon Notes Definition of Drafts ^. ^ . Entry for discounted Journal entries f or . . . 252 208 .205, 208 Drawing Account Closing of Vt'' Its relation to profit and loss account *'^ Deficiency Account Form of 33t 77 .313,333 .... 62 dis- 214 25s 251 239 341 239 396 402 393 Depreciation Definition of. • • • • • • ■ • • Its place in the profit and loss statement • • • Methods of treatment on the books .,..'• Directors , ^. ,. Admission of, binding ■ - Conveyance of property to themselves • ^ Election of 237. 258, 2O1 Liability after dissolution ... . 204 Liability for corporate debts. 350 Liability for dividends 243 Number of ; l' ' ' u' i Remedy in case of breach ot, duty of • •.' • Right to make calls on specifac StOCJt ..«...••••••**■" 213 194 211 257 231 330 259 265 Discount . On bonds sold, entry for. . Dissolution of a Corporation Procedure for a voluntary. Reasons for involimtary . . Dissolution of Partnership Distribution of assets. . . Problem in 184 944 25s 168, 169 . • » f JJO' "Tjf I Index, Page Dividends Action of creditors for declar- ing • • • ^^5 Cumulative - - 250 Declared but unpaid 182 Determination of 21 Out of what funds paid . . 260, 266 Double Entry Definition of • • • 205 Method of ascertaining profits. 206 Duties of Auditors Regarding inventories 228 Examination "Qsmk. 227 DifiEerence between audit and . 227 Executors Books and accounts kept by. 206 Claim for compensation. 167 Compensation for specific legacy -^99 Form of cash book for 207 Statement of amounts due beneficiaries ^ Statement of commissions due 162 Summary statement of the. 4, 154, 160 Final Accounting Definition of 214 Financial Statement i43 Fire Insurance Adjustment in case of fire . 108, 144 195 Fire Insurance Company Calculation of reserve 175 Determination of reserves f or . 20 Problem in closing the books of 20 Foreign Corporations Authority for doing business . . 346 Franchise fee of 246 Goodwill As basis for distribution of capital stock 60 Entry to place on the books . 33 25,45 Goods in Process Reconstruction of (in case of fire) 147 Goods on Hand Construction of (in case of fire) i47» 196 Income Charges against 142, 153 Income and Expenditure Ac- count Condensed form of 89 Difference between profit and loss account and 179 Form of 16, 32, 88 Page Income and Profit and Loss Statement of 97. ^33 Incorporation Advantages of 234 Certificate of 230 Time limit of 257 Incorporators ■ J 1 230, 250, Number required | 257, 261 Inspection of Books By a holder of a single share . . 237 Insurance Company Treatment of bonds on the balance sheet 223 Verification of securities of . . . 221 Interstate Commerce Commission Rights, powers and jurisdic- tion of the 265 Inventory Analysis of (in case of fire) 147. 196 Determination of 228 Examination of 228 Overvaluation, treatment of. 213 Joint Adventure Leading features of 340, 341 Joint Stock Companies Definition of 2 58 Differences between corpora- tions, partnerships and. 240, 241 Formation of 268 Journal Entries for Closing the books . . . . | ^' go,' 108 Opening the books of a club . . 75 Opening the books of a cor- poration 34, 73.81, 103, 126, 137, 164 Transactions of promoter 35 Liabilities Contingent, definition of. . 208, 211 Contingent, setting up of . .226, 228 Contingent, treatment in fi- nancial statement 208, 2 1 1 Of directors after dissolution . 264 Of directors of a corporation < ^ 50 Of the members of a defective corporation - ■ 251 Of president of a corporation . 343 r 238, Of stockholders for debts .. j 269, I 263 Of stockholder for transferred stock 255 Transfer of 125, 1 36 Management Expenses of 133. ^57 Maintenance Accounts In mining 119 441 ludes. Index. W I I i 'llaiiiilactiiriqg And profit and loss and in- come statement 14a And trading account 51 Cost of . 92 Bjtpense account 33, 34, 157 Kning Accounts Balance sheet of i ao Maintenance in , . 1 1.9 Operating statement in 119 Problem m coal 133 Trading. , 1 19 :i«t Proit .Definition of j la Election of corporation a 58 Remedy in case of breach of duty of 259 Opening Entries f 24,73, .81, For corporation books j 1 03 , i a6. [ 137, 164 Account, form ot 93 Section in income and ex- penditufe account 16. 110 Statement, lumber laa Statement, mines Ornuiizfttion Expense Entry on the nooks 24 Pttrtneriliip Amalgamation of partnerships Differences between corpora- tions, joint stock companies and 240, .^. Distribution of assets of 8, 99 Division of profits in 2, 187 General, leading features of/ **® \ 241 Limited, leading features of Liquidation of a PirtnerBliip Accomtt Adjustm.ent of interest in . . 30.3^.47.49. 55.90.99. "I. 168, 187 .■•...«.. 212 119 105 54 241 240, 9.41 29 29 Adjustment of . Partners' salaries'. Piatent Purchase of Plant Construction In balance sheet ,......,. . . . Jottm,al entry for. .Brtf«frwl.Stock Definition of , , . Pmposition to actuaUy paid up capital 256 105 104 252 Preferred Stock-Continued ""^ Redemption of 356 Voting rights of 256 Premium Treatment in the accounts ... 23^ President Right for compensation. ..... 254 Prime Cost and Overhead Charges to 67, 14a, 151 Private Corporation Definition of 239 Problems England, 1910 . , 1 1 1 England, 1910 138 Illinois. 1907 14, ao Illinois, 1909 • • 49. 54 Illinois, 1910 90 Illinois, 191 1 149, 154 Michigan, 1909 70, 73 New York, 1905 , i New York, 1906 4 New York, 1907 7 New York, 1908 23,28,33,36 New York, 1909 42, 57, 62, 64 New York, i9io..( 'f'^l* 96,99. I 102, 100, 108 New York. 191 1.. ( ^32, 135. 140, ^,. • y \ 144,156.163 Uhio, 1910 84 Ontario (Canada), 1907 11 Virginia, 1910 .............. 1 14 Profit and Loss Methods of ascertaining 206 Profit and Loss Account Form of banker's 41 Form of consolidated 139 Form of ../ 2 12,29.33, f\fu u 152.63.123,151 Of branches 2 Proof of correctness 212 Profit and Loss Statement Form of combined 59 Form of 67, 110, 11 1, 151 Promotsr Profit and loss account of ... . 27 Property Account Items in 186 Form of qa Proxy ' Definition of 237 Public Corporation Definition of 339 Public Service Commissions Powers 315 Supervision over issue of securities 315 Pnge Quasi-Public Corporation Definition of 239 Questions Auditing C. A. A. of Manitoba 340 English, 1 910 368,378 Illinois, 1910 282 Massachusetts, 1910.. . 275 New Jersey, 1 904-1 909 299 New "York, 19 10 316 New York, 191 1 386 Ohio, 1 910 326 Virginia, 1910 351 Washington, 1908 308 Commercial Law Florida, 1909 266 C. A. A. of Manitoba, 1910. . 339, 348. 349 Illinois 233, 258, 267 Illinois, 1909 257, 268 Illinois, 1910. 281 Maryland, 1909 250 Massachusetts, 1910 274 Michigan, 1908 245-249 Michigan, 1909 255 New Jersey, 1 904-1 909 .... 297 New York, 1906 229 New York, 1908 243, 266 New York, 1909 251 New York 261-265 New York, 1910 319 New York, 1911 . . . 268-270, 387 Ohio, 19 10 259,325 Pennsylvania, 1908 237 Rhode Island, 1907. . . . 241, 242 Virginia, 1910 353 Washington, 1908 309 Practical Accounting C. A. A. of Manitoba, 1910. 341, 346 IlUnois, 1910 283, 288 Massachusetts, 19 10. . . .276, 270 New Jersey. .904-1909. 4^, 29? New York, 1910 310,315 New York, 191 1 380, 384 Ohio, 1 9 10.... 321,324 Virginia, 1910 355. 360 Wkshington, 1908 303, 308 Theory of Accounts Illinois, 1910 279 Massachusetts, 1 9 10 273 New Jersey, 1904-1909 .... 291 New York, 1 9 10 317 New York, 1911 384 Ohio, 19 10 328 Virginia. 1910 352 Washington. 1908 302 Page Questions — Continued Banking C. A. A. of Manitoba, 191 o. 337 Bookkeeping C. A. A. of Manitoba, 1910. 331, 336 English 1910. .361,367,370,378 Branch Accounts Massachusetts, 1910 278 Brokers' and Agents' Accounts New York, 1910 312 New York, 1911 382 Virginia, 19 10 355 Club Accounts Illinois, 1910 284 Cost Accounting New York, 1911 380 Executorship English. 1910 370.375 Illinois, 19 10 287 New York, 191 1 381 Virginia, 1910 359 Mathematics C. A. A. of Manitoba, 1910 . 330 Mining Accoimts New York, 1910 313.314 Partnership C. A. A. of Manitoba, 1910. 336, 346 English, 1910 375, 378 Illinois, 1910 286 Massachusetts, 1910 277 Massachusetts, 1910 279 Virginia, 1910 355 Washington, 1908 303, 304 Realization and Liquidation Washington, 1908 305 Statement of Affairs and De- ficiency Accotmt Illinois, 1910 284 Massachusetts, 1 9 1 o 276 Washington, 1908 307 Real Estate Valuation of, appreciated .... 214 Realization Account Form of 54 Realization and Liquidation Account of 71, 182 Journal entry for 109 Problem in 70 Report Annual, of a corporation 26a Arrangement of auditor's 22a In an examination for merger . 227 Forms of. for corporation tax. 395, 409,414 443 Index. Index. Pass Report — Continued Penalty for failure to file 262 Text of accountant's 61 I fW* H* II Calculation of 175 For accrued charges 208 For bad debts, treatment of. 190 For earnings on investment. 94, 1 86 For fire insurance companies. 20 For investment 212 For working capital 82, 184 Royalty Joumal entries for 104 On machine output, treatment of 220 Treatment of accrued 190 Sales Cost of 97 Of real estate, profit on 212 Scrip Definition of 213 Single Entry Definition of 205 Method of ascertaining profits 206 Sinking Fund Joumal entries for 15 Specific Legacy Definition of 199 Statement of Amounts due beneficiaries. .6, i6r Bond accounts 65 Commissions due executors.. i6j Percentages 11,139 Profit and loss and income. . . 67, 97 Trading and profit and loss ... 151 Stock Certificate Loss in case of forgery 257 Stock Corporation Definition of 261 Stock Ledger Its relation to general books . . 211 Forms of 209, 210 Verification by auditor 224 Stock Might Definition of 213 Is it negotiable 232, 234 Who has prior 232 Stockholders Authority to exchange entire stock 261 Liabilities of, of a defective corporation 251 Liability for corporation debts 238, 260, 263 Pag Stockholders — Continued Liability for transferred stock. 255 Right m and to corporate property 239 Right to object to acts of the corporation 269 Rights with respect to the books 260 Stocks Definition of 239 Issue, supervision by public service commissions 215 Must they be paid in full 236 Pledge of 239 Preferred 252 Transfer of 239, 257 Valuation of dividend, paying. 2 1 4 Summary Accounting Statement of the Executor 4, 1 54, 160 Surplus Appropriation of 212 Tax Law Annual report for the corpora- tion 395, 409» 414 Classification of corporations for the 394 Decision of the Supreme Court of the U.S. on the constitu- tionality of the 41 5, 438 Decisions on By whom returns should be made 196 By whom returns should be signed 398 Deductions from income. . . 399, 400 Depreciation 400, 401 Exemption of corporations .396, 398 Forms of protest 398 Income derived from foreign countries 397 Interest on government bonds 398 Inventories 398 Meaning of ' ' calendar year' ' 397 Meaning of "principal place of business" 397 Returns of consolidated corporations 397 Returns of foreign corpora- tions 397 Returns of subsidiary rail- roads 396 System of accounting 399 What should be included in income 399 AAA ■ I ¥ Page Tax Law — Continued Deductions from gross income 394 Federal corporation, decisions relating to 396 Federal corporations, sum- mary of 393 Full text of the Federal cor- poration 402 Objects of the Federal cor- poration 393 Trading Account Form of 12, 29, 33, 119, 123 Trading and Profit and Loss Statement 151 Treasurer Authority of 261 Treasury Bonds Treatment of 199 Page Treasury Stock Definition of 2 58 Entry for 82 Value of 184 Theory of Accounts Answers 205, 215 Questions in 203, 205 Turnover Statement of percentage of . 1 1 , 1 74 Ultra Vires Act of a corporation 242, 267 Underwriting Securities Accounts of members of 39 Problem in 36 Statement of condition of afiairs of 41 Working Capital Entry for reserve for 83 Work in Process Definition of 3 14 •i*iiji fW */«*■« t^ ■■iMiUli, Greendlinger ? 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