MASTER NEGATIVE NO. 95-82500 COPYRIGHT STATEMENT The copyright law of the United States (Title 17. United States Code) governs the making of photocopies or other reproductions of copyrighted materials including foreign works under certain conditions. In addition the United States extends protection to foreign works by means of various international conventions, bilateral agreements, and proclamations. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or reproduction is not to be "used for any purpose other than private study, scholarship, or research. If a user makes a request for, or later uses, a photocopy or reproduction for purposes In excess of "fair use," that user may be liable for copynght infringement. 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: Walker, Ross G. Title: A classified selection of problems in accounting Place: Ann Arbor Date: [1922] MASTER NEGATIVE # COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD ■' Titers'- *'"»*« 419 ?oLo«.«r Walker, Ross G. A classified scloction of probloins in accounting (byi E. G. Walker ... Ann Arbor, j\[icb., G. Wahr [^^1922] ^^-hese^prbbflms have been selected or adapted largely from the C. P. A. examinations of Massac] setts. Hew York, Pennsylvania, Illinois, and l^is- consin, and from examinations given at the uni^ versity of Michigan." 1. Accounting — Problems, exercises, etc. Library of Congress Copyright A 681441 HF5661AV27 23-1769 RESTRICTIONS ON USE: FILM SIZE: TECHNICAL MICROFORM DATA REDUCTION RATIO : I^-l IMAGE PLACEMENT: lA (llA) IB IIB DATE FILMED: . wyhs INITIALS: TRACKING # : O^B^O RLMED BY PRESERVATION RESOURCES, BETHLEHEM, PA. •^z %r^. w^ ."v. ' ---'V: '^■ 00 CJ1 3 3 D" O > ?3-a IS go CO CJl OOM o ^^ ■1^ (J1 3 3 > o m (DO OQ >sj o o CO X < N X M o :^ A. <^ ^. ^ ^. ^^7^ ^* ^^ ^ *v o 3 3 > Ul o 3 3 .'V^ > Ul ^■ ^^ t\y a? S 3 3 f^ 4. ^fcP fp f^ to en o r'=i^i5i?i;i;i?|r I! O i> ^ CO ro N3 00 c> bo lb ro *V 1.0 mm 1.5 mm 2.0 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghiiklmnopqrstuvwxyz 1234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyzl234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 ^j^ .^^A 2.5 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 ^o -^^ m o Tj m u > C CO I T) ^ m 39 O m ^^ s« r^ ^o -•«o 00.0 IS 3 ^ M (/) OiX OOM o "to ¥* f^ •— • ro CJl E E: cr o >> &S Wo 5.m I? °i ♦< ^ fSJC a>x ^-< OOM o ?^ \Z:^- A Classified Selection of Problems m Accounting R. G. Wa&er !l i.*r ID intljtCitpof^togorfe WT51 LIBRARY ^c^ool of ^usiititsisi (KJe iWontgomerp Hibrarp of accountamp { i A CLASSIFIED SELECTION OF PROBLEMS IN ACCOUNTING R. G. WALKER Assistant Professor of Accounting University of Iowa : GeOBOB WaHB, PtTBUSHBB Ann Abbob, Michigan Copyright ig22 by George Wahr Ann Arbor, Michigan PREFACE The primary purpose of this collection of problems is to facilitate instruction in accounting at the University of Iowa. The problems have been selected or adapted largely from the C. P. A. examinations of Massachusetts, New York, Pennsyl- vania, Illinois, and Wisconsin, and from examinations given at the University of Michigan. A considerable number have been origi- nated by the editor to develop important theoretical points in the class room. The division of the subject in accord with which the problems have been arranged is of course not intended to be ex- haustive any more than entirely accurate. Nor is the brief intro- duction offered under each head proposed as even the barest out- line of the difficulties involved. Both the arrangement and the discussions are meant to be merely suggestive. T 1 MILLARD PRESS Ann Arbor, Mich. PROBLEMS IN ACCOUNTING 11 COINTENTS Page Section I Deriving from single entry records a statement of business condition and of profit and loss 13 Section II Miscellaneous problems and exercises in the theory of accounts 15 Section III Partnership accounting 47 Section IV Corporation accounting 68 Section V Depreciation accounting 106 Section VI The Interest Problem 114 Section VII The accounting problem of the pre-operating period and of failure and dissolution 127 Section VIII Accounting for the holding company and the merger 135-148 Section IX Miscellaneous problems requiring special ap- plication of principles, as in branch accounting and estate accounting, a few being for purposes of general review. .152 SECTION I. Deriving from Single Entry Records a State- ment of Business Condition and a Statement of Profit and Loss. Single entry bookkeeping has been rightly called incomplete entry bookkeeping. It might be defined as the keeping of memor- anda records touching only particular aspects of but two or three types of business transactions. The usual accounts kept are those with cash and with customers' and creditors' balances. The short- comings of such bookkeeping are chiefly two: failure to make periodic provision for an analysis of expenses and revenues and omission of certain important asset and liability balances. The inadequacy of its record necessitates painstaking inventorying of assets and liabilities at the end of the accounting period. No matter how carefully the inventory is taken, however, the liability always exists of overlooking some item which, if included, would materially affect the statement of financial condition. This state- ment, sometimes called in single entry the "statement of condi- tion," can be nothing more than an inventoried balance sheet; and a balance sheet based entirely upon an inventory is usually several degrees more rough in its approximation to the truth than one which is derived from a well-kept ledger. And the state- ment of profit and loss, if possible at all with such meager records as afforded by single entry, can be constructed only upon data drawn from the cash receipts and disbursements and from the balances of the customers' and creditors' accounts outstanding at the beginning and at the end of the period of operations. Double entry differs from single entry in the respect that it more or less automatically provides the bookkeeper with his peri- odic operating analysis and balance sheet. An attempt is made in double entry to show within the system the two-sided effect of every business transaction. At the end of the bookkeeping inter- val some inventorying even here is necessary, but it is reduced to a considerable minimum. And the process is expedited by the presence of a pretty complete statement of business happenings up to the end of the period. The omissions which are made in a given easel are excusable on the grounds of practical expediency. The following problems are illustrative of the difficulties pre- sented to the accountant by single entry records. 1 14 PROBLEMS IN ACCOUNTING i Problem 1. Show the profit or loss in the following cases : Proprie- Proprie- Proprie- tor X tor Y tor Z Net Worth Jan. 1 20,000 30,000 60,000 Net Worth Dec. 31 60,000 20,000 200,000 Drawings During Year 2,000 1,000 20,000 New Investments During Year 40,000 5,000 How would the case of concern Y be altered if it were later discovered that the proprietor had forgotten a business obliga- tion which he owed at the bank amounting to $5,000, together with accrued interest of $150, and that he also had failed to in- clude among his assets the value ($10,000) of his residence? Problem 2 James White uses the single entry method. On Jan. 1, 1920 his customers' balances amounted to $10,000 and his creditors* balances to $3,220. The balance of his cash book was $1,000, but there was a cash shortage of $100. Five hundred dollars of this was in the bank. No other records were kept. Upon inventory- ing it was found that White had merchandise worth $8,350, and auto truck valued at $1,000, furniture and fixtures worth $800, and a note payable given to a furniture creditor for $100. On December 31, 1917, White had accounts receivable of $10,000; he owed to creditors for merchandise the sum of $3,000; and cash on hand was $500. Merchandise was inventoried at $9,000. On a note for $500 due at his bank he owed $10 accrued interest. It was considered that the auto truck had depreciated 20%. White's drawings had amounted to $1,000, and he had reinvested $500. Compute the profit and loss by the so-called single entry method of subtracting the net worth at the end of the year from the net worth at the beginning, being sure that you consider that difference only as affected by actual business operation. Derive a "double entry" analysis of profit and loss with the aid of the following information : % PROBLEMS IN ACCOUNTING 15 Summary of receipts and disbursements for the year: Received: Accounts Receivable $19,710 New Investment 500 Loan at Bank 500 Disbursed: Creditor's Note 100 Accounts Payable 15,000 General Expense 4,000 Wages 1,000 Drawings 1,000 Interest 10 SECTION II. Problems and Exercises In the General The- ory of Accounting. The student is referred to Sprague's "Philosophy of Ac- counts" and to Paton's book on the theory of accounts for good sources. The latter study is a serious and comprehensive one, and is quite up-to-date in its analysis. Hatfield's "Modern Ac- counting" gives a rather impartial approach to the chief difficul- ties of accounting, but perhaps stops short of what one might term extended theoretical discussion. The student will do well to take time off for serious reference to books of the above charac- ter. Problem 3 A partnership of X, Y, and Z has on January 1, 1920 an auto truck worth $2,000, merchandise valued at $9,000, furniture and fixtures worth $500, and accounts receivable amounting to $15,000. Cash on hand is $3,000. Outstanding creditors' balances total $4,000. Both partners originally contributed capital on an equal basis, and withdrawals by both partners have been equal. On December 31 of the same year the assets were as follows : Accounts receivable $25,000, cash $3,000, merchandise $10,000, 16 PROBLEMS IN ACCOUNTING and the fixed assets the original balances less 10% depreciation on furniture and fixtures and 25% depreciation on the truck. Cred- itors' balances are $2,500. The books have been kept in an in- complete manner, only amounts for cash and customers' and cred- itors' balances being available. The drawings of the partners have been $2,000 apiece. Show the profit for the year, and give the entries in a double entry journal requisite to change the bookkeeping plan to the reg- ular double entry basis. Problem 4 Explain the inadequacy of the so-called single entry plan of keeping business records. (First show what we mean ordinarily by adequate records and how double entry provides for them.) Problem 5 The Jackson-Dayton Company record their merchandise transactions in a single merchandise account. What is this kind of an account called? Why? At the end of one of their ac- counting periods it shows a credit balance of $40,320. If their merchandise inventory amounts to $40,023, what is the amount of their gross revenue from sales ? Explain precisely the importance of this gross revenue from sales figure. Problem 6 Explain precisely the construction of the balance sheet. How does it differ, if at all, from the so-called "trial balance after ad- justments?" From the "trial balance before closing?" Expound the statement that "the balance sheet is the origin and terminus of every account," or "that the balance sheet is the groundwork of accountancy." Problem 7 It has been said that there are two methods of arriving at the balance sheet : by derivation and by inventory. Explain what is meant. PROBLEMS IN ACCOUNTING 17 Problem 8 How does the controlling account make possible the two principal types of information required by a business man, namely, comprehensive and detailed information? Problem 9 (a) Define an offset and an adjunct account. Illustrate their uses. (b) Explain the construction of the expense and revenue accounts, and the reason for their use. (c) At the end of an accounting period what are the accounts which we usually find in the general ledger having debit balances ? Having credit balances ? (d) What adjustments, ordinarily necessary at the end of an accounting period, must be made to render the trial balance a correct basis for the operating analysis and the balance sheet? Problem 10 Define the accounting period. Why do we try to "preserve the integrity" of the accounting period? Explain the distinction between the figure of net operating revenue and the figure of net profit. Problem 11 What do we mean when we say we keep books from the stand- point of the manager? What kind of accounting data is indis- pensable to the manager ? Problem 12 From the following figures of net sales, costs, and expenses prepare a statement which will account for the shrinkage in profits in 1920, and which will show in dollars and cents what portion of the shrinkage is due to decreased sales and what portion is oc- casioned by the several variations in cost and expense items. 18 PROBLEMS IN ACCOUNTING 1920 1919 Materials $230,000 $250,000 Direct Labor 80,000 108,000 Indirect Labor 6,000 8,000 Factory Expennes 27,000 26,500 Trading Expenses 23,500 21,000 Office Expenses 10,500 11,500 Net Sales 390,000 465,000 Problem 13 The books of a manufacturing company at the close of its first year's business show sales of $250,000 ; returns and allowances of $20,000 ; merchandise cash discounts debit of $15,000 ; merchan- dise debit balance of $70,000 ; labor $50,000 ; fuel $16,000 ; shop expense $20,000; salaries $16,000; general expense $8,000; ad- vertising $55,000 ; traveling expenses $5,000 ; insurance and taxes $6,000. The inventory totals $14,000, and before the books are closed a sufficient sum for depreciation, namely $5,000, is written off. The company claims that its profit figure, conservatively stated, is $22,000. Arrange the amounts in an income account and explain how the company could arrive at such a profit. The figures are supposed to be accurate. Problem 14 (a) The X Company issues 20-year bonds at par to the amount of $1,000,000. The bond contract requires the Company to accumulate a sinking fund "out of profits'* with which to re- tire the bonds at maturity. This fund is to be established with the Y Trust Company, to be used by the trustee in paying the bond- holders. Ignoring interest give the entries required by this contract the first year. Give the entries which would be made when the bonds mature. PROBLEMS IN ACCOUNTING 19 (b) Give journal entries which might reasonably explain the change between years in the following taken from the X Com- pany's balance sheet prepared December 31 for each of the years named. 1920 1921 Reserve for Federal Taxes $ 50,000 $ 60,000 Reserve for Depreciation 160,000 180,000 Reserve for Doubtful Accounts 3,000 2,500 Reserve for Improvements 50,000 75,000 Reserve for Contingencies 25,000 50,000 Problem 15 Mr. A, single proprietor, writes you a request to come to his place of business for the purpose of getting out his yearly financial statements. Having consented to go, you set out for Mr. A's office. Before you arrive fire breaks out in Mr. A's office and destroys every accounting record the proprietor ever possessed. Explain how you would set about the task of supplying Mr. A with the statements he requires. Would it be possible for you to give all he asks? Assuming he remembers his net worth as of the end of the preceding period, could you tell him his profits for the period just passed? Can you explain why the results would be at best but a rough approximation of the truth? Of what valuable in- information would Mr. A find himself lacking. Discuss generally. Problem 16 The principal objects of a corporation were to buy, rent, and sell land. The articles of incorporation provided that dividends should be paid only out of net profits. In 1881 the company had a worthless debt of $350,000 which it undertook to absorb by writing up in the balance sheet of that year the value of its lands some $340,000 above cost price, crediting such increase of value to profit and loss as a set-off against the bad account which was in this way treated as written off. Was this legitimate accounting? In 1885 the same company showed a profit by its revenue accounts, out of which the payment of a dividend on preferred < ! 20 PROBLEMS IN ACCOUNTING stock was proposed. A common shareholder brought suit to re- strain the payment of the proposed dividend on the ground that some of the company's land had, during the year 1885, much de- clined in value, and that if such loss of value were debited to the profit and loss account there would be no surplus available for dividends. Was the ground for action a good one? Problem 17 From the following trial balance before closing, and adjusting data, of the Passe Corporation, prepare a profit and loss state- ment and surplus analysis as of December 31, 1921, using the re- port form method of presentation : Account Dr. Cr. Plant, Machinery, etc., $1,000,000 Goods in Process Inv. Jan. 1, 1921 90,000 Materials Inv. Jan. 1, 1921 100,000 Finished Goods Inv. Jan. 1, 1921 50,000 Accounts and Notes Payable $ 65,000 Direct Labor 75,000 Bonds 200,000 Manufacturing Expense 30,000 Net Purchases 500,000 Selling Expenses 20,000 Accounts and Notes Receivable 200,000 Cash 25,000 Net Sales 640,000 Administration Expense 10,000 Interest Paid 5,000 Capital Stock 1,000,000 Surplus 200,000 PROBLEMS IN ACCOUNTING 81 $2,105,000 $2,105,000 No dividends were declared during 1921; the company has failed to charge operations with depreciation on the plant since purchased at the beginning of business five years ago, 5 per cent per annum being the correct amount for this type of property; inventories : December 31, 1921 : raw materials, $70,000 ; goods in process, $5,000, and finished goods, $40,000 ; direct wages unpaid $5,000. Make up a working sheet to hand in with your reports. Problem 18 A certain corporation established January 1, 1919, closes its books at the end of the half-year period. At the time of your audit, just following the closing of the books December 31, 1921, you find in the general ledger a buildings account with a debit of $100,000 purporting to be the cost (new) of the plant structure, offset by an allowance for depreciation account with a credit bal- ance of $20,000. You ascertain that the original program for writing off depreciation provided for building up of the allowance at a rate based on a service life of the property estimated to be 20 years, no salvage value expected, each year to bear accordingly its aliquot share of the capital expiration. Such a discovery gives evidence that the bookkeeper has misunderstood the instructions given him when the asset was purchased. Formulate the adjusting journal entries, with explanations. Problem 19 Corporation X, engaged in the manufacture of spark plugs, possesses unimproved real estate which cost $320,000, purchased with a view to expanding its plant on the one-story plan. Property in the vicinity has risen rapidly in value, and the board of direc- tors decided that it would be the better part of thrift for the com- pany to expand its facilities by adding new stories to already exist- ing structures, and to dispose of the real estate. The property is accordingly sold, the sale realizing $500,000. Journalize, giving reasons. A real estate organization purchases the land from the X Corporation, and eventually sells the property by lots for $1,000,- 000. Journalize, giving reasons. I ,ll ill t 22 PROBLEMS IN ACCOUNTING Explain why you accord different treatment to the two tran- sactions, since the same piece of property is dealt with in both in- stances. Problem 20 On February 15, 1920, the directors of a corporation with $10,000 Cumulative 6 per cent preferred stock and $10,000 com- mon stock, present to their stockholders their regular annual re- port including Exhibit A, statement of assets and liabilities at December 31, 1919. Exhibit B, statement of receipts and disbursements for the year ending December 31, 1919. A letter discussing the affairs of the company. In this letter the directors state : "Exhibit B shows a gain of $1253.50, increasing the balance from $590.00 at the beginning of the year to $1843.50 at the end of the year. As you will re- member, it was impossible to pay any dividends last year because the $590.00 balance was insufficient to pay 6 per cent on the pre- ferred. This left the preferred dividends one year in arrears. The gain of $1253.50 this year enables us to pay last year's pre- ferred dividend of $600.00, as well as this year's dividend on the preferred, or $1200 altogether. As this uses all but $53.50 of the year's gain it is impossible to pay any dividend on the common stock." A committee of common stockholders waited on the directors and strongly urged the payment of a 6 per cent dividend on the common stock, supporting their petition with the following figures : Balance at beginning of 1919 590.00 Increase during 1919, as shown by Exhibit B. . .1253.50 Balance at the end of 1919 1843.50 Dividends on preferred stock 1200.00 Balance available for common stock 643.50 A 6 per cent dividend on the common stock 600.00 Would still leave a balance of 43.60 PROBLEMS IN ACCOUNTING 23 The directors maintain that the dividends for the year can- not legally exceed $1253.50 and that the cumulative feature of the preferred stock requires that $1200.00 thereof must go to the preferred. You are asked to write a letter to the directors ad- vising them the proper course to follow. Make it brief. Problem 21 The statement of condition of a certain institution at the close of business December 31, 1913, which had been prepared by an accountant, appeared as follows : Liabilities Assets Cash $30,344.94 Acc'ts Rec. for Food 44.39 Accrued Interest. . . 500.00 Office Supplies 6.85 Sundry Food Sup- plies 1,226.72 Investments at Cost 10,095.00 Furniture and Fix- tures 300.00 Accounts Payable: Office Supplies ....$ 2.00 Food Supplies .... 480.00 Nurses' Salaries . . . 680.50 Laundry and Cleaning 28.0(1 Total $ 1,190.50 Notes Payable .... 5,000.00 Surplus 36,327.40 $42,517.90 $42,517.90 The accounts included in the foregoing statement of condi- tion are, with the exception of cash, not incorporated in any of the books of the organization, since the only record kept is a cash receipts and disbursements book. You were instructed to audit the cash book for the year ended December 31, 1914. You found the cash receipts and dis- bursements for the year to be made up as follows : RECEIPTS : Contributions $25,330.68 Special Campaign 6,800.00 r I i| i 24 PROBLEMS IN ACCOUNTING Sale of Food Supplies 1,352.32 Bank Loan 10,500.00 Sub-rentals 77.00 Interest on Investments 850.00 Bond Sold, including accrued Interest of $25.00. . . 5,010.00 Total Receipts 49,920.00 DISBURSEMENTS: Station Expenses $ 6,103.76 Food Supplies 1,821.00 General Expenses 12,262.20 Loan Repaid 5,000.00 Interest 638.50 Office Supplies 15.00 Nurses' Salaries 19,820.00 Laundry and Cleaning 720.00 Bonds purchased at cost , 28,020.00 Interest accrued on above Bonds 215.00 Total Disbursements $74,615.46 From the information available at the close of your examin- ation you ascertain the following facts : Accounts Receivable for food amounted to $ 58.20 Accrued Interest on Investments amounted to 756.00 Office Supplies inventory amounted to 10.00 Food Supplies inventory amounted to 926.50 The original cost of the Bond sold during the year was . 4,965.00 Unpaid invoices for Food Supplies 360.20 Nurses' Salaries unpaid 923.50 You are required to prepare a revenue and expense statement for the year ended December 31, 1914, and a statement of condi- tion at the close of the year. PROBLEMS IN ACCOUNTING 25 Problem 22 On July 1, 1916, the X. Y. Z. Co. borrowed on their notes, $4,500,000 to be paid back as follows : $500,000 due July 1, 1917 ; $500,000 due July 1, 1918; $500,000 due July 1, 1919; $500,000 due July 1, 1920 ; $2,500,000 due July 1, 1921. In addition to 5% interest on the notes, payable semi-annually, the bankers deducted 3% discount on the $4,500,000. The com- pany wishes to write off this discount proportionately at the end of each year. How much should be written off on December 31, 1916, 1917, 1918, 1919, 1920, 1921? Use the Bonds Outstanding Method. (By this method the amount of discount is accumulated in the same ratio as the bonds retired each year bear to total bonds out- standing at the beginning.) Problem 23 Distinguish between a statement of receipts and disburse- ments and a statement of revenues and expenses. Under what circumstances would the two statements be equivalent? Problem 24 After having conducted his business as a wholesale coal dealer for one year, and having kept only single entry accounts, a proprietor employs you to place his books in condition to be kept according to the double entry plan. You find only a cash book, a day book, and a ledger. Outline how you would set about making a profit and loss account for the year ended and a balance sheet, and how you would make provision for the double entry system required. Problem 25 State your objections, if you have any, to the "Merchandise*' account frequently appearing in ledgers. Describe a different method of recording the transactions affecting merchandise. 26 PROBLEMS IN ACCOUNTING Problem 26 The books of a manufacturing concern, which began business January 1, 1912, were kept by single entry. After the close of the second year you are called in to prepare a comparative statement, showing the financial condition as at December 31, 1912, and December 31, 1913. The following mfor- mation is handed you from which you will draw your conclusions : Statement as of December 31, 1912 (Prepared by the Bookkeeper) Manufacturing expense $5,384.25 Capital stock, fully paid 15,000.00 Plant and equipment 20,000.00 Cash 3,645.15 Gross sales for year 11,236.15 First mortgage bonds (due Dec. 31, 1913) 15,000.00 Materials and supplies (inventory) 4,563.84 Notes payable 7,500.00 Accounts Receivable 6,125.36 Accounts payable 2,936.43 Interest on bonds (9 months), accrued 562.50 Interest on notes and accounts payable, accrued 326.50 During the year 1913 there has been subscribed, and paid in cash, $5,000 in additional capital stock. All the notes and old accounts payable have been paid, together with the interest accrued as above. The plant and equipment were revalued in January, 1913, at $17,500. Of this amount you are instructed to charge off 6% for depreciation, and carry 2^2% to reserve, to cover repairs and renewals. The outstanding bonds were paid, both principal and interest, when due. The accounts payable (all for materials and supplies) at December 31, 1913, amounted to $1,146.34, none bearing interest. PROBLEMS IN ACCOUNTING 27 No inventory was prepared on December 31, 1913. The pur- chases during the year 1913, all paid for in cash, amounted to $10,396.42. The sales during the year were $28,726.50, of which 10% are still uncollected and considered good. The management considers the gross profit to be 50% of sales. Of the accounts receivable January 1, 1913, $5,496.43 was collected, and the balance you are instructed to charge off. Prepare the required statement. Problem 27 The Rex Manufacturing Company has its cost accounting de- partment at its factory, several miles from the main office. The product of the factory is charged to the main office at factory cost. At January 1, 1913, the factory books show the following facts: Petty cash fund, $500 ; raw materials, $15,283.46 ; accrued wages distributed, $1,846.93 ; goods in process, at cost, $56,834.63, exclusive of general expenses, $9,732.65, and management ex- penses, $7,834.50; finished goods, $39,864.70. Purchases of raw materials for the year 1913 amounted to $71,025.45 ; wages paid, $118,342.63 ; management expenses, $46,- 835; factory expenses, $30,846.18. The top floor of the factory is rented to another concern at $1,000 a year, which has been paid to date. Power is sold to the same concern at $25 per month, one month being unpaid. Raw material used during the year amounted to $58,943.66 ; factory expenses distributed, $38,241.16; management expenses distributed, $49,637.45. The output of finished goods for the year amounted to $289,- 864.38, including all costs. The goods charged to the main office amounted to $301,286.50. At December 31, 1913, there remained unpaid, and undis- tributed to manufacturing, the factory payroll for three days, amounting to $2,394.84, and 1,200 hours of overtime (the regular rate being 42 J^ cents), payable at 150% of regular rates. Prepare all accounts affected and final trial balance. '%■ 28 PROBLEMS IN ACCOUNTING II Problem 28 Explain why, in the following accounts, the charge to factory cost is less than the sum of credits to the component accounts, excluding inventory adjustments: Raw Materials 100,000 5,000 Labor 150,000 10,000 Inv. 10,000 5,000 80,000 10,000 3,000 1,000 500 100,000 5,500 60,000 Manufacturing Expense 30,000 2,000 2,500 5,500 4,500 40,000 40,000 5,000 100,000 45,000 500 10,000 9,500 20,000 10,000 Inv. 5,000 9,500 15,000 15,000 Factory Cost PROBLEMS IN ACCOUNTING 29 Problem 29 You are engaged to devise and install a system of cost ac- counts for a concern producing electrical machinery, which pur- chases all of its castings. Briefly outline a system of stores ac- counts, giving proper control, and draft the monthly journal en- tries affecting these accounts. State also particularly how you would advise tjhe following items to be treated in determining costs, and give your reasons: labor assembling and building machine for trial test ; labor disman- tling and packing machine for delivery; rent of buildings; ma- chine labor; machine repairs and supplies; depreciation of ma- chinery ; storeman's wages ; salesman's salaries and expenses ; and foreman's wages. Problem 30 What are the usual sinking fund provisions to be found in a trust deed securing an issue of bonds of a corporation? Sketch in journal entry form, with proper descriptions, the entries you would expect to find in the accounts relative thereto. Problem 31 (a) Expound the theory of double entry bookkeeping, and state briefly how you would proceed to complete the double entry in the event you were called upon to examine the accounts of a concern which had been kept on a single entry basis. (b) Give some of the meanings which have been attached to the terms "debit" and "credit." Problem 32 A company issues an order for material. From that point on, recite the accounting operations which relate to the purchase of the material, and which a well-organized concern would employ to safeguard its interests until the bill is paid. Problem 33 (a) What do you understand by the "Double Account Sys- tem," and state the kind of public corporations it would especially apply to? Describe fully, giving illustration. %'}i 30 PROBLEMS IN ACCOUNTING I (b) Give your understanding of good will. How should it be treated in the accounts? Illustrate the circumstances under which good will comes up for consideration. Can you say that good will is the result of commodity or capitalistic monopoly? Define as carefully as you can. Problem 34 Suppose that Mexican exchange has fallen considerably during the last year or so. What effect would this fall have upon the accounts of an American company with its head office in Hickory Corners which does business in Mexico through a local branch office? Also describe fully the effect of such a fall in exchange in the accounts of two American companies with head offices in the United States, of which one operates a gold mine in Mexico, ship- ping all its product to New York, where the metal is sold, and the other operating a local electric light and power plant in the re- public, buying all its materials and supplies in the United States ; and state how the matter should be dealt with in the accounts of the respective companies. Problem 35 Characterize the different kinds of reserves, first defining the term reserve. Illustrate each one. Wherein do secret reserves differ from ordinary reserves? How are such reserves created, and for what purposes ? Give sev- eral examples. Problem 36 Define the following terms: Depreciation, depletion, appre- ciation, amortization, accumulation, demurrage, income bonds, de- bentures, deferred charges, capital expenditures, sinking fund, expenditure, expense, revenue, gross profit. Problem 37 The X. Y. Z. Company was formed on January 1, 1920, and the following is the trial balance as of December 31, 1921, before closing the income and expense accounts for the current year : PROBLEMS IN ACCOUNTING 31 THE Z. Y. Z. COMPANY Trial Balance, December 31, 1921 Dr. Capital Stock Authorized and Issued . . . Bonds Issued: $130,000 20-year h% bonds, issued January 1, 1920, at a discount of 5% Discount on Bonds Issued $ 6,000.00 Property (Jan. 1, 1921) 250,280.50 Capital Stock in Treasury 12,000.00 Calls unpaid 500.00 Additions to property, 1921: Sinking Artesian Well 5,000.00 X. Y. C. Estate Co. : Bonds purchased, 1920 (and cancelled) $6,000.00 5,580.00 Bonds Purchased 1921.... 6,000.00 5,750.00 Rents collected Fire Insurance paid for year ending June 30, 1914 300.00 Agents' Fees and Expenses 2,850.00 General Offices Expenses 1,050.00 Cash at bankers and on hand 1,389.50 Secretary's Salary and Commission 2,380.00 Income and Expense Account, 1 920 Interest on bonds (paid annually) 5,400.00 Cr. $140,000.00 120,000.00 24,500.00 14,250.00 $298,750.00 $298,750.00 The rent collections include rents paid in advance — $750 — and there are sundry rents outstanding not taken up on the books, amounting to $2,650, of which it is estimated $15 will not be collected. No provision has been made in the year's accounts for depre- ciation of the buildings included in the property account, the original cost of which was $120,000. In the year 1920 the amount written off was based on an estimated life of twenty years. 32 PROBLEMS IN ACCOUNTING Prepare balance sheet as of December 31, 1921, and income and expense account for the year ended at that date, after making all necessary adjustments. Problem 38 The Cayuga Mining Company leases an iron mine from X. Drexel for a term of thirty years, at a rental to be based on a royalty charge of 25 cents per ton of ore mined, with a minimum or dead rent of $8,000 per annum. The lease provided that the lessee should have the right to recover dead rents paid in excess of royalties earned within the next succeeding five years. From the following information in regard to the ore mined, prepare the account of the lessor as it should appear on the books of the lessee company, and in addition show the "nominal" accounts affected. Tons Year Ore Mined 1907 10,200 1908 15,160 1909 50,280 1910 35,340 1911 30,180 1912 50,240 1913 36,400 1914 60,260 Problem 39 On October 31, 1913, a fire occurred at the plant of a furni- ture manufacturing company, which destroyed part of the equip- ment, a large portion of the stock, and one of the accounts re- ceivable ledgers. A claim under the company's policies of insur- ance of $250,000 was filed, which was ultimately settled by the adjusters on December 1, 1913, for $250,000, which was paid in cash, the company to retain all the salvage. The following is a summary of the book value of the assets destroyed or lost : PROBLEMS IN ACCOUNTING 33 Equipment $ 75,000.00 Merchandise 100,000.00 Accounts Receivable 80,000.00 At December 31, 1913, when closing the books for the fiscal year it was estimated that the salvage and the book debts would realize $90,000, as follows: Equipment $15,000.00 Merchandise 25,000.00 Book Debts 50,000.00 (a) Draw up a fire loss adjustment account and show the profit or loss resulting from the fire, stating how you would treat it in the annual accounts at December 31, 1913. State also what steps you would take to verify the salvage values placed on the various items for the purposes of the balance sheet of that date. (b) During the year succeeding that of the fire, in 1914, it turned out that the estimated salvage value of the stock had been excesssive, and that only $20,000.00 was realized thereon, while the book debts proved to have been undervalued, actually pro- ducing $70,000.00. How would you deal with these differences in the 1914 accounts ? Problem 40 A banking concern deals in foreign exchange and the follow- ing are the transactions with a London correspondent for one month : Debits Sept. 1 Remittance 30-Day Bill £400 @ 4.86 10 Remittance Sight Bill ilOO-10-0 @ 4.87 15 Remittance Demand Bill £200-0-6 @ 4.86 J4 Credits Sept. 2 Draft, Sight, £300 @ 4.87^ 12 Draft, Demand, £200-12-5 @ 4.87 20 Cable, £100 @ 4.88 (a) Ascertain the profit or loss in the account for the month. III ;!i 34 PROBLEMS IN ACCOUNTING (b) State the balance of the account at the end of the month in foreign and domestic currency, the current rate of sterling ex- change being cable transfers 4.89. Problem 41 Following is the trial balance of a general ledger Decem- ber 31, 1921 : Dr. Cr. Bank $ 1,753.18 Office Cash $ 13.67 Accounts Receivable 2,639.45 Accounts Payable 117.36 Purchases 14,248.62 Expenses 4,875.09 Sales 18,792.73 Machinery 75.19 Owner's Capital Acct 4,752.70 $23,633.70 $23,633.70 Investigation shows the bank account to be correct, but cash on hand is $75.28; inventory is $2,713.94; and machinery is worth $125. Examination of the purchase and sales ledgers shows noth- ing payable and $2,514.83 receivable. Make necessary adjusting entries, profit and loss account, and balance sheet. Problem 42 The annual report of a club contains both a statement of receipts and disbursements and a statement of income and ex- pense. You find that the items and figures in one are identical with those in the other. Explain fully how this could be true. Problem 43 Two concerns fail, owing each other money, the accounts of which are included in their respective Accounts Payable accounts. A summary balance sheet of X, which is accepted as correct, is as follows : PROBLEMS IN ACCOUNTING 35 * Balance Sheet of Firm X Assets Liabilities Due from Y $10,000 Due to Y $40,000 All other Assets 180,000 All other Liabilities. . . 200,000 Deficit 50,000 $240,000 $240,000 A summary balance sheet of Y, which is accepted as correct, is as follows: Balance Sheet of Firm Y Assets Liabilities Due from X $40,000 Due to X $10,000 All other Assets 160,000 All other Liabilities .. . 270,000 Deficit 80,000 $280,000 $280,000 The court holds that it is unfair to other creditors to allow such firms to strike a balance between their respective accounts and then to settle with the "outside" creditors on a percentage basis. Accordingly, it is necessary to obtain a "ratio of solvency," i. e., the percentage each concern will be able to pay on the basis of the respective balance sheets. Determine that ratio. Problem 44 The office of a firm of traders, doing business in San Fran- cisco, was destroyed by an earthquake. The books of account, which had been fully posted, were badly damaged. The follow- ing ledger accounts were found to be legible : Purchases, $69,000; Discounts "lost," $640; Discounts "gained," $3,450; Sales, $54,000; Bills Receivable, $33,000. In- quiry at the bank disclosed a balance on deposit of $129,000. Bills receivable amounting to $45,000 had been discounted at the bank. An audit of the checks paid by the bank showed that $99,000 had been paid creditors (including $60,000 notes payable). A balance sheet prepared at the last closing of the books was pro- duced, containing the following items: N ' i * I ■II' lip 36 PROBLEMS IN ACCOUNTING Cash, $60,000; accounts receivable, $126,000; loans receiv- able, $24,000; real estate, $90,000; notes receivable, $78,000; capital, $318,000; notes payable, $60,000. Prepare a trial balance, supplying the missing accounts. Problem 45 (a) What is meant by "extraneous profit"? By "extraneous loss"? Give illustrations. (b) What is the purpose of the operating statement? May the net profits from operations figure be used as a common de- nominator of managerial efficiency? To gain a rational sense of what his manager is doing, what must the business entrepre- neur do? Problem 46 Does a trial balance in which the aggregate debits and credits correspond prove the books to be correct ? Give reasons. Problem 47 Is it permissible to include in the valuation of a plant con- structed by a company's own employes for the company's use an amount of profits sufficient to bring the plant valuation to an amount equivalent to the cost of construction by an outside party? In the event that the cost of materials had increased consid- erably after purchase, but subsequent to the date of the comple- tion of construction, would you consider an adjustment necessary therefor ? Problem 48 A company purchased several machines, and in order to in- stall them to the best advantage, old machines which were to re- main in use were moved to make room for them. The machines were large and had to be taken apart before they could be moved. To what account should the cost of moving be charged, and why? PROBLEMS IN ACCOUNTING 37 Problem 49 The city of Razoo, in order to encourage manufacturers to settle within its jurisdiction, stands ready to transfer to them sufficient land for their plant requirements, in addition to certain other concessions. The Kadoo Manufacturing Company decided to accept the following proposition made by the city on December 31, 1920: 1. To transfer land having a value of $10,000, provided the company erects a factory and employs an average of 150 men during a period of five years to December 31, 1925. 2. The city to contribute $10,000 toward the erection of the plant. 3. The company to pay no city taxes during the period. 4. Should the company not comply with the requirements as to the number of employes, the company is to reimburse the city for the $10,000 given toward the erection of the plant, and $5,000 for the land. Give the journal entries necessary to record these transactions on the Kadoo Manufacturing Company's books. In preparing a balance sheet as at December 31, 1921, how would you deal with the situation? Problem 50 A concern needed an addition to its plant ; not having enough ready capital, it borrowed money, and when the interest was paid, the expenditure was charged to the plant account on the theory that it was not an expense in the ordinary conduct of the business, and should therefore not be charged to the regular interest account, but might with propriety be charged as a part of the cost of the addition. Is this theory sound? Problem 51 A company purchased land, and on this land was a building which the company had to pull down in order to make the required use of the land. During the demolishing of the building, a work- I [jrr- i 38 PROBLEMS IN ACCOUNTING man was killed. To what account should the compensation paid on account of this accident be charged, and why ? Problem 52 On January 1, 1910, the Dolorous Manufacturing Company purchased land costing $12,000, a building for $30,000, and ma- chinery costing $25,000. No further purchases are made, and on January 1, 1920, the balance sheet of the company disclosed the following financial condition: Assets Land $ 12,000 Buildings 30,000 Machinery 25,000 Mdse. Inv 60,000 Accts. Rec 75,000 Cash 10,000 Liabilities Capital Stock 150,000 Surplus 23,500 Reserve for Depr'n of Buildings 7,500 of Machinery 15,000 Accounts Payable 16,000 $212,000 $212,000 Depreciation had been computed each year on the original cost. On May 16, 1920, the factory burned down, a total loss en- suing. Their books of account as on that date show the follow- ing ledger balances : Land $ 12,000 Buildings 30,000 Machinery 25,000 Mdse. Inv. 1/1/1920.. 60,000 Purchases 160,000 Labor and Facty. Cost . 60,000 General Ex 45,000 Accounts Rec 73,000 Cash 22,000 Capital Stock $150,000 Surplus 23,500 Reserve for Depreciation of Buildings 7,500 of Machinery 15,000 Sales, Net 280,000 Accounts Pay 11,000 $487,000 $487,000 For the years 1917, 1918, and 1919, the books showed a "gross profit on sales" averaging 25% of net sales. The company, how- ever, succeeds in obtaining $65,000 from Fire Insurance Company for merchandise lost. 4 I . PROBLEMS IN ACCOUNTING 39 The insurance company acknowledges that the cost of replac- ing buildings and machinery would be 10% higher in 1920 than in 1910, and after taking this fact into consideration and determining what they hold to be fair depreciation, they settle these two items as follows : Buildings $28,000, machinery $17,500. The company erects a new building costing $40,000, and purchases machinery costing $35,000. Finding the value of its land to be now $24,000, the company makes book entry to so record it. Prepare journal entries properly to record all the above tran- sactions, including cash losses or gains due to the fire, actual trading profit from January 1, 1920, to date of fire, and balance sheet after making all of above entries. For the purposes of this question, as- sume no accounts receivable collected or accounts payable paid, be- tween May 16th and the date of settlement. Problem 53 The Rapanook Coal Co. has capital stock of $8,000 divided into 80 shares of par value of $100, owned as follows : John Pick 60 shares James Shovel 10 shares Dick Spade 10 shares John Pick was elected president; Ray Fork, vice-president and manager ; and DeLong Rake, secretary and treasurer. Neither Fork nor Rake held any stock, but they were nevertheless to receive the following percentages of net profits: Fork 15%, Rake 10%. At the end of the year 1920 there were apparent profits of $8,640.46 to divide; but before the division took place it was discovered that the treasurer Rake, who owed the company $2,264.14 had disappeared. He was not financially responsible and was not bonded, hence his account was quite uncollectible. Therefore the net profits are not $8,640.46 because of the loss from Rake's uncollectible account. Rake's account, however, is not the entire balance of $2,264.14, since he was entitled to a credit of 10% of the net profits. Compute the uncollectible balance of Rake's account. Ill »i Iff w 40 PROBLEMS IN ACCOUNTING I! (I Problem 54 The firm of Run & Gettem engage in a restaurant business where all sales are for cash, with the express pur|X)se at a later date of selling it out on the strength of the large profits shown by the books. With this object in view they grossly pad their sales every day and make compensating fraudulent entries on the dis- bursement side of the cash book purporting to represent the cash withdrawals of partners, and all records by which the cash sales might possibly be verified are destroyed. Run & Gettem make a proposition to Mr. A to sell their business to him, and on the showing of the profits made by the books Mr. A seriously con- siders the purchase, but engages an accountant to make an exam- ination. The latter discovers the fraud. How did he probably discover it? Problem 55 A has agreed to sell to B the good- will of the Kayo Com- pany on the basis of three years' profits of the business to be determined by you on the basis of sound accounting principles as accurately as possible from the following statement handed you by A. You are required to compute the value of the good- will, but are not expected to take into account any considerations out- side those presented by the statements. Credits 1st Year 2nd Year 3rd Year Sales (Selling prices substantially uniform during period) $638,400 $602,500 $564,000 Estimated value of construction work performed and charged to property 110,000 77,600 154,000 Appreciation of real estate upon revaluation by experts 80,000 Profit on sale of Bethlehem Steel Co. stock 85,000 PROBLEMS IN ACCOUNTING 41 Inventory at end of period — Production mat'l at cost 72,000 103,100 106,600 Finished goods at selling prices. 76,500 114,000 150,000 $896,900 $977,200 $1,059,600 Debits Production material purchased .. $233,000 $252,400 $ 220,300 Production labor 50,850 61,400 60,900 Production expense (including de- preciation) 66,750 69,300 70,300 Selling expenses 52,500 55,650 62,800 Interest 96,000 94,000 98,500 Cost of construction work 74,600 49,000 86,000 Inventory at beginning of period Production material at cost... . 51,400 72,000 103,100 Finished goods at selling prices. 54,900 76,500 114,000 $680,000 $730,250 $ 815,900 Balance, designated profit by A. .$216,900 $246,950 $ 243,700 Problem 56 In a large country store containing several departments, con- siderable produce is taken in the grocery section from farmers for which trading orders are issued redeemable in merchandise in any department. How should such transactions be recorded? Problem 57 What is meant by the "balance account" under the theory of double entry? How was the account used originally? What has become of it in modem bookkeeping practice? Problem 58 Explain what is meant by an accrual. Give several illustra- tions. Discuss : "An accrual is the present status of a growth on some basis of uniform increase." * I' i !ii I 42 PROBLEMS IN ACCOUNTING Problem 59 Expound the "double form" balance sheet. Explain the con- nection between its parts. What is the theory of the separation? Problem 60 What is the distinction made in accounting practice between "nominal" and "real" accounts? between "personal" and "imper- sonal" accounts? \ Problem 61 We can well say that it is the very purpose of the operating (expense and revenue) statement to show the ups and downs of business. There should be no attempt to iron out as between periods the unevenness of profit and loss figures, provided they have their origin in the strictly operating phases of business change. It is the nature of the business game to fluctuate for good or ill; and so far as business fluctuations are periodic in character, they should be permitted to find full expression in the periodic "net profits" figure. Discuss. If we are accounting for "extraneous" or extra-periodic occurrences, some care should be exercised to see that the periodic profits figure is not disturbed beyond its due share. This may mean that we shall have to "pro- rate" expense or revenue, or make an adjustment of accumulated profits. The latter would be the case when a loss has occurred which was not determinable in advance of its happening, although it is admitted to be a "cost of operation." Or such an adjustment of surplus would be required when a purely differential gain was realized, or an entirely non-business loss. Discuss fully, giviiTg illustrations. To what extent, in your opinion, can the periodic operating statement, read in comparison with a previous one, he used as a gauge of managerial efficiency? Problem 62 Surplus is a credit which gauges an element in the asset total. What kind of an error in accounting thinking does this definition of surplus forestall ? Contradistinguish the different credits which ! PROBLEMS IN ACCOUNTING 43 may or may not be said to "gauge an element" in "the asset total" Name and illustrate the three principal types of accounts with debit balances and with credit balances. Problem 63 When we talk of operating statements we of course have in mind an oflfsetting of values which have been realized — realized by actual purchase or realized by actual sale. To the entrepreneur only such events are meaningful as have been realized. At any rate, this is true so far as concerns his present operations. When the entrepreneur makes an expenditure he "ties up" his capital and adds to his risk, and the most convenient measure of his re- sponsibility in this regard is his money outlay. When he makes a sale, and only then, has society relieved him of this responsibility. And he can rationally define a sale only as an exchange which has given him general purchasing power in return for something which, as long as he possessed it, served only to add to his burden of capital ownership. Periodic business income may be defined as the excess of actual sales over the cost of sales plus the expenses of marketing and administration. What have you to offer for and against the inventory maxim of "cost or market, whichever is lower." How do you regard the contention that the operating state- ment should incorporate no change of an anticipated character, either positive or negative? (Change relative to cost, of course, determined as accurately as possible.) If favorable, you must have an alternative to suggest with regard to anticipating losses, for surely you agree that in the present dynamic situation the en- trepreneur should take all measures to protect his working invest- ment. What do you say pro and con in regard to replacement cost as an inventory basis ? Problem 64 What in your opinion are proper income determinants in business ? I' r- ill 44 PROBLEMS IN ACCOUNTING Problem 65 State the problems of materials pricing arising in connection with perpetual inventorying of stores under a cost system. Problem 66 In what respect and for what purpose could comparative statis- tics or percentages be made use of as regards the following : (a) Gross profit on sales (b) Costs of producing specific units (c) Turnover, (d) Sales volume, (e) Merchandise ''con- sumed" (f ) Selling and administrative expenses (g) Detection of fraud. Problem 67 Under what circumstances, if any, are reconstruction or re- habilitation costs properly chargeable to the property account? Problem 68 Discuss the following: A capital expenditure is any con- version of capital into some relatively permanent form which adds to the latter's service life, or increases the total sum of utilities which it can give toward further production. Problem 69 Only on condition that original cost is the proper basis of measurement of business income is it proper to carry fixed assets at cost less accrued depreciation, and then only in the case of a going concern. In other cases cost of replacement less accrued depreciation would be more desirable. What is in mind here? What do you have to offer for or against adjusting fixed asset values to replacement costs in the case of a going concern? Problem 70 Reserves are used for the following purposes: 1. To indi- cate accrued, but estimated, decreases in specific asset values ; 2. To indicate accrued, but estimated, liabilities ; 3. To indicate a PROBLEMS IN ACCOUNTING 45 favorable proprietary element in the asset total which may be cancelled by the withdrawal of assets without endangering the maintenance of an adequate investment ; 4. To indicate a proprie- tary element in the asset total which, although at present unes- sential to economic operation, may yet not be withdrawn without placing the investment in a doubtful condition or without endanger- ing the due payment of some liability; 5. To indicate not esti- mated accrued decreases of specific asset values, but estimated future decreases from those values quite within the field of prob- ability; 6. Reserves which exist, but are not booked. Expound and illustrate. Problem 71 What is the accounting significance of a probable as compared with a possible loss? Problem 72 What is the distinction, if any, between a deferred debit and a deferred asset? Between a deferred credit, a deferred liability, and a deferred sale? Problem 73 What are all the reasons for providing a "sinking fund out of profits?" Be sure you know what the phrase means. Problem 74 Having been employed to certify to the profits of a manu- facturing concern for the past five years for prospectus purposes, your work reveals that the recorded profits require adjustment as follows: Year Ledger 1906 profit $54,920 1907 profit 69,100 1908 profit 41,320 1909 loss 1,640 1910 profit 22,060 Adjustment Account Reduced by $4,200 Increase by 8,520 Reduce by 6,900 Reduce by 1,020 Increase by 1,360 Average Profit $37,152 Net Reduction $ 200 46 PROBLEMS IN ACCOUNTING Those interested point out to you that as only the average profit for the period is required to be certified to, you may dis- regard the small difference of $200. State your opinion. Problem 75 Some objection has been raised to calfing the "capital" ac- count a "liability" account. Discuss this objection, stating your opinion. Give reasons. Problem 76 What is the distinction to be drawn between a "capital" and a "revenue" expenditure? Problem 77 (a) Define the accounting transaction, and explain how it fits into the "double-entry" framework. Give examples of five kinds of transactions stated in terms of the balance sheet classes, (b) Define the account. Show how the conventional double ac- count form gains superiority over other possible forms. Problem 78 What is the most logical basis for grouping assets and liabil- ities in the balance sheet? In what different ways are these groups arranged in practice? Give the reasons in each case. Problem 79 How is an intangible asset to be distinguished? Would you consent to carrying the classification of intangibles to include items like bonds and notes receivable? Problem 80 (a) What is the significance of the division which is usual- ly made of the income account into sections called "manufactur- ing," "selling," "administrative," and "secondary or net deductions and additions?" PROBLEMS IN ACCOUNTING 47 (b) Define the following: "Cost of goods sold," "cost of goods manufactured," "goods in process," "gross revenue from sales," "net operating revenue," "net profit." Explain how each is determined. Problem 81 What are the component elements of the revenue credit? What relation to the revenue credit has the debit to expense? What is the function of the expense and revenue accounts? Problem 82 "An account is usually classified according to its predominat- ing element." Explain. Problem 83 Name the accounts which you would expect to find in the ledger of a medium-sized merchandising establishment, indicating which ones would probably appear in the trial balance "before closing" but not in the balance sheet. Problem 84 The City Coal Company is organized December 1, 1920. The proprietors are A. B. Culver and D. E. Flushing, equal partners. On January 1, 1921, you are called in to prepare a balance sheet showing the present financial condition of the firm. You find assets and liabilities as follows : Cash, $1,000 ; coal, $6,000 ; office furniture and equipment, $300; note payable, $500; due from Homer Horner, $400; supplies, $50; due to Babbitt and Com- pany, $1,500 ; unexpired insurance, $30 ; rent accrued on yard and office, $200. Exhibit this statement. Assuming each partner in- vested $2,700 on December 1, 1920, what was the profit for the month of December? Problem 85 State concisely why it is necessary to supplement the routine work of the bookkeeper with the process of taking inventory in order that rational statements of income and financial condition ! 48 PROBLEMS IN ACCOUNTING may be prepared. Stale three schemes for determining "cost" of goods on hand. What is meant by the statement that taking of inventory in the case of the manufacturing estabHshment is es- sentially a problem of "cost distribution"? Problem 86 The fiscal year of a Manufacturing Company ends Jure; 30, 1908, and the bookkeeper presents a statement to the Directors made up in the following form: Gross Sales $285,000 Increase of Inventory 15,000 $300,000 Cost of sales : Operating expenses, material and sup- plies 257,000 Plant Expense 12,000 Freight on returned goods 600 Sundry purchases finished goods 10,400 280,000 Manufacturing profit 20,000 Other Income: Miscellaneous Earnings 1,500 Profit on Contracts 6,500 Discount on Purchases 500 8,500 $ 28,500 Less: Discount on Sales 2,875 Rebates and Allowances 1,125 4,000 Net Plant Profit $ 24,500 Less: General Expenses 5,500 Interest 1,500 7,000 Net Profit $ 17,500 PROBLEMS IN ACCOUNTING 49 You are required to make up a working sheet, using such of the above figures as may be necessary, together with these fol- lowing: Inventory June 30, 1907: Materials, $115,000; Supplies, $35,000; Finished Goods, $45,000. Inventory June 30, 1908: Material, $140,000 ; Supplies, $10,000 ; Finished Goods, $60,000. Materials used in factory during the year, $75,000 ; Wages, $122,- 500 ; Fuel, $2,500 ; Repairs and Renewals, $2,000 ; other operating expenses, $55,000, which includes $25,000 supplies used. Now recast the above statement. Problem 87 What entries would you make to account for street car ticket sales and cancellations, noting specifically the effect upon the in- come statement and the balance sheet? Problem 88 "No dividends can be declared before the expenses of run- ning the business are paid. These expenses include payment of Bills Payable that are due, because a bill payable is merely written evidence of an account due. A bond is a promissory note and, therefore, of the same category as bills payable. Since a bond is equivalent to a bill payable, no dividend can be paid out before the bond is paid off." Examine critically the above statement. SECTION III. Accounting for Partnerships. The principal problem under this head deals with one of three things: 1. Revaluation of assets of a business which is taking in new interests ; 2. Determination of partnership income and its distribution according to the contract; 3. Determinaton of the status of the partners and other equities in the event of failure, and the necessity for realizing asset values and liquidating claims. If a business is taking in a new interest it may require of the purchaser that he pay a sum greater than that which corresponds 50 PROBLEMS IN ACCOUNTING arithmetically to his proposed fractional share. This the purchaser may be willing to do because the particular business into which he is thinking of buying is able to earn an especially high rate on a given investment. The amount of the excess agreed to in the purchase price is called goodwill — or the developed and trans- ferrable capacity of a particular business entity to make a "supra- normal" profit rate. Theoretically it may be arrived at by the capitalizing of excess earnings at the normal rate. Practically such a method of evaluating the goodwill intangible is rarely used. The excess is usually treated as a three or four years' "purchase," or the goodwill is considered as approximately equal in value to a sum which buyer and seller agree, under all the circumstances, to be justifiable. At any rate, if goodwill is recognized, it means that the sum total of the assets of the selling business is greater than that actually exhibited on the books up to the time of the sale. That is, the value of the assets is greater than before by the amount of the intangible. Such an increase is of course a special profit accruing to the selling proprietors. Conservative account- ants sometimes refuse to recognize goodwill as a specific asset, and credit the excess of the buyer's payment to the capital account of the vending interests in their profit and loss sharing ratio. However, if bona fide, there is perhaps little reason in theory to object to showing goodwill on the balance sheet of the new entity. If the buyer pays a sum which is less than that which corre- sponds arithmetically to his proposed share, it is possible that just the opposite to the above is true with respect to the earning ca- pacity of the business. And a special loss, rather than a profit, will have to be absorbed pro rata by capital accounts of the selling interests. Revaluation of the assets of a business becomes necessary in the following events: (a) change of a single proprietorship into a partnership ; (b) change of the personnel of a partnership, that is, change of the agreement, since agreement and parties can- not be disassociated; (c) change of a partnership into a corpora- tion. PROBLEMS IN ACCOUNTING 61 The determination of partnership income is, of course, no diiferent a problem from that presented by any other business. Obedience to sound accounting principles, and thorough recogni- tion of the necessity for preserving the integrity of operating results are all that is required to show the truth in periodic state- ments so far as such brief approximations, representing such brief intervals of time, may show the truth. The chief problem in this connection, that is, in regard to income, is in its distribution ac- cording to the agreement of the business partners, or, in the ab- sence of specific agreement, according to the legal rule for such cases. Sometimes certain partners are allowed interest on their investments as of some specified date, while all the partners receive their profit and loss percentages of the remaining profits ; sometimes no mention is made of a fixed return on the form of interest, and all the partners covenant to divide the total profits in accord with the profit and loss sharing ratio ; there are instances in which partners have been charged interest on their withdrawals, but it is usually held that withdrawals, if not excessive, are made against current profits. It is interesting to note that the profit and loss sharing ratio may be determined on the basis of capital balances at the beginning of an accounting period, at the end, on the basis of the average investment (computed by averaging with- drawals and investments to a monthly basis), or according to some arbitrary arrangement by percentages or otherwise. The law usually holds to even distribution in cases where the agreement is silent on the point, regardless of what may be a great disparity in the investments made by the several partners. The problem of realization and liquidation following failure comes up under this head only as related to unascertained profits and losses which may take place in process of realizing book values, and to the apparent inexpediency of making a partial distribution to a partner when the remainder of his capital account does not equal his profit and loss sharing ratio. Where there are partners* loan accounts, the usual rule is to treat the loan equities as equivalent to investments, so long as there is a possibility that the partners* capital accounts will not be large enough to absorb 52 PROBLEMS IN ACCOUNTING their pro rata share of losses. Outside equities, of course, stand in the usual preferential position. The following problems are illustrative of the foreoging brief discussion. Problem 89 The ledger account balances after closing of the Ku-Klux Partnership for the periods ending December 31, 1915, and De- cember 31, 1916, are as follows: Account Dec. 31, 1915 Dec. 31, 1916 Buildings $20,000 $1^,000 Accounts Receivable 10,000 30,000 Cheese on hand 5,000 6,000 Accounts Payable 15,000 25,000 Cash 10,000 25,000 Fire Insurance Premium 600 400 Ku, Capital ? ^ v ? 33 a ^^^ Klux, Capital ' ? -^ ? 22. '"^^ According to the articles of agreement, Ku is to receive three- fifths of the profits and Klux two-fifths. Asuming that their capi- tal accounts as of December 31, 1915, were adjusted to the profit and loss sharing ratio by withdrawal or new investment, and that no new investment or withdrawal was made during 1916, compute the profits for the period December 31, 1915-December 31, 1916, and exhibit the balance sheet of the partnership as of the latter date, showing the balance at the credit of Ku and the balance at the credit of Klux. Suppose that on January 1, 1917, Ku and Klux decided to admit Klan into the business on the basis of an offer of $100,000 for a half interest therein, cash contributed, what entries would you find it necessary to make to properly record the transactions, in one analysis recognizing the goodwill sold, in the other omitting it? (Profit from the sale of goodwill should be divided in the agreed profit and loss ratio.) A PROBLEMS IN ACCOUNTING 53 Problem 90 A is a manufacturer of carpets, and his balance sheet as a certain date appears as follows : Assets Liabilities Cash in bank $ 815.00 Bills Payable $22,000.00 Real Estate, apprais- , Book Accounts Pay- ed value 20,000.00 able 28,000.00 Machinery after 10% depreciation 40,000.00 Book Accounts Re- ceivable 7,227.50 Inventory, stock fin- ished 11,000.00 Inventory, stock in looms 850.00 Inventory, raw mate- rials and supplies.. 107.50 $80,000.00 He agrees with B to sell him one-half interest in the business for $20,000.00, to be contributed to the new firm, the new firm to take over the assets of A with the exception of the real estate, and to assume all the liabilities. The two further agree that the goodwill of the business of A shall be rated at $20,000.00 in the books of the new firm. It was understood that A guaranteed the correctness of the accounts. Shortly after beginning of busi- ness the discovery was made that the inventory of finished stock was incorrect ; that the value should have been stated at $8,500.00, instead of $11,000.00, and that of the book accounts receivable only $6,227.50 were collectible, one of the debtors, owing $1,000.00, having failed and absconded previous to the formation of the partnership leaving no assets, which fact was known to A, and he had instructed his bookkeeper to write off the account, but the latter had failed to do so. No correction was made of these discrepancies. The trial balance at the end of one year's business 54 PROBLEMS IN ACCOUNTING was as follows: Dr. Cr. A Capital Account $25,000.00 B Capital Account 25,000.00 A Personal Account $ 3,100.00 B Personal Account 3,100.00 Merchandise 78,000.00 Book Accounts Receivable 15,400.00 Expense 1,500.00 Machinery 40,000.00 Manufacturing Expense 22,000.00 Wages 44,000.00 Rent 1,500.00 Profit and Loss 600.00 Book Accounts Payable 45,200.00 Cash 22,000.00 Goodwill 20,000.00 $173,200.00 $173,200.00 The inventory at the close of the year footed as follows : Finished Stock $28,000 Stock in Looms 1,500 Raw Material and Supplies 1,500 $31,000 No amount had been charged off for depreciation of ma- chinery, which should be done at the rate of 10%. Make the proper entries to correct the books, and formulate balance sheet showing the standing of the firm, and give reasons for any correction that may be made. Problem 91 R. M. Smith and C. B. Jones entered into a partnership on January 1, 1916, whereby interest at the rate of 6% per annum was to be allowed on the capitals of the partners at the beginning PROBLEMS IN ACCOUNTING 55 of each year, and the remaining profits divided equally. Smith invested $30,000 and Jones $15,000. At the end of three years C. B. Jones desires to withdraw. Although a statement of condition had been prepared at the end of each year the profits were not ascertained. The drawings dur- ing the year, and the assets and liabilities at the close of each year were as follows: Liabilities Year Assets Drawings During Year R. M. Smith C. B. Jones $1,500 $500 1,200 300 800 400 1916 $68,000 $20,000 1917 73,000 25,500 1918 76,000 31,000 In order to arrive at a basis for the purchase of C. B. Jones* interest by Mr. Smith you are asked to prepare exhibits of (1) the profits for each of the three years. (2) the division of the profits each year. (3) the capital accounts of the partners. Problem 92 Two partners named Wilson and Peters find at the end of the first year's business the Balance Sheet showing that Wilson's interest is worth $18,000.00 and Peters' $9,000.00. The good will of the firm is worth $3,000.00. Each draws profits in proportion to his investment. They decide to take in another partner, and he is to have a one-quarter interest in the new firm. What sum must the new partner contribute? How will the partnership accounts appear after the payment of the additional capital ? How will the profits be divided. Give skeleton form of ac- counts. Problem 93 X and Y enter into partnership, X's capital being $20,000, and Y's $15,000. Capital is to bear interest at 10 per cent, per '4- 56 PROBLEMS IN ACCOUNTING annum. Profits are to be divided equally between the parties. The profits for the first two years (after charging interest on capital) were: 1st year $6,000 2nd year 7,500 and the drawings of the partners (in excess of salaries) were: X $1,500 first year, $1,750 second year Y 1,200 first year, 1,500 second year 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 salaiy 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. Problem 94 (a) A has $5,000 invested in a business. He sells B a half interest for $3,000 and keeps the money. Make the entry. (b) A has $5,000 invested in a business. He sells B a half interest for $3,000 and places the money in the business. Make the entry. Problem 95 In case you were consulted by prospective partners in regard to the terms of a partnership agreement what points would you recommend to be incorporated in such an agreement? Problem 96 Peters, Roberts, and Black are partners, Peters having $15,000.00, Roberts $10,000.00, and Black $5,000.00 capital, and PROBLEMS IN ACCOUNTING 57 they share profits and losses equally. They agree to admit White on condition that he pay $10,000.00 for one-fourth interest in the profits only. How would the $10,000.00 paid in by White be treated on the books of the firm, and how would the capital ac- counts of the partners stand? Problem 97 Bilsom and Marley are partners, sharing profits and losses equally. The partnership is dissolved December 31, 1907, at which time Bilsom's capital investment is $10,000, and Marley's $2,500. The total liabilities of the firm are $25,000, which includes $5,000 due Bilsom on loan account and $2,500 due Marley on loan ac- count. The whole of the assets of the firm are disposed of for $30,000 cash on May 1, 1908. Prepare accounts closing the part- nership and show the position in which the partners stand with each other. No allowance for interest is required. Problem 98 A, B, and C were partners and contributed the following capi- tal : A, $8,000 ; B, $6,000, and C, $4,000. Profits and losses were to be borne equally. At the end of the first year each partner had drawn $1,000. The assets were then disposed of for $3,000, the purchaser discharging all liabilities of the firm. How should this sum of $3,000 be apportioned among the partners and would any of them have to advance any further sum? If so, state which partner and how much and make up the necessary accounts to show the results. Problem 99 Smith & Jones are partners, drawing equal amounts for serv- ices, and sharing profits according to capital invested, after al- lowing 5% on capital. They require additional capital and ar- range to admit the manager to the firm, he to acquire a one-quarter interest in the business. According to the balance sheet Smith has $12,000 and Jones $6,000 invested, and goodwill is valued at $6,000. What sum must the manager contribute? How will the 58 PROBLEMS IN ACCOUNTING II partnership accounts appear after payment into the firm of the new capital? How will profits be divided in the future? Show accounts in skeleton form. Problem 100 A and B of Colorado engaged as usual partners in a stock raising enterprise with a capital of $10,000, each contributing one- half. A received a salary of $200 per month. At the end of three years they decided to terminate the business and B, who handled all the money of the co-partnership and kept the books, reported the following receipts and payments. Receipts Payments A's investment $ 5,000 Purchases of cattle $57,000 B's investment 5,000 Loans repaid 14,000 Sales of cattle 80,359 A's salary 4,200 Loans 15,000 Interest 1,000 Expenses 9,000 A's withdrawals 2,200 ^ B's withdrawals 1,800 A round up and branding of the herd showed 328 head worth $5,540. There remained with the bankers a balance of $15,150. Other assets included horses, $800; tools, etc., $100; supplies, $150; accounts receivable, $750. The firm owed the following bills, branding irons, $40 ; salt, $100 ; loan at bank, $1,000 ; unpaid wages, $260. You are asked to prepare such statements as are necessary to show (a) the financial condition of the co-partner- ship at its termination; (b) the results of the three years' opera- tions; and (c) the interest of each partner. Problem 101 A manufacturer is desirous of securing a partner and fur- nishes a statement covering five years' operations as follows: Assets Liabilities Buildings $ 20,000.00 Accounts and Bills ,^ , . Payable $ 30,000.00 Machmery and Fix- g^j^^ ^^^^^^^ ^^^ tures 75,000.00 year 500,000.00 PROBLEMS IN ACCOUNTING 59 Inventory Mdse. and Wages paid per year 170,000.00 Supplies 50,000.00 Expense, Selling and Cash 5,000.00 General, per year. 35,000.00 Accounts Receivable 40,000.00 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 ex- piration of lease. New machinery when installed ten years ago cost $50,000.00. Additional since cost $25,000.00 ; no depreciation has been charged off. All repairs and replacements charged to expense. What, in your opinion, would be a fair price to be contributed for a half interest ? Explain fully. Problem 102 Robert Adams and William Stevens are equal partners. On the night of July 3 their stock and fixtures were destroyed by fire. A trial balance, which Adams had at his home, showed the following condition of the ledger at the close of business, June 30th: Robert Adams $ 600.00 $ 5,450.00 William Stevens 600.00 7,450.00 Cash 3,309.00 Fixtures 1,500.00 Merchandise Purchases 32,600.00 Merchandise Sales 24,800.00 Notes Receivable 1,000.00 Notes Payable 4,000.00 Interest 120.00 50.00 Expense 780.00 Customers 4,500.00 Creditors 3,259.00 $45,009.00 $45,009.00 The property is fully covered by insurance. The insurance company, for the purpose of estimating the value of the mer- 60 PROBLEMS IN ACCOUNTING chandise destroyed, has agreed to allow 35 per cent, as the aver- age gross gain on the sales and to pay 66?^ per cent, on the value of the fixtures as shown by the ledger. On the basis of this agreement, state the result of the business and the capital of each partner. Problem 103 A fire in the office of a firm of traders partly destroyed its books of account that had been fully posted in anticipation of proving their correctness. The following ledger accounts were found to be legible : Purchases net $23,000 Cash discounts lost 320 Cash discounts gained 1,150 Sales net 18,000 Bills receivable 11,000 Upon inquiry the bank balance was ascer- tained 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 $30,000 notes payable 33,000 A balance sheet prepared at the last closing of the books and containing the following items was produced by one of the part- ners: Cash $20,000 Accts. Pay $10,000 Accounts Rec 42,000 Notes Pay 20,000 Loans Rec 8,000 Mortg. Pay 12,000 Real Estate 30,000 Capital 84,000 Notes Rec 14,000 Inventory 12,000 The firm stated that the real estate, loans receivable, and mort- gages payable remained as shown in the balance sheet. An inventory of goods in storage amounted to $15,000. PROBLEMS IN ACCOUNTING 61 With this information open a new set of books showing the position of the firm at the time of the fire. Problem 104 Anderson & Brooks are equal partners. Their balance sheet on June 30, 1910, was as follows : Assets Merchandise Inventory $35,000.00 Accounts Receivable 61,000.00 Furniture and Fixtures 2,500.00 Cash 500.00 Investments 3,000.00 $102,000.00 Liabilities Accounts Payable 50,000.00 Bank Overdraft 15,000.00 Anderson's Capital 21,000.00 Brooks' Capital 16,000.00 $102,000.00 Conway is to enter the firm. Preliminary thereto Anderson & Brooks revise their balance sheet by writing oflF bad debts amounting to $15,000.00; $500.00 from furniture and fixtures; 15% from inventory; 25% for loss on investments; and estab- lish a good will account of $5,000.00. Conway pays in $5,000.00 as his one-third interest, to which amount the other parties agree respectively to adjust their capital. Any necessary adjustment of their capital accounts is to be made through their personal accounts. The new firm name is to be Anderson, Brooks & Conway. Give the necessary journal entries and the balance sheet of the new firm at the start of business. Problem 105 Jack and Jill began a partnership business January 1, 1920. At the time of closing the books, December 31, 1920, an examina- 62 PROBLEMS IN ACCOUNTING tion of the accounts revealed the following contributions and withdrawals Jan. May June Sept. Oct. capital : — ^Jack paid in $9,000.00 —Jack paid in 2,400.00 — ^Jack drew out 1,800.00 — ^Jack drew out 2,000.00 -Jack paid in 800.00 Jan. 1— Jill paid in $3,000.00 Mar. 1— Jill drew out 1,600.00 May 1— Jill drew out 1,200.00 June 1— Jill paid in 1,500.00 Oct. 1— Jill paid in 3,000.00 Their merchandise account was debit $32,000.00, credit $27,000.00. Balance of merchandise on hand per inventory, $10,500.00 ; Cash on hand, $4,900.00 ; Bills receivable, $12,400.00. Tom Piper owes on account $250.00 ; Dick Hubbard owes $700.00 ; William Clark owes $650.00 ; J. Green owes $850.00. The part- ners owe on their notes $1,890.00. They owe A. Reed on account $240.00 ; C. Smith $500.00 ; A. Clark $100.00. Their profit and loss account shows before closing entries debit $866.00, credit $1,520 ; expense account is debit $2,520.00. Commission account is credit $2,760.00 ; interest is debit $480.00, credit $950.00. 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 (1) merchandise account; (2) profit and loss ac- count closed; (3) each partner's account; (4) balance sheet. Problem 106 You are required to make up from the following particulars a statement of the capital accounts of each partner in the firm of Going, Going & Gone for the six months ending December 31, 1920. Profits are divisible in the following proportions: Going, 4/10 ; Going, 3/10 ; Gone, 3/10. Interest at 4% per annum is to be credited on capital. The net profits before adjustment of in- terest are $24,380. The partners have drawn on the last day of PROBLEMS IN ACCOUNTING 63 each month as follows : Going, $500 ; Going, $375 ; Gone, $375. Capital at June 30, 1920 : Going, $94,500 ; Going, $52,500 ; Gone, $43,750. State also if in your view it is necessary to charge interest on drawings and give reasons, especially with respect to this particular case. Problem 107 A partnership contract between A and B provides that each partner shall contribute $25,000.00 to a business, and that on any capital brought in by either partner in excess of this amount he shall receive 6%. A contributes $10,000.00 additional and the bookkeeper makes an entry in the books at the end of the year crediting A with $600.00 and debiting B. Is this correct? Give reasons. Problem 108 (a) On Dec. 31, 1916, the balance sheet of X and Y, part- ners, in summary form stands as follows: Merchandise $20,000 X, Capital $39,000 Receivables 30,000 Y, Capital 20,000 Cash 10,000 Y, Drawing 8,000 X, Drawing 5,000 Accounts Payable 3,000 $65,000 $65,000 At this time it is agreed that Z shall be taken in as a new partner, to absorb enough of X's net interest and contribute suf- ficient cash and other property to make all three, X, Y, and Z, equal partners. Z insists that a long-standing customer's ac- count amounting to $2,000 shall be written oflF as worthless. Z then turns over to the firm cash amounting to $6,000, equipment valued at $5,000, and pays X sufficient cash to eflfectuate the ar- rangement stated above. Prepare journal entries showing Z's admission to the firm (closing the drawing accounts), and exhibit a balance sheet of the reorganized partnership. (b) Using the balance sheet given under (a) above, assume that Z buys X out completely, paying him $45,000 cash and there- in Hi ^mi 64 PROBLEMS IN ACCOUNTING by acquiring a three-fifths interest in the business ; that accounts receivable are adjusted as above; that X contributes no assets to the firm ; and prepare journal entries and new balance sheet. Problem 109 Dey & Knight, partners in a mercantile business, share profits and losses equally. At the end of five years the partnership ter- minates by limitation and their balance sheet appears as follows : Assets Liabilities Plant and machinery. . .$15,400 Creditors $30,000 Inventory 36,000 Bills Payable 10,000 Accounts Receivable . . 28,000 Capital Cash in Bank 5,600 Dey $30,000 Knight 15,000 $45,000 $85,000 $85,000 Subsequently the business as it stands (except cash in bank) is sold to Twilight for $30,000. Make final adjustments and closing entries and show the amount each partner receives. Problem 110 Dock and Dolton are partners sharing losses and gains equally. Dock has invested $3,000, Dolton $4,000. They are ready to wind up] the business. The firm owes $5,000, of which $1,000 is due Dock and $500 is due Dolton, both on loan accounts. They have $7,000 in cash. Prepare closing statement. Problem 111 On buying an interest in a partnership, what entries should be made in the books of the business? (a) When a direct sale is made of an interest, the money not to be used in the business? (b) When the money paid for the interest in the business is to be used in the business? In answering assume three cases: (1) the capital interest acquired is the same as the payment made; (2) is larger than the PROBLEMS IN ACCOUNTING 65 payment; (3) is smaller. Consider both with and without good- will, where possible. Problem 112 X, Y, and Z were partners and had contributed the follow- ing capital: X, $8,000, Y, $6,000, and Z, $4,000. Profits and losses were to be shared equally. At the end of the year each partner had drawn $1,000. The assets were then disposed of for $3,000, the purchaser discharging all the liabilities of the firm. Prepare a statement of the partners' accounts after dividing the $3,000 received from the purchaser. Problem 113 L, M, N, and O enter into partnership with a capital of $100,000. L invests $40,000; M, $30,000; N, $20,000, and O, $10,000. They are to share profits and losses in the following ratios: L, 35%; M, 28% ; N, 22%; and O, 15%. At the end of six months there is a loss of $8,000.00, and meantime the part- ners have drawn against prospective profits as follows : L, $400 ; M, $600 ; N, $600 ; and O, $400. The partners dissolve and agree to distribute the proceeds of the firm's assets monthly, as realized. The realization and liquida- tion lasts four months and the transactions are as follows, sum- marized : Expenses Assets Liabilities and Losses Month Realized Liquidated on Realization First $30,190.00 $7,900.00 $ 400.00 Second 50,300.00 6,100.00 750.00 Third 20,010.00 3,800.00 340.00 Fourth 9,500.00 2,200.00 110.00 $110,000.00 $20,000.00 $1,600.00 Prepare a statement of the partners' accounts showing the amount payable monthly to each one. Make up these accounts in tabular form, as follows: if 66 PROBLEMS IN ACCOUNTING Total L M N O Original capital. .$100,000 $40,000. $30,000 $20,000 $10,000 Problem 114 Higbsy and Hodge purchased at a forced sale merchandise and fixtures of two stores for $40,000.00, Higbsy taking a 2/5 interest and Hodge a 3/5 interest. Gains and losses are to be shared accordingly. Higbsy takes charge of one store and Hodge of the other, each keeping a bank account in his own name. Dur- ing the year Higbsy receives $35,450.00 in cash, and pays out $27,775.00, while Hodge receives $42,225.00 and pays out $55,- 710.00. The business is then sold for $52,500.00 cash, which is deposited to their joint account. Prepare a statement showing the amount due each partner. Problem 115 A, B, and C were partners sharing profits and losses equally. After closing the books on December 31, 1920, the capital ac- counts were as follows : A $30,000 B 15,000 C 5,000 The assets were carried on the books at the following values : land, $5,000; buildings, $60,000; cash, $2,000, and other assets, $13,000. The liabilities totaled $30,000. The building was old and no depreciation had been charged off. It was insured for $40,000. The building was totally destroyed by fire. The in- surance company paid the face of the policy, and the partners de- cided to liquidate. The land was sold for $7,000 and the) other assets for $10,000. Prepare a statement showing the partners* capital accounts, and state the disposition of the cash accumulated with the above transactions. Problem 116 The following is the balance sheet of A and B, equal part- ners: PROBLEMS IN ACCOUNTING 67 Assets Equities Cash $ 1,000 Accounts Payable $ 5,000 Accounts Receivable .. 10,000 Notes Payable 7,000 Merchandise 5,000 A, Capital 10,500 Bldg. and Equip 17,000 B, Capital 10,500 $33,000 $33,000 What is the amount of proprietorship according to this state- ment? The firm needs more capital and C is invited to become a partner. C investigates the situation and finds : that of the out- standing accounts probably $1,000 will never be collected; that the merchandise account should be written down $500 on account of shop wear and obsolescence; that accrued depreciation on building and equipment totals $1,500 and has never been booked. He oflFers to invest cash sufficient to give him a one-fourth interest on the basis of the corrected values as above outlined. A and B agree to this proposition. Present journal entries which give effect to the new valua- tion and C's investment and exhibit the new balance sheet after these entries are made. Problem 117 From the books of Messrs. Deakon & Elder, which are kept by single entry, the following balance sheet as of June 30, 1920, was taken: Assets Liabilities Cash on Hand and in Accounts Pay $10,309 Bank $10,800 Capital Accounts : Accounts Rec 16,032 Deakon . . . .$ 3,263 Inventories 29,980 Elder 61,240 Bldgs. and Equip 8,000 $54,503 $64,812 $64,812 It was agreed that the partnership would be dissolved Octo- ber 31, 1920, but that Elder would continue in business. It was 4 68 PROBLEMS IN ACCOUNTING further agreed that Deakon would be paid the balance at his credit June 30, 1920, together with the sum of $5,000 to cover his inter- est in the good will of the business and his profits up to October 31, 1920. The latter was estimated to be $1,200. From this amount, however, his drawings, amounting to $8Q0, were to be deducted. Payment to Deakon in accord with the above was made October 31, 1920. The following balances were shown on the books June 30, 1921: Assets Liabilities Cash in Bank and on Accounts Pay $8,706 Hand $ 8,310 Accounts Rec 12,203 Inventories 29,143 Bldgs. and Equip 8,103 You ascertain that on April 30, 1921, merchandise valued in the books at $500 was destroyed by fire. Since this loss is not covered by insurance, Mr. Elder reduced the book value of his inventory to take care of the loss. The additions to buildings and equipment during the year cost $503, but the book value of these assets was reduced by the sum of $400 to adjust for depreciation. Elder's personal drawings during the year amounted to $2,500. You are required to prepare a balance sheet for Elder as of June 30, 1921, together with a statement showing profit and loss for the year, and the distribution thereof: You are also to write up Elder's capital account for the year to June 30, 1921. No value is to be put upon good-will. Problem 118 Four equal partners, W, X, Y, and Z, agreed to sell their business to a corporation. Their assets and liabilities were as follows: W, capital, $145,500; X, capital, $123,500; Y, capital, $153,000; Z, capital, $152,330; building, $125,000; machinery, fixtures, etc., $38,335 ; stock, $150,940 ; accounts receivable, $328,- *) ) PROBLEMS IN ACCOUNTING 69 680; bills receivable, $37,005; 'cash, $17,030; horses and wagons, $1,230 ; unexpired insurance, $175 ; accounts payable, $124,065. A further agreement was made that the partners were to be paid for goodwill, based on a year and a quarter's purchase of the last three years* profits, which were respectively $32,620, $37,450 and $50,650. Prepare a balance sheet, bringing in goodwill as an assel and distributing it among the four partners. Problem 119 The firm of Hohenzollern & Ludendorf began business on January 1, 1920, the terms of the partnership contract specifying that no interest was to be credited on the investments or charged on withdrawals, and all profits or losses were to be shared equally. Hohenzollern invested $24,000 and Ludendorf $15,000. The books had not been closed, and all drawings had been charged to the capital accounts. On November 30, 1922, the partnership was dissolved, and since the books had not been properly kept, the following state- ment was submitted to the partners as a basis for settlement and agreed to by them: cash, $14,200; net debit of A, $6,300; ex- penses, $15,300 ; net credit of B, $10,500 ; profit and loss, debit, $9,000, credit, $1,500; real estate having an estimated market value of $3,300; the bank holds the firm's six months' 6% note for $10,000, due January 31, 1923, on which interest is unpaid. Hohenzollern liquidated the assets and liabilities, and in due course sold the real estate for $4,000, and paid off the note when due. Prepare the partners' accounts as of November 30, 1921, and as of the close of liquidation, and statement of condition Novem- ber 30, 1921. Problem 120 A business is owned by two partners, Hangon & Winnout, who share profits and losses on the basis of 2/3 and 1/3 re- spectively. They decide to sell a J4 interest in the business to m m Ml 70 PROBLEMS IN ACCOUNTING Kant, the amount he pays therefor to remain invested in the busi- ness. He is admitted into the firm on June 30, 1918, and on that date their books are closed. Hangon's capital account shows a credit balance of $40,000, and Winnout*s capital account shows a credit balance of $12,000. The parties at interest agree that the net worth of the business is $78,000. Kant is to be entitled to % of the profits, and the remainder is to be divided between Hangon and Winnout in their former ratio. Make journal entries for admission of Kant. During the year Hangon's loan is repaid with interest amounting to $400, and the partners draw as follows: Hangon $2,000 Winnout 1,600 Kant 1,000 At the end of the year the business, including goodwill, is sold for $100,000. Prepare a statement of the capital accounts after distributing the $100,000. Problem 121 A, B, and C engage in business, A contributing $10,000 cap- ital, B $5,000, and C undertakes to take the active management at a salary of $3,000 a year, to be paid to him monthly. After pro- viding 5 per cent interest on capital they are to divide the net re- sults in the proportions of 5, 3, and 2. At the end of 18 months they ascertain the position to be unfavorable and decide to wind up. The assets are agreed to be worth $12,500, of which A takes $10,000, 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. SECTION IV. Corporation Accounting. The special problems of corporation accounting grow out of the legal separation of the business entity and the personnel of its owners. In some cases it is important for the accountant to proceed as if the corporation were a distinct economic as well as legal individual ; in others it is equally important, if he would be PROBLEMS IN ACCOUNTING 71 accurate, for him to brush aside the so-called legal fiction, to look beneath the purely nominal capitalization, and to make his entries in accord with the actual facts. Considerable time will be spent reading and discussing sound authorities with special regard paid to the problem of the various stock issues (par and non-par), of treasury stock (including "donated stock"), of defaulted sub- scriptions and assessments, of non-cash dividends, of the position of the various equities in dissolution, and the like. The student should make sure he understands the general nature of these problems and the precise meaning of the terms em- ployed before attempting a solution of a specific problem case. Problem 122 What are some of the problems connected with the issue of corporate "par" stock for property? This assumes that the busi- ness of the accountant is to show facts. Problem 123 Describe the method of determining the number of shares of capital stock, both common and preferred, held by each of the several stockholders of a corporation, giving fully the titles of the books wherein the facts are registered and stating how the books are opened and operated. Problem 124 The Royal Manufacturing Company has been organized with an authorized capitalization of $500,000 (all common stock). $420,000 of the stock has been subscribed for, of which $120,000 was paid in cash and $200,000 in property. The remainder is to be paid in four equal installments. The first installment has been called for and collected. Make the original entries covering the above transactions. Problem 125 How do the accounts of a corporation and of a partner- ship differ in the statement of ' :!" Vii 73 PROBLEMS IN ACCOUNTING (a) Investments. (b) Operation of business and determination of profits. (c) Division and distribution of profits. Problem 126 Distinguish between the following: (a) Capital stock authorized. (b) Treasury stock. (c) Donated stock. (d) Stock outstanding. On which side of the balance sheet will each appear? Problem 127 The Domestic Manufacturing Company, organized with a Capital Stock of $5,000,000, half preferred and half com- mon, sells five shares of common stock at par for cash. It issues to John Jones $1,500,000 preferred stock and $1,000,000 common stock in consideration of the assignment by him of certain rights, patents, and contracts. Later Jones agrees to surrender for valuable consideration to the treasurer of the Domestic Manufacturing Company $1,000,000 common stock and $500,000 preferred stock. Still later Jones agrees to surrender to the Domestic Manufacturing Company $1,000,- 000 preferred stock and take in lieu thereof $1,000,000 com- mon stock. Jones makes a further agreement with the com- pany to deliver to it all the stock in the Blank Manufacturing Company, appraised at $350,000, and to pay the Domestic Manufacturing Company $150,000, for which he is to receive $500,000 in preferred stock of the Domestic Manufacturing Company. Illustrate by journal entries the necessary accounts to be opened on the books of the Domestic Manufacturing Com- pany to show each step in the foregoing agreement. PROBLEMS IN ACCOUNTING 73 I T Problem 128 The Elk Run Tanning Company has been organized under the laws of Pennsylvania with an authorized capitali- zation of $500,000, all common stock, par value $100. The five incorporators subscribe and pay cash for fifty shares each at face value. F. W. Coulter purchases the tannery now being operated by Thos. Keck & Son, paying for the com- plete plant $475,000, and transfers the same to the newly incorporated company for the remaining common stock and $100,000 of first mortgage 5% bonds. Make the opening journal entries. Problem 129 The following are subscriptions for stock in the Red Jacket Mining Co.: George C. Goodwin, 500 shares; S. V. Burnett, 250 shares; T. A. Mulholland, 1,000 shares; O. D. Hodgdon, 750 shares, and Charles Bridges, 1,500 shares. The first, second and third installments of 25% each have been called and paid. The stock certificates are issued to subscribers on payment of the first installment, each install- ment being recorded on the back of the certificate. Jan. 1. Mulholland sells 100 shares to Bridges. Jan. 2. Hodgdon sells 200 shares to Bridges. Jan. 3. Burnett sells 250 shares to Goodwin. Jan. 4. Bridges donates 50 shares to the company to be sold for the purpose of acquiring additional working capital. Show all necessary entries on the books of the company. Problem 130 Three brothers, A, B, and C, own all the capital stock (each >^) of a certain corporation X. They own also, but not equally, 55% of the capital stock of a kindred corporation Y, which is capitalized for $100,000, the par value of the shares being $10. The holdings of each in the Y corporation i 74 PROBLEMS IN ACCOUNTING are as follows: A, 2,222 shares; B, 2,222 shares; C, 1,056 shares. The three brothers, acting as the corporation X, purchase out of corporate funds the remaining 45% interest in the corporation Y, paying $100,000 therefor. Without further cost to X they now wish to merge the two corporations under the corporate name X and to dissolve Y. C proposes to make compensation to A and B individually for an equal interest in the 5,500 shares upon the same basis as the 45% interest was acquired, so that all may share equally in the merged properties. (1) How much should C pay to each of the other stock- holders ? (2) Outline the entries necessary to record all the above stated transactions on the books of X and Y. Problem 131 Prepare a working sheet. Allow 5% depreciation on plant and machinery for the year. Allow 2% for Reserve for Bad Debts on Accounts and Notes Receivable for the year. Bedford Shoe Co. Trial Balance, Dec. 31, 1911 Capital Stock $250,000.00 Surplus, Jan. 1, 1911 142,000.00 Reserve for Depreciation on Plant and Machinery, Jan. 1, 1911 20,000.00 Reserve for Bad Debts, Jan. 1, 1911. . 9,600.00 Inventory, finished goods, Jan. 1, 1911.$ 32,000.00 Inventory, Raw Material, Jan. 1, 1911. 45,000.00 Purchases 135,000.00 Sales 379,680.00 Discounts on Purchases 1,730.00 Discounts on Sales 2,500.00 Goods Returned 3,650.00 Wages 135,500.00 Power, Heat and Light 17,000.00 I f PROBLEMS IN ACCOUNTING 75 Repairs for Machinery 2,800.00 Factory Expense 9,500.00 Insurance Expense 2,200.00 Plant and Machinery 125,000.00 Salaries 37,000.00 Notes and Accounts Receivable 200,000.00 Notes and Accounts Payable 30,000.00 Furniture and Fixtures 4,000.00 Cash 75,500.00 Taxes 960.00 Advertising 6,400.00 $833,010.00 $833,010.00 Inventories on Dec. 31, 1911 : Finished Goods $16,000.00 Raw Material 10,700.00 Furniture and Fixtures 3,580.00 Problem 132 Messrs. Sharp & Flat, partners, engaged in manufactur- ing, decide to form a business corporation under the laws of New York, under the name of The Sharp & Flat Manufac- turing Company, having an authorized capital of $100,000. The corporation, in consideration of the entire issue of capital stock, purchased all of the assets and assumed all of the lia- bilities of the partnership as shown by the following balance sheet dated May 31, 1900. Sharp & Flat take all the stock except five shares, par value $100 each, issued to incorporators for cash subscriptions. Balance Sheet — May 31, 1900 Assets Plant and machinery $35,000 Stock on hand per inventory 20,525 l; 76 PROBLEMS IN ACCOUNTING Accounts receivable 22,750 Bills receivable 1,500 Cash 5,225 Total assets $85,000 Liabilities Sharp's capital $42,500 Flat's capital 36,300 Accounts payable 5,250 Bills payable 700 Wages due and unpaid 250 Total liabilities $85,000 During the first year of the corporation's existence, the books were kept in the same manner as during the partner- ship. Soon after the end of the first fiscal year, however, a certified public accountant was presented with the following trial balance showing the condition of the books May 31, 1901, and was requested to open a new set of books for the corpora- tion, covering the operations of the business during the past year, and to prepare therefrom an expense and revenue account and balance sheet: Trial Balance— May 31, 1901 Sharp's capital $ 42,500 Flat's capital 36,300 Plant and machinery $ 37,500 Stock on hand per inventory May 31, 1900. 20,525 Sales 131,405 Purchases: materials and supplies 48,000 Labor 34,500 Office salaries 7,000 Traveling expenses 2,400 Interest 600 Stationery and printing 175 Rent and taxes 4,200 Discounts and allowances 2,250 PROBLEMS IN ACCOUNTING Fuel 4,600 Insurance 175 Freight (inward) 1,750 Commission 6,375 Advertising 500 Bills receivable 6,115 Bills payable Accounts receivable 36,115 Accounts payable Cash 6,375 77 1,100 7,850 $219,155 $219,155 Draft the opening journal entries necessary to give effect to the above, prepare an income and profit and loss account and a balance sheet as at May 31, 1901. (a) depreciation 5% on plant and machinery, (b) unex- pired insurance $75, (c) bad debts $325, (d) inventory, stock on hand May 31, 1901, $19,605. Problem 133 "Treasury stock or bonds are merely so many legalized pieces of paper, and cannot in any sense be considered as assets of the corporation creating and issuing them" (Dickin- son). Defend. Problem 134 The Elite Amusement Company was organized on Jan- uary 1, 1912, with an authorized capital stock of $1,000,000. The stock was all subscribed for at 90, to be paid in three annual installments. The first two installments were duly called for and paid in full, with the exception of one block of ten shares, on which the subscriber defaulted after paying the first installment. It was decided to hold these shares in the treasury. Make journal entries necessary to record correctly each of the above named steps. i 78 PROBLEMS IN ACCOUNTING Problem 135 A corporation agrees to purchase a mine, issuing $500,000 full paid stock in payment. The stock is issued to the owner of the mine, with the agreement that he donate to the com- pany $200,000 of the stock to provide working capital. $60,000 of this stock is sold at 60% of par; $100,000 at 60%; and $40,000 at 70%. (a) Make all entries necessary to show these transac- tions, all subscriptions being paid in cash. (b) Show the balance sheet as it will stand after these transactions. Problem 136 A, B and C constitute a firm engaged in a manufacturing business, which they have decided to change into a stock company with a capital of $100,000, equally divided into com- mon and preferred stock, par value $100 for each share. Each partner is to take stock to the amount of his net investment in the business, on the basis of 75 per cent preferred and 25 per cent common stock and the remaining shares authorized are to be oifered for sale. On taking over the business the books of the firm show assets as follows: real estate, $25,000; machinery and tools, $10,000 ; merchandise, $15,000 ; materials and supplies, $8,000 ; cash, $5,000; notes receivable $3,000; accounts receivable, $9,000. The liabilities are: notes payable, $10,000; accounts payable, $5,000 ; A, $25,000 ; B, $20,000, and C, $15,000. Formulate the necessary entries to close the books of the firm and to open the books of the new corporation. Problem 137 On January 1, 1920, the condition of a small trading com- pany as determined by an examination of that date was as follows : PROBLEMS IN ACCOUNTING 79 Furniture and Fixtures. $ 2,000 Capital Stock $ 5,000 Cash 500 Notes Payable 3,000 Notes Receivable 3,000 Accts. Payable 6,000 Accounts Receivable . . 5,000 Surplus 500 Merchandise on Hand. 4,000 Total $14,500 Total $14,500 During the month of January the bookkeeper made all entries in the cash book and in the sales book, but made no journal entries and did not post his ledger. In addition to the entries appearing on the cash book and sales book the following transactions took place during January : Merchan- dise purchased on credit amounting to $6,000; notes payable amounting to $2,000 renewed ; special allowances of $500 made to customers. The credit sales journal had two columns, one for the billed amounts and the other for the cost of the goods sold. The billed amount was $8,000 and the cost was $5,000. The following statement gives a summary of the cash receipts and disbursements for January: Cash Received Collected from customers $4,000 Collected on notes receivable 2,000 Collected on Mdse. sold and not entered in sales' book (cost price $500) 600 Total cash received $6,600 Cash Payments Interest on notes payable $ 45 Salaries 500 Rent 200 Sundry expenses 300 Accounts payable 5,000 Total disbursements $6,045 ft 80 PROBLEMS IN ACCOUNTING Prepare balance sheet as of January 31, 1915, and a state- ment of profit and loss based on the book value of the mer- chandise. Problem 138 A corporation receives subscriptions for stock to the amount of $100,000 at 120. The amount is paid in cash. What entries should be made for these transactions? Another $100,000 is subscribed, to be paid in five install- ments, at 120. When two of the installments have been paid, what entries should have been made for the transactions of this subscription? A financial panic occurs and the last installment is de- faulted by the subscribers to the amount of one-twentieth of the total subscription, a default of $1,200 (thus forfeiting $4,000 of par value and $800 of premium already paid in by them in installments), but the other subscriptions are paid and the stock is issued. What entries should be made to record all these transactions. Show the final trial balance. Problem 139 Three manufacturers, each having an independent busi- ness and wishing to effect a consolidation of their respective interests, organize the United States Manufacturing Com- pany, a corporation with an authorized capital stock of $1,500,- 000, half common and half preferred. They sell to the new corporation all of their real estate, buildings, machinery, tools, fixtures, merchandise and supplies, in consideration of $1,500,- 000, and agree to accept in payment $750,000 preferred and $750,000 common stock of the new corporation. The three vendors then donate to the treasury of the corporation $150,- 000 of preferred and $150,000 of common stock to provide for working capital. The company sells $100,000 of its pre- ferred stock in the treasury for 80% cash, giving a bonus to the purchaser of 20% in common stock. PROBLEMS IN ACCOUNTING 81 For the purpose of raising additional funds for improve- ments and additions to plant, the corporation mortgages its real estate and buildings as security for an issue of bonds amounting to $250,000. These bonds the company sells to bankers at 90%, giving as a bonus 10% of preferred stock and 20% of common stock. Draft entries to express correctly the above transactions on the books of the corporation, and prepare a statement of assets and liabilities of the company. Problem 140 The balance sheet of A and B, equal partners, stands as follows just before the firm is taken over by a corporation : Assets Equities Real Estate and Imp. $64,500 A, Capital $30,000 Merchandise 15,900 B, Capital 30,000 Customers' Accounts.. 6,000 Accounts Payable 7,800 Cash, 2,600 Notes Payable 20,200 $88,000 $88,000 The new corporation receives all the assets except the cash and assumes the accounts payable, but not the notes payable. Real estate and improvements are taken over at a value of $100,000, and the goodwill of the partners is con- sidered to be worth $24,500. Payment is made to the partners as follows: Cash, $33,100; bonds of the corporation $50,000, and the balance in capital stock of the corporation. Give the journal entries, with explanations, necessary to close the books of the firm. (Assume that the valuations which the corporation sets upon the firm's real estate and goodwill are bona fide.) Give opening entries on the books of the corporation. Problem 141 Why is it desirable that the several states should pass a law permitting incorporation with shares without a nom- 82 PROBLEMS IN ACCOUNTING inal or par value ? How would a share of non-par stock read ? How would you determine the book value of your non-par holdings from the data given in your company's balance sheet? See if you can find the provisions of the New York company law with regard to non-par stock. Problem 142 Name the different pecuniary values which a share of stock may be said to have and explain why they are usually different. Problem 143 Define a dividend, being sure you consider non-cash as well as cash dividends. Would you treat all non-cash divi- dends as being homogeneous? Problem 144 Give some examples of the various kinds of preferred stock. State clearly the proprietary position of each. Problem 145 What IS "Founders" stock? Look up its position in respect to income and control. Problem 146 In its prospectus a corporation represents that it has an issue of "Cumulative, Non- voting. Non-participating, 6% Pre- ferred Stock." Give your interpretation of this expression, assuming a going concern, assuming failure and dissolution. Problem 147 A corporation's capitalization consists of 10,000 shares of cumulative 7% preferred stock, and 5,000 shares of com- mon stock, both classes of a par value of $50 per share, all of which was issued July 1, 1912, the date of incorporating. The corporation has paid ten dividends of 5% each on the PROBLEMS IN ACCOUNTING 83 preferred stock. In rendering the certified balance sheet as of June 30, 1922, what consideration should be given to the foregoing, and why? Problem 148 On December 31, 1921, the balance sheet of the Kaydo Rug Company was as follows: Dr. Cr. Real Estate $ 100,000 Buildings 175,000 Plant and Equipment 250,000 Inventories 500,000 Accounts Received 350,000 Cash in banks 75,000 Cash on hand 6,000 Interest and Insurance Prepaid 7,600 Capital Stock $ 300,000 Accounts Payable 160,000 Notes Payable 650,000 Taxes and Interest accrued 15,000 Surplus 347,600 $1,462,500 $1,462,500 Owing to certain difficulties involved in conducting busi- ness under the charter of the incorporating state, it was decided to transfer the entire business to another corporaition under the laws of a different state. Accordingly, a contract of sale was entered into whereby the assets and properties were to be sold to the new company for the sum of $1,815,000, payable to the extent of $1,000,000 in preferred and common stock of the new company, as follows: 5,000 Shares 6% Cumulative Preferred Stock $500,000 6,000 Shares Common Stock 500,000 And the balance by the assumption by the new company of the existing liabilities of the old company. The necessary resolutions of the directors and stockholders of both com- kJ '*! 84 PROBLEMS IN ACCOUNTING panics were duly passed, and the transaction was consum- mated. As a preliminary step, however, the real estate, build- ings, plant and equipment were valued by a firm of local appraisers, and the following valuations were made: Real Estate $250,000 Buildings 160,000 Plant and Equipment 300,000 Draw up the necessary journal entries (a) for closing the books of the old company; and (b) for opening the books of the new company. And prepare a trial balance of both com- panies after your journal entries have had their effect. Problem 149 A corporation is organized under the laws of the state of New Jersey, with a capital of $1,000,000 in 100,000 shares at $10.00 each. At a meeting of the incorporators it was resolved to purchase a patent right from Ole Oleson for the entire capital of the company, less 100 shares held by the incorporators and paid for by them at par. The former owner of the patent agreed to sell to the company 50,000 shares of the capital stock for the sum of $100,000, or $2.00 per share, and John Johnson was appointed trustee of the company to hold the stock in his name as trustee, and was authorized to sell the stock at $7.50 per share. This he succeeded in doing. (a) Give the journal entries for the transaction. (b) How would the profit on this transaction effect div- idends to stockholders? Problem 150 What are the different reasons which a board of directors may have in mind for reacquiring the stock of their own company? Stock once issued and reacquired by a company may be kept or it may be sold; if kept, different accounting treatment is perhaps required from that necessary if it is to be sold. Discuss. What is the precise status of treasury stock? Assuming simple cases, give entries. PROBLEMS IN ACCOUNTING 85 Problem 151 (a) Give several cases, using figures, of the acquisition of a company's own stock and bonds above and below book value, and journalize. (b) What is the real nature of the stock discount and stock premium accounts? How should they be shown in the balance sheet? (c) Describe the different methods of dealing with unissued stock, commenting upon the soundness of each. (d) How would you show unpaid subscriptions on the balance sheet? Problem 152 Bull Durham, having three claims in a gold mining inter- est, induces some Detroit men to form the Digumdeep Ex- tractive Corporation to buy them from him. They organize under the laws of a state which allows the holding of treasury stock with a capital of two million shares of one dollar each, all of which is voted by the stockholders to Durham to pay for the transfer to the company of the three claims. Durham then donates to the company one million shares to be sold for development purposes, at prices to be fixed by the board of directors. There are sold from time to time 100,000 shares at 12J^ cents, 80,000 at 15 cents, and 75,000 at 20 cents. Twenty thousand shares are given as commissions to Levin- sky, an influential man, when the price is 15 cents. Out of the cash received there is expended for buildings $3,000, for sinking the shaft $15,000, for machinery $5,300, for officers' salaries $8,000, for traveling expenses $1,200, for office expense, etc., $1,400. The mine is still in process of development, since the ore body has not yet been reached. Prepare the journal entries to put the above transactions on the books, making cash entries in journal form for con- venience, and construct a balance sheet at this point. fl : 86 PROBLEMS IN ACCOUNTING Problem 153 The periodic profit figure, or net profit from operations, should represent only the amount by which actually realized sales exceeds selling and administrative expenses and the actual cost of the goods sold (the latter determined on as accurate a basis as possible). Comment on this statement, and give the counter implications which it contains. Problem 154 ' The Dudek Darem Company began business on January 1, 1919, manufacturing a certain commodity, all of one stand- ard pattern. The bookkeeper, who understood the principles of double entry bookkeeping, but was not a trained account- ant, prepared the following statements at the close of the year; Expenses Raw material purchases $8,000 Less Mat'l Inv. (at cost, including freight) . 1,000 Materials used $ 7,000 Wages and Salaries 12,000 Freight , 1,200 Insurance — Factory 600 Taxes — Factory 300 Advertising 1,000 Stationery and Printing 500 Rent of Office 600 Interest Paid 200 General Expense 3,000 Repairs to Factory and Machinery 300 Heat, Light, and Power — Factory 2,300 Miscellaneous Factory Expense 1,000 Total Expenses for the year $30,000 PROBLEMS IN ACCOUNTING 87 Statement of Cost of Manufacture and Sale Total Expense, as above $30,000 Total Articles Produced 3,000 Goods in Process None Cost Per Article $ 10 Cost of 3,000 Articles Manufactured at $10 $30,000 Inventory 1,000 Articles Manufactured at $10 10,000 i' Cost of Goods Sold, 2,000 Articles at $10 $20,000 Statement of Profits Sales, net 2,0C0 Articles at $15 $30,000 Deduct : Cost of 2,000 Articles at $10 20,000 Net Profit $10,000 These statements were submitted to the president of the company. The president doubted the ability of the book- keeper to prepare scientific statements of manufacturing cost and of profits, and called you in to verify the correctness of the results shown by the bookkeeper's statements. He re- quests you to make a report showing : Sales. Cost of Goods Sold. Gross Profit on Sales. Selling Expense. Net Profit on Sales. General Expense and Interest Charges. Net Profit. In the course of your investigation you find the follow- ing: Wages and Salaries Account, Analysis: Productive Labor $ 3,000 Non-productive Labor 1,000 Salesmen's Salaries 4,000 Officers' Salaries 4,000 Total $12,000 s| ! 11 88 PROBLEMS IN ACCOUNTING Wages Accrued, not included in the above : Productive Labor $ 600 Non-productive Labor 100 Total $ 600 Freight Account, Analysis : Freight In $ 800 Freight Out 400 Total $ 1,200 Insurance Account : Yz Unexpired. Stationery and Printing: Of the $500 paid for this item, $100 is unused. Interest Paid Forty dollars of this amount is discount on notes dis- counted at the bank, and is applicable to 1920. The officers consent to charging depreciation on the fac- tory building, $20,000 at 5%; and on machinery, $5,000 at 10%. They also consent to provision for bad debts at 1% of sales. Prepare desired report. Problem 155 (a) Distinguish between "earned surplus," "paid-in sur- plus," "capital surplus," "restricted surplus." (b) Distinguish between an "income" dividend and a "liquidating" dividend. Problem 156 "The juggling of depreciation charges or other improper accounting policies cannot be justified even if its purpose is to iron out the fluctuations in net revenue so that a stable divi- dend rate may be established." Show that dividend appropriations may be stabilized by the use of the Undivided Profits account as a net revenue reservoir. r PROBLEMS IN ACCOUNTING 89 Problem 157 A corporation issues $300,000 of stock in exchange for a manufacturing plant and supplies, with the understanding that one-half of the stock is to be donated back to the cor- poration. After the consummation of this agreement $100,000 of the stock is sold at 80 for cash. Next, $50,000 of the stock issued to the original owners of the plant is repurchased at 70 and held for future sale. Show the balance sheet after these transactions. Problem 158 The New York Steamship Company issued income deb- entures for $500,000, the deed of trust providing . that an amount equal to 5% of the total issue be set aside out of the earnings of the company each year for the retirement of the bonds. , December 31, 1900, the assets of the company amounted to $1,200,000, the capital stock of $500,000, other liabilities $100,000, profits for the year $70,000. The company received $30,000 from the government for transportation of troops during time of war, which amount did not appear on the books as an asset, the cost of transport- ing the troops having been charged to profit and loss account in prior years. Explain by journal entries (a) how the redemption fund for the retirement of the income debentures should be treated, (b) how the income of $30,000 for transportation should be treated. Problem 159 The Barnes brothers own and operate a small canning factory. Attracted by the high prices of war munitions they decide to build an addition to the factory building, remodel the machinery and buy some new equipment in order to enter this field. These changes will require about $25,000 of addi- tional capital. It is decided to reorganize as a corporation ii r 90 PROBLEMS IN ACCOUNTING in order that the business may be more conveniently expanded. The balance sheet of the partnership, in summary form, appears as follows: Assets Liabilities Plant and Equipment. $45,000 H. A. Barnes $25,000 Materials and Supplies 28,000 J. W. Barnes 35,000 Cash 2,500 Accounts Payable 18,200 Other Current Assets. 12,600 Notes Payable 9,000 Accrued Items 900 $88,100 $88,100 The partnership is reorganized as a corporation, the Barnes Manufacturing Co. Capital Stock is authorized to the amount of $125,000. The entire amount is subscribed at par. The partners receive $76,000 in stock; their equities in the partnership being considered as full payment. The holders of the partners' notes to the full amount of $9,000 are induced to take stock in the new enterprise for the same amount. A steel company which has an open account against the part- nership for $5,000 for materials purchased takes stock to that amount in full settlement of the account. The other subscrip- tions are all paid in cash. The liabilities of the partnership are assumed by the corporation, and the assets taken over. Prepare : (a) Closing entries for the partnership. (b) Opening entries for the corporation. (c) The balance sheet of the corporation as it appears after the conclusion of the foregoing transactions. Problem 160 The X Mining Co. is incorporated with an authorized capital stock of $200,000, par $10 per share. Subscriptions for stock are taken to the amount of 15,500 shares at par. These subscriptions are paid as follows: mineral lands, $100,- 000; water rights, $54,000; the balance in cash. A, a stock- holder who furnished the water rights as payment for a sub- PROBLEMS IN ACCOUNTING 91 scription of 6,000 shares, donates 4,000 shares to the corpora- tion for the purpose of raising working capital. This stock is reissued at an average price of $8 per share. (a) Journalize the above transactions, using only the general ledger accounts, and prepare a balance sheet, assum- ing the land and water rights have bona fide values as given above. In this event what premium does A really pay for his stock? How much does he actually lose? (b) Assuming the water rights are worth but $16,000, how should the above entries and balance sheet be changed? Which of the two statements which you have prepared do you consider to be the most reliable expression of the Com- pany's true position? Give reasons. Problem 161 A corporation is organized to exploit a mining property. Authorized capital is 5,000 shares, par $100. There are three original incorporators each of whom subscribes for 10 shares. These subscriptions are paid in cash. One of the incorporators is the owner of mineral lands which he now agrees to turn over to the corporation in exchange for 2,500 shares of stock. This transaction is consummated. Later this individual do- nates 750 shares of stock to the company to be sold to raise working capital. This stock is sold at a discount of 30%. Give journal entries covering the foregoing transactions and prepare a balance sheet. Problem 162 How may those in control of a corporation manipulate the income account to the detriment of certain income equi- ties? What would be the accounting effect of the entries required to carry out their purpose? Problem 163 How would the problem of liquidating a partnership differ from that of liquidating a corporation? ». -. n PROBLEMS IN ACCOUNTING Problem 164 A company whose stock is widely distributed and much dealt in, increases its capital stock of $500,000 by a stock div- idend of 100%. Some years subsequently an original stock- holder brings suit for elimination from the capital stock of what he asserts is "water." How can the dividend stock be eliminated from $1,000,000 of stock outstanding? Problem 165 A company incorporated with a capital of $200,000.00 fully paid up, has sold its stock at a premium of 25 per cent, thus realizing in cash $250,000.00. The By-laws, which can- not be amended except in a stockholders' meeting and after proper notice of such amendment having been mailed to each stockholder ten days prior to the meeting, contain a provision that the $50,000.00 so received over and above the capital stock shall be placed to the credit of a Special Reserve account, and that this reserve shall not be applicable toward the pay- ment of dividends. At the close of the first fiscal year, it was found that the company has made a net profit of $4,000.00 after charging $6,000.00 for depreciation on buildings and machinery. The directors desire to pay a cash dividend of five per cent, and pass a resolution ordering that the depre- ciation referred to above shall be charged against the Special Reserve Account, instead of against Profit and Loss, and they then proceed to declare a dividend of five per cent. Discuss this transaction from an accountant's standpoint. Problem 166 The profit and loss account of the Howell Manufacturing Company, manufacturers of phonographs, shows the following debits for the year ended June 30, 1920 : July 1, 1919, raw materials $12,500 July 1, 1919, 1600 finished machines 48,000 Raw material purchased 62,500 Productive labor 82,500 PROBLEMS IN ACCOUNTING 93 Coal, repairs, paint, varnish, superintendence, indirect labor and sundry supplies 23,000 Agents' commissions 90,000 Branch expenses — rents, salaries, etc 40,000 Salesmen's salaries and expenses 20,000 Rebates and allowances 10,000 Bad debts 8,000 Depreciation of plant and machinery 5,500 June 30, 1919 the directors establish a unit sales price of $90. The raw materials inventories June 30, 1920, at cost, amounted to $4,000. The sales billed during the year aggre- gated $540,000. At June 30, 1920, finished phonographs in stock numbered 800. Prepare a profit and loss statement showing the itemized manufacturing cost per machine, and gross and net profit per machine. Problem 167 A manufacturer having turned his business into a cor- poration and yet owning all the stock himself — only a few shares standing on the company's books as belonging to his friends — finds after a time that the business needs more cap- ital. Thereupon he agrees to sell a portion of the stock to outside parties for cash, stipulating that the money so obtained shall all be put into the business — that is, shall be at once expended in purchasing new machinery. The sale is made and machinery purchased. How is this transaction properly to be brought into the company's accounts? Problem 168 The Calamity Corporation (incorporated under the laws of New Jersey) has a capital stock of $40,000, which is held as follows: X, $21,000; Y, $2,000; C, $8,500, and B, $8,500. On December 31, 1921, there is an undivided profits figure of $34,577. X disposes of his entire interest in the concern 1! 94 PROBLEMS IN ACCOUNTING for $35,000, which is paid him by the company out of the company funds. The company then agrees with Y to pay him for his holdings at their book value, as determined imme- diately following X's retirement. Draft entries in journal form covering the above transac- tions, showing amount paid to B, and the value of the stock remaining in the names of C and B. Problem 169 If a company has $100,000 preferred and $100,000 com- mon stock, the preferred to have 6% dividends, and the com- pany makes net profits the first year of $5,000, the second year of $12,000, and the third year of $16,000, what would be the dividends to each class of stock if the preferred was non- cumulative, cumulative, or cumulative with further equal dividends after the common had received 6%? (Directors are supposed to declare each year all the dividends possible.) Problem 170 A corporation has a capital stock of $100,000. It has net assets at inventory value amounting to $160,000. With a view to reducing the number of its enterprises, it sells two of its stores for $85,000 at inventory value. This $85,000 is distributed among its stockholders. What entries should be made upon the books, and what procedure would you rec- ommend to safeguard all interests in making such a distri- bution? Problem 171 A company with an authorized capital stock of $1,000,000, $100 par value, issues $800,000 of shares in payment of various properties. In order to secure working capital the stock- holders return to the company ^ths of their holdings to be sold at $50, and on the same day 1,000 shares are sold and paid for. Draft entries to show how you would treat this matter. PROBLEMS IN ACCOUNTING 95 Problem 172 A corporation is organized with a capital of $1,000,000 in 100,000 shares at $10.00 each, 50,000 shares of which are common, and 50,000 preferred stock. 20,000 shares of the preferred stock have been sold at par on which an assessment of $5.00 per share has been paid. Subsequently, it was decided by the shareholders to donate one share of the common stock of the company to the purchaser of each share of the preferred stock, the orig- inal subscribers to the 20,000 shares, on which an installment of $5.00 per share was paid, to receive the benefit of said offer upon the payment of the balance of their subscription. The effect of this offer was that all the preferred stock was sold, and the balance of the installment due was also paid. Give entries for all the above, placing the transactions at intervals of one month. Problem 173 What do you understand by watered stock, and how may a corporation eliminate such water? Problem 174 The Pinconning Mining Company has four stockholders, each holding one-quarter of the stock, on which payments have been made as follows: Stockholder Shares Par Am't Paid A 15 1,500 1,500 B 15 1,500 150 C 15 1,500 150 D 15 1,500 A, the president of the company, makes an agreement to buy the stock held by B, C, and D, paying them $750 each, or $50 per share. He uses the company's checks to pay B, C, and D, and the stock is transferred to A's name on the cor- poration's books. What entries should be made by the company? :i * rf 96 PROBLEMS IN ACCOUNTING Problem 175 John Kokomo contracts for $5,000 of capital stock in the Stone Manufacturing Company, which is to be paid for in five equal installments. He fails to pay the last installment and forfeits the stock to the corporation. The latter sells it for $3,800. The cost of selling was $50. Journalize. Problem 176 The executive committee of a corporation making a cer- tain patented article find that their product has cost the fol- lowing per cent of the sales price: Raw Material 30 Wages 20 Rent 5 Fuel 10 General Expenses 15 80 What should he add to his selling price to obtain the same profit if the following advances took place? Coal 50 per cent advance Materials 6 " " Wages 2,y2 " " Problem 177 (a) State whether depreciation is an element of the cost of manufactured products. If so, why? If not, how would you provide for replacing productive properties? (b) What is signified by "cost less accrued deprecia- tion"? By "cost of replacement less accrued depreciation"? By "cost of reproduction less accrued depreciation"? (c) What do you understand by "absolescence" and "inadequacy"? Can provision be made in the operating ac- counts for absolescence and inadequacy? (d) What other costs of carrying on a business are of the extra-periodic character, and yet must be met out of the PROBLEMS IN ACCOUNTING 97 years' product of operations before it can be said that a com- pany has earned "income"? Problem 178 (a) Discuss : "The amount to be pro rated against sales in respect of a fixed asset is the sum total of the cost of the property plus repairs divided by the number of years' serv- ice life. In the meantime, if any expenditure is made which changes that sum or that number of years is more properly a ^capital' charge." (b) Discuss: "It is foolish to attempt to adjust book values of fixed assets to changing costs of reproduction or replacement. In this dynamic order, only the executed event proves the character of the change. Although the accountant cannot rationally adjust specific values in accord with the dictates of experience of his particular business, he should make adequate provision for the uninsurable probabilities based on that experience." Problem 179 Vergus Dogberry manufactures a specialty covered by a patent. He finds that his orders exceed his ability to fill owing to a want of capital. He desires to interest capital in the business, but feels that he cannot do so unless he can make some inducement to them and limit their liability. He proposes to form a corporation with a capital of $200,000, all common stock, and as the business has already paid him $10,000 per year on his limited capital, he thinks he is entitled to the whole capital stock. This would not, however, produce the additional capital required, and for that reason he agrees to accept $120,000 in stock of the new com- pany in full for his patents and the following assets: Machinery $ 6,500.00 Real Estate 10,000.00 Suggest a plan for arriving at the end desired, and for- mulate journal entries whereby the stock of the new company can be sold at such prices as may interest investors. 4 I 98 PROBLEMS IN ACCOUNTING Assume that the investors demand 12J4% on the actual investment, and that the net profits are expected to be only $20,000 per annum. Problem 180 Discuss the theory and purpose of averaging accounts receivable. Give an illustration of a simple account averaged. Problem 181 The American Tube Company is incorporated to pur- chase by issue of preferred and common stock, three con- cerns doing the same business. The preferred stock carries 6% dividends. An examination of the books was made and the properties were valued by actual appraisement by a dis- interested expert. The following is a summary of the con- dition of each of the three plants: A. B. Co. CD. Co. E. F. Co Cash Acct. Rec, and Bills Rec. (good) 25,000 15,000 50,000 Stock on hand 25,000 20,000 10,000 Plant and machinery 50,000 25,000 90,000 Acc'ts and Bills Payable 10,000 20,000 15,000 Mortgages Payable 20,000 35,000 Average annual net operating prof- its, 5 years 10,000 15,000 8,000 You are consulted in regard to the capitalization of the new company, and how the stock should be apportioned to the three concerns. Make an equitable distribution, taking into consideration the values of the net assets and the good- will. Problem 182 A factory cost $100,000.00. Depreciation amounting to $40,000.00 has been charged. An engineer's appraisal shows actual value of $80,000.00. Should there be any adjustment of the plant account, and how would the matter of deprecia- tion or appreciation affect the current year's profit and loss account? PROBLEMS IN ACCOUNTING 99 n Problem 183 A company insures the life of its manager for its own benefit in the sum of $50,000, the annual premium being $1,250. Explain the method you would adopt of treating the dis- bursement at the annual accounting during the period the policy was in force. Problem 184 A gas company with a capital of $5,000,000 and a surplus of $1,000,000 had made no provision for the depreciation of its property till the directors reviewed the valuation of the property accounts and decided to write off $2,000,000, thus creating an apparent deficit of $1,000,000. The net earnings during the year following the writing down of the assets amounted to $1,250,000 before any depreciation was charged, and the directors proposed to pay out as dividends $1,000,000. What opinion would you express as to this proposition, if called on by the board before final action was taken? Problem 185 "The method that should be adopted to ascertain the net earnings of a street railway company, is to deduct from the gross earnings, (a) Operating Expenses, and maintenance; (b) Interest upon the bonded indebtedness; (c) Depreciation; and (d) Where the city franchise or ordinance operated under is of limited duration, then a sinking fund necessary to retire bonds, when the franchise ex- pires, for then the business ceases." The above extract is from an "Argument for the Estab- lishment of Rules and Principles that Should Guide the Board of Public Works in Assessing Street Railway Property." You, as City Auditor, are asked to write an opinion on the correctness of the principles above set forth, especially (d). 100 PROBLEMS IN ACCOUNTING i9' i i 1 f 1 \ .T : r 1 •! Problem 186 A public service corporation that regularly sets aside from its profits a sufficient amount to provide for deprecia- tion and credits the amount to Depreciation Reserve, removes part of its old plant and replaces it with a larger and more costly one. The old plant is sold for scrap. How should the cost of the new plant and the proceeds from the sale of the old plant and the excess of cost of old plant over scrap be treated in the accounts of the company? Give reasons. Problem 187 The secretary of a manufacturing corporation which has no surplus has undertaken to close the books. The balance to the credit of the profit and loss account is just sufficient to enable the directors to declare a small dividend, which they propose to do. At this juncture the services of an accountant are secured. He finds that no provision for depre- ciation has been made, and that all expenditures for repairs and renewals, amounting to more than the proposed dividend, have been charged direct to plant account. Show the nature of any corrective entries which should be made. What would be the effect on the balance sheet of such entries? Problem 188 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 further information. Was the act of the direc- ors a prudent one under the circumstances? Give reasons for your answer. Problem 189 A manufacturing corporation handling a patent device issued bonds aggregating $375,000, payable in installments of $25,000 annually for fifteen years. Having in mind possible PROBLEMS IN ACCOUNTING 101 competition and obsolescence of its property, it was provided that the sinking fund installments be charged against earn- ings. The president of the company had a contract under which he was to receive a bonus of 5% of the net profits in addition to his salary, but it was specifically provided that as to him the charges against earnings should not include the sinking fund installments. In making up the first year's accounts the auditors decided that the depreciation reserve, as nearly as could be determined, should be stated as $25,000 and this amount was included among the operating expenses. When their report was submitted to the directors, the presi- dent referred to his contract and stated that the sinking fund provision and depreciation were synonymous and that he was entitled to 5% of the earnings before any deduction was made for depreciation. The matter is referred to you as an account- ant; what is your opinion? Problem 190 A corporation's income sheet for 1912 showed a surplus for the year of $150,000. In 1913 the surplus appearing on the income sheet was $200,000. Are these figures consistent with the following items appearing on the liabilities side of the balance sheet for the years in question? 1911 1912 1913 Reserve for Accrued Depreciation.$120,000 $145,000 $175,000 Reserve for Addition to Plant 100,000 150,000 200,000 Contingent Reserve 100,000 150,000 Surplus 750,000 700,000 800,000 Problem 191 A banking company with $200,000 of capital stock out- standing shows at the end of a certain year profits for that year amounting to $38,000. The directors write off $8,000 of Premium on Bonds purchased during the year, and $10,000 of the original cost of its fixtures, charging both these amounts to the Undivided Profit account. The bonds had not fallen I 1 1 ^ 102 PROBLEMS IN ACCOUNTING in market value, and 5% had already been charged to Expense for Depreciation on Fixtures. How would you describe the result of this action on the part of the directors? Problem 192 What, in your opinion, would be the proper accounting record for a business corporation to make of an appropriation from its surplus profits for the amount of a permanent invest- ment in property? Problem 193 A New York company sells its capital stock at a pre- mium and the directors pass a resolution to declare a divi- dend out of the surplus thus paid in. Would you call atten- tion to this action if asked to make up the accounts, and if so, why? Problem 194 A corporation manufacturing explosives is compelled to pay exorbitant rates for a very limited amount of insurance, and in consequence was obliged to install an automatic sprinkler system at a cost of $75,000. This additional fire protection enabled them to secure a full line of insurance, though in mutual companies, and at a much lower rate than was obtained prior to such installation. At the end of the fiscal year the company received dividends from these mutual insurance companies aggregating $2,000. To what account should the cost of the sprinkler system be charged and to what account should this dividend be credited? State your reasons fully. Problem 195 I 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? PROBLEMS IN ACCOUNTING 103 Problem 196 A Life Insurance Co. has issued $100,000 of stock all fully paid up in cash. During the first year preliminary ex- penses and expenditures for agency establishment and adver- tising amount to $15,000. The liabilities exceed the tangible assets by $12,000 at the end of the year. Should the balance sheet be corrected by reducing the capital stock? If not, what item would you place on the asset side to offset the $12,000 excess of liabilities? Problem 197 A corporation organizes under the laws of the state of New Jersey to conduct a manufacturing business, with an authorized capital stock of $1,000,000.00, divided equally be- tween preferred and common. Five incorporators each sub- scribe for 100 shares of the common stock of a face value of $100.00 per share. John Jones purchases from three manu- facturers their fully equipped plants for $950,000.00 in cash, and turns over the said three plants to the newly incorporated company for the $950,000.00 of preferred and common stock and $400,000.00 of first mortgage 5 per cent, bonds, out of a total issue of said bonds in the sum of $500,000.00, leaving $100,000.00 of said bonds in the company's treasury. Prepare opening entries with necessary explanations of the transactions and a statement of the company's condition after having acquired the three plants. Problem 198 The trial balance of a corporation shows Dec. 31, 1912, a credit to capital stock account of $74,176. The authorized capital of the company is $150,000. There is $50,000 stock in the treasury of the corporation. These figures in the trial balance were occasioned by the fact that the bookkeeper, not understanding corporation bookkeeping, had charged the cap- ital stock account with losses as follows: 1908, $13,884.50; 1909, $9,897.50; 1910, $32,507.50; and credited the same ac- il! I 104 PROBLEMS IN ACCOUNTING count with gains as follows: 1911, $4,319.15; 1912, $26,146.35. (a) Make the necessary entries to adjust the books so as to show the true condition December 31, 1912. (b) Give a clear and concise explanation of the nature of the bookkeeper's error and of the changes which are necessary. Problem 199 At the beginning of the year, January 1, the capital stock of a corporation was $100,000, and it is known to represent good assets; the surplus was $24,000, the outside liabilities were $17,000. The net earnings since January 1 have been $16,000, and nothing has been paid in dividends. What is the present excess of assets over outside liabilities? Problem 200 It is proposed to organize for conducting a small manu- facturing business a corporation based on certain rights and franchises owned by one of the proposed stockholders. The amount of the capital stock is to be $100,000. The owner of the rights and franchises agrees to transfer them to the corporation in consideration of $50,000 of the capital stock, though he believes them to be worth much more than that amount. The remainder of the stock is to be sold to provide working capital. Certain capitalists are to be approached for cash subscriptions to the capital stock, but it is uncertain what opinion they hold concerning the enterprise, and it is desired to have the stock in the treasury in such form that it can be sold below par if necessary. What method would you suggest for accomplishing the end in view? Formulate the journal entries for opening the books of the corporation in accordance with your suggestion. Problem 201 The third installment of the subscriptions for the stock of The Elite Amusement Company was due on January 1, 1915. Because of the large profits, however, it was decided not to call this third installment, but instead a dividend was declared i PROBLEMS IN ACCOUNTING 105 just equal to the amount subscribers still owed for this in- stallment, and "fully paid" stock certificates were then issued to the subscribers. What entries are necessary to properly record these facts? Problem 202 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, divided into $250,000 com- mon and $250,000 preferred stock, par values 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 com- plete plants for $499,500 and transfers said plants to the Pros- perous Company for the remaining $499,500 of common and preferred stock and $100,000 of first mortgage 5 per cent, 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, equip- ment 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 Pros- perous Company; (b) initial balance sheet showing the com- pany's financial condition. Problem 203 Comparative Balance Sheet. Assets 1913 1912 Plants, patents, goodwill $71,060,813 $70,685,722 Investments 1,768,045 1,635,958 Treasury stock 2,058,700 2,227,117 Inventory 12,614,926 16,226,639 Accounts receivable 5,477,195 6,370.890 \ I if i 106 PROBLEMS IN ACCOUNTING Bills receivable 686,274 606,944 Cash 723,053 803,225 Prepaid insurance, taxes 222,950 229,619 Total Assets $94,511,956 $98,786,114 Liabilities Common stock $60,000,000 $60,000,000 Preferred stock 30,000,000 30,000,000 Bills payable 2,799,736 6,479,411 Accounts payable 489,031 653,185 Accrued liabilities 217,206 547,283 Contingent reserve 300,000 300,000 Surplus 705,983 806,235 Total Liabilities $94,511,956 $98,786,114 In the capital asset item, real estate, buildings, machinery, etc., are listed at $12,679,151; patents at $583,650 and good- will at $57,798,000. The income account for the year 1913, shows the follow- ing facts : Net Sales $39,509,346 Expenses 36,451,233 Balance $ 3,058,113 Misc. Income 491,316 Total Income $ 3,549,429 Treasury Stock reduced from Cost to par value.. $ 168,417 Depreciation 541,359 Interest on Bills Payable 239,906 Net Profit $ 2,599,747 Preferred Dividends $ 2,100,000 Common Dividends 600,000 Deficit for year $ 100,253 PROBLEMS IN ACCOUNTING 107 "Profits for the B. F. Goodrich (rubber) Company and subsidiary companies in the year ended Dec. 31, 1913, appli- cable to dividends was $2,599,747."— The Chicago Record- Herald, Feb. 24, 1914. (a) Comment on the above statement assuming that the figures in the Company's financial statements are correct. (b) What would you say as to the value of the good- will item appearing in the balance sheet? ' Problem 204 Before making the charges referred to below, the profit and loss account of a corporation for the year shows a credit balance of $60,000. The accounts receivable are $40,700, and the plant and machinery account is $55,000. The 6 per cent preferred stock is $50,000 and the common $150,000. It is decided (1) to provide, out of the above named profit and loss balance 7]^^ per cent depreciation on plant and machinery ; (2) to write off as uncollectible $1,500 of the accounts receiv- able and to make a reserve of 2 per cent on the remainder of the accounts receivable to provide for possible losses there- on; (3) to provide for the preferred stock dividend for the year; (4) to provide for a bonus of $7,500 to the employees; (5) to provide for a dividend on the common stock of 15 per cent for the year and (6) to carry the balance then remaining on the profit and loss account to undivided profit account. Draft the journal entries to give effect to the above. Problem 205 It has been proposed that if goodwill is to be written oflF at all the charge should be made to the capital account. Give your opinion of this. Problem 206 What is your opinion of the correct accounting treatment of stocks or bonds given as a "bonus" with some other se- curity? Assume a simple case, and state the entries you would recommend. i I 108 probhems in accounting 1 ^ per cent is $0.610270943. Problem 234 What entries would you make if the issuing company for which you work should redeem its bonds at a price more than book value? At a price less than book value? Problem 235 What is the duty of a trustee with respect to distributing the bond "dividend" between "life-man" and "remainder- man"? Consider in connection with estate bonds originally bought at a discount, at par, and at a premium. Problem 236 A. In 1910 a trustee buys for investment $10,000.00 (par value) Penna. R. R. 6% bonds due 1921 at 112. At the end of six months he receives $300.00. How much does a life tenant, who is entitled to all of the "income," receive? B. He buys 100 shares Penna. R. R. stock at 112. At the end of six months he receives a dividend of $300.00. How much does the life tenant receive? Problem 237 A corporation issues 5% 20-year bonds to the par value of $2,000,000, at 92. Seven years later the company provides for a new issue of 5% 30-year bonds to be used partly in refunding the outstanding bonds and partly in raising new capital. The $2,000,000 of old bonds are refunded by exchang- ing for them new bonds of the same par value and $140,000 ($7.00 per $100.00 bond) in cash. PROBLEMS IN ACCOUNTING 119 (a) What did the company realize on the $2,000,000 of new bonds? (b) What entries would you make at the time of this refunding operation? Problem 238 The theoretical book value of a 5% bond on January 1st is $10,136.47 (on a basis of 4%), and that is what you pay for it. The value on July 1 is $10,089.20. On July 1 you receive as interest on the bond $250, or at the rate of 5% a year. What should you credit on your books for that $250? On August 1 you buy another $10,000 of these bonds for $10,122.83, which includes accrued interest. The theoretical book value of the bond for the subsequent Jan. 1 is $10,040.98. What will you debit at the time of purchase? What should you credit when the $250 interest on the last purchase is received on January 1? Problem 239 A corporation has outstanding $20,000,000 first mortgage bonds, interest 7%, payable semi-annually on January 1st and July 1. These bonds fall due as follows: $5,000,000 on Jan. 1, 1918 5,000,000 on Jan. 1, 1920 5,000,000 on Jan. 1, 1922 5,000,000 on Jan. 1, 1924 This $20,000,000 issue is to be refunded as of January 1, 1916, on a 3J/^% basis. Allowance is to be made for the differ- ence in interest for the remainder of the lives of the various bonds, and such difference is to be paid in bonds. (a) What amount of bonds must be issued? (b) This same corporation has outstanding $10,000,000 of income bonds bearing 5% interest. The auditor decides that the Old Bond account should be debited $20,000,000, and the New Bond account credited the whole amount of the issue, — the excess of the new over the old bonds being charged il r. Ift 120 PROBLEMS IN ACCOUNTING against income for 1914. The entries are made accordingly. As a result of this entry no net income was left to pay the interest on the income bonds. Have the income bondholders any redress in the matter? (c) What will be the proper journal entries at the time of the refunding? (d) What will be the proper journal entries on July 1, 1916, and on Jan. 1, and July 1, 1917 to 1924? Problem 240 Fill in the missing items in the following table and tell how you know what items to add: Market Int. Bond Int. Accumulation Book Value Par $98,558.06 $100,000 $1,971.16 $1,500.00 1,980.58 1,500.00 1,990.20 1,500.00 Could you fill in the accumulation column directly, with- out calculating or using the market interest, if you knew the market interest rate ? If so how ? Problem 241 A corporation issues $100,000 of 5% bonds, payable in fifteen years, with interest payable semi-annually, and receives $105,411.33. This gives a 4i^% basis. Six months later the corporation pays interest on the bonds amounting to $2,500. What entry should the holder of a $1,000 bond make in his books when he receives his first interest? What entry should the corporation make when it pays its first interest, and how does that entry aflfect its income sheet, or its balance sheet, or both? Problem 242 Describe a sinking-fund. How should the account of such a fund be conducted in the case of a manufacturing corpora- tion that bonds its works for $100,000, payable in 20 years, and wishes to accumulate during that period the sum necessary to PROBLEMS IN ACCOUNTING 121 retire the bonds at maturity? What amount must be charged the first two years, assuming the interest rate to be 4% ? Problem 243 A mercantile company buys the leasehold to a site for $10,000. The leasehold has 5 years to run. How would you treat this transaction in the accounts (a) at the time of pur- chase, (b) each year during the remaining life of the lease- hold? Give entries. Problem 244 A corporation sells its first mortgage bonds at $10,000 premium and its second mortgage bonds at $10,000 discount. Give your views as to the proper treatment of these items of premium and discount. Problem 245 A, the owner of a certain property, leased it to B for a period, of twenty years, at an annual rental of $2,000, payable in advance. B occupied the property for ten years, during which time in the vicinity advanced materially. C desired to rent the property on the basis of $3,000 per year, and offered to pay B in cash immediately for his equity in the lease com- muted at 5%. The offer was accepted and the lease was assumed by C with the consent of all parties. What payments did C make to B ? Show in tabular form the annual journal entries made by C in respect to the rent, and the diminishing annual balances of the leasehold account. Problem 246 Give your understanding of the terms explicit and im- plicit interest. How are the two involved in the product of business operation? Problem 247 Support the contention that bond interest is a return to capital and not a cost of operation, but that commercial in- terest, so-called, is such a cost. Oppose the latter. , * ' f 122 PROBLEMS IN ACCOUNTING ' ^ I I 1(1 Problem 248 An advertisement of a well-known make of automobile appearing in a magazine some time ago had in it a statement which ran somewhat as follows: "We have no bonds outstanding on which interest must be paid. Most of our competitors do have bonds outstanding on which the fixed charge must be regularly paid. Our costs are therefore lower, of course, and we can sell at a lower price." Comment. Problem 249 "When a closing date comes between 'interest' payment dates, it is important that the true charge to interest be ac- crued but it is not necessary to accrue the premium amortiza- tion." Explain fully. Problem 250 Prepare a bid for an issue of $100,000 of the X Co's 5-year, 4% bonds, interest payable semiannually, on a 6% and 8^ basis, respectively, interest convertible semiannually. Problem 251 • The A Co. issued $100,000 (par value) of 6%, 10-year bonds, interest payable semi-annually, on June 1, 1921, for $107,795. This price is sufficient to yield the investor a rate of 5%. (a) Give the entries on the A Co.'s books to record, in summary, the issue of these bonds. (b) Give the entries recording the payment of the semi- annual interest on Dec. 1, 1921, and June 1, 1922. Problem 252 The Eastern Trust Company receives an estate amount- ing to $105,411.33. There are two heirs, A and B. A is to PROBLEMS IN ACCOUNTING 123 receive the entire income from the estate during her life; B is to receive the principal ($105,411.33) at the time of A's death. The estate is invested in $100,000 of 5% bonds, pay- able in 15 years, with interest payable semi-annually. This gives an effective yield of 4J/2%. (a) Assuming that the trust company turns over the income of the estate to A once a year, and ignoring the Com- pany's commission, give the journal entries covering the pay- ment of the first year's income on the books of the trustee. (b) Suppose that for 3 years the Company pays over as income to A the entire amount of the bond annuities, and, suppose further, that at the end of the 3 years the estate reverts to B. The trust company sells the above bonds and pays B the full amount of the estate. Assuming no change in interest rates, what is the loss to the trustee? Give jour- nal entries on the Company's books covering the sale of the bonds and the payment to B. Problem 253 A corporation issues a block of 20-year, 7% bonds at a market rate of 6%, realizing $111,500. Assuming that inter- est is paid semi-annually and that the corporation closes its books only on interest payment dates, give the journal entries on the corporation's books at date of issue, the first two inter- est payment dates, and at maturity. Suppose the books of this company were closed 3 months after the issue of the bonds and again 3 months later. Give the journal entries with respect to these bonds and the interest thereon, under this assumption, at these two closing dates. State precisely the significance of this bond premium, and show the effect of a neglect to amortize it. Problem 254 (a) It is the practice of some corporations to charge dis- count on bonds to Surplus account at the date of issue. Dis- INFORMATION OBSCURED ill I 124 PROBLEMS IN ACCOUNTING cuss. Show that if the discount were of significant amount the rights of particular investors and classes of investors might be disturbed by such a practice. (b) Would you object to the practice of charging dis- count on capital stock issued directly to undivided profits? Explain the difference between discount on bonds and dis- count on stocks. Problem 255 The price paid for an issue of $100,000, par, of 20-year 4% bonds, interest payable semi-annually, was $93,411.61. What rate of interest was used in this valuation ? Problem 256 The X Railroad Co. has paid a 6% dividend on its stock for several years. There is every indication that it will pay this rate continuously in the future. Assuming that this sort of investment should yield the investor 8%, what would be the value of the stock, the par value being $100? Problem 257 On January 1, 1920, the A Company issues a 5-year note which carries no periodic interest payments and which calls for the payment of $100,000 at maturity. This security is "sold" on an S% basis, interest convertible semi-annually, the proceeds being $67,556.42. The Company's accountant charges cash $67,556.42, debits surplus $32,443.58, and credits notes payable for $100,000. (a) Show that this procedure creates a "secret reserve." Give a general definition of the secret reserve. (b) Adhering to the plan that he has initiated, what entries will the Company's accountant make during the life of this note and on January 1, 1925? Show precisely why this accounting is improper from the standpoint of income sheet and balance sheet. (c) Assuming that the accountant had charged dis- count instead of surplus and then had neglected to account PROBLEMS IN ACCOUNTING 125 for accumulation what entries would he of necessity make at maturity? Show that this accounting is more seriously inadequate than the procedure given above. (d) Assuming that the A Company closes its books on June 30 and December 31, exhibit the journal entries with respect to the note described above which should be made on January 1, June 30, and December 31, 1920 ; and on January 1, 1925. Problem 258 On January 1, 1921, the B Company issues an S% $100,- 000, 10-year bond, "interest" payable semi-annually, on a 6% basis, convertible semi-annually. Assuming that the Com- pany closes its books on June 30 and December 31, give the journal entries with respect to this bond on January 1, June 30, July 1, and December 31, 1921. (The value of $1 due in 20 periods at 3% is $0.5536758. The value of an annuity of $1 per period for 20 periods at 3% is $14.8774749.) What, precisely, is the nature of the "Bonds-Premium" account? Why is it desirable, from the standpoint of both income sheet and balance sheet, to amortize bond premium in a systematic manner? Show carefully the impropriety of treating unamortized premiums as "unearned ii)^me" and the amount of the periodic amortization as "earnefl" income. Problem 259 A company has acquired machinery, which cost $100,000, which it expects to be able to use for 10 years. The scrap value at the end of that time is estimated at $25,000. A bond issue of $75,000 due in 10 years, bearing 6 per cent, interest and secured by a mortgage on the machinery, was floated at 98 soon after the purchase of the machinery. The trust in- denture requires that at the end of each year, before the pay- ment of dividends, a sum shall be set aside and charged against earnings sufficient to provide a sinking fund on a 5 per cent, basis for the redemption of the bonds at maturity. ii'1 126 PROBLEMS IN ACCOUNTING The president of the company is in favor of providing a reserve for depreciation on the machinery by the sinking- fund method, using 5 per cent, as a basis, although he does not advocate creating a replacement fund for the machinery as well as a sinking fund for the bonds. The treasurer con- tends that it is not necessary to provide any reserve for de- preciation, asserting as his reason that the creation of a sinking-fund reserve and a reserve for depreciation would involve a double charge against profits and, further, that as the sinking-fund reserve is obligatory the depreciation reserve is not required. (a) Compute the amount of the annual contribution to the sinking fund for the redemption of the bonds. (b) Set up a table showing the accumulation of the fund, on the assumption that it earned exactly 5 per cent. Also indicate the annual entries for the sinking fund and for the sinking-fund reserve. (c) Give your opinion as to whether or not there should be a reserve for depreciation as well as a sinking-fund reserve. If the sinking-fund reserve is sufficient, what disposition will eventually be made of it? If two reserves are necessary, when and in what manner will they be closed out? . 1.05^0=1.62889463. Problem 260 Criticize the following practices: (a) Treating bond discount as "prepaid interest"; (b) Treating bond premium as deferred revenue ; (c) Charging or crediting bond discount or premium at the beginning of the bond term directly to surplus; same at the end of the bond term. Section VII. (a) Thus far these problems have had to do with accounting for a "going" concern. When we think of "business" we of course think of buying and selling and profit-making; in short, we think of favorable economic oper- ation. Some of the most difficult of accounting problems, PROBLEMS IN ACCOUNTING 127 however, grow out of the transactions which precede busi- ness operation, during what have been named the organiza- tion, construction, and developmental periods; others, simi- larly unrelated to a "going" concern, come up for considera- tion subsequent to business operation, while a business is in process of dissolution or is being operated by an officer of the court of equity. The chief problem relating to the periods which are said to exist prior to "going" days may be summed up in the ques- tion: What expenditures are properly to be accounted for as additions to the cost of properties, either of specific units of property or of the general property of the business as a whole, and what ones are best accounted for as offsets to capital or as deferred debits to some revenue figure? Problem 261 Write a brief discussion of the proper treatment of or- ganization expenditures, interest during construction (explicit and implicit), dividends during construction, taxes paid on property during construction, and take up in some detail the theory of developmental value. Problem 262 Are public utilities and industrials to be considered as homogeneous economic units in dealing with the problems of pre-operating periods? Give reasons for your answer. Problem 263 Discuss the following: "The entrepreneur and capitalistic functions cannot in fact be divorced. If so, in a given case, the separation is no more than superficial, and the return to both, implicit and explicit, is all business income. A partic- ular arrangement of capital investment can be explained simply on the grounds of expediency." Problem 264 Discuss the different theories concerning the treatment of organization costs subsequent to the beginning of opera- tions. «S 128 PROBLEMS IN ACCOUNTING Problem 265 Look up the ruling of the I. C. C. in regard to the cap- italization of costs prior to "receipt or the completion or the coming into service of the property" constructed as the oper- ating plant. State whether you would consider it correct to apply such a ruling to the general situation without a good deal of modification. Problem 266 "In arriving at the cost of a building, every item which enters into its construction, or is caused by it, is a legitimate element of the cost." "Every expense that is essential to the completion of a building (during construction) is legitimately charged to its cost." Comment, giving the different items of expenditure which are "essential to the completion" of a build- ing. Problem 267 ; Some hold that discount on bonds and stock sold for construction purposes are losses and should be capitalized as a property cost. Give your opinion. Problem 268 Is it permissible to include in the valuation of a plant constructed by a company's own employes for the company's own use, an amount of "profits" sufficient to bring the plant valuation to an amount equivalent to the "cost" of construc- tion by outside parties? Problem 269 "The theory that interest paid for borrowed money should be capitalized is incorrect. In effect it holds that an asset costs less when the company has sufficient capital than when it has not enough. Borrowing money follows a want of cap- ital, and the interest is the price of capital, not of construc- tion." Statement made by same writer who advocates cap- italizing interest paid to bondholders during construction period. Is it sound? PROBLEMS IN ACCOUNTING 129 Problem 270 Can or cannot a going concern employing a salaried man- ager and superintendents charge any part of their salaries to cost of improvements or extensions which may be added to the plant at intervals? Why? Problem 271 "Whoever would hold to capitalizing bond interest dur- ing construction would hold that the return on business cap- ital accrues from year to year, and that there was no such thing as the business function of assuming the burden of irregularity of expenditure and of the results of expenditure. He would overlook the fact that a particular form of capital- ization is simply a special case of the residual owners 'trad- ing on their equity,' and that the responsibility of a fixed accruing return rests upon them and not upon society." Ex- plain fully. SECTION VII (b) The principal problem which comes up in connection with the cessation of business operation has to do with the inability or the failure to pay debts, making it necessary to estimate the realizable value of available assets, and to apply that estimate to the satisfaction of outstanding liabilities in the order of their rank, thus determining the estimated defi- ciency to those creditors who legally stand in a residual posi- tion. The formal estimate and determination of deficiency is called a "statement of affairs." An account showing the specific factors contributing to a deficiency is usually pre- sented as a companion exhibit. To account for the winding up of a business a form of account is used called a "realization and liquidation account." The same account is used for recording the transactions of receiver's or trustee's operation of a business for the benefit of creditors when the plan is to turn the business back to its legal owners as soon as it is solvent. It is apparent, then, m I- t\ \ , 1 130 PROBLEMS IN ACCOUNTING that such an account may be based on the going values of a balance sheet or the forced values of a statement of affairs. These statements will be discussed in full. Problem 272 Fat & Lean have been forced into the hands of a receiver. From their books and the testimony of the insolvent debtors the following statement of their condition at December 31, 1921, is ascertained : Cash $ 400 Bonds, Kadoo Company 10,000 Accounts Rec 40,000 Inventory 25,900 Machinery and Equipment 18,000 Buildings 30,000 Notes Payable 2nd Nat'l Bank 6,000 Notes Payable State Bank 4,000 Notes Payable individuals 6,000 Accounts Payable 88,700 Unpaid wages and taxes 600 Fat— Capital 11,000 Lean— Capital 9,000 The following appraisal was made by the receiver : Inventory, $22,900; machinery and equipment, $9,000; buildings, $20,000; and bonds at their face value. He classi- fied the -accounts receivable as $27,000 good, $9,000 doubtful but expected to produce $4,000, and $4,000 bad. The bonds were all held as collateral by the banks : $5,000 with the 2nd National and $5,000 with the State Bank. A memorandum for $100, although of no value, was found to have been con- sidered as part of the cash on hand. Prepare a statement of affairs, showing the liabilities and the assets with respect to their realization and liquidation; also a deficiency account showing the details accounting for the deficiency. PROBLEMS IN ACCOUNTING 131 Problem 273 State the various uses to which a statement of affairs may be put. How does it differ from a balance sheet? De- fine the following terms and tell how they should be treated in a statement of affairs: Preferential liabilities, contingent liabilities, fully secured liabilities, partially secured liabilities, unsecured liabilities. Problem 274 Wallace Hopkins, while perfectly solvent and doing a profitable manufacturing business, had so tied up his capital in plant 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 commence legal proceedings to enforce a settlement. The condition of his affairs at this time was as follows: Assets Liabilities Plant $25,198 Creditors $20,230 Cash 212 Capital 50,000 Materials, raw and Surplus 4,900 partly finished 40,400 Finished goods 6,070 Accts. Rec 3,250 $75,130 $75,130 At a meeting of the 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 unfin- ished goods would require the employment of skill and pro- cesses known only to him, 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. 1^ I )■ 132 PROBLEMS IN ACCOUNTING The subsequent operations of the trustee were as follows : Purchases on book account, charged to materials $5,100, to expense, $12,100; sales on book account, $57,802; losses on bad debts, $300; cash receipts (loan from creditors), $5,000; settlement from debtors, $58,100; cash payments for labor, $12,500 ; for expense, $4,350 ; for plant, $600. Creditors, $42,- 030 ; Wallace Hopkins, personal drawings, $3,000. There remained raw materials $4,000; finished goods, Prepare (1) realization and liquidation account, (2) trustee's cash account, (3) balance sheet of the estate as re- stored to Wallace Hopkins. Problem 275 Sharp & Flat have been in business as contractors for the last six years. Each invested $63,000 cash and was to receive one-half of the gain and bear one-half the losses which for the entire period were as follows: Year Gain Loss 1914 $15,000 1915 18,000 1916 21,852 1917 1,500 1918 $1,500 1919 3,000 Each withdrew from the business for private use $6,000 per year. On December 31, 1919, an assignment was made and the Assignee obtained the following information in addi- tion to that already given, from which he proceeded to make a statement of affairs and a deficiency account to be placed before the creditors: Unsecured creditors on open account $ 27,000 Fully secured creditors 6,900 Securities held by above consist of patents valued at. 9,000 Partly secured creditors 105,000 PROBLEMS IN ACCOUNTING 133 Securities held by above consist of railway shares, valued at 60,000 Wages due 2,000 Rent due — not preferred 400 Bills payable 60,000 Book debts (good) 3,000 Book debts (doubtful, est. worth $225) 800 Book debts (bad) of no value 700 Stock in trade 112,500 Above is estimated worth 66,600 Plant and machinery cost 120,000 Above estimate to produce 60,000 Office furniture (Est. $600) 900 Bills receivable under discount 10,000 Estimated liability of partnership on above 4,000 Cash in bank 252 From the facts given prepare a statement of affairs and a deficiency account. Problem 276 The following is a trial balance of the books of the Cunard Corporation, which has been declared bankrupt: Trial Balance at June 30, 1920 Dr. Cr. Land and buildings $125,000 Capital stock $300,000 Machinery and equipment 160,000 Customers* accounts rec 170,000 Notes payable 250,000 Accounts payable 309,000 Accrued wages 3,000 Mortgage on building 65,000 Notes receivable ..'. 26,000 Interest accrued on mtge 2,500 Cash on hand and in bank 9,500 Inventory raw material 85,000 n n ^ i i" » ill 134 PROBLEMS IN ACCOUNTING Inventory finished goods 121,000 Investments 12,000 Deficit 221,000 $929,500 $929,500 The land and buildings are appraised at $101,000 and the machinery and equipment at $135,000. An examination of the customers* accounts shows the following condition : Good, $95,000; doubtful (expect to collect 33>^%), $51,000; bad, $24,000. The holders of the notes payable of $12,000 hold notes receivable in security of face value of $15,000, but worth only $10,000. A creditor of $55,000 on open account has in his possession the stock certificates for the investments assigned in blank, and finished goods pledged to the value of $16,000. An examination of the notes receivable shows $9,000.00 good for collection and $17,000.00 doubtful, on which 50% will be collected. The investments have a market- able value of $16,500.00. The inventories are expected to realize book values. Prepare a statement of affairs for submission to creditors showing the amount on the dollar which they may expect to receive; also prepare a deficiency statement. Problem 277 John Thompson exhibits the following balance sheet of his business, dated June 30, 1900 : Cash $ 750 Sundry creditors $ 6,000 Book debts 9,500 Bills payable 7,500 Stock on hand 6,500 Bank (overdraft) 3,000 Fixtures, etc 1,750 Balance 2,000 Total $18,500 Total $18,500 On questioning Thompson it was found that he had omitted the following from his balance sheet : $250 owing for rent; $75 owing for taxes; $2,500 borrowed at 6% from his wife three years ago, no payment having been made on ac- PROBLEMS IN ACCOUNTING 135 count of either principal or interest ; a draft for $500 accepted by a firm without consideration, falling due in 30 days. His private and household debts amounted to $600. The item entered on his balance sheet as cash included his personal I. O. U.'s for $600. Of the book debts about $3,500 might be considered bad and the rest good. The stock was good except $1,000 which would not produce more than $100. The fixtures, if sold, would not realize more than $250. The only other assets were household furniture worth about $1,250 and residence valued at $7,500 subject to a first mortgage for $5,000 at 4%, and also a second mortgage held by his bank as security for overdraft. Prepare a statement of affairs. Problem 278 The trial balance of the Yellow Pine Timber Co., on Jan- uary 1, 1912, was as follows: Dr. Cr. Cash $ 2,618.03 Accounts Rec 21,111.17 Inventory 36,133.32 Unexpired insurance 559.44 Plant and equipment 352,109.75 Timber and lands 551,539.31 Preferred claims $ 37,011.99 First Mtge. Bonds 6's 212,500.00 Bond interest accrued 6 months 6,375.00 Unsecured creditors 64,471.64 Capital stock 400,000.00 Surplus 243,712.39 $964,071.02 $964,071.02 Since the company was unable to meet its current obli- gations, the Commercial Trust Co. was appointed Receiver on January 1, 1912. BMS k \\ ii 136 PROBLEMS IN ACCOUNTING The transactions under the receivership for the year following were, in summarized form : Purchased logs (half of which were paid for in cash, less cash discounts, and the remainder on credit) $ 9.646.22 Operating expenses 202,972.81 Commissions 4,214.14 Demurrage 326.00 Freight, inward 585.53 General expenses 4,837.40 Salaries 12,000.00 Shipping Expense 13,574.10 Taxes 1,421.00 All paid for in cash. Allowance for stumpage cut amounting to $50,000 was credited to the timber account. Interest on bonds to Decem- ber 31, 1912, was paid in full and the outstanding bonds redeemed to $200,000, December 31, 1912, by paying off $12,- 500 at 101. Sales amounted to $450,000 gross, of which $300,000 was received in cash as net payment by customers. Freight allowance to customers $70,510.00 Discounts allowed 556.33 Discounts received 500.00 Profit from commissary 5,000.00 Sundry income 3,500.00 The accounts receivable of January 1, 1912, realized $20.- 000.00 net. Preferred claims were paid in full. Depreciation of $3,500 was allowed on plant and equipment. Unexpired insurance on December 31, 1912, amounted to $125. Inven- tories, $40,000. Prepare a realization and liquidation account, cash ac- count, and balance sheet, as of December 31, 1912. Prepare a Receiver's Profit and Loss account, proving the gain shown by the realization and liquidation account, and showing all of the elements making up the net amount. PROBLEMS IN ACCOUNTING 137 SECTION VIII. Accounting for Holding Companies and Mergers. (a) Accounting for the holding company has its problem in the preparing of a balance sheet which will reflect the financial condition of all the interests effectively under one control, without regard to their apparent separation, and in the drafting of an income statement which will render a profit figure expressing the true realized gain of the "consolidation." In practice these two exhibits are distinguished as "consol- idated" statements. The making of a "consolidated" balance sheet involves the elimination of inter-company accounts. Among these are intercompany loan accounts and the investment account on the books of the holding company offset by the proprietary ac- counts of the controlled company. In the two ledgers such accounts are related essentially as reciprocal balances. The process of eliminating the latter carries with it consideration of the book value of the investment at the date purchased and its relation to the purchase price, and the resulting figure of goodwill or addition to surplus (or deduction from goodwill), as the case may be, of the combined interests. When book value at acquisition is not available, the elimination is accom- plished on the basis of values given, at the sacrifice, however, of some adjustment which might have been called for had the book value been known. Minority interests are best exhibited as a certain percentage of the combined asset total. The in- vestment account on the books of the holding company is carried either at cost or at book value. If at cost, the adjust- ing of the consolidated surplus account is done when the ac- count is eliminated ; if carried at book value, the adjusting is effected on the basis of the controlled company's income statement (corrected for intercompany "profits") and of actual dividends declared in favor of the holding company. In the latter case, the elimination is equivalent to cancellation of the offsetting accounts without further adjustment being neces- sary. Certain authorities hold to carrying the investment \ i i' iH 138 PROBLEMS IN ACCOUNTING account at book value. It should be noted at this point, how- ever, that if the holding company owns less than an effectively controlling interest, the investment account is best shown un- altered at cost in the company's balance sheet, and the various assets and liabilities represented by the account disregarded entirely. The "consolidated" income statement should be so made as to render a figure of profit representative of the results of all the contributing companies conceived as a unit. Where there is a duplication, and sometimes a triplication, of profits resulting from intercompany transactions, the accumulation should be allowed only to the extent of actual realization in the form of sales to "outside" parties. The cost of goods sold and general business overhead incurred in dealing with interests outside the holding company's control should be off- set to sales made to outsiders properly to measure the true income of the "consolidation." From this only dividends paid to stockholders of the holding company would be deduct- ible in determining the surplus remaining to the "consolida- tion." The remainder, corrected for the minority's equity, could then be reconciled with the surplus of the consolidated balance sheet. Arriving at the profit figure in this ideal manner may be at times impracticable. The better plan, if such is the case, is to set about preparing the income statements of the individual companies as quite spearate entries, allowing them to show intercompany gains, and then carefully to eliminate, in a com- panion statement, the holding company's proportion of the intercompany profits which have resulted from intercompany purchase and sales transactions. The latter step will give the amounts which should be charged to the consolidated surplus as first determined on the basis of the unadjusted subsidiary balance sheets, and which should be credited in the consoli- dated balance sheet as an offset to the overstated inventories. Minority interests are of course entitled to their share of inter- company gains as shown by their particular companies. PROBLEMS IN ACCOUNTING 139 The problems which follow are illustrative of the prin- ciples involved in the preparation of the consolidated balance sheet. Problem 279 Company K, as represented in the following exhibit of balance sheets, is a holding company owning all the stock in subsidiary X. Consolidate the two balance sheets so as prop- erly to reflect the financial condition of the unity of business interests. Now assume, as a new problem, that company K owns all the assets of company Y, and consolidate the two statements. Again, assume that company Z is the subsidiary, and that company K holds 80% of the stock. BALANCE SHEETS Assets K (1) X (2) Y (3) Z Company Company Company Company Plant Property $250,000 $100,000 $150,000 $210,000 Investment in Sub- sidiary (cost) 125,000 Inventories 30,000 20,000 40,000 50,000 Accounts Rec 20,000 30,000 45,000 20,000 Company X 10,000 Cash 10,000 10,000 25,000 10,000 $445,000 $160,000 $260,000 $290,000 Liabilities Accounts Pay $ 45,000 $ 25,000 $ 30,000 $ 50,000 Company K 10,000 Capital Stock 300,000 125,000 100,000 150,000 Surplus 100,000 130,000 *90,000 $445,000 $160,000 $260,000 $290,000 (*What would you do if this were a deficit?) Supplement- ary data: The stock investment account on K's books is carried at cost. Each subsidiary considered has been in opera- I II Wv n hi! 140 PROBLEMS IN ACCOUNTING tion but one year, with the exception of Z company, the book value of the total stock of which when purchased by K was $180,000. Assume Z company has made sales to X company resulting in an inter-company profit of $10,000. Solve as if the investment account is (a) to be carried at cost and (b) to be carried at book value. How would the solution of the K and Z company combination be altered if the book value at acquisition were not known? Problem 280 From the information provided by the following balance sheets prepare statements giving (a) the book value of sub- sidiary stock at date of purchase, assuming purchase to have been made on the basis of the subsidiary's showing as of that date ; (b) the goodwill purchased ; (c) the interest of the minority ; (d) "consolidated working papers" ; and make an analysis of the consolidated surplus. BALANCE SHEET HOLDING COMPANY Assets December 31, 1920 Plant $300,000 Inventories 50,000 Investment in Subsidiary, 1,600 shares of $100 par value all bought on June 30 for 250,000 Accounts Receivable 100,000 Cash 50,000 Advances to Subsidiary 75,000 $825,000 Liabilities Capital Stock $400,000 Notes Payable • 100,000 Accounts Payable 100,000 PROBLEMS IN ACCOUNTING 141 Surplus January 1, 1920 $100,000 Profits for year 1920 150,000 $250,000 Less dividends paid 25,000 225,000 $825,000 SUBSIDIARY COMPANY BALANCE SHEET December 31, 1920 Assets Plant $300,000 Accounts Receivable 50,000 Inventories 100,000 Cash 20,000 $470,000 Liabilities Capital Stock 2,000 shares $200,000 Notes Payable 55,000 Advances from Holding Company 75,000 Surplus January 1, 1920 $80,000 ♦Profits for 1920 60,000 140,000 I I' 1 ! 1 t $470,000 ♦Assume that the year's profit has accrued month by month. Problem 281 From the following three trial balances prepare a con- solidated balance sheet as at December 31, 1912, in the form you would draw it up for presentation to the stockholders of the parent company (The Safety Razor Company), showing as separate items therein (a) the total goodwill of the com- bined companies; and (b) the net profits accruing to the new corporation, viz., to the Safety Razor Company. II if t 142 PROBLEMS IN ACCOUNTING SAFETY RAZOR COMPANY TRIAL BALANCE December 31, 1912 Preferred Stock $1,500,000 Common Stock 1,500,000 Investments in Subsidiary Compan- ies: 4,000 shares of stock of L. W. Company and 4,000 shares of stock of Steel Blade Company, both of $100 each at cost $2,500,000 Accounts Payable 20,000 Dividends from Subsidiary Co.s 100,000 Administration Expense 25,000 L. W. Co. Current Account 100,000 Stel Blade Co. Advances 150,000 Cash 270,000 Organization Expenses 75,000 $3,120,000 $3,120,000 L. W. COMPANY TRIAL BALANCE December 31, 1912 Properties and Plant $325,000 Goodwill 250,000 Investment in Steel Blade Co., 2,000 shares of a par value of $100 cost- ing $300,000 400,000 Inventories 250,000 Receivables 195,000 Cash 90,000 Capital Stock (4,000 shares) $400,000 Accounts Payable 125,000 Steel Blade Company 175,000 PROBLEMS IN ACCOUNTING 143 Surplus (includes write-up of invest- ment) 710,000 Safety Razor Co 100,000 $1,510,000 $1,510,000 STEEL BLADE COMPANY TRIAL BALANCE December 31, 1912 Goodwill $ 50,000 Plant 325,000 Inventories 190,000 Receivables 105,000 L. W. Company 195,000 Cash 10,000 Capital Stock (6,000 shares) Accounts Payable Safety Razor Company Surplus or Deficit $600,000 90,000 150,000 35,000 i t $875,000 $875,000 In the preparation of your consolidated balance sheet be guided by the following assumptions : 1. That the Safety Razor Company was formed on March 28, 1912, and acquired its stock ownership in the two subsidiary companies, as shown in its trial balance, on April 1, 1912. 2. That at Jan. 1, 1912, the L. W. Company had a surplus of $605,000.00, and the Steel Blade Company a deficit of $50,- 000.00. 3. That no inventory was taken of either the L. W. Com- pany or the Steel Blade Company between January 1 and December 31, 1912, the business of the companies being con- tinued without interruption notwithstanding the change in the ownership of the capital stocks. It is estimated on reliable I 18? ; I I r : i' 144 PROBLEMS IN ACCOUNTING authority that from January 1 to March 31, 1912 the net profits of the L. W. Company were $30,000 and the net loss of the Steel Blade Company for the same period was $15,000. 4. That prior to December 31, 1912 the L. W. Company declared a dividend of $100,000 payable to the parent company which was duly taken up on the books of both companies, having been passed through the current accounts and charged against the surplus of the L. W. Company prior to December 31, 1912. 5. That the difference in the current accounts between the Steel Blade Company and the L. W. Company represents $10,000 merchandise in transit and $10,000, a charge for rental of warehouse for the last six months of 1912, which has been credited to the rent account on the books of the Steel Blade Company. Write off Yz of the organization expense of the Safety Razor Co. Problem 282 1. Following are the trial balances of Company A and its subsidiaries at December 31, 1920: Debits Co. A Co. B. Co. C Cash $ 75,000 $ 50,000 $ 60,000 Accounts Receivable 350,000 190,000 420,000 Notes Receivable 200,000 60,000 40,000 Inventory, raw material, Jan. 1, 1920 150,000 105,000 160,000 Purchases, raw materials 650,000 400,000 510,000 Labor 450,000 320,000 370,000 Manufacturing Expenses 190,000 190,000 205,000 Selling Expenses 85,000 40,000 75,000 Administrative Expenses 45,000 25,000 35,000 Inventory, goods in process, Jan. 1, 1920 80,000 70,000 75,000 Inventory, finished goods, Jan. 1, 1920 90,000 65,000 80,000 PROBLEMS IN ACCOUNTING 145 Plant and Equipment 900,000 400,000 750,000 Investment in Stock of Com- pany B 875,000 Investment in Stock of Com- pany C 1,200,000 $5,340,000 $1,915,000 $2,780,000 Credits Capital Stock $3,000,000 $ 500,000 $ 800,000 Notes Payable 110,000 80,000 60,000 Accounts Payable 100,000 65,000 250,000 Bonds Payable 500,000 Premium on Bonds 5,000 Reserve for Depreciation 100,000 60,000 112,500 Sales 1,400,000 1,050,000 1,250,000 Surplus 125,000 160,000 307,500 $5,340,000 $1,915,000 $2,780,000 The inventories at December 31, 1920, were: Co. A Co. B Co. C Raw Material $280,000 $175,000 $210,000 Goods in Process 95,000 80,000 85,000 Finished Goods 135,000 145,000 105,000 Company A purchased the entire stock issues of Com- panies B and C at January 1, 1920, at the price shown in the trial balance. During the year each of the three companies declared and paid a 5 per cent, dividend. Company A took up its dividends from Companies B and C by credits to surplus. The various entries for the dividends were the only entries affecting the surplus accounts during the year. At December 31, 1919, Company A's inventory of raw ma- terial included goods purchased from Company B at a price of $60,000, the cost thereof to Company B being $40,000. At the same date Company B's inventory of raw material included goods purchased from Company C for $75,000, on which Company C made a profit of $25,000. 146 PROBLEMS IN ACCOUNTING (If Finished Goods $4,000 5,000 During 1920, Company C sold goods to Company B at a price of $200,000. These goods cost Company C $160,000. Company B still owes $30,000 on these purchases, the in- debtedness being included in the accounts payable. During 1920, Company B sold goods to Company A at a cost of $300,000 and at a selling price of $375,000. Company A made cash advances totaling $400,000 to Company B during the year. The sales just mentioned were charged against the advances account, the $25,000 balance of which is included in Company B's account payable. The inventories at December 31, 1920, include intercom- pany profits as follows : Raw Goods in Material Process Company A $20,000 $5,000 Company B 30,000 6,000 Company A*s bonds were issued July 1, 1920. They bear 5 per cent, interest, payable semi-annually and mature in five years. No interest has been paid. Allow depreciation at 5 per cent, per annum on the cost of the fixed assets. Prepare the following consolidated statements : Cost of goods manufactured and sold. Profit and loss statement. Surplus statement (showing as the final balance there- in the surplus balance appearing in the consolidated balance sheet). Balance Sheet Problem 283 On January 1, 1913, the A B Company purchased 90% of the stock of the X Y. Company and 80% of that of the P Q Company, two subsidiary companies which it thus con- trolled, and in fact actually directed the policy and general administration, the minority holdings in each case being in the hands of the ofificers and employees of the subsidiary com- pany or of other interests friendly to the A B Company. On fcj^ PROBLEMS IN ACCOUNTING 147 June 30, 1913, the holdings of the X Y Company were reduced to 80% by the sale of 100 shares of $200.00 per share to cer- tain employes not heretofore stockholders; while in the case of the P Q Company, owing to the resignation of an officer, his holdings, consisting of 100 shares, were purchased at par, the holdings by the A B Company being thus increased to 90%, so that on December 31, 1913, the proportion of holdings in the two companies was exactly reversed. The following are the trial balances of all three companies (after closing) at December 31, 1913 : t 1^ l 4 148 PQ P^ PROBLEMS IN ACCOUN U o o o o o o o o o •^ •* •* o o o O tH iH r-t >o <^ a> CO Oi pq w U s 4^ o o o o o o o o CO «o 00 CO u IS- o o o o o o iO o ^ < iO o o o o o o 00 CO £/>• CO 1—1 C/3 CO (0 00 CO CO C5 CO two u >H > 3 o a i2 •• CO CO CO CO CO QJ (U •> rO Cu < c^ o 6 ^Pl, CO CL, p PQ ^ ^ ^ ^^ CJ u u ^ to t; ^-< CO g giSPQ>^as^ u C o ex ^ ^ u a.^XQ^ H U QhO in riNG D 1 ° D 1 D 0, 1 1 0" »o CO <3i •^ •* iO 01 05 D 1 <=> D D 1 0^ 1 »o ?H GQ CO •>k •Nt 1— D D CD W- 1 < 0^ CO tH 10 • « CO n3 < 1 1 i: ?, -4- t Jh t- 3(5 c I I PROBLEMS IN ACCOUNTING 149 a; 0) (\J V 0} l) CO CO a; 03 CO CO v tUO »H CO w o c« vi •S *« .^ CO a — ' •a CO rt CO a; (U CO i> bz) C •i-i a; CO CO ^ ,D CO n CO Vh o; 6 J5 c -r rt a; v V 7\ •«-H '^ o CO o .t; 5 ^ (D »»-i cti ctJ hJ O -I— Ph rH 0^ I-I CO a PL. CO CO o U 1; X ^ .s h CO Qh O P rt u 3 ^ CO CO »o CO ill 150 PROBLEMS IN ACCOUNTING SECTION VIII. Accounting for Holding Companies and Mergers. (b) A merger usually carries with it the voluntary action of corporations made toward combining their interests under one operating name. Expert talent is expended on arriving at an equitable valuation of the net assets of the merging companies, and the amalgamation stock is issued to the sev- eral interests in accord with that valuation. Sometimes the stock is issued direct to the individual companies, each one of which distributes the new stock in return for the old as the final act of dissolution; or the new stock is exchanged for the holdings of the stockholders, dealt with as individuals. An entirely new company may be organized to take over the assets and liabilities of the old, or one of the old companies may issue newly authorized stock (simple expansion) with or without a kind of accompanying process of reorganization. Where a stock allowance greater or less than the book value of the net assets is made in taking over a company through a merging of interests, it becomes necessary to recognize goodwill or a reduction of surplus, as the case may be. An interesting problem is presented by the merging of companies one of which is an investor in another. Problem 284 Assume that the Roman Cut Stone Company and the Arawanna Quarry Company agree to amalgamate under the name of the Arawanna Quarry Company. This latter com- pany is to reorganize and to secure a new authorization from its state to issue sufficient stock to cover the merger. The following are the balance sheets of the two companies just prior to the proposed merger : Roman Cut Stone Co. Balance Sheet January 31, 1920 Assets Liabilities Property $100,000 Capital Stock $150,000 Miscellaneous Assets. 80,000 Surplus 30,000 $180,000 $180,000 PROBLEMS IN ACCOUNTING 151 Arawanna Quarry Company Balance Sheet January 31, 1920 Assets Liabilities Property $250,000 Capital Stock $300,000 Investment in Ara- Acc'ts Payable 50,000 wanna Co., 1,000 Surplus 100,000 Shares, Par Value $100 100,000 Miscellaneous Assets 100,000 $450,000 $450,000 The reorganized company is to give one and one-half shares of new stock for one of the old. (Note that after ac- quiring the old stock of the Arawanna Quarry Co. the amal- gamation is a stockholder in the Roman Cut Stone Co., and need not distribute shares to itself.) Set up a series of bal- ance sheets reflecting the progress of the merger, assuming in one case that the amalgamation issues the new stock di- rectly to the old holders, and in the other that it deals directly with the merging companies. Also assume, in both these cases, that the amalgamation makes a stock allowance for the Roman holdings among the Arawanna Company's assets, according to one plan, and does not, according to another. Problem 285 Make the accounting entries, and show the balance sheet resulting, for the amalgamation of the following two com- panies : Blue Bell Mining Company Assets Liabilities Mine and Plant $525,000 Accounts Payable.... $ 20,000 Accounts Rec 20,000 Capital 400,000 K. D. Corporation . . . 10,000 Surplus 140,000 Cash 5,000 $560,000 $560,000 ■■f I 152 PROBLEMS IN ACCOUNTING K. D. Corporation Assets Mine and Plant $600,000 Accounts Rec 30,000 Cash 10,000 Bullion in transit 50,000 Liabilities Accounts Payable $ 30,000 Blue Bell Mining Co. 10,000 Capital 500,000 Surplus 150,000 $690,000 $690,000 Note: Assume that neither company is to have control in the merged organization. Problem 286 Three manufacturers, each having an independent busi- ness and wishing to effect a consolidation of their respective interests, organize the United States Manufacturing Com- pany, a corporation with an authorized capital stock of $1,500,- 000, half common and half preferred. They sell to the new corporation all of their real estate, buildings, machinery, tools, fixtures, merchandise and supplies, in consideration of $1,500,- 000, and agree to accept in payment $750,000 preferred and $750,000 common stock of the new corporation. The three vendors then donate to the treasury of the corporation $150,- 000 of preferred and $150,000 of common stock to provide for working capital. The company sells $100,000 of its preferred stock in the treasury for 80% cash, giving a bonus to the purchaser of 20% in common stock. For the purpose of raising additional funds for improve- ments and additions to plant, the corporation mortgages its real estate and buildings as security for an issue of bonds amounting to $250,000. These bonds the company sells to bankers at 90%, giving as a bonus 10% of preferred stock and 20% of common stock. Draft entries to express correctly the above transactions on the books of the corporation, and prepare a statement of assets and liabilities of the company. Pi! PROBLEMS IN ACCOUNTING 153 Problem 287 A promoter secures options upon the plants of three com- peting companies, A, B and C. He proposes to organize the Doe Co. with an authorized capital of $700,000, of which $300,000 is common and $400,000 is preferred stock, each having a par value of $100 a share. His plan includes $150,- 000 of 4% first mortgage bonds convertible at the holder's option into preferred stock at 105 or redeemable at the com- pany's option at 110 plus accrued interest. The companies A, B and C have the following status respectively, including cash: Assets 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 6,000 55,000 The promoter's options provide that these companies are to sell their properties on the basis of $125,000 to A, $100,000 to B, and $75,000 to C, payable ^ in cash, J/2 in preferred stock and ^ in bonds of any company that may be formed to take over these properties. It is also agreed that if the promoter elects to exercise his options and acquire the prop- erties covered, the liabilities of each company are to be as- sumed by the purchasing company. M, N and O incorporate the Doe Co. as outlined above, each subscribing for 10 shares of common stock, paying 50% in cash so as to qualify as incorporators and directors. At the first director's meeting the bonds are authorized and the Doe Co. through its directors agrees with the promoter to take over his options, issuing in payment thereof to him $250,000 in common stock of the company. It is also agreed in consideration of such stock that the promoter is to fur- nish $100,000 in cash. To provide additional working capital and to assist in its financing the promoter donates to the com- pany $75,000 in common stock. The Doe Co. takes over the property and liabilities of the other corporations. $100,000 ,' r IT ■ ; t 154 PROBLEMS IN ACCOUNTING of the preferred stock is underwritten by bankers at 110 in cash with a bonus of one share of common with every four shares of preferred. To be able to fund a part of its assumed liabilities the Doe Co. sells the balance of its bonds at 90, giving a bonus to the purchaser of 20% in common stock, and applies the proceeds to pay off the liabilities assumed. As the result of various bargains other creditors agree to take $75,000 of the common stock available for issue and sale at an average price considering the various stock bonuses given of 80. All common stock has been issued. $50,000 of the bonds are converted after issuance into preferred stock at 105, the holder paying the premium in cash to the company. The directors then exercise their option and retire and cancel $35,000 of the company's bonds at 110 paying the premium in cash, balance in preferred stock. (Neglect accrued interest.) Draft Journal entries to give effect to the above facts upon the books of the Doe Co. and present a properly drawn Balance sheet showing the position of the company, after these entries have been posted. SECTION IX. Miscellaneous Problems. Under this head will be considered cases requiring com- parative statements and "funds provided" statements, cases involving installment and consignment sales, joint ventures, accounting for estates, agency and branch accounts, long- time contracts, etc. Problem 288 General Balance Sheet, X. Y. Z. Co., December 31 Assets 1911 1910 Plant, machinery, patents, goodwill, etc.$ 6,978,288 $6,922,185 Securities owned 1,121,670 1,121,670 Treasury securities 237,000 237,000 Cash 92,385 241,966 Accts. and Bills Rec 1,143,211 1,116,893 PROBLEMS IN ACCOUNTING 155 Sinking fund assets 183,906 200,787 Inventories 1,405,138 1,109,835 $11,160,598 $10,950,336 Liabilities Capital stock $ 6,485,800 $6,485,800 Bonded debt 2,000,000 2,100,000 Interest on bonds 122,213 122,388 Accounts and bills payable 196,740 119,717 Reserve for taxes, etc 9,002 12,495 Sinking fund 682,906 600,787 Surplus 1,663,937 1,509,149 $11,160,598 $10,950,336 (a) What is the origin of the sinking fund of $682,906 appearing on the liability side? (b) How has the sinking fund been invested? (c) In 1911 the corporation paid a dividend of 4:%. What were the profits for the year? (d) What, in general, is the utility of the "comparative" balance sheet, and why would it be desirable to show the percentages of increase and decrease of the several items? (e) Can you see any reason why the executive would want to know the relation to the total which each item bears? Problem 289 Assets 1912 1913 Real Estate and Plant $ 60,000 $ 57,000 Machinery 10,000 9,000 Merchandise 39,321 44,771 Accounts Receivable 30,219 26,109 Loans to Directors 10,000 15,000 Cash 10,600 7,260 Total $160,140 $159,140 4 (ti H I 156 PROBLEMS IN ACC0U:NTING Liabilities Capital Stock $100,000 $100,000 Notes Payable 20,000 22,000 Accounts Payable 30,140 27,140 Surplus 10,000 10,000 Total $160,140 $159,140 Assume that you are the Cashier of a local bank and a request is made by the corporation whose balance sheets are shown above for a loan of $20,000. State whether or not you would grant the accommodation and give your reasons fully. Problem 290 Dartmouth Manufacturing Corporation General Balance Sheet, October 1 Assets 1907 1908 1909 Real Estate $ 458,709 $ 473,553 $ 466,614 Machinery 616,675 644,468 726,397 New Construction 644,184 Merchandise 393,570 634,735 669,953 Cash & Debts Receivable. . . 653,681 648,013 706,227 Totals $2,122,635 $2,300,769 $3,213,375 Liabilities 1907 1908 1909 Common Stock $ 600,000 $ 600,000 $1,200,000 Preferred Stock 337,820 Funded Debt 450,000 450,000 800,000 Bills Payable 150,000 Accounts Payable 20,529 24,505 61,940 Reserve for Bonds 150,000 175,000 200,000 Reserve for Depreciation .. . 100,000 175,000 175,000 Profit and Loss 802,106 876,264 288,615 Totals $2,122,635 $2,300,769 $3,213,375 PROBLEMS IN ACCOUNTING 157 (a) What were the profits for the year ending Oct. 1, 1909, assuming that no cash dividends have been paid and that the increase in common stock outstanding represents a stock dividend. (b) Where did they get the money to make the exten- sions added in 1908-09? Why didn't they use the surplus to make these extensions? Problem 291 Below is shown the liability side of a corporate balance sheet for the year ending Dec. 31, 1912. There are also shown various assumed balance sheets for the year ending Dec. 31, 1913. Give the history of the business during the year 1913 as shown by the assumed balance sheets (a) to (g). Dec. 31, Liabilities Dec. 31, 1913 1912 (a) (b) (c) Capital Stock... $ 800,000 $ 800,000 $1,200,000 $ 800,000 Bonds 500,000 750,000 500,000 500,000 Bills Payable . . 960,000 840,000 600,000 740,000 Accounts Paya- ble 320,000 160,000 300,000 280,000 Surplus 30,000 60,000 10,000 70,000 Total $2,610,000 $2,610,000 $2,610,000 $2,390,000 Liabilities 1913 (d) (e) (f) (g) Capital Stock.. $1,000,000 $1,000,000 $1,200,000 $1,000,000 Bonds 600,000 750,000 300,000 400,000 Bills Payable . . 960,000 800,000 600,000 760,000 Accounts Payable 320,000 320,000 400,000 270,000 Surplus 30,000 80,000 Total $2,910,000 $2,950,000 $2,500,000 $2,430,000 *A deficit of $20,000 appears on the asset side of the balance sheet. «r 158 PROBLEMS IN ACCOUNTING Problem 292 For the years ending December 31, 1913 and 1914, the bal- ance sheets of The Acme Specialty Company are as follows: Assets 1913 1914 Real Estate and Plant $300,000.00 $280,000.00 Machinery and Tools 100,000.00 90,000.00 Raw Materials and Goods in Process 46,313.00 37,642.00 Finished Products 53,687.00 62,358.00 Bills and Accounts Receivable.... 71,600.00 60,084.00 Sinking Fund 28,400.00 33,916.00 Depresiation Fund 30,000.00 Cash 5,049.66 14,128.87 Totals $605,049.66 $608,128.87 Liabilities Common Stock $200,000.00 $200,000.00 6% Preferred Stock 100,000.00 100,000.00 6% Bonds, 1st Mortgage 100,000.00 100,000.00 Bills and Accts. Payable 84,011.44 78,128.72 Accrued Liabilities 3,099.56 6,084.28 Sinking Fund 28,400.00 33,916.00 Reserve for Bad Debts 4,499.00 3,999.87 Reserve for Depreciation 25,000.00 25,000.00 Surplus 60,039.66 61,000.00 Totals $605,049.66 $608,128.87 No machinery or real estate has been sold during the year. At the end of 1914 the company paid a dividend of 6% on the Preferred Stock and 3% on the Common. What were the total profits for the year? How was depreciation provided for? PROBLEMS IN ACCOUNTING H o »-♦■ ^ m w ^ O •O n> '-I 2 f? =* -t O (T) »- ►-. o '^ o 'rHx ? 3 to ^^ GO o en O W 00 00 00 •a ft 2! en M M CO O ^^ ui crt o rf*^ "^ o CO ^o ^ w ^ "o 00 O) ^ CO o o tS tS CO Oi O ^ o o ^3 o o JU c 3 ^ "O < o n 03 •-1 P ^^. o 3 ble de bonds P a* t3 n n S r* -t d o •-I 3* rt» P CO en • n> • H o ■€« JO OS O O o o P o o o o o o o M 050 (-'"bs'coorf^o OMOOt3CO- OS o "o "c« o "m o 04-^*^Qococi»ooo ;OC;iC;tOlCiO)000 ^^ po o o ■69 00 "oo 00 -* 00 OS OS • < • M t3 • OS ^s . O o o I •-3 4»- . O 4»- O . - en • h-' OS O • O O' . t3 4>. O • ■M M OS o o o «« o o o 00 OS 00 "lo OS o • * • < HI *^ m: ; V oi ; OS *j ; -a en CO OS ■ «o O ' o CO . OS 00 • • gg 4^ O • . «j o h* OS o o o «« o o o ■M M OO "^ OS CD "«o OS o hdhd 3 n> > p p 3 O 3 C P 3 •-t «-»• ?r CO en P^^3 ^ "> H. 2 p o 3* p P O 1 O OQ O n> c CO j3 en o n) < p ?r "rf*. H^ O 00 "O OO S OS W CO OS O 4^ lI "os ^ "co en "o "bo ^^ o o o o M en OS tf*. to O OS CO 4^ 4^ CO o ^ ^-' O CO o 00 CO I-' OS 00 O OS 5" J*' ^ M P J"' "4*. 4»- "bs "bo ^ "en OS CO is3 en o t-i 4- M on CO O O o ■^ ^^ M -a en . 00 4>> . ^^ O . ^ en • OS ^^ • OS o • en M "(D "co "o o en w CO en o o M JO OS O O CO "en 4»- "to OS "o bo to f* 00 CO Q h-i O M 4>- CO O CO M j-i ^k^ en jS " r > r > n w w CO CO CO CO CO CO CO V H* I-* o o o o I-* O CO 00 -^ OS JJO JO J>0 JN3 "*4i. io 1-1 io O ^9 CO -4 OS M p CO ^ ^ 00 ~co 4». OS -a M CO 00 -^ H* to to W OS "cO P /-v O -^ 3 t3 00 OS 3 en CO tooq en OS 4^ en CO CO 4^ 00 «> CO ?; "4". "m "o 'r-l "-^ 00 2 CO 00 CO 00 OS en p o OS en «sj o 4»- P^ S o •-I n n p o 3 to to ^ W p o 00 «a 00 to CO ^ t>s en M CO CO CO M 4»- O O 4k. OS CO g. "O "4*. ^ uu O O O CO m "o o o"bo ?« o O O 4*. O O O 00 ^ o O 3 01 CO < ■^ O ^ M M J-* ir. CO CO is3 Iss "bs "en ^. OS OS 00 o o en Q. a> P P p p S^ n "o o o "o o ~o 3 o o o o o o o. O O O o O O CO 159 o I-' A 3 Is O CO > o o > H n n O n O w > n n o H »<; w > W O W d w p CO •^ M JO en 00 ^_t. 4A CO . OS H' o -. CO . ^^ o o H* -^ 4^ O ~i 4>> OS CO OO • CO OS o en O 4>> OS 00 o -a o • to en p 00 h-i 00 4^ -q -a "^ ta • CO en o o CO to -a OS OS o t i:^ ri i 160 PROBLEMS IN ACCOUNTING In 1907 there was written off against surplus for reduc- tion in value of pine lands and stumpage $703,497. For reduc- tion in patents, rights, trade marks, etc, $917,371. (a) On the basis of the figures presented above explain the changes in surplus for each year. (b) What was the surplus appearing on the balance sheet for Dec. 31, 1906? (c) Give a history of the business for the years 1907 to 1911, as shown by the figures presented. Problem 294 Prepare a statement of resources and their application for the 12 months ended December 31, 1930, using the following data: THE HALL MANUFACTURING COMPANY- BALANCE-SHEET Assets Dec. 31, 1919 Dec. 31, 1920 Cash $ 6,000 $ 1,800 Accounts receivable 30,000 32,000 Raw material 12,000 14,500 Goods in process 16,000 17,500 Finished goods 21,000 19,000 Land "^0,000 100,000 Buildings 115,000 170,000 Machinery 90,000 100,000 Tools 26,000 23,000 Patents 30,000 28,000 Discount on bonds 2,000 Investment in stocks 25,000 Advances to salesmen 500 1,000 Unexpired insurance 300 250 $440,800 $509,050 / PROBLEMS IN ACCOUNTING 161 Liabilities Accounts payable $ 35,000 $ 10,000 Notes payable 25,000 5,000 Bank loans 20,000 Bonds payable 200,000 300,000 Reserve for depreciation, build- ings and machinery 20,000 29,000 Reserve for bad debts 1,200 1,500 Reserve for construction 16,000 20,000 Capital stock 100,000 100,000 Surplus 23,600 43,550 $440,800 $509,050 Following is an abstract of the surplus account : Balance January 1, 1920 $23,600 Add net profit for 1920 8,950 Add appraisal increase in land 30,000 Total $62,500 Deduct credit to reserve for construction.. $ 4,000 Deduct dividends paid December 31, 1920. . 15,000 19,000 Balance, December 31, 1920 $43,550 Depreciation was provided during the year as follows : Credited to reserve for depreciation, buildings and machinery $10,000 Written off from tools 5,000 Written off from patents 2,000 During the year machinery which cost $7,000 was sold for $6,000. The loss was absorbed in the reserve for depreciation. Problem 295 (a) Assuming figures, draw up a comparative profit and loss statement, showing percentages of increase and decrease m 162 PROBLEMS IN ACCOUNTING of the various items. Write a brief discussion of what the statement means to you, and of what the business executive could get out of it. (b) Explain and illustrate a ''cumulative revenue state- ment." Problem 288 From the following comparative balance sheets of the ABC Company at December 31, lUlT, and December 31, 1918, prepare a short statement showing funds realized during the year and the disposition made thereof : Assets Dec. 31, 1917 Dec. 31, 1918 Capital Assets -, $ 600,000 $ 900,000 (Replacement values, as shown by ap- praisal, were used at December, 31, 1918.) Inventories 1,000,000 1,160,000 Accounts Receivable 850,000 800,000 Cash 200,000 550,000 Deferred Charges 20,000 10,000 $2,670,000 $3,420,000 Liabilities : Capital Stock $1,000,000 $1,000,000 Bonds (Issued at Par) 500,000 Capital Surplus, representing excess of sound replacement value of appraisal at December 31, 1918, over the book value of capital assets at that date.. . . 150,000 Bank Loans 750,000 400,000 Reserve for Depreciation and Replace- ment (the Reserve at Dec. 31, 1918, represents the difference between the replacement and sound value of the appraisal at Dec. 31, 1918) 100,000 200,000 Surplus 320,000 570,000 $2,670,000 $3,420,000 PROBLEMS IN ACCOUNTING 163 Problem 297 Assuming transactions, show by journal entries and accounts how you would deal with (a) sales on the installment plan and (b) sales on consignment. In regard to (a) the student should note that the Income Tax Unit permits either of two bases of account- ing for income from installment sales, namely, on the basis of the expected profit from the entire sale, and on the basis of actual installments when paid. Problem 298 Explain how you would go about providing for losses through bad debts. What, in your opinion, is the proper place for the bad debts charge in the income statement? Give full statement of your reasons. Probleni 299 Give a complete discussion of the different theories concern- ing accounting for cash discounts on purchases and on sales. Problem 300 On January 25th R. Rollins and K. Karr joined together, equally, in an investment of merchandise amounting to $5,000. Ten days later both buy for joint accounts additional merchandise costing $10,000. The day following Rollins contributed $2,000 in merchandise to the venture, and Karr $1,500 in merchandise, which both took from the shelves of their individual stores, Karr paying $500 in cash to Rollins to even up the account. On March 1st Rollins sells on joint account merchandise bringing him $8,000 in cash. On the same date each drew $1,000 worth of merchan- disse. On March 15th Rollins sells Ray & Ruff, wholesale mer- chants, property from his own business, asking in return an equiv- alent in their goods amounting to $6,000, which he treated as bought jointly for himself and Karr. Rollins makes a sale on the same date amounting to $5,000. He is allowed 3% commission on all of his sales. On April 1st the partners agree to close their 164 PROBLEMS IN ACCOUNTING m speculation and joint account, and each take over one-half the remaining unsold merchandise, which was valued at $12,000. Exhibit the journal entries on RolHns' books, and ledger accounts with the joint venture and with Karr. Where there are three or more partners concerned in a ven- ture of this kind, how would settlement between them be effected at the close of the venture? Assume a simple case involving three partners, and exhibit the accounts at the end, explaining the pro- cedure of settlement. Problem 301 (a) How would you show in the accounts of the consigner goods which have been shipped and reported damaged and unsal- able by the consignee? In the accounts of the consignee? (b) Assume transactions covering the typical consignment, and exhibit the accounts of both consignor and consignee during the progress of the deal, explaining how the situation should be made to appear on the two balance sheets. Problem 302 (a) Distinguish between an agency and a branch. In gen- eral what is the plan of accounting for agency and for branch transactions ? (b) If a complete statement of condition of the affairs of the "home office" were required, how would you set about pro- viding it? Problem 303 Compile from the following particulars, supplied by the branches, an account with each branch in the books at the head office of the Wholesale Company, whose year ends December 31, 1909, bringing down the balances as they should appear on Janu- ary 1, 1910. Also prepare a statement showing the profit of each branch. The branches receive all their goods from the head office and pay in all their cash every day. They keep their own sales ledgers PROBLEMS IN ACCOUNTING 165 and do their own collecting. All payments for wages and expenses at the branches are drawn by check from the head office on the Imprest system. A B Merchandise received from the Head Office. $10,360 $10,730 Cash received from customers 11,450 10,340 Allowances to customers 15 35 Returns from customers 75 200 One year's charge sales to Dec. 31, 1909 10,870 12,605 Cash Sales 8,400 5,700 Bad Debts 280 530 Inv. of Mdse. at Jan. 1, 1909 2,300 2,500 Debtors at Jan. 1, 1909 8,270 5,730 Debtors at Dec. 31, 1909 7,320 7,230 Inv. at Dec. 31, 1909 3,750 4,320 Rent and Taxes paid 600 * 730 Wages and other expenses 2,020 2,310 Problem 304 A company with head office in Chicago and factory at South Bend, Indiana, conducts three selling branches in New York, San Francisco, and Montreal, which are supplied with goods from the factory, the invoices being sent out from the head office. The branches keep their own sales ledgers, send out monthly statements to customers and receive cash against their ledger ac- counts, which they remit weekly to Chicago. All branch expenses, including salaries and wages, are paid by the branches from petty cash accounts, kept at a fixed balance of $500, by draft on the head office. The following information is supplied by the branches at December 31, 1913, summarizing the transactions of the previous six months : San New York Francisco Montreal Rents and taxes paid $ 200 $ 175 $ 75 Sales for 6 mos. to Dec. 31, 1913 . . 12,500 11,800 10,225 '4i 166 PROBLEMS IN ACCOUNTING Salaries and wages 1,650 1,520 1,600 Returned sales 200 100 250 Allowances to customers 50 40 40 Bad debts 125 60 Cash sales 6,250 5,380 6,100 Cash received from customers on ledger accounts 10,850 10,260 9,150 Debtors July 1, 1913 5,820 6,140 7,240 Debtors December 31, 1913 7,220 7,415 7,975 Petty cash on hand July 1, 1913 . . 500 500 500 Petty cash on hand Dec. 31, 1913. 500 500 500 Stock July 1,1913 3,450 3,820 3,650 Stock December 31, 1913 4,300 4,720 4,500 Goods received from Head Office factory 11,500 10,240 10,350 From these details prepare branch accounts as they should appear in the head office books and draw up a final general trial bal- ance with branch profit and loss accounts. Problem 305 A New York corporation builds a plant and establishes a branch in Liverpool, England. At the expiration of its fiscal period a trial balance is forwarded to the New York office as fol- lows: Plant £250,000 Accounts rec 187,500 Expenses 25,000 Inventory (end of fiscal period) 50,000 Remittance account 150,000 Cash 12,500 Accounts payable 87,500 Income from sales 250,000 New York Office 337,500 i675,000 i675,000 PROBLEMS IN ACCOUNTING 167 A trial balance of the New York books at the same date was as follows : Capital stock $2,500,000.00 Patents $1,500,000.00 London account 1,640,250.00 Remittance account 729,281.25 Expenses at New York 25,000.00 Cash 64,031.25 $3,229,281.25 $3,229,281.25 The remittance account is composed of four sixty day drafts on Liverpool for £37,500 each, which were sold in New York at $4,855, $4.86, $4,865, and $4.8675 respectively. Prepare a balance sheet of the New York books after closing and a statement of assets and liabilities of the Liverpool branch reconciled with the New York books. Close the books at rate of exchange on last day of the fiscal year of $4,875. Conversion of the remittances are to be made at the average rate of the four bills. Problem 306 A in London in current account with B of New York, engages an accountant to prepare a statement to be mailed to B, from the following data : DEBITS 1914 May 12 £ 750 May 30 117 June 12 340 July 1 150 Total debits ^1,357 m 168 PROBLEMS IN ACCOUNTING CREDITS 1914 June 10 £ 500 June 30 300 Total credits £ 800 Balance £ 557 Find the average due date of the account and the interest at 5% to July 1, 365 days to the year. Problem 307 A firm, having several branches, maintains an account with each branch in the ledger and charges all such accounts with goods sent the agents for stock. When the inventory of stock is taken, the balance of each branch account is treated as an ordinary Ac- counts Receivable and is included in the general debts owing to the firm. If you see any objection to this method say how you would deal with the accounts. Problem 308 On what two bases are contract jobs entered into? Discuss the theory of taking profit on contract jobs extending over one accounting period. (Note the ruling of the Income Tax Unit concerning income to be taken by contractors.) Problem 309 The assets of Richard Duke, deceased, were appraised by the Probate Court as follows: Appraised Disposition under the Value will House $ 2,000.00 To his brother Gustave. Bond holdings* 6%, pay- able June 30 and Dec. 31 112,551.39 To his widow for life, and then to his two sons, Harold and Peter, equally. PROBLEMS IN ACCOUNTING 169 Real Estate Lot No. 1 10,000.00 Cash to his sons $5,000 Lot No. 2 8,000.00 each, and the remain- Business block 30,000.00 der of the estate to the Household goods 2,000.00 widow. Cash 2,000.00 *These bonds ($100,000) bought to yield 6% on December 31, 1920. The death of the deceased took place on March 31, 1921. Debts amounting to $400, funeral expenses of $450, and the legal and probate expenses of $900 were all paid in cash. In April, 1921, Lot No. 1 was sold for $12,000, and by the consent of all the parties Harold took Lot No. 2 in discharge of the bequest to him, and paid the estate $4,000 in cash. The widow died on July 31, 19^2. Her entire estate was left to the brother-in-law. Prepare the statements necessary for presentation to the court in closing the estate as of December 31, 1922. Problem 310 There are three partners in a trading concern — X, Y, and Z — with equal amounts of invested capital, on which they each draw 5% interest. The net profits of the business, before charging interest, amounts to 20% of the entire capital. The net profits after charging interest are divisible as follows : X, one-half ; Y, one-third; and Z, one-sixth. Taking the interest and net profits together, prepare accounts showing the respective proportion of the profit to be credited to each partner. Problem 311 It has been said that there are three tests of the correctness of an accounting entry; first, does it disturb the integrity of the balance sheet? second, does it disturb the integrity of the peri- odic income account? and third, does it disturb the integrity of the "interior" classification of accounts, regardless of the ulti- mate effect upon the balance sheet or the income account? Com- ment upon each, explaining fully. I 170 PROBLEMS IN ACCOUNTING In view of your understanding of these tests, comment upon the various erroneous practices of treating bond discount and bond premium on the books of either the issuer or the purchaser. Problem 312 A and B are equal partners, and their balance sheet at a cer- tain date was as follows: Assets Liabilities Machinery and Plant... $ 6,250 Creditors $10,000 Horses and Wagons. . . 1,250 A's capital 15,000 Furniture 750 B's capital 15,000 Stock 18,250 Debtors 11,500 Bank 1,500 Cash 500 $40,000 $40,000 They decide to admit C and D, the former to contribute $15,- 000 as his capital, and the latter, in consideration of his business connections, only to bring in $10,000, but his capital account to be credited with the same amount as C's. C and D accept A and B's balance sheet only with the fol- lowing corrections : Horses and wagons to be taken at $ 1,000 Machinery and plant 5,500 Stock 16,500 Debtors to be subject to 5% discount. Creditors to be subject to 3% discount. Adjust the accounts and prepare the beginning balance sheet of the new firm. Problem 313 In examining a business to determine and to show separately the profits for the two years ending December 31, 1907, it is found that an item amounting to $500 had been omitted from the inven- tory of December 31, 1905, that an error had been made in the PROBLEMS IN ACCOUNTING 171 footing of the inventory of December 31, 1906, by which that in- ventory was overstated to the amount of $250 ; and that in pricing the inventory of December 31, 1907, an error was made by which that inventory was understated to the amount of $1,000. State fully the effect of these errors on the profit of each of the two years. Problem 314 A manufacturing concern having increased its capital and in- vested considerable money in new machinery and in the recon- struction of old machinery, removes to a new location and charges the cost of moving and the reconstruction of the old machinery to one account termed "Installation.'* Explain fully how this ac- count should be treated in closing the books of the company, and give your reasons. Problem 315 (a) Determine the average life of the following fixed assets belonging to the Western Hardware Company : Estimated Estimated life Assets Cost scrap value in years Buildings $100,000 $35,000 20 Machinery 70,000 25,000 15 Tools 20,000 5,000 10 Patterns 10,000 8 (b) After determining the average life of the fixed assets, state the amount of annual depreciation by the straight-line method. Problem 316 (a) A company with $500,000 of common capital stock, par value $100 a share, and a surplus account of $100,000, decides to change its capitalization from a par to a no-par basis. It there- fore calls in its 5,000 shares of par- value stock and issues in place thereof 10,000 shares of no-par value stock. How should the transaction be recorded? What effect, if any, will the change to a no-par- value basis have on the surplus account? 172 PROBLEMS IN ACCOUNTING (b) Suppose that a new company is organized with 10,000 shares of no-par-value stock and that this new company takes over all the assets and liabilities of the old company at their book value, issuing all of its capital stock in payment therefor. How would the transaction be recorded on the books of the new com- pany? Problem 317 A, B, C and D have decided to dissolve partnership. To that end they have liquidated all their liabilities; and at the date of the first division of cash among the partners the conditions are as follows: Partners Capital Loans Profit and loss ratio A $22,000 $ 7,000 40% B 19,000 6,000 30% C 12,000 14,000 20% D 7,000 13,000 10% Totals $60,000 $40,000 100% Cash available for distribution $20,000 Other assets not yet realized (of doubtful value) 80,000 Total $100,000 State which partners should participate in the distribution of the $20,000 ; how much cash each should receive ; whether the pay- ments should be applied against the capital accounts or the loan accounts. Explain the procedure of determining the distribution. Assume that none of the partners has any private property. Problem 318 (a) The Buffalo Forge Company has just issued $1,000,000 5% First Mortgage Bonds. By the terms of the Trust Agreement the company is required to set aside, out of profits, each year PROBLEMS IN ACCOUNTING 173 $50,000 in order to provide a fund for the ultimate redemption of the bonds. At the end of the first year the company uses $50,000 of its profits to purchase securities of other corporations, which securities it turns over to the Trustee. Name the four accounts which will be affected and give the journal entries. (b) At the end of twenty years the bonds fall due. The sinking fund assets are sold for cash and the bonds retired. What are the three journal entries which should now be made on the books of the company. Problem 319 A corporation charges all new machinery purchased to "New Machinery" account. This is merely a suspense account. At the end of the year, a portion of this account, equal to the cost of old machinery abandoned during the year, is credited out and charged to operating expenses, as Replacements. The remainder is credited out and charged to Machinery — a property account. In 1913 the company issued bonds to the par value of $1,000,- 000, which sold at a premium of 12%. The following entries were made: Cash $1,120,000 To Bonds $1,000,000 To New Machinery 120,000 What is the effect of these entries on the balance sheet? Problem 320 A manufacturer makes extensive investments in stocks and bonds, buying and selling from time to time as the market con- ditions warrant and clearing all such transactions through his reg- ular books of account. How should such transactions be isolated from his manufacturing operations and what books and accounts should he employ to record the details of the principal and income from such investments ? Problem 321 How would you proceed to ascertain the net sales, purchases, expenses and net profits of a business for a given period when the 174 PROBLEMS IN ACCOUNTING ledgers, sales books, purchase books and supporting documents have been destroyed by fire, and the only records available are the cash book, pass book and book of monthly balances, the latter con- taning all the ledger balances and annual balance sheets? (It is to be understood that no unusual transactions had taken place.) Problem 322 In the case of a company which has issued cumulative pre- ferred stock, but has not earned enough to pay such dividends in full for several years, how would you deal with the arrears of dividends due, if at all, on the company's balance sheet? Give reasons ? Problem 323 The machinery used by a firm has been purchased on the in- stallment 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 installments paid, and the royalty? Problem 324 On Dec. 31, 1912, the trial as follows: Real Estate $ 300,000.00 Buildings 158,000.00 Equipment 847,500.00 50,000.00 46,474.20 5,600.14 3,300.20 Goodwill Cash Discount Allowed Interest, General . Insurance paid in advance on plant 3,030.89 Accounts Receiv- able 156,028.75 balance of the M company was Discount earned .$ 10,120.52 Accounts payable . 75,871.38 Depreciation Re- serve Common stock . . Preferred stock . . Sales 1,371,491.17 Taxes accrued (est.) 5,300.00 Bills Payable 35,000.00 58,272.00 1,000,000.00 500,000.00 PROBLEMS IN ACCOUNTING 175 Inventory of raw Accrued interest material and on bills payable. 900.12 work in prog- First Mortgage ress Dec. 31, bonds (4%) .. 100,000.00 1911 184,567.39 Surplus 26,520.50 Operating, main- tenance, manu- facturing and general expenses 709,988.65 Depreciation 25,000.00 Purchases 691,985.47 Bond interest (one- half year to June 30, 1912) 2,000.00 Total $3,183,475.69 Total $3,183,475.69 The inventory of raw materials and work in progress on Dec. 31, 1912, is valued at $309,962.05. Before the books are finally closed it is determined to (1) make a reserve of one-half of one per cent or $140,000 of the accounts receivable to provide for possible bad and doubtful accounts; (2) add $1,000 to the taxes accrued (estimated) account; (3) carry to depreciation re- serve account a further sum of $5,000. Interest on bonds to Dec. 31st is also to be provided for. It is found that bona fide renewals of equipment, costing $17,500, have been charged to operating expenses ; that repairs to equipment, amounting to $6,000, have been charged to equipment account; that $1,500, proceeds of old machinery sold, have been credited to the sales account; and that a bill of $1,560.25 for raw material 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 the management. Make journal entries to give effect to the various adjustments above described and to close the books, creating (1) a combined 176 PROBLEMS IN ACCOUNTING Manufacturing and Trading Account, (2) a Profit and Loss Ac- count and (3) a Balance Sheet. Problem 325 Is there a 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 a depreciation, amortization or writ- ing off? Problem 326 Some proprietors keep a private ledger of their business, to which bookkeepers and clerks have no access. Explain the pur- pose of such a book, and show what accounts it usually contains and how it is made to agree with the general ledger. Problem 327 The bookkeeper of a manufacturing concern could produce only the following statement from its records on January 1, 1907 : Manufacturing expense $ 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 12/31/07). . 15,000.00 Materials and supplies (inventory) 4,289.34 Notes payable 5,000.00 Accounts payable 5,423.23 Interest on bonds (7 mos.) 393.75 Interest on notes and accounts payable.. 282.40 On January 1, 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 1, 1908. You find that during the preceding year the directors have subscribed in cash to $7,500 additional capital stock and have re- tired all the notes and accounts payable and that no interest was PROBLEMS IN ACCOUNTING 4 I 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 oflF to provide for depreciation, while an additional 2>^% was ordered placed in Reserve Account to cover repairs and renewals, the entire 7>4% being charged directly to Profit and Loss. The bonds outstanding fell due on December 31, 1907, and were 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 directly to Manufacturing expense and to credit back the amount of the in- ventory. The accounts payable (all for material and non-interest bear- ing) amount to $546.28. Of the accounts receivable, January 1, 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 manufac- turing expenses were $3,720.52, all paid in cash, the total manu- facturing expenses being 31% of the gross sales for the year end- ing January 1, 1908. Of these 91.3% was 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 1, 1907-08, and state the amount of gross sales for the year. Problem 328 The books of a manufacturing concern, operating under a system of cost accounts, shows 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 factory bur- den, also $12,074.92 to cover management charges ; finished wares in stock at total cost of $21,656.01. . 178 PROBLEMS IN ACCOUNTING The financial operations during the ensuing year include: Purchase of raw materials, $80,416.45; factory pay rolls, $125,- 793.00 ; factory expense, including wages not applied to cost ac- counts, $24,846 ; management expenses, $38,100 ; interest paid on loans, $1,200; income from investments, $5,004. The manufacturing operations during the same year com- prehend: 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 the preceding paragraph. Finished goods transferred from factory to warerooms, at prime cost, covering materials, $78,542.58, and labor $118,333.75. 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 the 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 of On Cost or Overhead Charges was as follows: Factory expense, 20% to materials and 80% to labor; management 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 : Mate- rials, $75,000; labor, $115,000; factory expense, $24,000; man- agement expense, $36,000. Open the general ledger accounts that control the cost ac- counts ; show the operation of each and the net profits resulting ; also calculate the percentage to be added to each $1 of material and of labor to give the total cost. PROBLEMS IN ACCOUNTING 179 Problem 329 A manufacturer is desirous of securing a partner and fur- nishes a statement covering five years' operations as follows: Assets Liabilities Buildings $20,000.00 Accounts and Bills Machinery and Fix- Payable $ 30,000.00 tures 75,000.00 Sales average per Invento^ Mdse. and year 500,000.00 SuppRes 50,000.00 Wages paid per year 170,000.00 Cash 5,000.00 Expense, Selling and Accounts Receivable. 40,000.00 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 ex- piration of lease. New machinery when installed ten years ago cost $50,000.00. Additional since cost $25,000.00 ; no depreciation has been charged off. All repairs and replacements charged to expense. What, in your opinion, would be a fair price to be con- tributed for a half interest? Explain fully. Problem 330 "The problem of the valuation of merchandise and materials inventories comes to focus in the balance sheet, and is summed up in the question. On what basis should pricing be accomplished, original cost or cost of replacement?" Show that this is inade- quate because it fails to consider the other statement of major importance, that is, the income statement. The importance of the balance sheet as a guide to economic conduct cannot be ques- tioned, but there are other figures in that exhibit besides asset bal- ances which can well be misleading, and perhaps in a more fun- damental sense. Explain. Possibly the person who wrote the above quotation had in mind the double aspect of the valuation problem, and did not intdid to give the idea that it was the pricing values of the inventories alone which were significant. Un- -< • ♦-▼■ !■ ^11 « 180 PROBLEMS IN ACCOUNTING doubtedly, the problem of inventory valuation should be ap- proached from two points of view, namely, that of the manager per se, and that of the investor per se. The former we may define as the person who should bid in an up-to-date intelligent manner for the maximum price obtainable for his product in a given de- mand situation. In competition with other managers, he must have available such current information as will enable him to do this, wisely and effectively. His function is to bring to his oper- ating unit the largest net return possible, and he can successfully perform that function provided only he follows all value changes in productive factors. As a minimum requirement, it might be said, the manager should try to offset unfavorable changes with favorable changes. Roughly speaking, the job of the manager might be said to contemplate a complete cycle of changes. This does not imply, of course, that the books should necessarily show all value changes. Discuss. The point of view of the investor, looked at narrowly as the person who assumes the burden of the irregularity of business costs and of business return, must be also carefully considered in connection with the valuation problem. The investor is the consumer of business income; that is, he is in position to withdraw from business a sum of liquid assets which purport to have been a return over and above capital. That return may be said to have been realized when invested capftal subject to value fluctuations normally incident to the business process have been converted back into assets which are not subject to such fluctuations, and which are not required economically to maintain the investment. The test of this realizatibn may be said to be the sale, and the basis, at least the provisional one, of measuring in- come from the sale may be said to be the original investment cost of the sale. What bearing has all this upon the problem of valu- ing inventories? How might one reconcile the demands of the two points of view, giving both the information they require, in preparing the current balance sheet ? Illustrate your points. PROBLEMS IN ACCOUNTING 181 Problem 331 How would you price inventories on the basis of original cost in the case of a number of shipments of merchandise remaining on hand which have lost their original identity, for example, ten ship- ments of J4"xlj^" stove bolts shipped at ten different prices and found in one bin in the store room? Problem 332 The following solution has been offered for the valuation problem: Carry all inventories at market, making a generous reservation from surplus to absorb unfavorable changes. Com- ment. Problem 333 The problem just preceding brings this question to the front: Should the current income figure be the difference between orig- inal cost of sales and sales (not considering other costs), or should we allow its ups and downs to be influenced by change in the "values" of unsold goods ? What is your answer. Problem 334 What application to the problem of balance sheet valuation have changes in the significance of the dollar? Would you con- sider it the accountant's business to allow for such changes? If so, what would you do upon having ascertained that the general significance of the dollar had dropped 100% ? .•Al'^ I / Mwa 1 * m I IPONTfiOW''^ i w\^ Ifalker Problems in accounting MAR i^£jW ti^ 4^ ijAN 13 192S JAN i ^ SEP 5 1933 oe % II II END OF TITLE