PROBLEMS IN ACCOUNTING DAVID FRIDAY PROBLEMS IN ACCOUNTING DAVID FRIDAY ANN ARBOR 1916 COPYRIGHT, 1915 BY DAVID FRIDAY THE ANN ARBOR PRESS ANN ARBOR PREFACE This text was originally intended for the use of students in the various courses in Accounting in the University of Michigan. It attempts to place before the student in the form of problems the more important types of concrete situations which present the neces- sity for accounting analysis. 357348 Problems in Accounting CHAPTERS II AND III i. Classify the following transactions into debit and credit items : (a) The book-keeper's salary is paid in cash, $20. (b) Coal to the amount of $60 is purchased. (c) A customer pays his account, $75. (d) The firm buys goods, $400, on a 6oday note. (e) The firm borrows $500 from a bank on a 6o-day note. (f) The firm settles an open account of $200 with a note. (g) The property of the firm is mortgaged for $4,000. (h) Interest is paid for capital-service rendered, $100. (i) Finished goods to the amount of $600 are sold on account to various parties. (j) The accounts mentioned in (i) are paid in cash. (k) Goods are damaged by fire, $200. (1) The plant depreciates in value, $600. (m) Fuel is consumed, $100. (n) The machinery is repaired, $50. (o) Cash, $200, is paid for labor services. (p) An insurance premium of $100 is paid in cash. (q) Taxes are paid, '$75. (r) Capital stock to the amount of $25,000 is issued for cash. (s) $10,000 of the above stock is exchanged for $10,000 in first mortgage bonds. (t) The bonds mentioned in (s) are paid with cash, $10,000. (u) Miscellaneous services are purchased with cash, $100. (v) Miscellaneous services are consumed, $100. (w) The firm gives $100 in cash to charities. (x) Dividends are paid in cash, $500. (y) $400 is received for rent of a portion of the factory. (z) The firm receives $30 in interest on its bank deposits. 2. Journalize the following transactions. Open the proper ledger accounts and post. 6 PROBLEMS IN ACCOUNTING (a) R. A. Taylor begins business with a capital (all in cash) of $10,000. (b) Mr. Taylor rents a store building, paying 3 months' rent ($180) in advance. (c) Merchandise is purchased, $3,000. Terms: $1,500 cash, and a 6o-day note for the balance. (d) Second-hand fixtures are purchased for $500 in cash. (e) Stock and fixtures are insured for one year; premium, $25. (f) Cash sales are made, $300. (g) Merchandise is sold on acount to J. R. Walters for $250. (h) Cash is paid for advertising, $10. (i) The clerk's salary is paid, $15. (j) Merchandise is purchased on account from E. P. Smith Co. to the amount of $500. (k) Merchandise is sold for cash, $350. (1) Miscellaneous services are purchased with cash, $40. (m) J. R. Walters returns $50 of merchandise as unsatisfactory. (n) Merchandise is sold on account to F. A. Talbot, $600. (o) Mr. Taylor draws $300 jinpash for his personal use. (p) The note mentioned in (c) is paid and interest for 20 days, $5. (q) Merchandise is stolen, $200. (r) Interest is received on bank deposit, $15. (s) Mr. Taylor buys the building he has been renting for $10,- ooo. Payment is made as follows: Cash, $3,000; the former own- er of the building assumes F. A. Talbot's account, $600; a mort- gage for $6,280 is given on building, stock, and fixtures ; two months prepaid rent, $120, is allowed as part payment. Bought from Howard Houck drugs invoiced at $430. In pay- ment we transferred to him an account which we held against G. Reed $115, gave him our (So-day note for $100, and paid him the balance in cash. Journalize. 4- T. R. McCracken owed me $1200. I offered a discount of 2 l / 2 % for cash. Not having the ready money he discounted his note at the bank for sixty days at the rate of 6%, the note producing the sum required to discount my claim. Give the entries as they would appear on McCracken's books. PROBLEMS IN ACCOUNTING 7 5- Mr. X called at my office today and presented a note signed by me for $187.50. This note had been sold to Mr. X by Mr. Y, in whose favor it had been originally drawn. After satisfying myself that the note was properly indorsed, and was due today, I gave Mr. X my check for the amount. Entries on my books? 6. A merchant draws a draft of $1,000 at four months on a cus- tomer who owes him on open account, and the draft is accepted on February 2, 1909. On March 13, 1909, he discounts the draft at a bank at 6% per annum. What entries should be made on the mer- chant's books properly to record the transactions ? 7- A owed B $1,000 and B draws on him for the account at 60 days. The draft is accepted by A, whereupon B takes it to the bank for discount. The bank discounts the paper 57 days before maturity, at 6% per annum. Show the entries you would make on the books of B. 8. Smith & Company draw on Jones & Company for an account of $1,500, allowing i% discount. At maturity the acceptors borrow from the drawers $500 to assist them in meeting the draft, which is, however, finally allowed to be returned. Jones & Company repay $300 of the loan of $500. Show the ledger account on the books of Smith & Company after the transactions are completed. 9- A has exhausted his credit with B. He needs further accommo- dation to the extent of $2,500, to obtain which he gives B a three months draft on C for $2,500. This is $1,000 more than C owes A. To adjust this difference C draws on A at four months for $1,000. Assuming that the drafts have been accepted by the various parties, state what the journal entries would be on the books of each. 10. The Dayton Plumbing Company has called our attention to an error in our bill of September 22, in which we charged them $1.95 each for six cast iron steel sinks. On September 16 we had quoted this concern these sinks at $1.45 each. The bookkeeper is accord- ingly instructed to send a credit memorandum for the amount of the over-charge. Make the proper journal entries. 8 PROBLEMS IN ACCOUNTING ii. On March 28 we purchased from the Standard Sanitary Manu- facturing Company 6 Class "A" Enameled Iron Bath Tubs at $23.50 each. These tubs were shipped to the Morgantown Supply Company on April 8 and billed to them at $28.00 each. A few days later we received a letter from our customer stating that two of the tubs which we had sent were Class "B" instead of Class "A." They stated that they were willing to keep the tubs if proper allowance in price were made. A letter from our salesman in this territory corroborated the customer's statement, and we accordingly sent a credit memor- andum for $20.00 to correct the price of the tubs. The matter was also taken up with the manufacturers and we received their credit memorandum for $8.00. Prepare the proper journal entries on our books. 12. A carload of coal purchased for cash from the Consolidated Coal Company proved of inferior quality. We received a check for $31.65 as a rebate. Journalize. What entries should an executor make on taking charge of a property which shows on the books of the deceased, and is appraised at the same figures, as follows : Real Estate (bequeathed to widow) ....... , . .$50,000 Accrued rentals on real estate .............. 100 Bonds owned .............................. J/^o Accrued interest on bonds .................. 185 Bills Receivable ........................... 7,000 Tradesman's bills .................... ...... 450 Household goods, etc ....................... 5,ooo What entries should be made on collecting rental amounting to $200 and interest amounting to $235 ? 14. (a) What is the distinction between "Interest and Discount" and "Mdse Discount" accounts? What is Trade Discount? (b) A bill of goods sold by A. A. Co. to T. Jones is listed at $1,000 with trade discount of 30% allowed. The terms offered on bill are 2% off if paid in 10 days, net if paid in 30 days. Supposing bill to be paid at once, give journal entries on the books of the seller for the transaction. PROBLEMS IN ACCOUNTING 9 (c) Suppose instead that bill is settled at end of 30 days with a 6o-day non-interest-bearing note which is at once discounted at the bank at 5%. Give journal entries on the books of the seller. I buy a house and lot of R. M. Brown, paying cash $3,500, and assuming a mortgage of $1,200, with interest at 5^2%, 4 months ac- crued. The premises are rented at $300 per year, payable semi-an- nually, of which 3 months' rent has accrued. My entries at the time of buying, of receiving rent at the end of 3 months from date, and paying interest in 2 months? Show interest and rent accounts as they appear four months from date, assuming no other transactions. 16. On January I we sent George Young our check for $142.56, in payment of our note of $125 and accrued interest. It is now found that a mistake was made in computing the interest and that we should have paid but $13.44 interest. Today we receive Mr. Young's check for the difference. Journalize. A owed B for goods purchased amounting to $500, subject to a discount of 10%. B draws on A at 30 days sight for the amount of the bill, less 12^2% discount, and A accepted the draft. At maturity A sends B his check for the amount of the acceptance. Two weeks later B discovers the mistake and sends A a debit memorandum for the difference. A sends B his check for the amount. Give the journal entries (i) on A's books and (2) on B's books. 18. We have donated supplies to the estimated value of $100 to the Belgian Relief Fund. Journalize. 19. On December 20 we sold and delivered to the Fort Pitt Supply Company 200 boxes of cigars at $7.50 per box. These cigars we inadvertently charged to T. R. Goldstick & Bro., who sent us their check for the amount, not noticing the mistake. The mistake is dis- covered two months later, and rectified. Give the proper correcting entries. io PROBLEMS IN ACCOUNTING 20. We have sold to T. R. Burton io shares of Pennsylvania Railroad stock at 112. He pays us $800 cash and gives us his 60 day note for the balance. Our bookkeeper made the following entry, which was posted : Cash, 800 Investments 320 T. R. Burton 800 Bills Pay. 320 Make the proper correcting entries. 21. One of our delivery trucks, valued at $1600, has been stolen. On the truck at the time there was general merchandise to the value of $117. What entry shall we make ? 22. We have deposited at the First National Bank for credit, coupons for the quarterly interest on the $20^000 Union Pacific First and Refunding 5*3 which our firm owns. "Cash to Investments" is the way our bookkeeper records the transaction. What should the entry have been ? 23- A check for $26.50 is received today from the Reading Railroad Company for losses sustained by us in a recent shipment of oranges. Journalize. 24. The Dime Savings Bank holds our note for $2,000, maturing today. We take up the note, with accrued interest amounting to $200, and give a new note at sixty days for the entire amount. Jour- nalize. 25- The June salary of our stenographer, amounting to $75, is paid with an order on the Field Company for Merchandise to the value of $25.00 and our check for the balance. Journalize. 26. On the books of the A. B. C. Corporation no separate account has heretofore been kept for postage. The amount of postage already PROBLEMS IN ACCOUNTING n charged in the Expense account is found to be $65.30. In order to- transfer the account the bookkeeper makes the following entry : Expense 65.30 Postage 65.30 Is this entry correct? If not, make a journalization which will make the desired correction. 27. The Milligan-Dible Company award a contract for an apartment house, the contract price being $125,000, payable in five installments of $25,000 each. The first installment is to be paid before work begins, the second installment when one-fifth of the job is completed and accepted, the third installment when the roof has been put on, the fourth installment when the plastering has been finished and the fifth and last installment when the job has been completed and the building accepted. The owners wish to record the interest lost on these advances as a part of the cost of the building. The following entry is made : Interest, $1,000 Bellefield Apartments $1,000 If this entry is not correct, what journalization will correct the error? 28. In April you sell three hundred customers bills of goods amount- ing to $30,000, and none pay immediate cash. You collect bills amounting to $25,000 from two hundred seventy customers, of whom two hundred fifty take $750 discounts offered for early payment. You buy bills of goods, amounting to $15,000, of fifteen creditors paying none in immediate cash, you pay nineteen creditors cash, amounting to $19,000, and take a discount in each case, amounting in- all to $600. You make forty cash payments for expenses, amounting to $4000. Into what book should you enter each class of transaction indi- cated above, and how many postings should be made from each book? Supposing you have subordinate ledgers for customers and for creditors, what would your general ledger show for the items above (show a rough posting for each item posted to the general ledger) ? 29. Rule and title five columns of a petty cash book in addition to the descriptive column, and make an illustrative entry for and in each distribution column. 12 PROBLEMS IN ACCOUNTING 30. State fully how the disbursements entered in a petty cash book should be carried to the controlling account in the general ledger and to the detail accounts in the expense ledger. Si- What is a controlling account ? Give three examples. How are postings made to controlling accounts? With what must the bal- ance of a controlling account coincide ? 32. A customer says that a bill which he has received from you repre- sents goods for which he does not owe. He fails to state whether the goods were never purchased, were purchased but returned, or were purchased and paid for. What process should you go through, (i. e., what books should you consult, naming them in order, and what should you look for) to determine the facts? ^A 33. Enter the following transactions in a journal having special columns for cash received and paid, post to ledger. Feb. i. R. M. Jones invested in business $2500.00 in cash. Feb. i. Paid cash for February rent, $75. Feb. 2. Bought from J. N. Price on account merchandise in- voicing at $560. Feb. 3. Sold merchandise for cash, $56.50. Feb. 5. Issued our note for $150 due in 30 days at 6% in favor of J. N. Price, to be applied on account. Feb. 6. Sold to R. B. Rodman on account goods billed at $73-50. Feb. 8. Bought furniture and fixtures, including glass show- case for store, $750. Paid cash. Feb. 9. Paid J. N. Price $125 in cash, on account. Feb. 10. R. B. Rodman paid $45 on account, in cash. Feb. ii. R. M. Jones took $25 in cash to pay a personal bill. Feb. 12. Sold to T. R. Martin merchandise, $165.50, for cash. Feb. 12. Paid in cash for 750 two-cent stamps. Feb. 16. Sold three glass showcases, second-hand, to T. J. Murray for $110. He paid cash. PROBLEMS IN ACCOUNTING 13. Feb. 1 8. Accommodated a friend with 100 two cent stamps, for which he paid cash. Feb. 19. R. M. Jones invested $2,000 more in cash in the bus- iness. Feb. 20. Sold to B. M. Miller on account, goods invoiced at $135- 34. Enter the following transactions in the cash book and the journal. Make special columns in the journal for merchandise debits and credits. Oct. i. J. B. Preston, proprietor, invested in business $5,000- in cash. Oct. i. Paid rent for October in cash, $70. Oct. 2. Sold to Jno. R. Thompson, on account, bill of goods for $65.50. Oct. 2. Bought merchandise from the Sterling Furniture Co. r for cash, $276.60. Oct. 3. Sold merchandise to Gus E. Ericson, on account,. $47.50. Oct. 4. Bought merchandise for cash, Palmer & Anderson's invoice, $364.20. Oct. 5. Received cash from Jno. R. Thompson, on account,. $50. Oct. 6. Sold to Harry K. Feldman, on his lo-day note at 6% merchandise, $126.50. Oct. 6. Paid the bookkeeper's salary for the week ending today in cash, $18. Oct. 8. J. B. Preston withdrew for his personal use $25 in cash. Oct. 9. Sold to Geo. W. Chambers, on account, $123.75 worth of merchandise. Oct. 10. Received cash from Gus E. Ericson, on account, $25, Oct. ii. Sold merchandise to Jno. R. Thompson, on account,. $98.50. Oct. 13. Paid the bookkeeper's salary in cash, as on Oct. 6. Oct. 16. Received from Harry K. Feldman his check for $126.71 to redeem his note of Oct. 6, $126.50, and interest for 10 days at 6%, $.21. Oct. 17. Sold to Gus E. Ericson, on account, merchandise, $76.75. Oct. 1 8. Paid for office stationery and envelopes in cash, $7.80. 1 4 ' PROBLEMS IN ACCOUNTING Oct. 19. Sold to Geo. W. Chambers, on account, merchandise, $32.25. Oct. 19. Received cash from Jno. R. Thompson, to apply on ac- count, $15.50. Oct. 19. Bought merchandise for cash from the Hoffman Co., their invoice, $225.60. Oct. 20. Paid the bookkeeper's salary in cash, as on Oct. 6. Oct. 22. Sold to F. N. Wright on his 3O-day note at 6%, bill of goods, $150.65. Oct. 24. Sold to Jno. R. Thompson, on account, $137.75, merchandise. Oct. 25. Received from Gus. E. Ericson cash to complete the payment of bill against him of Oct. 3, $22.50. 35- Enter the following transactions in the journal, cash book, purchase book or sales book. Post, and take a trail balance. May I. Begin a general grocery business today, investing cash, $4,000. May 2. Pay store rent in cash, one month, $60. May 3. Buy for cash, 200 bu. potatoes at $.80 ; 400 Ibs. butter at $.25. May 4. Buy of John Smith, on account, 60 bbls. flour at $4; 20 bbls. salt at $1.50; 175 Ibs. lard at $.10. May 5. Sell Albert Mullin for cash, 10 bbls. flour at $4.50; 45 bu. potatoes at $.80; 2 bbls. salt at $1.75. May 6. Sell J. B. Allen, on account, 100 Ibs. lard at $.12; 1 10 Ibs. butter at $.30 ; 10 bbls. flour at $4.50. May 8. Buy for cash a set of books for office use, $15. May 9. Pay John Smith cash, on account, $56.40. May 10. Receive cash of J. B. Allen, on account, $50. May ii. Buy of James Witt, on account, 5 bbls. flour at $3.50; 600 Ibs. of lard at $.08; 500 Ibs. butter at $.20; 250 bu. potatoes at $.70. May 12. Sell John Reed, on account, 12 bbls. flour at $4; 100 Ibs. lard at $.10; 100 Ibs. butter at $.22. May 13. Sell J. B. Allen, on account, 70 bu. potatoes at $.75 ; 6 bbls. salt at $1.70; 100 Ibs. lard at $.12. May 15. Receive cash of John Reed, on account, $52.50; pay James Witt cash, on account, $195. PROBLEMS IN ACCOUNTING 15 May 1 6. Buy of John Smith, on account, 40 bbls. flour at $3.50. May 17. Sell J. B. Allen, on account, 16 bbls. flour at $4; loo Ibs. lard at $.11. May 1 8. Give John Smith your note for goods bought on the i6th; sell Robert Lewis for cash, 20 bbls. flour at $4.10; 212 Ibs. but- ter at $.20 ; 60 bu. potatoes at $.77. May 20. Sell John Reed, on account 10 bbls. flour at $3.98; 100 Ibs. lard at $.11 ; 100 Ibs. butter at $.20 ; 10 bbls. salt at $1.68. May 22. Sell George Maine for cash, 100 Ibs. lard at $.10; sell for cash, 20 bu. potatoes at $.75. May 26. John Reed settles his bill of the 2Oth ; pay your note in favor of John Randolph. May 28. Pay clerk for one month, cash, $40. CHAPTER IV 36. After some correspondence and an interview, you buy from Watts & Gushing, Jan. I, 1914, a jobbing business in canned goods and dried fruits, to be conducted in Rochester, N. Y. You pay therefor on the same day $6,756.25 for stock on hand, $243.75 f r furniture and fixtures and $1,000 for the goodwill of the business. (Treat goodwill as an asset.) The payments are made as follows: your promissory note indorsed by Peter Martin at six months, for $3,000 with interest, and the remainder in cash, which constitutes your entire capital. Make, in proper form, the record of the above transactions and of those that follow. Use journal, cashbook, invoice book and sales book. No postings of cash or merchandise are to be made from the journal. A double page cashbook should be used, having four money columns on each page, for convenience in handling Merchandise Dis- count, Merchandise Sales to casual customers, and Expense, and for the purpose of saving labor in posting. Keep no "Cash Account" in ledger. Jan. I. Cash sales to sundry persons $29.60. Jan. 2. Cash sales to sundry persons $34. Bought office books and stationery $14.25. Jan. 4. Sold H. B. Eldredge, Syracuse, "rush order," 100 cases perfection blackberries @ $1.32. Terms, 3/10, n/6o ($% off if paid in 10 days, net 60 days). Shipped by express, charges prepaid by special request $22.30 (to be entered on bill but not subject to dis- count). Jan. 5. Bought of Excelsior Canning Co., Buffalo, 300 cases perf. blk. @ $1.10. Terms, 2/10, n/6o. Sold Lawson & Co., Elmira, 50 cases perf. com @ $1.20; 75 cases of perf. peas @ $1.62. Terms, 3/10 n/6o. Jan. 6. Sold Winthrop & Co., Binghamton, 100 cases standard cherries @ $1.32; 50 cases perf. peaches @ $1.98; 100 cases perf. tomatoes @ $1.08; 25 cases straw, jam @ $2.24. Terms, 3/10 n/6o. Jan. 7. Sold E. A. Sanford, Troy, 8 boxes, 4Oolb diamond apples @ 8c ; 10 bx. 50000 diamond peaches @ o/r ; 100 cases perf. corn @ $1.20. Terms, draft at 15 days date. Cash sales $46.85. PROBLEMS IN ACCOUNTING 17 Jan. 9. Had draft on Sanford discounted at Commercial Na- tional Bank. (Charge the deduction from face of draft to Interest, not to "Interest and Discount," which is misleading.) Bought of Excelsior Canning Co. 200 cases perf. corn @ $i ; 100 cases green beans at $1.15. Terms, 2/10 n/6o. Cash sales $115.40. Jan. 13. H. B. Eldredge remits draft of Salt City National Bank, John Mason, cashier, on Astor National Bank, N. Y. in pay- ment of bill of Jan. 4, according to terms of sale, and includes express charges prepaid on shipment. Jan. 14. Paid insurance premium on stock $16.50. Bought for cash 10 tons coal @ $5.75 for heating store. Sent Excelsior Canning Co. my check on Commercial National Bank in payment of invoice of Jan. 5. Lawson & Co. remit N. Y. draft for bill of Jan. 5. Jan. 15. Winthrop & Co. remit N. Y. draft for bill of Jan. 5. Cash sales $146.70. Jan. 16. Sold H. B. Eldredge 200 cases perf. corn @ $1.20. Terms, 3/10 n/6o. Cash sales $43.50. Jan. 1 8. Sent Excelsior Canning Co. N. Y. draft in payment of invoice of Jan. 9. Cash sales $78.50. Jan. 21. Sold Jones & Baker, Clean, 50 cases standard corn @ 8oc; 50 cases stan. peas @ $i. Cash sales $94.65. Jan. 25. Commercial National Bank returns, unpaid and pro- tested, the accepted draft on E. A. Sanford, protest fees $1.52. [See transactions of Jan. 7 and Jan. 9.] Cash sales $69.30. Jan. 29. You are convinced by correspondence with E. A. San- ford and others, that owing to a recent misfortune it is not possible for Sanford to pay his obligation in full, and you accept his promis- sory note at 30 days for $100, indorsed by Truman Wakeley, in full settlement of the account. Jan. 30. Paid rent of store for January $45 ; clerk's salary $50; printing $12.50; telegrams and postage $6.75. Cash sales $118.25. Having made all the original entries, post the accounts and make trial balance. Show through Loss and Gain account your net capital, using the following resource inventories : merchandise $5869.45 ; expense (for coal on hand) $45. "Furniture and fixtures" and "Goodwill" stand unchanged. i8 PROBLEMS IN ACCOUNTING 37- Dr. INTEREST Cr. Jan. 4 $20.50 Jan. 10 $48.50 8 14-63 21 12.16 17 8.60 31 Inventory 9-44 28 13.24 31 Inventory 4.80 Loss and Gain. . . 8.33 $70.10 $70.10 Close the above account and (a) Bring down the proper amounts for Feb. i. (b) State which, if any, of the above figures would appear on the Income Sheet for January ; and which ones, if any, would appear on the Balance Sheet of Jan. 31, and, whether on asset or liability side, being careful to give reason for your decision in each instance. If not corrected how would the following errors in bookkep- ing affect (i) the Expense and Revenue Account, (2) the Balance Sheet : (a) A sum of $125 for freight paid for John Jones on goods purchased by him posted wrongly to Purchases Ac- count. (b) A sale of goods for $500 posted to the debit of Freight Account instead of to the debit of the purchaser. (c) A sum of $250 received from a customer entered as a Cash Sale of $250? 39- What would be the significance of a change in the trial balance, between one month and the next, of a total increase of $30,000 on each side, if the changes on the debit side were in property ac- counts and the changes on the credit side were in proprietorship ac- counts ? What if the changes on the debit side were in expense accounts, and on the credit side were in liability accounts? What if the changes on both sides were in property and liability accounts ? PROBLEMS IN ACCOUNTING 19 40. State how the following differ: a trial balance; and a balance sheet. 41. The following trial balance is handed you, with the request that you prepare an expense and revenue account and a balance sheet : A B's capital $20,000.00 A B's personal account $ 1,000.00 Bank of North America 600.00 Cash in hand 90.00 Merchandise account 8,600.00 Repair account &7-5 Bills receivable 6,400.00 Bills payable 4,000.00 Real estate 1,350.00 Bank stock 1,566.00 General expenses 1,860.00 Freight 1,000.00 Accounts receivable 8,000.00 Accounts payable 10,000.00 Profit and loss 3,446.50 $34,000.00 $34,000.00 If all the information required is not presented in this trial bal- ance, supply what is wanting and submit the statements called for. 42. Being requested by a merchant to prepare a statement for cred- itors, you find his accounts to be as follows: real estate $25,000, mortgaged for $10,000, interest due $750; goods on hand $18,000; fixtures $1,250; merchandise in warehouse $10,000, on which the merchant has borrowed $3,000; accounts receivable deemed good $10,500, doubtful $1,500; known to be bad $2,000; bills receivable (held by bank as collaterial for an advance of $5,000) $6,800; cash $2,500. In addition to the above secured claims you will find the fol- lowing: accrued rent $500; taxes $750; wages $1,250. The merchant also owes A $6,000, B $3,500, C $13,500, D $6,850, E $1,800, F $2,650, G $1,225, H $1,400 and there is an unsecured disputed claim of K for $1,300. Submit the statement required. 20 PROBLEMS IN ACCOUNTING 43- Construct seven column statement from the following Trial Bal- ance and inventories. DR. CR. Cash $ 12,300 Notes Receivable 32,700 Accounts Receivable 47,000 Furniture and Fixtures 3,ooo Building 13,000 Real Estate 50,000 Notes Payable 30,000 Accts. Payable 13,100 Advertising 2,600 Commission 3,050 Supplies 12,900 Salary 9,300 Insurance 625 Postage fv^y?^. . . 1,650 Discount 550 Exchange 25 Interest 175 Discount 375 Thos. Greene, Prop 85,000 Drawing Accounts, (Prop.) 4,300 Mdse 64,350 $193,000 $193,000 INVENTORY. Furniture and Fixtures $ 2,500 Buildings 12,500 Real Estate 47,ooo Advertising 300 Supplies 500 Salary 300 Insurance 150 Postage 400 Interest (Asset) 25 Mdse 5,365 PROBLEMS IN ACCOUNTING 21 44. Prepare a seven column statement from a ledger which contained the following open accounts after 15 days of business: Cash .$8,418.76 $2,363.86 Peter B. Burns, Partner 9,000.00 Alfred E. Paine, Partner 3,000.00 Furniture and Fixtures 450.00 Bills Receivable 1,000.00 Interest .25 Commission 27.25 Mdse. discount 11.49 30.30 Supplies 169.85 James Addington ^S 1 ^ Mdse 7,060.00 3,040.50 Accounts Receivable 1,269.50 1,069.50 Inventories: Mdse., $4,474.07; supplies, $58. Net income is shared by the partners in proportion to their investment. Furniture and fixtures remains unchanged. 45- The general ledger balances of The Wilson & Wood Company are as follows: Cash, $20,000; Bills Receivable, $5,000; Bills Pay- able, $8,000; Accounts Payable, $7,000; Accounts Receivable, $14,- ooo ; Mdse. Dr., $80,000; Cr., $95,000; Real Estate, $7,500; Expense, $3,000; Interest and Discount, Cr., $500; Loss and Gain, Dr., $31,- ooo ; Capital Stock $50,000. There remain unsold Mdse., $36,000; the Real Estate on hand is valued at $6,000; items charged to expense and not yet used, $1,200; 5% of the accounts receivable are doubtful; wages due and not paid, $300. Prepare seven column statement. 4 6. Messrs. Hawley & Wood are partners in business, sharing gains and losses equally. On the basis of the following trial balance of their double entry ledger at the close of the fiscal year you are required to make a statement showing the expense and revenue, and also the net capital of each partner : W. H. Hawley, investment $ 8,405.26 E. K. Wood, investment 8,405.28 22 PROBLEMS IN ACCOUNTING Cash . $ 9,017.33 Merchandise 3,224.89 Bills Receivable 12,000.00 Bills Payable 8,350.00 Miscellaneous Supplies 576.00 Interest 129.74 Loss and Gain 450.00 Sundry book accounts receivable 3,566.00 Sundry book accounts payable 3,803.42 Totals $28,963.96 $28,963.96 Inventory of merchandise on hand, $8,000. Supplies, $85.50. 47- The trial balance of the Y. Co., is found to be as follows : Real estate and buildings $ 32,500 Plant and machinery 40,000 Capital Stock, Preferred. . ... . . . 100,000 Capital Stock, Common ^TT^. .\. . . . 100,000 Patents and goodwill 80,000 Inventory, July 1 29,000 Purchases 82,500 Sales 2I 9 I 75 Labor 88,000 Coal 6,000 Salaries general 11,000 Salaries management 5,ooo Insurance 875 Allowances 6,250 Freight 1,500 Discount and interest 750 Cash in bank 8,000 Investments 15,500 Notes payable 26,000 Accounts Payable 14,000 Miscellaneous expense 4,300 Book debts 42,000 Preferred stock in treasury 5,ooo Repairs 1,000 $459,175 $459,175 PROBLEMS IN ACCOUNTING 23 Merchandise on hand, $26,500. Prepare expense and revenue statement and balance sheet, giving effect in accounts to depreci- ation at the rate of 7*^% a year on plant and machinery, and mak- ing an allowance of 5% on the book debts to provide for bad debts. 4 8. In closing a set of books state how you would treat the following on ledger and financial statements : Depreciation on machinery $1,500 Expenses prepaid 500 Discounts on customers' accounts 1,080 Salaries and wages accrued 675 49- A trial balance of a manufacturing firm taken Dec. 31, 1910, con- tains the following accounts : Plant and machinery. . .$ 35,000 Capital A $ 40,000 Stock Raw Material Jan. Capital B 20,000 i, 1910 15,000 Creditor's Accounts. . . . 4,000 Accounts Receivable. . . 25,000 Sales 95,ooo Cash 200 Bank Overdraft 5,ooo Loan Account 7,000 Rent of Steam Power. . 1,500 Purchases Material .... 38,000 Labor 24,000 Traveling Expenses .... 2,500 Salaries General 6,000 Interest 600 Stationery and Printing 1,200 Rents and Taxes 3>5oo Discounts and Allow- ances 1,250 Fuel 3,ooo [nsurance (Plant) one year from July i, 1910 1,150 Freight Inward 1,500 General Expenses 600 Total $165,500 Total $165,500 Stock on hand Dec. 31, 1910, $23,000; each partner to be credited 6 per cent on his capital for one year before profits are ascertained ; 3 per cent to be written off book debts for discount ; 10 per cent to be written off machinery and plant for depreciation ; unexpired insur- 24 PROBLEMS IN ACCOUNTING ance to be taken into account; net profits to be divided 2-3 to A, 1-3 to B. Draft Journal entries for closing the books and prepare seven column statement. 50. Prepare a six-column statement. 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. i, 1911 142,000.00 Reserve for Depreciation on Plant and Machinery, Jan. i, 191 1 20,000.00 Reserve for Bad Debts, Jan. i, 191 1 9,600.00 Inventory, finished g o o Lpp\ Jan. i, 1911 $ 32,000.00 Inventory, Raw Material, Jan. i, 191 1 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 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 Rec. ... 200,000.00 Notes and Accounts Pay 30,000.00 Furniture and Fixtures 4,000.00 Cash 75,500.00 Taxes 960.00 Advertising 5,400.00 $833,010.00 $833,010.00 PROBLEMS IN ACCOUNTING 25 Inventories on Dec. 31, 1911 : Finished Goods $16,000.00 Raw Material 10,700.00 Furniture and Fixtures 3,580.00 Si- From the following trial balance and inventories prepare a seven- column statement. TRIAL BALANCE DR. CR. Capital $ 75,000 Land $ 5,ooo Buildings 21,500 Tools and Machinery 6,575 Horse and Wagon 1,205 Furniture and Fixtures 393 Patents 5,250 Notes Receivable 15,820 Accounts Receivable 86,981 Insurance 1,205 Notes Payable 21,000 Accounts Payable 25,180 Expense 830 Salaries 6,675 Advertising 2,620 Freight 2,200 Stationery 875 Interest 175 Discount 225 Merchandise 35,^99 $157,304 $157,304 INVENTORY Land $ 4,500 . Buildings 20,000 Tools and Machinery 6,200 Horse and Wagon 1,000 Furniture and Fixtures 350 Patents 5,ooo Insurance 200 Advertising 550 Stationery 400 Interest Payable 25 Merchandise 5,76o 26 PROBLEMS IN ACCOUNTING 52. From the following trial balance and inventories prepare a seven column statement. TRIAL BALANCE, JAN. 31 DR. CR. Capital $ 45,000 Furniture and Fixtures $ 3,930 Horse and Wagon 2,750 Land 3,650 Machinery 25,750 Buildings 18,650 Notes Payable 32,350 Notes Receivable 4,757 Accounts Payable 4,736 Accounts Receivable 32,450 Cash 3,433 Advertising .^ . . 2,570 Salary .^ \. . 8,750 Commission 3,650 Expense 5,74O Insurance 3,400 Postage 865 Interest 375 Discount 450 Merchandise Inventory, Jan I . . . 5,650 Merchandise Purchases 37,650 Merchandise Sales 81,484 $164,020 $164,020 INVENTORY Furniture and Fixtures $ 3,600 Horse and Wagon 2,500 Land 3400 Machinery 22,500 Buildings 18,150 Advertising 400 Insurance 515 Postage 125 Merchandise 755 PROBLEMS IN ACCOUNTING 27 53- From the following information prepare a seven column state- ment. LEDGER BALANCES A Capital Acount $82,000 Notes Payable 10,000 Accounts Payable 9,000 Notes Receivable 25,000 Acounts Receivable 22,000 Mortgage Payable 25,000 Real Estate 45,ooo Merchandise ("Credit) 7,000 Interest (Debit) 1,000 Labor 30,000 Expense 10,000 INVENTORIES Real Estate $42,600 Merchandise 45> oo Interest Due the Firm 500 Wages Accrued 800 Taxes Accrued 600 54- A grain dealer charges his customers 150 apiece for sacks that cost him loc. He agrees to receive back any sacks returned in good condition at I2c each, calculating that they would be worth 7^/2 c each. How should these transactions be treated on the dealer's books ? 55- What are the advantages of a seven-column statement? Why is it that the difference between the expenses and revenues is always exactly the same as the difference between the resources and liabil- ities? 56. Describe the expense and revenue account. Show how this ac- count is made up. What does the balance of this account represent, and how should such a balance be finally treated? PROBLEMS IN ACCOUNTING 57- The fiscal year of a Manufacturing Company ends June 30, 1908 and the bookkeeper presents a statement to the Directors made up in the following form : Gross Sales $285,000 Increase of Inventory 15,000 $300,000 Cost of sales : Operating expenses, material and supplies 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. . . 2 5O 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 partnership. 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 32 PROBLEMS IN ACCOUNTING books for the corporation, covering the operations of the business during the past year, and to prepare therefrom an expense and revenue account and balance sheet : TRIAL B ALA NGE; MAY 31, 1901 Sharp's capital $ 42,500 Flat's capital 36,300 Plant and machinery $ 37,500 Stock on hand per inventory May 3 1 * J 900 20,525 Sales I3M05 Purchases: materials and supplies 48,000 Labor 34,5oo Office salaries 7,000 Traveling expenses 2,400 Interest 600 Stationery and printing 175 Rent and taxes 4,200 Discounts and allowances. . . ./*. . . . 2,250 Fuel ^7:..\... 4,600 Insurance 175 Freight (inward) I 75O Commission 6,375 Advertising 500 Bills receivable 6,115 Bills payable 1,100 Accounts receivable 36,115 Accounts payable 7*850 Cash 6,375 $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 $% on plant and machinery, (b) unexpired in- surance $75, (c) bad debts $325, (d) inventory, stock on hand May 31, 1901, $19.605. 64. The Elite Amusement Company was organized on January I, 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 PROBLEMS IN ACCOUNTING 33 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. 65- The third installment of the subscriptions for the stock of The Elite Amusement Company, mentioned in Problem 168, was due on January i, 1915. Because of the large profits, however, it was decided not to call this third installment, but instead a dividend was declared 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 ? 66. A corporation has outstanding $1,000,000 of fully paid stock. Its accumulated surplus is $140,000. The profits for the current year are $100,000. The directors declare a cash dividend of 6% and a stock dividend of 25%. (a) Make Journal entries to record these last two transactions. (b) Prepare Balance Sheet after the dividends are declared. 67. A corporation earns in 1912 net $50,000.00 on a capital of $250,- ooo.oo. Business has increased and the stock on hand has increased $50,000.00, leaving the cash balance sufficient only for the current needs of the business. Several large stockholders are women who need some return on their investment, (a) Should the directors borrow money and pay a dividend? If so, how much should they pay? (b) Show the journal entries that would be made as a result of the course of action that you advise. (c) Prepare four imaginary balance sheets one for Dec. 31, 1911 ; one for Dec. 31, 1912; one for Jan. 5, after borrowing money and declaring a dividend of 8% but before the dividend has been paid ; one after paying the dividend.' 68. What is meant by the term "stock-dividends?" Are they legiti- mate at any time? Would you consider it justifiable at any time to pay a dividend with borrowed money ? Explain carefully. 69. "A stock-dividend is really not a dividend at all." Defend this statement. 34 PROBLEMS IN ACCOUNTING 70. "Treasury stock or bonds are merely so many legalized pieces of paper, and cannot in any sense be considered as assets of the corpora- tion creating and issuing them" (Dickinson). Defend. A company has purchased 1,000 shares of its own stock at $96.50 a share, the par value being $100 per share. Its balance sheet shows "Treasury Stock, $96,500." Is this correct? Give reason. If not correct, state how you would adjust the books. 72. Q A corporation is organized with an authorized capital stock of $50,000, of which only $40,000 is sold and stock certificates issued therefor. Two conflicting methods of recording the capital stock on the books of the company are urged by rival accountants as follows : (i) treasury stock to capital stock $50,000; cash and properties to treasury stock ,$40,000; (2) cash and properties to capital stock $40,000. Which method is the better, f and why ? 73- Smith & Jones are partners, drawing equal amounts for services, and sharing profits according to capital invested, after allowing 5% on capital. They require additional capital and arrange to admit the manager to the firm, he to acquire a one-quarter interest in the busi- ness. 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 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. 74- A, B and C were partners in business for several years. A died December 31, 1903. The articles of copartnership provided that on any change in the firm the goodwill should be taken into account and its value divided one-half to A and one-quarter each to B and C. The balance sheet at the date of A's death was as follows : Assets Liabilities Cash $ 1,5.00 Sundry accounts payable. $ 8,500 Mdse. on hand 12,000 A's net investment 10,000 Bills and Accts. Rec 15,000 B's net investment 5,ooo C's net investment 5,ooo $28,500 $28,500 PROBLEMS IN ACCOUNTING 35 In January, 1904, B and C arranged with D to come into the firm with $5,000. The goodwill is, by agreement, to be valued at $3,000. The new firm, consisting of B, C, and D takes over the business and goodwill in equal shares, subject to an allowance of 2 l / 2 % on the Bills and Accounts Receivable. It pays the estate of A $5,000, with the understanding the balance due A's estate shall remain as a loan at the rate of 5% interest. Prepare the balance sheet and the capital accounts of B, C, and D as they should appear at the beginning of the new business, writing off the goodwill in equal proportions to amount of capital invested. 75- A and B, each carrying on a similar business, agree to form a partnership, the new firm to take over the assets and assume the lia- bilities of each. The following trial balances, representing the book accounts, were presented : A. Capital $ 40,000 Machinery and Fixtures $ 30,000 Cash 2,000 Bills Receivable 5,ooo Accounts Receivable 30,000 Inventory Merchandise 25,000 Wages 7,000 Wages due 250 Expense 10,000 Bills payable ' . . . 10,000 Merchandise Account 40,000 Accounts Payable 20,000 Repairs 1,250 $110,250 $110,250 B. Capital $ 50,000 Machinery and Fixtures $ 30,000 Cash 4,000 Bills Receivable 8,000 Accounts Receivable 40,000 Wages 9,000 Wages due 500 General Expense 15,000 Bills Payable 15,000 Merchandise Account 50,000 Inventory 32,000 36 PROBLEMS IN ACCOUNTING Repairs Account ................ 2,500 Accounts Payable ............... 25,000 $140,500 $140,500 Each partner is to draw half the profits. Formulate opening entries for the new firm. At the end of the year a profit is made of $30,000.00. Create a trial balance and inventory, using your own figures to produce that result ; divide the profits between the partners and make statement of assets and liabilities. Two partners named Wilson and Peters find at the end of the first year's business the Balance Sheet shows 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 conclude 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 part- nership accounts appear after the payment of the additional cap- ital? How will the profits be divided? Give skeleton form of accounts. 77- 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 annum. Profits are to be divided equally between the parties. The profits for the first two years (after charging interest on capital) were: ist year ................................... $6,000 2nd year ................................... 7,5o 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 salary were : X ........................................ $1,750 Y ........................................ 1,600 Z ........................................ 1,500 Construct the capital accounts of the partners for each of the three years, showing the balance of each at the end of the third year. PROBLEMS IN ACCOUNTING 37 78. A, B, and C engage in business, A contributing $10,000 capital, 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 providing 5 per cent, interest on capital they are to divide the net results in the pro- portions 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. 79- A, B, and C were partners and contributed the following capital : 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. So. Bilsom and Marley are partners, sharing profits and losses equally. The partnership is dissolved December 31, 1907, at which time Bil- som'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 account. The whole of the assets of the firm are disposed of for $30,000 cash on May I, 19x38. Prepare accounts closing the partnership and show the posi- tion in which the partners stand with each other. No allowance for interest is required. A, the party of the first part, enters, March 31, on the perform- ance of a contract for $50,000, payable in two installments of $25,- ooo each, the first of which is due on completion of a specific part of the work, but subject to 10% to be retained by the party of the second part as security for the continuation of the undertaking ; the second, together with the security retained as aforesaid, is to be paid on final acceptance of the completed work. 38 PROBLEMS IN ACCOUNTING A has a capital of $4,000 available for payment of labor, which proves insufficient. He therefore takes in as associates on April I, B, who contributes $3,000, and C, who contributes $1,000, B and C to share profits in proportion of Y*. and Y% respectively and to re- ceive interest on capital at 6% per annum. The first installment of the contract falls due and Is pafd on May i, at which time there had been expended by the contractors for labor and incidentals $7,502, and obligations for materials and supplies furnished on credit had been incurred and were outstanding to the amount of $13,900, of which all 'but $1,500 are forthwith settled from the installment money. On receipt of the first installment B and C withdraw their capital and realize the profits earned at the completion of the first stage of the work, leaving A to continue alone, it being carefully estimated and mutually conceded that a further outlay of $26,158 will be suf- ficient to finish the work and cover all reasonable contingencies. Show by skeleton ledger accounts the cash payable by A to B and C respectively on their withdrawal /from the partnership, and state the resources and obligations that remain to A on entering upon the second part of the work. 82. A firm whose resources and liabilities are stated below is con- verted into a corporation: Assets Liabilities Real estate and improve- Accounts payable $ 7,800 ments $64,500 Bills payable 25,200 Merchandise 15,900 Partners' accts 55>ooo Accounts receivable 5 ,000 Cash . 2,600 $88,000 $88,000 The corporation receives all the assets except the casn, and as- sumes payment of the accounts payable but not of the bills payable. The real estate and improvements are taken over at a value of $100,- ooo, and the good will is considered worth $20,000. The purchase price is to be as follows : $33,100 in cash, $50,000 in bonds and $50,- ooo in capital stock of the corporation. What entries are necessary to close the books of the firm and to open the books of the corporation? PROBLEMS IN ACCOUNTING 39 83- A and B were partners, trading* under the name of A, B & Co. June 30, 1908, the following balances appear on their ledger: A, Capital Account $70,000.00 B, Capital Account 50,000.00 Real Estate 22,000.00 Buildings 20,000.00 Machinery and Tools 44,000.00 Furniture and Fixtures 2,000.00 Accounts Receivable 50,000.00 Cash 7,000.00 Materials and Merchandise 53,000.00 Accounts Payable 35,000.00 Bills Payable 48,000.00 Bills Receivable 5,000.00 On June 30, 1908, the business is incorporated as the X Company, on the following plan : 1. Capital stock, $150,000.00. 2. X Company takes over the entire assets and liabilities of A, B & Co. at the book figures as above, except (a) real estate of the book value of $5,000, which is retained by A, B & Co. ; (b) the ac- counts receivable, which are taken over at $48,000, and (c) the cap- ital accounts of the partners. 3. X Company pay A, B & Co. $30,000 for the good will of the business. 4. Payments to A, B & Co. are made as follows, viz. : $50,000 in first mortgage bonds, and the balance in capital stock of the X Company. 5. After paying off A, B & Co. the remainder of the capital stock is sold for cash to sundry persons. The real estate which is retained by A, B & Co. is bought from A, B & Co. by A, for $7,000, and is charged to A's capital account. After the conclusion of the foregoing described transactions A and B dissolve partnership. You are required : (a) To prepare closing entries for the books of A, B & Co. (b) A statement setting forth the partners' accounts down to their final closing, beginning with the balances shown by the books on June 30, 1908. (c) Opening entries for the X Company. 40 PROBLEMS IN ACCOUNTING 84. How do the accounts of a corporation and of a partnership differ in the statement of (a) Investments. (b) Operation of business and determination of profits. (c) Division and distribution of profits. 85. 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? 86. The Domestic Manufacturing Company, organized with a Capital Stock of $5,000,000, half preferred and half common, 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 common stock. Jones makes a further agreement with the company 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 Manufactur- ing Company. Illustrate by journal entries the necessary accounts to be opened on the books of the Domestic Manufacturing Company to show each step in the foregoing agreement. 8 7 . It is proposed to organize for conducting a small manufacturing 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 PROBLEMS IN ACCOUNTING 41 than that amount. The remainder of the stock is to be sold to pro- vide working capital. Certain capitalists are to be approached for cash subscriptions to the capital stock, but it is uncertain what opinion they will 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. 88. The Elk Run Tanning Company has been organized under the laws of Pennsylvania with an authorized capitalization 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 pur- chases the tannery now being operated by Thos. Keck & Son, paying for the complete plant $475,000, and transfers the same to the newly incorporated company for the remaining common stock and $100,- ooo of first mortgage 5% bonds. Make the opening journal entries. 8 9 . A, B and C constitute a firm engaged in a manufacturing busi- ness, which they have decided to change into a stock company with a capital of $100,000, equally divided into common 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 re- maining shares authorized are to be offered 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; mer- chandise, $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. 90. The Great Northern Manufacturing Company was incorporated under the laws of the state of New Jersey, February I, 1899, with a PROBLEMS IN ACCOUNTING capital stock of $10,000,000, consisting of $4,500,000 (45,000 shares of $100 each) preferred 7% non-cumulative stock, and $5,500,000 (55,000 shares of $100 each) of common stock. On the same date $2,000 of the common stock was subscribed for at par as follows : By John Smith, 2 shares $ 200 " Henry Brown, 4 shares 400 " John Doe, 4 shares 400 " Henry Rodman, 3 shares 300 ' Wm. Rodman, 7 shares 700 Total $2,000 On February 4, 1899, these subscribers paid in to the company the amount of their subscriptions, and stock was issued to them. February 15, the balance of the authorized capital stock of the com- pany, both preferred and common, was issued by resolution of the board of directors, to John M. Scott, for and in consideration of $750,000 in cash and 12 manufacturing plants. An inventory of the property purchased, made by authorized representatives of the com- pany, resulted in the following appraised valuations on the various plants and the stocks on hand : Materials $ 98,000 84,000 62,000 48,000 89,000 26,000 34,000 62,000 11,000 35,ooo 71,000 44,000 Totals $2,448,000 $526,000 $2,090,000 $279,500 $664,000 Open the accounts of the company so that the result of the opera- tion of each factory will be known at the end of the company's fiscal year. The books of the company are not to show the appraised valua- tion placed on the real estate, buildings, tools, machinery, etc., by Buildings 1 R.eal Estate Mach'y Tools A .... $ 430,000 $ 95,000 $ 195,000 $ 20,000 B .... 211,000 44,000 130,000 10,000 C .... 495,ooo 38,500 475,000 11,000 D .... 304,000 15,000 924,000 13,000 E .... 171,000 32,750 184,000 14,500 F .... 86,500 81,000 60,000 17,750 G . . . . 47,250 44,000 30,000 32,500 H .... 98,000 35,750 20,000 14,600 I .... 101,250 11,000 10,000 17,200 T .... 37,ooo 13,000 11,000 19,200 K .... 346,ooo 49,000 14,000 75,000 L .... 121,000 67,000 37,ooo 34,750 PROBLEMS IN ACCOUNTING 43 factories, but in one amount only ; and it is desired that the account include any expenditure incurred by the company for good-will, etc. Make opening entries in cash-book, journal and ledger, covering in full the above transactions. 91. A and B buy merchandise to the amount of $4,000, A contributing $2,500 and B $1,500. They sell to C a Vz interest in the business for $2,000. How much of the $2,000 will A and B receive respectively, in order to make A, B and C equally interested ? 92- *>i Three brothers, A, B, and C, own all the capital stock (each Vz] 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 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 i ) How much should C pay to each of the other stockholders ? (2) Outline the entries necessary to record all the above stated transactions on the books of X and Y. 93- *H V 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 company $200,000 of the stock to provide working capital. $60,000 of this stock is sold at 50% of par ; 100,000 at 60% ; and 40,000 at 70%. (a) Make all entries necessary to show these transactions, all subscriptions being paid in cash. (b) Show the balance sheet as it will stand after these trans- actions. 44 PROBLEMS IN ACCOUNTING 94- On December 31, 1910, the balance sheet of the Wrigley Supply Company was as follows : Real Estate and Build- Capital Stock $ 60,000 ings $ 50,000 Bills and Accts. Pay. . . . 25,000 Machinery 5,ooo Surplus 15,000 Furniture and Fixtures . 5,000 Merchandise Inventory. 25,000 Bills and Accts. Rec .... 10,000 Cash 5,ooo $100,000 $100,000 The Wrigley Supply Company now sells all its assets with the exception of its Cash to The Interurban Supply Company. The sell- ing price is $120,000 ; $60,000 being payable in cash and $60,000 in the 6% cumulative preferred stock of The Interurban Supply Com- pany. After the sale has been consummated The Wrigley Supply Com- pany pays off its outstanding liabilities and then distributes its remaining assets pro rata among its stockholders and dissolves. State how much cash and how much stock of The Interurban Company each share of The Wrigley Supply Company is entitled to receive in the final distribution. Make all the journal entries neces- sary for the books of The Wrigley Supply Company. A. B., desiring to incorporate his business, secures a charter under the laws of Pennsylvania, on December 28, 1910, the A. B. Company being organized for the purpose of manufacturing chemicals and for the sale of the products of such manufacture. The capital stock of the company consists of 3,000 shares of the par value of $100 each, the subscribers being as follows : A. B 2,996 shares C. D i share E. F i " G. H i " J. K i " A. B. advances from his own funds the minimum amount of cash required by law. The balance of the subscription is to be paid for in Formulae, Trade Marks, and Patents belonging to A. B. to the PROBLEMS IN ACCOUNTING 45 amount of $150,000, and a sufficient amount of the tangible assets of A. B.'s business, a Balance Sheet of which at January I, 1911, is as follows : Real Estate $ 25,000 Bills Payable $ 2,000 Machinery 30,000 Accts. Payable 3^43 Fixtures 15,600 Capital of A. B : . . 152,279 Manufactured Product. 15,220 Materials 28,650 Coal 578 Prepaid Insurance 1,856 Cash 12,106 Accts. Receivable. . , . . . 28,412 $157,422 $157422 (a) Prepare entries for opening the books of the A. B. Com- pany. (b) Prepare appropriate entries for the books of A. B. Two manufacturers of steel castings with their plants located in the same city decide to eliminate local competition by consolidating. A company is incorporated with $250,000 preferred and $250,000 common stock, to take over the assets and business of both plants. The new corporation buys the two plants, subject to a payment of $10,000, giving therefor its capital stock to the full amount author- ized. Twenty per cent of both common and preferred stock is donated to the new corporation's treasury in order to provide work- ing capital. The corporation sells three-fourths of the donated pre- ferred at 95, giving a 50% bonus in donated common stock. Exten- sions and betterments are considered desirable, and the corporation issues $100,000 6% ist mortgage bonds, which bonds are sold at par with a bonus of 10% preferred and 30% common. Prepare all the journal entries necessitated by the above trans- actions. 97- Several manufacturers consolidate their interests and organize the Consolidated Manufacturing Company, with an authorized capital stock of $1,000,000, divided into 5,000 shares of common stock and 5,000 shares of preferred stock at $100 each par value. The manufacturers sell to the company all of their assets, subject to floating debts of $115,000, divided into notes payable $65,000, and accounts payable $50,000, for the sum of $1,000,000, payable $1,000 46 PROBLEMS IN ACCOUNTING in cash, $499,000 in common stock, and $500,000 in preferred stock. The company agrees to pay the debts of $115,000. The active assets acquired are inventoried by the Consolidated Manufacturing Com- pany as follows : Real estate $175,000, machinery $200,000, and mer- chandise $155,000. The patents and good will were inventoried at a sum equal to the difference between the net cost to the company of the assets acquired and the above valuation of the active assets. The company received $1,000 cash for 10 shares of common stock, and for the purpose of providing funds for working capital author- ized an issue of bonds amounting to $300,000, of which $200,000 were immediately sold as follows: $100,000 for cash at 80%, and $100,000 for cash at par, with a bonus of common stock amounting to $100,000. For the purpose of providing common stock to be given as a bonus the manufacturers donated $200,000 of common stock to the treasury of the company. Prepare the journal and cash entries for the company, covering all of the above transactions, and prepare a balance sheet of the com- pany. 98. A corporation organizes under the laws of the state of New Jer- sey to conduct a manufacturing business, with an authorized capital stock of $1,000,000.00, divided equally between preferred and com- mon. Five incorporators each subscribe for 100 shares of the com- mon stock of a face value of $100.00 per share. John Jones pur- chases from three manufacturers 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,- ooo.oo of said bonds in the company's treasury. Prepare opening entries with necessary explanations of the trans- actions and a statement of the company's condition after having acquired the three plants. 99- 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 common and $250,000 pre- ferred 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 PROBLEMS IN ACCOUNTING 47 their complete plants for $499,500 and transfers said plants to the Prosperous 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 build- ings, $75,000 ; plant and machinery, $200,000 ; tools, equipment and fixtures, $50,000; inventories, $100,000; accounts receivable good $28,000, doubtful $5,000; cash, $12,000. Prepare (a) opening entries for the books of the Prosperous Company; (b) initial balance sheet showing the company's financial condition. 100. The Smith Brewing Co. with $1,000,000 capital stock, the Young Brewing Co. with $500,000 capital stock, and the Star Brewing Co. with $400,000 capital stock, agreed to consolidate as the Universal Brewing corporation, the new company to buy all the properties of the old companies at a valuation to be fixed by appraisal, payment therefor to be made in full-paid stock of the new company, the old companies to pay off their own indebtedness. The appraised values of the old companies are as follows: Smith Young Star Real Estate and Buildings $ 680,000 $327,000 $126,000 Plant 390,000 160,000 71,000 Cash 15,000 3,000 1,000 Bills Receivable 10,000 6,000 Horses, Wagons and Harnesses 4,000 3,ooo 1,500 Office Furniture 1,000 1,000 500 Total $1,100,000 $500,000 $200,000 Total Appraised Value $1,800,000 On this valuation the Universal Brewing Corporation issued $2,- 000,000 of stock, shares $100 each, which was divided pro rata among the old companies on the basis of their appraised value, no fractional shares of stock to be issued, odd amounts to be paid old companies in cash. Give journal entries necessary to set up property accounts and credit old companies with their pro rata on the books of the new company. 4 8 PROBLEMS IN ACCOUNTING At the time of the consolidation the ledger accounts of the Star Brewing Company were as follows : Real Estate and Buildings $250,000 Plant 247,000 Cash 1,000 Horses, Wagons and Harness 1,800 Office Furniture. . 1,200 $501,000 Capital Stock $400,000 Bills Payable 50,000 Accounts Payable 51,000 $501,000 Make the proper journal entries to liquidate in stock of the new company the liabilities other than capital stock, to apportion the re- maining stock and cash, and to close the books of the Star Brewing Company. 101. 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. IO2. The Royal Manufacturing Company has been organized with an authorized capitalization of $500,000 (All Common Stock). $420,- ooo 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. 103. The following are subscriptions for stock in the Red Jacket Min- ing 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 installment being recorded on the back of the certificate. PROBLEMS IN ACCOUNTING 49 Jan. i. 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. Rule a Stock Ledger and enter the following transactions: The Jordan & Maher Co. is incorporated with an authorized capital stock of $15,000, all of which is issued and paid. The stock- holders are as follows : A. J. Bennett, 50 shares ; Cyrus Crafts, 35 shares; J. O. Johnson, 30 shares; J. F. Connell, 25 shares, and E. B. Bosford, 10 shares. Crafts buys all of Bosford's shares; Johnson sells 10 shares to Bennett; Connell sells 15 shares to A. B. Freedman. CHAPTER VI 105. The year's cash receipts of a corporation were $250,625.16, dis- bursements $110,328.28. Are the directors warranted in declaring a dividend on the presentation of these facts alone? Give reason for your answer. 106. State the points of difference between a statement of receipts and disbursements and a statement of revenues and expenses. Under what conditions would they be alike ? 107. "No dividends can be declared before the expenses of running 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. 108. In closing the books of a firm it is found that the accounts receiv- able include $5,000 of worthless accounts and $10,000 of doubtful accounts. The firm decides to deduct from the gross profits $15,000 for these items. What would you consider the best method of carry- ing these items on the ledger ? 109. Define : Charging to Capital ; Charging to Revenue. What rule controls in determining whether certain payments belong to capital or to revenue? no. A Life Insurance Co. has issued $100,000 of stock all fully paid up in cash. During the first year preliminary expenses and ex- penditures for agency establishment and advertising amount to $15,- ooo. The liabilities exceed the tangible assets by $12,000 at the end *s^ PROBLEMS IN ACCOUNTING 51 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? in. A railway company leases the property of another railway com- pany for a period of 50 years and, as part consideration for the lease, . agrees to expend immediately $250,000 on the leased property, in or- der that it shall have a greater operating efficiency. At the termina- tion of the lease the property is to be returned to the lessor in the same condition as at the time of making the lease, subject to ordinary wear and tear. What entries, if any, would you make on the books of the lessor in respect to the expenditure of the $250,000, and why? What entries required on lessee company books? 112. If a company, duly organized, acquires several plants that are found to be in a "run down" condition, and to require extensive out- lay for repairs and renewals to bring them to the required state of efficiency, should such outlay be charged against Capital or against Revenue ? us. 7 c Which of the following should be charged to Capital and which against Revenue: The purchase of good will; Loss by fire of uninsured property ; Promotion expenses ; The purchase of a lease ; Replacement of machinery ; Repairs to machinery ; Additional machinery. 114. Expenditures are made by a corporation for items of each of the following classes: (a) taking down a machine in one part of a fac- tory, moving it and putting it up in another part, (b) expenses of in- corporating the company, including state charges and lawyer's serv- ices, (c) brokerage on purchase of a piece of property, (d) com- mission on an issue of debenture bonds, (e) costs attending a mort- gage, (f) furniture and fitting of a city office and salesroom, (g) J 52 PROBLEMS IN ACCOUNTING costs of patents, including solicitor's charges and government fees. Which items should be charged to capital and which to revenue? State reasons for your answer in each case. In closing the books of a company at the end of its first fiscal year how would you treat : Organization expenses ; Advertising booklets on hand estimated to last another year ; Cash paid for patents ; Bonus paid to secure contracts having two years to run ; Pig iron on hand costing $20.00 per ton the market value at the closing date being $18.00. 116. "The total income of a business during any given period is the excess of its net proprietorship at the end of that period over what it was at the beginning. Expenditure for labor and materials to be used upon the property are properly divided therefore, into two classes." (a) What are the two classes mentioned above? (b) What is the basis of their separation ? < 117, 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 account should be treated in closing the books of the company, and give your reasons. 118. A A corporation manufacturing explosives is compelled to pay ex- orbitant rates for a very limited amount of insurance, and in con- sequence 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. PROBLEMS IN ACCOUNTING 53 At the end of the fiscal year the company received dividends from these mutual insurance companies aggregating $2,000. To what ac- count should the cost of the sprinkler system be charged and to what account should this dividend be credited? State your reasons fully. 119. A suburban traction company, after equipping its line at a very considerable expense for overhead trolley and operating same for several years, decides to adopt a third rail system. Extensive changes are necessary in changing power houses, re-arranging tracks, and altering cars, involving an expenditure of $25,000. In addition con- siderable machinery and rolling stock, the original cost of which had been treated as capital outlay and was carried on the books at a valuation of $25,000, is rendered obsolete and is disposed of for $3,500, showing a loss of $21,500. The profits from operation for the year are $18,000. State how you would recommend that the matter be dealt with in the company's accounts and whether the company can pay a divid- end. Give Journal entries. 120. When provision is made for bad and doubtful debts and for possible discounts, how are the amounts determined, what entries are made in the books, and how do they appear in the Balance Sheet and Expense and Revenue Statement? *t A mining corporation has assets comprising, among others, leases, goodwill, rent and royalties paid in advance, and patents. How would you deal with them in the balance sheet and Expense and Revenue Statement? 139. In preparing the balance sheet of a business at the close of a year, how should you treat each of the following items: (a) Bad and doubtful debts? (b) Premiums for fire insurance unexpired? (c) Interest paid in advance on notes payable discounted. (d) Discount on notes receivable. (e) Discount on accounts payable? (f) Actual depreciation of plant? 54 PROBLEMS IN ACCOUNTING 123. On January I, 1915, the condition of a small trading company as determined by an examination of that date was as follows : Assets Liabilities Furniture and Fixtures. .$ 2,000 Capital Stock $ 5.000 Cash 500 Notes Payable 3,000 Notes receivable 3,ooo Accts. Payable 6,000 Accounts receivable 5,ooo 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: Merchandise purchased on credit amounting to $6,000; notes payable amounting to $2,000 renewed; special allow- ances 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,ooo Total disbursements $6,045 Prepare balance sheet as of January 31, 1915, and a statement of profit and loss based on the book value of the merchandise. PROBLEMS IN ACCOUNTING 55 124. 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,ooo Loans repaid 14,000 Sales of cattle 8o359 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 $5540. 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, brand- ing 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-partnership at its termination; (b) the results of the three years' operations; and (c) the interest of each partner. 125. A land company is incorporated with a capital of $50,000. It pur- chases a tract of 104 acres of land at $500 an acre, paying therefor $32,000 in cash and giving capital stock for the remainder of the consideration, and at the same time giving a mortgage to a title guarantee company to secure a loan of $35,000, which is to be satis- fied by partial payments as lots are sold and released. Obligations are incurred on book account as follows : for organi- zation expense, $619; for grading and paving, $23,400; for water mains (a separate enterprise to be reimbursed by service charges when ready for operation), $4,000. Direct expenditures of cash are made for organization expense, $537; for grading and paving, $11,060; for water mains, $1,020; for maps, $700; for advertising, $1,200; for salaries and expenses, 56 PROBLEMS IN ACCOUNTING $8,679. Settlements are made with creditors by cash $8,784 and by capital stock issue $10,000; the remaining capital stock is issued for cash. Lots sold on purchase money mortgages, $24,857; installments collected, $9,442 ; cancellation of title company mortgage on lots sold, $8,050, and purchase money mortgages pledged for loan of $10,000. Interest paid to title company, $1,849; interest received on pur- chase money mortgages, $924. Inventory of lots unsold, including improvements at cost, $66,575, to which latter 10% is to be added for appreciation of value. Maps on hand, $500. Prepare (i) cash summary, (2) skeleton ledger accounts, (3) profit and loss account, (4) balance sheet, covering the transactions above stated. 126. The trustees of an estate of $250,000 make the following invest- ments and collect the income : NV\ PURCHASES Feb. 2 loo shares D. Q. stock, par 100 each, at $109.50. Mar. 5 10 S. P. bonds, maturing 1950, $1,000 each, 6% Jan. i and July i, at $1010 and accrued interest. Apr. 10 Bond and mortgage for $5,000, maturing 1916; interest, 5%, Apr. i and Oct. i. Oct. 6 10 S. P. bonds, maturing 1950, $1,000 each, 6% Jan. i and July i, at $1020 and accrued interest. SALES Oct. 5 loo shares of D. Q. stock, par 100 each, at $110. The D. Q. stock pays quarterly dividends as follows: Apr. i, *M%; J^y r > !^%; Oct. i, 2%. These dividends are received respectively on April 3, July 5, and October 3. The interest on S. P. bonds is received July 2 and the interest on the bond and mortgage for 5 months and 20 days is received on the due date. On April 10 the trustees borrow from the bank $1,100 on col- lateral note and repay the loan October 10, with interest at 6% per annum. Prepare cash account, principal and income accounts of each security, interest and dividend account, and trial balance as of October 10. PROBLEMS IN ACCOUNTING 57 I2 7- (n/\/ LAKEVIEW WATER DEPARTMENT Receipts Water Rates $106,352.62 City's Payment for Public Use of Water 17,549.10 Plumbers' Licenses 150.00 Miscellaneous 2,835.03 $126,886.75 Disbursements Bonds Paid $ 25,700.00 Interest on Bonds 18,049.00 Salaries 17,371.90 Repairs to Mains 460.21 Repairs to Hydrants 1,082.61 Tools and Utensils 495-33 Supplies and Repairs to Sta- tions 5>5&3-3 2 Fuel 12,319.77 Barn expense 1,987.94 Repairs to Service I >575-56 Office expense 1,131.27 Repairs to gates and valves. . 66.63 Repairs to Meters 908.31 Insurance 102.00 Engineering 88.77 Miscellaneous 1,327.46 Special assessment 138.19 Tax refunded at Lansing. ... 1.03 Reconstruction 1,789.58 Temporary loan paid and in- terest on the loan 2,542.50 Meter settings, etc 689.55 Pipe extensions 23,259.79 Improvements to stations .... 7,650.03 $124,320.75 From the above data prepare Income Account for the Water Department, assuming that the value of the water furnished the city was $25,500.00. 58 PROBLEMS IN ACCOUNTING 128. The city of Urban owns its water plant. The total cost of the plant and extensions, new, was $530,000. At the end of the year 1912 the city treasurer makes the following report : RECEIPTS AND DISBURSEMENTS FOR YEAR 1912 Receipts Assessed Rates $33,967.36 Metered Water 14,722.48 Mason Work - 836.04 Meter Rentals 172.44 Miscellaneous 71-75 Total $49,770.07 Disbursements Operation Pumping Station expenses. $ 6,402.54 Fuel 5,061.46 Office and distribution expenses 10,072.88 Rebate and stoppages 605.76 Maintenance Repairs to Distribution 607.35 Repairs to Pumping Station 644.19 Repairs to Meters 581.50 Interest on Bonds and Sinking Fund 30,000.00 New Extension 8,000.00 Insurance 414.88 $62,390.56 On the basis of the above figures the City Treasurer reports that the water plant has been operated at a deficit of $12,620.49, and recommends that the water rates be raised. Assuming that the cost new of the depreciable property was $500,000, and that 1^/2% on cost new is a reasonable annual allow- ance for depreciation ; that the fire protection furnished free to the city by the maintenance of fire hydrants costs (including deprecia- tion and interest on investment) $12,000 per year; that the water PROBLEMS IN ACCOUNTING 59 furnished the public institutions of the city (public schools, jail, en- gine house, drinking fountains, etc.) would bring if paid for at meter rates $2,000; that of the $450,000 of 5% bonds originally issued to build the plant $300,000 are still outstanding while $150,000 have been redeemed and cancelled. On the basis of these assumed figures and the statement of receipts and disbursements construct an income account for this water plant. What per cent of return is the plant yielding the city on its invest- ment assuming that the present value of the plant (cost new less depreciation) is $465,000? 129. "Income must be accounted for, not when it is received in actual cash, but as it accrues to the corporation." Defend this statement, and illustrate. 130. I ^ I The auditor of an incorporated company which has been accus- tomed to making investments in interest-paying securities, in making his statement to the directors presented a balance sheet showing a surplus of $65,000. After discussion, the directors determined that they did not wish to declare a dividend out of the surplus and gave their auditor the following order : "Decrease this surplus by invest- ing $50,000 in the bonds of the XYZ Railroad Co." Presuming there was an item in the aforesaid balance sheet of cash $75,000, what effect will the carrying out of the directors' order have upon the surplus of $65,000? Should fluctuation in the value of the permanent assets of a com- pany be allowed to affect the result of the loss and gain account? Give reasons for your answer. I32< ir^ In examining a business to determine and 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 inventory of December 31, 1905, that an error had been made in the footing of the inventory of December 31, 1906, by which that inventory was overstated to the amount of $250 ; and that in pricing the inventory <6o PROBLEMS IN ACCOUNTING 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. 133- The East and West Railroad Company hauled many tons of coal during the year to the various distributing points along its line for the use of the locomotives, and upon this Company coal $70,000 freight was charged, such charge being made against the cost of fuel for locomotives, and credited to freight earnings. Was the above method of handling this freight item correct? In answering state your reasons fully. 134. A construction company has a number of contracts partly com- pleted at the close of the fiscal year. Would you carry any portion of the anticipated profit on these contracts into Revenue account? If so, why? 135. An examination of the minutes and other records of the books of a corporation, preceding an audit, discloses that a revaluation of its buildings, plant, and machinery had been made by expert appraisers called in for the purpose. The report of these appraisers states that the values as determined by them are greater than those shown on the books of the company. Should such increased value be entered on the books of the corporation? How would this increased value show, if at all, in the profits and loss account and the balance sheet ? 136. In auditing the accounts of a corporation you find that the com- pany utilized its own materials and labor in the construction of extensive additions to its plant, and that it has charged up such work at regular trade prices sufficient to yield to it a substantial profit, which has been credited to the Expense and Revenue Account. Do you see any objection to this course? Explain fully the theory upon which your answer is based. 137- A corporation purchases a tract of land for $25,000.00 and after holding it for 3 years sells half of it for $20,000.00, using the remain- der for an extension of its plant. PROBLEMS IN ACCOUNTING 6r The president of the company favors crediting Profit and Loss with $7,500, crediting Real Estate Account with $12,500.00. The directors ask your opinion. Write out the letter you would submit. 138. The statement submitted by the treasurer of a corporation shows receipts of money greatly in excess of disbursements, leaving a bal- ance in hand of more than enough to pay to stockholders a dividend of 6%. The directors declare such dividend pursuant to the state- ment submitted without asking for any other further information. Was the act of the directors a prudent one under the circumstances ? Give reasons for your answer. 139. A life insurance company has issued $100,000 of stock, all fully paid up in cash. During the first year preliminary expenses and expenditures for agency establishment and advertising 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 ? 140. A New York company sells its capital stock at a premium and the directors pass a resolution to declare a dividend out of the surplus thus paid in. Would you call attention to this action if asked to make up the accounts, and if so, why? 141. "Premiums realized on capital stock are neither income, profits, nor an excess of capital obtained in exchange for a liability." (Esquerre.) Explain. 142. 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 investment in property? 143- The principal objects of a corporation were to buy, rent, and sell land. The articles of incorporation provided that dividends should be paid out of net earnings. In 1882 the company had a bad debt of $350,000 and they met this by writing up in the balance sheet of that year the value of their lands some $340,000 above cost price, and 62 PROBLEMS IN ACCOUNTING brought down such increased value into the credit side of the profit and loss account as a set-off against the bad debt, which was in this way treated as written off. Was this legitimate accounting? 144. In 1885 the above company made a profit on their revenue accounts, out of which the payment of a dividend on preferred stock was proposed. A common shareholder brought suit to restrain the payment of the proposed dividend on the ground that some of the company's lands had, during the year 1885, much depreciated in value and that if such depreciation were debited to the profit and loss account there would be a considerable loss and no fund available for dividends. Was the ground for action a good one ? CHAPTER VII A banking firm with $200,000 of capital stock outstanding 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, charg- ing both these amounts to the Undivided Profit account. The bonds had not fallen 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 ? 146. Describe a sinking-fund. How should the account of such a fund be conducted in the case of a manufacturing corporation that bonds its works for $100,000, payable in 20 years, and wishes to accumulate during that period the sum necessary to retire the bonds at maturity ? What amount must be charged the first two years, assuming the in- terest rate to be 4% ? 147. Draft journal entries showing how a sinking fund of $5,000 a year should be provided for retirement of an issue of bonds, the interest rate being (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 each year $50,000 in order to pro- vide 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 sink- ing 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. 64 PROBLEMS IN ACCOUNTING (c) When the sinking fund assets mentioned in (b) are sold $1,048,500 is realized, because of a rise in the market price of the securities. To what account would the above excess of $48,500 naturally be transferred? Could it be legitimately used for the pay- ment of dividends ? M9. A corporation with $200,000 common stock, $100,000 6% income bonds and $100,000 5% 1st mortgage bonds outstanding sets aside $10,000 a year out of profits as a sinking fund with which to retire the ist mortgage bond issue. During the last four years of the life of the bonds profits were large enough to provide interest and sink- ing fund on the bonds. After the sinking fund assets have been used to pay off the bonds, the income bondholders bring action to compel payment of the four unpaid dividends. Have they any reasonable ground for action? Explain fully the reason for your answer. 150. Among the credits in the Profit and Loss account of a Corpora- tion for 1909 is the following item, "Profit on bonds repurchased for sinking fund, $16,500." (a) Explain the probable origin of this item. (b) The par value of the bonds repurchased during 1909 was $266,000. Give the entries made at the time of purchasing the bonds. What entries should have been made? The Virginia Coal Company was organized January I, 1906, began operations about January 7, 1906, and kept an ordinary double entry set of books but did not close their accounts at the end of any fiscal year. After an examination and verification of all accounts stated in the trial balance they are accepted as correct except that termed "Sinking Fund Payment" ($22,500). The mortgage, securing bonds to the amount of $100,000, con- tains a sinking fund clause providing that the company shall deposit semi-annually with the Sinking Fund Trustee 5c per ton of coal mined ; such payments shall be made to trustee during January and July of each year for the preceding six months' period. Money so deposited is to be applied, as soon as practicable, to purchase bonds at not exceeding 115 and accrued interest; compensation and expenses of trustee are also to be paid from the Sinking Fund. Bonds, when PROBLEMS IN ACCOUNTING 65 redeemed, cannot be canceled, but are to be held by trustee, who shall collect the semi-annual interest thereon and apply it to the same pur- poses as the 5c per ton payments. Bonds are dated January i, 1906, run for 20 years, and bear in- terest at 6% per annum, payable January I and July I of each year. Payments to Sinking Fund Trustees have been made as follows: July 27, 06 Payment for 6 mo. ending 6/30/06, 5c per ton on 120,000 tons $ 6,000 Jan. 24, '07 Payment for 6 mo. ending 12/31/06, 5c per ton on 150,000 tons 7>S July 28, 07 Payment for 6 mo. ending 6/30/07, 5c per ton on 180,000 tons 9,000 $22,500 On January 30, 1908 the Company paid to the Trustee $5,500 for Sinking Fund payment for the 6 mo. ending Dec. 31, 1907, being 50 per ton on 110,000 tons. The Trustee submitted statements of receipts and disbursements for account of the Sinking Fund to date (January 31, 1908) as follows : Cash Received to Dec. 31, 1907 July 27, 1906 S. F. deposit for 6 mo. ending June 31, 1906, 120,000 tons at 5c $6,000 Jan. 5, 1907 Jan. '07 coupons on 5 bonds 150 Jan. 24, 1907 S. F. deposit for 6 mo. ending Dec. 31, 1907, 150,000 tons at 5c 7,5 July 3, 1907 July '07 coupons on 12 bonds 360 July 28, 1907 S. F. deposit for 6 mo. ending June 30, 1907, 180,000 tons at 5c 9,000 $23,010 Cash Disbursements to Dec. 31, 1907 Aug. 16, 1906 Bonds redeemed 5,000 at no $5,500.00 Commission at %% 12.50 Accrued interest 37-5 ? 5,550 Feb. 15, 1907 Bonds redeemed: 4,000 at 108 $4,320 2,000 at no 2,200 1,000 at 112 1,150 $7,640.00 Commission I 7-5 Accrued interest 52.50 $ 7,710 66 PROBLEMS IN ACCOUNTING Aug. 12, 1907 Bonds redeemed : 9,000 at 90 $8,100 1,000 at par 1,000 $9,100 Commission 250 Accrued interest 70 $ 9>420 Compensation of Trustee, $100; Advertising, $50 150 $22,830 Cash balance in hands of trustees, Dec. 31, 1907 $ 180 Received in January 1908, viz : S. F. deposit for 6 mo. ending Dec. 31, 1907, 110,000 at 5c $5,500 Coupons on 22 bonds in S. F 660 Interest allowed on balance to 12/31/08 100 6,260 $6,440 Prepare entries to state properly on the books of the Virginia Coal Co. all Sinking Fund transactions. 152. A corporation issues 5% 2O-year bonds to the par value of $2,000,000, at 92. Seven years later the company provides for a new issue of 5% 3O-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 exchanging for them new bonds of the same par value and $140,000 ($7.00 per $100.00 bond) in cash. (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 refund- ing operation ? 153- ^ On January I, 1906, a corporation issued and sold 5% 2O-year bonds, interest payable July I and January i, to the par value of $1,000,000, for $900,000.00 cash. These bonds contained a sinking fund provision under which the corporation was obliged to call and cancel 2% of the original issue on January i, 1911, and each year thereafter until maturity. The bonds were callable at 105 and ac- crued interest. PROBLEMS IN ACCOUNTING 67 In conformity with these provisions the corporation called $20,- ooo of the bonds at 105 on January i, 1911, and each year since, and expects to continue the practice. (a) What was the original discount on these bonds at the time of issue? (b) What is the unextinguished bond discount on January i, 1916? (c) What entries would you have made when you paid the bonds which were called on January i, 1911 ? (d) What is the effective rate of interest on the capital which the corporation secured from the sale of these bonds? 154- "Discounts and Premiums on Bonds are in effect an addition to or a deduction from the interest rate paid on the bonds over their life." (Dickinson). Defend and illustrate this .statement in view of your definition of interest. 155. A. In 1910 a trustee buys for investment $10,000.00 (par value) Penna. R. R. 6% bonds due 1921 at 1 12. 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? 156. A corporation issues $100,000 of 7% 2O-year bonds at $111.56, giving a yield of 6%, and $100,000 of 4% lo-year bonds, at $76.89, giving a yield of 6%. At the end of a half-year they pay $5,500 in interest. Give entries made at time of issuing bonds and of paying interest. 157- To what should the discount on bonds sold for construction pur- poses and the expense of disposing of such bonds be charged? Give reasons. 158. 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. 68 PROBLEMS IN ACCOUNTING 159- Buncombe & Company, Ltd., issued $500,000 5% Debenture Bonds in consideration of $1,080 for every $1,000 bond. The sub- scribers for these bonds were to pay as follows : On January i, $580.00 On July i, 500.00 All the amounts were received by the company on the due dates. Make the necessary Journal and Cash Book entries and post to the ledger. 1 60. An insurance company buys $50,000 J% lo-year bonds at 116 for investment. The bonds will mature at the end of five years. 1 i ) How should this purchase be entered on the balance sheet ? (2) Give the journal entry which would correctly record the facts upon the receipt of the first yearly interest payment. The Toledo Paper Company, finding that it can use to advantage additional capital, issues $100,000 ist Mortgage 2O-year Bonds bear- ing 5% interest. It sells these bonds at 96. Give the journal entry on the books of the corporation. J. M. Davidson buys $10,000 of the bonds of The Toledo Paper Company at the market price of 96. What journal entry will David- son make ? 162. 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 4^% 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 affect its income sheet, or its balance sheet, or both ? 163. A and B are dealers in bonds and share profits in the proportion of 75% to A and 25% to B. They engage C to sell bonds, agreeing to pay him a salary equal to 25% of the net profits to be divided between the partners. PROBLEMS IN ACCOUNTING 69 During the continuance of C's contract the firm purchases $100,000 of Waterville Traction Company first mortgage $% bonds on a 4% basis. The bonds have eighteen months to run, interest pay- able semi-annually (three interest periods). (a) The firm holds the Waterville bonds till maturity. Prepare a statement of the Waterville bond accounts, showing cost, interest, and amortization. (b) The total profit for the first year of C's contract is $10,000. Show the division of this profit. 164. 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, without cal- culating or using the market interest, if you knew the market interest rate? If so, how? 165. 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 i is $10,089.20. On July I 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 i 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. i is $10,040.98. What will you debit at the time of purchase ? What should you credit when the $250 interest on the last pur- chase is received on January i ? . A corporation issued $500,000 par value 2O-year bonds, interest at 4% payable semi-annually. These bonds were sold to yield 5%. After 5 years the corporation, needing more capital, issues $2,000,000 par value, 6%, 2o-year bonds, interest payable semi-annually. Part of these are exchanged for the entire original issue of 4% bonds and 70 PROBLEMS IN ACCOUNTING the remainder are sold. The whole transaction is carried through on the basis of a 5% yield. The value of the 6% bonds on this basis was $2,251,028, while the value at the time of refunding of the 4% bonds was $447,674.25. Give the journal entries on the books of the corporation at the time of the exchange of the 6% bonds for the 4%'s. A bond (interest 6% payable semi-annually) whose par value is $1,000, has been purchased to yield 5%. The bond is due two years from the date of purchase. The purchase price is $1,018.81. What entries should be made on the books of the purchaser (a) When he acquires the bond? (b) At each interest payment? (c) At date of maturity? Give actual figures. 168. You buy a bond on Jan. i for $10,449.13, which is its theoretical value on a 4% basis. On Mar. i you buy another like it and pay $10,518.79, which includes accrued interest. On July i you receive your semi-annual interest of $250 on each bond. The book value of the two bonds on July i is $20,816.22. What entry should you make on your books for the original pur- chase ? What for the March ist purchase? What for the interest received on July i ? The book value of the two bonds on the subsequent January i is $20,732.55. You sell them on October i for $21,030. How much do you make or lose on the sale ? 169. You buy a bond on Jan. i, for $10,560, which is its value on a 4% basis. On Mar. I, you buy another like it and pay $10,665.50, which includes accrued interest. On July i, you receive your semi-annual interest of $300 on each bond. The book value of the bonds on July i is $20,942. What entry should you make on your books at the time of the original purchase ? What for the Mar. i purchase ? What for the interest received on July I ? PROBLEMS IN ACCOUNTING 7I The book value of the two bonds on the subsequent Jan i is $20,762. You sell them on Oct. I for $21,200. How much do you make or lose on the sale ? 170 7-7 V A corporation has outstanding $20,000,000 first mortgage bonds, interest 7%, payable semi-annually on January ist and July i. These bonds fall due as follows : $5,000,000 on Jan. i, 1918 5,000,000 on Jan. i, 1920 5,000,000 on Jan. i, 1922 5,000,000 on Jan. I, 1924 This $20,000,000 issue is to be refunded as of January i, 1916 on a 3 l /2% basis. Allowance is to be made for the difference in interest for the remainder of the lives of the various bonds, and such differ- ence is to be paid in bonds. (a) What amount of bonds must be issued? (b) This same corporation has outstanding $10,000,000 of in- come 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 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 i, 1916 and on Jan. i, and July i, 1917 to 1924? There were purchased December 31, 1907, $100,000 of Altoona 4^'s for $103,394.43 ex. interest. On June 30, 1909 half of the bonds were sold for $52,418.55 ex. interest. Given that the bonds are semi-annual and that the price paid is such as to net the investor the nominal rate of 4% per annum, that is 2% semi-annually, determine the profit made from the sale and the interest revenue for the two years ended December 31, 1909. Give an analysis of the Bond Ledger account as it would appear at the close of business December 31, 1909. 72 PROBLEMS IN ACCOUNTING 172. A corporation authorizes an issue of $1,000,000 of bonds. The trust company issues and certifies $500,000 of these bonds to Decem- ber 31, 1914. On this date the company sells $200,000 of bonds, pledges $200,000 as collateral security for the payment of its notes, and has $100,000 of bonds in the treasury. How should this issue of bonds appear on the balance sheet of the corporation on December 173- The payment made for building a bridge is $1,200,000 of the com- pany's 4% bonds. The same bridge could have been built for $1,080,000 in cash. Make the proper journal entries upon the com- pletion of this transaction. 174. The following argument is presented by an official of the com- pany, in view of the facts stated in Problem 282 : "The bridge cannot be built without capital any mor^t|af\ it can be built without draw- ings. The discount on the bonds is a cost of acquiring the bridge just as much as the wages of the engineer who draws the plans, for the full face value of the bonds must be returned to the bond- holders. The bridge should stand on the books as costing $1,200,- ooo." Discuss this argument fully. The A. B. Banking Co. of New York borrows 20,000 from C. D. & Co., of London, for 60 days at 4%, money being at 6% in New York. The rate of exchange is 4.87^4 when the loan is made and 4.88)4 when it is repaid. If brokerage is 1/32%, cable charges $15, how much is saved or lost by borrowing abroad? (Interest on basis of 360 days to the year.) CHAPTERS VIII AND IX 176. 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 75o,ooo 700,000 800,000 177. The A. B. C. Co. started business January i, 1911. The follow- ing Balance Sheet is an accurate representation of the condition ot the business. Real Estate and Buildings $200,000.00 Plant and Machinery 280,000.00 Cash and other cur- rent assets 70,000.00 Capital Stock $350,000.00 Mortgage 150,000.00 Bills Payable 50,000.00 $550,000.00 $550,000.00 After operating three years, the Company shows the following Balance Sheet. What is the proprietorship as shown by this state- ment? Real Estate and Buildings $200,000.00 Plant and Machinery 300,000.00 Cash and other cur- rent assets 157,000.00 Profit and Loss 10,000.00 Capital Stock $350,000.00 Mortgage 150,000.00 Bills Payable 60,000.00 Accounts Payable . . . 50,000.00 Reserve for Accrued Depreciation 57,000.00 $667,000.00 $667,000.00 74 PROBLEMS IN ACCOUNTING An examination of the accounts discloses that they are correct except for the following facts : In 1911, 23 machines were purchased at a cost of $25,000 to replace the same number of machines aband- oned whose original cost was $13,000; the entire $25,000 was charged to operating expenses as renewals. The allowance for depreciation iwas $18,000, while $12,000 would have been adequate. In 1912, $9,000, charged to Maintenance, was really improvement to build- ings. In this year, the allowance for depreciation was $20,000, while $13,500 would have been adequate. In 1913, 16 new machines, cost- ing $21,000, were purchased and charged to Operating Expense. These replaced 16 machines whose original cost was $12,500. De- preciation to the amount of $19,000 was charged when $14,000 would have been adequate. (a) Rewrite the Balance Sheet for January I, 1914 in the light of these discoveries. (b) What is the proprietorship as shown by the Balance Sheet as so reconstructed? A manufacturing corporation handling a patent device issued bonds aggregating $375,000, payable in installments of $25,000 an- nually for fifteen years. Having in mind possible competition and obsolescence of its property, it was provided that the sinking fund installments be charged against earnings. 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 pro- vided 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 in- cluded among the operating expenses. When their report was sub- mitted to the directors, the president referred to his contract and stated that the sinking fund provision and depreciation were synony- mous and that he was entitled to 5% of the earnings before any de- duction was made for depreciation. The matter is referred to you as an accountant ; what is your opinion ? 179. The secretary of a manufacturing corporation which has no sur- plus 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 PROBLEMS IN ACCOUNTING 75 for depreciation 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 cor- rective entries which should be made. What would be the effect on the balance sheet of such entries ? 180. The State of New York requires telephone companies to main- tain a Depreciation Reserve to take care of the actual depreciation of tangible assets. The Treasurer of a certain telephone company re- ported Cash in Bank $15,000 among his assets. Among his liabili- ties he reported a loan from the same bank of $12,000. He was receiving 3% interest on the cash in bank and paying 6% interest on the loan from the bank. When asked why he did not use the cash in Bank instead of borrowing he replied: "Your requirement with respect to Depreciation Reserves prevents me from doing so." Write him a brief letter setting him right. Tell him how he should keep these accounts. 181. When auditing the books and accounts of a concern operating a large machine shop you find that the machinery and tools have been regularly depreciated each year, that their value as shown by the books is considerably less than the value as shown by an inde- pendent appraisal, and that the firm has set up the higher values as shown by the appraisal on the books. To what account would you recommend the corresponding credit to go, and for what reasons ? Ite. Defend the statement that Maintenance should be charged not when the repairs are actually made, but should be spread on some uniform basis over the life of the particular item of plant involved. The actual cost of repairs in a certain plant for the years 1908- 1913 inclusive was as follows : 1908 $ 400,000 1909 600,000 1910 55 ' 000 191 1 450,000 1912 640,000 1913 600,000 $3,240,000 7 6 PROBLEMS IN ACCOUNTING If Maintenance charges had been made on the basis of an even percentage of Gross Earnings, they would have been as follows : 1908 $ 420,000 1909 585,000 1910 540,000 I9H 495,000 1912 630,000 $3,240,000 Assuming that the method suggested in 185 had been followed and the charges to Income for Maintenance had been on the even percentage basis here shown, what entries would have been made each year to provide for Maintenance ? A syndicate owning in fee large tracts of timber land makes a contract with a lumber company to sell 1,000,000,000 feet of stand- ing timber, at the rate of $3 per M feet. The lumber company agrees to cut and pay for this timber within a period of six years, and guar- antees that the following shall be the minimum amount to be cut and paid for in each of the six years, payments to be made in cash at the end of each six months : 1st year ....... 80,000,000 feet $ 240,000 June 30 $ 120,000 Dec. 31 120,000 2d 4th 5th 6th 90,000,000 100,000,000 120,000,000 150,000,000 200,000,000 270,000 June 30 135,000 Dec. 31 135,000 300,000 June 30 150,000 Dec. 31 150,000 360,000 June 30 180,000 Dec. 31 180,000 450,000 June 30 225,000 Dec. 31 225,000 600,000 June 30 300,000 Dec. 31 300,000 $2,220,000 $2,220,000 The syndicate desiring to anticipate the payments under its con- tract, applies to its bankers for the cash value of the contract, offering as security the contract itself and a mortgage on the timber land. What is the present worth of the contract, calculated on a 6% basis? PROBLEMS IN ACCOUNTING 77- 185. 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 (i), to provide, out of the above named profit and loss balance 7^2 per cent deprecia- tion on plant and machinery; (2) to write off as uncollectable $1,500 of the accounts receivable and to make a reserve of 2 per cent on the remainder of the accounts receivable to provide for possible losses thereon; (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. 186. (a) Defend the statement that Maintenance should be charged not when the repairs to plant are actually made, but should be spread on some uniform basis over the life of the particular item of plant involved. (b) The actual cost of repairs in a certain plant for the years 1908-1913 inclusive was as follows : 1908 .......................... $ 400,000 1909 .......................... 600,000 1910 .......................... 550,000 1911 .......... .- ............... 450,000 1912 .......................... 640,000 1913 ........... . .............. 600,000 $3,240,000 If Maintenance charges had been made on the basis of an evert percentage of Gross Earnings, they would have been as follows : 1908 .......................... $ 420,000 1909 .......................... 585,000 1910 .......................... 540,000 1911 .......................... 495oo 1912 .......................... 630,000 1913 .......................... $3,240,000 7 8 PROBLEMS IN ACCOUNTING Assuming that the method suggested in (a) has been followed, and the charges to Income for Maintenance had been on the even percentage basis here shown, what entries would have been made each year to provide for Maintenance ? 187. The following is the Balance Sheet of the X. Y. Z. Co. on Dec. 31, 1910. Capital Stock $500,000 Bills Payable 100,000 Accts. Payable 20,000 Real Estate and Plant. .$420,000 Bills Rec 60,000 Accts. Rec 19,000 Supplies Sy Cash 40,000 Merchandise 96,000 Profit and Loss 20,000 $640,000 $640,000 (a) An investigation shows -that a decrease in the value of the real estate of $12,000 has been written off the real estate account and debited to Profit and Loss; also that improvements in the plant amounting to $16,000 have been charged to expense. Make the cor- rected Balance Sheet. (b) Suppose the investigation had shown an appreciation in the value of the Real Estate of $20,000 which had been carried to Profit and Loss, and that repairs and replacements to the amount of $18,000 had been charged to expense. Correct the Balance Sheets and the above valuation of the active assets. 1 88. Product by year. 1900 12 1901 ii 1902 ii 1903 ii 1904 5 1905 10 1906 10 1907 9 1908 9 1909 12 100 Present value of output at 5%. $77.70445 69.58975 62.06919 54.17264 45.88131 35-33403 27.10077 1945578 11.42856 PROBLEMS IN ACCOUNTING 79 The above table gives, in the first column, the net earnings, by years, for a certain machine, before deducting depreciation. In the second column is shown the present value of these future earnings, at the beginning of each of the years, computed on a 5% basis. (a) From the data above presented compute (i) the deprecia- tion by years, on the basis of declining value (2) the annual profit. (b) Construct a table showing the depreciation by years on the basis of an even charge, and, also, the profit by years. (c) Which of the above methods of writing off depreciation gives greatest uniformity as regards (i) annual profit; (2) rate of return on the investment; (3) cost per unit of product? Explain fully. 189. What do you understand by the term "depreciation," and how should it be provided for on the books of a manufacturing company owning its plant and equipment? Wherein does the charge for depreciation differ from the charge for repairs and renewals? Can the charges for depreciation be avoided through any system of book- keeping ? I9 ' Describe two methods of treating the allowance for depreciation of machinery on both the books and the balance sheet. What are the various methods of determining the amount to be written off the cost of a lease for a term of years? Explain which method you prefer and give your reasons. 192. A mercantile company buys the leasehold to a site for $10,000. n The leasehold has 5 years to run. How would you treat this transac- tion in the accounts (a) at the time of purchase, (b) each year dur- ing the remaining life of the leasehold? Give entries. 193- A company leases for a term of fifty years certain unimproved property for factory purposes, paying a ground rent therefor of $1,000 a year. The company erects certain buildings at a cost of $40,000, which are to pass to the owner of the fee at the termina- tion of the lease. Without going into the mathematics of the matter state how you would treat this proposition in the books of account. 8o PROBLEMS IN ACCOUNTING 194. A public service corporation that regularly sets aside from its profits a sufficient amount to provide for depreciation 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. 195. The following statistics are taken from the books of a corpora- tion: Capital Stock ............................. $400,000 Merchandise Inventory .................... 954OO Machinery .............................. 125,000 Undivided Profits ........................ 800 Surplus (Credit) ......... . r ............... 32,900 To cover actual depreciation suffered during past years but which has not been written off before, the directors decide to set aside a machine depreciation reserve of 10% ; they also decide to pay a dividend of 5%. What entries are necessary? 196. A factory cost $100,000.00. Depreciation amounting to $40,000.00 has been charged. An engineer's appraisal shows, actual value ot $80,000.00. Should there be any adjustment of the plant account, and how would the matter of depreciation or appreciation affect the current year's profit and loss account ? You find in the journal of a corporation's books the following entries : Depreciation ....................... $12,000 To Plant ........................ $12,000 Undivided Profits ................... 10,000 To Depr. Reserve ................. 10,000 Depr. Res. Fund .................... 10,000 To Cash ........................ 10,000 (a) Interpret these entries. (b) What effect have these entries on the asset side and on the liability side of the balance sheet ? (c) What effect have these entries on the amount of profits available for dividends? PROBLEMS IN ACCOUNTING 81 198. "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 expires, for then the business ceases." The above extract is from an "Argument for the Establishment 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 cor- rectness of the principles above set forth, especially (d). 199. 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 ? 200. The company referred to in the last problem, five years subse- quent to the time of writing down its assets, reconsidered the action taken at that time and instructed its accounting officer to write back the valuation of the assets and thus apparently add $2,000,000 to its surplus, (i) What entries would be required? (2) If you were auditing the accounts of a corporation which owned practically all of the capital stock of this gas company, how would you regard both the writing down and the writing up of the assets of the subsidiary company on the accounts of the company you were auditing? 201. An individual buys a fleet of ships. He then forms a corporation to take them over at double the sum paid by him, payable one-half in 82 PROBLEMS IN ACCOUNTING debenture bonds of the company, and one-half in its capital stock. A sinking fund is to be provided for the gradual retirement of the de- benture bonds. A public accountant is called in at the end of five years to make up the accounts. He insists on creating a depreciation fund based on the full consideration paid by the corporation. The directors argue that the depreciation fund should be based on the amount of debenture bonds issued, on the theory that the capital stock issued to the vendor was in the nature of a bonus and did not repre- sent any real value. State your views regarding the two proposi- tions. 202. Below is a table of locomotives abandoned by the A. B. R. R. during the years 1907-1912. From the data given compute a depre- ciation rate for locomotives on this railroad. 4000 $ 9,900.00 $1,400.00 23 1911 4001 9,900.00 j, 500.00 23 1911 4003 9,900.00 1,500.00 22 1911 4004 9,900.00 4,000.00 6 1911 4005 9,900.00 3,500.00 6 1911 4006 9,900.00 4,000.00 5 1911 4007 9,900.00 3,500.00 6 1911 4008 9,900.00 3,700.00 5 1911 4051 5,500.00 441-38 36 1909 4052 5,500.00 626.40 36 1909 4110 9,050.00 800.00 29 1908 4111 7,700.00 479-15 25 1908 4112 7,250.00 897.01 37 1909 4113 7,700.00 469.44 27 1908 4115 7,250.00 469.44 ii 1908 4117 9,050.00 878.12 27 1911 4119 7,250.00 527-25 36 1908 4120 7,250.00 72747 38 1911 4122 7,700.00 1,340.74 25 1910 4127 7,250.00 856.30 33 1911 4128 7,250.00 886.34 32 1910 4129 7,250.00 89L57 3i 1909 4130 7,250.00 485-63 30 1908 413! 7,250.00 481.93 30 1908 4132 9,000.00 1,058.04 32 1911 4134 9,000.00 504.5 1 30 1909 4135 9,000.00 874.28 28 1909 4137 9,000.00 443-54 27 1908 PROBLEMS IN ACCOUNTING 4H5 4286 4287 4289 4290 4291 4292 4293 4296 4298 4299 4300 4301 4302 4303 4304 4306 4308 4309 4310 9,000.00 10,552.00 10,552.00 10,552.00 9,050.00 10,552.00 10,552.00 10,552.00 10,552.00 10,552.00 7,614.22 7,614.22 7,614.22 7,614.22 7,614.22 7,614.22 7,614.22 9,125.00 9,125.00 9,125.00 438.45 527-25 770-95 770.95 1,038.10 1,390.92 794.80 850.00 547-6o 491.18 892.70 1,172.97 1,000.00 1,700.00 1,200.00 1,200.00 1,246.55 898.83 1,350.00 1,197.05 27 28 19 20 17 22 21 20 28 27 24 24 24 23 24 24 24 21 23 23 1908 I008 1009 1007 1009 1910 1009 1909 I008 1908 1912 1912 1912 I9II 1912 I9I2 1912 1910 1912 1912 203. In making up the accounts the master allowed deductions from profits for bad debts, for rents, for interest paid debiting to rents and interest received ; he allowed for the market value of the mate- rials on hand when the infringement began, for the cost of those acquired afterwards to carry on the business and for the usual sal- aries of the managing officers. He refused to allow the extraordin- ary salaries which it appeared by the books had been paid, being satisfied they were dividends of profit. He refused to allow the value at the time they were issued, of materials bought for purposes of infringement. The market was a rising one. He refused to allow manufacture's profit and interest on the capital stock. Discuss the propriety of the accounting. 204. The following figures are taken from the locomotive records of a railroad company. 84 PROBLHMS IN ACCOUNTING Inventory Acquisitions Retirements Depreciation at cost at cost at cost 1908 12,868,491 o 103,106 1909 373.766 435,172 1910 1,442,765 368,381 1911 1,401,316 214,075 1912 o 289,365 Complete the fourth column in the above statement, using a straight line depreciation rate on original cost for locomotives of 3-5%. 205. A manufacturing corporation has been operating five years and has among other accounts the following, viz. : Plant account, $600,- ooo; Reserve for Depreciation, $150,000; Surplus, $100,000. The officers ask you as accountant to certify a statement embracing the above items in the following form: "Plant," $600,000; Surplus and reserve accounts, $250,000. State (a) whether you approve same and (b) the reasons supporting your answer. 206. A manufacturer is desirious of securing a partner and furnishes 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 Inventory Mdse. and year 500,000.00 Supplies 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 expiration 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. PROBLEMS IN ACCOUNTING 85 207. The accounts of a certain manufacturing corporation for the year ending Dec. 31 showed a profit of $85,000 and the directors proposed to pay $75,000 in dividends on preferred stock. The holders of common stock brought action, alleging that the value of the property had depreciated, and a large part of the capital of the company lost and that there could not be any profits applicable to the payment of a dividend until such loss and depreciation had been made good. Comment. 208. A certain public service corporation with all its property in one state is incorporated in another state. It has outstanding $32,000,000 of securities while the appraised value of its property is $25,000,000. In making application for a charter in the state in which its property is located this corporation claims that in addition to the $25,000,000 appraised value of its properties it has a "going value" or "going concern value" of an additional $7,000,000, thus bringing its total property up to the amount of its outstanding securities. (a) State what you understand by "going" value, pointing out the difference, if any, between this and good-will. (b) Suppose you are delegated by the State to ascertain the propriety of the corporation's claim of $7,000,000 going value. State what steps you would take to verify or disprove the claim. - 209. (a) Explain the meaning of the term "good-will." (b) When may it properly appear upon the books of a company as a valuable asset? (c) What factors should be taken into consideration in plac- ing a valuation on good-will? ^ ., 210. $50,000 of stock is issued for a "going concern" whose property accounts showed it to have a net worth of $45,000. Nothing was said about good will when the contracts were made between the owners and the new company. How would you treat the $5>ooo difference ? 211. 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 writing off? / 86 PROBLEMS IN ACCOUNTING 212. In auditing the books of a corporation capitalized at $250,000 you find that three years previously they acquired the business of a co-partnership included in which was an asset called "goodwill" valued at that time at $25,000, since which time the same has not been written down. The average profits of the corporation for the three years have been 9% on the capitalization. How would you treat the item goodwill ? Give reasons. 213. A corporation capitalized at $100,000.00 carries as an asset $50,- ooo.oo for goodwill. During the year it earns net $25,000.00 and pays a 10% dividend. What disposition would you advise being made of the remaining $15,000? Give reasons. Comparative Balance Sheet. r 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 Bills receivable ....................... 586,274 606,944 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 goodwill at $57,- 798,000. PROBLEMS IN ACCOUNTING 87 The income account for the year 1913, shows the following 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 54 1 >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 "Profits for the B. F. Goodrich (rubber) Company and sub- sidiary companies in the year ended Dec. 31, 1913, applicable 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 goodwill item appearing in the balance sheet? CHAPTER XI 215. The following accounts are found on the books of a corporation : reserve fund; depreciation on furniture; bad debt reserve; bond redemption account ; bills receivable ; rents of properties owned ; dividend on preferred stock. State which would enter the profit and loss account and balance sheet, and which would show debit and which credit balances. 216. "A balance sheet can only be an approximation to facts, the degree of approximation depending upon the skill and accuracy with which the estimates ure made." (Dickinson, Accounting Practice and Pro- cedure.) Explain. 217. For each of the businesses whose figures are shown below, indicate whether there is a discrepancy, a deficit, or neither of these. The figures are for the balance sheet. (Show your figures in the form of a Balance Sheet) Partners $65,000 Capital Stock $65,000 Merchandise on hand .... 34,000 Merchandise on hand .... 34,000 Accounts Rec 35,ooo Accounts Rec 45,000 Accounts Pay 15,000 Accounts Pay 15,000 Cash 12,000 Cash 13,000 Real Estate 45,000 Real Estate 35,ooo Bills Pay 47,000 Bills Pay 49,000 Profit and Loss 2,000 218. On the basis of the following balance sheets show what has be- come of the profits earned, no dividend having been declared : ASSETS. 1913 1914 Real Estate $ 50,000 $ 52,000 Plant and Machinery 85,000 76,500 Patents and good- will 20,500 20,500 PROBLEMS IN ACCOUNTING 89 Horses and Wagons 15,000 12,750 Inventory 49,000 65,000 Accounts Receivable 35,ooo 33,000 Cash 22,000 21,150 Agency Investments 15,000 Total $276,500 $295,900 LIABILITIES. Capital Stock $200,000 $200,000 Creditors, open accounts 16,000 17,000 Bills Payable 30,000 Mortgage 25,000 Profit and Loss 30,500 53,900 Total $276,500 $295,900 219. ASSETS. 1912 1913 Real Estate $ 55,000 $ 57,000 Plant 95,ooo 85,500 Accts. Rec 45>5 43>5 Mdse. (Invy.) 59,ooo 73,75 Cash 12,000 11,150 Investments 10,000 Total $266,500 $280,900 LIABILITIES. Capital Stock .$200,000 $200,000 Accts. Pay 20,000 12,000 Bills Pay 26,000 Surplus 20,500 28,900 Mortgage 20,000 Contingent 10,000 Reserve 10,000 Total $266,500 $280,900 What were the profits for the year? Prepare tabulation show- ing what has been done with these profits. PROBLEMS IN ACCOUNTING 220. ASSETS. 1912 Real Estate and Plant $ 60,000 Machinery 10,000 Merchandise 39,3 21 Accounts Receivable 30,219 Loans to Directors 10,000 Cash 10,600 1913 $ 57,000 9,000 44,77 J 26,109 15,000 7,260 Total $160,140 $159,140 LIABILITIES. Capital Stock $100,000 Notes Payable 20,000 Accounts Payable 30,140 Surplus ^ . . 10,000 $100,000 22,000 27,140 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. 221. A concern owns a parcel of real estate which cost it $500,000. There is a purchase money mortgage on it for $350,000. You are asked to enter the same in the balance sheet at $150,000 net. Would you comply with this request? Give reasons. 222. Dartmouth Manufacturing Corporation. General Balance Sheet, October i. Assets 1907 Real Estate $ 458,709 Machinery 616,675 New Construction Merchandise 393,57 Cash & Debts Receiv 653,681 1908 1909 $ 473,553 $ 466,614 644,468 726,397 644,184 634,735 669,953 548,013 706,227 Totals $2,122,635 $2,300,769 $3,213,375 PROBLEMS IN ACCOUNTING 91 Liabilities 1907 Common Stock $ 600,000 Preferred Stock Funded Debt 450,000 Bills Payable Accounts Payable 20,529 Reserve for Bonds 150,000 Reserve for Depreciation 100,000 Profit and Loss 802,106 1908 $ 600,000 450,000 24,505 175,000 175,000 876,264 1909 $1,200,000 337^20 800,000 150,000 61,940 200,000 175,000 288,615 Totals $2,122,635 $2,300,769 $3,213,375 (a) What were the profits for the year ending Oct. I, 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 extensions added in 1908-09? Why didn't they use the surplus to make these ex- tensions ? 223. The Canavan Mining Company is organized under the laws of Arizona to buy and develop certain silver mines near the Mexican border. The Capital Stock, fully paid in cash at par, is $500,000.00. At the end of the third year of operation the Company has the fol- lowing assets : Mining lands $496,712.18 Buildings and Improvements 53,287.82 Cash 33,244.20 Machinery 31,000.00 Merchandise and Supplies 8,614.38 Bills and Accounts Receivable 11,385.62 Silver Bullion 69,000.00 The Company owes $20,000 on open account and has accrued liabilities amounting to $2,244.20. (a) Set up the balance sheet and determine the total profits for the three years, assuming the above to be the values of the assets after proper allowances have been made for depreciation, and that no dividends have been paid the first year and 8% in each of the other two years, (b) Answer the same ques- tions as in (a) on the assumption that the values given above rep- 92 PROBLEMS IN ACCOUNTING resent original cost and that a reserve for depreciation for mining lands amounting to $180,000 has been set up, and another for de- preciation of buildings, improvements, and machinery amounting to $20,000 ; and that no dividends have been paid. 224. A company authorizes its officers to borrow $100,000 for its account and give as security $200,000 of the first mortgage bonds of the company. How should this transaction be treated on the balance sheet? 225. 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 191 as shown by the assumed balance sheets (a) to (g). Liabilities Dec. 31, 1913 Dec. 31, 1912 (a) (b) Capital Stock ...... $ 800,000 $ 800,000 $1,200,000 Bonds ............ 500,000 Bills Payable ...... 960,000 Accounts Payable. . 320,000 Surplus .......... 30,000 750,000 8(4O,OOO l60,000 6O,OOO 500,000 6OO,OOO 300,000 IO,OOO (c) $ 8OO,OOO 500,000 280,000 7O,OOO Total $2,610,000 $2,610,000 $2,610,000 $2,390,000 Liabilities 1913 (d) (e) ' (f) Capital Stock $1,000,000 $1,000,000 $1,200,000 Bonds 600,000 750,000 300,000 Bills Payable 960,000 800,000 600,000 Accounts Payable. . 320,000 320,000 400,000 Surplus 30,000 80,000 (g) $1,000,000 400,000 760,000 270,000 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. PROBLEMS IN ACCOUNTING 93 226. The following is a comparative balance sheet at December 31,. 1910, and December 31, 1911, presented to the directors of the West- ern Company at their meeting of January 5, 1912 : Assets 1910 1911 Land $ 20,000 $ 25,000* Buildings 45,ooo 45,ooo Machinery and Tools 86,000 89,000 Horse, Wagon and Harness 10,500 10,500 Patents 6,000 6,000 Good-will 25,000 25,000 Cash 28,300 10,300 Accounts Receivable 29,600 26,550 Investments Bonds 15,000 Inventory of Goods in Process. . 10,800 14,690 Inventory of Materials and Sup. 6,750 10,300 Agency Investment 3,68o $267,950 $281,020 Liabilities Capital Stock: Preferred $150,000 $150,000 Common 50,000 50,000 Bond and Mortgage Payable. . . 20,000 Notes Payable 35,ooo 2,000 Accounts Payable 16,400 I 9>3S Reserves for Depreciation 2,500 6,750 Prerhium on Bonds 1,000 Surplus 14,050 31,920 $267,950 $281,020 *Increase due to appraisal based on rise in values of factory sites in the immediate vicinity. Together with the above balance sheet there was submitted to the Board of Directors a statement of income and profit and loss show- ing the profits of the year 1911 to have been $22,120. The directors state to the auditors that, in view of the decrease of cash and of the increase of capital liabilities, they are unable to ascertain what has become of the increased profits of the year. The auditor prepares and submits to the directors, before the meeting is adjourned, an -94 PROBLEMS IN ACCOUNTING account properly named, which is so arranged as to show clearly how the Western Company has applied such resources of the year 1910 as have been lost in 1911, and the resources and profits of the year 1911. Prepare the account rendered by the auditor. 227. Condensed General Balance Sheets The Chemical Co., December 31. Assets 1907 1908 1909 Manufacturing Investment, at c st $14,320,656 $14,334,087 $14,491,886 Investments in other Corpor- ations 2,971,290 2,962,757 3,008,613 Merchandise on hand, at Fac- tory cost 2,179,734 1,981,011 1,905,153 Receivables as follows : Customers' accounts 1,147,346 1,027,383 1,007,959 Due from Corporations controlled 1,39^960 i,4O9,5 J 3 ^9 2 5^55 Loans 40,99 2 37.S 66 2,581 Cash 572,866 679,946 2,063,290 Reserved Fund for Fire In- surance (Cash and Securi- ties at Market Values) . . . 329,902 389,206 436,512 Miscellaneous Assets 76,384 83,742 88,358 Totals $23,031,130 $22,905,211 $24,930,007 Lialibilities Preferred Stock $11,000,000 $11,000,000 $12,500,000 Common Stock 7,410,300 7,410,300 7,410,300 Accounts payable but not due 522,023 401,687 314,499 Loans 450,000 350,000 Profit Sharing Fund 109,346 Funded Reserve for Fire In- surance (Contra) 329,902 389,206 436,512 Reserve for U. S. Corporation Tax 15,000 Dividend Payable January. . . 165,000 165,000 187,500 Surplus 3> I 53>905 3,189,018 3,956,850 Totals $23,031,130 $22,905,211 $24,930,007 PROBLEMS IN- ACCOUNTING 95 (a) What were the profits for the years 1908 and 1909 as nearly as may be determined from the above balance sheets, assum- ing that the dividend rate is i l /2% quarterly on preferred stock. No dividends have been paid on common. (b) Give the journal entries made in 1909 affecting the accounts "Reserved Fund for Fire Insurance" and "Funded Reserve for Fire Insurance." (c) Is the "Profit Sharing Fund" a valuation account, a surplus account, or a liability account ? (d) Give a history of the business as shown by the balance sheets for the two years. 228. For the years ending December 31, 1913 and 1914, the balance 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 Receiv- able 71,600.00 60,084.00 Sinking Fund 28,400.00 33,916.00 Depreciation 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 $% Bonds, ist Mortgage. . 100,000.00 100,000.00 Bills and Accts. Payable. . 84,011.44 78,128.72 Accrued Liabilities 3>99-56 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 96 PROBLEMS IN ACCOUNTING 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? 229. A company owns all the capital stock of another company. This company has outstanding an issue of bonds not guaranteed by the company holding the stock. The assets of this subsidiary company are deemed insufficient to cover the bonds, so that the capital stock has no value. The owning company desires the auditor to pre- pare its balance sheet, setting up the assets of this subsidiary com- pany along with other assets directly owned and the bonds as liabil- ities. Is it proper for him to do so under the circumstances ? Give reasons for your answer. 230. r^-w . Comparative General Balance Sheet and Income Accounts of General Railway Signal Company, December 31. Assets 1908 1909 Patents, including Youngs' system $3,269,350 $3,332,089 Factory bldg., land and improvements 717,828 729.349 Machinery, tools and fixtures 635,731 655,794 Material in stock 902,236 893,595 Bonds owned (Century Tel. Con. Co.) &5,55 85,550 Cash 60,541 54,267 Bills and accts. receivable 262,115 325,315 Deposit 6,923 Bond discount and tax 53,664 51,048 Prepaid items 7,982 4,937 Deficit 6,088 Totals $5.994,997 $6,144,955 Liabilities Common stock $3,000,000 $3,000,000 Preferred stock 2,000,000 2,000,000 Funded debt, Pneumatic Signal Co., bonds 110,000 88,000 General Railway Signal Co., bonds 515,000 529,000 Bills and accts. payable 350,169 526,195 PROBLEMS IN ACCOUNTING Accrued interest on bonds Surplus 17,610 2,218 97 1,760 Totals '.$5,994,997 $6,144,955 Gross Net Interest Profit Expenses Earnings (paid) Balance Deprec'n Balance 1906 $510,427 $230,286 $260,141 $ 38,063 $242,078 1907 453,073 240,200 212,873: 52,113 160,760 156,898* 3,862 1908 1909 260,663 213,319 233,434 182,869 47,344 47,333 50,565 43,818 II 6,747 15,054 I9,io2def. 8,307 def . * Made up as follows : depreciation, $50,345 ; reserve account, $15,000, and moving and extraordinary expenses, $89,465 total, $156,898. (a) Give the history of the business for the year 1909. (b) The preferred stock is entitled to 6% cumulative dividends. In case of dissolution, the preferred stockholders get the amount of their stock and unpaid dividends before payment can be made on common stock. Dividends have accumulated to io l /2%. Assum- ing that the patents are worth So% of the stated figure, how much would the common stock holders receive in case of dissolution ? 231. Criticize the following balance sheet from both the auditor's standpoint and that of the company's financial position. Assume that the bond indebtedness outstanding is $200,000. ASSETS. Real Estate, Buildings, Plants, Machinery, Equipment, and other per- manent Investment, including Good Will $1,000,000 Investment in Stocks and Bonds at Cost (Market Value, $60,000) . . . 100,000 Current Assets Raw Materials $ 170,000 Finished Stock at Selling Prices, less S% Discount 100,000 Consignments (Selling Value) 50,000 Supplies (Estimated) 200,000 Accts. and Bills Rec. including advances to employees 125,000 Stocks in Treasury (Unissued) Preferred 150,000 Common 137,225 Investments in Subsidiary Companies 225,500 Cash and Miscellaneous Items 50,500 $1,208,225 $2,308,225 9 8 PROBLEMS IN ACCOUNTING Capital Stock: LIABILITIES. Preferred 500,000 Common 750,000 Bonds and Bankers' Loans 575,ooo Current Liabilities : 'Accounts Payable $ 15,225 Other Indebtedness 231,000 Accrued Items 2,000 Reserves : 248,225 For Depreciation $ 50,000 Less Renewal Expenditures, written off 65,000 Balance (Debit) 15,000 For Bad Debts 20,000 Other Contingencies 5,ooo 10,000 Surplus (less Dividends Paid) including\ appreciation in Real Es- tate 'and other Capital Assets and Profit on Inventorying Raw (Materials at Market Prices 225,000 232. The following is a comparative Balance Sheet of the Arban Seed and Oil Co. for the dates given. ASSETS. Current Assets: Jan. i, 1913 Jan. i, 1912 Cash $ 33,450.74 $ 27,830.81 Bill's Receivable 1,499.11 1,221.10 Accounts Receivable 139,222.73 108,437.79 Merchandise on 'hand and in process 458,890.79 561,726.14 Thomas Jones 7,264.09 9,370.79 Railroad Claims 8,878.68 7,241.42 Car. M'ileage 91.09 1.94 Plant Assets : Land 15,513-52 15,513-52 Buildings and Plant 107,033.43 101,652.30 Machinery and Equipment 249,603.68 232,673.85 New Process 27,480.33 26,140.00 Pumping and Station Equipment 12,498.90 12,498.90 Tank Cars 30,739-59 3,739-59 Furniture and Fixtures 11,317.06 10,274.80 Tools 8,934.76 7,983-24 99 PROBLEMS IN ACCOUNTING Deferred Charges to operation; Interest on Bills Payable prepaid 123.00 Insurance Prepaid 4,673.00 Profit and Loss 188,000.00 169,000.00 Total $1,305,214.50 $1,323,718.49 LIABILITIES. Common Stock $ 350,000.00 $ 350,000.00 Preferred Stock 350,000.00 350,000.00 Bills Payable 590,000.00 600,000.00 Accounts Payable 8,186.60 17,278.79 Accrued Interest 723.40 634.00 Accrued Wages 2,724.50 2,845.70 Accrued Taxes 3,580.00 2,960.00 Total $1,305,214.50 $1,323,718.49 In addition to the information conveyed by the above statement, you have the following facts. First, the item of Accts. Receivable contains an overdue account for $50,000.00 of the Ebenezer Manfg. Co. This account is now in litigation and there is no liklihood that the Arban Oil and Seed Co. will realize anything on it. Second, the plant has been running six years, during which time no depre- ciation has been charged on plant, equipment, or machinery, some machinery, together with its foundations, has been wrecked and replaced by new machinery on newly constructed foundations with- out any credits to plant and machinery. Third, the company paid, in 1912, a six per cent dividend on the preferred stock. Fourth, the profits for the current year will not be any larger than they were in 1912. Fifth, the asset item "Thos. Jones" represents an overdraft by him while an officer of the corporation, and is not collectible. (a) A man who owns $150,000 preferred and $150,000 common stock of this corporation dies with liabilities amounting to $220,000. His executor presents the above statements, together with the additional information, to you and asks you whether or not the estate is insolvent. Give him your answer supported by the analysis of the corporation's affairs on which that answer is based. (b) What were the profits for the year? (c) Make a comparative statement showing where the money used to pay dividends was obtained. 100 PROBLEMS IN ACCOUNTING 233. Harbison- Walker Refractories Co. Comparative General Balance Sheet, September 30. Assets 1908 1909 Property Account $28,755,434 $28,716,152 Betterments completed 1,118,409 1,136,196 Betterments uncompleted 76,299 237,809 *Def erred Charges 310,907 288,787 Inventories at cost 1,335,862 1,578,317 Accounts Receivable 891,775 1,227,864 Bills Receivable 36,018 33,009 Cash 703,822 566,526 Investment Securities: Investment of Reserves 182,000 182,000 Co.'s bonds purchased, held in T^eas.. 312,000 267,000 Other Securities 61,559 247,390 Totals $33784o85 $34481,050 Liabilities Common Stock $18,000,000 $18,000,000 Preferred Stock 9,600,000 9,600,000 Bonds (Total issue $3,500,000 purchased cancelled as per sinking fund require- ments) 2,440,000 2,205,000 Bond interest and taxes not due 44,446 50,897 Reserve to cover premium at redemption of bonds 13,020 9, I 3 I Clay and Coal Depletion Fund 111,529 125,706 Accounts Payable 123,442 362,608 Pay Rolls 45,523 62,099 Sundry Reserves 236,163 213,620 Surplus 3,169,962 3.851,989 Total $33,784,085 $34,481,050 * Including clay and coal outfits (1909, $217,986), advanced royalties, stripping, prospecting, uncompleted extraordinary repairs, etc. PROBLEMS IN ACCOUNTING 101 (a) State the facts exhibited by the above balance sheet for 1909 in narrative form, showing the net proprietorship and earnings for the year Sept. 30, 1908, to Sept. 30, 1909, as far as these can be determined from the balance sheet ; and discuss their accounting practices. (b) What was the sinking fund installment for the year? 234- In the preparation of a manufacturing and trading account and a balance sheet, state on what basis the following assets should be valued: (i) raw materials, (2) product in process of manufacture, (3) manufactured product, (4) bills receivable, and (5) accounts receivable. Give fully your reasons. 235- The following figures are shown on a balance sheet for January i, 1912. Real Estate $100,000 Capital stock $400,000 Machinery 500,000 Funded Debt 200,000 Merchandise 150,000 Bills Payable 50,000 Accounts Receivable. . . 50,000 Accounts Payable 75,ooo Cash 50,000 Surplus 125,000 $850,000 $850,000 The following is the income sheet for the year 1911 : Sales $1,000,000 Goods in process, Jan. i, 1912. . . 30,000 Stores on hand, Jan. i, 1912. . . . 20,000 Merchandise, Jan. I, 1912 100,000 $1,150,000 Less selling costs 250,000 $900,000 Goods in process, Jan. i, 1911. . .$ 20,000 Stores on hand, Jan. i, 1911 15,000 Merchandise on hand, Jan. I, 1911 80,000 Supplies purchased 175,000 Wages paid 320,000 102 PROBLEMS IN ACCOUNTING Wages due and unpaid 30,000 General manufacturing expenses 200,000 Cost of product $840,000 Net profit $ 60,000 Dividends declared, but not yet paid 32,000 Surplus for the year $ 28,000 Is the balance sheet consistent with the income sheet? If not, assume the ledger and the totals of both sides of the balance sheet to be correct, and any error to have been caused by unwarranted com- binations or cancellations of accounts, and then correct the balance sheet. Show the trial balance as it stood before the books were closed for December 31. 236. The balance sheet, on January I, 1911, of the corporation whose balance sheet for January i, 1912, was given in Problem 235, was as follows : Real Estate. $100,000 Capital Stock $400,000 Machinery 500,000 Funded Debt 200,000 Goods in Process 20,000 Bills Payable 40,000 Finished Goods 80,000 * Accounts Payable 60,000 Stores 15,000 Surplus 97,000 Accounts Receivable. . . 75,000 Dividends 28,000 Cash 35.000 $825,000 $825,000 What more can you now tell about the business for the year 1911 than you could tell from the figures given in Question 235. PROBLEMS IN ACCOUNTING 103 237- I Q w p w c/1 P^ Si >H H O MD O t^ N co i^ ^ i^ -^-00 "- 1 ; t q 2" oo % 2" CO O H M l-l W ^- C ^ V &S% (5S^ g .9 oo g\ o^oq, c^oq^vo COVO M M O4 of of of of of vo O 00 co vn o O\ O -i M *"" O\ ON I ^inco^ CO rt pa PQ O 00 $ O\ co t LO CO O\ >-i in Po I 00" t m Q\ co< ON m m I P-T M s| ffi o\ <35 oa " o i I ^ ._, 1-1 i-4 M o ?" " < W ^ O X5 O OO ON M Tj- d\ co rf w M i vcT of t-T in in co' ^ a< It * tJ I! ' is lt~i < % S /-^ u in O H, .- v o JIIIJ In 1907 there was written off against surplus for reduction in value o! pine lands and stumpage $703,497. For reduction 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. 104 ' PROBLEMS IN ACCOUNTING 238. The Holmes Realty Company was organized January I, 1913, to own and sell suburban lots, and is operated by a manager under an agreement of which the following is a digest : "The company is to furnish and maintain offices at New York and at the site of the company's property in the suburbs of Philadelphia, and also to pay salaries of clerks and salesmen. The manager is to receive 5% commission on the sales. "The property is to be reappraised at the beginning of each year by adding to the account 4% on the book fig- ure of the property unsold at the beginning of the pre- ceding year, and by adding the amount of any losses which may have occurred in the preceding year, such additions for losses to be canceled in subsequent years if they are made up by profits. The figures so added shall be pro-rated over the remaining lots for sale, and the manager is bound not to sell any property at less than the book figure." The books have been kept for two years without adjusting and closing entries, and the accounts show the following figures at December 31, 1915: Property account (original purchases of 1000 lots of equal value) $400,000.00 Capital stock 400,000.00 New York office expense 3,085.00 Philadelphia office expense 5,178.32 Salesmen's salaries 17,500.00 Sales 220 lots for 1 1 1,425.00 Deposits on account of sales not yet closed 215.00 Mortgages held on property sold 38,000.00 Cash 49,096.43 Creditors' accounts (for office supplies) . . . 643.75 Interest on mortgages received 576.00 There is also an amount of $125 interest due and not yet received and $235 accrued interest on mortgages at Dec. 31, 1907. These figures for expenses and sales appear up to Dec. 31, 1906: New York office expense $ 1,435.00 Salaries of salesmen 8,500.00 PROBLEMS IN ACCOUNTING 105 Philadelphia office expense 2,647.82 Sales 60 lots for 29,000.00 Prepare a detailed exhibit of operations, also balance sheet as at the beginning of the third year with exhibit of the Property Account. 239- The bookkeeper of a manufacturing concern could produce only the following statement from its records on January i, 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 I, 1907, the management is changed and you are later retained as a public accountant to conduct an examination and pre- pare a balance sheet as of January I, 1908. You find that during the preceding year the directors have sub- scribed in cash to $7,500 additional capital stock and have retired all the notes and accounts payable and that no interest was paid on these accounts for the year. You also find that the plant and equipment was revalued at $15,000 and 5% of this amount was charged off to provide for depreciation, while an additional 2^/2% was ordered placed in Reserve Account to cover repairs and renewals, the entire 7/^% being charged directly to Profit and Loss. The bonds out- standing 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 Manu- facturing expense and to credit back the amount of the inventory. The accounts payable (all for material and non-interest bearing) amount to $546.28. Of the accounts receivable, January I, 1907, $4,968.18 was col- lected and the balance charged off as uncollectible. 106 PROBLEMS IN ACCOUNTING In addition to the material used from stock during the year, and the amount still due for material purchased, the manufacturing ex- penses were $3,720.52, all paid in cash, the total manufacturing expenses being 31% of the gross sales for the year ending January i, 1908. Of these 91.3% was collected in cash and the balance, all of which is considered good, remains on the books in accounts receiv- able. Produce a comparative balance sheet of January i, 1907-08, and state the amount of gross sales for the year. 240. At the close of the year 1907 the books of a manufacturing com- pany show a credit balance in the profit and loss account of $20,000, and a merchandise account, based on appraisement of inventory at selling prices of $36,000, but an appraisement of the same inventory at cost prices would amount to $27,000. The trading, income, and profi^and loss accounts for the year 1908 show the following balancesT^ Sales $100,000 Discount on sales 1,500 Returns and allowances 500 Purchases 75,ooo Freight on purchases 3,ooo Discount on purchases 600 Shipping expenses 2,000 Selling expenses 5,ooo Office and general expenses 10,000 Insurance 300 Taxes 200 Depreciation of machinery, fittings and fur- niture 1,000 Accounts written off as uncollectible 300 Interest on notes and accounts receivable 1,900 Interest on notes and accounts payable 700 At the end of the year 1908 the books were closed on the basis of an inventory, appraised at selling prices, amounting to $40,000. If this inventory had been appraised at cost prices it would have amounted to $30,000. Prepare from these items one statement showing the correct trad- ing and income results for the year, and another statement of Profit and Loss Account opened with the credit balance shown by the books at the beginning of the year. PROBLEMS IN ACCOUNTING 241 107 On Dec. 3! 1912, the trial balance of the M company was as follows : Real Estate $ 300,000.00 Discount earned. . .$ 10,120.5* Buildings i 58,000.00 Accounts payable. . 75,871.38 Equipment .... 847.500.00 Depreciation Re- Goodwill 50 oou oo serve 58,272.00 Cash 46,474.20 Common stock .... i ,000,000.00 Discount Allowed. . [nterest General. . . 5,600.14 3. 3OO.2O Preferred stock .... Sales 500,000.00 1,371,401.17 Insurance paid in advance on plant O'O 3 O3O 80 Taxes accrued (est) Bills Payable 5,300.00 35,000.00 Accounts Receivable Inventory of raw 156,028.75 Accrued interest on bills payable QOO.I2 material and work in progress Dec. 31 IQII l84 ^67 3Q First Mortgage bonds (4%) Surplus . . . 100,000.00 Operating, mainte- nance, manufac- turing and gen- eral expenses .... Depreciation Purchases * \) ~ / \J */ 709,988.65 25,000.00 6Q I O8^ 47 Bond interest (one- half year to June 30. 1012") . , 2 OOO OO Total . . .to !. 1 83.47S.60 Total . . .$ 3,183,475.60 The inventory of raw materials and work in progress on Dec. 31, 1912, is valued at $309,062.05. Before the books are finally closed it is determined to (i) make a reserve of one-half of one per cent on $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 reserve account a further sum of $5,000. Interest on bonds to Dec. 3ist 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 io8 PROBLEMS IN ACCOUNTING 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 compen- sation to the management. Make journal entries to give effect to the various adjustments above described and to close the books, creating (i) a combined Manufacturing and Trading Account, (2) a Profit and Loss Account and (3) a Balance Sheet. 242. What are secret reserves ? Show at least two instances, illustrat- ing the reasons for their creation and the methods of establishing them. 243- (1) A corporation has set aside out of profits $250,000 and has invested the same in government securities at par. Will this affect the Assets side, or the Liabilities side of the balance sheet, or both ? Make up a simple balance sheet after these profits have been so invested. (2) How should the fund and investment appear on the bal- ance sheet if the value of the securities should rise? (3) If the securities should fall in price? 244. ASSETS Real Estate $ 2,347,816 Plant and Machinery 7,500,000 Inventory 4,869,509 Notes Receivable 1,000,000 Accounts Receivable 935>34 Bond Discount I39>796 Sinking Fund 1,700,000 (Redeemed Bonds 6% Convert.) Cash 1,465,625 Profit and Loss 779,9^ $20,737,968 LIABILITIES. Capital Stock $10,000,000 6% Convertible Debentures 2,000,000 5% Income Bonds 1,500,000 Mortgage to secure purchase price of Real Estate i ,07797 PROBLEMS IN ACCOUNTING Notes and Accounts Payable 340,30x3 Interest and Taxes Accrued 107,336 Sinking Fund Reserve 1,700,000 Reserve for Accrued Depreciation on Plant and Machinery 2,800,000 Reserves for Additions to Plant 1,213,235 $20,737,968 (a) Rearrange the above Balance Sheet in more intelligible form. (b) State the facts exhibited by the above Balance Sheet in narrative form. (c) What is the net proprietorship ? (d) Assume that after three years the 6% Convertible Deben- ture Bonds are all redeemed with Sinking Fund accruals. The Reserve for Accrued Depreciation to Plant has been increased to $1,500,000, and the Profit and Loss item on the asset side is $600,000. The Capital Stock remains at $10,000,000. What will the proprietor- ship be at that time ? (e) What entries would you make to simplify the Balance Sheet at that time? (f) Assume that the proposed additions to plant are made and cost $1,300,000 in cash. What is the proprietorship? (g) What entries would you make now to simplify Balance Sheet? 245. Assets Liabilities Land and Buildings. . . .$500,000 Capital Stock $300,000 Machinery & Tools 150,000 Bonds 500,000 Raw Materials 43,6oo Bills and Accts. Pay 60,000 Goods in Process 50,700 Accrued Items 12,000 Finished Product 25,700 Surplus 18,000 Bills & Accts. Rec 85,000 Furniture & Fixtures. . 5,000 Investments 18,000 Cash 12,000 $890,000 $890,000 (a) Assuming that the figures on the above balance sheet rep- resent actual market values, how much would the stockholders re- ceive in case of dissolution? no PROBLEMS IN ACCOUNTING (b) Assume that the above balance sheet represents the true condition of a corporation on January i, 1895 ; that the bonds, which have just been issued, are 2o-year 5% First Mortgage Bonds ; that the company has agreed to set aside in a Sinking Fund, out of profits, a sum which will be sufficient to retire the bonds at maturity; that the company has faithfully carried out this agreement and on January i, 1915, the funds which it has set aside are sufficient to retire the bonds. You are required to reconstruct the above balance sheet as of January i, 1915, (i) before the bonds are actually retired, and (2) after retirement. (c) What journal entries are required each year for the setting aside of the sum agreed upon? 246. General Balance Sheet, X. Y. Z. Co., December 31. ASjSet&rx 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 Sinking fund assets 182,906 200,787 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 i,509,H9 $11,160,598 $10,950,336 (a) What is the origin of the sinking fund of $682,906 appear- ing 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? PROBLEMS IN ACCOUNTING in S3 ro of ^F g5 Tf oT x. oo oi to o\ oo *N. M t -1 <1 O * 247. to CO 04 01 OJ VO 01 1-1 to ON H-I M co M" oo" HH" i-T M" W- *"* 8 en s ^t * M ^t O\ 10 rx to O fo vo R 10 O" 00" OO vo ON fO IN. 00 H-_ O_ H^ 8*^ cT ^cT cx5 co l^ 1^ CO c ^ ^ 01 co to O ON 2 O^ 'O vo" of oo" HH" c* "- 1 rf 04 Tf- 01 ON ^ to vo IN. to vp" CO" "-^ 1O VO 'O 10 CO CO to "-H VO IN, HH_ O 00_ 04 VO vo" oo" oS <*S c5 l0 i 2 p-i r^J & fnst nf x c **" . > r 1 en o IS cu "rt rt c w j: 3 c/ iscellaneous v - ^ s VO M 5 S CO HH 69- ^ O tO H-l C^ HH" vo" is f5 vo o 3 o 3 ; . . in 9 ; iy :O TJ bO rt _bfl j3 ' Q 6 ^N C/J VO 4> -^J H !| || | ; c * C Q " ^ c bo w > ^ tu n O 7o Sales allowances ................ 750 Prepaid Rent ................... 250 Sales returns ................... 200 Notes Receivable ................ 10,000 Insurance ...................... 300 PROBLEMS IN ACCOUNTING 113 Purchases 60,000 Office Expense 1,800 Reserve for Bad Debts 3>5oo $197,487 $197487 Merchandise Inventory, 12/31/14, $16,000. Estimated value of goodwill, $5,000. Unexpired insurance, $38. (a) Prepare a six-column statement. (b) Mr. Lydic enters into a partnership agreement with J. P. Thomas whereby the latter agrees to purchase a half-interest m the business for $63,000. Frame the journal entries to close the books of A. D. Lydic and to open the books of the new firm, Lydic & Thomas. 251- A corporation is organized with an authorized capital stock of $100,000, of which $50,000 is paid in cash immediately. Subscrip- tions are received for an additional $25,000 payable in four install- ments at semi-annual intervals, at no. Six per cent bonds for a par value of $50,000 are issued at 90. For the first year the income sheet is as follows: Gross profits on merchandise ................ $40,000 Operating expenses ........................ 20,000 Net earnings .............................. $20,000 Bond interest .................. ........... 3,ooo Net income ............................... $17,000 Dividends .............................. .. i Surplus for the year ....................... $ 2,000 The balance sheet is as follows : Stock Subscriptions ---- $ 13,750 Capital stock .......... $ 50,000 Unissued unsubscribed Capital stock subscribed, stock .............. 25,000 unissued ........... 25,000 Bond Discount ........ 5,ooo Capital stock unsubscrib- Cash, and other assets .. 130,750 ed, unissued ......... 25,000 Bonds ............... 50,000 Accounts Payable and other debts .......... 20,000 Premium ............ 2,500 Surplus from operation 2,000 $174,500 $174,500 H4 PROBLEMS IN ACCOUNTING Aside from brevity (or combination of unlike assets and debts) are the income sheet and the balance sheet satisfactory? Interpret the items. 252. 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,- ooo, which sold at a permium 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 ? 253- 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 disbursement at the annual accounting during the period the policy was in force. 254- A corporation has on its books $210,000 of accounts receivable, of which $49,000 are long overdue and apparently worthless. The inventory of finished goods, taken at contract price less 5%, amounts to $124,000, and from this sum has been deducted $45,000 "to pro- vide for any losses." How would you deal with this state of affairs in reporting to the Bank Commissioner on the condition of the cor- poration for savings bank loans ? MISCELLANEOUS 255- F. G. Waite and H. R. Wilcox, partners sharing equally in busi- ness, have determined to change their system of bookkeeping from purely single entry to double entry, continuing the use of the old ledger. The following statement shows the footings of the open ac- counts in their ledger : Dr. Cr. F. G. Waite (Partner) $ 250.25 $5,000.75 H. R. Wilcox (Partner) 1,360.00 6,000.00 A. M. Sanderson ; . . 320.00 150.25 Martin Chever 841.60 541.60 Hendricks & Co 1,120.00 Smith & Robbins 482.50 2,200.00 E. R. Bender 500.00 640.40 The inventories are: Mdse. $6,135 ; Traders' National Bank stock, (10 shares) $1,000; cash on hand and in bank, $3,924.82 ; .bills re- ceivable as per bill book, $5,320.43 ; bills payable as per bill book, $2,531.60. Formulate a journal entry thatj when posted, will change the ledger to double entry form, checking in the journal such items as do not need to be posted. Give all the figures by which the result is obtained. 256. T. F. Curry and W. J. Schmitt are partners in business, sharing equally in gains and losses. Their books have been kept by single entry, but they desire to change them to the double entry method. The following is an abstract of their affairs at this date: Assets and Liabilities as per Ledger: T. F. Curry, investment, $12,500; withdrawals, $2,500; W. J. Schmitt, investment, $12,500; withdrawals, $2,000; sundry accounts receivable, $8,500; sundry accounts payable, $6,000. Other assets and liabilities not in ledger: Merchandise as per inventory, $18,000; cash in bank, $5,500; bills receivable, $2,300; bills payable, $2,000 ; bank stock, $2,000 ; real estate $5,000. Determine the amount of gain and loss of each partner at this date, and formulate proper journal entry for conversion of single entry ledger into a double entry ledger. H6 PROBLEMS IN ACCOUNTING 257- A. B., a retailer, whose books have been kept by single entry requests you to install a double entry system. The ledger contains the following accounts: Expense, $900; A. B.'s drawings, $3,000; customers' accounts, $15,000; creditors, $4,000. Upon inquiry you find A. B. has cash, $4,000; merchandise, $8,000; factory property worth $15,000, subject to a mortgage of $10,000. Make the journal entries necessary to change his accounts from single to double entry. You are to use the ledger containing the above named accounts. The YCX Co. takes a large number of notes (bills receivable) from its customers, and when in need of funds discounts or sells them; how may the accounts be managed so as to show the com- pany's liability as indorser on the paper discounted ? 258. A promoter secures options lX ttpon\ the plants of three competing 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 holders option into preferred stock at 105 or redeemable at the company's option at no plus accrued interest. The companies A, B and C have the following status respectively, excluding cash: Assets Liabilities Surplus Deficit Capital A $171,000 $56,000 $15,000 $100,000 B 165,000 80,000 $5,ooo 90,000 C 108,000 47,000 6,000 55,ooo 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 Y^. in cash, y 2 in preferred stock and ^ m bonds of any company that may be formed to take over these prop- erties. It is also agreed that if the promoter elects to exercise his options and acquire the properties covered, the liabilities of each company are to be assumed 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 PROBLEMS IN ACCOUNTING 117 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 furnish $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 prop- erty and liabilities of the other corporations. $100,000 of the pre- ferred stock is underwritten by bankers at no 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 con- verted 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 $25,000 of the company's bonds at no 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. 259. A corporation is organized to conduct a manufacturing business with an authorized capital of $20,000 divided into 200 shares of the par value of $100, of which 150 shares shall be preferred and 50 shares common stock. The corporation purposes to issue $5,000 in consolidated mortgage bonds to be used toward the purchase of sundry properties. The amount of the paid up capital with which the corporation begins business is $500, being the proceeds of sub- scription of 5 shares preferred stock. To carry out the purpose of said corporation, the real estate, water power, machinery, goodwill, etc., of certain existing corpora- tions has been purchased at an appraised value of $20,000, viz. Star Mfg. Co., $2,000; Earl Mfg. Co., $3,000; Ajax Mfg. Co., $5,000; Acme Mfg. Co., $6,000; Coe Mfg. Co., $4,000. In payment full paid stock and bonds have been issued at par on a basis of 60 per cent in preferred stock, 20 per cent in common stock and 20 per cent in bonds. n8 PROBLEMS IN ACCOUNTING Material and supplies are to be paid for in cash when their value is determined. Formulate the entries necessary to open the books of the new corporation. 260. What proportion of $15,000 commission paid for negotiating a sale of bonds whose par value was $1,000,000 interest 5% and which were sold at 90 to run 10 years should be treated as an asset at the end of the first year ? Give reasons. 261. B began business a year ago keeping only single entry books. He started with the following assets and liabilities : Cash $50,000 Mortgages (Land) $50,000 Land 20,000 Accounts Payable 500 Patents 10,000 Bills Payable 2,000 Notes Receivable 10,000 Bonds 5,ooo Accounts Receivable. . . . 1,000 Today his assets and liabilities are as follows: Cash $ 5,000 Bonds $10,000 Land and Buildings 30,000 Accounts Payable 2,000 Patents 8,000 Accrued Wages 500 Trade Marks 5,000 Note. Notes Receivable 15,000 (B's drawings, $1,000.) Accounts Receivable. . . . 20,000 Material and Supplies. . . 12,000 Finished Goods 10,000 Prepare a tabulation showing what the profits were and what became of them. 262. The balance sheet of a firm is summarized as follows : ASSETS. Cash, stock, and accounts receivable $67,500 Manufacturing Plant I5>o Total $82,500 PROBLEMS IN ACCOUNTING 119 LIABILITIES. Notes and accounts payable $49,500 Capital 37>5oo Total $87,000 Would you consider this firm insolvent? Give reasons for your answer. 263. The New York Steamship Company issued income debentures 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 com- pany 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 trans- portation of troops during time of war, which amount did not appear on the books as an asset, the cost of transporting 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. 264. A manufacturer makes extensive investments in stocks and bonds, buying and selling from time to time as the market conditions war- rant and clearing all such transactions through his regular books of account. How should such transactions be isolated from his manu- facturing operations and what books and accounts should he employ to record the details of the principal and income from such invest- ments ? 265. Draw up a form for the record of household accounts that may be used as a combined cashbook, journal and ledger. Give the headings and provide five distribution columns for expenditures, and also col- umns for controlling accounts for both accounts payable and accounts receivable. 266. An inventory of a going concern, taken under your supervision and direction and requiring two weeks to complete, is commenced one 120 PROBLEMS IN ACCOUNTING week prior to the close of the fiscal year. How would you instruct (a) as to the general care and custody of stock under inventory and (b) as to the recording of incoming and outgoing goods during stock taking ? 267. You are asked the following question : "It costs $15.00 per thousand to manufacture a certain article laid down in the stock room. This cost includes labor, material and manufacturing, overhead. The sales, advertising, and shipping expense is 15% of sales, what is the relation between cost of manu- facture and cost of sales ?" (a) What is your answer ? (b) Prepare a formula for the computation of the relation be- tween cost of manufacture and cost of sales. What entry should be made on the books of a company of goods sent out on consignment? When the goods have been sold and the consignee sends in his account sales, what entries should be made ? 269. A company manufacturing a proprietary article offers certain premiums to its customers on the return of its wrappers, the premium offers being indicated in a published schedule. At the time of mak- ing out the annual balance sheet only a few of the premiums have been distributed. How should this matter be treated in the balance sheet? 270. The ledger of a corporation has an account entitled "First Mtg. Bond Script", showing a credit balance of $967.54. What does this balance represent, and how would you treat the item in the balance sheet? 271. State the full procedure leading up to the entry of the following transactions in the shares of a corporation, the par value of which is $100 : April 5, 1901. James Williamson receives certificate for $75 for loo shares full paid. PROBLEMS IN ACCOUNTING 121 May 3, 1901. James Williamson requests a transfer to George T. Jenkins of 30 of his 100 shares. Outline a form of stockholders' ledger and properly enter the above items therein. 272. The Iron City Nut & Bolt Company is financially embarrassed. At a meeting of the stockholders it is decided to raise additional cap- ital by the issue of 5,000 shares of 6% Preferred Stock, par $100. This stock is sold on the open market at an average price of 103. Give the journal entries. 273. Three manufacturers, each having an independent business and wishing to effect a consolidation of their respective interests, organize the United States Manufacturing Company, a corporation with an authorized capital stock of $1,500,000, half common and half pre- ferred. 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 improvements 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 lia- bilities of the company. 274. A corporation issues $300,000 of stock in exchange for a manu- facturing plant and supplies, with the understanding that one-half of the stock is to be donated back to the corporation. After the con- summation 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 bal- ance sheet after these transactions. 122 PROBLEMS IN ACCOUNTING 275- 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 instalments, at 120. When two of the instalments have been paid, what entries should have been made for the transactions of this subscription? A financial panic occurs and the last instalment is defaulted 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 instalments), but the other sub- scriptions are paid and the stock is issued. What entries should record all these events ? Show the final trial balance for the result of all these entries. A village makes the following appropriations for the year 1915 and levies a tax therefor: Bond redemption $2,000 Bond interest 800 Salaries 2,700 Contingent expenses 5 Police 1,600 Poor , 750 Care of streets 1,200 Lighting 950 Education 3,000 (1) Outline an entry that will properly open the village books. (2) How will collection of taxes be recorded? (3) How will disbursements against appropriations be recorded ? (4) WTiat will the balance of the accounts at any date show ? 277. A municipality sells improvement bonds, the proceeds forming a fund out of which is defrayed the cost of certain improvements, the total expense of these improvements being .assessed on the property benefited. Bond redemptions are to be made out of assess- ments collected. What accounts would be required for recording the foregoing transaction, and for what items would these accounts be debited or credited? PROBLEMS IN ACCOUNTING 123, 278. Highland county undertakes two public improvements, viz. : a road estimated to cost $50,000, and a sewer estimated to cost $40,- ooo. The work is to be paid for out of proceeds of county bonds falling due at various dates and redeemable from assessments levied against property presumably benefitted, to the amount of the actual cost of the work and incidental charges when these are determined. Bonds to the above amounts are accordingly sold, realizing a premium of i%, which is to be added to the respective funds; the cost of the two undertakings when completed is $50,000 and $40,500 respectively, for which assessments are accordingly levied. Assessments are subsequently collected as follows: For roads $30,200, with accrued interest of $1,310; for sewers, $29,400, with accrued interest of $1,250. The interest in each case goes into the related funds. Road bonds of the par value of $20,000 and sewer bonds of the par value of $15,000 mature and are redeemed. Frame journal entries, post to ledger accounts, and prepare a trial balance from which the status of the county debt and of the funds and assessments at the conclusion of the above transac- tions can be ascertained and determined. The books of a manufacturing concern, operating under a sys- tem 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 burden, also $12,074.92 to cover management charges; finished wares in stock at total cost of $21,- 656.01. The financial operations during the ensuing year include: Pur- chases of raw materials $80,416.45; factory pay rolls $125,793.90; factory expense, including wages not applied to cost accounts, $24,- 846; management expenses, $38,100; interest paid on loans $1,200;. income from investments, $5,004. The manufacturing operations during the same year comprehend: Raw materials issued on requisition for consumption, $79,820.34; wages, applied and distributed to manufacturing cost, $120,250.40; and to factory expenses $5,959.39, included in the sum stated irr the preceding paragraph. 124 PROBLEMS IN ACCOUNTING 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 So% to labor; management expenses, 30% to materials and 70% to labor. The transactions of the pervious year in round amounts were used in calculating the current year's apportionments, viz : Materials, -$75,000; labor, $115,000; factory expense, $24,000; management ex- pense, $36,000. Open the general ledger accounts that control the cost accounts ; show the operation of each and the net profits resulting; also cal- culate the percentage to be added to each $i of material and of labor to give the total cost. 280. A manufacturing company after erecting and equipping its factory, placing orders for materials and hiring a working force of skilled mechanics, commences operations. In addition to the finan- cial accounts, arrangements have been made to conduct cost ac- counts from the outset, and the current details thereof grouped under Account Titles and collated upon "forms" show the following ac- tivities : Form I Receiving Sheet. Raw materials received into storeroom $ 7,701.37 Form II Consumption Sheet Materials Raw materials consumed 6,651.69 Form III Consumption Sheet Manufacturing Partly made goods consumed, combining values of materials 3,225.82 and of labor 3,106.26 Previously expended, and to which further material and labor were added. PROBLEMS IN ACCOUNTING 125 Form IV Production Sheet. Manufactured product, combining values of material. . 9,877.51 and of labor 13,127.13. As per manufacturing reports, discharging requisitions collated on forms II and III. Form V Cost Sheet. Finished wares transferred from factory to warehouse, carrying prime cost of materials 5,890.69 and of labor 8,875.04 Adding further to the materials cost $353.44 and $828.69, and to the labor cost $1,331.26 and $1,775 f r factory expenses and management expenses respec- tively in each instance. Form VI Disposition Sheet. Total cost of finished wares sold 14,827.84 Proceeds of sales 17,145.40 The register of manufacturing reports shows total application of direct labor to cost in the amount of $10,020.87, and the payrolls show expenditure for labor in the amount of $10,466.16. Only requisitions discharged by manufacturing reports collated on the Consumption Sheets for credit to accounts in the Materials and Manufacturing Ledgers. The medium for posting the charges to finished wares accounts and the offsetting credits to manufacturing accounts is the Cost Journal. All materials, manufacturing and finished wares accounts carry units and price in each specific account, but only aggregates or controlling accounts are here dealt with. Frame Consumption Journal and Cost Journal entries. Show the subjects and the amounts of charges and credits to the .several ledgers in the cost system, also the charges and credits to General Ledger accounts from data developed by the Cost records. 281. How would you proceed to ascertain the net sales, purchases, expenses and net profits of a business for a given period when the ledgers, sales books, purchase books and supporting documents have been destroyed by fire, and the only records available are the cash- book, bank pass book and book of monthly balances, the latter con- taining all the ledger balances and annual balance sheets ? It is to be understood that no unusual transactions had taken place.) 126 PROBLEMS IN ACCOUNTING 282. A fire in the office of a firm of traders partly destroyed its books of account that had been fully posted in anticipation of prov- ing their correctness. The following ledger accounts were found to be legible: Purchases net $23,000 Cash discounts lost 320 Cash discounts gained 1,150 vSales net 18,000 Bills receivable n,ooo Upon inquiry the bank balance was ascertained 43,000 Bills receivable had been discounted at the bank, amounting to 15,000 An inspection of the checks paid by the bank showed amount paid creditors, including $20,000 notes payable 33,ooo A balance sheet prepared at the last closing of the books and containing the following items was produced by one of the partners : 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. With this information open a new set of books showing the position of the firm at the time of the fire. 283. A fire insurance company began business with a capital of $400,000 and a surplus of $400,000 paid in cash. At the end of the year its books show the following: Income: gross premiums $707,135.84 less re-insurance rebates and return premiums $94,971.27; interest on mortgage loans, re- ceived in cash $6,803.65 and interest accrued and due $1,349.87; in- terest on collateral loans, received in cash $1,014.44 and accrued and due $4,228.32; interest on bonds and dividends on stocks, re- ceived in cash $16,841.65 and accrued and due $186; profit on sale of assets $4,204.52. PROBLEMS IN ACCOUNTING 127 Outgo: Gross amount paid for losses $115,048.22, less salvages $14,900; gross claims for losses in process of adjustment $32,263.83 ; gross claims for losses resisted $8,618.50, less due and accrued for re- insurance $11,412.71 ; commissions or brokerage paid in cash $123,- 544.19, and due or to become due $9,519.24; salaries, fees, and all other charges of officers, clerks and other employees paid $24,755.68; rents paid $4,224.93 ; taxes, licenses, insurance department fees paid $9,764.99; all other expenses paid $20,820.12; due and accrued ex- penses $621.29; due and accrued return premiums $9,597.36; due and accrued re-insurance premiums $6,856.48. The market value of securities owned was $20,625 I GSS than their cost. The risks in force at the end of the year carried premiums of $580,867.07, of which sum $424,747.65 was the aggregate premiums on risks running one year or less, and $156,119.42 was on risks run- ning more than one year, the unearned premiums on which amounted to $111,950.46. Set up the income accounts, making due allowance for unearned premiums. 284. 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 3Oth : Robert Adams $ 600.00 $ 5,45O-OO William Stevens 600.00 745 - 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> 2 59- $45,009.00 $45,009.00 The property is fully covered by insurance. The insurance com- pany, for the purpose of estimating the value of the merchandise destroyed, has agreed to allow 35 per cent, as the average gross gain 128 PROBLEMS IN ACCOUNTING on the sales and to pay 66^3 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. The Richardson Engraving and Printing Company has an authorized capital stock of $50,000.00, owned by William Richard- son, $10,000.00; Silas Johnson, $15,000.00 and Thomas Acton, $25,000.00. The plant was destroyed by fire September 23, 1908. All the books and records were saved except the sales records, which were not written up for September. The insurance companies paid $28,- ooo.oo on the plant and $7,000.00 on the stock, which was distributed to the stockholders as received in proportion to their holdings. Cash was received from September sales amounting to $13,500.00. On September 30 the trial balance disclosed the following condition : Capital Stock ........ (v^/TX $ 50,000.00 Stock on Hand June I, 1908.$ 8,750.00 Plant .................... 30,000.00 Accounts Receivable ....... 19,640.00 Accounts Payable .......... 12,590.00 Reserve for Bad Debts ...... 1,250.00 Insurance Adjustment ...... 28,000.00 Cash ..................... 3,900.00 Engraving ................ 77,600.00 Printing .................. 99,350.00 Merchandise Purchases ..... 58,800.00 September Sales, not allocated 24,175.00 Wages ................... 130,180.00 Rent ................. ---- 1,800.00 Salaries .................. 5,750.00 Profit and Loss Surplus ..... 855.00 William Richardson ........ 7,000.00 Silas Johnson ............. 10,500.00 Thomas Acton ............ 17,500.00 $293,820.00 $293,820.00 The accounts receivable realized $18,320.00, and the liquidation expenses were $1,850.00. The stockholders turned in their stock for cancellation and received their proportionate amount of cash. Pre- pare journal entries closing the books of the corporation and a profit and loss account. PROBLEMS IN ACCOUNTING 129 286. 4 A firm manufacturing but one grade of cloaks, insured against burglary, claims to have been robbed on the night of September 10. The proof of the loss, filed by the insured, contains two items for 600 cloaks, $12,000, and silk, 1,000 yards, $1,500. An inventory of stock on hand, consisting of cloaks, cloth and silk, had been taken January i, amounting to $118,500, the particulars of which have been lost or destroyed. An analysis of the firm's books produced the following informa- tion: Purchases of cloth, 37,500 yards at $i ; Purchases of silk, 10,000 yards at $2 ; 6,000 cloaks were manufactured, consuming 40,000 yards of cloth and 10,000 yards of silk. 9,000 cloaks were sold 'between January I and September 10. Cost of sales, per cloak, for material ............. $10 Cost of sales, per cloak, for labor and sundries ---- 7 $17 Inventory, September n : 2,500 cloaks at $17. 12,500 yards cloth at $i. 5,000 yards silk at $2. Prepare a report proving or disproving the claim. 287. Three months after the close of a fiscal year you are requested to audit a set of books to the end of the fiscal year. How do you ascertain if the cash called for by the books was actually on hand and in the bank? 288. You are asked to test the correctness of a set of books kept by single entry by applying the double entry system to the entries made. What would you do, without writing a new set of books. Take as a basis the following ledger accounts : Dr. John Doe Cr. 1913 J 9i3 Jan. 2 Balance ......... $1,000 Feb. 2 Cash ............ $ 600 20 Mdse ............ 500 Discount ........ 12 Returns ......... 400 130 PROBLEMS IN ACCOUNTING Richard Roe Jan. 25 Freight charges,. .$ 200 Jan. 20 Mdse $1,000 Feb. 2 Acceptances 1,500 2 Mdse. returned-. 300 289. The "balance of cash on hand at the date of audit according to the cashbook and ledger is $15,906.27; the bank passbook on the .same date shows a balance of $16,527.02. Which amount should appear on the balance sheet ? Why ? 290. Given the following reconciliation of cash at the close of an audit, state categorically how it may be verified : June 30, cash on hand as per cash book $8,549.17 Balance as per bank book at close of business. .$16,549.72 Add check of J. B. Jones, not deposited 1,450.00 17,999.72 Deduct checks drawn, not presented 10,154.29 7^4543 Cash in drawer 703.74 8,549.17 , 291. You are called in to examine the books of a firm whose book- keeper and cashier has absconded. He is known to be an embezzler to the amount of at least $2,000. The books have been kept by double entry and are apparently correct. How would you proceed to determine the total amount of the embezzlement ? Mention the dif- ferent methods that the embezzler might have used to hide his steal- ings. 292. A, the party of the first part, enters, March i, on the perform- ance of a contract for $50,000, payable in two installments of $25,000 each, the first of which is due on completion of a specific part of the work, but subject to 10% to be retained by the party of the second part as security for the continuation of the undertaking ; the second, together with the security retained as aforesaid, is to be paid on final acceptance of the completed work. PROBLEMS IN ACCOUNTING 131 A has a capital of $4,000 available for the payment of labor, which proves insufficient. He therefore takes in as associates on April i B, who contributes $3,000, and C who contributes $1,000, B and C to share profits in the proportion of ^ and ^ respectively, and to receive interest on capital at 6 per cent per annum. The first installment of the contract falls due and is paid on May i, at which date there had been expended by the contractors for labor and incidentals $7,502 and obligations for material and supplies furnished on credit had been incurred and were outstanding to the account of $13,900, of which all but $1,500 are forthwith settled from the installment money. On receipt of the first installment, B and C withdraw their capi- tal and realize the profits earned at the completion of the first stage of the work, leaving A to continue alone, it being carefully estimated and mutually conceded that a further outlay of $26,158 will be suffi- cient to finish the work and cover all reasonable contingencies. Show by skeleton ledger accounts the cash payable by A to B and C respectively on their withdrawal from the partnership, and state the resources and obligations that remain to A on entering on the second part of the work. A and B are partners trading under the name A, B & Co. On June 30, 1910, the following balances appear upon their ledger: A capital account $7,000 B capital account 5,ooo Real estate 2,200 Buildings 2,000 Machinery and tools 4,400 Furniture and fixtures 200 Accounts receivable 5,ooo Cash 700 Materials and merchandise 5>3OO Accounts payable 3>5o Bills payable 4,800 Bills receivable '. 500 On this date the business is incorporated as the S Co., on the following plan: (1) Capital Stock, 150 shares, $15,000, $5,000 preferred, $10,- ooo common. (2) S Co. takes over the assets and liabilities of A, B & Co. at the book figures as above, except (a) real estate of the book value 1 32 PROBLEMS IN ACCOUNTING of $500, which is retained by A, B & Co. ; (b) the accounts receivable which are taken over at $4,800. (3) S Co. pays A, B & Co. $3,000 for the good will of the business. (4) Payments to A, B & Co. are made as follows : $5,000 in first mortgage bonds and the balance in common stock. (5) Stock not issued to A, B & Co. is sold for cash to sundry persons at par. (6) Real estate retained by A, B & Co. is taken by A from the firm at a valuation of $700 and is to be charged to his capital account. After the completion of these transactions A and B dissolve partnership. You are asked to prepare (i) closing entries for the books of A, B & Co., (2) opening entries for the S Co. 293- Some proprietors keep a private ledger of their business, to which bookkeepers and clerks have no access. Explain the purpose of such a book, and show what accounts it usually contains and how it is made to agree with the general ledger. 294. The machinery used by a firm has been purchased on the instal- ment 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 state- ment deal with the machinery, the instalments paid, and the royalty ? 295. A company issues annually over 10,000 checks on three separate banks, recording each one on the check stub and then transcribing each check in detail on the general cash book. Suggest a change in method which would facilitate the work and point out advantages gained. 296. In auditing an account the auditor finds that Robert Brown had bought a bill of goods amounting to $500, payable on August 10, less 2%. He had, however, made payments thereon as follows: PROBLEMS IN ACCOUNTING 133 June 2 $100 June 15 100 July 3 loo On what date would he be required to make payment of the remaining $200 to entitle him to the 2% discount under the original terms of sale ? 297. 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 bal- ance of each 'branch account is treated as an ordinary Accounts 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. 298. A retail book-store agrees to deliver certain sets of books at $20, on payment of $2 down, the purchaser agreeing to make $3 payments for each of the six months next following. It is expected that sales on this plan will aggregate several hundred sets. Suggest method of keeping the accounts, so that results may be readily shown. 399. 3 1 One of the early experiences of the firm of Gardner & Kestin, Certified Public Accountants, was to make an investigation of the books and accounts of Evans, Smart & By ford (which firm had be- come involved in business difficulties and was compelled to stop payment) and to prepare from the following data a statement of affairs, accompanied by a deficiency account: Unsecured creditors, A $35,000, B $27,500, C $26,000, D $24,500, E $17,500. F $15*000 and G $2,000; creditors for rent, salaries, etc. $1,250, of which $750 was preferential; debtors $42,500, of which $37,500 was good, $1,825 doubtful (estimated to produce $625) and $3,125 bad; bills receiv- able, H $3,000, J $4,250, K $2,500 and L $1,500; land and buildings $25,000, plant and machinery $8,500, stock on hand $5,000, furniture and fixtures $1,500, cash on hand $15,000, sundry profits $37,500, sundry losses $30,000, trading expenses $17,500. Evans' capital account was $5,000, Smart's $3,750, Byford's $3,750; Evans' draw- ings were $10,000, Smart's $15,000, Byford's $17,500. Show how you would have prepared the statements required had you been employed to do the work. 134 PROBLEMS IN ACCOUNTING 300. John Thompson exhibits the following 'balance sheet of his busi- ness, dated June 30, 1900: Cash $ 750 Sundry creditors $ 6,000 Book debts 9,500 Bills payable 7>5o Stock on hand 6,500 Bank (overdraft) 3,ooo Fixtures, etc 1,750 Balance 2,000 Total $18,500 Total $18,500 On questioning Thompson it was found that he had omitted the following from his balance sheet: $250 owing for rent; $75 owing for taxes; $2,500 borrowed at 5% from his wife three years ago, no payment having been made on account of either principal or interest ; a draft for $500 accepted by a firm without consideration, falling due in 30 days. His private and household debts amounted to $600. The item entered on his balance^ x sheet as cash included his per- sonal 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 pro- duce 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 mort- gage for $5,000 at 4%, and also a second mortgage held by his bank as security for overdraft. Prepare a statement of affairs. 30I> Wallace Hopkins, while perfectly solvent and doing a profitable manufacturing business, had so tied up his capital in plant and mate- rials 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 partly Surplus 4,900 finished 40,400 Finished goods 6,070 Accts. Rec 3,250 $75.130 $75,130 PROBLEMS IN ACCOUNTING 135 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 unfinished goods would require the employment of skill and processes 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. The subsequent operations of the trustee were as follows. Pur- chases 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 draw- ings, $3,000. There remained raw materials $4,000 ; finished goods, $22,388. Prepare (i) realization and liquidation account, (2) trustee's cash account, (3) balance sheet of the estate as restored to Wallace Hopkins. 302. In the valuation of a certain Gas Light & Coke Company for rate purposes, the appraiser takes cost-new as the value of the physical property for rate purposes rather than cost-of-reproduction- less-depreciation. He found the cost-new of the physical property to be $49,023,947 and the existing depreciation to be $6,786,538. The company had a specific reserve of $1,617,095 for depreciation. The appraiser states that while this amount is inadequate, still the specific reserve allotted to depreciation is largely a bookkeeping transaction and as it possessed other funds from which amounts could be transferred by book entry to depreciation reserve when occasion required, the company should be assumed to have a fund adequate to meet existing depreciation and that therefore, the value- new rather than the depreciated value should be used. The appraiser says: "The difference between the reproduction cost new of the phy- sical property and its present value is $6,786,538, which represents the estimated depreciations through wear and tear and obsolescence. The rate of return to which the investor is entitled should be applied on the fair present value of the property. If the property has depre- ciated, and no allowance has been made to restore the capital so 136 PROBLEMS IN ACCOUNTING consumed, the rate of return must apply on the depreciated value of the plant instead of on the cost new. The company in this case has charged operating expenses annually with an amount which it deemed sufficient to offset the depreciation. The reserve for depre- ciation on December 31, 1909, as shown by the company's books, was $1,617,095. In some respects, the amount shown to the credit of such a specific reserve is largely a bookkeeping transaction, the important consideration in each instance being, whether the com- pany actually possesses property which, if not set aside for specific depreciation purposes, could be set aside without doing violence to any other obligation. This is believed to be the situation here. Its earnings have exceeded, by a liberal margin, all necessary require- ments, but instead of creating a reserve for depreciation sufficiently large to represent the estimated depreciation of the property, such surplus earnings have been placed to the credit of other accounts from which they may be transferred by book entry to the deprecia- tion reserve when occasion requires/ s Since such assets are ample in amount, the value of the physical property through the addition of these amounts is considered on the basis of its cost new." The following are the balance sheets of this corporation about the time of this appraisal : Assets 1910 1909 Real estate, franchise tunnels, street mains, meters, serv. etc $82,699,338 $79,086,611 Materials 1,468,1 13 1,433,648 - ( . Securities 128,459 200,71 1 Accounts receivable 1,010,087 1,320,434 Deposits with Agencies 295,155 286,735 Gas Bills Receivable 990,993 922,565 Bills Receivable 52,227 52,227 Cash 4,819,934 3,546,428 Total $91,464,306 $86,849.359 Liabilities 1910 1909 Capital stock $35,000,000 $35,000,000 Bonded debt 40,096,000 37,096,000 Deposits, security for gas bills 259,615 265,837 Accounts payable 1,271,536 9 2I >547 Coupons past due 295,155 286,735 PROBLEMS IN ACCOUNTING 137 Bond interest accrued 389*525 339>5 2 5 Depreciation and Reserves. . 2,029,195 1,520,767 Profit and loss 12,123,280 11,418,948 Total $91,464,306 $86,849,359 The above illustrates a common misunderstanding as to the nature of the Depreciation Reserve. (a) Explain fully, (b) Show how this error with respect to the Depreciation Reserve invalidates the conclusion that in this case Cost new is the proper basis for rates. 303- A real estate company buys a tract of land for $9,500.00 and divides it into 74 lots. After spending $5,300.00 in improvements the property is estimated to be worth $25,000.00 in excess of the expense of selling it. Four corner lots are actually sold on this basis for a lump sum of $1,800. Allowing $60 for the expense of selling them, what profit is to be written up for the sale ? 304- "Where an ordinary bond is bought at a premium, this is a lump sum to offset the receipts from future interest payments whose rate is higher than the market rate." Explain and illustrate fully. 305- (a) "The cost of bonds bought at discount differs from that of bonds bought at a premium in that there is not the same cer- tainty of the discount being eventually earned as of the premium being lost." (b) In commenting on the above statement, Dr. Sprague says, " 'Earned' and 'lost' are not happy expressions here. The premium is not lost at maturity, but has gradually been refunded to us; and the discount is not earned, but gradually withheld from us" Illustrate and explain fully the italicised sentence. 306. What is the cost per square foot per annum of a station site which cost $60 per square foot, allowing 5% interest and taxes at the rate of $15.00 per thousand of actual value? 138 PROBLEMS IN ACCOUNTING Suppose by going 4 blocks out you can get land at $5 per square foot. The station occupies 20,000 square feet. What is the differ- ence in cost per annum between the two sites ? 307- Machine No. n. Cost $4,000. Scrap only sufficient to cover the cost of removal and restoring floor conditions. Estimated life, 10 years. Interest rate 5%. Insurance rate 5% for a period of 10 years. Repairs and maintenance $40 per year. What is the machine rate per hour for the above costs ? "The relation of overhead charges to direct labor costs is in no sense a measure of the efficiency of a plant." (Evans.) 1. Prove and illustrate the above quotation. 2. Show that in the light of the above quotation the productive process in the form of the job should be taken as the unit in cost accounting. 309. "Two main principles have emerged, "i. The reduction of non-productive work to different classes of 'service' rendered to actual production ; and "2. The grouping of all indirect expense into these natural classes instead of into purely accountancy classifications such as the consolidation of all charges for depreciation, for rent, for interest, for repairs, etc., irrespective of the purposes for which these charges were incurred." (Church "Production Factors," p. 113.) Explain. 310. "If low shop expense percentage is the aim, it is easily accom- plished by not spending money to bring the tool equipment up to a proper standard." (Evans, p. 92.) Explain and illustrate the above statement. How would the inefficiency of poor tool equipment be disclosed by a cost system on the production factor plan ? PROBLEMS IN ACCOUNTING 139 A certain factory employs 259 men. The total number of direct labor hours for the month of April is 48,000 hours and the amount of wages is $12,250. The total burden for the month amounts to $11,000. Job No. 45 is the construction of a heavy machine. The direct labor spent on it amounted to 3,000 hours with a direct wage of $950. The material entering into the machine cost $1,128. (a) What will be the total factory cost of the job according to the hourly burden plan and the percentage of wages plan? (b) Suppose the job required the use of three machines on which the rates are as follows : A 1,000 hours, rate $0.124 per hour. B 400 " " 0.152 " ,200 " " What would be the total factory cost according to this plan ? (Give reasons for the differences in the costs according to these three methods of distributing burden.) What possible conditions in the shop would account for these differences ? 312. A concern is engaged in manufacturing steel ranges. Cost of Steel Range, Style A93. Foundry Department. Process A. Labor ......................... $5.50 Material ....................... 8.00 Other Expenses ................. 6.00 Capital used $7,500 2 days. Market price $23.50. Process B. Process B 1 . Labor .................. $1.80 $0.90 Material ................ 1.50 1.60 Other Expenses .......... 3.20 3.50 Capital $3,000 i l A days. $5,4OO one day. 140 PROBLEMS IN ACCOUNTING Assembling. Process C. Process C 1 . Labor $0.70 $0.40 Material 1.30 1.30 Other Expenses 1.20 1.46 Capital $900 H da. $2,400 % da. Sales Expense $4.25 Selling Price $61.50 (a) Would it be better to continue producing the castings made by process A or to buy them ? (b) The concern can use for the second process either Process EorB 1 . Which is preferable? (c) For the third operation, which is preferable, C or C 1 ? (d) Work out the cost of each process and the cost of the fin- ished article according to all the different combinations of processes possible. 313- A certain railroad, being about to be foreclosed under a consoli- dated deed of trust, a committee of the consolidated bondholders, the members of which were large holders of stock and prior bonds, drafted "a plan for purchase and reorganization," effective Jan. I, 1880. This provided that the old stock should be deposited, and that the new company should issue (i) first mortgage 6% bonds to be used to find the past due and maturing interest on the prior bonds and for permanent construction and improvement; (2) preferred 7% stock to represent the par value of outstanding consolidated bonds; and (3) common stock to represent the outstanding common stock. Holders of the common stock were not to be entitled to .shares or to vote until preferred stock had paid five successive an- nual dividends of 7%. A reincorporation was effected on this basis. At the end of five years the common stockholders brought action, setting forth that earnings and income which had been wrongfully converted to pay for improvements and extensions, would, if applied to dividends, have been sufficient to pay for five successive dividends of 7% each on the preferred stock, and that the common stock- holders were therefore, entitled to representation. The net earnings as reported by the company were as follows : Net earnings for 1880 $133,084.69 " 1881 244,037.94 " 1882 438,989.89 " 1883 488,799-13 " 1884 400,303.40 " 1885 272,451.77 PROBLEMS IN ACCOUNTING 141 In 1 88 1 steel rails were laid. The cost of this, less the value of old rails removed was $133,779.03, all of which sum was charged to operating expenses. In 1882 a similar charge was made to the amount of $31,224.56. In 1883, of $65,000.00; in 1884, $10,000.00; in 1885, $9,996.35. In 1881 new sidings and spurs were charged to operating expenses to the amount of $45,430.00. In 1882 the amount so charged was $9,640.00; in 1883, $16,960.00; in 1884, $11,640.00; in 1885, $5,400.00. In 1883 two steamers owned by the company were enlarged and made more efficient, at a cost of $40,286.44, which was paid out of and charged to earnings. In the spring of 1884, $142,000 was expended for 8 new freight engines and 200 coal cars. The funds for this purchase were raised by loan, which was paid off by the company at the rate of $3,000.00 per month and the sum so paid in addition to interest on the loan was charged to operating expenses and withdrawn from earnings. $15,000.00 was thus charged in 1884 and $36,000.00 in 1885. The amount of preferred stock on which the 7% was to be paid annually was $6,500,000. Make out a statement showing whether or not the common shareholders were entitled to representation on Jan. i, 1886. THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW AN INITIAL FINE OF 25 CENTS WILL BE A THIS BOOK DEC 34 1937 .DECJ LD 21-95m-7,'37 C 24512 UNIVERSITY OF CALIFORNIA UBRARY