THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES This book is DUE on the last SOUTHERN BRAN< IJHYERS1TY OF LIB- 1ALIF. California ACCOUNTING PROBLEMS: INTERMEDIATE 3f ill Book (a PUBLISHERS OF BOOKS F O R_/ Electrical World ^ Engineering News-Record Power v Engineering and Mining Journal-fress Chemical and Metallurgical Engineering Electric Railway Journal v Coal Age American Machinist v Ingenieria Internacional Electrical Merchandising ^ BusTransportation Journal of Electricity and Western Industry Industrial Engineer ACCOUNTING PROBLEMS: INTERMEDIATE BY CHARLES F. RITTENHOUSE, B. C. S., C. P. A. PROFESSOR OF ACCOUNTING, BOSTON UNIVEB8ITT COLLEGE OF BUSINESS ADMINISTRATION AND ATLEE L. PERCY, A. B., B. B. A., C. P. A. ASSOCIATE PROFESSOR OF ACCOUNTING, BOSTON UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION FIRST EDITION McGRAW-HILL BOOK COMPANY, INC. NEW YORK: 370 SEVENTH AVENUE LONDON: 6 & 8 BOUVERIE ST., E. C. 4 1922 71767 COPYRIGHT, 1922, BY THE McGiiAW-HiLL BOOK COMPANY, INC. \\ ASHIN(7TON MONOTYPF. COMPOSITION COMPANY, WASHINGTON, I). C. Bu HP PREFACE This book of exercises in accounting is the result of work by the authors extending over several years in collecting and pre- paring problems and exercises of an intermediate grade which would provide the instructor of accounting with a variety of laboratory material of a practical and teachable character. It should be understood that the book is essentially a compilation of problems and exercises illustrated by model statements of various types, rather than a presentation of accounting theory. It is, therefore, intended to be used in conjunction with a text on accounting theory or to supplement the instructor's own lectures on the subject. The work is adapted to second year students or to those even further advanced in their accounting course. It is divided into two parts. Part I consists of more than forty model forms of financial statements and reports with comments and interpretations. These serve the purpose of familiarizing the student with forms of statements and reports adaptable to representative busi- nesses and institutions, and at the same time they aim to present within certain limits the standardized practice in form and arrangement of such statements. The published balance sheets of representative industrial concerns of this country and Great Britain which are reproduced should broaden the horizon of the student, add to his knowledge of accounts and accounting terms, and serve to develop his power to interpret statements from the point of view of the business executive, banker, and investor. Part II consists of some four hundred problems and questions in accounting theory classified and arranged to correspond to the topics in accounting which would as a general practice receive consideration in the intermediate state of the student's work. Much more care and thought have been given to the selection of these problems than is apparent on the surface. Many of them are original problems developed from the authors' experiences in accounting work, but the majority are taken from C. P. A. examinations given by different states and from the vi PREFACE examinations of the American Institute of Accountants. Only such C. P. A. problems have been selected as have real merit. Many of the problems have been revised for the purpose of making them teachable and clearer of interpretation. The purpose in the main has been to select problems which combine a maximum of benefit with a minimum of clerical work. While many collections of problems have been published, the authors believe that this is the first time that any serious thought has been given to the pedagogy of such laboratory material. Not only have the problems been carefully classified and graded, but a feature of the work which should be much appreciated by all instructors is the notes and comments which accompany most of the problems. These comments call attention to the major points of the problem, state the nature and the purpose of the problem, the principles involved in its solution, reading references where necessary, and helpful hints and suggestions to assist the student in arriving at an intelligent and finished solu- tion of the problem. Throughout Part II cross references are made to the model forms in Part I, which combined with the proper guidance by the instructor, should develop and maintain a high standard of accounting technique. A serious effort has been made to have both student and in- structor realize that the solution of a problem is of consequence not merely for its own sake, but of far greater importance for the training thus provided in making a practical application of the principles involved in the problem. The solution thus be- comes nothing more than a concise, well-planned, and readable presentation of a certain phase of accounting theory. The student should thus acquire much more than a mere "knack" or skill in solving problems. Every problem should be looked upon as an actual "case" given to him for his careful consideration and opinion, with the result of his thought and study presented in proper technical form, and reflecting in as high degree possible his mature and expert judgment. It is believed that the instructor will find it impossible to make use of all the problems under each topic in a one year course. Accordingly, the assignments from year to year may be varied to a considerable degree, thereby overcoming the dangers that result from assigning identical problems to successive classes. PREFACE vii The carefully compiled bibliography at the close of each section of the book should prove of great help to the student who wishes to make an extended study of a particular topic. THE AUTHORS BOSTON, MASS. July 1, 1922 V4 F 6,4 CONTENTS PART I ILLUSTRATIVE FORMS OF FINANCIAL STATEMENTS AND REPORTS PAGE PREFACE ......................... v INTRODUCTION: Form and arrangement of financial statements; Importance of technique; Grouping of items; Punctuation; Inden- tations; Capitalization; Abbreviations; Divisions of finan- cial statements; Form of balance sheet ........ 3-5 ILLUSTRATIVE STATEMENTS FOR SOLE PROPRIETORSHIP: Model Exercise I, Trial Balance, with comments ...... 6-7 Form I. Balance Sheet, Report Form, with comments . . . 8-10 Form II. Profit and Loss Statement, Report Form, wjth comments .................... 11-14 Form III. Closing Entries, with comments ........ 15-17 ILLUSTRATIVE STATEMENTS FOR PARTNERSHIP: Model Exercise II, Trial Balance, with comments ..... 18-19 Form IV. Adjusting Journal Entries, with comments . . . 20-21 Form V. Working Sheet, with comments ........ 22-24 Form VI. Balance Sheet, Report Form, with comments . . 25-26 Form VII. Profit and Loss Statement, Report Form, with comments ..................... 27-28 Form VIII. Closing Journal Entries, with comments ... 29 ILLUSTRATIVE STATEMENTS FOR CORPORATION: Form IX. Balance Sheet, Account Form, with comments . 30-32 Form X. Profit and Loss Statement, with comments . . . 33-34 Form XI. Closing Journal Entries ........... 35-36 ILLUSTRATIVE STATEMENTS FOR MANUFACTURING CORPORATION: Model Exercise III, Trial Balance, with comments ..... 37-38 Form XII. Balance Sheet, Account Form ........ 39 Form XIII. Profit and Loss Statement, Report Form, with comments .................... 40 Form XIV. Statement of Cost of Goods Manufactured, with comments .................... 41 Form XV. Closing Journal Entries ........... 42-43 ix X CONTENTS PAGE ILLUSTRATIVE STATEMENTS. SUPPORTING SCHEDULES FOR FINAN- CIAL STATEMENTS: Form XVI. Analysis of Cost of Goods Manufactured, with comments 44-45 Form XVII. Analysis of Cost of Goods Sold, with comments 46 Form XVIII. Analysis of Operating Expenses, with com- ments 47-48 Form XIX. Analysis of Surplus, with Comments 49 Form XX. Comparative Analysis of Operating Expenses, with comments 50-51 ILLUSTRATIVE STATEMENTS. SPECIAL FORMS OF FINANCIAL STATEMENTS: Form XXI. Condensed Balance Sheet American Interna- tional Company 52 Form XXII. Condensed Income Account American Inter- national Company 53 Form XXIII. Comparative Balance Sheet The Boston Dry Goods Company 54-55 Form XXIV. Comparative Income Statement The Boston Dry Goods Company 56-57 Form XXV. Consolidated Balance Sheet American Hide and Leather Company and Subsidiary Companies . . . 58-59 Form XXVI. Double Account Form of Balance Sheet Royal Manufacturing Company 60-61 Form XXVII. English Form of Balance Sheet Walker and Homfrays, Limited 62-63 Form XXVIII. American Bankers Association Form for Credit Purposes Firm or Individual 64-65 Form XXIX. American Bankers Association Form for Credit Purposes Corporation 66-67 Form XXX. Statement of Cash Receipts and Disburse- ments Arlington Research Club 68 Form XXXI. Form of Balance Sheet Recommended by the Federal Reserve Board for Credit Purposes 70-71 Form XXXII. Form of Profit and Loss Statement Recom- mended by the Federal Reserve Board 72 Form XXXIII. Certificate of Condition Required to be Filed by Massachusetts Corporations 73-75 ILLUSTRATIVE STATEMENTS. PUBLISHED BALANCE SHEETS OF REPRESENTATIVE BUSINESS CONCERNS: Form XXXIV. Balance Sheet, Profit and Loss Statement, and Surplus Account American Writing Paper Com- pany 76-77 Form XXXV. Balance Sheet Willys-Overland Company . 78-79 Form XXXVI. Consolidated Balance Sheet and Profit and Loss Statement Westinghouse Electric and Manufac- turing Company 80-81 CONTENTS xi PAGE Form XXXVII. Balance Sheet and Profit and Loss State- ment United States Steel Corporation . . 82-89 Form XXXVIII. Income Account and Balance Sheet American Locomotive Company 90-92 Form XXXIX. Balance Sheet and Income Account Atchi- son, Topeka, and Santa Fe Railway Company 93-95 Form XL. Consolidated Balance Sheet and Income Ac- count Northern States Power Company 96-98 Form XLI. Balance Sheet and Statement of Income and Expenses University of Chicago 99-104 Form XLII. Comparative Profit and Loss Statement, Bal- ance Sheet, and Comparative Department Operating Statement Boston City Club 105-108 Form XLIII. Balance Sheet and Statement of Income The Mutual Insurance Company 109-110 Form XLIV. Balance Sheet National Bank Ill Form XLV. Balance Sheet A Massachusetts Trust Com- pany 112-113 Form XLVI. Statement of Condition A Massachusetts Savings Bank 114 Form XLVII. Balance Sheet Needham Cooperative Bank. 115 ILLUSTRATIVE STATEMENTS. AUDITOR'S REPORT: Form XLVIII. Audit Report covering audit of a small re- tail business, comment's on the balance sheet, comments on the operating statement, estimated cash requirements; Exhibit A Balance Sheet; Exhibit B Profit and Loss Statement; Exhibit C Estimated Cash and Credit Re- quirements 116-121 UNIFORM ACCOUNTING SYSTEMS FOR TRADE ASSOCIATIONS . . . 122-123 PART II CLASSIFIED PROBLEMS AND EXERCISES IN THEORY AND PRACTICE SECTION I. CONSTRUCTION OF FINANCIAL STATEMENTS: Group A. Single Proprietorship Statements, Problems 1 to 4. 127-135 Group B. Partnership Statements, Problems 5 to 9 . . . . 136-148 Group C. Corporation Statements, Problems 10 to 16 . . . 149-159 Group D. Manufacturing Statements, Problems 17 to 25. . 160-175 Group E. Financial Statements Prepared from Single Entry Records, Problems 26 to 34 176-185 Group F. Special Types of Statements, Problems 35 to 44 . 186-201 Group G. Analysis and Interpretation of Financial State- ments, Problems 45 to 62 202-228 Group H. Financial Statements. Theory Questions, Ques- tions T-l to T-35 229-237 Bibliography. Financial Statements 238-239 xii CONTENTS PAGE SECTION II. CORPORATION ACCOUNTS: Group A. Opening Books of New Corporation, Problems 63 to 76 241-249 Group B. Changing a Partnership to a Corporation, Prob- lems 77 to 83 250-258 Group C. Corporate Bond Issues, Problems 84 to 87 ... 259-260 Group D. General Problems Involving Corporation Ac- counts, Problems 88 to 101 261-274 Group E. Corporations. Theory Questions, Questions T-36 to T-72 275-286 Group F. Liquidation of Corporations, Problems 102 to 103. 287-289 Group G. Amalgamations and Mergers, Problems 104 to 107. 290-295 Group H. Holding Companies and Consolidated Balance Sheets, Problems 108 to 114 296-309 Group I. Holding Companies and Consolidations. Theory Questions. Questions T-73 to T-86 310-313 Group J. Bonds and Sinking Funds, Problems 115 to 123 . 314-318 Group K. Bonds and Bond Sinking Funds. Theory Ques- tions, Questions T-87 to T-98 319-321 Bibliography 322-323 SECTION III. DEPRECIATION, RESERVES, AND SURPLUS: Group A. Depreciation and Reserves, Problems 124 to 134. 325-332 Group B. Depreciation and Reserves, Theory .Questions, Questions T-99 to T- 113 333-337 Group C. Adjustments and Analysis of Surplus, Problems 135 to 140 338-344 Group D. Surplus and Reserves. Theory Questions, Ques- tions T- 114 to T- 125 345-348 Bibliography 349 SECTION IV. PARTNERSHIP PROBLEMS: Group A. Admission of Partner, Problems 141 to 151 . . . 351-357 Group B. Dissolution of a Partnership, Problems 152 to 155. 358-360 Group C. Partnership Liquidation by Installments, Prob- lems 156 to 162 361-366 Group D. Miscellaneous Partnership Problems, Problems 163 to 169 367-371 Group E. Partnerships. Theory Questions, Questions T-126 toT-135 372-374 Bibliography 375 SECTION V. CONSIGNMENTS, BRANCH HOUSES, AND SELLING AGENCIES: Group A. Consignments and Joint Ventures, Problems 170 to 179 377-384 Croup B. Consignments and Joint Ventures. Theory Ques- tions, Questions T-136 to T-140 385-386 CONTENTS .xiii PAGE Group C. Branch Houses and Selling Agencies, Problems 180 to 189 387-396 Group D. Branch Houses. Theory Questions, Questions T-141 to T-145 397-398 Bibliography 399 SECTION VI. MISCELLANEOUS PROBLEMS AND THEORY QUES- TIONS: Group A. Fire Loss and Insurance Adjustments, Problems 190 to 199 401-408 Group B. Suspense Items and Adjustments, Problems 200 to 204 409-412 Group C. Miscellaneous Thcorj- Questions, Questions T-146 to T-165 413^18 Bibliography 419 INDEX . . . 421 INTRODUCTION FORM AND ARRANGEMENT OF FINANCIAL STATEMENTS Importance of Technique. Financial statements are the most formal documents in accounting, and should, therefore, be pre- pared with the greatest degree of accuracy and understanding. They may be said to bear the same relation to other phases of accounting as an engraved invitation does to ordinary social correspondence. The entire accounting system should be arranged with a view to gathering all the information that may be required in the preparation of the financial statements. All other processes in accounting are merely the means to an end. The end to be sought is the presentation through readable and comprehensive reports or statements of the results of business operations and a clear and accurate statement of financial condition. Poor ar- rangement and carelessness in the preparation of financial state- ments usually give the impression that the books of account have likewise been kept in a careless and unmethodical manner. One extreme in regard to form and arrangement, as applied to financial statements, is to throw together a mass of figures and facts in a careless fashion without regard to logical arrangement. Such figures are accordingly more or less unintelligible, and give no definite information as to details. The other extreme is to prepare the statements in such a technical manner that none except those skilled in accounts can read them intelligently. As a happy medium the facts should be presented in a formal and logical order, but with all items well defined and completely stated, and with the facts presented in proper sequence. The terms should be explicit and the figures accurate. While con- taining no unnecessary words, they should be so complete that the layman will not be left in doubt as to the meaning of the various items. Such work is distinctly constructive in its nature 3 4 ACCOUNTING PROBLEMS: INTERMEDIATE and requires imagination, an analytical turn of mind, and the ability to think clearly and to see things from the other person's point of view. Good technique requires attention to punctua- tion, indentations, capitalization, and abbreviations. Grouping of Items. All items of like nature should be grouped under appropriate headings so that proper comparison and analy- sis of the financial facts presented may be made. All items and totals should be properly defined. Punctuation. Little punctuation is necessary in financial state- ments because of the grouping and indentations. The principal marks used are the comma, dash, semi-colon, and parentheses. The comma is used in the customary way for the punctuation of dates, explanatory clauses, etc. It is recommended that the dash be used after such words as "Less" and "Deduct" when followed by other words on the same line. The colon is used after all group headings, the items of which appear in tabulated form under such headings. The parentheses are used to inclose all words and phrases of an explanatory nature such as "cost," "book value," etc., used after certain assets in the Balance Sheet. The dollar mark should not be used when figures appear in ruled columns but should appear at the head of all unruled columns, and should be repeated when the column is broken by a single or double line. This applies only to pen-written work on ordinary ruled sheets, and not to typewritten work where the dollar mark appears in all columns. Indentations. The various indentations are for the purpose of indicating the connection between items and groups of items, and should be given close attention in order that the statement may be more easily read. They should follow as closely as possible the ordinary rules for tabulation of financial facts, the main thing being to make the indentations uniform. Capitalization. Practice in the use of capitals should be con- sistent. One method is to capitalize all words in each item except the articles, prepositions, and conjunctions. Another method is to capitalize only the first word of each item. Abbreviations. There should be no abbreviations except in extreme cases. Ditto marks should never appear in a financial statement. FINANCIAL STATEMENTS AND REPORTS 5 Divisions of the Financial Statement. In the field of account- ing work covered in these exercises we need recognize only the following divisions of financial statements: Balance Sheet with supporting schedules, known as Exhibit A. Profit and Loss Statement with supporting schedules, known as Exhibit B. Statement of Cost of Goods Sold (for manufacturers only), known as Exhibit C. Sundry other statements are used from time to time, but they are usually subsidiary to the above named statements. Form of Balance Sheet. The most common forms of Balance Sheet are known as the Report or Statement form, and the Account or Technical form. The former is known as a one- page or "running" form, the assets appearing at the top, fol- lowed by the liabilities and capital. It should be used only when the number of items is small and the entire statement can be placed on a single page without crowding. The account form, known as the two-page or technical form, is used when the number of items is large, the assets being placed to the left, and the liabilities and capital to the right. All other forms of Balance Sheets are variations of these two forms. ACCOUNTING PROBLEMS: INTERMEDIATE MODEL EXERCISE I $ 5 630 00 224 296 00 22 600 00 210 275 00 654 00 76 540 00 14 416 00 2 760 00 1 350 00 956 00 890 00 175 00 $ 84 264 00 50 000 00 70 000 00 460 00 800 00 275 000 00 Financial Statements for Sole Proprietorship GEORGE W. DUNN Trial Balance December 31, 1921 (Adjusted) Cash on Hand and in Bank Accounts Receivable Notes Receivable Inventory,' December 31, 1920 (cost) Interest Accrued on Notes Receivable Real Estate (book value) Store Fixtures (book value) Office Furniture and Equipment (book value) Interest Prepaid on Notes Payable Discounted Advertising Matter on Hand Taxes Prepaid Insurance Prepaid Accounts Payable Notes Payable Mortgage Payable Interest Accrued on Notes Payable Interest Accrued on Mortgage Payable George W. Dunn, Capital George W. Dunn, Current Sales Sales Returns and Allowances Purchases Purchase Returns and Allowances Freight and Hauling Inward Advertising Store Clerks' Salaries Traveling Salesmen's Salaries Traveling Expenses Store Supplies Used Freight and Hauling Outward Office Clerks' Salaries Office Expenses Maintenance of Real Estate Interest on Notes Receivable Interest on Bank Balances Discounts on Purchases Interest on Notes Payable Interest on Mortgage Payable Discounts on Sales Inventory, December 31, 1921 (cost) $185,820.00 Required : (a) Profit and Loss Statement (b) Balance Sheet (c) Closing Entries. 15 600 00 17 273 00 649 120 00 4 035 00 21 607 00 18 460 00 18 644 00 13 720 00 1 516 00 2 060 00 6 488 00 1 780 00 4 260 00 5 745 00 4 200 00 2 495 00 852 075 00 8 670 00 1 307 00 79 00 4 890 00 $1 347 545 00 $1 347 545 00 FINANCIAL STATEMENTS AND REPORTS 7 Comments. Mr. Dunn conducts a wholesale jobbing business. He owns a six-story building, using the basement and first two floors for his business and renting the upper floors. "Maintenance of Real Estate" includes taxes, insurance, repairs to building, depreciation, heat and light, janitor and helpers, etc., and is to be charged as an operating expense in lieu of rent. Freight and hauling inward on merchandise purchases is considered a part of the cost of goods purchased, and the proper portion thereof is included in the cost of goods on hand, both at the beginning and at the end of the year. 8 ACCOUNTING PROBLEMS: INTERMEDIATE FORM I. Balance Sheet (Report Form). GEORGE W. DUNN Exhibit A Balance Sheet December 31, 1921 Assets Current Assets: Cash $ 5 630 00 Accounts Receivable 224 296 00 Notes Receivable 22 600 00 Merchandise on Hand (cost) 185 820 00 Accrued Items: Interest on Notes Receivable 654 00 $439 000 00 Fixed Assets: Real Estate (book value) $ 76 540 00 Store Fixtures (book value) 14 416 00 Office Furniture and Equipment (book value) 2 760 00 93 716 00 Deferred Charges to Operations: Advertising Matter on Hand $ 956 00 Interest Prepaid on Notes Payable Dis- counted 1 350 00 Taxes Prepaid 890 00 Insurance Prepaid 175 00 3 371 00 Total Assets $536 087 00 Liabilities and Capital Current Liabilities: Accounts Payable $ 84 264 00 Notes Payable 50 000 00 Accrued Items: Interest on Notes Payable $ 460 00 Interest on Mortgage Pay- able 800 00 1 260 00 $135 524 00 Fixed Liabilities: Mortgage Payable 70 OOP 00 Total Liabilities $205 524 00 George W. Dunn's Capital: Balance, December 31, 1920 $275 000 00 Add Net Profit for the Year (See Exhibit B) $71 163 00 Less Drawings for the Year 15 600 00 55 563 00 330 563 00 Total Liabilities and Capital $536 087 00 FINANCIAL STATEMENTS AND REPORTS 9 Form 1 Balance Sheet. This form illustrates the manner of setting up the report form of balance sheet for a single proprietorship. Attention is called to the following points in this statement: Heading. This appears on three lines, the first of which contains the name of the proprietor, the second, the words "Exhibit A," and the third, the title and date of statement. Each item should be properly centered and all words underlined. The words "Exhibit A" may appear at the bottom of the page if the balance sheet forms a part of a report which is bound at the top instead of the left side. The date should always be as of the close of the fiscal period. Grouping. The two main sections are headed "Assets" and "Liabilities and Capital" respectively. The subheadings under the "Assets" section are "Current Assets," "Fixed Assets," and "Deferred Charges to Operations." The latter should always be shown as the last subheading in the "Assets" group. In this form, current assets appear first. Either current assets or fixed assets may appear first, depending upon the purpose for which the balance sheet is to be used, and the total amount of the respective groups. The current assets usually appear first when the statement is submitted for credit purposes. If the amount of the fixed assets is very large as compared with current assets, then the "Fixed Assets" group may be shown first. The "Liabilities and Capital" section is subdivided into the following groups: "Current Liabilities," "Fixed Liabilities," and "Capital." The capital should always appear as the last group under the "Liabilities" section, while either fixed liabilities or current liabilities may appear first, depending upon the manner in which the assets are shown. If current assets are shown first, then current liabilities must be shown first, and vice versa. The words "book value" after each of the items under the "Fixed Assets" group indicate that whatever depreciation has been set aside has been credited to the asset account, and, therefore, the amounts represent the cost of the assets less the depreciation and not the original cost. Underlining. All main headings and subheadings are underlined. This is done for emphasis and to make the statement more readable, especially when pen-written. In typewritten statements capitalization of items may serve the same purpose as underlining. Each item that touches the left- hand margin should be underlined, the "Total Assets" and "Total Lia- bilities and Capital" being underlined with a double line to correspond with the double ruling under the total figures. Punctuation. Commas are used to punctuate the date in the heading and the capital section. The period is not necessary in the heading, but may be used if desired. The colon is used after each of the subheadings and the term "Accrued Items" under the current assets and current liabilities. The dash is used to separate the title of the statement and the date, and after the words "Add" and "Less" in the capital section. Parentheses are used for such explanatory words as "cost," "book value," and "See Exhibit B," the latter referring to the profit and loss statement. The dollar sign appears at the top of each column in typewritten work, 10 ACCOUNTING PROBLEMS: INTERMEDIATE and is repeated when the column is broken by ruling. When ruled columns are used, the dollar signs are omitted, especially for pen work. Indentations. There are but two indentations one for the main items under the subheads, and another for the items of similar character under subheads such as "Accrued Items" under "Current Assets" and "Accrued Items" under "Current Liabilities." Care should be taken to keep in- dentations uniform. FINANCIAL STATEMENTS AND REPORTS H FORM II. Profit and Loss Statement (Report Form). GEORGE W. DUNN Exhibit B Profit and Loss Statement for Year Ending December 31, 1921 Gross Sales $852 075 00 Less -Returns and Allowances 17 273 00 Net Sales $834 802 00 Deduct Cost of Goods Sold: Inventory^ December 31, 1920 $210 275 00 Gross Purchases $649 120 00 Less Returns and Allowances 8 670 00 Net Purchases 640 450 00 Freight and Hauling Inward 4 035 00 Total Cost of Goods $854 760 00 Less Inventory, December 31, 1921 185 820 00 668 940 00 Gross Profit on Sales $165 862 00 Deduct Operating Expenses: Store Clerks' Salaries $18 460 00 Advertising 21 607 00 Traveling Salesmen's Salaries 18 644 00 Traveling Expenses 13 720 00 Office Clerks' Salaries 6 488 00 Maintenance of Real Estate 4 260 00 Freight and Hauling Outward 2 060 00 Office Expenses 1 780 00 Store Supplies Used 1 516 00 88 535 00 Net Trading Profit $77 327 00 Add Other Income: Discount on Purchases $4 890 00 Interest on Notes Receivable 1 307 00 Interest on Bank Balances 79 00 6 276 00 Total Income $83 603 00 Deduct Other Expenses: Interest on Notes Payable $5 745 00 Interest on Mortgage Payable 4 200 00 Discounts on Sales 2 495 00 12 440 00 Net Profit for the Year (See Exhibit A) $71 163 00 12 ACCOUNTING PROBLEMS: INTERMEDIATE Form II Profit and Loss Statement. This form illustrates a form of profit and loss statement in common use for a trading business in this instance, for a single proprietorship. Attention is directed to the following details concerning this form of statement: Heading. The heading appears in three lines, as in the balance sheet. The profit and loss statement is usually designated as "Exhibit B." The name of the firm appears on the first line, "Exhibit B" appears on the second line, and the third line is used for the title and designation of period covered by the statement. The latter should show not merely the date of the state- ment, but should state specifically the entire period covered. Grouping. This statement is divided into four main sections: (1) the Sales and Cost of Sales section, known as the Trading section; (2) the Operating Expense section; (3) the Other Income section; (4) Other Ex- penses section. They should appear in the order shown in Form II, unless the statement shows a loss from operations instead of net income from operations, in which case the "Other Expense" group should be added to Loss from Operations, giving a total loss. From this should be deducted Other Income, giving the net profit or net loss for the period. The Trading section should include all items that have to do directly with the cost and sales of merchandise. Freight In is usually added to cost of goods. If, however, no portion of freight is included in the cost of goods on hand at the beginning and at the end of the year, this item should be shown as operating expense (See Form VII). Trading details such as returns, allowances, etc., should be shown when available. Freight Out is usually shown as a selling expense, but may be deducted from sales if it is the custom to prepay all transportation charges and fix a uniform selling price which includes cost of delivery to all points. This is the exception rather than the rule, because of the wide variation in freight charges to various delivery points. Sales and purchase discounts are sometimes shown as deductions from sales and purchases respectively, but are here shown as Other Expenses and Other Income. Trade discounts which are not conditional upon payment of accounts within a specified time but depend upon quantity purchases or sales, etc., should be shown as deductions in the Trading section. Cash discounts, on the other hand, should be handled in the same manner as interest collected or paid, upon the theory that they are a charge or income of the period when the accounts are paid, and are not of the period when the sale or purchase took place. Underlining. Attention is called to the fact that all items that touch the left-hand margin are underlined. The subheadings, Cost of Goods Sold, Operating Expenses, Other Income, and Other Expenses, are also underlined. The words "Deduct" and "Add," preceding these group headings, are never underlined. In some instances, these words are omitted entirely. The purpose of the underline is to make the important items stand out, thus enabling the reader to find them more readily. Punctuation. The rules regarding punctuation are similar to those sug- gested for the Balance Sheet, the colon being used after each group heading and the dash after the words Less, Add, and Deduct. FINANCIAL STATEMENTS AND REPORTS 13 Indentations. Two main indentations are made following the ordinary rules for tabulation. It is important that the left-hand margin be kept straight, and that the indentations be uniform and not too wide. Variation in Form of Cost of Goods Sold Section. Instead of starting with the inventory at the beginning of the period and then adding the net pur- chases and freight to find the total cost of all goods, and then deducting inventory at the end of period to find cost of goods sold, the net purchases are added to the freight to find total cost of purchases for period. To this figure will be added the decrease in inventory at the close of the period as compared with that on hand in the beginning. Under this plan decrease in inventory is added, while increase in inventory is deducted, the result in either case being cost of goods sold. Under this plan the items in Form II would appear as follows: Deduct Cost of Goods Sold : Gross Purchases $649 120 00 Less Returns and Allowances 8 670 00 Net Purchases $640 450 00 Add Freight and Hauling Inward 4 035 00 Total Cost of Purchases for Year $644 485 00 Add Decrease in Inventory: Inventory, December 31, 1920 $210 275 00 Inventory, December 31, 1921 185 820 00 24 455 00 Cost of Goods Sold Classification of Expenses. In this particular statement no attempt is made to classify operating expenses, except that the larger items are shown first. The same order has been followed in grouping the other income and expense items. There are three common methods of setting up the operating expenses: (1) They may be shown in detail with larger items first, as shown in Form II. (2) They may be shown in detail by grouping under subheads of Selling, etc. When this form is used, the details are shown short, with group totals in inside column. (3) They may be departmentized, and only totals for each shown in profit and loss statements, the details being shown in supporting schedules When the last method is used the items would appear as follows: Deduct Operating Expenses: Selling Expenses (See Schedule 2) $76 007 General Administration (See Schedule 3) 12 528 CC KQK ]poo OOO Operating Expenses include all those ordinary expense items necessary for the operation of the business and those common to all other concerns in the same line of business. Such expense, deducted from gross profit, shows 14 ACCOUNTING PROBLEMS: INTERMEDIATE profit from the regular operations of the business before allowing for the cost of obtaining capital with which to operate the business or any unusual charges beyond the control of the management. Such items appear under the Other Expenses group and in this statement are represented by interest on notes and mortgages and discount on sales, all of which are financial items. Loss on bad debts is usually shown under this group as well as dona- tions and other unusual expenses. Other Income items represent those sources of income other than from the regular trading operations of the business. They include income de- rived from financial operations such as interest and discount received and any other income aside from the ordinary trading income accounts. In this statement they include interest collected on notes and bank balances and discounts on purchases. FINANCIAL STATEMENTS AND REPORTS 15 FORM III. Closing Entries. GEORGE W. DUNN Closing Entries December 31, 1921 Sales $17 273 00 To Sales Returns and Allowances $17 273 00 To close the sales returns and allowances for the year into the Sales account. 31 Purchase Returns and Allowances 8 670 00 To Purchases 8 670 00 To close the purchase returns and allowances for the year into the Purchases account. 31 Purchases 4 035 00 To Freight and Hauling Inward 4 035 00 To close the cost of freight and hauling inward on Mer- chandise purchases for the year into the Purchases account. 31 Purchases 210 275 00 To Inventory 210 275 00 To close cost of goods on hand 12/31/20 into the Purchases account. 31 Inventory 185 820 00 To Purchases 185 820 00 To bring onto the books through the Purchases account the cost of goods on hand 12/31/21. O J Sales 668 940 00 To Purchases 668 940 00 To close the cost of goods sold during the year into the Sales account: Inventory 12/31/20 $210 275 00 Gross Purchases $649 120 00 Less Returns 8 670 00 640 450 00 Freight and Hauling Inward 4 035 00 Total $854 760 00 Less Inventory 12/31/21 185 820 00 Cost of Sales, as above $668 940 00 31 Sales 165 862 00 To Profit and Loss 165 862 00 To close the gross profit on sales for the year into Profit and Loss account. Gross Sales $852 075 00 Less Returns and allowances 17 273 00 Net Sales $834 802 00 Less Cost of goods sold 668 940 00 $165 862 00 16 ACCOUNTING PROBLEMS: INTERMEDIATE Closing Entries December 31, 1921 (Concluded) Discounts on Purchases $4 890 00 Interest on Notes Receivable 1 307 00 Interest on Bank Balances 79 00 To Profit and Loss $6 276 00 To close the accounts representing miscellaneous income for the year into Profit and Loss account. 31 Profit and Loss 88 535 00 To Store Clerks' Salaries 18 460 00 Advertising 21 607 00 Traveling Salesmen's Salaries 18 644 00 Traveling Expenses 13 720 00 Office Clerks' Salaries 6 488 00 Maintenance of Real Estate 4 260 00 Freight and Hauling Outward 2 060 00 Office Expenses 1 780 00 Store Supplies Used 1 516 00 To close the accounts representing the operating expenses for the year into Profit and Loss account. 31 Profit and Loss 12 440 00 To Interest on Notes Payable 5 745 00 Interest on Mortgage Payable 4 200 00 Discount on Sales 2 495 00 To close the accounts representing miscellaneous expenses for the year into Profit and Loss account. 31 Profit and Loss 71 163 00 To George W. Dunn, Current 71 163 00 To transfer the net profit for the year to George W. Dunn's Current account. 31 George W. Dunn, Current 55 563 00 George W. Dunn, Capital 55 563 00 To transfer to George W. Dunn's Capital account the credit balance of his Current account, being the net addition for the year to his capital investment. FINANCIAL STATEMENTS AND REPORTS 17 Form III Closing Entries. This illustrates the method of closing the nominal accounts in the ledger at the close of the fiscal period. The trading items are closed through Purchases account. An alternate method would be to close these items through a Trading account. The items for the closing entries are taken directly from the Profit and Loss Statement (Form II). As a general rule the entries should be made in the order in which they appear on the statement. There are a number of variations in the method of closing the ledger, but the method used in Form III has the advantage of being logical, complete, and easily understood. 18 ACCOUNTING PROBLEMS: INTERMEDIATE MODEL EXERCISE II Financial Statements For A Partnership HALL AND MARVIN Trial Balance June 30, 1922 Land (cost) Building (cost) Furniture and Fixtures (cost) Cash Accounts Receivable Notes Receivable Inventory, December 31, 1921 (cost) Mortgage Payable Accounts Payable Notes Payable C. R. Marvin, Salary Account Reserve for Depreciation of Building Reserve for Depreciation of Furniture and Fixtures Reserve for Loss on Bad Accounts and Notes Receivable H. B. Hall, Capital H. B. Hall, Drawings C. R. Marvin, Capital C. R. Marvin, Drawings Sales Purchases Freight, Express, and Cartage Inward Traveling Expenses Salaries and Wages Delivery Expenses Office Expenses Insurance Interest on Notes Receivable Interest on Notes Payable Interest on Mortgage Payable Cash Discount on Purchases Cash Discounts on Sales $55 000 00 37 500 00 5 820 00 7 682 53 23 731 40 730 00 24 260 75 $35 000 00 9 840 62 5 000 00 250 00 7 500 00 1 750 00 169 80 60 OCO 00 1 869 00 30 000 00 4 705 00 82 687 19 53 321 60 1 924 34 2 107 40 9 369 72 1 290 81 1 587 10 435 00 238 90 875 00 372 02 $232 820 57 $232 820 57 136 24 486 72 Cost of merchandise on hand June 30, 1922, $25,710.40. Required : (a) Adjusting journal entries in complete form (b) Working sheet; (c) Profit and loss statement (d) Balance sheet (e) Closing entries. Comments. The firm of Hall and Marvin conducts a wholesale and retail hardware business, owning its own real estate. By the terms of the partnership agreement, profits and losses are shared two-thirds to Mr. Hall and one-third to Mr. Marvin. Mr. Marvin, who acts FINANCIAL STATEMENTS AND REPORTS 19 as general manager, is allowed a salary of $250.00 a month, which is considered as an expense of operating the business; profits not withdrawn by the partners are not considered a part of their capital investments, but are credited to the partners' Drawing accounts, and may be withdrawn by the partners at their convenience. On December 31, 1921, Mr. Hall's Drawing account contained a credit balance of $3,629.40. Mr. Marvin's Drawing account had no balance. Freight, express, and cartage inward on merchandise purchases is not con- sidered a part of the cost of goods purchased. The stock is very varied, and to distribute properly the cost of freight and carting among the numer- ous commodities would be difficult and unsatisfactory. During the six months ending June 30, 1922, the Sales account has been credited for $86,108.89 representing gross sales, and debited for $3,421.70 representing sales returns and allowance. The Purchases account has been debited for $57,529.46, gross purchases, and credited for $4,207.86, purchase returns and allowances. In order that the results of the period may be correctly shown, the follow- ing items require adjustment: Unexpired insurance as of June 30 $260 00 Taxes accrued to June 30 102 50 Interest accrued on interest bearing notes receivable to June 30 24 60 Interest accrued on interest bearing notes payable to June 30 75 00 There are office supplies on hand which cost 150 89 Depreciation on the building is figured at the rate of 2% per annum; on the furniture and fixtures at 10% per annum. It is desired to set aside out of the profits for the period a further reserve for loss on bad accounts and notes receivable amount- ing to 1 A.% of the net sales. 20 ACCOUNTING PROBLEMS: INTERMEDIATE FORM IV. Adjusting Journal Entries. HALL AND MARVIN Adjusting Entries, June 30, 1922 Unexpired Insurance Insurance To bring onto the books as an asset the unexpired insurance as of this date 30 (No. 1) Taxes Taxes Accrued To bring onto the books the liability for taxes accrued to date 30 (No. 2) Accrued Interest on Notes Receivable (No. 3) Interest on Notes Receivable To bring onto the books the interest accrued to date on interest bearing notes receivable: J. A. Shore's note of 10/15/21. $500, 8 mos. 15 days at 6% $21 25 R. C. Cram's note of 4/3/22, $230, 2 mos. 27 days at 6% 3 35 Total, as above, $24 60 -30- Interest on Notes Payable (No. 4) Interest Accrued on Notes Payable To bring onto the books the interest accrued to date on interest bearing notes payable: Note of 4/1 /22 favor First Nat'l Bank, $5,000, 90 days at 6% 30 Office Supplies on Hand Office Expenses To bring onto the books the cost of office supplies on hand as of this date 30 (No. 5) Depreciation of Building Reserve for Depreciation of Building Estimated depreciation on the build- ing for the six months ending 6/30/22. Figured on cost ($37,500) at the rate of 2% per annum 30 (No. 6) Depreciation of Furniture and Fixtures (No. 7) Reserve for Depreciation of Furniture and Fixtures Estimated depreciation on furniture and fixtures for the six months ending 6/30/22. Figured on cost ($5,820) at the rate of 10% per annum 30 Loss on Bad Accounts and Notes Receivable (No. 8) Reserve for Loss on Bad Accounts and Notes Receivable To set aside from the profits of the period H% of the net sales to provide for future losses on bad accounts and notes receivable. .00.5X882,687. 19 =$413.44, as above 26000 10250 2460 7500 15089 37500 29100 41344 26000 10250 2460 7500 15089 37500 29100 41344 FINANCIAL STATEMENTS AND REPORTS 21 Form IV Adjusting Journal Entries. It becomes necessary at the end of each fiscal period to make certain corrections or adjustments in the ac- counts in order to bring the books into agreement with facts as they actually exist. If the books are to be closed, these entries should be entered in the journal in regular form as shown in Form IV. It is essential that the par- ticulars for these entries be very complete. From the journal, the entries are posted to the ledger, from which an adjusted trial balance is then taken. If a working sheet is used, the adjusting entries are posted to the "Adjust- ments" column of same as shown in Form V. When monthly statements are desired and the books are to be closed annually, the adjustments may be omitted from the journal and may be shown only in the "Adjustments" column of the working sheet. It is considered better practice even in that case to write them out in proper form on loose paper before entering on working sheet so that proper explanations may be placed on record. The entries should be numbered on the working sheet to correspond with those in the journal. 22 ACCOUNTING PROBLEMS: INTERMEDIATE FORM V. Working HALL AND Working Sheet Six Months' Period, Trial Balance per Books Adjustments Debits Credits Debits Credits Land 55 000 00 Building 37 500 00 Furniture and Fixtures 5 820 00 Cash 7 682 H Accounts Receivable 23 731 40 Notes Receivable 730 00 Inventory 24 260 75 Mortgage Payable 35 000 00 Accounts Payable 9 840 02 Notes Payable 5 000 00 C. R. Marvin, Salary 250 00 Reserve for Depreciation of Building 7 500 00 #6 375 00 Reserve for Depreciation of Furniture and Fixtures 1 750 00 #7 291 00 Reserve for Loss on Bad Accounts and Notes Receivable 169 80 #8 413 44 H. B. Hall, Capital 60 000 00 H. B. Hall, Drawings 1 869 (X) C. R. Marvin, Capital 30 000 (X) C. R. Marvin, Drawings 4 705 00 Sales (Returns $3,421.70) 82 687 19 Purchases (Returns $4,207.80) 53 321 60 Freight, Express, and Cartage Inward 1 924 M Traveling Expenses 2 107 40 Salaries and Wages 9 369 72 Delivery Expenses 1 290 81 Office Expenses 1 587 10 #5 150 S9 Insurance 435 00 #1 260 00 Interest on Notes Receivable 136 24 #3 24 GO Interest on Notes Payable 238 90 #4 75 00 Interest on Mortgage Payable 875 00 Cash Discounts on Purchases 486 72 Cash Discounts on Sales 372 02 232 820 57 232 820 57 Unexpired Insurance #1 260 00 Taxes #2 102 50 Accrued Taxes #2 102 50 Accrued Interest on Notes Receivable *3 24 (JO Accrued Interest on Notes Payable #4 75 00 Office Supplies on Hand #5 150 89 Depreciation of Building #6 375 00 Depreciation of Furniture and Fixtures ?7 291 00 Loss on Bad Accounts and Notes Receivable #8 413 44 1 692 43 1 692 43 Gross Trading Profit Net Profit FINANCIAL STATEMENTS AND REPORTS 23 Sheet (12 Columns). MARVIN December 31, 1921, to June 30, 1922. Adjusted Trial Balance Trading Profit and Loss Assets and Liabilities Debits || Credits Debits Credits Expenses Income Assets || Liabilities 55 000 00 55 000,00 37 50000 37 50000 5 82o'oO 5 820 00 7 682 53 7 682 53 23 731 40 23 731 40 73000 730 )0 24 260 75 24 260 75 25 710 40 25 710 40 35 000 00 35 000 00 9 840 02 9 840 62 5 000 X) 5 000 00 250 00 250 00 7 875 X) 7 875 00 2 041 00 2 041 00 583 24 583 24 60 000 00 60 000 00 1 869 00 5 498 10 3 629 40 30 000 00 30 000 00 4 705 00 | 4 705 )0 82 687 19 3 421 70 86 108 89 53 321 60 57 529 46 4 207 86 1 924 34 1 924 14 2 107 40 2 107 40 9 369 72 9 36P 72 1 290 81 1 290 81 1 436 81, 1 436 21 175 00 175 00 160 84 160 84 313 BO 313 90 875 00 875 00 486 72 486 72 372 02 372 02 260 00 260 00 102 50 102 50 102 50 102 50 24 60 24 60 75 00 75 00 150 BO 150 89 375 00 375 00 291 00 291 00 413 44 413 44 234 102 11 234 102 11 30 815 24 30 815 24 116 027 15 116 027 15 12 416 46 Ha 11 8 277 64 Marvi a 4 133 82 31 462 80 31 462 SO 166 813 22 166 813 22 1 24 'ACCOUNTING PROBLEMS: INTERMEDIATE Form V Working Sheet. This form illustrates an ordinary twelve- column working sheet. The working sheet is not a part of the financial statement properly speaking, but is used for analyzing the trial balance and making adjustments preparatory to setting up the balance sheet and profit and loss statement in proper form. If the books are to be closed, its only purpose is to prove the arithmetical results of the statements before setting them up. If the books are not to be closed, the working sheet is almost indispensable for making adjustments, analysis of the ledger, etc. There is no fixed form of working sheet. The details vary according to the wishes of the individual preparing the same. The form shown here- with contains the essentials as adopted by the best accountants. Attention is caljed to the handling of the inventory accounts. The merchandise items are handled through a trading account in the ledger; therefore, trading columns are used in the working sheet. The old inven- tory, $24,260.75, is charged to trading, while the new inventory, $25,710.40, is credited to trading and set up as an asset, thus keeping the equilibrium of the accounts. The details concerning sales and purchases are also inserted in the trading columns so as to be at hand in preparing the profit and loss statement. The problem states specifically that freight inward on merchandise pur- chases is not considered a part of the cost of goods purchased. This item is accordingly shown as an expense in the working sheet and appears as an operating expense in the profit and loss statement (Form VII). When freight is considered as a part of the cost of goods, which is the usual custom, it should be shown in the debit trading column of the working sheet and hi the cost of goods sold section of the profit and loss statement. FINANCIAL STATEMENTS AND REPORTS FORM VI. Balance Sheet Variation of Report Form. HALL AND MARVIN Balance Sheet, June 30, 1922 25 - Assets 55 000 29 625 3 779 00 K) 00 33 ! 16 )() ' X) 40 00 ' 88 404 57 295 410 X) '' 80 . ?ixed Assets: Land (cost) Building (cost) $37 500 00 Less Reserve for Depreciation 7 875 00 Furniture and Fixtures (cost) $5 820 00 Less Reserve for Depreciation 2 041 00 Current Assets: 7 682 23 148 730 24 25 710 Cash on Hand Accounts Receivable $23 731 40 Less Reserve for Loss on Bad Ac- counts and Notes Receivable 583 24 Notes Receivable Accrued Interest on Notes Receivable Merchandise on Hand Deferred Charges to Profit and Loss: 260 150 Unexpired Insurance Office Supplies on Hand Total Assets 146 110 58 Liabilities and Net Worth 9 840 5 000 75 102 250 82 00 00 .30 00 35 000 15 268 00 13 Fixed Liabilities: Mortgage Payable Current Liabilities: Accounts Payable Notes Payable Accrued Interest on Notes Payable Accrued Taxes Due C. R. Marvin on Salary Account Total Liabilities 60 000 6 408 00 64 00 id 50 268 66 408 29 433 12 64 82 .38 H. B. Hall's Net Worth: Capital Investment Add Profits Accumulated to Decem- ber 31, 1921 $3 629 40 Two-thirds Net Profit for Six Months Ending June 30, 1922 8 277 64 Total $11 907 04 Less Drawings, December 31, 1921, to June 30, 1922 5 498 40 C. R. Marvin's Net Worth: 30 000 566 Capital Investment Deduct Drawings, December 31, 1921, to June 30, 1922 $4 705 00 Less One-third Net Profit for Six Months Ending June 30, 1922 4 138 82 Total Liabilities and Net Worth 146 110 26 ACCOUNTING PROBLEMS: INTERMEDIATE Form VI Balance Sheet. This form represents the report form of bal- ance sheet as adapted to the accounts of a partnership. The reserves are shown as deductions from the correlative assets. Balance due partner on salary account is shown as a current liability. Special attention is called to the "Capital" section. Each partner's capital is set up separately showing details as to investments, drawings, and share of profits for the current period. The term "net worth" is used here instead of "capital." While these terms are used synonymously, "net worth" would seem to be more appro- priate in a partnership, while "capital" would be the better term for a cor- poration. Either may be used for single proprietorship. FINANCIAL STATEMENTS AND REPORTS 27 FORM VII. Profit and Loss Statement Report Form. HALL AND MARVIN Exhibit B Profit and Loss Statement for Six Months Ending June 30, 1922 Gross Sales $86 108 89 Less Returns and Allowances 3 421 70 Net Sales $82 687 19 Deduct Cost of Goods Sold: Goods on hand, December 31, 1921 $24 260 75 Gross Purchases $57 529 46 Less Returns and Allowances 4 207 86 Net Purchases 53 321 60 Total Cost of Goods $77 582 35 Less Goods on hand, June 30, 1922 25 710 40 51 871 95 Gross Trading Profit $30 815 24 Deduct Operating Expenses: Freight, Express and Cartage Inward $ 1 924 34 Traveling Expenses 2 107 40 Salaries and Wages 9 369 72 Delivery Expenses 1 290 81 Office Expenses 1 436 21 Taxes 102 50 Insurance 175 00 Depreciation of Buildings 375 00 Depreciation of Furniture and Fixtures 291 00 17 071 98 Net Trading Profit $13 743 26 Add Other Income Items: Interest on Notes Receivable $ 160 84 Cash Discount on Purchases 486 72 647 56 Total Income $14 390 82 Deduct Other Expense Items: Interest on Notes Payable $ 313 90 Interest on Mortgage Payable 875 00 Cash Discount on Sales 372 02 Loss on Bad Debts and Accounts Receivable 413 44 1 974 36 Net Profit for the Period $12 416 46 H. B. Hall two-thirds $ 8 277 64 C. R. Marvin one-third 4 138 82 $12 416 46 *12 416 46 28 ACCOUNTING PROBLEMS: INTERMEDIATE Form VII Profit and Loss Statement Report Form. This form presents little that is new. The chief point of difference between this form as used for a partnership and that for a single proprietorship is the manner of show- ing the division of profits. Attention has already been called to the fact that Freight, Express and Cartage Inward is shown as an operating expense rather than as an addition to the cost of goods. Depreciation charges are considered as operating expenses while Loss on Bad Debts is shown under Other Expense Items. FINANCIAL STATEMENTS AND REPORTS 29 FORM VIII. Closing Journal Entries. HALL AND MARVIN Closing Entries, June 30, 1922 Trading Inventory Goods on hand 12/31/21 per inventory 30 Interest on Notes Receivable Cash Discounts on Purchases Profit and Loss To transfer to Profit and Loss account the balances of the accounts representing extrane- ous income for the six months ending 6/30/22 30 Trading Purchases Net purchases for six months ending 6/30/22 30 Sales Trading Net sales for six months ending 6/30/22 30 Inventory Trading Goods on hand 6/30/22 per inventory 30 Trading Profit and Loss To transfer to Profit and Loss account the gross trading profit for the six months ending 6/30/22 as represented by the balance of the Trading account -30- Profit and Loss Freight, Express and Cartage Inward Traveling Expenses Salaries and Wages Delivery Expenses Office Expenses Taxes Insurance Depreciatjon of Building Depreciation of Furniture and Fixtures To transfer to Profit and Loss account the balances of the accounts representing operating expenses for the six months ending 6/30/22 30 Profit and Loss Interest on Notes Payable Interest on Mortgage Payable Cash Discounts on Sales Loss on Bad Accounts and Notes Receivable To transfer to Profit and Loss account the balances of the accounts representing extrane- ous expenses for the six months ending 6/30/22 30 53 321 60 82 687 19 25 71040 30 81524 16084 486 72 17 071 98 1 97436 12 416 46 24 26075 53 321 60 82 687 19 25 71040 30 81524 64756 1 924 2 10740 9 369 1 290 1 436 10250 175 375 291 313 87500 372 41344 X) 8 277 64 4 13882 Profit and Loss H. B. Hall, Drawings C. R. Marvin, Drawings To transfer to the partners' drawings ac- counts the net profit for the six months ending 6/30/22 in the proportion of two-thirds to H. B. Hall and one-third to C. R. Marvin Form VIII Closing Journal Entries. This form presents the method of closing the merchandise items through a Trading account instead of through Purchases as shown in Form III. No accounts were carried with Sales and Purchases Returns in this problem, so those items are already in the Sales and Purchases accounts, and no closing entries are necessary to place them there. Aside from the method of handling trading items, the method of closing is similar to that shown in Form III. 30 ACCOUNTING PROBLEMS: INTERMEDIATE FORM IX. Balance Sheet, THE HARMON- Balance Sheet, Fixed Assets: Goodwill Sinking Fund Investments: Securities and Cash in Hands of Trustees Outside Investments: Securities Owned (cost) market value $17,268.00 Vacant Land (cost, including taxes to June 30, 1922) Total Outside Investments Current Assets: Assets Land (cost) Buildings (cost) Less Reserve for Depreciation Sales Department Furniture and Fixtures (cost) Less Reserve for Depreciation Office Furniture and Fixtures (cost) Less Reserve for Depreciation $155 000 00 24 500 00 $9 200 00 2 730 00 $5 000 00 1 250 00 Total Fixed Assets Cash (in banks and at office) Accounts Receivable Less Reserve for Loss on Doubtful Accounts Reserve for Cash Discounts Due from Subscribers to Capital Stock Common Notes Receivable Merchandise on Hand (cost) Less Reserve for Adjustment of Inventory Values Office Supplies on Hand Total Current Assets Prepaid Items: $2 789 60 1 200 00 $63 284 36 3 989 60 $160 520 60 8 500 00 Unexpired Insurance Interest Prepaid on Notes Discounted Total Prepaid Items Deferred Charges to Profit and Loss: Bond Discount and Expenses Unextinguished Organization Expenses Unextinguished Total Deferred Charges to Profit and Loss Total Assets 72 00000 130 50000 6 470 3 750 18 76000 18 72430 7 82989 59 294 76 18 00000 6 500 152 02060 26750 1 95000 13670 19 50000 14 30000 00 00 00 212 720 100 00000 46 72850 37 484 30 243 912 75 2 086 70 33 80000 00 NOTE There are in the treasury 250 shares of common stock donated to the company FINANCIAL STATEMENTS AND REPORTS 31 Account Form Corporation. STREETER COMPANY June 30, 1922 Liabilities and Capital 74 000 30 000 00: (XI 104 000 131 960 30 000 00 11 00 11 14 25! Funded Debt: Five Per Cent First Mortgage Sinking Fund Bonds Due January 1, 1926 Author- ized Issue $100,000.00: Issued $92 000 00 Less Retired through Sinking Fund 18 000 00 Six Per Cent Debenture Bonds, Due July 1, 1930 Total Funded Debt Current Liabilities: 24 000 86 732 10 500 10 727 00 40 00 65 0(1 00 Notes Payable Accounts Payable Dividends Payable: On Seven Per Cent Preferred Stock (3H% semi-annual, due July 5, 1922) $3 500 00 On Common Stock (4% semi-annual, due July 15, 1922) 7 000 00 taxes Total Current Liabilities Capital Stock Common, Subscribed and Un- 100 000 200 000 issued 300 Shares Total Liabilities 265 960 410 772 Capital Stock: Seven Per Cent Preferred Authorized Issue 1500 Shares, Par $100: Full Paid and Issued, 1000 Shares Common Authorized Issue 3000 Shares, Par $100: Full Paid and Issued, 2000 Shares: In Hands of Stockholders, 1750 Shares $175 000 00 In Treasury, 250 Shares 25 000 00 Total Capital Stock Working Capital Donated (Proceeds of sale 300 000 21 630 5 000 55 396 28 745 00 00 00 50 64 of 250 shares of common stock from the treasury) Appropriated Surplus: Reserve for Federal Tax (1922) Reserve for Sinking Fund Requirements Surplus : Balance, December 31, 1921 $30 389 67 Add Net Income, Six Months Ending June 30, 1922, per Profit and Loss Statement 22 523 97 $52 913 64 come Tax (1922) $5 000 00 Dividends Declared: On Preferred Stock (3^3% semi-annual) $3 500 00 On Common Stock (4% semi-annual) 7 000 00 10 500 00 ing Fund 8 668 00 24 168 00 Net Surplus Total Capital Total Liabilities and Capital 676 732 by the incorporators for the purpose of raising additional working capital. 32 ACCOUNTING PROBLEMS: INTERMEDIATE Form IX Balance Sheet Account Form Corporation. This form illustrates the method of setting up the account or two-page form of state- ment commonly used when the items are so numerous as not to go on a single page. It has the advantage of setting the various asset and liability groups opposite each other for comparative purposes. In this form, valuation reserves are shown as deductions from correlative assets, while the capital reserves (in this instance Reserve for Sinking Fund and Reserve for Federal Income Tax) are shown in the capital section as appropriated Surplus. Attention is also called to the method of showing treasury stock donated as a footnote. In this form, surplus is analyzed in the balance sheet itself. Frequently the net amount only is shown, the details being set forth in a supporting statement. The method of handling Federal income taxes should be carefully noted. The Federal income taxes item under current liabilities represents the unpaid installments on 1921 taxes, bill for which was rendered on March 15, 1922. The estimated tax for 1922 to June 30 is set up in the form of a reserve. This item appears as a deduction from net income for the six months ending June 30, 1922, and also as a reserve item under appropriated surplus. It will be carried thus until the actual liability is ascertained, when it will be carried as a current liability. FINANCIAL STATEMENTS AND REPORTS 33 FORM X. Profit and Loss Statement Variation in Report Form. THE HARMON-STREETER COMPANY Profit and Loss Statement for the Six Months Ending June 30, 1922 Gross Sales $746 829 60 Less Returns and Allowances 12 364 30 Net Sales " $734 465 30 Deduct Cost of Goods Sold: Inventory, December 31, 1921 $184 962 38 Net Purchases: Gross Purchases $569 827 40 Less Returns and Allow- ances 18 260 39 551 567 01 Freight and Hauling Inward 5 829 50 $742 358 89 Less Inventory, June 30, 1922 160 520 60 581 838 29 Gross Profit on Sales $152 627 01 Deduct Operating Expenses: Selling Expenses: Salesmen's Salaries $26 432 80 Traveling Expenses 20 869 40 Shipping Expenses 5 942 60 Taxes and Insurance on Stock 1 286 50 Taxes and Insurance on Sales Department Furniture and Fixtures 150 64 Depreciation of Sales Department Furni- ture and Fixtures 765 00 Proportion of Expense of Building Main- tenance (75%) 11 446 87 $66 893 81 General Administrative Expenses: Officers' Salaries $37 853 00 Office Salaries 12 272 46 Office Expenses and Supplies 1 781 30 Taxes and Insurance on Office Furniture and Fixtures 110 75 Depreciation of Office Furniture and Fix- tures 465 00 Proportion of Expense of Building Main- tenance (25%) 3 815 63 56 298 14 123 191 95 Net Operating Income *29 435 06 Add -Other Income; Income on Securities Owned $924 00 Interest on Notes Receivable 1 832 50 Cash Discounts on Purchases 8 269 40 Profit on Sale of Securities 3 466 77 14 492 67 Total Income $43 927 73 Deduct Other Charges: Interest on Funded Debt $2 750 00 Interest on Notes Payable 1 589 40 Cash Discounts on Sales 4 387 30 Premiums on Redeemed Bonds 1 650 00 Bond Discount and Expenses Written Off 910 00 Organization Expenses Written Off 2 340 00 Loss on Bad Accounts 4 277 06 Loss from Sale of Liberty Loan Bonds 3 500 00 21 403 76 Net Income before providing for Federal Income Tax $22 523 97 Less Provision for Federal Income Taxes for 1922 5 OOP 00 Net Income after provision for taxes $17 523 97 Add Surplus, January 1. 1922 30 389 67 Gross Surplus $47 913 64 Deduct Surplus Charges: Dividends Declared $10 500 00 Provision for Sinking Fund 8 668 00 19 168 00 Surplus. June 30. 1922 $28 745 64 34 ACCOUNTING PROBLEMS: INTERMEDIATE Form X Profit and Loss Statement Report Form. This statement, while used for a corporation, presents very little that is new. The items are somewhat more numerous. Attention is called to the method of showing Surplus at the end of the statement. The net profit available as surplus for the period is added to surplus on hand at beginning of period and from this is deducted the appro- priations of surplus, the result being surplus on hand at the close of the period. This serves as an analysis of surplus, the details of which may then be omitted from the balance sheet if desired. Attention is also called to slight differences in terminology and to new accounts introduced especially in "Other Income" and "Other Charges" groups. The method of showing provision for Federal Income Taxes as a separate deduction should receive special attention. FINANCIAL STATEMENTS AND REPORTS FORM XI. Closing Journal Entries Corporation. THE HARMON-STREETER COMPANY Closing Entries, June 30, 1922 35 Sales 12 364 30 To Sales Returns and Allowances 12 364 30 To close into the Sales account the sales returns and allowances for the six months ending June 30, 1922 Purchase Returns and Allowances 18 26O 39 To Purchases 18 260 89 To close into the Purchases account the purchase returns and allowances for the six months ending June 30, 1922 Purchases 5 829 60 To Freight and Hauling Inward 5 829 60 To close into the Purchases account the freight and hauling inward on purchases for the six months ending June 30, 1922 Purchases 184 962 38 To Inventory 184 962 38 Cost of goods on hand December 31, 1922 Inventory 160 520 60 To Purchases 160 520 60 Cost of goods on hand June 30, 1922 Sales 734 465 80 To Cost of Goods Sold 734 465 30 Net Sales for the six months ending June 30, 1922: Gross sales $746 829 60 Less Returns and Allow- ances 12 364 30 Net Sales, as above $734 465 30 Cost of Goods Sold 581 838 29 To Purchases 581 838 29 Cost of goods sold for the six months ending June 30, 1922: Inventory 12/31/21 $184 962 38 Net Purchases: Gross pur- chases $569 827 40 Less Re- turns and allowances 18 260 39 551 567 01 Freight and hauling inward 5 829 50 $742 358 89 Less Inventory 6/30/22 160 520 60 Cost of Goods Sold, as above $581 838 29 Cost of Goods Sold 152 627 01 To Profit and Loss 152 627 01 Gross profit on sales for six months ending June 30, 1922: Net sales $734 465 30 Less Cost of sales 581 838 29 Gross Profit, as above $152 627 01 36 ACCOUNTING PROBLEMS: INTERMEDIATE Closing Entries, June 30, 1922-Concluded Income on Securities Owned Interest on Notes Receivable Cash Discounts on Purchases Profit on Sale of Securities To Profit and Loss To close into Profit and Loss account the items of extraneous income for the six months ending June 30, 1922 Profit and Loss To Salesmen's Salaries Traveling Expenses Shipping Expenses Taxes and Insurance on Stock Taxes. and Insurance on Sales Department Furniture and Fixtures Depreciation of Sales Department Furni- ture and Fixtures Building Maintenance Officers, Salaries Office Salaries Office Expenses and Supplies Taxes and Insurance on Office Furniture and Fixtures Depreciation of Office Furniture and Fix- tures To close into Profit and Loss account the accounts representing the operating expenses for the six months ending June 30, 1922 Profit and Loss To Interest on Funded Debt Interest on Notes Payable Cash Discounts on Sales Premiums on Redeemed Bonds Bond Discount and Expenses Written Off Organization Expenses Written Off Loss on Bad Accounts To close into Profit and Loss account the items of extraneous expense for the six months ending June 30, 1922 Profit and Loss To Surplus To transfer to Surplus account the net in- come for the six months ending June 30, 1916 $924 1 83260 8 269 40 3 466 77 123 191 95 17 90376 26 023 97 (X) $14 492 67 26 432 80 20 869 40 5 94260 1 28650 15064 76500 15 262 50 37 853 X) 12 272 46 1 781 11075 46500 2 75000 1 58940 4 387 1 65000 91000 2 34000 4 27706 26 023 Form XI Closing Journal Entries Corporation. The method used in handling trading items is similar to that employed in Form III. The expense items are handled in the same manner. The only difference is the method of handling Profit and Loss. This account is closed into Surplus in the case of a corporation. FINANCIAL STATEMENTS AND REPORTS 37 MODEL EXERCISE m Financial Statements for a Manufacturing Corporation MODEL MANUFACTURING COMPANY Trial Balance December 31, 1922 Land and Buildings $110 800 00 Machinery 30 670 00 Power Plant Equipment 19 500 00 Shafting and Belting 2 500 00 Furniture and Fixtures 4 500 00 Goodwill 25 000 00 Securities Owned 15 000 00 Cash in Banks 9 280 50 Imprest Cash Fund 300 00 Accounts Receivable 47 250 00 Notes Receivable 3 000 00 Advances to Salesmen 800 00 Accrued Interest on Notes Receivable 50 00 Raw Materials (On hand December 31, 1921, $6,800; gross purchases, $95,600) 102 400 00 Manufacturing (Goods in process, Dec. 31, 1921) 10 360 00 Finished Goods, December 31, 1921 46 700 00 Factory Supplies on Hand 200 00 Office Supplies on Hand 150 00 Taxes Paid in Advance 400 00 Insurance Paid in Advance 360 00 Interest on Notes Payable Paid in Advance 75 00 Legal Expenses Deferred 2 600 00 Capital Stock Preferred (750 shares, par value $100) $75 000 00 Capital Stock Common (1000 shares, par value $100) 100 000 00 Surplus 14 250 00 Real Estate Mortgage Assumed in Purchase of property 60 000 00 Accounts Payable 26 500 00 Notes Payable 5 000 00 Accrued Interest on Mortgage Payable 1 800 00 Accrued Interest on Notes Payable 62 50 Accrued Salaries and Wages 780 00 Accrued Expenses 250 00 Reserve for Depreciation of Buildings 16 700 00 Reserve for Depreciation of Factory Machinery and Equipment 19 100 00 Reserve for Depreciation of Furniture and Fixtures 600 00 Reserve for Loss on Bad Debts 5 280 00 38 ACCOUNTING PROBLEMS: INTERMEDIATE Trial Balance December 31, 1922 Concluded Sales of Finished Goods $239 909 00 Sales Returns and Allowances $4 260 40 Purchase Returns and Allowances 1 720 00 Freight and Hauling Inward 1 620 00 Direct Labor 54 620 00 Superintendence 5 940 30 Fuel Used 2 600 00 Salaries of Engineer and Firemen 3 680 20 Taxes and Insurance on Factory Buildings 1 562 50 Depreciation of Factory Buildings 2 289 40 Taxes and Insurance of Factory Machinery and Equipment 937 50 Depreciation of Factory Machinery and Equipment 2 500 00 Repairs to Factory Machinery and Equipment 800 00 Factory Office Salaries and Expenses 3 580 65 Advertising 5 000 00 Salaries of Salesmen 10 650 00 Traveling Expenses 6 780 30 Delivery Expenses 2 684 00 General Office Salaries and Expenses 10 294 60 Taxes and Insurance on Office Building 300 00 Depreciation of Office Building 864 00 Interest on Notes Receivable 280 85 Income on Securities Owned 180 00 Interest on Mortgage Payable 1 800 00 Interest on Notes Payable 289 00 Loss on Bad Debts 1 564 00 Legal Expenses Extinguished 900 00 $557 412 35 $557 412 35 Inventories, December 31, 1922: Raw Materials $7 100 00 Goods in Process 12 900 00 Finished Goods 44 800 00 NOTE: During the year, dividends amounting to 7% on the preferred stock and 6% on the common stock have been declared and paid. Form XII Balance Sheet Account Form. This form illustrates an arrangement of the balance sheet for a manufacturing corporation. Prop- erty or Capital Assets are shown first on the asset side while Capital Lia- bilities including Capital Stock are shown first on the liability side. This is on the theory that Capital Stock is a fixed liability and as such should be placed opposite fixed assets. An objection to this arrangement is that it di- vides the net worth of the corporation inasmuch as Capital Stock is shown as the first and Surplus as the last item on the liability side. Another objection is that Capital Stock is a proprietorship item and as such cannot be a fixed liability in the sense that obligations to outsiders are liabilities. FINANCIAL STATEMENTS AND REPORTS 39 2 P! -J g g g g sll OS S i M < BE 10 ^ o M f". CC CO * gg gg g g || i g| I 5 ca Kg CM CM S ooog g g g g o Co 20 ic g 2 S g 1 g| ~ j 8 S S 1O O : gj i -i x Q g ivi R . i ~ ~8 S - W C3 b a -0 S .M S - 5k S of 8 * j - 5 _ a III 1 09 ecember 31, 19 Capital, Liabi apital Stock: Preferred 750 Share Common 1000 Shar Property urrent Liabilities: Accounts Payablr Notes Payable Accrued Items: Interest on Mortga Interest on Notes 1 Salaries and Wages Other Accrued Itci irplus: Balance of Surplus . cember 31, 1921 Add Net Profit for 1 ing December 31, 1 hibit B Deduct Dividends 1 On Preferred Stock cent On Common Stoi cent otal Capital, Liabilitic Q O i XI H -iJ~ 0) II I J3 O2 O g 8 g SI g g S o o 2 g g I i |2 B "5 a 3 L" 2 S s i s g g g og ggg g g Bggg ll ^ g g g oog gg S g ^ & -u> 10 o CMCO O Sao H 15 S 5- CO t~ S B W gg g g ,8 g g g 11 S g SO 1 i 3 1 o so (M o: * r- >o T* DO C >H fe w g G t*l 0) o a; J3 ^ g CD O u of 0. > u CO -l o Q C I X .3 ^ O M *3 G i g '+3 oj i X o a o *o u O3 a o 'S >> o PQ 03 1 C 1 K5 0 CO to 1.0 o> CO *O ^O 00 I 00 O CO O ^ IN S e Months to Date 8.S< *< X' ^ o c (N 00 O t^ * O 1C O 8 OtNOOOINOQgOOOt- 00 1 MEM o OOOSCOi-nOCOtDt- tO M 1-1 IN CO 00 IN i-l 9 S iciliSliilili in K t^OtO to ,_, (N OS CO 0>5 tO -H TJI 10 CSI CO tO CO i-l CO COiOtOOCO S CO iH O CO O OS -< (N g >OO OOOSCOOOCOOSOOO IN 10 o o < r^ IN QO oo *^ >o "5 1| <)< i-l S SCO ^ i ' CS t^* to C 1 ) oo to to S 00 CXI to OOi-lOOO rj( i a *3 s fl 111 "^ wQ ( 3 a, ^ C ^ ~ w .2 iP- B > fcaftg, ^gc-Sg,, | fl; *"* HO c "S ^ bP^ ^ I^^g S. iS9-a-g p n;ii u : iP : ' - iii'i i !iiii ill * >. "v 5 3 g a c -" :>, M J'jj J rt'c ; O^,^-, 05 ij x~. fe~- tU 41 ..8|"f| 3 ffl.llli|f| 5 lllll II 1 Sifl 3 ^ lllllllll ^ lllllllilllll ^ P9 K ffl FINANCIAL STATEMENTS AND REPORTS 51 SO US !"5 tO 1 00 O CO ooc^oo-<# r^-ooiN i-l> 00 US -l S-i (NlOrHrtlN IN " t- TO 00 f-H b- 00 <-- "5U5 O OOUS i IN s ,-<* IQ (N co S5 ^ ' O to us O ' CM CM..-iO-*00 tDCMO rt^us.-'CO t-I^OO i-l 00 tO r>- i-l r-l tC 8 m O"3T)O -HO'O-^ic-.usoiM rrl< lOCNrt r-iTO ~ (- ee 8 to 1-1 O US * O t>- QOOO5 t~ TO to 1-1 00 to *!< O^-H i-i O C5 TO eN i-i ri N OSCOtN to CO I 0rj. rt f-( c-i M UO -! 00 O'H'-tNCM M--I * ^" 8 (N CMIOOO5 QCMt^ ^OO-H OOO-* IQ e* IO)h-t-OCOK5'-'iN COi-iOO'-iroiN"5Ot- * t- 8O 00 i-i O! t^- O US QUSN 00(NTO-H-^<5to OOt^ ^ 00 OS Q ^ CO M >O -Hoot- rir>. TO to -^ i-< ^ ~. 6 tO-^O'^tO-^'C^OOO -iTOOJ t^TO>-iOTO T(( T-l rH t~ s US to -^ CN CM OS O Gi us * to h-ftOOOO i-it-l t^CMO tO OS r-i i-i i-l TO>-1 us i 1 <-c M eo t age and Stable Packers 20 S 8 3 6x2 ill ac 3-8 x cj a.;- POIS^, TJ-SGOB, 3 o- go-go? Katiss .^ Ma M gap a WHlidll Maintena Expenses *co ^ C "O ^ d Collection: s of Credit M ion Expenses s on Collectio References ffi ldi So Q8 U'SSl lisa ,2 a, 03 x "Isw si's! 1^1 fa c .is c 1 g & .. IB I 2 -J ti c6 ro c3 03 t* ^, GJ -*-> i I 22 .2S g g g |oo &| S'S'oWo 1 SI " HH o"? o S s * alJl MJ=> s oi &!> ' Mainte Expense es, Insura id Fixture t 15% of cellaneous .S | 5 a X -3 W O g -- 4) -S o. ^a 52 ACCOUST1XG PROBLEMS: INTERMEDIATE Special Forms of Financial Statements TTT Condensed Balance ! AMERICAN INTERNATIONAL CORPORATION General Bdhageflhwl,, Dm ii ! 31, 19 Investment* Bonds, Stock, etc. $27 S47 508 17 ReaJ Estate 2 040 255 44 Current Assets: r =.-:. fl 538 888 73 Call Loans 100 000 00 Inventories of Merchandise 7 474 399 78 Accounts Receivable 339449326 Interest Accrued Beeeirabk 128 811 74 $12 636 593 51 Leas Branch Office and Inter-Com- pany Cash in Tranaft 219 654 34 12 416 939 17 Other Assete 1 557 OOP 57 Total 43 861 703 3-5 Liabilities and Capital Capital .St/x-k: .Stock 10,000 shares (less held in Treasury) 60% paid $ 570 000 00 Corrjmojj .SVx-k 490,000 shares, 60% p&id 29 400 OOP 00 $29 970 000 00 N'^v-- and A'-'-'tuni* Payable 6 364 390 47 K'*-rv** 1 783 902 63 5 743 410 25 Total $43 861 703 35 i ;.-...'. H< T. Goutiuceut LibiUti kccrc ww JHABABA ui tbe 54 ACCOUNTING PROBLEMS: INTERMEDIATE FORM XXIII. Com THE BOSTON DRY Comparative Balance Sh Assets Dec. 31, 1921 Dec. 31, 1920 Increase Decrease Real Estate and Equipment: 124 000 236 750 25 291 30 169 3 682 00 00 liO 50 72 124 000 190 400 20 300 34 287 2 983 00 00 00 !)5 10 46 350 4 991 699 00 no 32 4 118 45 Land Buildings Trucks, Wagons and Horses Furniture and Fixtures Garage and Stable Equipment Total Real Estate and Equip- ment Goodwill 419 893 82 371 971 88 47 922 47 250 000 00 250 000 00 Sinking and Reserve Funds: 44 968 36 738 15 640 79 20 56 36 941 25 789 12 987 30 f,0 32 8 027 10 948 2 653 43 60 24 With Trustees for Redemption of Twenty Year 6% Gold Bonds Fund for Redemption of Ten Year 4J% Debentures Insurance Fund Total Sinking and Reserve Funds Investments: 97 347 49 75 718 22 21 629 27 12 362 62 550 50 50 ! 44321 61 780 97 00 770 50 31 959 47 Securities Owned Vacant Land Cost plus Accrued Taxes Total Investments Current Assets: 74 913 00 106 101 ,)7 31 188 97 15 813 247 932 4 176 98 196 211 617 802 46 16 30 70 ss : 29 | 37 12 463 228 113 5 207 126 162 486 132 484 19 43 85 32 : 85 65 21 3 350 19 818 33 725 484 318 27 73 03 64 16 1 031 27 u 62 Cash Accounts Receivable Notes Receivable Accrued Interest on Notes Re- ceivable Merchandise on Hand Office Supplies on Hand Garage and Stable Supplies on Hand Total Current Assets Prepaid Assets: 465 652 16 409 014 50 56 637 06 1 846 217 50 30 1 524 541 90 H 321 60 324 35 Taxes Insurance Total Prepaid Assets Deferred Charges to Operations: 2 063 SO 2 066 55 2 75 17 640 14 000 00 00 18 900 17 500 00 00 1 260 3 500 00 00 Bond Discount and Expenses Organization Expenses Total Deferred Charges to Operations Total Assets 31 640 00 36 400 00 4 760 00 1 341 510 27 1 251 272 59 90 237 08 FINANCIAL STATEMENTS AND REPORTS 55 parative Balance Sheet. GOODS COMPANY eet, December 31, 1921 Capital, Liabilities and Surplus Dec. 31, 1921 Dec. 3 1,1920 Increase Decrease Capital Stock: 150 000 450 000 00 00 150 000 400 000 00 00 50 000 00 Preferred Authorized, 2500 Shares par value $100 Common Authorized, 5000 Shares par value $100 Total Capital Stock Funded Debt: 600 000 00 550 000 00 50 000 00 175 000 25 000 100 000 00 00 00 185 000 15 000 100 000 00 00 00 10 000 00 10 000 00 Twenty Year 6% Sinking Fund Gold Bonds, Due January 1, 1930: In Hands of Public Held by Sinking Fund Trus- tees Ten Year 4J% Debentures, Due July 1, 1926 Total Funded Debt Current Liabilities: 300 000 00 300 000 00 62 731 25 700 5 250 296 982 3 000 7 875 281 49 00 00 37 50 00 00 90 53 906 37 689 5 250 468 604 3 000 7 000 231 73 40 00 97 47 00 00 60 8 824 378 875 50 76 03 00 30 11 989 172 40 60 Accounts Payable Notes Payable Accrued Interest on Bonds Accrued Interest on Notes Pay- able Accrued Salaries and Wages Dividends on Preferred Stock Dividends on Common Stock Unclaimed Dividends and Interest Total Current Liabilities Reserves: 106 117 26 108 151 17 2 033 91 45 260 8 239 44 968 43 738 19 621 00 64 73 20 14 36 410 5 749 36 941 32 689 15 129 00 37 30 25 60 8 850 2 490 8 027 11 048 4 491 00 27 43 95 54 For Depreciation of Buildings and Equipment For Loss on Bad Accounts For Sinking Fund for Redemption of Twenty Year 6% Gold Bonds For Redemption of Ten Year 4 J% Debentures For Insurance Total Reserves Capital Surplus Proceeds of Sale of 161 827 71 126 919 62 34 908 19 130 000 00 130 000 00 Treasury Stock Undivided Profits 43 565 30 36 201 90 7 363 40 Total Capital, Liabilities and Surplus 1 341 510 27 1 251 272 50 90 237 68 56 ACCOUNTING PROBLEMS: INTERMEDIATE ; C " TJ< to *-< us O ^ CO us us CO 1-c 00 CN S3 cc oo cs t- 1- l- HH M CO CO -H 00 OS O US 00 CN OS --** CO ,_, CO O CD 6^ S 1-1 ~ 1-1 1-C 1-1 i oo co f I s - co i 1 CO us CN CO * os co t- a US O Tf Q Tt< OS CD US CN t~ i-i CN CN t^. 00 CN _ CN CN 00 CN CN i US O -I <* US - 00 t~ OS US t^ 00 S| 1 -H Tt" OS ^ ~ CN OS CO rt CN 00 CO "0 ?I us * -!l< OS CN 1-H S 1 1 a CO t^ I!S 00 us t^ S CO O 1-1 t^ ^f US CN co CO CO CN US 1 1 ec (H 1l O CN CN CO O 00 Tjl CO i-i us us I-H US O * t CN CO CO O US 00 O CO OS CO CN CO CO f- , t g, 5 ^H O v K. os T(I r- o: oo co US CO i ' OS us 00 00 F*. t>. CO t^ CN 1 s a> "So oo co 1-1 I-H co o US CN i-l CO CO O CO i-l l~ OJ ,=! 00 CN r-H CO S S i? O C! l~ ! OH CJ a i-5 02 O to O us O CN t>. T}< ^ US 1-H US CN -! 1-1 CN N US * rH N i-H 00 O CO 00 00 N us 00 i 1 t~ 00 O ti "* S 93 CO CN OS CO CS CN 5 00 00 CN CN us CN us us CN t-* co r>- S i t- 1-1 US CO O CO CC H _, K, cc H f^" 1 c M C ^sJ 2-~ 0) O '"^ CO OS O CO ^ 00 O i-l T)I O CD t- CN CS CO CO t-H 00 CO S 8 to o us oo t- <-i 1 ^ X "O JH " 1 CN O CO 1-1 CO CN CD CO O US t^ CO 00 00 CN I s - CN CO to CN 00 CS t~ US OS ^ Cs OS t^* CO O CO CN 00 CN O CO CO 00 o CN CN OS CO 00 CO CN t^ _ O c CO CN *-* i i i l t I cs O rt rt 1-1 * CN c3 C \ ^ O S "-~ c 3 v C * 4) 5H . rt d a S o 2 C O tn '2 S S c .S g .S 2 JJ j=oj^ jao 1 ^* i ^ CO2^ flOQO^ C -3 W O^^ -* 1 * nj ^ 0,2"^ 00 M B & 8 "c 3 ^ o"3 "co* ^-S H M IllJiiJ 1 lilflll ^ = gl ''S '^ g 3 g_ P3 (S 02 55 -6. a FINANCIAL STATEMENTS AND REPORTS 57 a> ** oo co o to . CN IN i t- CN CO CD 00 00 o CO i m co o o "5 PO SO O 00 Q O O t 1-1 O O i t- T(I M 1 CC t, t^ rt CN CO CO 1 <* CO b- e* a> o CO N O t- co oj CN s 1 O in co t" CN 10 m CO 31 * CN 00 * CO rl< 1 i .M t^ CO CN cN O CN * CN CO -H CO 8 r^ >n T)< b. IN h- *

. N CO t~ t^ CN o CN CO m 31 fi^ a O B g 3 a M 5 01 1 fl C fl 5 o o o p ? B fl 3 o o O 1 1 02 *2 fc 3 2 "~ O O 3 o H et Tradi .herlnco 12 I 5 J 3 o g C8 d K O CJ O ' Proporti Proporti 3 o et Profit X O O O Z 58 ACCOUNTING PROBLEMS: INTERMEDIATE FORM XXV. Consol AMERICAN HIDE AND LEATHER COM Balance Sheet as Assets Cost of Properties: Including 4517 Shares Preferred and 2259 Shares Com- mon Stock of American Hide & Leather Co. held in trust $26 838 470 80 Sinking Fund Assets: Cash and Accrued Interest 98 407 01 ($4,891,000 par value of Bonds in Sinking Fund held by Trustees not treated as an asset and deducted from Bonds issued per contra Current Assets: Hides, Skins, and Leather on hand and in process of manufacture and Gen- eral Supplies $12 589 481 22 Less Reserve for possible depreciation in values 700 OOP 00 $11 889 481 22 Sundry Debtors for Bills and Accounts Receivable $4 113 343 61 Less Reserve for Doubtful Debts and Discount 259 136 16 3 854 207 45 Claims and Sundries 15 416 61 Insurance Premiums unexpired and prepaid interest 143 431 98 Liberty Loan Bonds at par 800 550 00 Cash: In Banks and on hand 1 077 946 00 17 781 033 26 Total Assets $44 717 911 07 FINANCIAL STATEMENTS AND REPORTS 59 idated Balance Sheet. PANY AND SUBSIDIARY COMPANIES at June 30, 1918 Liabilities Capital Stock: Authorized: 175,000 7% Cumulative Preferred Shares of $100 each $17 500 000 00 175,000 Common Shares of $100 each 17 500 OOP 00 Issued : 130,000 Preferred Shares $13 000 000 00 (Dividends accumulated thereon since 1899 except as to 15^% paid to date) 115,000 Common Shares 11 500 OOP 00 $24 500 000 00 First Mortage 6% Bonds: Authorized $10 OOP 000 00 Issued $ 9 000 000 00 Less In Treasury $ 475 000 00 In Sinking Fund 4 891 000 00 Held by Trustee as invested proceeds of released prop- erty sold 478 OOP 00 5 844 OOP 00 3 156 000 00 Current Liabilities: Bonds Interest Accrued $ 170 500 00 Bills Payable 2 200 000 00 Trade Accounts 605 715 10 Wages Accrued 53 120 35 Taxes and Estimated Excess Profits Tax 594 123 80 3 623 459 25 Sinking Fund for Redemption of First Mortgage Bonds: Appropriations and Accretions to June 30, 1917 $4 539 282 13 Appropriations for year ended June 30, 1918, charged to Profit and Loss 150 000 00 Interest accretions dur- ing year $ 280 630 00 Less Difference be- tween cost and par of Bonds purchased out of interest Ac- cretions and in anti- cipation of Sinking Fund and other re- quirements 846 37 279 783 63 4 969 065 76 Surplus: 8 469 386 06 Total Liabilities, Capital and Surplus $44 717 911 07 60 ACCOUNTING PROBLEMS: INTERMEDIATE J p V 3 ^ $ a r^ O G FINANCIAL STATEMENTS AND REPORTS 61 gs OS CO ic co ^t OS O O OO 1C O O O o O5 ^f co co 00 O 05 CO iO ^1 00 t^ rH 1 Tf CD OS OO CO c; . CO CO CO !> OS 03 00 CO O 1-H (N i-H (M 00 CO OS T}H a .2 a *t? *~^ Qi t^ Tj^ *~* - ta T3 a 9 C3 a: -s II M Advances to Salesmer Accounts Receivable Notes Receivable $ T f^oci "\T 4-f\ T) ceivable Discounted Interest Accrued on I> ceivable Income Accrued on ments Raw Materials Goods in Process Trading Goods Manufactured Goods S T3 a ci F^2 'o o H fc*2 g -^ c3 J3 ll T; G ^ i I a ~ 1 Catalogs on Hand Stationery and Postagi Hi CO CO CO I 00 O Prepai Prepaid x a -5 < -31 & s\ " o Hi 62 ACCOUNTING PROBLEMS: INTERMEDIATE FORM XXVII. English WALKER & HOM Balance Sheet, S Capital and Liabilities Nominal Capital: 600,412 six per cent. Cumulative Preference Shares of 1 each 220,000 Ordinary Shares of 1 each Issued: 581.397 Preference Shares of 1 each, fully paid 203,430 Ordinary Shares of 1 each Less Calls in arrear Four-and-a-Half per cent. First Mortgage Debenture Stock Interest to date Less Tax 1,400 Four per cent. Debentures of 100 each (Showell's) Interest to date Less Tax Four per cent. Mortgage Debenture Stock (Watson, Woodhead & Wagstaffe's): Authorised Issue. 250,000 Issued Interest to date Less Tax (21,000 of this issue is deposited as security for Loan.) Mortgages on Properties and Interest to date secured by Deposit of Deeds or charge upon Properties, and also a charge upon the Properties in the Trust Deeds securing the Company's De- benture Stock Loans, Deposits, etc. Sundry Creditors: Trade Accounts, etc. Rent, Rates and Taxes apportioned Unpaid Dividends, etc. Capital Reserve Account Suspense Account for Outstanding Adjustments (re Showell's pur- chase) Suspense Account for Outstanding Adjustments (re Watson, Wood- head & Wagstaffe's purchase) General Reserve Fund Profit and Loss Account On behalf of the Board s. d. 600,412 220,000 820,412 581,397 209.430 _ _ ~T90^27 30, 664 200,000 1,726 11 5 140,000 1,237 1 10 206,740 3.261 11 7 80,856 13 27.039 17 s. d. 760, 163 552,965 4 10 224,616 6 33,650 7 2 107,896 11 2 3,669 1 11 5,553 15 124 6 6 3,424 7 50,000 110.108 18 J. H. DA VIES, C. B. MORGAN, H. SPARY, Secretary. Directors. 1,852.171 17 10 AUDITORS' To the Shareholders of Walker & Homfrays, Limited, In accordance with the provisions of the Companies (Consolidation) Act, 1908, we report to the Share last, with the books and vouchers relating thereto, and have audited the above Balance Sheet. During the course of the audit we have obtained all the information and explanations we have required, a true and correct view of the state of the Company's affairs, according to the best of our information and Manchester, February 18, 1918. FINANCIAL STATEMENTS AND REPORTS 63 Form of Balance Sheet FRAYS, LIMITED eptember 30, 1917 Property and Assets Woodside Brewery with Freehold, Copyhold, and Long Leasehold Fully-Licensed Public Houses, Beerhouses and other Proper- ties, as on June 30, 1916 Additions during the fifteen months Less Compensation received, proceeds of sale of properties and losses thereon Ingoings, Fixtures, etc. Properties held on Short Leases and on Yearly Tenancies Less Depreciation for the fifteen months Fixed Plant: As on June 30, 1916 Less Depreciation, Five per cent, per annum Additions Less Sales during the fifteen months Rolling Stock As on June 30, 1916 Less Depreciation, Twelve-and-a-half per cent, per annum Additions Less Sales during the fifteen months Bottling Plant: As on June 30, 1916 Less Depreciation, Twenty-five per cent, per annum Additions Less Sales during the fifteen months Office Furniture, etc.: As on June 30, 1916 Less Depreciation, Seven-and-a-half per cent, per annum Additions during the fifteen months Stock-in-Trade, comprising Beer, Malt, Hops, Wines, Spirits, Cigars, etc. Sundry Debtors: Trade Accounts Less Discount and reserve for Bad Debts Rent Accounts Loans Rates, Taxes, Licences, etc., prepaid Manchester Brewery Co., Ltd., Trade Account Dividends Receivable from Manchester Brewery Co., Ltd. (since 1,258,474 5,554 a. IS 12 4Ym"*t ,, Stocks, Bond* and Investment* ....... .-, Any Other LU.!:!liticp Itrniiic Land . _. iju.'ldlngs . i Machinery, Equipment and Fixture* _ i bones, Wagons and Automobile* _.._. i _ Total MabtU""" Note* Receivable Duo from Office, Account* Receivable Due from Off- icers Stockholders and Employees... I Good Will, Patents and Trade Marks... Other Asset* Itemize Capital Stock Pref. Outstanding ._..._ """"" C Ital Stock Com. Ontntandlnr j Capital Stock No Par Value TOTAL ' ' FINANCIAL STATEMENTS AND REPORTS 67 Contingent Liability of Any Kind Co Idab g Commitment Liability Co t Prl of Goods Purchased DUv to b made Durin 193 Present Market Voloe of Goods Purchased. Delivery to b made Daring 193 Inumnuice. Fire, on Buildings $ Merchandise * ..Machinery, Fixtures and Equipment t- Llte In faTor of Company CONDENSED PROFIT AND LOSS STATEMENT FOR FISCAL YEAR ENDING; EXPENSE) ma l , OcKt of Material or Net SJe .,, From Investments T>. T--,-,.. .t. From Discount fn f*nr* _ From Oth* Source* Itomlxa on T. U"d Cti * t , ' T"'*l IVrf.1 Sarplcs end Undivided Profits At CloM of PrerioDl Ytat- meota contained on both tides of thla (beet are true and give a correct (bowing of the financial condition of tbe Company. Signed thli ^T of,.... ................... .192-. By 4 . 3 i i ; < B k, t! SO "S 1o tp 3 ^ a ** i s" V 9 3 "3 o 8. 4 i 9 3 i 3 n D i 3 H 13 W 3 W H ' 02 U Inabilities, tes, and accounts payable: ured bills and notes: Acceptances made for merchandise raw material purchased Notes given for merchandise or i material purchased Notes given to banks for money b rowed Notes sold through brokers Notes given for machinery, additl to plant, etc. Notes due to stockholders, officers, employees ured accounts: Accounts payable for purchase (not due) Accounts payable for purchases (p due) Accounts payable to stockholders, c cers, or employees :d liabilities: Notes receivable discounted or s with indorsement or guaranty (c tra) . Customers' accounts discounted or signed (contra) Obligations secured by liens on inv tories . Obligations secured by securities posited as collateral Accrued liabilities (interest, taxes, wat etc.) irrent liabilities (describe fully) : H r* o o g < r-\ d K N ^ to 060 ei $* to 06 go o o O IN O *> /5 .3 a cc N 3 <1 3 O 3 (-3 D 3 a D j "O " "S -z 1111 3 TJ 3 ^ # a ^o 3 c 2 " I 3 B a "o c CQ 5 02 'c S 2 2 tn . "*t c i 5 1 I S B H -d 1 1 1 # S -0 o H 5 s B " "S "g > 1 aS* 2 3 j > 3 J2 3 c *3 C o a) O o j2 S !g 3 ^-s -a o u o Bg a 3 3 > V g .2 3^ "0 M_) o 2" "s^i c * " J is =3 1 ^q c 1 2 V m -T? ^^ ^ > oT > *^ t- C ^2 es o S < 5 < 3 =i c "s w w a os 00 s and accounts r .S^>4 > > S 3 J I 1-lFHlN CO IN .3 d 1 Z, 6 FINANCIAL STATEMENTS AND REPORTS 71 3 3 ~ -2 8 ^ i U W *> v +J -*j iH " * b ( *tJ ent liabilities - -S 'g a a x g S 3 S*. e * *M| 2 . ta o M _^ ra .2 a a 3 1 3 ::I i fi S S 1 * a -t 00 OQ QJ -r- o G ^2 o "3 c'^u'fiC 3 * * *~ i 'S o 1 2 H jg S t^5 - -o 0^-3 -B .2 O O C O ^^ s^^j:^^ ,5 -^ iftlJSJ | srri | ^ 55 r i /YI /~ \ O fe 3 O 3 CQ **" 2~-'E -^rcoGtns ** ^c3l^ S fc s c rt^ _M "S 'C-* 3 .23 15151 111 p-H 3 g-Sn W P3 Q "SOS o^ _ ^ ^ >s ^^ E" 1 1; W Q-C)U "c'v' c O -o 3 < L HH WC^ M CO CO I i CO W CO S a J; *> S 5 x ague ; "3. '3.= -^: " S3 H E? ^^ ._ O M^ 8 3 .s -g m ^ c ! 1 *. " s iCO 0 U5 06 co f 1C S*" 1 O Ci 00 i S 5" 00 si i 1 oo CO o I . ,_, CO * w i e 1 CO s it CD 00 O5 -i >-i IN gs N CO ^ (N S CO -* CO oo o r- r IN N CO g tN O rt 00 CO 00 ss ^- CN * CO O 00 CO *> o o o 00 CO ^ 00 O | 5 S S s CO t- S K <-H 00 00 O> t- M to t^- " o i 1(5 CN IN -! " ) M s ** ** ** \ ) O 1 | w 2 \ w s ^& w J 02 H 3 .s 1 I i > > s 1 4 ^H 3uj g I i 1 g ^3 ' i > .j > ^1 1 i i 1 I \ o 1 s 1 \ S > W V 1 2 50 -*i "o 1 io i ,0 <5 ! "o *3 "3 *" i w 5 ! o s 0> u . ,.- 17,, r] Aoonto- Cash resources held by Trustees account of Bond Sinking Fun (In addition Trustees hold $135,147,000 of redeemed bonds, Contingent Fund and Miscellaneous Assets fil < * H w Q FINANCIAL STATEMENTS AND REPORTS 83 in M S n t~- <> t- o w oo oo o -i t~- o oco^ ^g 84 ACCOUNTING PROBLEMS: INTERMEDIATE 8S i I oo f. GO IN S : 1 | "O Tjl ot i ji 1 3 Z 1 co M 80 < 5 < B8 882 gos m co >O CO (N O ' O ' IN 00 (N O 1 1 H W i | ^ .s - Y 2 o L/_ "3 *~ "^ H _ O f 3 y. 1 * 8 l' ^ c V E 9 w "S OS J 3 S j ^H 1 ^> O o l* 0} K 03 (^ X W si | w 2 ^ 3 w ^ i c .2 .2 * i I 11 '5. i O o ll J & 1 CONSOLIDATED G Capital Stock of U. S. Steel Corporation: Common Preferred Capital Stocks of Subsidiary Companies Not Held by U. S. Steel Cor Bonded and Debenture Debt Outstanding: United States Steel Corporation 50 Year 5% Bonds United States Steel Corporation 10-60 Year 5% Bonds Subsidiary Companies' Bonds, guaranteed by U. S. Steel Corporati Subsidiary Companies' Bonds, not guaranteed by U. S. Steel Corp 1 i ID O t-l O 1 o "3 2 '3 3 | .2 3 1 a *o c _c 1 2 'c O subject to sale, but not included in assets or liabilities) Subsidiary Companies' Non-Interest Bearing Notes Maturing over existing mining royalty obligations Guaranteed by U. S. Steel Co: Mortgages & Purchase Money Obligations of Subsidiary Companies: Mortgages Purchase Money Obligations issued in acquirement of Fixed Prope Mining Royalty Notes (Interest Bearing Guaranteed by U. S. St FINANCIAL STATEMENTS AND REPORTS 85 8833 O5 t* O3 1^- CO t- tO tO 00 CO o *o 00 00 a 1< N I 253 & S E c d S3 P "8 0! - C g .9 3 i o d = -a ^ 5 I . o I s "3 i i .! * "3 s 'a '\ C 3 03 i O _j o Q> i ~ a i Sa ^i T3 r* 3 1 """S-S c E 2J 52- 1 .2 O fc 0. ^ o O 3^ cj . N O 5 b > ^ 1 1 & 8" leserv ll r~ -1 o E 3 's '| 8 ^ ^ a 'C i S 2 Current Accounts Payable and Pay Rolls Accrued Taxes, not yet due, including reserve for Accrued Interest, Unpresented Coupons and Uncl Preferred Stock Dividend No. 79, payable Februt Common Stock Dividend No. 66, payable March Total Capital and Current Liabilities indry Reserve Funds: Contingent, Miscellaneous Operating and Other I Insurance Funds ppropriated Surplus to Cover Capital Expenditure Invested in Property Account Additions and Co ndivided Surplus of U. S. Steel Corporation and S Capital Surplus provided in organization Balance of Surplus accumulated by all companies 1 02 | 1 s ~ o Pi "o V j3 *o X V 1 02 1 H in Inventories, December 31, 1920 (see note be VT~, TUot ^o-t ^f *Ka S,,fr>liia rvf S,lV rials and products to other subsidiary co Sheet, deducted from the amount of Inven a. < P 86 ACCOUNTING PROBLEMS: INTERMEDIATE oo r*. C< 00 1 o -5 c x ^* CO IM * a M M ip S a -a 00 00 a E S S ||S S 'Ills g VH O iiM 85 B ^ "g " ^; o g .2 '3 O '3 P 8 'a H- 1 e .2 fe S i i C g 2 -a S S i-T a -3 S 3 J 's UNITED STATES STEEL CORPO and Subsidiary Companies Consolidated Income Account For the Fiscal Year Ending December 1 expenses incidental to operations, including ordi under merit plan, adjustments in value of materi: of extraordinary cost resulting from the world war aluations, and taxes (including $37,500,000 for esti Loss Account iges and purchase money obligations of the subsidi nd Depreciation applied as follows, viz.: and Sinking Funds on Bonds of Subsidiary Compa Corporation a o a > -B S 05 01 " .2 o >, c S 1 a s * e S | 1 S o .2 cc 3 S S 1 S g M - lll|fi-s n-f (^ ^-< O g ^ fe OJ . " C 5 rf a g j H os g x ^ -3 E 5 P3 II? l5 1^ 15! & i5 g^2 a -^ i W I q s e H w t, SK ill . c 1.S-J * c "S ? &l g E & csa &*$ B c o 2 2 " 5 M -E O) CO >, 'cS 'cj 'e! c3 ft P. a a c e c c . , , CJ 4J C> a a c. 2 ! o os SI *1 ^ .a s III &SI to U cembe ried rplus stme o ^ g-s^ S 2 I rplu Pro tal Undivided Inter-Compa 88 ACCOUNTING PROBLEMS: INTERMEDIATE CO r>- O >Cl (N O 00 CO O CM CO * >O <*< O OS CO ^ CN O Tj< t- C5 t~- >O 00 * >o IO ^* t^ .s o *> 43 s o hH H o 1 1 1 11 "^ ~i s "~ x 8 3 PH o <5 O5 1-H 1^ ^ 2 Q) "o 1 n3 || | If c fL| g m iV 2 "2 w a s OG X oj J O g. T3 S C h-3 O 03 CO V ^ CD 03 fl g - ^ S "3, B .2 'S P^ JH *- II t: if M Q) provisional W ^ O 1 s 1 -a "^ I HH ^ ^5 *r^ fe P. ** GO .2 PL, 3 e "3 1 S .rHTH ^1 J| o S a "S i a 1 o . < 3 r* | 00^ a c 3 2 cf f 3 -5 s S o ^ 3 " o j o o /f 1 fe M -9 O ^ <^ o c s' g 1 || n ^> lo o >. C *^> PH S Wl & ^ J3 S" O PH M'5 (5J 4 <9 , ^ . "u-^ 05 rj ^ i i 2 -a ca.S '^ Sc^S o c^ 5 00 a o o TJ 2 otBTS |l e o f c 9 f jb +> ~ CO 1 i Iif ilii 3 jllUllJ C oa O t**^CQ oi O5 1-1 | ^E" *il 5 1l PS r^> o a .2 E2cSS2 _J 3-M . 3 . CO o O i c a-aiiii a h XS'S"'! "s p c .S || f || J | | S| V 1 llf 3 M w o S2a^^ i Q 03 3 3 K02 co 3 o 1 o 8 o 5? 1 OC'JCO^t^-CNCOO O 8 S&8 g 9 o ^ g icco a O '3 cit^^cooioc^r^ oo o ^ 00 CO 00 i S s K f P Pi h CO CO CO CO Ol * >O >O 00 OOCO lO S T*CO 1- , a S COCO t- COcO'-i IN CO f-H~ g 2 -o "'co r ?. c c CO CO CO g U5 a ~ s' | *"* S O. p M-S *"* & J ~ g S 02 ^y r^ 73 "C c s c c -, -** aj o o o o o o -C^ k. kl SEE jj'^'gi e -i^j r- 5 C C fe O S o^^ E o o o o 4>^^ - Oj sS ~ 03 ^>.^ OOOO fe o o7;;^ L- o a 9 " r: OQ t* S < o> S - CO CO 0202 ^.Srt^S 3,_; . p. X-c 0) ? o P d S 0-g ^TST5 =S S '^3 CH g g cu C o.-S.-S S C3 B S fe s >S"S s ^fc N . M 13 _c X ' | |||gg|g8 ^^ fi'EM GO llSicf IT &C3 & 1 =3 3 g oJJ-g-g^^" S^OOO IO 10 i-t) CB fc o.S^'S^ " "l^ 5 ^ a * =s * s ^* =i! * s O.CCO |^. ,3 c c fe j3 ?.2.2-S-2.2 ** ^ > > > > P"i"1 2J ^ pQ . H Q OHPnSS^MliSQ (55S5 <;OH Q OQPQ 94 ACCOUNTING PROBLEMS: INTERMEDIATE THE ATCHISON, TOPEKA & SAN General Balance Shee Balances Assets Dec. 31, 1919 Railroads, Franchises and Other Prop- erty, including Stocks, Bonds, etc. (Exhibit A) $731 110 400 11 Expenditures for Additions and Better- ments, Construction and other Capi- tal Purposes, during Current Fiscal Year (Exhibit B) 22 512 037 77 $753 622 437 ~88 Investments, New Acquisitions (Ex- hibit C) 15 885 799 01 Sinking Fund 819 06 Other Investments 35 394 013 76 Balance brought down $172 302 412 01 Current Assets: U. S. Government Accrued Com- pensation $53 169 398 06 Cash 4 282 650 01 Time Deposits 250 000 00 Special Deposits 248 641 68 Loans and Bills Receivable 1 499 589 70 Traffic and Car Service Balances 17 365 74 Miscellaneous Accounts Receivable 618 885 69 Material and Supplies 119 989 00 Interest and Dividends Receivable 34 449 04 Other Current Assets _ 181 13 60 241 150 05 Deferred Assets: Working Fund Advances $ 200 00 Guaranty Trust Co. of N. Y. Cash De- posit for Fuel Reserve Fund 2 103 945 06 Other Deferred Assets 26 330 14 2 130 475 20 U. S. Government Deferred Assets 49 219 874 54 Unadjusted Debits: Rents and Insurance Premiums Paid in Advance $ 139 186 18 Other Unadjusted Debits 1 431 505 10 1 570 691 28 V. S. Government Unadjusted Debits " 11 987 583 20 $297 452 186 28 FINANCIAL STATEMENTS AND REPORTS 95 TA FE RAILWAY CO. SYSTEM t, December 31, 1919 Balances Liabilities Dec 31> 1919 Capital Stock: Outstanding (Exhibit D) $347 047 200 00 Funded Debt: Bonds Outstanding (Exhibit E) 285 553 457 70 Balance carried down 172 302 412 01 $804 903 069 71 Current Liabilities: Loans and Bills Payable Traffic and Car Service Balances $ 3 259 22 Audited Accounts and Wages Payable 309 500 23 Miscellaneous Accounts Payable 46 555 49 Interest Matured Unpaid 1 138 367 54 Dividends Matured Unpaid 225 187 70 Funded Debt Matured Unpaid 45 000 00 Unmatured Dividends Declared 6 447 475 00 Unmatured Interest Accrued 3 158 621 30 Unmatured Rents Accrued 39 560 47 1141352695 Deferred Liabilities 196 639 49 U. S. Government Deferred Liabilities 68 057 090 00 Unadjusted Credits: Tax Liability $ 3 499 878 30 Operating Reserves 3 204 199 94 Accrued Depreciation Equipment 46 681 481 40 Other Unadjusted Credits 10 233 092" 60 U. S. Government Unadjusted Credits Corporate Surplus: Additions to Property through Income and Surplus $86 260 798 44 Funded Debt Retired through Income and Surplus 34 504 94 California-Arizona Lines Bonds Sink- ing Fund Reserve 108 166 65 The S. F. & S. J. V. Ry. Co. Bonds- Sinking Fund Reserve 14 118 28 Reserve for Fuel Lands 2 103 945 06 $88 521 533 37 Profit and Loss Balance 65 366 689 83 153 888 223 20 $297 452 186 28 96 ACCOUNTING PROBLEMS: INTERMEDIATE NORTHERN STATES POWER COMPANY Consolidated Balance Sheet, Assets Capital Assets: Plant, Property, Rights, Franchises, etc., including Preferred Stock Dis- count and Expense $67 590 683 34 Collateral and Other Cash Deposits: Collateral Cash Deposited under First and Refunding Mortgage Bonds $ 12 250 00 Sinking Fund Cash 7 693 24 19 943 24 Investments in Stocks and Bonds of Other Companies, Associations, etc. 56 475 55 Debt Discount and Expense in Process of Amortization 5 102 845 25 Deferred Charges and Prepaid Accounts: Unexpired Insurance $ 38 164 50 Prepaid Interest 9 753 49 Miscellaneous Unadjusted Items 51 177 48 Rate Investigation Expenses 84 376 08 Extraordinary Operating Expenses in Process of Amorti- zation 129 593 79 313 065 34 Current Assets: Cash on Hand and in Banks S 602 700 26 U. S. Liberty Bonds at Par 105 600 00 Cash Deposited for Bond Interest 10 320 00 Accounts and Notes Receivable $1 400 806 44 Less Reserve for Uncollectible Accounts 100 444 05 1 300 362 39 Unbilled Electricity and Gas 285 579 67 Standard Gas and Electric Company 790 109 45 Receivable on Sales of Preferred Stock 209 552 63 Inventories 1 930 796 24 5 235 020 64 Total 878 318 033 36 We have audited the books and records of the NORTHERN STATES POWER COMPANY OP DELAWARE AND SUBSIDIARIES for the year ended December 31, 1920, and we hereby CERTIFY that, in our opinion, the attached Consolidated Balance Sheet and Consolidated Income Account correctly reflect the financial condition at December 31, 1920, and the results from operations for the year ended that date. HENRY AUSTIN & Co., CHICAGO, March 19, 1921. Certified Public Accountants. FINANCIAL STATEMENTS AND REPORTS 97 OF DELAWARE AND SUBSIDIARIES December 31, 1920 Liabilities Capital Stock of Northern States Power Company of Delaware; Authorized : 7% Preferred, 500,000 Shares, $100.00 each $ 50 000 000 00 Common, 500,000 Shares. $100.00 each 50 OOP OOP 00 $100 OOP OOP 00 Issued and Outstanding: 7% Preferred, 204,400 Shares, $100.00 each $20 440 000 00 Less In Treasury 99 200 00 $ 20 340 800 00 Common, 61,700 Shares, $100.00 each 6 170 OOP 00 $26 510 800 00 Capital Stock of Subsidiary Companies (In Hands of Public) : Preferred : Ottumwa Railway and Light Com- pany, 7% $ 501 500 00 Southwestern Minnesota Division Companies, 7% 109 500 00 $ 611 000 00 Common 5 OOP 00 616 000 00 Funded Debt: Northern States Power Company of Minnesota: 25-Year 5% First and Refunding Mortgage Gold Bonds, due April 1, 1941 $ 24 567 500 00 25- Year 6% First and Refunding Mortgage Gold Bonds, due April 1, 1941 2 000 000 00 Minneapolis General Electric Company 30- Year 5% First Mortgage Bonds, due December 1, 1934 7 323 000 00 Southwestern Minnesota Division Bonds 536 000 00 Ottumwa Railway and Light Company Bonds 1 336 OOP 00 35 762 500 00 Unfunded Debt Northern States Power Company of Minnesota: 10- Year 6% Gold Notes, due April 1, 1926 $ 7 805 000 00 5-Year Sinking Fund Convertible 7% Gold Notes, due August 15, 1923 1 800 OOP 00 9 605 000 00 Current Liabilities: Notes Payable $ 1 077 500 00 Accounts Payable 610 939 33 Accrued Interest 586 825 07 Accrued Taxes 848 332 77 Accrued Preferred Stock Dividends 367 344 43 H. M. Byllesby & Co. 30 650 36 Byllesby Engineering and Management Corporation 16 099 57 Consumers' Deposits 108 724 94 Miscellaneous Outstanding Liabilities 36 070 02 3 682 486 49 Reserves: Depreciation and Replacements $ 757 489 41 Special Maintenance, etc. 63 946 96 821 436 37 Surplus 1 319 810 50 Total $78 318 033 36 98 ACCOUNTING PROBLEMS: INTERMEDIATE FORM XL. Northern States Power Company and Subsidiaries Consoli- dated Income Account Consolidated Balance Sheet. NORTHERN STATES POWER COMPANY OF DELAWARE AND SUBSIDIARIES Consolidated Income Account For the Year Ended December 31, 1920 And Summary of Surplus Account Gross Earnings: . Electric Department $10 264 733 74 Gas Department 660 593 60 Steam Department 636 993 47 Telephone Department 75 722 93 Street Railway Department 160 735 10 Total Gross Earnings $11 798 778 84 Operating Expenses and Taxes: Operation $5 610 004 96 Maintenance 799 938 20 Taxes 921 897 45 Total Operating Expenses and Taxes 7 331 840 61 Net Earnings $ 4 466 938 23 Interest Charges (Net) 2 148 470 28 Net Income Available for Amortization of Debt Discount and Expense, Depreciation and Dividends 8 2 318 467 95 Deduct: Preferred Stock Dividends $1 341 374 22 Appropriated for: Depreciation $475 000 00 Amortization of Debt Discount and Ex- pense 250 000 00 725 000 00 2 066 374 22 Balance Carried to Surplus Account $ 252 093 73 Surplus, January 1, 1920 1 067 716 77 Total Surplus, December 31, 1920, per Balance Sheet $ 1 319 810 50 FINANCIAL STATEMENTS AND REPORTS 99 FORM XLI. University of Chicago Balance Sheet Statement of Income and Expense. UNIVERSITY OF CHICAGO Exhibit A General Balance Sheet June 30, 19 Assets Endowment Assets: Investments of Endowment Funds Uni- versity Endowments (Schedule 1) $28 252 746 16 General Education Board 999 835 49 $29 252 581 65 Cash Awaiting Investment University (Schedule V) $ 74 337 37 General Education Board 304 23 74 641 60 $29 327 223 25 Plant Assets: Buildings and Grounds (Schedule II) $11 427 245 50 Books, Equipment and Furniture (Schedule III) 2 047 911 83 $13 475 157 33 Investments of Building Funds CSchedule I) 2 553 020 47 Cash on Hand (Schedule V) 44 353 61 $16 072 531 41 Current Assets: Investments (Schedule I): Special Funds $ 4 970 00 General Designated Funds 257 829 86 Other Current Funds 361 181 56 White Deposit 33 965 63 $ 657 947 05 Receivable (Schedule IV) 283 728 40 Materials and Supplies (Schedule III) 49 632 53 University Press 208 749 38 Cash on Hand (Schedule V) : General $ 28 690 99 Special 127 051 60 155 742 59 1 355 799 95 $46 755 554 61 100 ACCOUNTING PROBLEMS: INTERMEDIATE UNIVERSITY OF CHICAGO Exhibit A Continued General Balance Sheet June 30, 19 Liabilities Endowment Funds: University (Schedule VI) $28 327 083 53 General Education Board Funds Held in Trust for the University of Chicago 1 OOP 139 72 $29 327 223 25 Plant Funds: Capital (Schedule X) i!3 706 649 61 Deduct amount used as working capital 275 350 16 $13 431 299 45 Building and Equipment Funds (Schedule VIII) 2 641 231 96 16 072 531 4 Current Funds: Working Capital (see above) $ 275 350 16 Special Funds for Designated Purposes (Schedule VII) 18 813 74 General Funds for Designated Purposes (Schedule IX) 258 029 86 Income Credits (Schedule XI) 46 554 19 Reserves (Schedule XII) 495 206 32 Liabilities (Schedule XIII) 261 845 68 $ 1 355 799 95 $46 755 554 61 The above exhibit is supported by the following schedules which are not reproduced: Schedule I. Investments II. University Buildings and Grounds III Books, Equipment, Material and Supplies IV. Accounts Receivable V. Cash on Hand VI. Endowment Funds and Their Investment VII. Special Funds for Designated Purposes VIII. Building and Equipment Funds IX. General Funds for Designated Purposes X. Capital XI. Income Credits XII. Reserves XIII. Current Liabilities FINANCIAL STATEMENTS AND REPORTS UNIVERSITY OF CHICAGO Exhibit B Statement of University Receipts and Expenditures Year Ended June 30, 19 101 Receipts University General: Matriculation and Diploma Fees Lectures and Concerts Rockefeller Endowment Income Retiring Allowance Fund Income Culver-Rosenberger Funds Income Gallup Memorial Fund Income Packer Annuity Funds Income' Emily Talbot Memorial Fund Income Prize Funds Income Permelia Brown Aid Income Hitchcock Fund Income Business Office Commissions Midway Properties Income Athletics Athletics High School Locker Rentals Interest Miscellaneous Receipts Operation and Maintenance of Buildings and Grounds: Room Rente" University Press Rent Commons Heat and Light Harper Library Fund Income Yerkes Endowment Income Libraries, Laboratories and Museums: Library Fines Laboratory Fees and Tickets Kent Fund Income Department of Arts, Literature and Science; Graduate Tuition College Tuition University College Tuition Culver Fund Income Ogden Fund Income Haskell and Barrows Funds Income Fellowship and Scholarship Funds Income Reynolds Fund Income Carried Forward $1 162 174 52 $ 25 987 50 1 834 70 985 630 08 24 647 58 1 750 00 1 431 25 561 00 775 00 412 50 1 320 47 1 200 00 26 765 98 7 257 36 28 108 60 959 88 10 431 54 27 428 45 15 690 63 * 57 828 75 5 000 00 5 350 00 9 615 00 2 423 37 $ 1 562 22 30 685 68 2 510 71 $ 75 706 01 303 269 08 30 329 23 35 650 18 31 042 98 1 965 96 5 553 78 1 453 98 80 217 12 34 758 61 484 971 20 $1 762 121 45 102 ACCOUNTING PROBLEMS: INTERMEDIATE UNIVERSITY OF CHICAGO Exhibit B Continued Statement of University Receipts and Expenditures Year Ended June 30, 19 Receipts Brought Forward Divinity School: Matriculation Fees Tuition Fees Room Rents Rockefeller Fund Income Baptist Theological Union University Endowment Income Scholarship Fund Income Law School: Tuition School of Education: College of Education Tuition School of Education Fund Income Secondary-School Tuition Crerar Fund Income McBirney Fund Income Elementary-School Tuition School of Commerce and Administration: Tuition Laboratory Fees Williams Fund Income Publications: 755 00 13 866 82 6 466 92 4 967 05 13 129 77 19 676 50 355 00 $ 15 202 86 $ 66 481 44 21 066 09 80 571 64 2 643 77 250 00 46 460 82 * 40 334 29 3 784 00 19 577 71 $1 762 112 45 59 217 06 The receipts of the journals are credited to the expenses, showing the net cost under "Budget Expenditures" University Extension: Lecture-Study Fees $ 4 975 25 Correspondence-Study Fees 55 644 60 Institute of Sacred Literature 3 478 25 Total Receipts 15 202 86 217 473 76 63 696 00 64 098 00 82 181 809 13 FINANCIAL STATEMENTS AND REPORTS 103 UNIVERSITY OF CHICAGO Exhibit B Continued Statement of University Receipts and Expenditures Year Ended June 30, 19 Expenditures University General: 1 351 904 49 Educational: Administrative Offices $ 61 285 05 Convocation and Diplomas 4 774 88 Official Documents 20 432 66 General Expense 9 809 66 Business: Administrative Offices 97 213 11 Business General 7 995 87 Student Welfare: Housing and Employment Bureaus 9 740 86 Chapel, Music and Lectures 9 413 04 Social Activities, Ida Noyes Hall 7 854 37 Aids and Prizes 1 714 97 Daily Maroon Subsidy 695 00 Hitchcock Fund Expense 1 200 00 University Bank 2 782 15 Alumni Subsidies 2 250 00 Athletics and Gymnasium Expense 39 587 96 Public Health Expense 7 250 28 . Physical Culture Instruction and Expense 19 560 45 Telephones 7 961 60 Retiring Allowances 24 647 58 Annuities 15 735 00 Operation and Maintenance of Buildings and Grounds' 369 854 84 Administration $ 11 064 26 Campus Maintenance 9 720 34 Furniture 7 908 71 Engineers, Firemen, Janitors 106 255 65 Repairs 73 797 49 Insurance 8 442 75 Yerkes Observatory Expense 9 951 66 Harper Library Expense 12 001 10 Greenwood Hall Expense 6 420 89 Fuel 92 465 00 Supplies and Miscellaneous 31 826 99 Libraries, Laboratories and Museums: 246 300 21 Administration $ 93 866 97 Student Service 17 553 93 Books 20 700 00 Equipment and Expense 103 880 86 Binding 10 298 45 Departments of Arts, Literature and Science: 738 147 91 Deans S 8 066 .84 Instruction 633 492 84 University College Instruction 21 729 59 University College Expense 8 099 90 Fellowships 14 855 46 Scholarships 51 903 28 Carried Forward $1 706 207 45 104 ACCOUNTING PROBLEMS: INTERMEDIATE $ 3 400 00 33 375 00 1 100 00 15 180 28 6 161 78 $1 706 207 45 59 217 06 UNIVERSITY OF CHICAGO Exhibit B Continued Statement of University Receipts and Expenditures Year Ended June 30, 19 Expenditures Brought Forward Divinity School: Administration Expense Instruction Books Fellowships and Scholarships Dormitories Expense Law School: Administration Expense Instruction Books Scholarships Library Administration Office Documents School of Education: (1) College of Education: Administration Expense $ 6 897 15 Instruction 93 727 89 Scholarships, Fellowships and Student Ser- vice 7 053 43 (2) Secondary School: Administration Expense $ 6 161 38 Instruction 58 476 99 Student Service and Crerar and McBirney Scholarships 2 654 00 (3) Elementary School: $ 3 699 95 46 845 53 3 000 00 1 536 44 2 506 51 498 18 $107 678 47 67 292 37 37 379 66 Administration Expense Instruction Student Service (4) School of Education, General: Instruction Equipment and Expense Books School of Commerce and Administration: Administration Expense Instruction Books Supplies and Equipment Publications: Journals Departmental Publications University Extension^ Lecture-Study Instruction Lecture-Study Expense Correspondence-Study Instruction Correspondence-Study Expense Institute of Sacred Literature Total $ 3 460 00 33 559 66 360 00 $12 291 31 19 078 49 2 158 44 33 528 24 2 184 29 16 735 24 1 220 00 6 660 22 $ 24 442 31 800 00 4 380 00 2 765 74 25 369 11 22 179 98 3 478 25 58 086 61 245 878 74 26 799 75 25 242 31 58 173 00 $2 179 605 00 FINANCIAL STATEMENTS AND REPORTS 105 FORM XLII. Boston City Club Comparative Profit and Loss Statement Balance Sheet Comparative Department Operating Statement. BOSTON CITY CLUB Exhibit A Comparative Profit and Loss Statement For the Twelve Months Ended December 31, 1920 and 1919 Income Gross Profit or Loss from Departments Exhibit B: Restaurant Bar Cigars Billiards and Pool Rooms Barber Shop and Shines Bowling Total Departmental Gross Profit Annual Dues Interest on Bank Balances, etc. Discount Newspapers Laundry Commissions House Rent Apportioned to Departments Heating Apportioned to Departments Lighting Apportioned to Departments Total Income (Less Direct Departmental Charges) General Expenses House Salaries and Wages Board of Employees House Expense General Depreciation on Furniture and Fixtures Fuel Mortgage Interest Debenture Interest Taxes Stationery and Printing Lighting Repairs and Renewals Telephone (Net) Insurance Salary of Civic Secretary Entertainment Committee Art and Library Committee Publicity Committee House Committee Forum Committee Cash Variations Total General Expenses Net Profit for the twelve months carried to Surplus Ac- count Exhibit C 1920 1919 * 333 73 $ 2 003 55 1 739 01 11 074 41 14 052 64 11 215 89 638 60 4 276 31 16 469 40 25 218 35 483 49 2 118 63 * 3 099 11 * 184 84 $ 27 139 64 $ 51 715 20 188 121 60 187 841 34 6 386 62 2 710 31 4 962 07 4 595 14 119 63 51 84 343 99 367 10 24 867 00 6 871 21 6 142 35 $264 954 11 $247 280 93 $ 86 749 58 $ 76 125 75 3 976 97 3 427 17 15 054 96 13 547 68 6 000 00 6 000 00 12 640 32 9 586 63 16 079 76 15 760 17 10 233 37 12 113 12 16 966 40 16 614 40 4 464 96 2 392 51 9 484 15 8 311 17 8 936 20 6 689 59 1 247 28 1 611 32 1 500 00 1 500 00 3 008 52 2 669 36 4 224 93 2 895 33 2 187 55 2 522 81 4 496 68 2 878 89 13 50 35 55 777 13 1 064 31 10 21 4 34 $208 052 47 $185 741 42 $ 56 901 64 $ 61 539 51 106 ACCOUNTING PROBLEMS: INTERMEDIATE BOSTON CITY CLUB Restaurant Revenue: From Members Board of Employees Expenses: Supplies Consumed ~~ Wages Board of Employees General Gross Profit or Loss Exhibit A Bar Revenue: From Members Sale of Bottles, etc. Expenses: Supplies Consumed Wages Board of Employees General License Gross Profit or Loss Exhibit A Cigars Revenue: From Members Expenses: Supplies Consumed Wages General Gross Profit Exhibit A Billiards and Pool Revenue: From Members Expenses: Wages Board of Employees General Gross Profit Exhibit A Rooms Revenue : From Members Expenses: Wages Board of Employees General Gross Profit Exhibit A Barber Shop and Shines Revenue: From Members Expenses: Wages General Gross Profit Exhibit A Bowling Revenue: From Members Expenses: Wages General Gross Loss Exhibit A Exhibit B e Department Operating Statement onths Ended December 31, 1920 and 1919 1920 $482 254 89 37 332 81 1919 $377 624 77 34 638 50 $291 311 60 138 041 95 31 111 02 58 789 40 $519 587 70 519 253 97 $236 546 21 112 035 33 29 233 81 36 451 47 $412 263 27 414 266 82 A $ 333 73- $ 2 003 55 $ 8 325 58 21 79 $ 44 831 50 56 42 $ 3 964 14 3 837 83 258 85 2 025 56 $ 8 347 37 10 086 38 $ 23 991 11 5 993 44 560 95 3 020 37 247 64 $ 44 887 92 33 813 51 A *$ 1 739 01 $ 11 074 41 $ 65 626 83 $ 84 726 67 $ 61 023 87 $ 75 288 75 4 147 79 2 627 50 899 51 70 674 13 421 49 64 072 86 $ 14 052 54 $ 11 215 89 $ 11 668 82 $ 11 271 34 $ 5 021 34 $ 4 815 34 545 45 477 10 5 463 43 11 030 22 1 702 59 6 995 03 $ 638 60 $ 4 276 31 $ 48 133 80 $ 41 302 75 $ 9 897 40 $ 8 904 09 943 85 542 85 20 823 15 31 664 40 6 637 46 16 084 40 $ 16 469 40 $ 25 218 35 $ 12 671 70 $ 11 192 40 $ 9 959 96 $ 7 700 95 2 228 25 12 188 21 1 372 82 9 073 77 $ 483 49 $ 2 118 63 $ 4 519 78 $ 4 551 78 $ 3 830 34 $ 3 561 88 3 788 55 7 618 89 1 174 74 4 736 62 *$ 3 099 11 184 84 Loss. FINANCIAL STATEMENTS AND REPORTS BOSTON CITY CLUB Exhibit C Balance Sheet As at December 31, 1920 107 Assets Current Assets: Cash in Banks and on Hand Members' Accounts Receivable: House Accounts Annual Dues War Tax Less Reserves for Unpaid Dues and War Tax $4 700 11 Less Reserve for Doubtful Accounts 1 991 89 $ 69 117 79 $80 287 71 4 343 35 356 76 $84 987 82 6 692 00 Inventories (Food, Beverages, Cigars, etc.) Total Current Assets Investments: U. S. Liberty Loan Bonds U. S. Certificates of Indebtedness Total Investments Capital Assets: Real Estate Club Building Furniture and Fixtures Linen, Crockery, Glass, etc. Less Reserves for Depreciation Total Capital Assets Redemption Fund Cash in Bank: Unredeemed Debenture Bonds Due 1908 and Interest Deferred Assets: Unexpired Insurance Total Assets' 78 295 82 22 608 86 $170 022 47 $ 10 000 00 75 000 00 $827 389 37 53 963 23 13 692 54 $895 045 14 239 360 00 85 000 00 655 685 14 408 51 6 874 61 $917 990 73 108 ACCOUNTING PROBLEMS: INTERMEDIATE BOSTON CITY CLUB Exhibit C Continued Balance Sheet As at December 31, 1920 Liabilities and Surplus Current Liabilities: Accounts Payable $ 23 324 94 Accrued Interest 7 572 66 Employees' Christmas Fund 14 235 77 War Tax Collections 10 425 73 Uncalled-for Wages 700 64 Total Current Liabilities Prepaid Annual Dues (To December 31, 1921) Reserve for Debenture Bonds 1908 and Interest Capital Liabilities: Mortgage Note $275 000 00 Debenture Bonds Due 1923 113 300 00 Debenture Bonds Due 1924 70 900 00 Total Capital Liabilities Surplus: Balance, January 1, 1920 $244 069 05 Add Net Profit for the year as per Profit and Loss Account Exhibit A Add Initiation Fees Transferred $ 56 259 74 102 233 33 408 51 459 200 00 Deduct Reserve for Depreciation on Real Estate Deduct Net Adjustment of Reserve for Doubtful Accounts Net Additions to Surplus Balance December 31, 1920 Total Liabilities and Surplus $56 901 64 11 720 00 $68 621 64 $11 720 00 1 081 54 12 801 54 55 820 10 299 889 15 $917 990 73 FINANCIAL STATEMENTS AND REPORTS 109 OS rH CO OS CO O rH t rH CO CD 1C O O O O O Q * CD CO O O O O t> rU OS CO 00 CO OS CO ^ rH O CO O O 00 CO f ^_ 1C rH OO CO CO O (N OS CO CO O O 1C O y O 1C t~ rH O (N Cl d CD CO CD t^ t>- ,_, bO M C c (3 73 0) CO fl C W >> ^3 CO '| =| '3 -Statement of S^ r "S g & Sfl 5 | | 73 3 j a - o rt 02 HH O 3 -c ^g-g a, a "8 - 1 1 fill i 1 .52 73 3 - 2 S 22 ^ " S ts W > ' os o >H t, os 3 2 43 3 03 ^ i-l -^73 a bf) rH^^, g fl ^ fl ^ co ^ a A g 0) Z a> << S PH co 5 S P S rH r-T CO t_ J ^Sl^^^TS 03 3 *s-37i^^|g 8 M eg ^3CO **cS i i(2ifii s 3 ? 1 ! II 73 73 03 03 fl fl o o ^S^^H.IPI toflaj-r-> S ooooooooocooic oooooooooooco ^^ CO rH O5 1C O O O O 1C rH 0) kJ i 1 0) ^fl rvjOOOoOrHiC^Ost^-COOt^- ioCDCOCOlNfNr^'-i^HOOCO 5QiCO5OcOi^5COO5OOOt~- 1C OS 1C O 1C O * CO d CO OS 1C CO * O OS X Cl p S H w p ffl GCiCOOOrH-^COiCoOCOlMcO ioOiCCllN O-^OOiiCt> t-.iCiC(NlC O 1C CO 'f > ! I s " (N 00 O OS CO i-H CO CD CO (N rH I- CO CO rH t> f/3 0: iC rS 5 "g jrHOOCOCO Cl rHCD O rH (N rH Tf r*H flj N rH rH 00 cc H 1 w 3 r , 2 03 O * Si T3 03 8 o 3 03 'P 3 S 73 03 I w S , *S > O CQ Bon nicipa lroad a u M R Misce Bank a I O 03 rS " OJ pis s S E R Loans on Mortgage Loans on Collateral Loans on Policies Premium Notes sec Cash in Bank at In " a) K O! 03 OQ p3 as 110 ACCOUNTING PROBLEMS: INTERMEDIATE THE MUTUAL INSURANCE COMPANY Statement of Income for the Year Ending December 31, 1921 Income Credits: New Premiums $ 2 711 699 85 Renewal Premiums 10 168 806 71 Total Premiums $12 340 506 56 Consideration for Instalment Contracts 139 116 85 Shares of Surplus Left on Deposit 12 973 60 Interest on Mortgage Loans 777 706 98 Interest and Dividends on Stocks and Bonds 2 023 313 02 Interest on Collateral Loajis 4 391 95 Interest on Bank Balances 25 498 24 Interest on Policy Loans and Premium Notes 692 212 55 Rents 125 142 72 Discount on Endowment Claims paid in Advance 286 76 Total Income $16 141 149 23 Expenses and Charges: Death Claims $ 3 562 483 37 Endowment Claims 850 477 26 Surrender Values 1 186 599 09 Shares of Surplus 2 211 102 12 Total Payments to Policyholders $ 7 810 661 84 Instalment Claims 92 578 47 Commissions, Agency and Medical Exp. 1 763 555 88 Salaries of Officers and Home Office Employees and Legal Expense 323 998 33 Insurance, Taxes, and License Fees 199 738 40 Printing, Stationery, Furniture and Supplies 82 984 45 Real Estate Taxes, Expense and Rent 140 730 23 Postage, Telephone, Telegraph, Travel, Express, Ex- change and Advertising 43 025 21 Miscellaneous, Unclassified 25 516 55 Total Expenses and Charges 10 482 789 36 Net Income FINANCIAL STATEMENTS AND REPORTS HI FORM XLIV. National Bank Balance Sheet. STATEMENT OF CONDITION March 4, 1918 Resources Loans and Discounts $226 921 469 12 Overdrafts, Secured and Unsecured 20 685 07 U. S. Certificates of Indebtedness 75 322 500 00 U. S. Liberty Bonds 12 589 957 51 Other Bonds and Securities 20 750 931 50 Stock of Federal Reserve Bank 1 200 000 00 U. S. and Other Bonds borrowed 21 100 000 00 Bonds Loaned 50 000 00 Banking House 2 000 000 00 Due from Banks and Bankers 8 448 141 53 Checks and Other Cash Items 2 018 509 26 Exchanges for Clearing House 33 244 835 05 Cash in Vault and Net Amount due from Federal Reserve Bank 37 108 823 24 Interest Accrued 1 240 456 35 Customers' Obligations % Bank's Contingent Liability 1 340 000 00 Customers' Liability under Letters of Credit and Accept- ances 41 312 346 46 $484 668 655 09 Liabilities Capital Stock paid in $25 000 000 00 Surplus Fund 15 000 000 00 Undivided Profits, less expenses and taxes paid 6 269 348 78 Reserved for Taxes, etc. 1 669 848 68 Dividends unpaid 23 080 50 Letters of Credit 14 892 813 49 Acceptances executed for Customers 26 602 970 40 Deposits 356 446 602 54 U. S. and Other Bonds borrowed 21 100 000 00 Unearned Discount 1 336 092 11 Rediscounts with Federal Reserve Bank 14 704 597 19 Liabilities other than those above stated 1 623 301 40 $484 668 655 09 112 ACCOUNTING PROBLEMS: INTERMEDIATE FORM XLV. A Massachusetts Trust Company Balance Sheets. A MASSACHUSETTS TRUST COMPANY Banking Department Assets United States Bonds $ 3 069 984 Massachusetts Bonds 391 Federal Reserve Bank Stock 450 000 Bonds deposited with U. S. Treasurer 461 000 Other Stocks and Bonds 11 837 612 Loans on Real Estate 3 181 179 Demand Loans with Collateral 13 987 681 Other Demand Loans 8 531 270 Time Loans with Collateral 14 723 395 Other Time Loans 62 542 935 Acceptances 10 225 796 Exchanges for Clearing House 5 587 230 Overdrafts 9 722 Banking House and Real Estate 3 070 619 Safe Deposit Vaults 276 918 Customers' Liability on Account of Notes Rediscounted 7 139 847 War Savings, Thrift and Revenue Stamps 5 507 Due from Federal Reserve Bank 15 992 401 Due from Other Banks 7 804 292 Cash: Currency and Specie 3 305 472 Other Cash Items 407 901 $172 611 149 Liabilities Capital Stock $ 7 000 000 Surplus Fund 9 000 000 Undivided Earnings, less Expenses, Interest and Taxes Paid 997 091 Deposits: Demand: Subject to Check 105 524 708 For Payment of Coupons, etc. 1 487 005 Certificates of Deposit 7 110 993 Certified Checks 906 630 Treasurer's Checks 3 773 578 Time: Certificates of Deposit not Payable within Thirty Days 1 Oil 289 Open Accounts not Payable within Thirty Days 1 805 418 Due to Reserve Banks 3 500 650 Due to Other Banks 6 773 644 Dividends Unpaid 77 775 Bills Payable, including Certificates of Deposit Representing Money Borrowed 4 500 000 Acceptances 10 831 735 Reserved for Taxes 662 655 Reserved for Depreciation 253 614 Reserved for Interest on Certificates of Deposit and Open Accounts 254 518 Notes Rediscounted 7 139 846 $172 611 149 FINANCIAL STATEMENTS AND REPORTS 113 Trust Department Assets United States Bonds $ 2 436 117 89 State Bonds 669 680 04 City, County and Town Bonds 4 052 793 25 Railroad Bonds 3 345 863 95 Street Railway Bonds 374 877 12 Miscellaneous Bonds 6 722 093 84 Bank Stocks 3 057 026 04 Railroad Stocks 6 187 199 64 Manufacturing Stocks 1 865 081 68 Miscellaneous Stocks 17 970 074 11 Loans on Real Estate 6 628 466 08 Loans with Collaterals or Sureties 88 445 25 Notes of Individuals 22 920 50 Notes of Corporations 404 403 54 Real Estate Owned 2 455 817 92 Real Estate Acquired by Foreclosure 21 999 31 Other Assets 370 408 16 Deposits in Savings Banks 374 798 49 Deposits in National Banks or Trust Companies 1 627 723 20 858 675 790 01 Liabilities On Trust Accounts $49 442 849 41 Income 550 331 13 As Executors, Administrators, etc. 8 362 928 91 Income 309 130 56 Income Investments 10 550 00 $58 675 790 01 Savings Department Assets Investments Authorized for Savings Banks: Public Funds S 12 500 00 Due from National Banks and Trust Companies 724 00 8 13 224 00 Liabilities Deposits 8 12 958 00 Interest, Rents, etc., less Current Expenses 266 00 $ 13 224 00 114 ACCOUNTING PROBLEMS: INTERMEDIATE FORM XL VI. A Massachusetts Savings Bank. A MASSACHUSETTS SAVINGS BANK Statement of Condition, October 31, 1919 Assets Public Funds, Bonds and Notes $10 409 692 39 Railroad Bonds and Notes 14 865 715 00 Street Railway Bonds 919 000 00 Boston Terminal Co. Bonds 960 000 00 American Tel. & Tel. Co. Bonds 1 084 281 25 Stocks of Banks and Trust Companies 418 650 00 372 Loans on Real Estate (average of each, $59,462.13) 22 119 911 00 250 Loans on Personal Security 7 476 890 00 Bankers' Acceptances 196 948 12 Bank Building and Fixtures (estimated value, $1,517,000; assessed value, $1,517,000) 570 000 00 Real Estate by Foreclosure, etc. (assessed value, $41,700) 31 690 18 Deposits in National Banks or Trust Companies 1 518 628 65 Cash and Cash Items 69 416 74 Total Assets $60 640 823 33 Liabilities Due Depositors on 102,820 Accounts, averaging $548.87 each $56 435 174 62 (Accounts opened during year, 8,918; closed, 8,760; increase, 158) Surplus: a. Guaranty Fund (4.97% of deposits; increase during year, $3,020) 2 803 500 Oo b. Profit and Loss (decrease during year, $44,100.86) 559 386 63 Current income: a. Interest $707 319 21 b. Rent 25 833 33 $733 152 54 Less Current expenses and rent not charged off 74 211 46 658 941 08 Deposits or Instalments Received on Sales of Liberty Loan Bonds 183 821 00 Total Liabilities $60 640 823 33 FINANCIAL STATEMENTS AND REPORTS 115 O Tt* O iO oo GO o rt CO CO T-H CO >-H O CO OO co o CD CO 00 S O "^ g" ,_J 0> m O 1C o O CO O O 00 O M Oi >-> tn 03 ' S . Sa ill o a *i "* 4) 02 2 S -2 g += ri h 5.S H I 8 s -a 5-0 C (3 3 o3 *r w O M O S+1 S g^ ^ wti^ <"-(-> . !-> S ei -i C 03 0) O 116 ACCOUNTING PROBLEMS: INTERMEDIATE FORM XLVin. Form of Audit Report Covering Audit of a Small Retail Business. CHARLES M. FURBUSH & COMPANY CERTIFIED PUBLIC ACCOUNTANTS BOSTON NEW YORK 89 STATE STREET 120 BROADWAY January 15, 1922 The Newton Mercantile Company 260 Center Street Boston, Massachusetts Gentlemen : In accordance with your instructions, we have made an examination of your books and accounts as of December 31, 1921, for the purpose of estab- lishing your assets and liabilities as at that date, and of preparing a state- ment of your financial operations for the year ended December 31, 1921. We submit the following statements, which are commented upon below: Exhibit A Balance Sheet, December 31, 1921. Exhibit B Profit and Loss Statement Year Ended December 31, 1921. Exhibit C Estimated Cash Requirements Six Months Ended June 31, 1922. Comments on the Balance Sheet We have verified the items shown on the appended Balance Sheet (Exhibit A), and have satisfied ourselves that it correctly sets forth the company's financial condition at December 31, 1921. The Accounts Receivable from Employees ($450.30) represents the balances due on account of sales by the company to Mr. Morris ($25.30) and Mr. Wallis ($425.00). A physical inventory of merchandise was taken as of December 31, 1921, and conservatively priced at cost or market, whichever was lower. In order to establish the true liability to creditors ($5,120.00) we found it necessary to check the individual accounts with creditors with their in- voices and statements, which had been erroneously brought onto the books less the cash discounts. The Notes Payable comprise the following: Date Payee Due Rate Amount 12/1/21 Newton Trust Company 2/1/22 7% $1 000 00 11/10/21 T. Lawrence Mayer 1/10/22 6% 1 200 00 9/1/21 Roderick N. Shaw 12/1/21 6% 500 00 We obtained independent verification from the Newton Trust Company of the note for $1,000 held by them. The notes due Mr. T. Lawrence Mayer and Mr. Roderick N. Shaw are as shown on the books, and have not been verified independently. FINANCIAL STATEMENTS AND REPORTS 117 Comments on the Operating Statement Although the operations for the year have resulted in a profit of only ".00, it must be borne in mind that the past year was the first year of the company's existence, that business conditions in general during the period have been bad, that undoubtedly losses have had to be taken on goods in stock due to the fall in prices of various articles, and that the inventory as of December 31, 1921, has been conservatively priced. A condensed summary of the operations for the year is as follows: Ratio to Amount Net Sales Net Sales $42 812 51 100 00% Cost of Sales 30 281 18 70 73 Gross Profit on Sales $12 531 33 29 27 Operating Expenses: Salaries $5 173 00 Rent (net) 2 500 00 Discounts 1 835 62 Other Expenses 2 000 67 Depreciation of Furniture and Fix- tures 153 08 11 662 37 27 24 Net Profit from Operations $ 868 96 2 03 Interest Charges (net) 68 96 16 Net Profit for the Year $ 800 00 T87 The above summary shows that the operating overhead for the past year has been too large in comparison with the business done, although it has been kept as low as possible under the existing conditions. Estimated Cash Requirements for Six Months Ended June 30, 1922 We have discussed with Mr. Shaw the outlook of the business for the next six months with a view to ascertaining the estimated cash requirements of the business for that period, and we submit, in Exhibit C appended, a state- me.nt setting forth these requirements. This estimate is based upon an anticipated business of approximately $25,000, for the six months' period, upon purchases being kept at a minimum, and upon every possible economy in operation. From the appended statement it will be noted that credit will have to be obtained in the amount of approximately $6,500 in order to carry the company through the winter months. This may be accomplished by Bank Loans or by purchases on credit payable during the six months following June 30, 1922. So far as current indebtedness is concerned, the company will thus be in approximately the same position six months hence as it was on Decem- ber 31, 1921. 118 ACCOUNTING PROBLEMS: INTERMEDIATE In conclusion, we desire to express our appreciation for the courtesy and attention extended to us during the progress of our work, and to express our willingness to be of assistance in giving you any further information you may desire regarding this report and the operation of your books of account. Respectfully submitted, (Signed) CHARLES M. FURBUSH & COMPANY, Certified Public Accountants. FINANCIAL STATEMENTS AND REPORTS 119 NEWTON MERCANTILE COMPANY Exhibit A Balance Sheet December 31, 1921 Assets Current Assets: Cash: In Bank $ 235 60 Petty Cash 125 10 Change Fund 15 00 $ 375 70 Accounts Receivable: From Customers Schedule I $4 238 60 From Employees 450 30 4 688 90 Merchandise Inventory 8 921 10 $13 985 70 Furniture and Fixtures (at cost) 586 20 Deferred Charges to Operations: Insurance Prepaid $ 135 00 Office Supplies on Hand 72 10 207 10 Total Assets $14 779 00 Liabilities, Reserves, and Capital Current Liabilities: Accounts Payable Schedule II $5 120 00 Notes Payable 2 700 00 Accrued Expenses 60 00 Accrued Interest on Notes Payable 42 80 $ 7 922 80 Reserves: For Loss on Bad Debts $ 428 70 For Depreciation on Furniture and Fixtures 627 50 1 056 20 Partners' Capital: T. Lawrence Mayer: Investment $2 500 00 Add 50% of profit for year (Exhibit B) 40000 $2 900 00 Roderick N. Shaw: Investment $2 500 00 Add 50% of profit for year (Exhibit B) 400 00 2 900 00 5 800 00 Total Liabilities, Reserves, and Capital $14 779 00 120 ACCOUNTING PROBLEMS: INTERMEDIATE NEWTON MERCANTILE COMPANY Exhibit B 1921 Profit and Loss Statement for Year Ended December 31, Net Sales Amount $42 812 51 042 08 160 20 Ratio to Net Sales 100.00% 70.73 Deduct Cost of Goods Sold: Inventory, January 1, 1921 $3 Net Purchases for the Year 36 Total Cost of Goods $39 Less Inventory, December 31, 1921 8 202 28 921 10 30 281 18 Gross Profit on Sales $12 531 33 173 00 200 00 835 62 225 50 521 80 162 75 91 62 153 08 12 363 37 29.27 28.81 Deduct Operating Expenses . Salaries $5 Rent 3 Discounts 1 Store Expenses 1 Advertising Stationery and Postage Insurance Depreciation of Furniture and Fix- tures Net Profit from Operations $ 167 96 700 00 8 20 14 92 723 12 .46 1.69 Add Other Income: Rental of Store Space $ Interest on Bank Balance Cash Variance Total Income $ 891 08 91 08 2.15 .21 Deduct Other Charges: Interest on Notes Payable Net Profit for the Year $ 800 00 $ 400 00 400 00 1.94 Distribution of Profit T. Lawrence Mayer 50% Roderick N. Shaw 50% $ 800 00 FINANCIAL STATEMENTS AND REPORTS 121 NEWTON MERCANTILE COMPANY Exhibit C Estimated Cash or Credit Requirements for Six Months Ended June 30, 1922 Cash on Hand January 1, 1922 $ 235 60 Estimated Cash Collections from Sales and Ac- counts Receivable $18 000 00 Estimated Disbursements: Accounts Payable and Accruals, De- ' cember 31, 1921 $5 222 80 Note Payable Newton Trust Com- pany, due February 1, 1922 1 000 00 Purchases 11 817 80 Salaries 2 575 00 Advertising 175 00 Rent 1 250 00 Insurance 50 00 Discounts 670 00 Store Expenses 500 00 Stationery and Postage 100 00 Interest on Notes Payable 75 00 Accounting Services 300 00 24 735 60 Excess of Estimated Disbursements over Estimated Receipts $6 735 60 Estimated Cash or Credit Requirements for the Six Months $6 500 00 122 ACCOUNTING PROBLEMS: INTERMEDIATE UNIFORM ACCOUNTING SYSTEMS FOR TRADE ASSO- CIATIONS Within recent years a large number of trade associations have made a study of accounting problems peculiar to their particular industry for the purpose of working out uniform systems for use by the members of the association. The following is a representative list of some of the associa- tions which have prepared and adopted uniform systems: Steel Barrel Manufacturers Association The American Boiler Manufacturing Association The American Face Brick Association The National Association of Box Manufacturers Folding Box Manufacturers National Association The National Association of Brass Manufacturers National Canners Association The Casket Manufacturers Association of America Portland Cement Association American Association of Pharmaceutical Chemists National Association of Finishers of Cotton Fabrics The National Cloak, Suit & Skirt Manufacturers Association National Coal Association National Confectioners' Association of the United States National Association of Dyers and Cleaners Electrical Manufacturers Council National Association of Electrical Contractors and Dealers Biscuit and Cracker Manufacturers Association of the United States The Steel Founders' Society of America American Foundrymen's Association National Foundrymen's Association National Association of Upholstered Furniture Manufacturers Heating and Piping Contractors National Association National Warm Air Heating and Ventilating Association National Association of Ice Industries National Implement and Vehicle Association of the United States of America Label Manufacturers National Association National Association of Employing Lithographers Lime Association Southern Sash, Door and Millwork Manufacturers Association North Carolina Pine Association West Coast Lumbermen's Association California White and Sugar Pine Manufacturing Association National Paint, and Oil Varnish Association American Photo-Engravers Association FINANCIAL STATEMENTS AND REPORTS 123 Writing Paper Manufacturers Association Cover Paper Manufacturers Association Newsprint Service Bureau United Typothetae of America Atlantic Coast Shipbuilders' Association Missouri Valley Association Sand and Gravel Producers National Association of Sheet and Tin Plate Manufacturers The Central Association of Stove Manufacturers National Association of Stove Manufacturers Truck Owners Conference, Inc. National Machine Tool Builders' Association The National Tent and Awning Manufacturers Association American Warehousemen's Association PART II CLASSIFIED PROBLEMS AND EXERCISES IN THEORY AND PRACTICE SECTION 1 CONSTRUCTION OF FINANCIAL STATEMENTS Group A Single Proprietorship Statements Problem 1 T. L. DAVIS Adjusted Trial Balance June 30, 1922 Cash on Hand and in Bank $ 2 540 00 Notes Receivable 7 250 00 Accounts Receivable 38 425 00 Interest Accrued on Notes Receivable 35 00 Merchandise Inventory, June 30, 1921 (cost) 165 900 00 Land (cost) 12 000 00 Store Building (book value) 50 000 00 Store Fixtures (book value) 1 680 00 Office Equipment (book value) 620 00 Delivery Equipment (book value) 2 400 00 Garage Supplies on Hand 140 00 Store and Office Supplies Unused 86 00 Advertising Matter on Hand 675 00 Insurance Prepaid 110 00 Accounts Payable $ 52 300 00 Notes Payable 75 000 00 Mortgage Payable 25 000 00 Interest Accrued on Notes Payable 125 00 Interest Accrued on Mortgage Payable 1 250 00 Salaries Accrued 320 00 Taxes Accrued 210 00 T. L. Davis, Capital 125 000 00 T. L. Davis, Current 7 590 00 Sales 541 250 00 Sales Returns and Allowances 5 420 00 Purchases 478 000 00 Purchase Returns and Allowances 2 160 00 127 128 ACCOUNTING PROBLEMS: INTERMEDIATE Adjusted Trial Balance June 30, 1922 Continued Freight, Express, and Cartage In $ 8 340 00 Salaries and Wages 22 000 00 Advertising 4 210 00 Heat and Light 950 00 Printing and Stationery 142 00 Postage and Supplies 290 00 Telephone and Telegrams 175 00 Taxes 1 680 00 Insurance 1 120 00 Freight Outward 186 00 Shipping Supplies 92 00 Automobile Expenses 2 830 00 Discounts on Purchases $ 3 225 00 Discounts on Sales 2 190 00 Interest on Notes Receivable 140 00 Interest on Notes Payable 4 200 00 Interest on Mortgage Payable 1 250 00 Depreciation of Building 1 200 00 Maintenance of Building 320 00 Depreciation of Equipment 500 00 Loss on Bad Debts 875 00 Interest on Bank Balances 62 00 Red Cross Donation 200 00 Collection Expenses 495 00 Sales of Boxes, Paper, and Waste 74 00 $826 116 00 $826 116 00 Inventory, June 30, 1922 $172 500 00 Required : (a) Balance sheet statement form, with current assets first (b) Profit and loss statement showing detailed expenses Comments. In preparing the balance sheet, use the following subheadings: Assets: Liabilities: Current Assets Current Liabilities Fixed Assets Fixed Liabilities Deferred Charges to Operations (See Form I) CLASSIFIED PROBLEMS AND EXERCISES 129 It has been Mr. Davis's practice not to carry any reserves on his books, but to credit the annual depreciation to the asset accounts. Such ac- counts, therefore, appear in the trial balance at the book or depreciated value. This is not the best practice. In setting up the profit and loss statement, show operating expenses hi detail. They are not to be departmentized. List them with the larger items first. (See Form II.) Special attention should be given to the form and arrangement of the statements. Observe carefully instructions regarding: Punctuation Capitalization Marginal indentations Underscoring Abbreviations Proper grouping of accounts Study the model Jorms 130 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 2 W. F. ZIEGLER Adjusted Trial Balance September 30, 1921 Land (cost) $ 12 250 00 Store Building (cost) 45 000 00 Reserve for Depreciation of Store Building $ 4 500 00 Store Equipment (cost) . 15 200 00 Reserve for Depreciation of Store Equipment 4 560 00 Office Equipment (cost) 2 670 00 Reserve for Depreciation of Office Equipment 800 00 Delivery Equipment (cost) 10 500 00 Reserve for Depreciation of Delivery Equip- ment 3 500 00 Cash in Banks 12 500 00 Petty Cash Fund ' 350 00 Notes Receivable 39 250 00 Notes Receivable Discounted 7 500 00 Interest Accrued on Notes Receivable 110 00 Accounts Receivable 120 310 00 Reserve for Loss on Bad Debts 1 160 00 Merchandise Inventory, 9/30/20 152 600 00 Interest Prepaid on Notes Payable Discounted 540 00 Insurance Prepaid 620 00 Garage Supplies on Hand 762 00 Office Supplies on Hand 249 00 Advertising Material on Hand 2 231 00 Interest Collected in Advance on Notes Re- ceivable 75 00 W. F. Ziegler, Capital 225 000 00 W. F. Ziegler, Current 2 968 00 Notes Payable 90 000 00 Accounts Payable 58 700 00 Mortgage Payable 25 000 00 Salaries and Wages Accrued 700 00 Taxes Accrued 2 310 00 Sales 650 125 00 Sales Returns and Allowances 7 580 00 Purchases 462 350 00 Purchase Returns 1 290 00 Discounts on Purchases 9 830 00 Loss on Bad Debts 2 100 00 Interest on Notes Receivable 320 00 Interest on Notes Payable 4 500 00 Interest on Mortgage Payable 1 500 00 Freight and Express In 18 230 00 CLASSIFIED PROBLEMS AND EXERCISES 131 Adjusted Trial Balance September 30, 1921 Continued Buying and Receiving Expenses $ 24 460 00 Selling Expense 104 450 00 Delivery Expense 14 320 00 Credit and Collection Expense 4 230 00 General Administrative Expense 15 280 00 Maintenance of Real Estate 8 260 00 $1 085 370 00 $1 085 370 00 Merchandise Inventory, September 30, 1921, $168,250. Required : (a) Balance sheet account form, with current assets first (b) Profit and loss statement Comments. Use only the primary subheadings in the balance sheet. (Form I.) The various reserves should be shown as deductions from the correlative asset accounts. (Form VI.) Notes Receivable Discounted should be shown as a deduction from the Notes Receivable account. Interest Collected in Advance on Notes Receivable will be shown as a current liability. Attention is called to the fact that only departmental expense accounts are shown in the trial balance. When this is done, it is usually customary to file with the profit and loss statement a summarized analysis of the various departmental items, setting forth the details of each. (See Form XXVIII.) Give careful attention to the technical details of the statements. 132 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 3 JAMES A. CROSBY Trial Balance, December 31, 1921 Land (cost) S 20 750 00 Wharves and Warehouses (book value) 12 625 00 Office Building (book value) 9 726 00 Horses, Wagons, and Equipment (book value) 4 221 40 Office Equipment (book value) 2 169 75 Cash 6 785 90 Accounts Receivable 149 678 40 Notes Receivable 2 560 00 Office Supplies on Hand 240 00 Inventory, December 31, 1920 (cost) 90 284 50 Accounts Payable $ 52 869 36 Notes Payable 40 000 00 Sales 734 432 46 Sales Returns and Allowances 12 738 60 Purchases 608 205 75 Purchase Returns and Allowances 14 768 91 Wages of Yardmen and Helpers 9 689 42 Stable Expenses 6 139 60 Selling Expenses 27 196 41 General Administrative Expenses 46 132 90 Interest on Notes Receivable 462 91 Loss on Bad Accounts and Notes Re- ceivable 1 624 00 Cash Discounts on Purchases 1 729 42 Cash Discounts on Sales 960 47 Interest on Notes Payable 400 00 James A. Crosby, Capital 170 842 10 James A. Crosby, Current 2 977 06 $1 015 105 16 $1 015 105 16 Inventory, December 31, 1921 $72 237 60 Required : (a) Balance sheet report form with fixed assets first (b) Profit and loss statement with detailed expenses (c) Mr. Crosby's business is a growing one, and he desires to expand it considerably. With this idea in mind he applies at his bank for a loan of $60,000 for the pur- chase of a lot of land adjoining his present property and CLASSIFIED PROBLEMS AXD EXERCISES 133 the erection of new structures. He submits the state- ments which you have just made as a basis for the loan. Would you, as credit manager of the bank, approve this loan? Give reasons for your answer. Comments. Mr. Crosby conducts a lumber business in Boston. The real estate consists of waterfront property and includes wharfage, office building, stable and sheds for the storage of lumber. The charges for freight and towing are added to the invoice cost of the lumber when it is received, and are charged directly to the purchases account, no account with Freight being kept. The yardmen and helpers unload and pile the lumber and load the teams when orders are filled. No basis of distribution being shown, this item will be carried as an operating expense. Stable expenses include stable supplies used, repairs to wagons, fodder, veterinary's charges, depreciation, and wages of drivers. No attempt need be made to classify the operating expenses. List them in order of their importance. (See Form II.) For the purposes of this problem you may base your answer to (c) on the working capital ratio or the ratio between current assets and current liabilities. The ratio of current assets to current liabilities should be at least two and one-half to one to warrant further extension of credit. The credit man would consider many other elements, but they will not be taken into account in solving this problem. 134 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 4 E. C. EWING Trial Balance, December 31, 1920 Land (cost) $ 3 000 00 Buildings (cost) 15 400 00 Horses and Wagons (cost) 2 950 00 Cash 3 469 70 Accounts Receivable 4 697 50 Notes Receivable 1 150 00 Merchandise on Hand, June 30, 1920 (cost) 3 674 95 Accounts Payable $ 4 627 70 Notes Payable 1 000 00 E. C. Ewing, Capital 20 600 00 E. C. Ewing, Drawings 600 00 Sales 434 50 20 221 85 Purchases 11 261 75 234 15 Freight Inward 326 30 Selling Expenses 1 716 40 Delivery Expenses 682 36 General Administrative Expenses 976 84 Insurance Prepaid 124 50 Interest Charges 96 87 Interest Earnings 129 67 Reserve for Depreciation of Buildings 3 080 00 Reserve for Depreciation of Horses and Wagons 590 00 Reserve for Loss of Bad Debts 78 30 S50 561 67 $50 561 67 Merchandise on Hand, December 31, 1920 (cost) $2 892 60 Make the proper provision for depreciation of buildings. Esti- mated life of buildings, twenty years. Charge General Admin- istrative Expense. Make the proper provision for depreciation of horses and wagons. Estimated life, ten years. The charge is to be divided equally between Freight Inward and Delivery Expenses. Mr. Ewing desires to set up a further reserve for losses on account of bad debts amounting to one per cent of the net sales for the period. Interest accrued to date on interest bearing notes payable, $24.50. Portion of cost of insurance policies applicable to the current period, $02.25. Charge General Administrative Expense. CLASSIFIED PROBLEMS AND EXERCISES 135 There are office supplies on hand which cost $34. When acquired these supplies were charged to General Administrative Expense. Required : (a) Adjusting entries (See Form IV) (b) Balance sheet current assets first (c) Profit and loss statement (d) The estimated life of the building is 20 years. On ap- proximately what date was it acquired? (e) Compute: (1) The turnover for the period (2) Rate per cent of gross profit on sales (3) Rate per cent of gross profit on cost of sales (4) Rate per cent of net profit on the average capital for the period. Comments. Mr. Ewing conducts a small retail business. Apparently he neither allows cash discounts on sales nor takes advantage of cash dis- counts offered by creditors; or, if such items do occur, they have been treated as direct deductions from Sales and Purchases, respectively. For convenience in making up the profit and loss statement the debit and credit footings of the Purchases and Sales accounts are shown instead of the balances of these accounts. The Purchases account has been charged with gross purchases and credited with purchase returns and allowances. The Sales account has been credited with gross sales and debited with sales returns and allowances. This information should be considered when drawing up the profit and loss statement. In the adjusting entries, when making debits or credits to expense ac- counts, care should be taken to use the expense accounts already on the books so far as is possible. In this case, general expense accounts only are kept in the general ledger; consequently, only these accounts should be used. New expense or income accounts should be opened only when adjusting extraneous items, and then only when the necessary accounts are not already on the books. Of course, when detailed expense accounts are kept in the general ledger they should be used in making the adjusting entries. The horses and wagons are used for both hauling inward and hauling outward. Consequently, expenses for repairs, teamsters' salaries, board- ing, depreciation, etc., should be divided between Hauling Inward and Delivery Expense. 136 ACCOUNTING PROBLEMS: INTERMEDIATE Group B Partnership Statements Problem 5 JONES & MARTIN Adjusted Trial Balance, June 30, 1920 Office Furniture (book value) $ 1 025 00 Store Furniture and Fixtures (book value) 3 970 00 Machinery (book value) 2 260 00 Cash 37 902 40 Imprest Cash Fund 250 00 Accounts Receivable 167 842 60 Amounts Due from Consignees 28 249 00 Notes Receivable 66 209 40 Interest Accrued on Notes Receivable 1 780 50 Merchandise on Hand, December 31, 1919 (cost) 160 263 75 Goods in Hands of Consignees (cost) 20 189 50 Insurance Prepaid 2 940 83 Stationery on Hand 540 00 Accounts Payable $ 160 290 40 Notes Payable 95 530 50 Interest Accrued on Notes Payable 1 650 80 Taxes Accrued 780 00 Sales 690 607 00 Sales Returns and Allowances 7 890 60 Purchases 532 738 00 Purchase Returns and Allowances 8 921 20 Freight Inward 2 769 80 Sales of Consigned Goods (gross profit) 26 170 80 Advertising 25 962 50 Salaries of Salesmen 47 580 00 Traveling Expenses 48 260 25 Deliver}- Expense 5 445 70 Miscellaneous Store Expense 6 699 22 Office Salaries 23 752 80 Office Supplies Used 19 260 50 Taxes and Insurance 5 326 70 Altering and Trimming Department Ex- penses 5 740 90 Commissions 24 236 50 Interest Earnings 5 290 00 Interest Charges 10 250 15 Cash Discounts on Purchases 4 659 00 Cash Discounts on Sales 1 769 80 E. J. Jones, Capital 194 460 00 CLASSIFIED PROBLEMS AND EXERCISES 137 Adjusted Trial Balance, June 30, 1920 Continued E. J. Jones, Current 19 763 00 F. C. Martin, Capital 98 346 70 F. C. Martin, Current 5 237 00 $1 280 706 40 SI 286 706 40 Merchandise on hand, June 30, 1920 (cost), $210,730. Required : (a) Profit and loss statement (b) Balance sheet account form (current assets first) (c) Write up the closing entries up to and including the point at which the gross trading profit is closed into the Profit and Loss account (omit explanations, but skip a line between each entry) (d) On July 15, 1920, the concern applied to the First National Bank for a loan of $50,000. Would you, as credit man for the bank, approve this loan, basing your decision on the statements just made up? Give reasons for your answer (e) The inventory of June 30, 1920, is stated at $210,730. Of this amount $1,680 was included as the proper pro- portional part of the altering and trimming depart- ment expenses for the period. Of the remaining $209,050 how much represents the invoice cost of the proper portion of freight inward? Comments. Messrs. Jones and Martin conduct a wholesale millinery business. They rent the second and third floors of a large building in the wholesale district of Boston. Profits are shared in the proportion of two- thirds to Mr. Jones and one-third to Mr. Martin. In this line of business there are two busy seasons, from January 15 to April 15, and from August 1 to October 1. The chances of goods sud- denly becoming more or less unsalable because of changing styles and the possibility of purchasing goods which will not appeal to the buying public are large. While profits are large they must necessarily be so, for the busy seasons must pay for the dull. If a business of this kind is well conducted, when the semi-annual statements are made out, the stock should be pretty well reduced and the business of the past season cleaned up in so far as possible. This is essential in order that the business may be in proper shape to start upon the activities of the approaching; season. The concern owns several sewing machines and other small machines which are used in remodeling and trimming hat?, either to suit the require- 138 ACCOUNTING PROBLEMS: INTERMEDIATE ments of purchasers or because certain styles have become unsalable. This work is carried on in a separate room. The expenses of this depart- ment, which include wages of operators, supplies used, etc., are charged to an account called "Altering and Trimming Department Expenses." Inas- much as these expenses affect the cost of the goods sold, they should be included in that part of the profit and loss statement which is used to arrive at the gross profit on sales. Presumably a certain proportion of these expenses is included in the cost of goods on hand. The concern makes a practice of sending out certain goods on consign- ment to be sold, on a commission basis, by the consignees. When a ship- ment of this kind takes place, an entry is made debiting "Goods in Hands of Consignees" and crediting "Purchases" for the cost of the goods shipped When the goods are reported sold, an entry is made crediting "Sales of Con- signed Goods" for the selling price, charging "Commission" for the com- mission charged by the consignee and "Amounts Due from Consignees" for the difference between the commission charged and the selling price. Another entry is then made debiting "Sales of Consigned Goods" and crediting "Goods in Hands of Consignees" for the cost of the goods sold. Cash received from consignees is credited to the "Amounts Due from Consignees" account through the Cash Book. The balance of the "Sales of Consigned Goods" account thus shows the gross profit on sales of con- signed goods. W'hen making up the profit and loss statement this figure should appear just below and as an addition to the gross profit on sales made by the home office in order to arrive at the total gross profit on sales. See Form VII for method of showing division of the net profit or loss for the period in the profit and loss statement. In preparing the balance sheet the balance of Goods in Hands of Con- signees account should appear just below Merchandise on Hand under current assets. See Form VI for arrangement of Capital section of balance sheet for a partnership. The Commission account will appear as an operating expense in the profit and loss statement. CLASSIFIED PROBLEMS AND EXERCISES 139 Problem 6 MERVILLE AND MORROW Trial Balance, September 30, 1920 (Before adjusting) Cash in Bank $ 1 520 00 Petty Cash Fund 100 00 Accounts Receivable 20 425 00 Reserve for Loss on Bad Accounts $ 272 00 Delivery Equipment (cost) 4 200 00 Reserve for Depreciation of Delivery Equip- ment 840 00 Office Equipment (cost) 3 500 00 Reserve for Depreciation of Office Equipment 350 00 Merchandise Inventory, September 30, 1919 8 106 00 Acceptances Receivable 13 140 00 Acceptances Receivable Discounted 5 800 00 Notes Payable Discounted 9 000 00 E. E. Merville, Loan 5 000 00 Accounts Payable 18 360 00 Salaries Accrued 540 00 E. E. Merville, Capital 10 000 00 W. C. Morrow, Capital 8 000 00 E. E. Merville, Current 1 850 00 W. C. Morrow, Current 1 575 00 Sales 165 225 00 Sales Returns and Allowances 3 304 00 Purchases 150 250 00 Freight and Cartage Inward 2 820 00 Purchase Returns and Allowances 2 165 00 Liability Insurance 195 00 Advertising 924 50 Office Salaries 3 820 00 Postage 190 00 Salaries of Salesmen 3 435 00 Printing and Stationery 125 00 Rent 3 500 00 Heating and Lighting 210 00 Legal Expense (collections) 50 00 Insurance on Stock and Fixtures 420 00 Interest on Bank Balance 9 50 Sales Discounts 2 602 70 Purchase Discounts 2 910 25 Interest on Notes Payable 105 00 Telephone and Telegrams 28 90 140 ACCOUNTING PROBLEMS: INTERMEDIATE Trial Balance, September 30, 1920 Continued Taxes $ 152 00 Sales of Junk $65 00 Cash Variance 2 55 Delivery Expense 1 353 00 Traveling Expenses 550 00 Sundry General Expenses 83 10 $228 536 75 $228 536 75 Merchandise Inventory, September 30, 1920 $9 875 00 The following information is to be considered in making such adjustments in the above accounts as may be necessary as of September 30, 1920: (1) Oil, tires, and other automobile supplies on hand, $243.75. (2) Unused postage, $16.10. (3) Salaries Accrued, $438. (4) Salaries of Salesmen includes advances on account of October salary, $125. (5) The notes payable owing at bank were discounted as follows: September 1, 1920, $5,000 payable in 2 months, dis- counted at 6%. September 10, 1920, $4,000 payable in 30 days, discounted at 6%. (6) The bank statement shows interest on balances not recorded, $5.20. (7) Goods amounting to $1,200 received from Siegel & Com- pany on September 30 have been taken into the inventory but do not appear on the books. (8) The insurance on stock and fixtures was taken out September 30, 1919, for a period of three years. (9) Rent is $100 in arrears. (10) Adjust the reserve for loss on bad accounts to an amount equivalent to 1H% of the sum due from customers. (11) Provide for depreciation as follows: Delivery equip- ment 20% per annum. Office equipment 10% per annum. (12) Profits and losses are to be shared in proportion to the original investments of the partners. Required : (a) Adjusting entries with complete particulars (b) Working sheet (Use twelve columns) CLASSIFIED PROBLEMS AND EXERCISES 141 (c) Balance sheet Account form (Form IX) (d) Profit and loss statement (list operating expenses separately). Comments. Assuming that September 30 is the close of the fiscal year, the journal entries will be set up in proper form and posted to the working sheet. (See Form IV.) See model of twelve-column working sheet on pages 22 and 23. (Form V.) Set up Interest Prepaid on Notes Payable Discounted account in adjust- ment (5). Charge this account and credit Interest on Notes Payable for the interest on Notes Payable from September 30 until due date of the notes. Cash Variance will be treated as an expense and shown as "Other Ex- penses" in the profit and loss statement, Problem 7 The firm of William Black & Company conducts a trading business at 500 Broadway, Syracuse, N. Y. The cashier has had general supervision of the bookkeeping, and having been in the employ of the firm a long time, in addition to the above duties, he has also acted in the capacity of confidential secretary. On the evening of the 31st of October, 1918, a fire was dis- covered in that part of the office where the books and filing system were located. The actions of the cashier on the following morning added color to the mysterious conflagration. An investigation revealed the startling fact that nearly all of the accounting records were destroyed. The cashier found it convenient to visit friends in another city. The members of the firm started an investi- gation. The work of gathering the available information and preparing such exhibits as may be possible, under the circum- stances, is placed in your hands. A rough copy of the Balance Sheet of December 31, 1917, is found in a dust-covered pigeon-hole. It reveals the following: Capital account, $22,500; real estate, $18,000; store fixtures, $1,500; office fixtures, $1,200; reserve for depreciation of store fixtures, $75; reserve for depreciation of office fixtures, $60; de- 142 ACCOUNTING PROBLEMS: INTERMEDIATE livery equipment, $700; reserve for depreciation of delivery equip- ment, $70; cash balance, $2,900; merchandise inventory, $11,400; due creditors, $2,243.10; due from customers, $1,865; notes receivable on hand, $4,690; notes payable outstanding, $2,540; mortgage payable, $14,000; interest payable accrued, $700; wages accrued, $350; insurance prepaid, $123.60; advertising prepaid, $200; expense accrued, $40.50. From various sources, the following information as to the business transacted between January 1, 1918, and October 31, 1918, was assembled: Purchases, $26,500; sales, $31,900; notes issued, $18,500; returns to creditors, $180; notes receivable from customers, $27,500; returns by customers, $220.50; interest paid, $1,000; wages paid, $7,290; expenses paid, $536; repairs to build- ing, $640; due from customers on open account, $2,444.50; due to creditors, $2,563.10; notes receivable on hand, $974.85; notes payable outstanding, $4,815; cash in safe, $176.92; pass book balance, $3,716; checks outstanding, $1,807.15. Merchandise inventory, October 31, 1918, $16,800; wages accrued, $145; interest receivable accrued, $95; interest payable accrued, $110; advertising prepaid, $38 ; insurance prepaid, $49.30. Increase the reserve for depreciation of store and office furni- ture 7%; delivery equipment 10%; and create a reserve for depreciation of real estate 2%, and for doubtful accounts 3% of the customers' balances. Required : A working sheet, profit and loss statement, and a balance sheet are suggested as proper means of reflecting the con- dition of the company's affairs as at the last date named. You will set them up in proper form. Comments. This problem illustrates a typical use of the working sheet where it becomes necessary not only to make adjustments at the close of the period but also to record current transactions which are missing because of the destruction of the records. Such items must be gathered from var- ious .sources. In this problem the first two columns of the working sheet may be used for the balance sheet as of December 31, 1917; the next two for current transactions, followed by two each for the trial balance as at the time of fire, adjustments as at October 31, 1918, adjusted trial balance, profit and loss items, and balance sheet items. Such an arrangement would necessi- tate the use of fourteen columns. The same purpose would be served by CLASSIFIED PROBLEMS AND EXERCISES 143 using one set of columns for both current transactions and adjustments and omitting the trial balance at the time of fire. Under this plan trading columns may be used if desired and but twelve columns would be required. The latter plan is recommended. From the information available it will be necessary to find by deduction certain cash items among the current transactions. For instance, the amount due from customers on open account as at October 31, 1918, is given at $2,444.50. Presumably this is the correct amount. From data available the balance due is found to be $6,044.50, found as follows: (Bal. Jan. 1, $1,865 plus Sales, $31,900) minus (Notes received, $27,500 plus returns, $220.50). Therefore, it may be assumed that the difference, or $3,600, was received in cash, for which an entry must be made as follows: Cash $3 600 Accounts Receivable $3 600 It will be necessary to handle Accounts Payable, Notes Payable, Notes Receivable and Cash in a similar manner. A convenient way of getting the proper balance is by setting up skeleton ledger accounts A final analysis of the Cash account will develop a cashier's shortage which may be carried as an asset or may be treated as a loss, depending upon whether the cashier is bonded, whether there is a possibility of the shortage being made good, or whether it is considered as a total loss. In any event the profit and loss statement should reflect the net profit or loss to date of fire, the shortage being shown at the end of the statement if treated as a loss. The balance sheet will be set up in the usual report form with items properly classified. 144 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 8 TAYLOR, WOOD AND COMPANY Trial Balance, September 30, 1920 F. H. Taylor, Capital $16 578 04 C. F. Woods, Capital 24 831 48 L. F. Johnson, Capital 2 602 03 F. C. Taylor, Drawing $100 00 C. F. Wood, Drawing 50 00 L. F. Johnson, Drawing 35 00 Notes Receivable 1 000 00 Interest 35 04 Accounts Receivable 10 740 46 Inventory, September 1 23 525 05 Shipping Supplies 196 50 Office Supplies 192 75 Insurance Unexpired 267 50 Horses and Wagons 742 50 Furniture and Fixtures 2 475 00 Real Estate 12 150 00 Notes Payable 5 000 00 Accounts Payable 7 181 84 Traveling Expenses 225 00 Rent 300 00 Discount 3 60 Freight Inward 47 59 Purchases 7 597 27 Wamsutta Mills Stock 1 150 00 Office Salaries 655 00 Shipping Department Salaries 65 00 Delivery Expenses 111 75 Sales 10 593 69 Discounts on Purchases 61 27 Discounts on Sales 112 43 Collection and Exchange 7 45 Returned Purchases 297 84 Returned Sales 172 20 Reserve for Bad Debts 121 60 Office Expenses 15 00 Cash 5 365 70 $67 302 79 $67 302 79 The above accounts are representative of a wholesale dry goods business conducted by three partners under the firm name of Taj'lor, Wood & Co. The trial balance covers a period of one month. CLASSIFIED PROBLEMS AND EXERCISES 145 The merchandise on hand September 30 amounts to $22,372.76; furniture and fixtures are valued at $2,450; horses and wagons, $735; insurance unexpired, $260; shipping supplies on hand, $93.25; office supplies on hand, $106.50; real estate, $12,250; Wamsutta Mills stock, $1,150. The note of the firm for $5,000 is a demand note issued September 26 and bearing interest at 6%; the note of $1,000 held by the firm was received on September 9 and bears interest at 6%. The real estate owned by the firm is a building at 74 Chestnut St., which cost $12,000, and which is occupied by a tenant. At the time of closing the books on August 31 the value of the prop- erty was increased to $12,250; on that date rent accrued for August of $100 was charged to the Real Estate account; Septem- ber 2, $200 rent was received from the tenant for August and September, which was credited to Real Estate, leaving the present balance of $12,150 The building occupied by the firm for business purposes is rented at $300 per month. The ten shares of Wamsutta Mills stock were bought on August 13 for $105 per share; the book value was increased August 31, at the time of closing the books, to $1,150. No dividend has been received on the stock. One per cent of the gross sales is to be set aside as a reserve for bad debts. By the terms of the partnership agreement, 6% interest is to be allowed each partner on his capital account. Taylor is allowed a monthly salary of $150; Wood, $200; Johnson, $225. The salary of each partner for September has been credited to the respective drawing accounts. An analysis of the Interest account shows interest accrued on notes receivable as of August 31, $12.75; interest accrued on notes payable, $166.67; interest paid during September, $208.33; interest received, $19.37. Required : (a) Adjusting entries (b) Profit and loss statement for September (c) Balance sheet account form (d) Closing entries skeleton form. 146 ACCOUNTING PROBLEMS: INTERMEDIATE Comments. The adjusting entries in the problem need careful attention. First, record the accrued interest on notes receivable and notes payable from date of each to September 30. The real estate should be carried at cost. The estimated increase in value should not appear on the books as a profit until the property has been disposed of at a profit. It will be necessary, therefore, to remove from this account the appreciation of $250. Charge this item to the partners and credit the Real Estate account. The rent items will also be removed from the Real Estate account and carried to the proper accounts. In like manner, the appreciation on Wamsutta Mills Stock will be charged to the partners and credited to the stock account. Fluctuations in market value of stocks should not be reflected in the ledger accounts. The profit or loss on the stock will be taken when the stock is disposed of. Figure the interest on the partners' capital for one month at 6% on the adjusted figures, after taking into consideration the above items. Salary accounts will be kept with partners. Therefore, September salary should be removed from the Drawing accounts, and transferred to the Salary accounts. An entry will be made to open detailed interest accounts as per analysis, and to close out the general interest account charged with $35.04. See Form III for method of setting up closing journal entries. CLASSIFIED PROBLEMS AND EXERCISES 147 Problem 9 Alexander, Brown, and Clark entered into a partnership agreement on January 1, 1920, their business being the operating of a dry goods store in Galesburg, Illinois. At December 31, 1920, the trial balance of the partnership, before making any adjustments, was as follows: Alexander, Capital $50 000 00 Brown, Capital 30 000 00 Clark, Capital 20 000 00 Merchandise Inventory, 1/1/20 $125 000 00 Accounts Receivable, Customers 75 000 00 Accounts Receivable, Employees 3 000 00 Cash in Bank 5 000 00 Cash on Hand 1 000 00 Notes Payable 60 000 00 Accounts Payable 15 000 00 Sales 500 000 00 Purchases, including Freight 323 000 00 Salaries and Store Expenses 125 000 00 Bad Debts Written Off 2 500 00 Interest Paid on Notes Payable 6 000 00 Alexander, Salary Paid 2 500 00 Brown, Salary Paid 4 000 00 Clark, Salary Paid 3 OOP 00 $675 000 00 $675 OOP 00 The following adjustments are to be made: (1) Interest at 6% per annum charged or credited to partners. Accept the amounts in capital accounts as being capital at Jan- uary 1, 1920. (2) Mr. Alexander owns the store and will be credited in monthly installments on first of each month (in advance) with $10,000 for rent. Interest at 6% per annum to be allowed on these credits. (3) Of the interest paid on notes payable, $2,000 applies to period subsequent to December 31, 1920. (4) Provide for unpaid taxes, $1,000; and for unpaid wages, $1,500. (5) A reserve of $1,500 is necessary for bad and doubtful accounts. (6) The inventory at December 31, 1920, is valued at $150,000. 148 ACCOUNTING PROBLEMS: INTERMEDIATE (7) Of the profits, if any, after giving effect to these adjust- ments, credit 10% to Bonus to Department Managers and Sales- men. The profits or losses are divisible in the following proportions: Alexander, 40%; Brown, 33^% 5 Clark, 26%%. Required : (a) Balance sheet as at December 31, 1920 (b) Profit and loss statement for the year 1920 (c) Statement of each partner's capital account, showing transactions for the year. (Adapted from Illinois C. P. A. Examination) Comments. The adjustments in this problem need careful attention. In (1) the item "Interest at 6% per annum charged or credited to partners" may be construed to mean that the interest on capital investment is not to be passed through the profit and loss account, but is to be adjusted directly through the capital accounts. In order to do this it will be necessary to find each partner's share of the interest charge on partner's capital accord- ing to the ratio in which profits are shared. If the partner's proportion of the interest charge is greater than the amount of interest due him on his capital investment, his capital account will be charged with the difference; if less, his capital account will be credited. Under this plan the aggregate net charges to certain partners will just equal the aggregate credits to others and will form the basis of the adjusting entry referred to above. In (2) find the aggregate time an installment of $10,000 would be on inter- est to be equivalent to $10,000 payable monthly. For instance, the first installment would bear interest for 12 months, the second for 11 months, etc. In (7) Bonus to Department Managers and Salesmen is in the nature of a liability, and if there should be any such item in this statement it would appear in the balance sheet as a liability in the same manner as wages accrued. CLASSIFIED PROBLEMS AND EXERCISES 149 Group C Corporation Statements Problem 10 From the following accounts, prepare a balance sheet that will exhibit a correct view of the net worth: Accounts Receivable $ 50 000 Accounts Payable 20 000 Bonds Outstanding 100 000 Cash on Hand 100 000 Common Stock Outstanding 100 000 Dividends on Preferred Stock Due and Unpaid 10 000 Inventories at Cost 10 000 Notes Receivable 5 000 Notes Payable 213 000 Plant Account (cost) 200 000 Preferred Stock Outstanding 100 000 Profit and Loss Account (debit balance) 126 000 Reserve for Depreciation 30 000 Reserve for Federal Taxes 2 000 Reserve for Shrinkage of Inventory Values 5 000 Reserve for Possible Loss in Accounts Receivable 1 000 Reserve for Bonds past due 10 000 Treasury Stock (common) 50 000 Treasury Stock (preferred) 50 000 Required : Balance sheet Report form Fixed assets first. (From North Carolina C. P. A. Examination) Comments. This problem is for the purpose of affording practice in the arrangement of a corporate balance sheet. Reference is made to Forms IX and XII for suggestions regarding form and arrangement. The capital items should be shown as the last group on the liability side, and it is recommended that the Treasury Stock be shown as a deduction from the stock outstanding. 150 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 11 THE SOMERTON MANUFACTURING COMPANY Trial Balance, December 31, 1921 . Cash in Bank $ 50 000 00 Imprest Cash Fund 350 00 Merchandise Inventory, January 1, 1921 95 760 00 Furniture and Equipment 18 200 00 Consigned Goods Account 12 750 00 Ajax Mining Stock, 3,000 shares, par $100 300 000 00 Premium Paid for Leasehold 25 000 00 Accounts Receivable 275 460 00 Accounts Payable $ 65 290 00 Notes Payable 20 000 00 Purchases 620 275 00 Sales Returns and Allowances 4 896 00 Sales 975 240 00 Wages 110 650 00 Rent 12 000 00 Taxes 3 865 00 Factory Expenses 45 385 00 Office Salaries 9 575 00 Sundry Expenses 22 860 00 Income from Investments 15 300 00 Capital Stock 400 000 00 Surplus, January 1, 1920 137 196 00 $1 613 026 00 $1 613 026 00 The above trial balance is taken at the close of the fiscal year before adjusting and closing entries have been made. The following items must be taken into consideration in making up the financial statements: (a) Leasehold was acquired January 1, 1921, and expires December 31, 1930. (b) Goods on hand, December 31, 1921, $95,900.' (c) Provision is made for discounts and bad debts to the extent of 5% of the balance of customers' accounts at the close of the period. (d) The notes payable are held by the bank. They were dis- counted on December 1, 1921, and fall due March 1, 1922. The discount at 6% was charged to Sundry Expenses when the notes were negotiated. CLASSIFIED PROBLEMS AND EXERCISES 151 (e) A dividend of 6% was declared on December 20, 1921, on the Ajax stock, payable January 10, 1922. (f) Provide for depreciation of furniture and equipment at 10%. (g) Wages accrued since the last pay day amount to $1,200 on December 31, 1921. (h) The directors have declared a 10% dividend payable to all stockholders of record on January 15, 1922. Required. (a) Necessary adjusting entries (b) Balance sheet as of December 31, 1921 report form (c) Profit and loss statement for year ending December 31, 1921. Comments. Consigned Goods account consists of goods consigned at cost to selling agents in New York City for sale on a commission basis. The cost of these goods amounted to $12,000, and charges on same have been paid to the amount of $750. No report has been received on these goods. The Leasehold Premium must be written off over the life of the lease. This company is engaged in the production of an assembled machine. They purchase all their parts from other manufacturers and assemble them for the market. The cost of the sales will therefore be represented by the Inventory, January 1, 1921, plus Purchases, Wages, Rent, Taxes, and Fac- tory Expenses, less Inventory, December 31, 1921. Problem 12 The directors of a manufacturing company submit the follow- ing trial balance to an accountant, requesting that he inform them as to what percentage of dividend they may safely declare out of the year's net income: Trial Balance December 31, 1922 Real Estate $94 000 00 Plant and Machinery 80 000 00 Patents and Good-Will 160 000 00 152 ACCOUNTING PROBLEMS: INTERMEDIATE Inventory, January 1, 1922 Purchases Labor Coal Salaries, General Salaries, Management Insurance Repairs Claims and Allowances Prepaid Freight (included in invoice price) Interest and Discount Cash Investments Miscellaneous Expenses Accounts Receivable Deficit, January 1, 1922 Capital Stock Sales Accounts Payable Notes Payable Dividends on Stocks Owned Rentals $58 000 00 165 000 00 176 000 00 12 000 00 22 000 00 10 000 00 1 750 00 2 000 00 12 500 00 3 000 00 1 500 00 16 000 00 31 000 00 8 600 00 84 000 00 2 000 00 $422 000 00 438 350 00 20 000 00 52 000 00 3 000 00 4 OOP 00 $939 350 00 $939 350 00 Inventory, December 31, 1921, $53,000. Four employees, A, B, C, and D, receive as additional salaries the following per- centages of the earnings measured by the net income: A, 25%; B, 12X%; C, 6^%; and D, 6tf%. Depreciation for the period of 6 months ending December 31, 1921, was not put upon the books. No additions have been made to the fixed assets within a year. Estimated discounts on the Accounts Receivable and Payable were not put upon the books January 1, 1922. These were, respectively, $400 and $750. The last two semi-annual dividends on preferred stock are unpaid. Required : (a) Balance sheet as of December 31, 1916 (b) Profit and loss statement for the year (c) What ratio of dividend would you recommend? (From New York C. P. A. Examination) Comments. This problem presents a few points somewhat out of the ordinary and should therefore be given careful study. While the statement CLASSIFIED PROBLEMS AND EXERCISES 153 is made that the last two semi-annual dividends on preferred stock are un- paid there is nothing in the problem to indicate how much of the capital stock is preferred stock. If the financial statement at the close of the period should show a surplus, it would be well to indicate the portion of such surplus applicable to preferred dividends before any other dividend could be declared. This cannot be done in this case. As there is no distinction made between raw materials and finished goods in the inventory, the cost of sales may be represented by the inventory, Janupry 1 plus purchases less inventory, December 31, and for the purpose of this problem, labor, coal, repairs, etc., may be treated as operating ex- penses. After finding the net profit an additional charge will be made for the bonus to A, B, C, and D. This may be deducted at the end of the profit and loss statement. The depreciation for the six months prior to December 31, 1921, should be brought on at a normal rate and charged to the Deficit, January 1, 1922. Current depreciation should also be provided for. Estimated discounts on the Accounts Receivable and Payable were not put upon the books January 1, 1922. While sales discounts are sometimes set up by charging anticipated Sales Discounts and crediting a Reserve for Sales Discounts, it is inadvisable to anticipate purchase discounts as this has the effect of anticipating profits. As accounts receivable are quite large some provision should be made for anticipated loss on bad debts. The item Prepaid Freight represents the amount due from customers for prepaid freight. Problem 13 The trial balance of the A. B. Co., on January 1, 1912, appears as follows: Cash $50 100 Reserve for Disc. Accts., Accts. Receivable, gross 400 000 Receivable, 1/1/11 $12 000 Notes Receivable 30000 Reserve for Disc. Mdse., Merchandise Inventory, Invty., 1/1/11 12 000 1/1/11, gross 240 000 Accts. Payable 90 000 Merchandise Purchases, Notes Payable 600 000 to 1/1/12 1 250 000 Sales 1 500 000 Prepaid Interest, 1/1/11 12500 Purchase Discounts, Col- Interest, paid to 1/1/12 36 000 lected on Settlements Expenses, paid to 1/1/12 156000 with Creditors 59500 154 ACCOUNTING PROBLEMS: INTERMEDIATE Reserve for Disc. Accts. Payable, 1/1/11 Bad debts, Charged off to 1/1/12 Returned Sales Custom- ers Salaries Taxes Plant Discounts Allowed Cus- tomers $ 4 000 2 500 100 000 20 000 5 000 250 000 51 900 $2 608 000 Reserve for Bad Debts, 1/1/11 $ 3 000 Mdse. Returned to Cred- itors, to 1/1/12 50 000 Collected on Accts. Charged to P. & L. in 1910 500 Credit Insurance, re- ceived on 1910 Losses 1 000 Profit A Loss, 1/1/11 55 000 Capital Stock 225 OOP $2 608 000 The following information is stated: Accounts Payable, January 1, 1911, Gross, $80,000. Accounts Receivable, January 1, 1911, Gross, $300,000. Notes Payable, January 1, 1911, $500,000. Interest paid at 5% to July 1, 1911. On July 1, 1911, $500,000 is renewed at 6% for 1 year and $100,000 additional is borrowed at same rate for one year. Inventory, January 1, 1912, $320,000 Gross Goods bought on terms of 5% 30 days. Goods sold on terms of 4% 30 days. Reserve for Bad Debts, January 1, 1912, to be 1% on Gross Accounts Receivable Required : (a) Necessary adjusting entries (b) Profit and loss statement (c) Balance sheet. (From Massachusetts C. P. A. Examination) Comments. This problem requires careful analytical reasoning. It i.s evident that the Reserve for Discount Accounts Receivable for $12.000 shown in the trial balance represents the amount set up January 1, 1911, being 4% of $300,000 accounts receivable on hand at that time. This has remained untouched throughout the year, the discounts allowed cus- tomers being charged to the account Discounts Allowed Customers, $51,900. An entry should be made closing the reserve against the Discounts Allowed Customers. A new reserve will then be created for Discounts on Accounts Receivable as of January 1, 1912 (4% of $400,000). The inventory of merchandise has been taken at invoice price. As the actual cost was 5% less, a reserve was set up January 1, 1911, for this amount (5% of $240,000). This reserve should now be closed out, bringing the inventory down to cost. An entry will then be made setting up the reserve as of January 1, 1912 (5% of $320,000). CLASSIFIED PROBLEMS AND EXERCISES 155 Purchase discounts have been handled in like manner. At the beginning of the year, Reserve for Discount Accounts Payable was charged with 5% of $80,000. The discounts taken during the year have been credited to Purchase Discounts instead of to the reserve account. Charge Purchase Discounts and credit the reserve account. Bad debts charged off during the year should be charged to the reserve account. Make proper entry to adjust and then set up reserve as of Jan- uary 1, 1912, to bring reserve up to 1% of accounts receivable as shown in trial balance. Interest is paid in advance to July 1, 1912, in the sum of $18,000. It will, therefore, be necessary to adjust Prepaid Interest account so as to show this amount. The statements will be set up in the usual form except that discounts allowed customers is deducted from sales and purchase discounts from pur- chases, instead of showing same after "Net Profit from Operations." Problem 14 Write a reply to the following letter, and prepare a balance sheet as requested therein: Dear Sir: Our bank has asked us for a statement for credit purpose. Will you please prepare one for us? Our plants stand at their cost price, which is $60,400. We have set up a reserve for a depreciation of $10,200. There is a mortgage for $20,000 on the plant and interest on the mortgage is at 6%, and is paid up to three months ago. We hold $10,000 of notes receivable, and have discounted $25,000 of notes with the bank. Our accounts receivable, which we consider good, amount to $18,000, including $3,000 due from one of our employees personal account. Our trade accounts receivable are subject to 5% dis- count if paid at due date, and only $1,000 is now past due. Our accounts in suspense amount to $4,000. I believe these are 50% good. We have ordered a new machine to cost $6,000, but it has not yet been delivered. We have endorsed a note for $6,000 for our friends, the A. B. Company, but I am confident they will take care of it when it is due. Our accounts payable amount to $4,200. Our insurance amounts to $400 a year, and has six months to run. We have a note at the bank for $5,000, interest paid to date. We own fifty shares of stock in the company from which we buy raw 156 ACCOUNTING PROBLEMS: INTERMEDIATE material. This stock cost us $2,800 and is surely worth it, though we might have difficulty in selling it in a hurry. Our inventory is taken at a low selling price, which is some 10% more than it cost us. The amount is $17,600. In addition, we have a special contract for one of our customers. The contract price is $25,000. We have spent $12,000 on it, and expect to have to spend $4,000 more, and we have received $10,000 on account. Our cash in bank is $4,800, and cash in hand, $200. I have told you all the facts I think you need. Perhaps some are not required, but I want to give the bankers all the information they ought to have in the way they expect to get it. I do not, of course, expect you to accept any responsibility for the fig- ures in the statement, but simply to prepare the statement in the best form you can from this letter. If you have any suggestions as to how I can better meet the bank's requirements, please let me have them. (Signed) R. P. JONES. Required : Prepare a balance sheet following the form recommended by the Federal Reserve Board. (Form XXXI.) (From American Institute Examination) Comments. Care should be used in handling the accounts receivable items. The trade accounts receivable amount to $15,000. Ot this amount, $1,000 is past due, leaving $14,000 not past due, and subject to a 5% dis- count. Set up a reserve for 5% of $14,000. This is perhaps more than will be taken, but it is better to overestimate this item than to under- estimate it. Inasmuch as the accounts receivable in suspense are esti- mated to be worth only 50%, a reserve should be created for the $2,000 not considered good. Show order for machine as a footnote to the balance sheet. Handle the contingent liability on account of endorsement in the same manner. The merchandise inventory must be reduced to cost figures. In handling the contract, it is considered better accounting not to antici- pate profits until completed. Carry as an asset the net amount expended on account of contract. The details may be shown in parentheses. CLASSIFIED PROBLEMS AND EXERCISES 157 Problem 15 From the following trial balance of the Sampson Company, December 31, 1919, after closing, prepare a statement of financial condition, such as might be presented to bankers: Debits Prepaid Insurance ] Plant Property Notes Receivable Finished Goods Patents, Trade-Marks and Good-will Prepaid Interest Goods in Process Cash Advances to Salesmen Materials and Supplies Treasury Preferred Stock Customers 1 850 350 000 16 500 47 800 500 000 525 53 750 52 425 750 25 500 5 000 145 900 $1 200 000 Credits Reserve for Customers' Discounts $ 13 500 Notes Payable 35 000 Surplus Capital 240 000 Profit and Loss 243 650 Reserve for Credit Losses 15 000 Accounts Payable 62 000 Reserve for Deprecia- tion of Plant Property 85 000 Salaries and Wages Pay- able 2 350 Preferred Stock* 100 000 Common Stockf 400 000 Dividends Payable 2 000 Accrued Taxes Payable 1 500 $1 200 000 * 1,000 shares, par value $100 each, preferred as to assets and dividends, t 80,000 shares of no par value, issued at a stated value of $5.00 a share. Required : Set up a balance sheet using as a model the form recom- mended in the bulletin of the Federal Reserve Board: "Approved Methods for the Preparation of Balance Sheet Statements" (See Form XXXI). (From American Institute Examination) 158 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 16 Y AND Z COMPANY Trial Balance July 1, 1920 Cash $ 4 005 07 Accounts Receivable 250 317 02 Real Estate 16 520 00 Merchandise Inventory, January 1, 1920 210 319 07 Discounts Allowed Customers 35 318 72 Bad Debts Charged Off 4 414 84 Merchandise Purchases 738 898 43 Expenses 47 397 80 Notes Receivable 1 436 11 Machinery 3 780 00 Sales $ 916 389 04 Accounts Payable, Merchandise 175 119 28 Notes Payable 42 500 00 Discounts Received on Merchandise Settle- ments 29 320 16 Capital Stock 125 000 00 Surplus 24 078 58 $1 312 407 06 $1 312 407 06 You are asked by a creditor to examine the books of the Y and Z Company and present a balance sheet as of July 1, 1920, together with a profit and loss statement, showing the results of the business for the preceding six months. On January 1, 1920, the merchandise inventory was $210,319.07 and on July 1, 1920, it was $110,318.67. You find these amounts in accordance with the stock sheets turned over to the book- keeper by the stock clerk. On January 1, 1920, the accounts receivable were $216,895.98, and on July 1, 1920, they were $250,317.02, and on January 1, 1920, the merchandise accounts payable were $22,524.05, and on July 1, 1920, they were $175,119.28; you find that the totals of the customers' and creditors' accounts on the sales and pur- chases ledgers on these dates are in agreement with the controlling accounts. Prepare statements which in your opinion will correctly rep- resent the condition of this company, and which give the creditor a true statement of its earning capacity for this period. CLASSIFIED PROBLEMS AND EXERCISES 159 Required : (a) Balance sheet as of July 1, 1920 (b) Profit and loss statement for six months ending July 1, 1920. (From Massachusetts C. P. A. Examination) Comments. The inventory figures and the amount due from customers and to creditors both at the beginning and the close of the period are apparently for comparative purposes. There is insufficient data furnished to enable us to reconcile the balances of accounts receivable and accounts payable at the beginning of the period with the balances at the end. Both inventory figures will be used in the statements while the accounts receivable and accounts payable balances on January 1 may be ignored. The amount due from customers shows a slight increase while the amount due creditors has increased eight-fold. The inventory shows a shrinkage of $100,000. The cash seems rather small in comparison with the large amount due creditors. The stock has been turned a trifle more than five times. Approximately one-fourth of the sales are as yet unpaid; therefore, the average term of credit must be 90 days. The discounts allowed by cus- tomers amount to almost 4% of the sales. This seems like a large discount item for sales made on a 90-day basis. 160 ACCOUNTING PROBLEMS: INTERMEDIATE Group D Manufacturing Statements Problem 17 From the following items prepare the operating statement of the A Manufacturing Company for the fiscal year ending June 30, 1919. Your statement should clearly set forth the cost of goods made, cost of goods sold, selling expenses, etc. Advertising $6 000 00 Association Membership Dues 200 00 Cash Discount on Purchases 3 900 00 Cash Discount on Sales 2 100 00 Commissions Paid 7 750 00 Depreciation, Machinery and Equipment 3 750 00 Depreciation on Buildings 3 600 00 Direct Labor 135 000 00 Dividends Paid 10 000 00 Dividends Received on Stocks 1 500 00 Donations and Charity 300 00 Factory General Expense 1 200 00 Factory Office Salaries 7 000 00 Factory Supplies 900 00 Federal Income, Profits and Taxes 20 000 00 Heat, Light, and Power 4 000 00 Insurance, Fire 1 000 00 Insurance, Life (President's Life) 500 00 Interest on Bonds Payable 3 500 00 Interest on Notes Receivable 900 00 Interest on Notes Payable 1 600 00 Interest on Bonds Owned 1 400 00 Officers' Salaries 25 000 00 Office Salaries 9 500 00 Postage 2 100 00 Property Taxes 3 750 00 Raw Material Consumed 110 000 00 Repairs to Machinery and Equipment 1 250 00 Returned Sales 5 000 00 Sales 605 000 00 Salesmen's Salaries 21 000 00 Stationery and Printing 3 700 00 Subscription to Trade Papers 25 00 Superintendent of Factory 11 000 00 Telephone and Telegraph 1 900 00 Traveling Expense 4 500 00 Sundry General Expense 1 250 00 CLASSIFIED PROBLEMS AND EXERCISES 161 The inventories of finished goods and work in process are as follows: July 1, 1918 June 30,1919 Finished Goods $35 000 00 $40 000 00 Work in Process 52 200 00 25 400 00 Required I (a) Statement of cost of goods manufactured for year end- ing June 30, 1919 (b) Profit and loss statement for year ending June 30, 1919. (From Wisconsin C. P. A. Examination) Comments. An operating statement only is called for in this problem, the figures submitted being only such as are required for such purpose. While all the data submitted in this problem might be included in one operating statement headed " Manufacturing, Trading and Profit and Loss Statement," or some such title, especially as many of the manufacturing details are omitted, it is usually considered better practice to set up two statements, one for the purpose of showing the cost of the manufactured product for the period (Forms XIV and XVI), the result of which is then transferred to a profit and loss statement in the usual form (Form XIII). The requirements in this problem call for such statements. Include in the Analysis of Cost of Goods Manufactured Statement all items that have to do directly with the manufacturing process. Inasmuch as the details concerning raw materials are not given, only the amount con- sumed can be shown in the statement. Items that represent both admin- istrative and factory expenses, and for which no basis of apportionment is given, such as Property Taxes, etc., may be included in the manufactur- ing statement. Selling, administrative and financial items will be shown in the profit and loss statement in the usual form (Form XIII). Federal Income Taxes will be shown as a separate deduction from the net income before providing for Federal Taxes. (See Form X.) Problem 18 From the following accounts appearing on the trial balance, prepare, without using figures, statements which you consider best calculated to set forth the operations of the year and the 162 ACCOUNTING PROBLEMS: INTERMEDIATE financial position r,t December 31, 1916, assuming that you are preparing these statements on behalf of a bank which desires paper available for rediscount with the federal reserve bank. Accounts Payable Accounts Receivable Advertising Buildings Capital Stock Capital Stock Unsubscribed Cash on Deposit Depreciation, Buildings, 1916 Depreciation, Machinery, 1916 Discount Allowed on Sales Discount Received on Purchases Doubtful Accounts Receivable Factory Expense Finished Goods Inventory, December 31, 1915 Freight and Cartage Inward Freight and Cartage Outward Fuel Good-Will Insurance, Buildings and Machinery Insurance, Finished Goods Insurance Unexpired, Buildings and Machinery Petty Cash Insurance Unexpired, Finished Goods Interest Accrued on Investments Interest Accrued on Mortgage Pay- able Interest Paid Interest Received Investments Labor Factory Payroll Land Machinery The inventories, December 31, 1916, not on the books were: Finished goods Material work in process Required : Balance sheet account form. (From American Institute Examination) Comments. Follow as closely as possible form recommended by Federal Reserve Board for use of member banks. (Form XXXI.) Material Inventory, 12/31/15 Material Purchases Mortgage on Plant Notes Payable Notes Receivable Office Expenses Commissions Paid Salesmen Office Furniture and Fixtures Office Payroll Organization Expenses (to be dis- tributed over three years from January 1, 1916) Payroll Factory Accrued Payroll Office Accrued Salaries General Officers Prepaid Taxes and Real Estate Profit and Loss, 1915 Surplus Repairs, Buildings Repairs, Machinery Reserve for Bad and Doubtful Ac- counts Reserve for Depreciation, Buildings Reserve for Depreciation, Machinery Returns and Allowances on Sales Salaries Salesmen Sales Salesmen Accounts Advances on Salaries Taxes, Income U. S. Subscriptions and Donations Taxes, Real Estate Work in Process Inventory, Decem- ber 31, 1915 CLASSIFIED PROBLEMS AND EXERCISES 163 Problem 19 MACFARLANE MANUFACTURING COMPANY Trial Balance April 30, 1916 Land and Buildings (cost) $ 68 000 00 Machinery and Equipment (cost) 36 800 00 Office Furniture and Fixtures (cost) 12 300 00 Sales Room Equipment (cost) 9 840 00 Factory Tools and Supplies (on hand Dec. 31, 1915) 834 00 Cash 2 960 00 Accounts Receivable 43 680 39 Subscriptions to Capital Stock Common 8 000 00 Securities Owned (cost) 12 500 00 Good-Will 10 000 00 Patent Rights 8 400 00 Raw Materials (on hand Dec. 31, 1915, $15,- 432.60; purchases, $46,380.40) 61 813 00 Manufacturing (in process Dec. 31, 1915) 20 268 80 Finished Goods (on hand Dec. 31, 1915) 36 261 15 Bond Discount and Expenses 9 000 00 First Mortgage Bonds $70 000 00 Accounts Payable 17 576 16 Capital Stock Preferred (authorized issue, 1,000 shares, par $100 each) 70 000 00 Capital Stock Common (authorized issue, 2,000 shares, par $100 each) 85 000 00 Surplus (undivided profits, Dec. 31, 1915) 13 869 20 Capital Stock Common, Subscribed 16 000 00 Sales of Finished Goods 85 239 41 Salesmen's Salaries and Expenses 8 269 40 Delivery Expenses 3 732 89 Office Clerks' Salaries 5 321 76 General Office Supplies Used 1 869 30 Taxes 486 00 Insurance 1 240 00 Direct Labor 14 178 32 Indirect Labor 5 650 00 Factory Heat, Light, and Power 2 730 46 Reserve for Depreciation of Buildings 15 000 00 Reserve for Depreciation of Machinery and Equipment 7 682 40 Reserve for Depreciation of Office Equipment 2 800 00 Reserve for Depreciation of Sales Room Equip- ment 968 30 135 47 $384 135 47 164 ACCOUNTING PROBLEMS: INTERMEDIATE Adjustments: Cost of buildings, $45,000; estimated life, 30 years. Estimated life of machinery and equipment, 8 years. Estimated life of office furniture and fixtures, 10 years. Estimated life of salesroom equipment, 10 years. Factory tools and supplies on hand, April 30, 1916, $500. The first mortgage bonds were issued January 1, 1916, and mature January 1, 1926. The bond discount and expenses are to be written off over that time. The bonds bear interest at the rate of 6% per annum, payable January 1 and July 1. Insurance prepaid, $620. Raw materials on hand, April 30, 1916 $10 400 00 Goods in process, April 30, 1916 36 126 50 Finished goods on hand, April 30, 1916 28 740 80 Required: (a) Adjusting entries (b) Manufacturing statement (c) Profit and loss statement (d) Balance sheet account form (e) Closing entries. Comments. Give careful attention to Illustrative Forms for suggestions regarding arrangement of the balance sheet and statements. Problem 20 Thompson and Brown are partners operating under the name of Thompson and Company. The following is a trial balance of the partnership books at December 31, 1920: Cash $ 103 000 00 Accounts Receivable 187 000 00 Notes Receivable 10 000 00 Land 50 000 00 Buildings 200 000 00 Machinery and Tools 300 000 00 CLASSIFIED PROBLEMS AND EXERCISES 165 Office Furniture Factory Fixtures Good-Will Work in Process, Inventory, 1/1/20 Raw Materials, Inventory, 1/1/20 Raw Materials Purchased Productive Labor Non-Productive Labor Insurance Factory Taxes Factory Repairs Machinery Repairs Building, Factory Repairs Office Fixtures Manufacturing Supplies Salesmen's Salaries Salesmen's Expenses Salesmen's Commissions Advertising Freight Out Cartage Out Packing Supplies Packing Labor Office Salaries Clerks Office Stationery Cost Department Salaries Factory Stationery Postage Office Telephone Telegrams Donations Legal Expenses Auditing Miscellaneous Factory Expenses Miscellaneous General Expenses Interest Paid Heat, Light, and Power Reserve for Depreciation Cash Discount on Sales Allowances on Sales Interest Earned Cash Discount on Purchases Sales Accounts Payable Notes Payable C. W. Thompson Capital J. R. Brown Capital C. W. Thompson Drawing J. R. Brown Drawing $ 10 000 00 20 000 00 100 000 00 100 000 00 75 000 00 300 000 00 200 000 00 100 000 00 10 000 00 5 000 00 12 000 00 2 000 00 500 00 7 000 00 20 000 00 12 000 00 10 000 00 50 000 00 10 000 00 2 000 00 4 000 00 10 000 00 15 000 00 3 000 00 12 000 00 3 000 00 6 000 00 4 000 00 500 00 1 000 00 1 000 00 5 000 00 10 000 00 2 000 00 24 000 00 7 000 00 37 000 00 $ 80 000 00 1 500 00 10 500 00 879 359 28 92 640 72 100 000 00 100 000 00 800 000 00 14 000 00 10 OOP 00 $2 064 000 00 $2 064 000 00 166 ACCOUNTING PROBLEMS: INTERMEDIATE The inventories at December 31, 1920, were as follows: Raw Materials $125 000 00 Manufacturing Supplies 2 000 00 Packing Supplies 2 000 00 Prepaid Insurance 1 000 00 Advertising 5 000 00 Office Stationery 1 000 00 Accrued Interest Notes Receivable 500 00 Work in Process 200 000 00 You are to make provision for the following: Depreciation : Buildings 3% Machinery and Tools 10% Factory Fixtures 10% Office Fixtures 10% Taxes accrued and unpaid December 31, 1920 $ 3 000 00 Accrued Productive Labor 3 000 00 Accrued Non-Productive Labor 1 000 00 Accrued Salaries of Salesmen 500 00 Accrued Commissions of Salesmen 10 000 00 Bad Debts to be written off 3 000 00 Accrued Interest Notes Payable 500 00 The partnership agreement provides that 6% interest on capital is to be credited to each partner's account arid profits are to be divided, Thompson 60% and Brown 40% respectively. Brown is to receive a salary of $10,000 and Thompson a salary of $6,000. The salaries had not been credited to their accounts at December 31, 1920. Required : (a) Adjusting entries in proper form (b) Balance sheet account form (c) Profit and loss statement (d) Cost of goods manufactured statement. (From Ohio C. P. A. Examination.) CLASSIFIED PROBLEMS AND EXERCISES 167 Problem 21 The Bond Machine Manufacturing Company commenced business January 1, 1919, with a paid-up capital of $800,000. The following is a trial balance of the general ledger at December 31, 1919: Cash $10 000 00 Accounts Receivable 100 000 00 Notes Receivable 13 000 00 Liberty Bonds 100 000 00 Land 25 000 00 Factory Buildings 150 000 00 Machinery and Tools 250 000 00 Office Furniture 5 000 00 Factory Fixtures 15 000 00 Good- Will 200 000 00 Raw Materials 350 090 00 Productive Labor 213 000 00 Non-Productive Labor 87 000 00 Insurance, Factory 6 000 00 Taxes, Factory 4 000 00 Heat, Light, and Power, Factory 20 000 00 Repairs, Machinery 32 000 00 Repairs, Office Furniture 300 00 Repairs, Buildings, Factory 6 000 00 Manufacturing Supplies 6 590 00 Salesmen's Salaries 30 000 00 Salesmen's Expenses 20 000 00 Salesmen's Commissions 26 000 00 Advertising 25 000 00 Freight Out 12 000 00 Cartage Out 3 000 00 Packing Supplies 6 000 00 Packing Labor 4 000 00 Office Salaries (Clerks) 12 000 00 Office Stationery 4 000 00 Cost Department Salaries 10 000 00 Factory Stationery 2 000 00 Postage (Office) 3 000 00 Telephone and Telegraph 3 000 00 Donations 5 000 00 Legal Expenses 1 000 00 Auditing 1 000 00 Miscellaneous Factory Expenses 3 000 00 Miscellaneous General Expenses 4 000 00 Interest on Own Bonds 3 000 00 Interest on Notes Payable 900 00 168 ACCOUNTING PROBLEMS: INTERMEDIATE Cash Discount on Sales Allowances on Sales Executive Salaries Interest on Notes Receivable Interest on Liberty Bonds Interest on Bank Balance Cash Discount on Purchases Sales Capital Stock Mortgage Bonds Accounts Payable Notes Payable $ 5 000 00 3 000 00 40 000 00 $1 000 00 2 000 00 1 000 00 7 000 00 759 119 00 800 000 00 100 000 00 128 761 00 20 000 00 818 880 00 $1 818 880 00 The inventories at December 31, 1919, were as follows: Raw Materials Manufacturing Supplies Packing Supplies Prepaid Insurance Advertising Office Stationery Accrued Interest on Notes Receivable Accrued Interest on Liberty Bonds Work in Process $75 000 00 1 500 00 1 000 00 2 000 00 3 000 00 500 00 240 00 2 000 00 150 000 00 You are to make provision for the following: Depreciation: Buildings Machinery and Tools Factory Fixtures Office Fixtures Taxes Accrued and Unpaid, 12/31/19 Accrued Productive Labor Accrued Non-Productive Labor Accrued Salaries of Salesmen Accrued Commissions of Salesmen Bad Debts to be written off Accrued Interest on Notes Payable 3% 10 10 10 $4 000 00 000 00 000 00 500 00 000 00 040 00 300 00 Of the total non-productive labor, $10,000 was for repairing machinery. There was expended on new machinery, built for own use and installed during the year, $4,000 for materials and $0,000 for productive labor. None of these expenditures were charged out. CLASSIFIED PROBLEMS AND EXERCISES 169 Executive salaries are to be divided as follows: 30% to selling expenses, 20% to manufacturing expenses, and the balance to administrative expenses. Required : (a) Necessary adjusting entries (b) Balance sheet account form (c) Profit and loss statement (d) Cost of goods manufactured statement. (From Ohio C. P. A. Examination) Problem 22 The following is the balance sheet of the A. B. Company January 1, 1915: Assets Cash $52 864 00 Accounts Receivable 197 425 00 Inventories: Raw Material 84 268 00 Finished Goods 31 597 00 Office Furniture and Fixtures 7 500 00 Land 180 000 00 Buildings 150 000 00 Machinery 250 OOP 00 $953 654 00 Liabilities Accounts Payable $35 482 00 Dividends Payable, Preferred Stock, February 1, 1915 7 500 00 Dividends Payable, Common Stock, February 1, 1915 10 000 00 Mortgage Bonds, 20-year at 6%, dated January 1, 1915 100 000 00 Premium on Bonds 5 000 CO Capital Stock, Preferred 250 000 00 Capital Stock, Common 500 000 00 Reserve for Bad Debts 4 718 00 Surplus 40 954 00 $953 654 00 170 ACCOUNTING PROBLEMS: INTERMEDIATE The transactions for the year ending January 1, 1916, have been as follows : Cash Received from Customers $793 501 00 Rent Received 60 There have been purchased 1,232,000 pounds raw material at 20c per pound Sales have been made 823 334 00 Discount and Allowances on Sales 23 519 00 Bad Debts Written Off 2 143 00 Disbursements have been made for: Accounts Payable 243 356 00 Factory Expense 7 489 00 Factory Labor 351 426 00 Factory Repairs Office Expense 1 927 00 Selling Expense 52 914 00 Salaries 58 471 00 Taxes 7 853 00 Inventories, January 1, 1916: Raw material, 412,595 pounds having a market value of 22c per pound; and finished goods, $30,842. The land is estimated to be worth $200,000. Semi-annual dividends of 3% on Preferred and 2% on Common declared in June and December, payable August 1 and Febru- ary 1. Reserves for depreciation of buildings, 3%; machinery, 5%; office furniture and fixtures, 10%. Bad and doubtful debts reserve should be 2% of accounts receivable. Required : (a) Balance sheet as of January 1, 1916 (b) Profit and loss statement for year ending December 31, 1916 (c) Statement of cost of goods manufactured for period. (From the American Institute Examination) Comments. It will be necessary to bring into the accounts the trans- actions of the year beginning January 1, 1915, in order to obtain the balances with which to make up the statements called for. It is suggested that these entries be carried directly to a working sheet and an adjusted trial balance taken as of December 31, 1915. This working sheet need not be submitted with the solution. Proper charge should be made for bond interest for one year. Write off 1 /20 of the Bond Premium. The balance will be carried as a deferred credit in the balance sheet. It mav be assumed that the semi-annual bond interest CLASSIFIED PROBLEMS AND EXERCISES 171 of $3,000 was paid on July 1, 1915, the due date if the interest is payable semi-annually as is customary. The inventory of raw materials on January 1, 1916, should be taken at cost rather than market, the former being the lower. The estimated value of the land, $200,000, as of January 1, 1916, may be shown short in the balance sheet in parentheses to indicate the present value, but the apprecia, tion should not be extended to the asset column. While there is no record that the dividends payable February 1, 1915- and shown in the balance sheet of that date as a liability have been paid, it may be assumed that they were paid on that date. It may also be assumed that the June dividends, payable August 1, have been paid. The December 1915 dividends, payable February 1, 1916, will be shown as liabilities. Problem 23 At the close of its fiscal year, December 31, 1915, the Trial Balance of The Nau-Pace Company was as follows: Real Estate Fixed Machinery Movable Equipment Shaftings, Pulleys, etc. Stable Equipment Office Equipment Drawings and Patterns Patents Capital Stock First Mortgage Bonds Profit and Loss Surplus Dividends Interest on Bonds Other Interest Paid Interest Received Cash Discount on Purchase Cash Discounts on Sales Sales Return Sales Cash Notes Receivable Accounts Receivable 225 000 00 150 000 00 18 000 00 10 500 00 3 500 00 2 915 90 9 000 00 75 000 00 000 00 323 10 2 861 50 8 258 25 27 750 65 50 750 00 298 650 25 500 000 00 100 000 00 86 140 28 300 00 2 469 50 13 389 52 1 540 816 75 172 ACCOUNTING PROBLEMS: INTERMEDIATE Raw Materials Finished Goods, Jan. 1, 1915 Goods in Process, Jan. 1, 1915 Fuel Insurance Taxes Notes Payable Accounts Payable Reserve for Depreciation: Machinery and Equipment Buildings Patents Bad Accounts Salaries, Offices and Clerks (general) General Office Supplies Postage, Telegraph, and Telephone Miscellaneous General Expenses Advertising Salaries and Expenses, Salesmen Agents' Commissions Credit Department Salaries Miscellaneous Expenses, Selling Stable Expenses Direct Labor (mfg.) Indirect Labor (mfg.) Superintendence, Factory Factory Supplies Repairs, Machinery and Equipment Repairs of Buildings Power. Heat, and Light $ 622 190 90 62 735 06 24 747 27 38 688 28 4 000 00 5 000 00 56 150 00 2 950 75 1 560 00 850 00 35 000 00 72 350 31 30 141 40 $7 560 00 610 00 3 963 46 508 311 39 44 981 01 6 000 00 8 547 18 7 418 52 2 860 47 2 875 80 $2 438 001 45 $ 40 000 00 46 585 85 50 000 00 30 000 00 22 058 80 6 240 75 438 001 45 You are to take into consideration the following facts: (1) Real estate, machinery and other factory equipment, and patents are stated at cost. (2) Of the real estate $25,000 is for land and $200,000 is for buildings. (3) All capital stock authorized has been issued and is out- standing. (4) Allowances for depreciation arc: Machinery and Factory Equipment, $15,000. Building, 3% on cost. Patents l/17th of cost. (5) $15,000 is to be set aside as a reserve for bad accounts. ((>) Ten per cent of the book values of Stable Equipment and CLASSIFIED PROBLEMS AND EXERCISES 173 Office Equipment, and l/6th of the book value of Drawings and Patterns are to be charged off. (7) Inventories at the close of the fiscal year were : Raw Materials $63 580 40 Factory Supplies $1 525 00 Finished Goods 58 864 56 Office Supplies 500 00 Goods in Process 27 024 52 Prepaid Insurance 500 00 Fuel 4 823 43 (8) The accruals are: Taxes $ 7 000 00 Interest on Bonds $1 000 00 Direct Labor 12 618 75 Advertising 4 718 50 Indirect Labor 2 040 50 (9) The depreciation on stable equipment (see item 6) is to be charged to Stable Expenses, and one-third of the latter is apportioned to Manufacturing Expenses and two-thirds to Selling Expenses. (10) The cost of fuel used is to be charged to Power, Heat, and Light. (11) Maintenance of Real Estate is to be charged with cost of repairs to buildings, depreciation on buildings, 20% of taxes for the year, and $1,000 for insurance. The total cost of such maintenance is to be shown as an item of manufacturing expense on the statement of Cost of Sales. (12) The portion of insurance remaining after charging Main- tenance of Real Estate is to be allocated to manufacturing expenses. (13) Thirty per cent, of the taxes for the year is to be appor- tioned to manufacturing expenses and 50% is to be charged against income (Gross Income). (14) Of the salaries of officers and clerks, general, $3,600 should be apportioned to selling expenses. (15) Amongst the notes receivable is a note for $5,000, per- taining to a previous fiscal year, which is considered to be worth- less. No provision was made for such loss. Required : (a) Adjusting entries (b) Profit and loss statement (c) Balance sheet account form (d) Cost of goods manufactured. (From Ohio C. P. A. Examination) 174 ACCOUNTING PROBLEMS: INTERMEDIATE Comments. Because of the extended adjustments it is recommended that a working sheet be used in solving this problem. The working sheet need not be submitted with the solution. Problem 24 The main office of a manufacturing concern keeps the general books of the company and sells the finished product which is billed to it by the factory at cost. The cost books of the factory show the following facts on January 1, 1914: Cash Fund (Imprest), $500; Raw Materials and Supplies, $15,910.32; Work in Process, made up of: Material and Direct Labor, $55,816.25; Factory Expenses, $10,592.16; and Management Expenses, $6,200.83- Finished Product, $40,219.57. A portion of the payroll distributed but not yet paid, $3,553.42. During the year 1914 the transactions were as follows: Purchases of Raw Materials, $91,113.20; Wages Paid, $143,273.49; Fac- tory Expenses, Charged, $63,383.83; Management Expenses, Charged, $40,315.33; Sale of Power to another company occuping adjacent buildings, $100 per month. The raw materials and supplies used amounted to $90,265.72; the management charges distributed, to $40,315.33, and Factory expenses distributed, $63,519.10. There are also on hand un- paid local bills which have not been entered on the books amount- ing to $135.27, all of which were for factory expense. The finished product made during the year, figured at cost, amounted to $338,652.32; the amount of finished product trans- ferred to the main office was $340,192.45. At the close of the year, December 31, 1914, there was unpaid and undistributed the factory payroll for four days amounting to $2,942.10 and also 550 hours of overtime, payable at the rate of time and one-quarter, the regular day rate being 35c per hour. Required: Write up all the ledger accounts on the factory books and show the final trial balance of December 31, 1914. (From Massachusetts C. P. A. Examination.) CLASSIFIED PROBLEMS AND EXERCISES 175 Problem 25 A company of bicycle manufacturers makes up its accounts December 31, 1907, for the year. The following are the debits to the profit and loss account: Raw Material on hand January 1, 1907 $12 500 00 Finished Machines on hand January 1, 1907, 1,600 wheels at $30 48 000 00 Purchases of Material 62 500 00 Labor, productive 82 500 00 Manufacturing Expenses: Coal, repairs, paint, varnish, super- intendents' salaries, unproductive labor, and sundry other expenses 23 000 00 Agents' Commissions 90 000 00 Branch Expense: Rents, salaries, and miscellaneous 40 000 00 Selling expense: Travelers' Expenses and salaries, discounts, rebates, and miscellaneous 30 000 00 Bad Debts 8 000 00 Depreciation on Machinery and Plant 5 500 00 The sales for the year 1907 were 6,000 wheels, yielding $540,000; the raw material on December 31, 1907, taken at cost, were $4,000, and the finished wheels in stock ready for sale numbered 800. Required : From the above data, prepare a statement showing (a) Number of wheels manufactured (b) Cost per wheel (c) Gross manufacturing profit (d) The final net result, including in the profit and loss account the stock of finished wheels on hand December 31, 1907, at their cost as shown by the accounts. (From Michigan C. P. A. Examination.) Refer to page 229 for theory questions on financial statements. 176 ACCOUNTING PROBLEMS: INTERMEDIATE Group E Financial Statements Prepared from Single Entry Records Problem 26 The books of William Selby, which have been kept by single entry, show the following results at the close of business, April 30, 1921: Investment of Selby, January 1, 1921, $5,000; due from customers, $3,000; notes on hand, $1,500; interest accrued, $75; cash in bank, $3,560; insurance prepaid, $125; rents payable accrued, $180; owing to creditors, $1,950; outstanding notes, $500; total of purchase invoices, $15,350; mortgage in favor of Selby, $3,000, on which there is owing interest for six months at 6%. The sales book shows sales on account, $2,500, for cash, $4,580, and for notes, $3,520. Cost of expenses not available. Inven- tory of furniture amounts to $450; goods on hand, $1,520. Required : (a) Prepare a statement showing the net worth on April 30, 1921, together with the profit or loss for the period from January 1 to April 30, 1921 (b) Outline the necessary journal entry to change the books to double entry, assuming that the same books are to be continued. Comments. The data given in this problem has been gathered from various sources such as books of entry, ledger, inventories, etc., as is cus- tomary in single entry, a complete record not being kept in the ledger. It will be necessary to select those items representing assets and liabilities on April 30, 1921, set them up in statement form, and find the net worth, which will then be compared with the investment to find the profit or loss. This statement is in effect a balance sheet, but inasmuch as the accounts in single entry are not in balance, it is customary to call it a Statement of Assets and Liabilities. CLASSIFIED PROBLEMS AND EXERCISES 177 Problem 27 C. W. Brooke began business July 1, 1921, with assets and liabilities consisting of accounts receivable, $8,500; accounts payable, $4,000; merchandise, $5,000; cash, $1,000. On De- cember 31, 1921, his assets and liabilities consisted of cash, $100; accounts payable, $6,000; notes payable, $1,000; furniture and fixtures, $800; merchandise, $12,500; accounts receivable, $8,000; office supplies, $100. During the period, Brooke had invested $2,000 additional and had withdrawn at different times sums amounting to $3,000. His books are kept by single entry. Required: (a) Prepare a statement of assets and liabilities as of June 30, supplemented by a statement showing what the net profit or loss has been for the six months (b) Make entry or entries which will result in changing the books to double entry, assuming that the same led- ger is to be continued. Comments. In this problem it will be necessary to find the net worth at the beginning as well as at the end of the period named. Instead of setting up two separate statements in order to arrive at the desired results a comparative statement of assets and liabilities will be prepared with col- umns at the right showing increase and decrease of the various items. See Form XXIII. Attention is called to the fact that where there are withdrawals or addi- tional investments of capital, a comparison of net worth at beginning and close of period shows increase or decrease in capital and not net profit or net loss. Therefore, if capital shows an increase, withdrawals will be added and additional investments deducted in order to show the profit or loss for the period. After ascertaining the profit or loss an entry will be made in single entry form charging or crediting the proprietor with the loss or profit as the case may be. This entry will result in adjusting the capital account in the ledger so that it will agree with the capital as shown by the financial statement. In order to change the books to double entry an entry is then made in double entry form, the debits consisting of the assets as shown by the financial statement and the credits consisting of the liabilities and capital. If a new ledger is to be used this entry is then posted, after which all transactions may be entered in double entry form. If the old ledger is to be used, only those items are posted that do not appear in the ledger, the others being checked off. This results in bringing the ledger into balance and the pro- cedure may thereafter be according to the double entry method. 178 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 28 Gaylord and Laird have been doing business as equal partners and have kept their books by single entry. They wish to admit Davis as a partner and have their books kept by double entry. Their books and inventory taken show the following assets and liabilities on September 1, 1921: Merchandise, $9,240; cash, $850; notes receivable, $2,500; real estate, $3,000; accounts receivable, $6,940; store fixtures, $570; Gaylord's investment account, credit, $6,400; Laird's investment account, credit, $5,390; accounts payable, $4,175; bills payable, $975. Davis is admitted and invests cash, $3,000; merchandise, $2,000; bills receivable, $1,500. Required : (a) Prepare statement of assets and liabilities and show net profit and each partner's net worth (b) Make entries necessary to open set of double entry books (c) Make entry showing admission of Davis. Problem 29 On January 1, 1920, J. M. Dickey began business as a retail dry goods merchant. His capital at the time consisted of merchandise, $12,300; cash, $1,150; furniture and fixtures, $600. He sold most of his goods for cash, although credit was extended in certain cases. The books were kept by single entry and consisted of a ledger, journal, and cash book. At the end of 3 months, Mr. Dickey desired to ascertain whether he was making any money. The clerks were set to work taking inventory, and the bookkeeper was instructed to prepare a list of outstanding accounts receivable and payable. This produced the following results: CLASSIFIED PROBLEMS AND EXERCISES 179 Merchandise on hand $24 062 62 Accounts Receivable 2 165 74 Accounts Payable 15 203 21 Cash in Bank 2 572 43 Cash in Drawer 224 12 Paid invoices showed purchases of office equipment during the period amounting to $275. Invoices have been received and entered on the books covering the purchase of goods amounting to $375.20, which goods have not yet arrived. Feeling the need of more working capital, Mr. Dickey sold on February 10 certain bonds which he had been holding as invest- ments, realizing thereon $1,250, which amount was placed in the business. Required : (a) Statement or statements showing the assets and liabilities and the net profit or loss for the period (b) Entry to accomplish the opening of a set of double entry books. Comments. It may be assumed that the inventory of furniture and fixtures has been increased by the purchases during the period to the extent of $275. The value of the goods in transit has been entered on the books and is included in the Accounts Payable as given above, but not in the Inventory. It will, therefore, be added to the inventory in preparing the statements. Problem 30 A set of single entry books for 1912 is sent to you with an order to prepare a profit and loss statement for the year and a balance sheet at December 31. The starting capital was $34,500. January 1 December 31 Accounts Receivable $26 500 00 $44 000 00 Accounts Payable 7 500 00 9 750 00 Merchandise 8 500 00 9 500 00 Plant and Machinery 10 000 00 10 000 00 Furniture and Fixtures 700 00 700 00 180 ACCOUNTING PROBLEMS: INTERMEDIATE A summary of cash book for the year shows as follows: Received: Accounts Receivable $30 000 00 Capital paid in 2 500 00 Disbursed: Bank Overdraft, January 1 $ 3 700 00 Accounts Payable 12 500 00 General Expense 5 000 00 Wages 7 750 00 Personal Account 1 500 00 Leaving a bank account of $2,000, and currency on hand, $50. Provide 5% interest on capital, disregarding additions during the year and personal drafts, deducting 10% for plant and ma- chinery depreciation, 5% for furniture and fixtures, and 5% for bad debt reserve. Required : (a) Comparative statement showing net profit for the year (b) Profit and loss statement for the year (c) Balance sheet as of December 31, 1912 (From Illinois C. P. A. Examination) Comments. This problem not only calls for a statement showing net profit, but also for a detailed profit and loss statement. A number of items for the latter must be found by deduction. The amount of net sales may be determined by adding cash collections to the increase in accounts receivable, and net purchases by adding the increase in accounts payable to the cash payments on account of same. It may be assumed that all the accounts payable are the result of merchandise purchases. CLASSIFIED PROBLEMS AND EXERCISES 181 Problem 31 T. M. Williams, who has been keeping his books by single entry, desires to have them placed upon a double entry basis, and submits to you the following data concerning his business for the year ended September 30, 1922. T. M. Williams, Investment $25 000 00 T. M. Williams, Drawings 2 635 00 Cash in Bank as per Bank Statement 18 500 00 Due from Customers 6 230 00 Due to Creditors 8 625 00 Notes on Hand 4 695 00 Notes Outstanding (Bank Loan) 2 500 00 Land and Buildings Owned 16 500 00 Mortgage Owing on Real Estate 12 500 00 Interest Accrued on Mortgage 375 00 Total Purchases for the year 42 840 00 Total Sales for the year 46 285 00 Inventory of Goods on Hand 8 240 00 General Expenses 3 520 00 Rent of Office Due and Unpaid 150 00 Interest Accrued on Notes Receivable 75 00 Interest Prepaid on Notes Payable at the Bank 45 00 Insurance Premiums Unexpired 240 00 Required : (a) Statement showing profit or loss for the year (b) Detailed profit and loss statement (c) Entries to change to double entry, new books to be opened. Problem 32 The books of the Butter, Egg, and Cheese Company, with an authorized and outstanding capital stock issue of $25,000, are kept by single entry. It annually inventories all of its assets and liabilities, and from such inventory prepares a financial statement. At De- cember 31, 1913, this inventory is as follows: 182 ACCOUNTING PROBLEMS: INTERMEDIATE Assets Office cash $ 1 584 00 Balance Bank A 10 824 00 Accounts Receivable 29 521 00 Ten shares stock in competing company 1 000 00 Plant and Equipment 64 938 00 Merchandise Inventory 21 737 00 Prepaid Expenses 5 081 00 Liabilities Overdraft Bank B $ 5 003 00 Accounts Payable 19 747 00 Mortgage Payable 25 000 00 Notes Payable 20 000 00 From a comparison of the financial statements at the begin- ning and end of year you find that the above item of Plant and Equipment is stated in an amount less by $11,460 than it was at the beginning of the year, plus additions during the year. The financial statement for the beginning of year showed a surplus of $35,703. From your analysis of the disbursements and unpaid accounts payable at beginning and end of year, you find a total of pur- chases amounting to $661,910, and expenses for salaries, wages, supplies, repairs, etc., amounting to $120,115. The purchases, however, included $450 paid out for John Smith, an employee, for which he had not reimbursed the com- pany; and the total expenses of $120,115 included $250 in the hands of a buyer as a working fund. The inventory of merchandise at the beginning cf the year was $18,125, and of prepaid expense, $2,653. There was canceled on the customers' ledger during the year $3,206 of uncollectible accounts. There was paid for interest and discount on notes payable $1,061, and for interest on mortgage $1,500. A 10% dividend was declared but not paid. Required : From the foregoing prepare: (a) Balance sheet as at December 31, 1913 (b) Profit and loss statement exhibiting net sales, cost of sales, and gross and net profit for the year. (From Ohio C. P. A. Examination) CLASSIFIED PROBLEMS AND EXERCISES 183 Comments. The balance sheet called for will be the usual statement of assets and liabilities. The dividend declared will be included with the liabilities. The net worth will be made up of the Capital Stock and the present surplus. A comparison of the surplus December 31 with the sur- plus at beginning of year represents the net increase in capital to which must be added the dividends to find the profit for the period. In preparing the profit and loss statement, inasmuch as the data as to sales is not available, it will be necessary to use the net profit as shown by the balance sheet as a basis, and work back to the sales. The $11,460 shrinkage in plant value may be treated as depreciation. Care must be exercised in arriving at the miscellaneous expenses for the year. This may be found by adding the amount of expenses prepaid at the beginning of the year to expenses paid during the year, and deducting expenses prepaid at end of year. Problem 33 The following statement of assets and liabilities is taken from a single entry system of books. Prepare a balance sheet that will exhibit a correct view of the net worth of the business. Cash on hand, $10,000; bonds outstanding, $50,000; reserve for con- tingencies, $10,000; plant account, $100,000; reserve for bad accounts, $2,000; notes receivable, $50,000; accounts receivable, $100,000. Reserve for unpaid Federal income taxes, $8,000; dividends declared and unpaid, $5,000; reserve for shrinkage of inventory values, $6,000; common stock account, $100,000; reserve for amortization of bonds outstanding, $50,000; accounts payable, $5,000; inventories at cost or market, whichever is lower, $60,000; treasury stock (100 shares, par value), purchased at cost, $15,000; depreciation reserve, $20,000; notes payable, $20,000. Required : (a) Balance sheet, statement form. Use current date (b) Entry necessary to change the books to double entry. (From North Carolina C. P. A. Examination) 184 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 34 A dispute arises between two partners carrying on a retail business under the name of Levy & Mayer, and you are called in to adjust the accounts between them, when you find the following conditions : The books have been kept by single entry, and it is imprac- ticable to go over the accounts in sufficient detail to complete the double entry. It is three years since the firm has had an accounting, when a balance sheet was prepared (copy of which is handed to you), and contains the following: Assets December 31, 1918: Store Fixtures $15 000 00 Leasehold (5 years to run) 5 000 00 Merchandise on Hand 35 000 00 Customers' Accounts 10 000 00 Cash on Hand and in Bank 12 500 00 Prepaid Expenses 2 500 00 $80 OOP 00 Liabilities: Accounts Payable $15 000 00 A. B. Levy Special Loan 20 000 00 A. B. Levy Capital 30 000 00 W. K. Mayer Capital 15 OOP 00 $80 OOP 00 You are informed that Mr. Levy's loan bears interest at 6% per annum, and that the capital accounts are to be credited with interest at 5%. Also that Mr. Mayer, who has active charge of the business, is to receive 20% of the profits in lieu of other salary, the remaining 80% of the profits to be divided be- tween the partners in proportion to the capital contributed. The inventory as taken as at December 31, 1921, was as follows: Merchandise Good condition $50 000 00 Old styles and partly soiled 7 500 00 Obsolete and useless 1 500 00 $59 000 00 Customers' Accounts Good $12 500 00 Doubtful 2 500 00 Bad 1 pop OQ $16 000 00 Accounts Payable $17 500 00 CLASSIFIED PROBLEMS AND EXERCISES 185 You also found that on June 30, 1920, Mr. A. B. Levy's special loan had been repaid with interest, and that a 5% loan had been obtained from the bank for $10,000, and that the cash in bank and on hand at December 31, 1921, was $15,000, while the bank interest prepaid was $250, and insurance premiums prepaid amounted to $5,000. The partners' drawings on account of profits and interest and commissions were found to be as follows: A. B. Levy W. K. Mayer In 1919 $12 000 00 $16 000 00 In 1920 15 000 00 15 000 00 In 1921 18 OOP 00 20 OOP 00 $45 OOP 00 $51 OOP 00 After consultation with the partners it was agreed to write 50% off the value of the "Old Style and Partly Soiled" goods, and off the Doubtful Accounts Receivable; and to consider the Bad Accounts and Obsolete and Useless materials to be of no value. Required : (a) A statement showing how you arrive at the profit and loss for the three years, showing also the disposition thereof (b) The partners' capital accounts (c) A balance sheet at December 31, 1921, after making the necessary adjustment of the accounts. (From Illinois C. P. A. Examination) Refer to page 237 for questions on the theory of single entry accounts. 186 ACCOUNTING PROBLEMS: INTERMEDIATE Group F Special Types of Statements Problem 35 Charles Cabell, William West, and Henry Hart form a part- nership for the purpose of engaging in the manufacture of plug and smoking tobacco. Cabell invests $75,000; West, $50,000; and Hart, $25,000. Profits or losses are to be shared as follows: Cabell, one-half; West, one-third; Hart, one-sxith. Interest is not to be allowed on capital nor charged on drawings, but each partner's drawings in any one year are not to exceed one-tenth of his capital in the business. At the end of their first fiscal year their ledger shows the fol- lowing balances: Charles Cabell, Capital Account $75 000 00 William West, Capital Account 50 000 00 Henry Hart, Capital Account 25 000 00 Charles Cabell, Withdrawal Account $5 842 17 William West, Withdrawal Account 4 179 16 Henry Hart, Withdrawal Account 2 033 88 Land and Buildings 25 000 00 Machinery 11 026 92 Furniture and Fixtures 1 866 13 Cash 8 730 45 Accounts Receivable 131 244 49 Notes Receivable 4 999 97 Accounts Payable 6 138 16 Notes Payable 118 060 62 Sales Plug Tobacco 249 472 43 Sales Smoking Tobacco 61 882 25 Sales Stems 841 95 Leaf Tobacco 200 044 57 Licorice and Flavoring 21 918 66 Boxes 8 572 10 Labor 25 182 47 Stamps 48 475 24 Power, Light, and Heat 3 571 60 Factory Expense 7 380 55 Hauling ! 451 30 Salaries 12 443 71 Office Expense 4 228 87 Insurance ! 68 2 90 Interest and Discount 9 164 47 Postage 1 211 97 Attorney's Fees 769 25 CLASSIFIED PROBLEMS AND EXERCISES 187 Salesmen's Salaries, Commissions, etc. $38 795 15 Advertising 5 149 09 Lost Accounts 1 429 34 $5X6 395 41 $586 395 41 Ten per cent, is to be charged off from Machinery account, to cover depreciation, and a reserve equal to 2 per cent, of the Accounts and Bills Receivable is to be created, to cover pos- sible undeveloped losses. The unexpired insurance premiums amount to $331.11. Inventories are as follows: Finished Goods $38 189 42 Goods in Process 11 209 36 Leaf Tobacco 49 128 98 Licorice and Flavoring 1 511 68 Boxes 1 073 04 Stems 43 31 Required : (a) Statement of cost of goods manufactured (b) Profit and loss statement (c) Balance sheet account form (d) Necessary adjusting entries. (From Virginia C. P. A. Examination) Comments. This problem illustrates the preparation of financial state- ments for a type of manufacturing business somewhat out of the ordinary. The essentials of the statements will be the same as those for an ordinary manufacturing concern. Include in the manufacturing statement the elements of material, labor, and factory expense. Material in this instance consists of leaf tobacco, licorice and flavoring, and boxes. The boxes in this business are so closely associated with the manufacturing process that they will be included under that head. The factory expense items will include all those expenses usually shown under this heading. While the item of stamps, meaning revenue stamps, is a large one in the tobacco business, and is closely identified with the manufacturing process, it is more in the nature of a selling expense and should be so shown in the profit and loss statement. The sales accounts should be entered in the profit and loss statement separately and totalled, showing total sales. The balance sheet presents no difficulties. 188 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 36 Spark Plug and Auto Supply, Inc., is the manufacturer of a patented spark plug and is also dealer in automobile supplies. From the following trial balance (as of October 31, 1919), and information prepare balance sheet and profit and loss statements showing cost of manufacture of spark plugs and gross and net profits on sales. Advertising $26 450 Accounts Receivable 180 105 Accounts Payable $42 500 Bills Receivable 35 000 Bills Payable Trade Creditors 22 700 Bills Payable First National Bank 150 000 Bonds 5% 1st Mortgage 250 000 Building Factory 225 000 Bad Debts Written Off 7 850 Capital Stock: Common Fully Paid Authorized $250,000 Issued 100 000 6% Preferred: Authorized and Issued 300 000 Dividend Preferred Stock 18 000 Delivery Expenses 7 140 Delivery Equipment and Trucks 9 250 Directors' Fees 2 500 Discount on Sales 12 200 Freight: Raw Materials 12 050 Freight: Automobile Supplies 2 345 Finished Goods 34 320 First National Bank Current Account 51 850 General Expenses 14 770 Goods in Process 13 250 Heat, Light, and Power 22 200 Interest on Bonds 9 375 Insurance and Taxes: Factory 17 400 Labor: Productive 233 846 Labor: Non-Productive 99 444 Liberty Bonds 195 000 Loose Tools 15 270 Machinery and Plant 165 090 Office Furniture and Fixtures 1 200 Payroll 4 27g Patent Rights 30 000 Purchases: Raw Materials 450 960 CLASSIFIED PROBLEMS AND EXERCISES 189 Purchases: Automobile Supplies $141 690 Repairs 14 050 Rent: Warehouse 3 875 Reserve for Depreciation: Buildings $20 500 Reserve for Depreciation: Machinery 16 836 Reserve for Bad Debts 8 000 Real estate: Factory Site 150 000 Shop Supplies and Expenses 15 560 Surplus 173 Oil Sales: Spark Plugs 1 063 020 Sales: Automobile Supplies 137 595 Salaries: Office and General 14 500 Salaries: Salesmen 34 600 Traveling Expenses 22 300 $2~288 440 $2 288 440 Inventories, November 1, 1918: Raw materials $14 500 Automobile supplies 22 450 Inventories, October 31, 1919: Raw materials 27 300 Automobile supplies 19 200 Finished goods 50 400 Goods in process 17 205 Loose tools 10 500 Reserve for bad debts to be adjusted to 5% of open accounts. Depreciation for the 12 months ended October 31, to be al- lowed as follows: Factory buildings, 2%; Machinery, 5%; De- livery equipment, 10%; Furniture and fixtures, $200. Disregard fractional parts of a dollar. Patent rights expire October 31, 1925. Advertising, $950 applies to next season. Taxes on factory building accrued, $1,400. First mortgage 5% gold bonds are a first charge on all the assets of the company. Interest payable quarterly on the first of February, May, August, and November. Required : (a) Necessary adjusting entries in skeleton form (b) Cost of goods manufactured statement (c) Profit and loss statement (d) Balance sheet. (From American Institute Examination) 190 ACCOUNTING PROBLEMS: INTERMEDIATE Comments. In solving this problem no attempt need be made to allo- cate costs between spark plugs and automobile supplies. Charge the manu- facturing expenses to spark plugs even though some of heat, light, etc., may be used in the sales office. Set up a manufacturing statement showing cost of spark plugs made. The inventories of raw materials and of automobile supplies as of November 1, 1918, it will be noted, are included in the respec- tive purchase accounts as shown in the trial balance. In the first section of the profit and loss statement, show gross profit on spark plugs. Follow this with a section showing gross profit on automobile supplies. These results added show total gross profit, from which will be deducted the operating expenses in the usual manner. The credit to payroll, $4,278, may be assumed to be wages accrued but not due. Use the account form of balance sheet and show reserves as deductions from the correlative assets. Problem 37 At the end of their fiscal year you are given the following rial balance and information from the Gem Corporation, whicht owns a young bearing orange grove. TRIAL BALANCE December 31, 1920 Capital Stock Gem Orange Grove Cost New Trees and Sotting Out Improvements and Betterments Live Stock Wagons and Harness Tools and Implements Field Boxes Irrigating Plant Box Material, Paper, Nails Horse Feed Fertilizer Seeds Payrolls Salaries General Expenses Insurance Taxes $100 000 00 000 00 500 00 000 00 500 00 000 00 600 00 10 000 00 1 800 00 900 00 500 00 500 00 000 00 500 00 500 00 50 00 100 00 $100 000 00 CLASSIFIED PROBLEMS AND EXERCISES 191 Interest $800 00 Sales of Fruit $12 000 00 Prepaid Freight 3 300 00 Commissions and Brokerage 200 00 Notes Payable 30 000 00 Surplus 5 750 00 $147 750 00 $147 750 00 You are given the following information: Inventories Wagons and Harness $300 00 Tools and Implements 650 00 Field Boxes, used for bringing fruit to packing house 400 00 Box Material, Paper, Nails 600 00 Horse Feed 300 00 Fertilizer 700 00 Insurance, one policy due 4/1, 1921. You are told that 15,000 boxes of fruit had been shipped and that the amount estimated to be still on the trees was 9,000 boxes; that about 30 acres of vegetables, consisting of cabbages, lettuce, and cucumbers, had been planted between the rows of trees; that the fertilizer for the year before, when there were no vege- tables, had cost $2,500 and the labor pay rolls for caring for the grove for that year had been $1,200. You find that $500 charged as labor pay rolls was for putting up fruit, and that of the $7,500 in salaries, only $2,500 was chargeable to this year and the $5,000 was for former period. Required : (a) Balance sheet as of December 31, 1921 (b) Profit and loss statement for the fiscal year (c) Necessary journal entries to properly adjust the accounts. (From Florida C. P. A. Examination) Comments. For this type of business it is difficult to prepare statements that will in themselves adequately set forth the financial position. The fruit on the trees and the vegetables in the ground being of a perishable nature may never be realized upon. On the other hand, they may be sold so as to produce a large income. The statements should, therefore, be sup- plemented with footnotes and comments setting forth rather fully those things bearing directly upon the financial prospects of the concern that cannot be included in the statements themselves. The cost of sales in this case is represented by the cost to produce or the cost of placing the fruit in the packing house. 192 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 38 The following is the trial balance of the X. Y. Z. Coal Mining Company as of December 31, 1918: Cash $ 5 674 50 Breaker and Machinery 145 000 00 Office Building 5 000 00 Blacksmith Shop 4 000 00 Inside Construction 15 675 00 Car and Mine Rail Account 7 534 50 Horses and Mules 5 600 00 Accounts Receivable 35 112 25 Notes Receivable 10 000 00 Capital Stock Common $ 50 000 00 Capital Stock Preferred 100 000 00 Coal Sales 257 890 00 Accounts Payable 12 500 00 Surplus 17 709 35 Depreciation on Buildings and Machinery Re- serve 12 000 00 Supplies 8 240 00 Payroll Outside 24 701 50 Payroll Inside 110 434 25 Salaries Superintendent, etc. 6 000 00 Salaries Office Clerks 4 500 00 Office Expense 1 147 35 General Expense 750 00 Claims for Injuries 4 000 00 Insurance (Expires July 1, 1919) 5 500 00 Repairs to Buildings 4 075 00 Repairs to Construction 3 445 00 Barn Expense 1 500 00 Selling Expense 4 500 00 Royalty Account 30 500 00 Water 800 00 Fuel 935 00 Timber and Props 5 475 00 $450 099 35 $450 099 35 The total output for the year was 132,300 tons. An examination of the books and accounts shows that the following charges had not been entered: Horses and Mules, $2,000; Car and Mine Rail account, $1,450; Claims for Injuries, $1,000. During the year the bookkeeper, through error, charged $3,415 to Inside Construction instead of to Inside Pay Roll. The coal is mined on lease that averages 20 cents per ton. CLASSIFIED PROBLEMS AND EXERCISES 193 The inventory is as follows: timber and props, $1,500; powder, $555; oil, etc., $175. In preparing the above statements allow- ance for depreciation on buildings, machinery, and other proper- ties may be considered at the rate of 5% per annum. Required : (a) Profit and loss statement for the fiscal year (b) Balance sheet as of December 31, 1918 (c) Cost summary showing average cost and net profit on each ton of coal sold. (From New York C. P. A. Examination) Comments. The expenses of mine operations in digging, hoisting, and preparing coal for shipment may be likened to the manufacturing costs of the ordinary manufacturing concern in preparing articles for sale. The company leases the mine on a royalty basis according to the output for the year. In this case the total output was 132,300 tons on a lease averaging 20 cents per ton. The royalty payments will be considered as a part of the cost of production. Royalties are prepaid to the extent of $4,040 inasmuch as the Royalty account is charged with $30,500, while the charge for the fiscal year is $26,460. Depreciation on mine properties is also considered a part of cost of production. All inside costs will be charged to production. They refer to expenses incurred within the mine, while outside costs refer to expenses incurred after the coal is brought to the surface. Mines are usually leased for a definite number of years, and, consequently, costs of construction and buildings should be written off over the life of the lease. In this case, the depreciation being 5%, the life of the lease may be assumed to be 20 j^ears, and all properties will be written down on that basis. The insurance may be assumed to be for one year, the date of policy not being given, and that one-half of it is unexpired. Since no mention is made of coal in stock, it may be assumed that the entire output has been disposed of. Set up a profit and loss statement showing gross profit and net profit in the usual manner. Include in cost of sales all inside expenses such as supplies, inside payroll, repairs to construction, barn expenses, royalties, water, fuel, timber, and props, and depreciation of construction, cars, and rails. Outside costs will be carried as operating charges. In preparing cost summary, show production cost, outside cost, total cost, and net profit per ton. The balance sheet will be set up in the usual form. 194 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 39 The following is a trial balance June 30, 1916, before closing, of the ledger of a textile mill. Land $ 10 000 00 Buildings 75 000 00 Machinery 119 138 73 Tenements 1 670 66 Finished Goods Inventory, 1/1/16 66 984 43 Stock in Process Inventory, 1/1/16 57 042 38 Yarn 259 882 12 Cash 12 769 19 Petty Cash 106 39 Accounts Receivable 46 085 68 Mortgage Receivable 875 00 Labor 25 979 27 Supplies 2 974 31 Repairs 956 63 Oils 50 84 Coal 1 443 20 Starch 1 390 00 Water 122 65 Finishing 15 381 54 Brokerage 660 50 Commission 4 580 67 Discounts Allowed 1 246 84 Insurance 679 92 Taxes 1 502 81 General Expense 389 39 Freight and Express 974 34 Telephone and Telegraph 68 72 Traveling Expense 274 85 Interest Paid 409 80 Discount on Notes Payable 1 408 00 Profit and Loss 20 694 80 Dividends 3 375 00 Capital Stock Preferred 6% Cumulative $100 000 00 Capital Stock Common 263 800 00 Accounts Payable 40 864 56 Notes Payable 187 500 00 Cloth Sales !37 818 7 Waste Sales 922 94 Tenement Rents Received 339 50 Discount Taken 2 873 59 $734 118 66 $734 118 66 CLASSIFIED PROBLEMS AND EXERCISES 195 Inventories and Items, June 30, 1916: Finished Goods $104 190 24 Stock in Process 71 242 39 Yarn 1 35 66 i 63 Coal 1 000 00 Starch 900 00 Supplies 1 150 00 Interest Accrued on Notes Payable 389 41 Interest Prepaid on Notes Payable 211 11 Wages Accrued 2 051 05 Unexpired Insurance 600 00 Prepaid Taxes 402 26 Prepaid Water Rents 100 00 Bad Debts 100 00 Estimated Discounts to be taken on Accounts Payable 817 29 Estimated Discounts to be allowed on Accounts Receivable 460 86 Depreciation rates per annum are: Machinery 5% Tenements 3% Mill Buildings 2% Depreciation for the period of six months ending December 31, 1915, was not put upon the books. No additions have been made to the fixed assets within a year. Estimated discounts on the accounts receivable and payable were not put upon the books January 1, 1916; these were respec- tively $400 and $750. The last two semi-annual dividends on preferred stock are unpaid. Required T (a) Balance sheet as of June 30, 1916 (b) Profit and loss statement for six months (c) Necessary adjusting entries. (From Massachusetts C. P. A. Examination.) Comments. Include in cost of production stock in process, yarn, coal, starch, supplies, repairs, oils, water, finishing, etc. A combined manufac- turing and profit and loss statement may be prepared, or a separate cost of goods manufactured statement may be used as desired. The problem indicates that estimated discounts to be taken on accounts payable should be taken into the statements. This is not considered best practice, as it means anticipating profits to that extent. The entry to accomplish this would be to charge Estimated Discounts on Accounts Payable (asset) and credit Purchase Discounts (income). 196 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 40 The following trial balance of the B. C. Cotton Company is taken from the books after inventories and deferred charges have been posted. The accounts are ready to close for the period. The consigned goods account has been inactive for six months and will continue so for the present. Prepare statements to show for the quarter ending March 30, 1918, total manufacturing expenses, cost of goods made, cost of goods sold, and net profit, and submit a balance sheet as of March 30, 1918. Cloth $268 337 28 Labor $33 862 99 Light 132 72 Royalties 50 00 Oils 38 62 Finishing 7 455 55 Cash 119 126 06 Liberty Bonds 1 000 00 Supplies 1 276 06 Starch 800 00 Fuel 1 455 99 Water 202 24 Freight Inward 1 353 99 Accounts Receivable 63 492 58 Accounts Payable 313 45 Notes Payable 225 000 00 Building and Machinery 341 378 14 Tenements 1 610 99 Insurance 350 00 Taxes 567 71 General Expense 542 88 Rents Receivable 378 87 Commissions 7 121 42 Interest Paid 2 539 90 Discount Taken 4 016 26 Purchases, Material 162 403 68 Surplus 168 866 14 Discount Allowed 899 50 Capital Stock 362 500 00 Waste Sales 1 401 39 Inventory, Finished Goods, 3-30 114 069 57 Process, 3-30 31 464 02 Materials, 3-30 113 860 99 Fuel, 3-30 1 250 00 Starch, 3-30 800 00 Supplies, 3-30 1 300 00 CLASSIFIED PROBLEMS AND EXERCISES 197 Prepaid Tuxes, 3-30 $208 96 Unexpired Insurance, 3-30 660 41 Prepaid Interest, 3-30 5 100 00 Consigned Goods, 3-30 14 438 42 $1 030 813 39 $1 030 813 39 Inventories of finished goods have been credited to Cloth Account and inventories of goods in process and materials to Purchase Account. Inventories, January 1, 1918: Finished goods, January 1, 1918 . $132 833 85 Goods in process, January 1, 1918 22 258 01 Materials, January 1, 1918 143 566 55 Required : (a) Balance sheet as of March 30, 1918 (b) Cost of goods manufactured statement for three months (c) Profit and loss statement. (From American Institute Examination) Comments. In order to prepare the statements as desired, it will be necessary to find sales and purchases for the period. This will be done by eliminating the inventories from the cloth and purchase accounts. Cloth account as per trial balance xxxxx Add Inventory, Finished Goods, 1/1/18 xxxx Total xxxxx Less Inventory, Finished Goods, 3/30/18 xxxx Sales of Cloth for period xxxxx The purchases would be handled just the reverse. Add Goods in Process, March 30, 1918, and Inventory of Material, March 30, 1918, to the trial balance figure for purchases, and from this total deduct the Goods in Process, January 1, 1918, and Inventory of Material, January 1, 1918. The result will be purchases for the period. The Waste Sales may be shown as other income in the profit and loss statement. Consigned Goods will be shown as a current asset in the balance sheet. 198 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 41 From the following statement of facts set up the trial balance of the Broad Exchange Bank, December 31, 1918, after closing, and prepare therefrom a condensed statement of condition as of the same date: Due from banks, $74,975; time certificates of deposit, $10,000; cashier's cheques, $496,349.75; rediscounts, $400,000; customers' loans, $500,000; bills purchased, $550,000; exchanges for clearing house, $320,000; due to banks, $834,000; certified cheques, $12,500; cash, $956,750; demand cer- tificates of deposit, $2,500; transit department, $100,000; on deposit with Federal Reserve 'Bank, New York, $48,500; demand loans, $125,000; time loans, $80,000; bonds and mortgages owned, $100,000; coupon deposits, $3,750; on deposit with National City Bank, $53,062.50; depositors, $765,910; banking house, $200,000; furniture and fixtures, $25,000; capital stock issued and outstanding, $500,000; securities owned, $96,812.50; surplus, $201,090.25; accrued interest receivable, $1,075: interest purchased, $125; unearned discount, $5,200. Required : (a) Trial balance as of December 31, 1918 (b) Condensed statement of condition as of December 31, 1918. (From American Institute Examination) Comments. See Model Form XLIV for condensed statement of condition. Problem 42 The following trial balances have been taken from the books of George T. Wallace at the close of business on December 31, 1920, and June 30, 1921, respectively: December 31, 1920 June 30, 1921 George T. Wallace, Capital $41 076 54 $41 076 54 George T. Wallace, Current $2 000 00 $3 500 00 Cash 11 977 05 12 303 25 Sales 99 486 05 121 794 75 Sales Returns and Allowances 210 00 195 00 CLASSIFIED PROBLEMS AND EXERCISES 199 Purchases $39 822 82 $40 963 25 Purchase Returns $650 00 $630 00 Real Estate and Buildings 30 913 27 30 083 27 Tools 1 507 04 1 903 23 Machinery and Equipment 12 091 07 19 093 09 Delivery Equipment 1 890 00 2 240 00 Accounts Receivable 39 027 09 51 270 00 Notes Receivable 1 850 00 1 500 00 Accounts Payable 19 760 00 18 892 10 Notes Payable 17 000 00 19 000 00 Insurance Premiums 225 00 275 00 Insurance Prepaid 210 00 160 00 Taxes 345 00 690 00 Heat and Power 1 024 00 1 165 00 Salesmen's Expenses 2 496 00 1 890 00 Salesmen's Salaries 4 000 00 3 600 00 Office Expenses 250 00 125 00 Traveling Expenses 360 CO 394 00 Loss on Bad Accounts 125 00 210 00 Interest Charges 96 00 75 00 Delivery Expenses 329 00 356 00 Office Salaries 2 600 00 2 500 00 Freight Inward 1 560 00 1 482 00 Inventory, 6/30/20 23 064 25 Inventory, 12/31/20 25 420 30 $177 972 9 $177 972 59 $201 393 39 S201 393 39 Inventory, June 30, 1921, $20, 219.25. Required : (a) Comparative balance sheet statement form with current assets first (b) Comparative profit and loss statement for the period. Comments. See Model Forms XX and XXIII. 200 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 43 The following trial balances have been taken from the ledger of Thatcher and Jones after all adjusting entries were posted: June 30, 1920 September 30, 1920 Cash $ 1 600 00 $ 1 350 00 Goods on Hand (end of period) 5 400 00 5 600 00 Purchases (cost of sales) 5 890 00 7 480 00 Purchase Discounts $ 135 00 $ 265 00 Freight Inward 1 165 20 1 543 20 Sales 13 350 00 13 200 00 Sales Discounts 72 10 104 30 Sales Returns 9 10 3 46 General Administra- tive Expenses 954 36 768 90 Selling Expenses 456 78 314 67 Interest Earnings 9 00 10 10 Loss on Bad Debts 35 60 29 30 Office Equipment 544 50 610 50 Reserve for Deprecia- tion of Office Equip- ment 27 CO 54 00 Store Fixtures 250 00 260 00 Reserve for Depreica- tion of Store Fixtures 50 00 75 00 Delivery Equipment 540 00 760 00 Reserve for Deprecia- tion of Delivery Equipment 54 00 108 00 Notes Receivable 1 200 00 1 530 00 Notes Payable 1 4o5 00 1 206 80 Reserve for Bad Debts 35 10 65 70 Insurance Unexpired 75 00 60 00 Office Supplies 20 00 18 00 Wages Accrued 140 00 150 00 Accounts Payable 3 500 00 3 250 00 Accounts Receivable 4 510 00 2 850 60 A. J. Thatcher, Capital 2 500 00 2 500 00 A. J. Thatcher, Current .500 00 50 00 E. F. Jones, Capital 2 500 00 2 500 00 E. F. Jones, Current __542_ 46 51 67 $23 76-5 10 $23 765 10 $23 3S4 60 $23 384 60 Required '. (a) Comparative balance sheet statement form (b) Comparative profit and loss statement. CLASSIFIED PROBLEMS AND EXERCISES 201 , Problem 44 A public library presents the following trial balance of its ledger: Allen Fund for Purchase of Historic Literature $ 92 000 Smith Fund for Purchase of Civil War Literature 18 000 Receipts from Lost Books 100 Membership Annual Fees 14 500 Income from Allen Fund 3 680 Income from Smith Fund 540 Salaries and Sundry Expenses $ 8 640 Rent 6 400 Purchase of Historic Literature 3 400 Purchase of Civil War Literature 450 Cash in Bank 4 930 Securities Allen Fund 90 000 Securities Smith Fund 15 OOP $128 820 $128 820 Required : Prepare a report showing the financial status of the library. (From New York C. P. A. Examination) 202 ACCOUNTING PROBLEMS: INTERMEDIATE Group G Analysis and Interpretation of Financial Statements Problem 45 The balance sheet of the Simplex Manufacturing Company for the year ending September 30, 1920, contains the following items : Total Assets $1 341 510 27 Total Liabilities 406 117 26 Reserve for Depreciation of Plant and Machinery 45 260 00 Reserve for Loss on Bad Debts 8 239 64 Reserve for Bond Sinking Fund 44 968 73 Reserve for Extension of Plant 43 738 20 Reserve for Insurance 19 621 14 Capital Stock Issued and Outstanding (par $100) 600 000 00 Capital Surplus, Proceeds of Sale of Treasury Stock 130 000 00 Profit and Loss Surplus 43 565 30 Required : Calculate the book value of the capital stock outstanding Show in detail how you arrive at your figure. Comments. The book value of stock is found by dividing the net worth of the concern by the number of shares of stock outstanding, in this problem, 6,000 shares. The net worth may be found in two ways, either by deduct- ing the total liabilities and valuation reserves from the total assets, or by adding together the net worth or capital items. The essential thing is to be able to distinguish valuation reserves from proprietorship or capital reserves, the latter being nothing more or less than surplus under another name. CLASSIFIED PROBLEMS AND EXERCISES 203 Problem 46 The financial statements of the Acme Manufacturing Company contain the following items as of December 31, 1920. 7% Preferred Stock, par $100, issued and outstanding $2 000 000 Common Stock, par $100, issued; including 5,000 shares treasury stock donated to secure additional working capital 2 000 000 Balance of Surplus, January 1, 1920 750 000 Net Profit for the year 1920 (Bond Interest deducted) 950 000 First Mortgage 6% Gold Bonds outstanding 1 200 000 From the above information compute the following, indicating all processes and amounts used to arrive at your results. Required: (a) Rate of net profit earned on all capital stock out- standing (b) Rate of net profit earned available for common stock outstanding (c) Rate of net profit earned on invested capital (d) Ratio of net earnings to interest on bonds (e) Earnings per share on common stock outstanding (f) Book value per share of common stock outstanding (g) Book value per share of common stock assuming that the treasury stock had been sold at $75 and the proceeds credited to Capital Surplus (h) Assuming that the asset Plant was brought on the books at an inflated value in order to cover an issue of the common stock later donated to the corporation, and that when the stock was sold at $75 the proceeds were credited to the asset account instead of to capital surplus, would your answer be different from that given in (g)? 204 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 47 JAMES MANUFACTURING COMPANY Balance Sheet as at December 31, 1920 Assets Cash $9 000 Notes Receivable 2 000 Accounts Receivable 3 000 Subscriptions Receivable 6 000 Patents 40 000 Plant, Machinery, and Equipment 20 OOP Total Assets $80 OOP Liabilitiea Accounts Payable $4 000 Notes Payable 6 000 Mortgage Payable 10 000 Capital Stock Subscribed 12 000 Treasury Stock Donated 3 000 Capital Stock: Common: Authorized, 1,000 shares no par value Unissued 200 shares no par value Issued 800 shares no par value and sold at $10 a share $ 8 000 Less 300 shares no par value in treasury @$1P 3 OOP 5 000 Preferred: Authorized, 400 shares @ $100 $40 000 Unissued 100 shares @ $100 10 OOP Issued 300 shares @ $100 $30 000 Less 10 shares in treasury bought back at par 1 OPP 29 POP Surplus: Balance as of January 1, 1920 $21 000 Less Dividend declared 12/15/20 and prepaid 12/25/20 in unissued preferred stock 10 OOP 11 QOQ Total Liabilities, Capital and Surplus $8P OOP Required : (a) Amount of working capital (b) Ratio of current assets to current liabilities (c) Book value per share of the common stock (d) Rate of stock dividend on capital invested CLASSIFIED PROBLEMS AND EXERCISES 205 Problem 48 The following balance sheet has been published by the X Company as showing the condition of the business after the sale of $10,000,000 of the first preferred stock and all of the second preferred stock noted therein. A prospective purchaser of some of the stock asks you to tell him book values of each class of stock, amounts of net tangible and net quick assets for the appro- priate class or classes of stock, and to advise him whether to purchase the first preferred at 95 or the common at 90. Assets Land, Buildings, Machinery $ 7 000 000 Good-Will and Patents 8 000 000 Investments 500 000 Cash 10 715 000 Inventories 13 000 000 Accounts and Notes Receivable 10 000 000 Other Current Assets 450 000 Deferred Charges 335 OOP $50 OOP OOP Liabilities Capital Stock: 7% Cumulative First Preferred $15 OOP 000 7% Cumulative Second Preferred 5 000 000 Common Stock, 75,000 shares of no par value 6 000 000 Notes and Accounts Payable 13 000 000 Dividends Payable 52 500 1919 Federal Taxes 1 000 PPO Reserve for Depreciation 3 447 500 Surplus 6 500 OOP $50 OOP OOP The par value of the preferred stock shares is $100. It is expected that a quarterly dividend of $2 per share will be paid upon the common stock. In your report, mention such matters as it would seem advis- able to know in addition to those contained in the statement given above. Required: (a) Book value per share of each class of stock (b) The amount of working capital (c) The amount received per share for common stock issued to date. . (From Wisconsin C. P. A. Examination) 206 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 49 The stockholders of a trading corporation decide to sell their business to a competitor, and an agreement is made whereby the purchaser is to pay for the stock, the value shown by the books at the close of business December 31, 1914, plus a value for Good- will to be determined by you as accountant upon the basis of the earnings for five years preceding December 31, 1914. The balance sheet at the beginning of business January 1, 1914, was as follows: Assets Cash $37 227 61 Accounts Receivable 10 026 76 Special Accounts Receivable 1 819 40 Notes Receivable 635 00 Inventories 36 473 22 Unexpired Insurance 699 44 Furniture and Fixtures $24 028 36 Less Reserve 14 978 01 9 050 35 Horse and Wagon Account 2 928 16 S98 859 94 Liabilities Capital Stock $50 000 00 Surplus 48 859 94 $98 859 94 The following trial balance was taken from the books Decem- ber 31, 1914: Accounts Receivable $ 13 672 21 Advertising 578 10 Notes Receivable 700 00 Capital Stock $ 50 000 00 Cash 22 394 81 Claims and Allowances 234 69 Commission 60 63 Accounts Payable 4 556 68 Discount Purchases 4 165 98 Discount Sales 1 218 50 General Expense Account 4 442 33 General Expense 1 595 69 Fuel and Light 2 484 96 Furniture and Fixtures 24 112 46 Furniture and Fixtures Repairs 337 79 Freight and Cartage In 4 409 62 Freight and Cartage Out 429 68 Horse and Wagon Account 2 928 16 CLASSIFIED PROBLEMS AND EXERCISES 207 Horse and Wagon Repa ; rs $ 169 68 Horse Feed 421 18 Interest $183 01 Inventory, January 1, 1914 36 473 22 Insurance 2 020 30 Labor 24 ,473 80 Out of Balance (Suspense Account) 13 68 Printing and Stationery 634 16 Profit and Loss 176 14 Purchases 215 686 51 Rent 4 000 00 Reserve for Depreciation 14 978 01 Salary 9 059 14 Sales 258 101 22 Special Accounts 2 132 29 Special Accounts 714 79 Surplus 44 795 96 Taxes 100 29 Traveling Expense 2 535 63 $377 495 65 $377 495 65 The inventories of December 31, 1914, were Merchandise, $53,134.65; Unexpired Insurance, $975.96. 10% depreciation is to be allowed upon the book value of the Horse and Wagon account and the Furniture and Fixtures account. The net earnings for the four years were as follows: 1910 $3 132 74 1911 4 728 93 1912 6 241 24 1913 5 876 29 Dividends have been paid each year at the rate of 6%. Required: (a) Profit and loss statement for the year 1914 (b) Determine the value of the good-will and explain your method (c) Balance sheet of December 31, 1914 (d) What is the book value of the stock, per share? Total number of shares is 500. (From Massachusetts C. P. A. Examination) Comments. Set up the financial statements in the usual manner. A suggested method of valuing the good-will is to find the average profits for the past 5 years. Capitalize this amount at a normal rate and compare this capitalization with the net worth of the corporation. 208 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 50 THE SEWARD COMPANY Balance Sheet December 31, 1920 Assets Real Estate, Buildings, Plant, Machinery, Equipment and Good-Will $2 000 000 Investments in Stocks and Bonds at Cost (market value $100,000) 150 000 Current Assets: Inventories: Raw Material (market value) $230 000 Finished Stock at Selling Prices, less Discount 5 per cent. 200 000 Consignment (selling value) 50 000 Supplies (estimated) 200 000 $680 000 Accounts and Bills Receivable, including Advances to Employes 225 000 Stock in Treasury (unissued) : Preferred $150 000 Common 237 OOP 387 000 Investments in Subsidiary Companies 425 000 Cash and Miscellaneous Items 50 000 1 767 000 $3 917 OOP Liabilities Capital Stock: Preferred Stock $1 000 000 Common Stock 1 800 000 Bonds and Bankers' Loans 625 000 Reserves: For Depreciation Less Renewal Expenditures written off Balance (debit) $ 25 000 For Bad Debts 5 QOO Other Contingencies 50 OOP 30 000 Current Liabilities: Accounts Payable $115 000 Other Indebtedness 231 000 Accrued Items 52 OOP 398 000 Sur Plus 64 OOP $3 917 POO CLASSIFIED PROBLEMS AND EXERCISES 209 Required: (a) Write a brief criticism of the balance sheet from the standpoint of form and arrangement and of the com- pany's financial condition (b) Assuming the markup on finished goods to be 50% you are asked to recast the statement using the form that in your opinion will best set forth the condition of the business. (Adapted from Massachusetts C. P. A. Examination) Comments. The balance sheet should be entirely rewritten in accord- ance with good practice. Make such adjustments as can be made from the information at hand and call attention to those that cannot be made. The finished stock and consignments should be written down to cost, the adjustment being made through surplus. The reserve for contingencies may be used to offset any deficit that may be shown. Problem 51 9 THE B. F. GOODRICH COMPANY Consolidated Balance Sheet December 31, 19 Assets Capital Assets: Real Estate, Buildings, Plant, Machinery and Sundry Equipment less Reserve for Depreciation $12 679 151 72 Patents 583 650 00 Good-Will 57 798 OOP 00 $71 060 801 72 Investments in Other Companies, etc. 1 197 058 00 Societe Francaise B. F. Goodrich representing the net investment at December 31, 191- 570 987 32 20,587 Shares of 7% Cumulative Preferred Stock in Treasury at Par 2 058 700 00 210 ACCOUNTING PROBLEMS: INTERMEDIATE Current Assets: Inventory of Raw Materials, Partly Manufactured and Finished Stock $12 614 926 67 Trade Accounts Receivable after de- ducting Reserve to cover Doubtful Accounts, Discounts, and Allowances 4 699 938 10 Other Accounts Receivable 777 266 85 Bills Receivable 586 274 70 Cash in Banks and on Hand 723 053 50 $19 401 459 82 Deferred Charges to Future Operations: Prepaid Insurance, Interest, Taxes, etc. 222 950 Ol $94 511 956 87 Liabilities Capital Stock: 600,000 shares of Common Stock of $100 each $60 000 000 00 300,000 shares of 7% Cumulative Pre- ferred Stock of $100 each 30 OOP OOP 00 $90 000 000 00 (Redeemable in case of dissolution, liquidation, merger or consolidation at $125 per share) Current Liabilities: Bills Payable 2 799 736 24 Accounts Payable 489 031 53 Sundry Accrued Liabilities 217 206 47 3 505 974 24 Reserve for Contingencies 300 000 00 Surplus Balance at December 31, 191- $806 235 24 Add Net Profit for the year ending December 31, 191-, as per annexed statement 2 599 747 39 $ 3 405 982 63 Deduct Dividends Paid. 7% on Cumu- lative Preferred Stock for the year ending December 31, 191- $2 100 000 1 % on Common Stock 600 OOP 2 700 OOP 00 70598263 Contingent Liability (Societe Francaise B. F. Goodrich) $573 OOP 00 Bankers loans secured by assets of the French Company and by the guar- antee of the B. F. Goodrich Company (a New York Corporation) $94 511 956 87 CLASSIFIED PROBLEMS AND EXERCISES 211 TKE B. F. GOODRICH COMPANY Profit and Loss Account For the Year Ending December 31, 19- Net Sales $39 509 346 52 Deduct Manufacturing, Selling, and General Admini- strative Expenses 36 451 233 98 Profit from Operations $ 3 058 112 54 Add Miscellaneous Income 491 316 72 $ 3 549 429 26 Deduct Reduction of Treasury Preferred Stock from Cost to Par Value $168 417 03 Provision for Depreciation 541 358 09 Interest on Bills Payable 239 906 75 949 681 87 Net Profit Carried to Balance Sheet $ 2 599 747 39 Required: (a) Define capital assets; contingent liability; consolidated balance sheet; 7% cumulative stock (b) How was the treasury stock preferred acquired? What entry pertaining to this stock was made during the year? (c) What is the ratio between current assets and current liabilities? (d) What, in your opinion, is included under "Other Ac- counts Receivable" and "Sundry Accrued Liabilities?" (e) Would there appear to be any relation between the amount of good- will and the issue of common stock? What proportion of the total assets is represented by good- will? (f ) What is the book value of the common stock? (g) Do you approve of the amount of reserves for deprecia- tion and for doubtful accounts not being shown? (h) Was the dividend paid on the common stock earned during the current year? 212 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 52 THE AMERICAN SUGAR REFINING COMPANY and Its Constituent Companies Assets Real Estate and Plants, including Refineries, Warehouses, Cooperage, Railroads, Tank Cars, Wharves, and Sta- bles, with their machinery and equipment, and timber and other lands owned in fee or through ownership of the entire Capital Stock of constituent companies, at cost less depreciation $ 45 931 123 93 Investments, General 24 782 540 68 Investments, Insurance Fund 9 500 000 00 Investments, Pension Fund 1 750 000 00 Merchandise and Supplies, including raw and refined sugar, syrup, material in process of manufacturing boneblack, cooperage, and other stock and supplies on hand 9 142 074 71 Prepaid Accounts, Insurance, Taxes, Etc. 309 051 18 Loans 1 121 266 10 Accounts Receivable 3 322 489 23 Accrued Income, Interest earned, and dividends declared but not yet collected 1 047 043 91 Cash on hand, with Trust Companies, Banks and Short Term Loans 40 493 252 19 $137 398 841 93 Liabilities Capital Stock: Preferred $45 000 000 Common 45 000 000 $ 90 000 000 00 Sundry Reserves: For Insurance $ 9 500 000 00 For Pension Fund 1 750 000 00 For Improvement of Plants 3 367 514 84 For Trade Mark Advertising 2 000 000 00 For Contingencies 823 647 99 17 441 162 83 Accounts, Taxes, and Loans Payable 8 097 115 45 Dividends declared, payable January 2, 1918, and former dividends unclaimed 1 599 036 75 Surplus: Balance, December 31, 1916 $18 348 711 69 Add Amount, transferred in 1917 as stated in Income and Profit and Loss Statement 1 912 815 21 20 261 526 90 $137 398 841 93 CLASSIFIED PROBLEMS AND EXERCISES 213 ' Profit and Loss Statement Comparative Statement years 1915, 1916 and 1917 Credits: 1915 1916 1917 Profit from Operations $ 2 991 465 39 $ 9 756 379 42 $ 10 055 291 41 Interest on Loans and Deposits 880 609 09 792 990 70 1 006 002 25 Income from Investments 2 312 646 21 2 905 737 10 3 129 948 70 Net Profit from Investments 248 336 34 21 554 85 $ 6 184 720 69 $ 13 703 443 56 $ 14 212 787 21 Amount of Appropriations for Im- provement of Plants expended in new construction, and offset in Depreciation on Plant and Equip- ment below $ 685 470 76 Amount deducted from surplus of former years 701 992 24 $ 7 572 183 69 $ 13 703 443 56 $ 14 212 787 21 Debits: Depreciation, Renewal and Re- placement $ 790 304 71 $ 2 000 000 00 $ 2 000 000 00 Sundry Reserves 481 906 98 3 383 562 09 4 000 000 00 Dividends Declared 6 299 972 00 6 299 972 00 6 299 972 00 7 572 183 69 $ 11 683 534 09 $ 12 299 972 00 2 019 909 47 1 912 815 21 $ 7 572 183 69 $ 13 703 443 56 $ 14 212 787 21 Balance Sheet Assets: Real Estate and Plants $ 48 763 560 47 $ 47 246 442 89 $ 45 931 123 93 Investments, General 22 577 772 00 23 972 036 34 24 782 540 68 Investments, Insurance Fund 800000000 900000000 950000000 Investments, Pension Fund 100000000 125000000 175000000 Merchandise & Supplies 16 963 384 52 18 654 839 97 9 142 074 71 Prepaid Accounts 252 834 04 1 527 643 32 309 051 18 Loans 3 803 274 90 1 222 193 00 1 121 266 10 Accounts Receivable 4 607 398 09 3 833 259 72 3 322 489 23 Accrued Income 468 844 67 555 907 03 1 047 043 91 Cash 15 624 806 32 22 717 453 53 40 493 252 19 $122 061 875 01 $129 979 775 80 $137 398 841 93 Liabilities: Capital Stock $9000000000 $9000000000 $ 90 000 000 00 Sundry Reserves 10 137 705 62 13 475 267 87 17 441 162 83 Accounts & Loans Payable 3 999 462 92 6 555 963 24 8 097 115 45 Dividends declared & outstanding .1 595 904 25 1 599 833 00 1 599 036 75 Surplus 16 328 802 22 18 348 711 69 20 261 526 90 $122 061 875 01 $129 979 775 80 8137 398 841 93 214 ACCOUNTING PROBLEMS: INTERMEDIATE Questions (a) Give two examples of a funded reserve in the above balance sheet. (b) What amount of current assets does the balance sheet show? What is the ratio between current assets and liabilities? (c) Ascertain what dividends were declared by this company payable on January 2, 1918, and after doing so determine the amount of unclaimed dividends. (d) How do you explain the item among the assets, "Accrued income, interest earned, and dividends declared but not yet collected?" (e) After allowing for the dividend paid on the preferred stock during the year, what were the earnings per share on the common stock? (f) What evidences of strength do you observe in the statements of this company? (g) Determine the book value of the common stock. (h) Explain the nature of the Reserve for Trade Mark Advertising. Give the probable function of the account. (i) The Reserve for Pension Fund and the corresponding Pension Fund have been increased $500,000 during the year. By what entries was thia brought about? (j) The report of the company states that the number of stockholders has increased during the year from 18,949 to 19,758 and that the average holdings have decreased from 47 Yi shares to 45^ shares. Is this change to be regarded in a favorable or an unfavorable light? (k) From a study of the comparative figures for 1915, 1916 and 1917, write a full report upon the growth and development of the company during these years as revealed by such figures. (1) During the first Liberty Loan Campaign, the company financed the purchase of Liberty Bonds by employees to a total amount of $471,300. representing subscriptions by 6,876 employees. The company is being reimbursed at the rate of $1 per week for each $50 bond. Make complete recommendations with reference to handling this matter through the ac- counting records, and the manner of showing same on this balance sheet. (m) Explain this quotation from the detailed report: "Betterments have been capitalized to the extent of $866,323.56." (n) The total business of the company for the year exceeded $200,000,000. What is your opinion of the rate of return shown by the profit from opera- tions of $100,055,291.41 as compared with rate which ordinarily prevails in a manufacturing concern? CLASSIFIED PROBLEMS AND EXERCISES 215 Problem 53 PITTSBURGH PLATE GLASS COMPANY Statement of Assets and Liabilities December 31, 1920 Assets Assets Liabilities Investment $35 968 524 36 Merchandise $ 9 218 910 92 Material and Working Accounts 7 018 286 33 Bills and Accounts Receivable 11 561 073 22 Bonds, Sundry 211 547 50 Bonds, Liberty Loan 502 127 73 Cash and Cash Items 2 472 680 48 Quick Assets 30 984 626 18 Treasury Stock 6 894 91 Liabilities Capital Stock Authorized $37 500 000 00 Less Unissued Capital Stock 622 400 00 $36 877 600 00 Fractional Shares Issued 50 240 00 Sundry Credits: Bills Payable None Accounts Payable (Current) $ 3 132 797 82 3 132 797 82 Insurance Fund 261 981 69 Reserve for Possible Inventory Deflation 4 850 000 00 Reserve for Estimated Federal Income and Excess Profits Taxes Payable in 1921 5 500 000 00 Profit and Loss Surplus, January 1, 1920 $19 491 615 68 Surplus paid in by Paint, Varnish, Dry Color, Brush, and Chemical Divisions 804 905 61 Earnings for Year 1920 after above reserves for Taxes and Inven- tory Deflation $10 858 095 80 Less Depreciation and Obsolescence 2 262 180 01 8 595 915 79 $28 892 437 08 Less Common Stock and premium issued and paid to retire Preferred Stock $ 197 916 92 Federal Income and Excess Profits Taxes on 1919 Profits 2 896 490 22 Cash Dividends 3 355 964 00 Stock Dividends 6 154 640 00 $12 605 Oil 14 Balance in Surplus Accounts 12/31/20 16 287 425 94 $66 960 045 45 $66 960 045 45 216 ACCOUNTING PROBLEMS: INTERMEDIATE Questions (a) Net earnings of $8,595,915.79 are equivalent to what per cent on capital stock? on invested capital? (b) Investment account shows over $35,000,000. How may such a large amount be accounted for? (c) Federal taxes for two full years amounting to $8,396,490.22 have been deducted from profits and surplus account. How is this accounted for? (d) Explain the nature of Reserve for Possible Inventory Deflation. (e) What do you assume to be included under title (a) Material and Working Accounts; (b) Merchandise. (f) What entry was made on books for item "Depreciation and Obso- lescence?" (g) What is the working capital ratio? (h) Explain the item "Fractional Shares Issued." (i) Find book value of capital stock, (j) How was Treasury Stock acquired? (k) Set up the balance sheet in better form. Problem 54 EASTMAN KODAK COMPANY OF NEW JERSEY and Subsidiary Companies Combined Balance Sheet December 31, 19 Liabilities Capital Stock: Authorized: 100,000 shares Preferred Stock $10 000 000 00 250,000 shares Common Stock of $100 each 25 OOP OOP 00 $35 OOP OOP 00 Issued: Preferred Stock $6 165 700 00 Common Stock $19 586 200 00 Less In Treasury 63 400 00 19 522 800 00 $25 688 500 00 CLASSIFIED PROBLEMS AND EXERCISES 217 Current Liabilities: ' Accounts Payable $1 511 010 27 Dividends Declared Quarterly Dividends (Payable 1-1-19): Preferred Stock $ 9248550 Common Stock 488 070 00 580 555 50 $2 091 565 77 Welfare Fund Reserve 1 025 520 91 Other Funds and Reserves: For Capital Purposes $469 196 53 For Renewal of Plant 3 250 000 00 For Depreciation 2 858 518 81 For Contingencies 360 137 34 6 937 852 68 Surplus as per Annexed Account 17 507 435 47 $53 250 874 83 Assets Cost of Properties (including Real Estate, Buildings, Plant, Machinery, Patents and Good- Will, and Invest- ments in Other Photographic Companies) $32 014 370 90 Deferred Charges to Profit and Loss Account (Insurance, Taxes, etc., Paid in advance) 139 651 67 Welfare Fund Assets: 1 025 520 91 Current Assets : Merchandise, Materials and Supplies on hand $ 9 733 650 12 Accounts and Bills Receivable (net) 3 317 703 12 Marketable Bonds and Stock 1 385 913 99 (Market Value, $1,606,912.50) Cash: On deposit at In- terest $ 4 228 072 87 At Banks on Cur- rent Accounts and on hand 1 405 991 25 5 634 064 12 20 071 331 35 $53 250 874 83 Surplus Account Balance at December 31, 19 $12 186 287 52 Less Transferred to Welfare Fund 500 OOP 00 $11 686 287 52 218 ACCOUNTING PROBLEMS: INTERMEDIATE EASTMAN KODAK COMPANY OF NEW JERSEY and Subsidiary Companies Combined Balance Sheet Continued December 31, 19 SURPLUS ACCOUNT Continued Net Profits of Combined Companies for year ending December 31, 19 $13 999 047 45 Deduct Dividends Paid and Accrued: Four quarterly divi- dends of 1 Yi% each on Preferred Stock $369 942 00 Four dividends of 2K% each and ex- tra Dividends amounting to 30% on Common Stock 7 807 957 50 8 177 899 50 Balance, Amount to Surplus 5 821 147 95 $17 fl07~i35'lfr Questions (a) The above balance sheet as it appeared in the original report was prepared in double page form, liabilities being shown on the left-hand page and assets on the right. With what practice does this conform? What reasons exist for such an arrangement? (1)) Explain the method illustrated of showing Treasury Stock Common. (c) Define funded reserve. What example of a funded reserve appears in this balance sheet? (d) What do you assume to be the purpose of the following reserves? For Capital Purposes For Contingencies (e) Assuming that the preferred stockholders do not share in the distri- bution of earnings in excess of the established rate of 6%, what is the book value of the common stock now outstanding? (f) Do you think the reserve for depreciation is excessive? (g) The auditor's certificate states that "full provision has been made for bad and doubtful accounts receivable." What evidence, if any, is there in the balance sheet that this has been clone? (h) What were the earnings per share of the Common Stock for the year in excess of preferred dividend requirements? (i) What criticism, if any, have you to offer in regard to the order of arrangement of assets and liabilities? CLASSIFIED PROBLEMS AXD EXERCISES 219 Problem 55 ARMOUR AND COMPANY Financial Statement for Fiscal Year ending October 28, 1916 Assets Capital Assets: Lands, Building, Plants, Machin- ery, etc. $ 54 116 062 70 Refrigerator and Other Cars 3 913 677 00 Car Trust Agreement 4 848 416 00 Investment in Allied Companies 28 152 522 31 $ 91 030 678 01 Current Assets: Inventories of Product, Material and Supplies $ 57 120 917 52 Miscellaneous Marketable Invest- ments 11 091 429 64 Bills Receivable 5 354 017 00 Accounts Receivable 56 282 021 37 Cash on Hand and in Banks 7 893 408 79 137 742 694 32 $228 773 372 33 Liabilities Current Liabilities: Bills Payable $ 27 865 600 00 Accounts Payable 13 155 831 29 $ 41 021 431 29 Reserve (for bond interest) 918 824 31 Capital Liabilities: Bonds 50 000 000 00 Capital Stock $100 000 000 00 Surplus 36 833 116 73 136 833 116 73 Net Capital Investment $228 773 372 33 A dividend of $2,000,000 was paid January 15, 1916, out of 1915 earnings. 220 ACCOUNTING PROBLEMS: INTERMEDIATE ARMOUR AND COMPANY Income and Expenditures Net Profit on Manufacture and Sales after deducting charges for repairs and depreciation, including also earnings of subsidiary allied companies $27 162 1G4 48 Expenditures Interest on Bonds $ 1 809 783 51 Interest on Borrowed Money 1 925 424 67 Administrative Expense 1 960 602 26 Taxes, Insurance, etc. 1 366 354 04 Net Earnings $20 256 000 00 Less Donation to Pension Fund 156 OOP 00 20 100 OOP 00 $27 162 164 48 A dividend of 2% has been declared payable January 15, 1917. Questions (a) The net earnings of $20,100,000 are equivalent to what per cent on the capital stock? on the invested capital? (b) The gross sales for the year amounted to $525,000,000. The net profit for the year is equivalent to how many cents on each dollar of sales? (c) The report states that a dividend of 2% has been declared payable January 15. Do you find such a dividend stated among the liabilities? (d) Explain the exact nature of the following assets: Car Trust Agreement. Investments in Allied Companies. Miscellaneous Marketable Investments. (e) What is meant by the item: Reserve for Bond Interest? (f) What is the book value of the stock? (g) Re: Pension Fund Begun by an Endowment Fund of $1,000,000 being appropriated by the company in 1911. The company makes an annual contribution to the fund (this year $156,000 or about 1M% of the capital stock) and employees receiving from $520 to $7,500 per year contribute 3% of their annual sal- aries. This is deducted from the June salary. Employees leaving the service before retirement are entitled to a refund. Officers and employees may be pensioned, men at 57 and women at 50, if preceded by 20 years of continuous service. Compulsory retirement age is 65. Pensions are computed at 2% of the salary at retirement, multiplied by number of years of continuous service. In case of death after 15 years of continuous service, the widow or de- pendents of the employee receive a pension computed on a basis of one per cent for each year's service; if such decedents have participated in the CLASSIFIED PROBLEMS AND EXERCISES 221 Pension Fund, his dependents are entitled to a return of all amounts paid into the fund plus compound interest at 4%. You are asked to recommend a method of recording on the books all trans- actions pertaining to the Pension Fund; also to prescribe any special books pertaining thereto which you deem necessary. Problem 56 F. W. WOOLWORTH COMPANY Figures of operations for the year ended December 31, 1921, with com- parisons, are given below: 1921 1920 Net Sales $147 654 647 $140 918 981 Net Income * f!3 792 960 9 775 251 Preferred Dividends 770 OOP 857 500 Balance $ 13 022 960 $ 8 917 751 Common Dividends 5 200 OOP 4 600 OOP Surplus $ 7 822 960 $ 4 317 751 Previous Surplus 14 361 365 25 144 435 Total Surplus $ 22 184 325 $ 29 462 186 Stock Dividend 15 000 OOP Preferred Stock Premium 145 375 100 821 Profit and Loss Surplus $ 22 P38 950 $ 14 361 365 * After depreciation, Federal taxes, etc. t After $1,743,170 depreciation in inventories and reserve of $3,5PO,000 for Federal taxes, contingencies, etc. The general balance sheet as of December 31, 1921, compares as follows: Assets 1921 1920 Real Estate, Buildings, etc. $ 20 427 644 $ 16 424 127 Good-Will 50 000 OOP 5P 000 000 Treasury Stock 472 045 2 611 920 Securities 1 330 834 1 340 903 Mortgage Receivable 74 250 82 000 Inventories 16 194 461 18 500 668 Accounts Receivable 703 033 468 308 Cash 11 050 799 4 267 345 Prepayments 83 910 148 383 Dividends Accrued 10 803 45 185 Deferred Charges 6 517 020 5 405 132 Totals $106 864 799 $ 99 293 971 222 ACCOUNTING PKUBLKM8: INTERMEDIATE Liabilities Preferred Stock $ 10 000 000 $ 12 000 000 Common Stock 65 000 000 65 000 000 Mortgage Payable 1 914 500 1 524 500 Accounts Payable 661 965 831 988 Dividends Payable 175 000 210 000 Depreciation Reserve 3 474 384 2 966 117 Reserve for Taxes, etc. 3 500 000 . 2 300 000 Employment Benefit Fund 100 000 100 000 Surplus 22 038 950 14 361 366 Totals $106 864 799 $ 99 293 971 Analyze the above figures for the purpose of determining the following : (a) Net earnings applicable to common dividends as compared with 1920. (b) Comparison of cash position of 1920 and 1921. (c) Comparison of inventories considering that there has been an increase in gross business. (d) Comparison of working capital. (e) Net profits per dollar of sales. (f) Reduction in preferred stock. (g) Write a brief report summarizing the above findings and discussing the position of the company at the close of the year as compared with the beginning. Problem 57 UNITED FRUIT COMPANY The figures of operations for the year ended December 31, 1921, with comparisons, follow: 1921 1920 Decrease Net earning $18 827 979 $43 661 238 $24 833 259 Other income 1 751 856 954 035 *797 821 Total net $20 579 836 $44 615 274 $24 035 438 Interest charges _ 8 __?j> 25 187 16 281 Balance $20 570 930 $44 590 087 $24 019 156 CLASSIFIED PROBLEMS AND EXERCISES 223 Estate taxes Net profit Dividends Surplus Previous surplus Total profit and loss surplus 3 595 167 15 581 779 11 986 612 $16 975 763 8 OOP OOP $ 8 975 763 25 980 010 S29 008 307 6 518 990 $22 489 317 49 109 722 $12 032 543 *1 481 010 $13 513 553 23 129 712 $34 955 774 $71 599 040 $36 643 265 Direct charges to profit and loss balance Balance $34 955 774 Direct credits to profit and loss |50 OOP OOP 50 OOP OOP $21 499 040 t$13 356 734 4 380 970 4 380 970 Balance credit of profit and loss $34 955 774 $25 980 010 $ 8 975 763 * Increase. f Capital stock distribution. The condensed balance sheet as of December 31, 1921, as compared with December 31, 1920, is given below Assets Property: Tropical Lands and Equipment Domestic and European Property Steamships (tonnage 239,297) Steamships under Construction Totals Investments: United States and British Government Securities Other Investments 1921 1920 $ 88 454 682 8 812 417 23 189 097 1 608 660 $ 78 197 713 8 729 118 19 203 833 6 729 766 $122 064 857 $112 860 431 $9 227 553 $13 742 183 6 057 265 5 982 593 $ 15 284 818 $ 19 724 777 Set aside for payment of Current Assets: ~Cash Notes Receivable Accounts Receivable Sugar and Molasses Stock Totals Deferred Assets: Loans to Planters Other Items Totals Deferred Debits Transit Items Total Assets debentures 382 316 $11 176 326 $20 392 302 28 952 213 044 5 298 614 7 349 066 1 240 467 3 105 264 $ 17 744 361 $ 31 059 477 $1 120 707 1 345 194 $842 437 972 546 $ 2 465 902 $ 979 692 1 773 141 1 814 984 503 795 1 338 343 $160 312 775 $167 684 126 224 ACCOUNTING PROBLEMS: INTERMEDIATE Liabilities Capital Stock: United Fruit Company *Capital Stock Distribution Fund Debt; $100 000 000 $ 50 000 000 50 000 000 $ 195 500 131 500 $ 327 000 Deb. 1923 Deb. 1925 Total Current Liabilities: Drafts Payable Accounts Payable Dividend Payable Totals Deferred Liabilities: Costa Rica Ry. Material Account Costa Rica Ry. Replacement Res. Rentals Accrued Other Deferred Liabilities Totals Deferred Credits Surplus: Steamship Construction Reserve Tax Reserve Insurance Reserve Profit and Loss Totals Total Liabilities * Issued January 15, 1921, to stockholders of record December 20, 1920. Questions (a) Compare the earnings per share of 1921 with 1920. (b) Compare ratio of current assets to current liabilities for 1921 and 1920. (c) Can you determine from the statement to what extent the company has reduced its operating costs? (d) What was the market value of the stock on December 31, 1921? The book value? (e) When and how were the 4>6% Debentures of 1923 and 1925 paid off? (f) Distinguish between deferred assets and deferred debits; deferred liabilities and deferred credits. (g) Explain "Capital stock distribution $50,000,000." (h) Define "Transit Items." $1 070 511 $1 998 931 3 375 945 5 514 748 2 000 000 2 000 000 $ 6 446 457 $ 9 513 680 $243 125 $243 125 363 520 331 738 260 483 162 024 424 802 246 373 $ 1 291 930 $ 1 083 262 2 046 652 815 380 2 312 068 9 102 237 12 630 726 20 862 555 629 165 34 955 774 25 980 010 $ 50 527 734 $ 55 944 803 160 312 775 167 684 126 CLASSIFIED PROBLEMS AND EXERCISES 225 Problem 58 A corporation has the following items in its balance sheet: Accounts Payable, Accounts Receivable, Cash, Capital Stock, Expense Accrued not due, Expense Paid in Advance, Good- Will, Merchandise, Machinery, Notes Payable, Patents, Real Estate, Reserve for Depreciation of Plant, Surplus, Trade Marks, and Treasury Stock. You are asked to figure the value of the stock. State which items you would take to get the gross, and which items you would deduct from the gross to get the net amount, and how you would obtain the value of each share. (Massachusetts C. P. A.) Problem 59 The ledger of a manufacturing corporation contains a Fire Insurance Fund account. The treasurer submits, for credit purposes, a statement showing, as "Surplus Funds," the sum of the amount at the credit of the Insurance Fund account, and of the amount at the credit of Surplus account. State (a) your comments thereon; and (b) the reasons supporting your answer. (Massachusetts C. P. A.) 226 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 60 A manufacturer renders the following statement for credit purposes: Assets Residence Plant Inventory Accounts Receivable Cash $ 30 000 140 000 90 400 3 500 625 $264 525 Liabilities Mortgage, Residence Mortgage, Plant Notes Payable Accounts Payable Surplus $ 12 000 60 000 25 000 19 650 147 875 $264 525 From this statement, what inferences would you draw as to the condition of his business? (Massachusetts C.' P. A.) Problem 61 PASSAIC FALLS WOOLEN MANUFACTURING CO. Balance Sheet June 30, 1918 Assets: Land $ 10 000 00 Buildings (brick) 100 000 00 Machinery 150 000 00 Steam Power Plant 25 000 00 Treasury Stock Common, 250 shares costing 20 000 00 Accounts Receivable 50 000 00 Inventories, June 30, 1918 75 000 00 Cash 20 OOP 00 $450 OOP 00 Liabilities. Capital Stock common, par $100.00 $125 000 00 Capital Stock preferred 7% cumulative, par $100.00 100 000 00 Accounts Payable 130 000 00 Undistributed Earnings, June 30, 1917 60 000 00 Profits, year ended June 30, 1918 35 OOP 00 $450 000 00 CLASSIFIED PROBLEMS AND EXERCISES 227 Adjust the above* figures in regard to the following: (1) Land is appraised at $15,000 and is to be adjusted to that value. (2) Give effect in the statements to depreciation of the wasting fixed assets for the year ended June 30, 1918, at rates considered fair. (3) Dividends on the Preferred Stock have not been paid for years ended June 30, 1917, and June 30, 1918. (4) Inventories are valued $5,000 below cost. Required From the above balance sheet and data: (a) Prepare corrected balance sheet in appropriate form for the information of stockholders (b) Show statement of adjustments to profits and surplus. (From American Institute Examination) Problem 62 The following is a comparative balance sheet at December 31, 1910, and at December 31, 1911, presented to the Board of Directors of the Western Company at its meeting January 5, 1912. Assets 12/31/1910 12/31/1911 Land $ 20 000 00 $ 25 000 00 Buildings 45 000 00 45 000 00 Machinery and Tools 86 000 00 89 000 00 Horses, Wagons, and Harnesses 10 500 00 10 500 00 Patents 6 000 00 6 000 00 Good-Will 25 000 00 25 000 00 Cash 28 300 00 10 300 00 Accounts Receivable 29 600 00 26 550 00 Investments and Bonds 15 000 00 Inventory, Goods in Process 10 800 00 14 690 00 Inventory, Materials and Supplies 6 750 00 10 300 00 Agency Investments 3 680 00 $267 950 00 $281 020 00 228 ACCOUNTING PROBLEMS: INTERMEDIATE Liabilities Bonds and Mortgages Payable $ 20 000 00 Notes Payable $ 35 000 00 2 000 00 Accounts Payable 16 400 00 19 350 00 Reserves for Depreciation 2 500 00 6 750 00 Discount on Bonds 1 000 00 Capital Stock: Preferred 150 000 00 150 000 00 Common 50 000 00 50 000 00 Surplus 14 050 00 31 920 00 $267 950 00 $281 020 00 The land increase was due to appraisal based on rise of values of factory sites in the immediate vicinity. Together with the above balance sheet, there was submitted to the Board a statement of income and profit and loss showing the profits of the year to have been $22,120. The directors state to the auditor that in view of the decrease of cash and accounts receivable, of the absence of dividends, and of the increase of capital liabilities, they are unable to ascer- tain what has become of the profits of the year. Required. Prepare a statement to show clearly how the West- ern Company has applied such resources of the year 1910 as have been lost in 1911, and the resources and profits of the year 1911. (From Massachusetts C, P. A. Examination) CLASSIFIED PROBLEMS AND EXERCISES 229 Group H Financial Statements Theory Questions T-l In a general way what is the difference between a financial statement and a balance sheet? (Michigan C. P. A.) T-2 Distinguish between the function of the profit and loss state- ment and that of the balance sheet. T-3 On what theory does the English form of balance sheet differ from the continental and American form? Give an argument either for or against the English form. (New York C. P. A.) T-4 What is the mechanism of the double account form of balance sheet? Explain the connection between its sections. (New York C. P. A.) T-5 (a) What determines the form and arrangement of the balance sheet? (b) What, if any, are the existing limitations to the accuracy of any balance sheet? (Ohio C. P. A.) 230 ACCOUNTING PROBLEMS: INTERMEDIATE T-6 In which section of the balance sheet and in what order would you show the following items: wages, accounts payable, taxes, notes payable, interest accrued payable? (American Institute) T-7 Give either the classification of notes and accounts receivable suggested in the Federal Reserve Bulletin for April 1917, for use in audited statements for credit purposes, or an alternative classi- fication. (American Institute) T-8 There is a confusion in the minds of many people between statements of "revenue and expense" on the one hand and of "receipts and payments" on the other hand. Discuss the dis- tinctive features of such statements showing wherein they differ. (American Institute.) T-9 How would you distinguish between plant and machinery expenditures chargeable to capital assets accounts and those chargeable to ordinary repair and maintenance accounts? T-10 How would you classify the following items in preparing a certificate of condition, to be filed with the Secretary of the Commonwealth ? (a) Prepaid Insurance. CLASSIFIED PROBLEMS AND EXERCISES 231 (b) Duty paid 'on foreign merchandise received, invoice for same being unpaid. (c) Investments in stocks. (d) An ascertained loss on a contract for the purchase of merchandise to be delivered in the following month. (Massachusetts C. P. A.) T-ll In preparing a balance sheet of a corporation how would you classify or deal with securities : (a) Representing the entire ownership of a plant? (b) Representing an interest in a competing company? (c) Representing an investment of a sinking fund? (d) Representing the investment of a temporary surplus of cash? (e) Stocks or bonds issued by the company itself? (American Institute) T-12 Explain fully in what way, if at all, the following should enter into trading and profit and loss statements of a grocery business, with reasons for inclusion or exclusion: (a) Partners' salaries. (b) Profit on sale of real estate. (c) Partners' drawings. (d) Overvaluation of opening inventory. (e) Estimated losses in realization of trading assets. (Massachusetts C. P. A.) T-13 How would you indicate on the balance sheet as of December 31st: 232 ACCOUNTING PROBLEMS: INTERMEDIATE (a) Preferred dividend (cumulative) due the previous Novem- ber 1st, not declared. (b) Ordinary dividend for the year, declared the following January 22nd. (c) Ordinary dividend declared December 30th, payable February 1st? (American Institute adapted) T-14 A corporation has a controlling account in the general ledger for accounts receivable. The balance of the controlling account is $80,000. The debit balances of the individual accounts total $100,000 and the credit balances total $20,000. Is a statement correct which uses the controlling account balance as an asset? If not, what would you do? Give reasons. (Michigan C. P. A.) T-15 A concern needed an addition to its plant. Not having enough ready capital they borrowed money and when the interest was paid it was charged to the Plant account on the theory that it was not an expense in the ordinary conduct of the business, and, therefore, could not be charged to the regular interest and dis- count account but might with propriety be charged as a part of the addition. Is the theory sound? (Michigan C. P. A.) T-16 A manufacturing concern during a slack period used its own labor and material for the purpose of construction, and charged the Plant account with the value of the work done at the price it would have cost if outsiders had been employed. What would you say about this? (Michigan C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 233 T-17 (a) What is meant by "Working Capital?" (b) What facts govern as to the amount of working capital required? (c) In what ways may working capital be increased? (Ohio C. P. A.) T-18 Explain how the following items would appear in the balance sheet : 1. Notes receivable discounted. 2. Actions pending against your client. 3. Cumulative preferred dividends payable. 4. Liability as guarantor for third parties. 5. Liability as accommodation signer on note. 6. Contingent liabilities under contracts. 7. Unpaid balances on contracts not yet fulfilled. 8. Collateral in possession of your banker to secure payment of a note. (Wisconsin C. P. A.) T-19 In reporting upon an audit you include as an asset "Advances to Officers $20,000." The advances have been authorized and there is every probability that they will be repaid. The presi- dent instructs you to make up a new balance sheet and include this item among "Accounts Receivable." How would you answer him? (Maryland C. P. A.) T-20 Enumerate the essential heads of information which ought to be brought out in statements prepared for the information of 234 ACCOUNTING PROBLEMS: INTERMEDIATE bankers for credit purposes. Would you or would you not amplify such information in a statement prepared for the information of (a) Officers and directors? (b) Shareholders of a company? (American Institute,) T-21 What do you understand by the terms: (a) Contingent assets? (b) Contingent liabilities? Give three illustrations of each. Should they .be set up on the books of the company? Should they appear on a certified balance sheet of the company? If so, where and how stated? (American Institute) T-22 In the accounts of a large corporation you find an account with Liberty Bonds, charged with $200,000, representing the cost of bonds subscribed and paid for by the company. At the date of the balance sheet to which you are to certify, the bonds had a market value of $187,500. What attitude would you take as to their valuation in the balance sheet? (American Institute) T-23 (a) Should cash discounts earned be credited against the cost of goods purchased, or credited to profits? Explain why. (b) What is meant by "turnover?" (c) How can the amount of the "turnover" be shown in the Trading Statement? (Michigan C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 235 T-24 A soap company has adopted the policy of giving away pre- miums in connection with its sales, by means of coupons which are to be redeemed in quantities provided as per a printed list. How should these premiums be treated in preparing a balance sheet and profit and loss statement? (Michigan C. P. A.) T-25 The Gordon Manufacturing Company purchases its ma- chinery on the installment plan, payments being made monthly, and bill of sale not rendered until the machinery is paid in full. December 31, 1921, they have several machines in service not fully paid for. How should the value of the machinery and the installments paid be shown on the balance sheet? T-26 The X Company has recently purchased the patent rights to a new type of vending machine, which they are manufacturing in quantities. In order to get them on the market quickly they are shipping large quantities of these machines to general agents on approval, the agents reporting weekly the total number of machines sold. The machines were charged to the ledger ac- counts of the general agents when shipped and credited to the regular sales account. How should these items be handled in preparing the balance sheet and profit and loss statement at the end of the fiscal period? T-27 A corporation has among its notes receivable, a note given for stock subscriptions; also, a note given by an officer of the com- pany to cover an overdraft on his salary account. The notes 236 ACCOUNTING PROBLEMS: INTERMEDIATE payable include a note in favor of another officer for money advanced to the business. How would you show these items in the balance sheet? (Michigan C. P. A.) T-28 The books of a company when closed for the fiscal year show a substantial net profit. No dividends were paid during the year and there is no cash available with which to pay dividends. What would account for this condition? (Massachusetts C. P. A.) T-29 The federal reserve board stipulates that paper to be eligible for re-discount must be supported by a statement of the borrower showing a satisfactory excess of quick assets over current lia- bilities. (a) For such purposes what items are 1. Quick assets? 2. Current liabilities? (American Institute) T-30 A company that has constructed a dam across a river has found it necessary to retain a large legal force to handle damage suits coming up from claims that the reservoir and back water have damaged property around them. The plant has been in operation for 4 years. How should these legal fees be shown in the finan- cial statements at the close of each fiscal period? CLASSIFIED PROBLEMS AND EXERCISES 237 Group I Theory Questions Single Entry Accounts T-31 In a single entry system a statement of operations could not be constructed. What statements would you prepare in order to meet the requirements of determining the selling value of its net worth? (North Carolina C. P. A.) T-32 (a) Name the arguments for double entry bookkeeping as opposed to single entry bookkeeping. (b) What facts can be determined from books kept by double entry which cannot be determined from books kept by single entry? (Michigan C. P. A.) T-33 Describe the process of changing a set of books from single entry to double entry. (Virginia C. P. A.) T-34 (a) What are the sources of data for the financial statements of a firm keeping their books under the single entry system? (b) How may the profit or loss for a fiscal period be determined from a single entry set of books? T-35 Discuss briefly the following statement: "Single entry is an obsolete system and has no place in modern business." (California C. P. A.) 238 ACCOUNTING PROBLEMS: INTERMEDIATE Bibliography Financial Statements BELL, WILLIAM H. Accountants' Reports. New York, 1921. BENNETT, GEORGE E. Accounting Principles and Practice. New York, 1920. Vol. i, Chaps, xm-xiv. BENNETT, ROBERT J. Corporation Accounting. New York, 1917. Chaps. xxiv-xxvi. COLE, WILLIAM MORSE. Accounts: Their Construction and Interpreta- tion. Boston, 1915. Chaps, v and ix. The Fundamentals of Accounting. Boston, 1921. Chap. xx. Cox, HENRY C. Advanced and Analytical Accounting. Business Ac- counting, Vol. iv. New York, 1920. Chaps, xxi-xxiv. DICKINSON, ARTHUR L. Accounting Practice and Procedure. New York, 1914. ESQUERRE, PAUL J. The Applied Theory of Accounts. New York, 1914. Part v. ESQUERRE, PAUL J. Practical Accounting Problems. Theory Discussion and Solutions. Part i. New York, 1921. GREELEY, HAROLD DUDLEY. Theory of Accounts. Vol. i, Business Ac- counting. New York, 1920. Chaps, xi and xiv. GREENDLINGER, LEO. Financial and Business Statements. New York, 1919. Modern Business, Volume 22. HASKINS AND SELLS. Bulletin. New York, 1921. Supplement July 15, 1921. HATFIELD, HENRY R. Modern Accounting. New York, 1913. Chaps. iv, v and vn. KESTER, ROY B. Accounting Theory and Practice. Vol. 11. New York, 1918. Vol. in, Chap. n. New York, 1921. KLEIN, JOSEPH J. Elements of Accounting, New York, 1915. Chaps, vn and ix. McKiNSEY, JAMES O. Bookkeeping and Accounting. Cincinnati, 1921. Vol. n, Chaps, xxxiv, XLII, XLIII. Vol. in, Chaps. L-LVII. MONTGOMERY, ROBERT H. Auditing Theory and Practice. New York, 1915. PATON, WILLIAM H., and STEVENSON, R. A. Principles of Accounting. New York, 1918. SPRAGUE, CHARLES E. The Philosophy of Accounts. New York, 1917. Chap. v. SALIERS, EARL A. Accounts in Theory and Practice. New York, 1920. Part v, Pages 191-218. Financial Statements Made Plain. The Magazine of Wall Street. New York, 1917. WALL, ALEXANDER. The Bankers' Credit Manual. Indianapolis, 1919. Chaps, iv-vi. WILSON, R. P., and CARPENTER, H. J. Analysis of Financial Statements. Chicago, 1918. CLASSIFIED PROBLEMS AND EXERCISES 239 ' Manufacturing Accounts BENNETT, GEORGE E. Accounting Principles and Practice. New York, 1921. Vol. ii. Chap. xv. GREEND LINGER, LEO. Accounting Practice. New York, 1914. Chap. XXII. HATFIELD, HENRY R. Modern Accounting. New York, 1913. Chaps. xv-xvi. McKiNSEY, JAMES O. Bookkeeping and Accounting. Cincinnati, 1921. Vol. n, Series B, Chap. XLIV. RITTENHOUSE, CHARLES F., and CLAP?, PHILIP F. Accounting Theory and Practice. Unit 11. New York, 1919. Chap. xn. SALIERS, EARL A. Accounts in Theory and Practice. New York, 1920. Part vi. Pages 251-269. Single Entry BENNETT, GEORGE E. Accounting Principles and Practice. New York, 1920. Vol. i, Chap. n. ESQUERRE, PAUL J. The Applied Theory of Accounts. New York, 1920. Chap. v. GREELEY, H. D. Theory of Accounts. Vol. i, Business Accounting. New York, 1920. Chaps, xxxiv-xxxv. KESTER, ROY B. Accounting Theory and Practice. New York, 1917. Vol. i, Chaps. LV and LVI. KLEIN, JOSEPH J. Elements of Accounting. New York, 1915. Chap. iv. LISLE, GEORGE. Accounting in Theory and Practice. London, 1909. MACFARLAND, G. A., and ROSSHEIM, I. D. A First Year in Bookkeeping and Accounting. New York, 1915. Chap. iv. MCKINSEY, JAMES 0. Bookkeeping and Accounting. Cincinnati, 1921. Vol. n, Series B, Chap, xxxvi. SECTION H CORPORATION ACCOUNTS Group A Opening the Books of a New Corporation Problem 63 S. V. Benclel, W. J. Clark, and R. M. Dean organize the Bendel Manufacturing Company with an authorized capital stock of $50,000, divided into shares of $100 each. The charter is dated April 1, 1922, at which time all the stock is subscribed, full payment made in cash, and the stock certificates issued. Required: (a) Opening entries in the financial books of the corporation (b) Entries required in the corporate books (c) Entry to record payment of incorporation fee. Comments. This problem illustrates the use of the simplest form of entry for opening the books of a corporation. When the entire authorized stock issue is subscribed and paid for in full at the time the corporation is organized, the only entry necessary in the financial books is to debit cash and credit capital stock. Problem 64 The S. W. Heath Company was organized June 1, 1922, with an authorized capital stock of $25,000, par value of shares $50 each, at which time all of the stock had been subscribed for, payable in 30 days. July 1, 1922, the subscribers made full payments for their stock in cash, and the certificates were issued in proper form. 241 242 ACCOUNTING PROBLEMS: INTERMEDIATE Required: (a) Entries in the financial books of the corporation to record the above facts (b) Entries in the corporate records on June 1 and July 1. Comments. When the authorized stock^ issue is all subscribed as of the date of incorporation, and is to be paid for in full at a later date, an entry should be made following the closing of the subscription list debiting Sub- scriptions Receivable and crediting Capital Stock Subscribed. Later, when the stock is paid for and the certificate issued, an entry is made debiting Cash and crediting Subscriptions Receivable, and another entry made debiting Capital Stock Subscribed and crediting Capital Stock to record the issue of the stock. Problem 65 The Mansfield Company was incorporated January 1, 1923, with an authorized capital stock of $100,000, consisting of $50,000 6% Preferred Stock and $50,000 Common Stock, divided into shares of $100 each. Seventy-five per cent of the Preferred Stock and 50 per cent of the Common Stock had been sub- scribed for. The subscriptions were paid February 1, and the stock certificates issued. Required. Show in general journal form entries covering the above, bringing onto the books the authorized stock issue. Comments. Separate accounts must be opened with each class of stock. When the authorized stock issue is not all subscribed as of the date of incorporation or when the subscriptions are to be paid for in installments extending over a considerable period, certificates not to be issued until stock is fully paid, it is sometimes advisable to make an entry at time of incorporation debiting Unissued Stock and crediting Capital Stock Author- ized (separate accounts for each class of stock). This problem calls for such an entry. The subscriptions to the stock should be recorded as usual. When the stock is issued, debit Capital Stock Subscribed and credit Unissued Stock. CLASSIFIED PROBLEMS AND EXERCISES 243 Problem 66 The Duplex Manufacturing Company was organized under the Business Corporation Law of Massachusetts, September 1, 1922, with an authorized issue of five thousand shares of no par value stock. Three thousand shares of the stock were issued to A in payment for his plant valued at $250,000; one thousand shares were issued for cash at $60 per share; and five hundred shares were subscribed at $75 per share, payable in 30 days. The sub- scribed stock was paid for October 1, and the shares issued. Required: (a) Make in general journal form entries covering the above, including payment of incorporation fee (b) Indicate how the outstanding stock should be shown in the balance sheet on October 31, 1922. Comments. No par value stock should be brought onto the books at value actually received for same or value at which subscribed. The num- ber of shares should be indicated in each case. The first entry in this prob- lem would be as follows: Plant $250 000 Capital Stock (3,000 shares) $250 000 The remaining entries would be in the usual form for par value stock except that the values should be those actually received. Problem 67 The Rich Manufacturing Company was incorporated May 1, 1921, to take over the business established by William Rich. It was agreed between Rich and the other incorporators that of the $100,000 in capital stock which he received in exchange for his business, he would donate to the corporation 20% to be sold to provide cash to make necessary expansion. On July 10, $10,000 of the stock so donated was sold to investors at 60. 244 ACCOUNTING PROBLEMS: INTERMEDIATE Required: Make entries to record the above. Comments. Debit Plant Equipment for business acquired by the cor- poration from Rich. Charge Treasury Stock and credit Capital Stock Donated for par value of stock donated by Rich under date of May 1. Credit Capital Surplus for proceeds of sale of treasury stock. When the stock is issued reverse that portion of the entry made when stock was received applicable to shares disposed of (Capital Stock Donated to Treasury Stock). Problem 68 A mining company is organized with a capital stock of $500,000, in shares of $5 each. The entire capital stock is issued in pay- ment for the properties acquired by the company. The stock- holders then return to the company as a gift, 25,000 shares, which are to be sold by the company for the purpose of providing working capital. The company afterwards sells 10,000 of these shares at $2.50 each, and the remainder at $2.75 each. Required : Prepare journal entries covering above transactions, illustrat- ing two methods of handling the donated stock. Comments. It may be assumed that the cash is received and shares issued. The first method would be as illustrated in the previous problem. The second method assumes the book value of properties to be inflated to the extent of the donation. The Properties account should, therefore, be credited instead of Capital Surplus. CLASSIFIED PROBLEMS AND EXERCISES 245 Problem 69 Company A received its certificate of incorporation from the Commonwealth of Massachusetts on January 10, 1922. The company was authorized to issue 10,000 shares of Preferred Stock and 10,000 shares of Common Stock of the par value of $100 each. The subscribers of record agreed to take 1,000 shares of Preferred and 2,000 shares of Common Stock, and paid the treasurer 10% of the amount subscribed. January 15, 1922, the company sold 1,000 shares of Preferred to a firm of brokers at 101, and received the balance owing by the subscribers of record in cash. The stock being fully paid, certificates were issued to all subscribers of record. January 25, 1922, several stockholders donated $500 shares of Common Stock for use in financing the company. January 30, 1922, sold 100 shares of the donated stock held by the treasurer at 79; also sold 100 shares of Preferred at 102; and gave as a bonus three shares of Treasury Stock with each block of ten shares of Preferred. January 31, 1922, the directors declared dividends as follows: On the preferred, %%; on the common, ^%, payable February 15 to the stockholders of record as of January 31. Required: (a) Journal entries for above transactions (without explana- tions) (b) Prepare trial balance as of January 31, 1922. Comments. The stock not being all subscribed the Unissued and Author- ized Stock accounts may be used. For the purpose of this problem, the dividends may be charged to Surplus. Problem 70 A company is formed with a nominal capital of $500,000 in 50,000 shares of $10 each. Of these, 40,000 are subscribed for. $1 per share is payable on application, and $2 per share on allotment. A call of $3 per share is made four months afterthe 246 ACCOUNTING PROBLEMS: INTERMEDIATE date of allotment, and a further call of $3 three months after the date of the first call. The deposit, with the amount per share due on allotment, is paid in full, but in respect to the first call $110,000 only is received, and on the second call $95,000 only. The amounts received are paid into the company's banking account. Required: (a) Prepare journal entries to record the above transactions (b) Submit a list of ledger balances. (From Massachusetts C. P. A. Examination) Comments. The $1 per share paid OP application and the $2 per share paid on allotment are credited to Subscriptions Receivable account. The two calls made at later dates for $3 per share make it advisable to set up accounts with Installment 1 and Installment 2. There remains $1 per share to be paid on this stock, and therefore the shares are not issued until this is paid. Problem 71 A corporation having issued its capital stock at par buys 1,000 shares at 95. It later sells 500 of these shares at 98, 300 at 85, and 200 at 101. Required : (a) Give the journal entries covering these transactions (b) How should the items appear on the balance sheet immediately after purchasing the stock, and imme- diately after each of the sales? (From American Institute Examination) Comments. The first sentence is understood to mean that the corpora- tion buys 1,000 shares of its own stock, which thus becomes treasury stock. CLASSIFIED PROBLEMS AND EXERCISES 247 Problem 72 The Marion Plating Company was organized on April 1, 1922, with an authorized capital stock of $200,000 divided into 4,000 shares at the par value of $50 each. At a meeting of the directors there was purchased from H. A. Bush, at a valuation of $150,000, all his right, title, and interest in various patents held by him. The balance of the stock was subscribed for on April 1 by E. S. Altieri and F. W. Balcomb in equal amounts. In order to raise funds with which to exploit the invention, Mr. Bush donated to the company 2,500 shares of stock. Of this, 2,000 shares were sold before April 15 at an average of 40, and 200 shares were used in giving a bonus of 10% in stock. The first installment of $10 per share was received April 15 from both Mr. Altieri and Mr. Balcomb. The organization expenses were $500; this was paid April 15. Required: (a) Journal entries to express the above facts (b) A trial balance as of April 15. Problem 73 The Excelsior Company is organized under the laws of the State of New York with an authorized capital of $1,000,000, divided into $500,000 Common and $500,000 Preferred Stock, the par value of the . Preferred being $100 and the par value of the Common being $50. Three incorporators, John Doe, Richard Roe, and Samuel Straight, each subscribes for one share of Preferred Stock at the par value. John Doe, one of the in- corporators, transfers his complete manufacturing plant to the Excelsior Company for the remaining Preferred Stock and $300,000 in Common Stock. The individual assets acquired are : Land and Building, $100,000; Plant and Machinery, $150,000; Furniture and Fixtures, $75,000; Inventories, $84,000; Accounts 248 ACCOUNTING PROBLEMS: INTERMEDIATE Receivable, $63,000; Cash, $77,700. The incorporators pay in cash for their subscriptions. The organization expenses were $2,500 paid in cash: Required: (a) The opening entries for the books of the Excelsior Company (b) The initial balance sheet. Comments. Set up an account with good-will for the excess of the stock issued over the value of the assets acquired. Problem 74 A corporation is organized under the laws of the State of Michigan, with Capital Stock $250,000, of which $100,000 is Preferred and $150,000 is Common Stock, shares $100 each. The purchasers of Preferred Stock at par are to receive an equal amount of Common Stock free. All the Preferred Stock is sub- scribed and paid for, leaving $50,000 of Common Stock unsub- scribed. It is found that the remaining Common Stock cannot be sold for sufficient cash for requirements, and the holders of Preferred Stock donate to the Treasury $50,000 of their Common Stock. The Common Stock is sold at 50 cents on the dollar. Required: Provide journal entries covering the above (explain each entry fully). (From Michigan C. P. A. Examination) Comments. The Common Stock issued to preferred stockholders free of charge may be charged to a Bonus account. The last sentence is construed to mean a sale of both the balance of the unissued Common Stock and the Treasury Stock on hand at 50% of par value. CLASSIFIED PROBLEMS AND EXERCISES 249 Problem 75 A Massachusetts corporation was organized with a capital of $100,00010,000 shares of $10 each. At the meeting of the incorporators it was resolved to purchase certain patent rights from and for the whole of the capital, less 100 shares held by the incorporators and paid for at par. Afterward the former owner of the patent rights agreed to sell to the company 5.900 shares for the sum of $29,500, or $5 per share, which was ac- cepted, and B was appointed trustee to hold the stock in his name as trustee, and was authorized by the directors to sell the stock at $8 per share, which he succeeded in doing. Required: (a) Give proper entries for the above transactions (b) How would the profits on this transaction affect the dividends of the stockholders? (From Massachusetts C. P. A. Examination] Comments. No entry need be made for appointment of B as trustee. When the sale is made, carry the profit to Capital Surplus account. Problem 76 A corporation is organized with a capital stock of $100,000 to acquire a business formerly conducted by A. The business shows sundry assets, $150,000, and sundry liabilities, $80,000. Three shares of stock are sold at par to X, Y, and Z, who after- ward become directors of the new corporation. All of the re- maining stock is issued to A, who immediately donates $10,000 of stock to the treasury to procure additional capital. Two months later $5,000 of the donated stock is sold at 48, and 6 months later the remainder was sold at 62. Required : (a) Show in general journal form entries covering the above (b) Submit a trial balance of ledger accounts. 250 ACCOUNTING PROBLEMS: INTERMEDIATE Group B Changing a Partnership to a Corporation Problem 77 Messrs. Elwell and Rogers, partners, engaged in manufacturing, decide to form a business corporation under the laws of Massa- chusetts, under the name of the Rogers Manufacturing Com- pany, with an authorized capital of $100,000. In consideration of the entire issue of capital stock, the corporation purchased all of the assets except cash, and assumed all of the liabilities of the partnership, except the loan owed Rogers as shown by the following balance sheet dated November 30, 1920. Balance Sheet November 30, 1920 Assets Plant and Machinery $35 000 Stock on Hand per inventory 20 525 Accounts Receivable 22 750 Notes Receivable 1 500 Cash 5 225 Total Assets $85 OOP Liabilities Elwell's Capital $42 500 Rogers' Capital 36 300 Accounts Payable 5 250 Rogers' Loan 700 Wages Due and Unpaid 250 Total Liabilities and Capital fSSjOOO Required: Sketch in general journal form entries necessary: (a) To close out the books of the above partnership (b) To open the books of the Rogers Manufacturing Com- pany. Comments. In closing out the partnership books, where the form of proprietorship is changed to that of a corporation, a very definite pro- cedure should be followed. The entries should be set up as if it were a sale to outsiders, an account being opened with the corporation as vendee. In this problem the entries would be as follows: (1) Bring onto the books the good-will incidental to the sale of the business by charging Good-Will and crediting the partners' accounts in the proportion in which profits are shared. (2) Charge the assets (including good-will) ' sold to the vendee company by debiting the vendee company and crediting the various asset accounts. CLASSIFIED PROBLEMS AND EXERCISES 251 (3) Credit the vcndOc company for the liabilities assumed by debiting the various liability accounts and crediting the vendee company. (4) Credit the vendee company for the shares of capital stock received from them in payment for the net p.ssets by debiting Capital Stock of Rogers Manufacturing Company and crediting Rogers Manufacturing Company, Vendee. (5) Pay off the Rogers Loan not assumed by the vendee company, crediting cash. (6) Distribute the stock received from the vendee company and the cash remaining in the business by charging the partners' accounts and crediting Capital Stock of Rogers Manufacturing Company and Cash. In the absence of any special agreement, the distribution will be in the ratio that each partner's net capital bears to the total net capital at time of distribution. In making entries to open the corporation books: (1) Make the usual entry to set up the capital stock authorized. (2) Bring onto the books the assets (including good-will) acquired from the vendor firm by debiting the various asset accounts and crediting the vendor firm. (3) Bring on the various liabilities assumed by the vendee corporation by debiting the vendor firm and crediting the proper liability accounts. (4) Charge the vendor firm for the capital stock issued to it in settle- ment for the net assets taken over by debiting the vendor firm and credit- ing Unissued Stock. Problem 78 G. W. Pitts & Company, who have been conducting a whole- sale grocery business, have decided to incorporate. Their assets and liabilities are stated as follows: Balance Sheet April 30, 1922 Assets Real Estate and Improvements $64 500 Inventory 15 500 Accounts Receivable 5 400 Cash 2 600 Total Assets $88 000 252 ACCOUNTING PROBLEMS: INTERMEDIATE Liabilities Accounts Payable $ 7 800 Notes Payable 25 OOP $32 800 G. W. Pitts, Capital $30 000 R. M. Price, Capital 20 000 J. G. Riley, Capital 5 200 55 200 Total Liabilities and Capital $88 OOP Profits are shared as follows: Pitts, one-half; Price, one-fourth; and Riley, one-fourth. The corporation known as The Pitts-Price-Riley Company is incorporated May 1, 1922, with an authorized capital stock of $150,000, par value $100 per share. The following subscrip- tions were received for stock at par: R. M. Price, 100 shares; J. G. Riley, 250 shares; Dion & Company, brokers, 500 shares. The subscriptions are fully paid in cash, and the certificates issued. The corporation takes all the assets of the partnership except cash and assumes payment of the accounts payable, but not notes payable. The real estate and improvements are taken over at a valuation of $100,000, and the Good-will is considered worth $20,000. The purchase price is to be paid as follows: Cash, $33,100; Bonds, $50,000; Stock, $50,000. Required: (a) The entries necessary to close the books of the partner- ship and open the books of the corporation (b) Balance sheet of corporation, May 31, 1922. Comments. The procedure in this problem will be similar to that out- lined for the previous problem. It will be necessary to adjust the Real Estate account, crediting the increase in value to the partners in proper proportion. The good-will of $20,000 will be brought onto the books and credited to the partners in profit and loss ratio. Credit the vendee cor- poration for the cash, bonds, and stock received in payment for the net assets. The payment of the notes payable and the distribution of assets will be as outlined for the previous problem. CLASSIFIED PROBLEMS AND EXERCISES 253 Problem 79 Foster, French & Company, a partnership conducting a manu- facturing business, decide to incorporate. A balance sheet taken on December 31, 1922, shows the fol- lowing assets and liabilities: Balance Sheet December 31, 1922 Cash $ 5 000 Accounts Payable $ 40 000 Accounts Receivable 30 000 Foster, Capital 50 000 Plant and Sundry Assets 155 000 French, Capital 50 000 Gilman, Capital 25 000 Gould, Capital 25 OOP $190 OOP $190 OOP Profits and losses are shared in proportion to capital invest- ments. . On January 1, 1923, they incorporate the Salem Manufac- turing Company with a capital stock of $200,000, consisting of 1,000 shares each of Common and Preferred Stock, with a par value of $100. All the assets of the firm, except cash, are taken over by the new corporation, and all of the liabilities are assumed. In exchange for the property of the old firm, 900 shares each of Preferred and Common Stock are issued to the partners in the proportion shown by their capital accounts, which stock, includ- ing the cash on hand, is distributed equitably among the partners. The remaining stock is subscribed for at par by outside parties, their subscriptions being paid in full on January 15. On February 1, the four incorporators donate to the corpora- tion $20,000 of Common Stock in proportion to their holdings to be sold to produce further working capital. April 1, 100 shares of the donated stock is reported sold at an average price of 75. Required: (a) Entries to close partnership books (b) Entries to open corporation books and to record suc- ceeding transactions (c) Balance sheet of the Salem Manufacturing Company as of April 1, 1923. 254 ACCOUNTING PROBLEMS: INTERMEDIATE Comments. Attention is called to the fact that the stock received from the vendee and the cash remaining on hand are distributed in proportion to partners' net capital at time of distribution and after bringing on the good-will, if any. Problem 80 Crosby & Company, desiring to incorporate their business, secure a charter under the laws of the Commonwealth of Massa- chusetts on December 30, 1921, the Crosby Chemical 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, par value of $100 each. Two shares each are issued to A and B for services ren- dered the corporation. The balance of the stock is issued to the partners in payment for formulae, trade marks, and patents, and for the net assets of Crosby & Company's business, a balance sheet of which is as follows: Balance Sheet January 1, 1922 Assets Real Estate $25 000 Machinery 30 000 Fixtures 15 600 Manufactured Goods 15 220 Materials and Supplies 29 222 Prepaid Insurance 1 856 Cash 12 106 Accounts Receivable 28 418 Total Assets $157 422 Liabilities Notes Payable $ 2 000 Accounts Payable 3 143 J. A. Crosby 77 025 Thomas Rows 75 254 Total Liabilities $157 422 Required: (a) Entries to close the books of Crosby & Company (b) Entries to open the books of the corporation. CLASSIFIED PROBLEMS AXD EXERCISES 255 Comments. The difference between the par value of stock issued to part- ners and the book value of the business is charged to Formulae, Trade Marks, and Patents account. Inasmuch as practically all the stock of the corporation is held by the old partners, the cash is transferred with the other assets. Clearness and completeness in stating all necessary particulars should receive your consideration. Problem 81 Charles Capon and Albert Carver have been partners in the wholesale drug business for a number of years. They decide to incorporate, and a corporation to be known as the People's Drug Company is organized under the laws of Maine, with a Capital Stock of $100,000, of which $60,000 is 6% Preferred Stock and the remainder Common Stock. The balance sheet of the partnership on July 1, the date of of incorporation, is as follows: Assets Liabilitiea Cash $ 2 000 Notes Payable $ 2 000 Real Estate 40 000 Accounts Payable 8 000 Accounts Receivable 20 000 Charles Capon, Capital 30 000 Notes Receivable 5 000 Albert Carver, Capital 30 000 Furniture and Equipment 3 000 i70~00b $701)00 All of the Preferred Stock is issued in equal parts to Capon and Carver in exchange for the net assets of the old business. The Common Stock is all subscribed for at par by outsiders, and their subscriptions are paid August 15. The company closed its books December 31, at which time the profit and loss statement showed a net profit of $5,496.83. The regular quarterly dividend was declared on the Preferred Stock and a dividend of 2% on the Common Stock, payable January 15. 256 ACCOUNTING PROBLEMS: INTERMEDIATE Required: (a) Entries necessary to close the partnership books (b) Entries on corporation books to record issue of both classes of stock, assets acquired and liabilities assumed (c) Entries to close profit and loss account and for the dec- laration of the dividends and their payment. Problem 82 A and B were partners, trading under the name of A, B & Company. June 30, 1922, the following balances appear on their ledger: A, Capital $70 000 B, Capital 50 000 Real Estate 22 000 Buildings 20 000 Machinery and Tools . 44 000 Furniture and Fixtures 2 OGO Accounts Receivable 50 000 Cash 7 OCO Materials and Merchandise 53 000 Accounts Payable 35 000 Bills Payable 48 000 Bills Receivable 5 000 On June 30, 1922, the business is incorporated as the X Com- pany, on the following plan: (1) Capital stock, $150,000. (2) X Company takes over the entire assets and liabilities of A, B & Company at the book figures as above, except (a) real estate of the book value of $5,000, which is retained by A, B & Company; (b) the accounts receivable, which are taken over at $48,000, and (c) the capital accounts of the partners. (3) X Company pays A, B & Company $30,000 for the good- will of the business. (4) Payments to A, B & Company are made as follows, viz.: $50,000 in first mortgage bonds, and the balance in capital stock of X Company. CLASSIFIED PROBLEMS AND EXERCISES 257 (5) After paying off A, B & Company, the remainder of the capital stock is sold for cash to sundry persons. The real estate which is retained by A, B & Company is bought from A, B & Company 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. Required: (a) Prepare closing entries for books of A, B & Company (b) Statement setting forth the partners' accounts down to their final closing, beginning with the balances shown by the books on June 30, 1922 (c) Opening entries for the X Company. (From Washington C. P. A. Examination) Comments. The statement called for in (b) may be shown in the form of ledger accounts with each item fully explained. Problem 83 Thomas Jones and William Thompson are trading in partner- ship as wholesale grocery merchants, sharing profits equally. On January 1 their balance sheet is as follows: Assets Stock in Trade $27 245 Furniture 2 752 Debtors 37 625 Cash 752 Good-Will _5 000 $73 374 Liabilities Bank of British North America " $10 000 Creditors 27 528 Jones 25 243 Thompson 10 603 $73 374 258 ACCOUNTING PROBLEMS: INTERMEDIATE An agreement is made to amalgamate with Joseph Smith and George Brown, also trading in partnership, and sharing profits respectively 2/3 and 1/3. Their balance sheet on January 1 is as below: Assets Stock in Trade $35 424 Furniture 3 840 Debtors 42 741 Bank of Toronto 3 415 $85 420 Liabilities Creditors $35 818 Smith 22 176 Brown 27 426 $85 420 A company is formed to take over the business, under the name of Smith, Jones & Company, Limited, with authorized capital $200,000, divided into 2,000 Common shares of $100 each. George Wilkins, John Lister, and Robert Ryder subscribe for 20 shares each, for which they pay cash. The Jones and Thompson business is taken over at book figures, except that good- will is raised to $10,000, and $1,000 is set up as a reserve for doubtful debts. The Smith and Brown business is taken as shown, with an addition of $15,000 for good-will, and $1,500 reserve for doubtful debts. The partners in the two businesses are to take shares for their interests, making up an even amount by paying cash if required. All cash is deposited in the Bank of British North America. Required: (a) Journal entries to show the various transactions inci- dent to taking over the businesses and allotment of shares, giving the number of shares allotted each party (b) Balance sheet of Smith, Jones & Company, Limited (c) Entries necessary to close the books of the partnerships. (From Final Examination of the Manitoba Institute of Chartered Accountants). CLASSIFIED PROBLEMS AND EXERCISES 259 Gr6up C Corporate Bond Issues Problem 84 The directors of the Consolidated Railway Company vote an issue of $850,000 First Mortgage 5% Bonds on March 1, 1912, due in 1940. The entire issue is subscribed for by E. H. Sloane & Company, Investment Bankers, at 98, and paid for in cash. Required. Make proper entry to show the issue of the bonds. Comments. An entry is made at the time of the sale of the bonds to E. H. Sloane & Co. charging Cash and Bond Discount and crediting First Mortgage 5% Bonds at par. The bond discount will then be carried as a deferred asset and amortized over the life of the bonds, the entry at the end of each fiscal period being to charge Bond Interest and credit Bond Discount. This has the effect of increasing the amount of interest paid each period, and increases the nominal rate of interest 5% to what is known as the effective rate. When the bonds are not all sold at the time of issue an account may be brought on to the books for Unissued Bonds and one for Bonds Authorized, in the same manner as Unissued Stock and Capital Stock Authorized. As the bonds are sold they are credited to Unissued Bonds account. This method is not recommended. It is usually considered better practice not to bring the bonds onto the books until sold. Problem 85 The Cleveland Paper Company, finding that it can use addi- tional capital to advantage, issues $100,000 first mortgage 20- year Gold Bonds bearing 5% interest. It sells these bonds at 96. J. W. Pittenger buys $10,000 of the bonds. Required : (a) Proper entry to record issue of the bonds by the cor- poration (b) Entry on Pittenger's books to record purchase of the bonds. Comments. Bonds sold are brought onto the books by the issuing company at par, the difference between that and the amount received for them being set up as Bond Discount or Bond Premium. Bonds purchased 260 ACCOUNTING PROBLEMS: INTERMEDIATE for investment purposes are usually brought onto the books at cost. Pit- tenger will therefore bring these bonds on at cost charging an Investments account. If such bonds are to be held until maturity they should be written up or down as the case may be, the annual increments being re- flected through the income account. In this way the discount or premium will be written off over the life of the bonds, and they will stand on the books at par at the time they are paid by the issuing company. Problem 86 Corporation XYZ floated a series of 150 bonds (coupon), par value $1,000 each. The interest at 5^% is payable January 1 and July 1. Jones & Smith took over a block of 100 of the bonds at 97^ and accrued interest to date of purchase (September 24), and gave the company their check in payment. Required : (a) Journal entry on books of corporation (b) Journal entry on books of Jones & Smith. Comments. Jones and Smith agree to pay interest on the face of the bonds purchased from July 1 to September 24 at 5H%- In the corporate books this may be credited to Interest on Bonds, and in Jones & Smith's books may be charged to Income from Investments. The effect of this arrangement is that the corporation pays interest from the date of sale and the purchaser receives interest from the same date. Problem 87 A municipal corporation sold thirty days after their date $600,000 thirty-year, 6%, Street Improvement Bonds at 96 and accrued interest. Required: Give the journal entries for the books of the municipality and state what final disposition is to be made of the discount. (From North Carolina C. P. A. Examination) CLASSIFIED PROBLEMS AND EXERCISES 261 Group D General Problems Involving Corporate Accounts Problem 88 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 Preferred Stock, par value of shares $100. Five incorporators subscribe each for one share of Common Stock at face value. John Peters, one of the incorporators, purchases from three manufacturing companies their complete plants for $499,500 and transfers said plants to the Prosperous Company for the remaining $499,500 of Common and Preferred stock and $100,000 of First Mortgage 5% Bonds out of a total issue of bonds amounting to $150,000, leaving $50,000 of bonds in the treasury. The incorporators then pay in cash for their respective sub- scriptions. The individual assets acquired are as follows: Land and buildings, $75,000; plant and machinery, $200,000; tools, equip- ment, and fixtures, $50,000; inventories, $100,000; accounts receivable, good, $28,000, doubtful, $5,000; cash, $12,000. Required: (a) Opening entries for the books of the Prosperous Com- pany (Explain fully) (b) Initial balance sheet showing the company's financial condition. (From New York C. P. A. Examination) Comments. It will be necessary to set up an account with good-will for the excess of the stock and bonds issued over the net value of the assets acquired, a reserve being set up for the doubtful accounts receivable. 262 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 89 A corporation is organized to conduct a manufacturing business with a declared capital of $2,000,000, divided into 20,000 shares of the par value of $100, of which 15,000 shares or $1,500,000 shall be Preferred Stock and 5,000 shares or $500,000 Common Stock. The corporation proposes to issue $500,000 in consol- idated mortgage bonds to be used toward the purchase of sundry properties. The amount of capital with which the corporation begins business is $50,000, being the proceeds of the sale of 500 shares Preferred Stock for cash. To carry out the purposes of said corporation, the real estate, water power, machinery, good- will, etc., of certain existing cor- porations has been purchased at an appraised valuation of $2,000,000, viz., Diamond Manufacturing Company, $200,000; Eureka Manufacturing Company, $300,000; Champion Manu- facturing Company, $500,000; American Manufacturing Com- pany, $600,000; Aetna Manufacturing Company, $400,000, and in payment full paid stock and bonds have been issued at par on a basis of 60% in Preferred Stock, 20% in Common Stock, and 20% in bonds. Materials and supplies are to be paid for in cash when their value is determined. Required: The entries necessary to open the books of the new corpora- tion and to record the purchase of properties as stated. Comments. It is assumed that the 500 shares of preferred stock re- ferred to as having been sold, have been issued and are outstanding. A Vendee account should be opened for each corporation from which properties are acquired, so as to bring onto the books more complete infor- mation regarding the purchase, and forestall possible legal questioning relative to the value placed upon the various properties acquired. I Entries such as above should be supported by complete and carefully worded particulars so that proper statistics will be available when desired. CLASSIFIED PROBLEMS AND EXERCISES 263 Problem 90 The Norwood Electric Company was incorporated January 1, 1922, for the purpose of engaging in the manufacture of electrical specialties. The authorized capital stock was 500 shares 5% Preferred Stock, par value $100, and 500 shares of Common Stock with no par value. The Common Stock was fully subscribed at $90 per share and certificates issued on January 10, at which time a 10% call was made and payment received in cash. The incorporation and other expenses of organization amounted to $500, and were paid in cash. On April 10, the corporation purchased a patent for the sum of $72,000 on the following terms: $50,000 in Preferred Stock of the company, $2,000 cash, and a note for $20,000 bearing interest at the rate of 6%, due July 10. On July 1 a second call of 50% on the subscriptions was made and payments received in cash. The note was paid on July 10. Certain appliances covered by the patent were manufactured and marketed jointly with the Atlas Manufacturing Company. The Norwood Electric Company's share of the profits amounted to $65,000, which was received in cash. During the year, interest, salaries, and general expenses amounting to $8,000 were paid. Wages accrued and unpaid amounted to $600. The Chamber of Commerce of Norwood agreed to donate to the company a factory site on consideration that the corporation build a plant costing not less than $50,000, and employ therein at least 40 men for a period of 3 years. The offer was accepted and a contract was entered into with the Suburban Construction Company to erect a factory building at a cost of $50,000. At the end of the year, the building was partly completed, and cash payments of $20,000 had been made to the contractor. Required: (a) Journal entries to record all of the above (b) Balance sheet as of December 31, 1922. Comments. Unissued stock is not recorded in this problem as the Common Stock is no par value stock, and to record it would necessitate placing an arbitrary value on same. 264 ACCOUNTING PROBLEMS: INTERMEDIATE Attention is called to the fact that the Common Stock is installment stock, the certificates being issued before payment is made. Calls made upon subscriptions should be recorded so as to indicate that calls were made and show the status of the Subscription and Call accounts. The calls may be designated as Installment 1, Installment 2, etc. Organization expenses are usually carried as deferred charges and written off over a period of years. In this instance, the amount is small in com- parison with the profits and should be written off at once. A Vendee account may be opened so as to record details of purchase of patent. The real estate donated for a factory site should be carried in the bal- ance sheet as a contingent asset, as the title does not vest until the per- formance of all the stated conditions. A memorandum entry similar to that made for stock donations may be made in journal. Set up memorandum accounts for the contract entered into for the erection of the factory, and charge Building in Construction for the pay- ments on account. Problem 91 H. M. Bradford is an inventor and holds patent rights, pro- cesses, and inventions which are used by different companies in the manufacture of gas and electric engines and electrical appliances. He decides to organize a corporation for the purpose of selling gas and electric engines, pumps, irrigation machinery, and a full line of electrical appliances. A central jobbing house is to be established in Boston, and selling agencies will gradually be opened in all the principal cities. The corporation is organized under the laws of the State of Maine, March 1, 1920, the incorporators being H. M. Brad- ford and three of his business associates. The corporation name is The H. M. Bradford Co. The authorized capitalization is $100,000 divided into 500 shares of 7% non-cumulative Pre- ferred Stock, par value $100 per share, and 500 shares of Common Stock, par value $100 per share. In order that the four incorporators may qualify as directors, each is given two shares of Common Stock. Bradford assigns to the corporation all of his patent rights and trade marks in ex- CLASSIFIED PROBLEMS AND EXERCISES 265 change for 100 sh?res of Preferred and 492 shares of Common Stock. He at once donates to the corporation all of his Pre- ferred Stock and 242 shares of his Common Stock to be sold to procure working capital. He also assigns to each of the other three incorporators for a private consideration one-fourth of the remainder of his holding of Common Stock. Russell & Co., stockbrokers, are engaged to sell the unissued Preferred Stock held in the treasury, their commission to be paid in treasury stock. They sell to John Waters 50 shares of the Preferred Stock, taking in payment real estate valued at $3,500, and cash $1,500. For making this sale, Russell & Com- pany are given 25 shares of Preferred and 75 shares of Common Stock. Bradford is elected general manager of the company at a salary of $2,000 per year and traveling expenses. The payments made during the month of March are as follows: Office Furni- ture, $200; Office Rent, $50; Bradford's salary for the month; Organization Expenses amounting to $250 (this included lawyer's fee, stenographer's services, publicity, state corporation fee, corporation seal, accountant's fee, corporation books of account, etc). Required: (a) Make journal entries covering the above transactions (Explain fully) (b) Prepare trial balance. Comments. The stock given to the incorporators may be treated as Organization Expenses. Since the treasury stock given to Russell & Company as commission for selling stock is donated stock, it need not appear as an expense charge on the books; as the effect of such a charge would be to increase both expenses and surplus, one offsetting the other. Such a charge is sometimes made, however, for statistical purposes 266 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 92 The Crowley Manufacturing Company was organized April 1, 1922, with a capital stock of $5,000,000, one-half Preferred Stock and one-half Common Stock. Five shares of Common Stock are sold to the incorporators at par for cash. The company issues to S. A. Edison $1,500,000 Preferred Stock and $1,000,000 Com- mon Stock, in consideration of the assignment by him of certain patents, rights, and contracts. Later Edison agrees to surrender to the treasurer of the Crowley Manufacturing Company $1,000,000 Common Stock and $500,000 Preferred Stock to be used for the development of the company as the directors see fit. Still later, Edison agrees with the Crowley Manufacturing Company to surrender $1,000,000 Preferred Stock and take in lieu therefor $1,000,000 in Common Stock. Edison makes a further agreement with the Crowley Manufacturing Company to deliver to it all of the stock in the Eclipse Company, appraised at $350,000, and to pay the Crowley Manufacturing Company $150,000, for which he is to receive $500,000 in Pre- ferred Stock of the Crowley Manufacturing Company. Required: (a) Entries in general journal form to record all of the above transactions on the books of the Crowley Manu- facturing Company (b) Entries to record above on the books of Edison. Problem 93 A company was organized with $1,000,000 capital stock which it placed at par, and $1,000,000 5% bonds which it sold at 90, this being a 6% basis. It paid to contractors, etc., for con- struction $1,800,000, and this amount of investment ran, on the average, for one year before the property was ready for opera- tion. When operation began, the company had, therefore, paid one year's interest on the issue of bonds. No dividends were CLASSIFIED PROBLEMS AND EXERCISES 267 paid on the stock.' In addition to the sum named above, the company also paid $10,000 for legal expenses in connection with incorporation and $5,000 for franchise and other fees. Required: (a) Journal entries covering above transactions (b) Balance sheet of the accounts when the property was ready for operation. (From American Institute Examination) Comments. This problem illustrates the important principle of capi- talizing expenses incurred during the construction period. This is allowed by many public service commissions, and has the sanction of good account- ing practice. Hence, the interest on the bond issue before the property was ready for operation is a proper charge to Construction. Problem 94 The Pencoyd Iron Works desires to enlarge its plant. It proposes to finance the undertaking by an additional issue of $500,000 Common Stock. Stockholders of record are notified that they will be permitted to subscribe to the new issue at par up to 25% of their present holdings. The market value of the stock is $125 a share. R. G. Wells, who owns 100 shares of Pencoyd stock, does not wish to exercise his right to purchase the new stock, and wishes to sell his right. What should he receive for it? Required: (a) Compute the theoretical value of Wells' stock right (b) Set up the entry that would appear on Wells' books for the sale of his right. Comments. The right to purchase stock at a specified price granted by a corporation to its stockholders before the stock is offered to the public is transferable, and may be sold at private sale or through brokers in the same manner as the stock itself. The proceeds of such sale represent a capital income and should be credited to some such account as Sale of Stock Rights, indicating the name of the stock in each case. 268 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 95 The stockholders of the Fiske Leather Company approved the plan of the directors to increase the capital stock of the com- pany from $7,200,000 to $14,400,000 (par value $100). The sum total of assets above the amount of capital stock and debt is now more than $6,750,000 and is invested in plant, working capital, and other assets. Under the stock increase each stock- holder receives a stock dividend of three shares for each four shares held, and a transferable right to subscribe at par for one share for each four old shares held. Required: (a) Using accounts with Authorized and Unissued Stock, give entry for increased capitalization (b) Give entry for the declaration and payment of the stock dividend (c) Morse owns 100 shares. Give the amount of his dividend (d) Morse decides to sell his "stock rights." Establish a value for these rights on February 28, 1921, the market value on that date being 160. Comments. The $6,750,000 excess of assets over capital stock and debt does not enter into the solution. This refers to the surplus of the cor- poration at the time of the increase in capital and is given as a justification of same. It may be assumed that before the new stock is issued proper authority has been secured from the state for the increased capitalization. Problem 96 The American Telegraph and Telephone Company issued on March 1, 1913, $67,000,000 of 20-year convertible 4>% bonds. These bonds were made convertible at par into Common Stock of the company at $120 per share (par value $100) from March 1. 1915, to March 1, 1925. CLASSIFIED PROBLEMS AND EXERCISES 269 September 1, 19l6, Brown, who owns $10,000 bonds, deposits them with the company and receives in exchange common Stock. Required: (a) The number of shares received by Brown, and assuming the dividend on Common Stock to be 8%, the dif- ference in his annual income (b) Journal entry to record the conversion on the books of the corporation. Problem 97 Frame any entries necessary to record the action of the direc- tors as it appears in the minutes of the meeting of August 15, 1917, of which the following is a synopsis, and the action of the officers taken pursuant to authority conferred on them by such minutes: The treasurer reported that the profits for the year as audited amounted to $59,287. Voted that a dividend of $40,000 be paid on October 1 to the stockholders of record September 15, and that $10,000 of the profits be appropriated as a reserve for relief of employees disabled while in the service of the United States and invested in Liberty Bonds. The treasurer reported that he had an offer of $1,000 in settle- ment of a debt of $3,000 of the A. B. C. Company, which had been written off as irrecoverable in 1914. He was authorized to accept the same in full settlement. The president reported that he had secured tenders for new building planned in the amount of $185,000. He was authorized to execute a contract accordingly. The president reported that a firm of bankers had offered to purchase $200,000 of the company's 20-year 5% bonds to be dated October 1, 1917, at 93 and accrued interest. He was authorized to accept the offer and deliver bonds on that date. 270 ACCOUNTING PROBLEMS: INTERMEDIATE Required: (a) Entries to dispose of profits, dividend, and appro- priations (b) Entry to record settlement with A. B. C. Co. (c) Entry to record execution of contract for new building (d) Entry for sale of bonds. (From the American Institute Examination) Problem 98 A corporation's profits for the year ended December 31, 1921, amount to $451,000. The by-laws require a reserve equal to 10% of any dividend paid to the common stockholders, and any surplus remaining after such dividend has been paid is also to be applied to the reserve until it amounts to $250,000. The reserve at December 31, 1920, was $156,020. The capital is $2,000,000 one-half cumulative preference 5%, and one-half common, all fully paid. On December 31, 1921, the preferred dividend is 2^ years in arrears. On December 31, 1920, Profit and Loss account was in debit $202,000. Required: State how you would dispose of the profit for 1921, illustrat- ing your answer by means of journal entries. (From Illinois C. P. A. Examination.) Comments. This problem is for the purpose of testing the judgment of the student. Remember that the deficit and the cumulative dividend in arrears must be taken care of first. The object should be to make such distribution as will satisfy both the common and the preferred stock- holders. CLASSIFIED PROBLEMS AND EXERCISES 271 Problem 99 The owner of 300 acres cf coal land organized a corporation with $1,000,000 capital stock (par $100) deeding his land to the corporation in consideration of three thousand shares, fully paid. The remaining shares were sold for cash. The net profit for the first year was $110,000 and a dividend of 8% was declared. The dividend having increased the market quotations of the stock, the stockholders voted to increase the book value of the land and mines and distribute pro rata among themselves $500,000 fully paid stock. At the end of the second year, the corporation showed a loss for that year of $100,000; therefore, it was de- termined to reduce the capital stock $250,000. Required: Journal entries for these transactions and balance sheet at the end of the second year. (From North Carolina C, P. A. Examination) Problem 100 A company is formed at January 1, 1922, with a capital of $1,750,000, consisting of 17,500 shares of the par value of $100 each. Of these, 16,250 shares are sold to subscribers at par for cash. The following is a summary of the transactions of the com- pany during the first 12 months of carrying on business: The preliminary and formation expenses are $12,500, which are paid in cash. They purchase freehold and leasehold current going iron works and collieries from A. B. and Company for $1,250,000. They take over from them the necessary plant and machinery at $375,000, and a stock of iron, coal, etc., at $229,250. The vendors take in part payment of their purchase money ),000 on first mortgage bonds, and $125,000 in shares of the 272 ACCOUXT1XG PROBLEMS: INTERMEDIATE company, fully paid. There is $1,665,000 paid to them in cash. The company expends during the year $54,200 in additions to the plant and machinery by purchases from sundry creditors to the extent of $41,300, and by payments through Cash account of $12,900. They purchase materials from sundry creditors to the extent of $461,500, and they purchase for cash to the extent of $67,310. They pay for wages, rents, royalties, tools, wagon hire, repairs, etc., $842,700. Their sales from iron and coal to sundry debtors amount to $1,526,585. They receive in cash from sundry debtors $1,040,- 700. They draw on sundry debtors bills to the extent of $419,740. They transfer of the above amount to sundry creditors $54,510, and the bank credits their account with $331,400, the proceeds of those discounted. They pay in cash to sundry creditors, $231,415. They accept for creditors, bills of exchange to the extent of $142,110; of this amount they meet $86,005 through their bank- ing account, the balance being still current at the end of the year. They borrow on First Mortgage Bonds $375,000, which is paid into their banking account as received. The}- pay to their bankers for interest and commissions $8,040; for salaries, office expenses, and management, $15,670; law charges, $410, and for directors' and auditors' fees, $3,010. They write off 5% from the original amount of the plant and machinery for depreciation, but nothing from the additions. They also write off the following amounts: $25,000 from the freehold and leasehold property to cover minerals taken from the freehold and to provide for the expiration of the leases; $3,005 for bad debts, and one-fifth from the preliminary expenses. The discount allowed to sundry debtors amounted to $5,530. There is due at the close of the year $2,250 for interest on bonds, and the value of the stock of materials then on hand is $154,285. All receipts are paid into the bank, and all payments are made bv check. CLASSIFIED PROBLEMS AND EXERCISES 273 * Required: (a) Journal entries covering the above transactions for the year (with explanations) (b) Profit and loss statement (c) Balance sheet. (From Illinois C. P. A. Examination) Problem 101 The X Company is incorporated under the Business Corpora- tion Law of Massachusetts, January 1, 1916, with an authorized capital of $100,000. One share of stock is given to each of the three incorporators, A, B, and C, in order that they may qualify as directors; five shares are given to a lawyer, D, as compensa- tion for legal services performed in organizing the corporation; an investment banker undertakes the sale of the remainder of the stock to investors, less fifty shares of stock which he is to receive as compensation for his services. The subscription books remain open until March 1. Payments for the stock are to be made in four equal installments on the first day of March, June, September, and December. On March 1, the banker reports that all the stock is subscribed for and the first installment is called and paid. Fifty shares of stock are issued to the banker for his services. Stock certificates are issued to all subscribers. June 1, the second installment is called and paid. September 1, the third installment is called and paid by all subscribers except F, who subscribed for 10 shares. December 1, the fourth and last installment is called and paid, F again defaulting on the payment of his installment January 10, 1917, the treasurer of the X Company offers F's shares for sale at public auction. The shares are sold to G for $700. The expenses of the sale amount to $25. A stock cer- tificate for the ten shares is issued to G. After deducting ex- 274 ACCOUNTING PROBLEMS: INTERMEDIATE penses and interest on unpaid installments at 6% the surplus of the sale is remitted to F upon the surrender of his certificates. Required: (a) Make necessary entries in journal form to cover the above (b) In case $400 is the highest bid at auction for the shares what action would the directors take? (c) Instead of offering F's shares for sale at auction, the directors elected to bring action at law against him for the amount due from him, together with interest thereon. The action is entered on February 1, 1917, for $535, covering interest and charges. Judgment is obtained on March 1. At the end of thirty days, as the judg- ment remains unpaid, the directors declare all amounts previously paid by him forfeited to the corporation, an entry of transfer of the stock to the corporation is made, and the original certificate is declared void. Make necessary entries in general journal form. Comments. This problem illustrates the method of realizing upon un- paid stock subscriptions. The student is referred to the Business Corpora- tion Law of the Commonwealth for the legal procedure necessary. There are some points of difference between the method of procedure in the case of installment stock (stock issued but unpaid) and ordinary stock (stock unissued and unpaid). They should be noted carefully. Referring to last paragraph of the problem, charge the unpaid subscrip- tion and all expenses to F personally; credit him with the proceeds of sale of stock, and remit balance of his account in cash. CLASSIFIED PROBLEMS AND EXERCISES 275 Group E Corporations Theory Questions T-36 What are the distinguishing characteristics of the "corpora- tion" as compared with other forms of business organization? What privileges does it carry and what, if any, are its dis- advantages? (American Institute) T-37 (a) Explain the books and accounts needed by a corporation that are not needed by a firm. (b) Name the various kinds of stock and explain what the different kinds represent. (c) How would the following affect the individual holders or subscribers : secret reserves, excessive dividends, bankruptcy, and voluntary dissolution of the corporation? (Michigan C. P. A.) T-38 A corporation is under contract to furnish pure water. Owing to its present source of supply becoming polluted it is obliged to install a plant to pipe water from a great distance, the old plant being abandoned. The abandoned plant is carried on the company's books at $100,000. The new plant will cost $200,- 000. The new water supply will be the same as regards quantity with no increase in the rates. How would you treat the above as regards capital and income? (North Carolina C. P. A.) T-39 A corporation is formed to engage in manufacturing. Pend- ing the sale of underwritten capital stock, money is borrowed 276 ACCOUNTING PROBLEMS: INTERMEDIATE for the erection and equipment of a plant. How should the interest on this loan be treated in the books of account? (North Carolina C. P. A.) T-40 A Massachusetts corporation in need of funds makes the fol- lowing arrangement with three of its directors. They indi- vidually pledge their stock, par value $15,000, $10,000, and $5,000, and receive loans of $7,500, $5,000, and $2,500, with which they purchase new stock at par. It is their intention, when the loans are paid by the corporation, to return this $15,000 worth of stock. (a) May this stock be purchased by the company? (b) What should be the entries on the books of the corpora- tion? (Massachusetts C. P. A.) T-41 (a) When may the account "Treasury Stock" properly be raised on the books of a corporation? (b) What relation does authorized but unissued capital stock bear to the accounts of a corporation? (Ohio C. P. A.) T-42 You find that a corporation has purchased one thousand dollars worth of its own stock for nine hundred dollars. The bookkeeper has made an entry debiting Treasury Stock for $900. If the entry is right, explain in detail the reason. If wrong, make the correcting entry and explain in detail why it was wrong and why yours is right. (Michigan C. P. A.) CLASSIFIED PROBLEMS, AND EXERCISES 277 T-43 What are organization expenses? How are they to be treated in accounts? At what point do expenses cease to be organization expenses and become operating expenses? Is the deficiency in the early years of a corporation's activi- ties (whether an actual loss or a deficiency between the earnings and the normal rate of return) similar to organization expenses? How should such deficiencies be treated in the accounts? To what extent is such a deficiency similar to interest paid during construction? Should such deficiencies be carried on the bal- ance sheet? If so, should they be written off, and how and when? May the deficiencies representing the difference between actual earnings and normal rate of return be capitalized, in the strict sense of having capital stock issued to a corresponding sum? State clearly just who is affected, and how, by the dif- ferent methods of treating the items mentioned above. (American Institute) T-44 The Central Manufacturing Company, with a capital of $200,000 (2,000 shares, par 100), owns 1,000 shares, par 100, in the General Manufacturing Company whose capital is $200,000 (2,000 shares, par 100). The Central Manufacturing Company increases to $400,000 capital and takes over the General Manufacturing Company share for share. Are the Central Manufacturing Company shares which come in place of the General Manufacturing Company shares "Treasury Stock" or "Stock not Issued?" State an argument or reason or authority for your answer. (Massachusetts C. P. A.) T-45 (a) How would you deal in the balance sheet of a corporation with shares recovered from a vendor to whom they had been issued as fully paid and who had returned them in settlement of a claim for fraudulent misrepresentation in respect of the prop- erty sold by him to the corporation? 278 ACCOUNTING PROBLEMS: INTERMEDIATE (b) How would you deal with these shares for the purposes of a dividend? (American Institute) T-46 When a corporation undertakes its own construction work on what basis is it permissible for it to make charges to Property account in respect thereof? On what basis would you person- ally recommend that the charges should be made? Give your reasons. (American Institute) T-47 Three persons (A, B, and C) after two weeks of negotiations agree on July 15 to buy the business of John Doe Company (a manufacturing corporation) and to take over the assets as of July 1, 1915, and assume the results of operations from July 1. A, B, and C form a new corporation on July 31 which acquires the business through A, B, and C as of July 1. The result of the business for the month was a profit of $25,000. How should this profit be treated in the accounts of the new corpora- tion? Give reasons. (Massachusetts C. P. A.) T-48 . - A corporation on September 1, 1920, issued $5,000,000 5-year 6% convertible notes, redeemable at 105 and interest in whole or in part on 60 days' notice, subject to the right of conversion into the stock of the company at the rate of 10 shares of stock for each $1,000 par value of notes, the said stock having no par value. December 31, 1921, the company reported $735,- 000 notes converted into stock at the above rate. They also purchased on open market $2,000,000 notes at 105 and accrued interest. Give entries covering above and state how the items would appear on the balance sheet as of December 31, 1921. CLASSIFIED PROBLEMS AND EXERCISES 279 Group F Theory Questions Corporate Stock Issues T-49 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. (Virginia C. P. A.) T-50 (a) What various factors determine the desirable amount of authorized capital stock? (b) Should good- will ever be capitalized? T-51 In its prospectus a corporation represents that it has an issue of "cumulative, non- voting, non-participating, six per cent pre- ferred stock." Give your interpretation of this expression. (Massachusetts C. P. A.) T-52 In setting up the balance sheet of a corporation which has an issue of 100,000 shares of stock of no par value, but a stated value of $5 a share, and an excess of assets over liabilities of $1,500,000, how would you show the capital on the balance sheet? (American Institttte) 280 ACCOUNTING PROBLEMS: INTERMEDIATE T-53 (a) A company with $500,000 of Common Capital Stock, par value $100 per share, and a Surplus account of $100,000 decides to change its capitalization from a par to a no-par basis. It therefore calls in its 5,000 shares of par value stock and issues in place thereof 10,000 shares of no-par value stock. How should the transaction be recorded? What effect, if any, will the change to a no par value basis have on the surplus account? (b) Suppose that a new company is organized with 10,000 shares of no par value stock and that this new company takes over all the assets and liabilities of the old company at their book value, issuing all of its capital stock in payment therefor. How would the transaction be recorded on the books of the new company? (American Institute) T-54 (a) A and B, partners, organize a corporation with a capital stock of $500,000, to take over their business. The corporation issues its entire capital stock to A and B in payment for their plant and equipment, which is valued at $300,000. The entry recording this transaction is as follows: Plant $500 000 To Capital Stock $500 000 For the purpose of furnishing working capital A and B each donates to the corporation $100,000 of their stock. What entry would you suggest to show the exact state of affairs at this point? (b) Assuming the plant to be valued at $500,000, give the proper entry to record the stock donation. Give reasons for your entries. (Kansas C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 281 T-55 (a) State the purpose for which subscription privileges or "rights" may be given stockholders. (b) How may a stockholder use the "right?" (c) What is the value of a "right" in the following case: The par value of the outstanding capital stock of a corporation is $1,000,000, market value $150 per share. The stockholders of a certain date are offered $500,000 more of this same class of stock at $125. (Wisconsin C. P. A.) T-56 A corporation is organized with an authorized capital stock of $50,000 of which only $40,000 is sold, and stock certificates issued therefor. Conflicting methods of recording the capital stock on the books are urged by rival accountants as follows: (a) Treasury Stock to Capital Stock, $50,000. Cash and Properties to Treasury Stock, $40,000. (b) Cash and Properties to Capital Stock, $40,000. Which method is the better, and why? Can you suggest another method of recording this transaction? (Adapted Maine C. P. A.) T-57 The following paragraphs have appeared in recent announce- ments of stock issues. Comment upon each of them, including the specific points mentioned below. (a) "The First Preferred 7% stock is redeemable by lot at 110 and accrued dividend on four weeks' notice." In your comment, state the exact value of this feature to the investor. (b) "Net tangible assets are $287 per share and net quick assets exceed $125 per share of First Preferred Stock, and no dividends shall be declared and paid upon common shares, which will reduce the net quick assets below $110 for each share of First Preferred Stock then outstanding." In your comment, 282 ACCOUNTING PROBLEMS: INTERMEDIATE state exactly what these terms, "net tangible assets" and "net quick assets, " mean. (c) Capitalization 7% Cumulative Preferred Stock ($100 par) $25 000 000 00 Common Stock ($15 par) 15 000 000 00 Founders' Stock (No par value) 100 000 00 In your comment, discuss Founders' shares in its various aspects purpose of issue, voting rights, payment for stock, right to dividends, etc. (Wisconsin C. P. A.) T-58 An expression of your opinion is desired regarding the follow- ing: Is it legal or sound business policy to declare a dividend out of current earnings while capital is impaired? Is it ever justifiable to pay dividends with borrowed money? (American Institute) T-59 The Directors of the A company are contemplating a preferred stock issue, and are confronted with the proposition of making the preferred issue attractive to investors and at the same time protecting their own equity as common stockholders. After making an audit of the A company, an appraisal was made which showed that the assets were worth double the book value. It thereby doubled the value of the authorized common stock outstanding. (a) If the directors asked your advice as to doubling the authorized common stock of the corporation by the declaration of a stock dividend, what would you reply? (b) If the directors asked your opinion as to the advisability of changing the common stock from a par value basis to the non-par basis, what reasons would you give in reply? (Wisconsin C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 283 T-60 A corporation has two classes of stock fully issued: $5,000,0007% Cumulative Preferred as to dividend and assets. 10% dividends are in arrears. $12,000,000 Common, on which no dividend has been paid. The corporation proposes to retire by purchase $2,000,000 common. What would be the effect, if any, on the interest of the preferred stockholders? Give reasons supporting your answer. (Massachusetts C. P. A.) T-61 (a) How would you treat money received on stock subscrip- tions from persons who afterward forfeited their stock by non- payment of other installments? (b) A company buys $5,000 of its own stock for $4,000. The entry that is made debits Treasury Stock $5,000, credits cash $4,000 and credits Loss and Gain $1,000. State why you approve or disagree. (Michigan C. P. A.) T-62 A corporation is authorized to sell its preferred stock at par value of $100 and with every four shares sold is permitted to give a 25% bonus in common stock, that is, one share of common stock free. State how this bonus stock would be shown in the financial statements at the close of the fiscal period. 284 ACCOUNTING PROBLEMS: INTERMEDIATE Group G Theory Questions Dividends T-63 What is a dividend? State when and how dividends become effective. State how declaration and payment of dividends are usually recorded in books of account. (Michigan C. P. A.) T-64 Give journal entry to express the declaration of a dividend. How would you treat unclaimed dividends? Can you mention any distinction between dividends declared out of income and dividends declared out of profits realized from the increment of invested values? (American Institute) T-65 What do you understand by the term "Dividends Paid out of Capital?" What in your opinion would constitute such pay- ment, and mention any circumstances that may occur to you to justify such payment? (Maryland C. P. A.) T-66 The Bruce Company started in business with the following capitalization, viz. : 10,000 shares, par value each $25 of non- cumulative 7% stock and 6,000 shares common stock of the same par value. When it began business the liabilities of the company exceeded its actual assets by $12,000, which it carried in a Suspense account. Three years elapsed during which some losses were made and charged to Profit and Loss which showed a credit balance of CLASSIFIED PROBLEMS AND EXERCISES 285 $15,000. You are called in to settle a dispute which has arisen between the preferred and common stockholders as to the dis- position of this balance, the preferred holders claimed it should be used to extinguish the Suspense account and the common holders that it should be used to pay them a 10% dividend. What would you advise and why? Answer fully. (Maryland C. P. A.) T-67 Discuss preferred shareholders' right to recover from cor- poration when dividend is earned but not declared. (Wisconsin C. P. A.) T-68 Discuss the subject of dividends: (a) When declared out of premium secured from sale of cap- ital stock. (b) When company's sole investments are in diminishing (or wasting) assets. (Wisconsin C. P. A.) T-69 A corporation was formed which acquired several plants, issuing therefor $17,000,000 bonds and $24,000,000 stock. It was well known at the time that this capitalization exceeded the true value of the assets (including good-will) acquired, to an extent of $11,000,000. In the first year, after paying expenses and interest on bonds, the business yielded considerable net income. May such net income be used to pay dividends, or must it be first applied towards making up the $11,000,000? (American Institute) 286 ACCOUNTING PROBLEMS: INTERMEDIATE T-70 In view of the Supreme Court decision that stock dividends are not income, it is probable that many stock dividends will be declared within the near future. Summarize: (a) The reasons for issuing stock dividends. (b) The reasons against issuing stock dividends. (c) The decision of the Court as to why stock dividends are not income. (d) If a corporation is organized with capital stock of no par value, summarize the reasons why stock dividends would, or would not be declared. (Wisconsin C. P. A.) T-71 The preferred stock of a corporation is entitled to cumulative dividends at 7% per annum. For the past ten years the com- pany has paid dividends on this stock at the rate of 5% per annum. How should the arrears of dividends appear on the company's balance sheet? (Massachusetts C. P. A.) T-72 A corporation has an issue of $100,000 of cumulative preferred stock bearing 6 per cent dividends. No dividends have been paid for two years. How would you disclose the facts in a balance sheet dated December 31, 1920, if (a) A dividend of $12,000 on the preferred stock was declared on December 27, payable January 15, and there is a remaining surplus of $5,000? (b) No dividends have been declared and there is a surplus of $17,000. (c) No dividends have been declared and there is a surplus of $4,000? (d) No dividends have been declared and there is a deficit of $7,000? (American Institute) CLASSIFIED PROBLEMS AND EXERCISES 287 Group F Liquidation of Corporations Problem 102 The Doylestown Hardware Company, because of competi- tion, is forced into liquidation. The balance sheet of the cor- poration on January 1, 1922, is as follows: THE DOYLESTOWN HARDWARE COMPANY Balance Sheet January 1, 1 922 Assets Liabilities Store and Equipment $20 000 Notes Payable $ 6 000 Office Furniture 2 000 Accounts Payable 17 000 Inventory 12 000 Capital Stock 50 000 Notes Receivable 5 000 Accounts Receivable 30 000 Cash 4 OOP $73 OOP $73 OOP The cash book showed the results cf liquidation to be as follows: Cash Receipts: Store and Equipment, $25,000; Office Furniture, $1,200; Stock in Trade, $7,500; Notes Receivable, $3,500; Accounts Receivable, $21,000. Cash Payments: Notes Payable, $6,000; Interest on Notes Payable, $90; Accounts Pay- able, $17,000; Expenses, $3,500. The legal formalities have been complied with, and the charter sur- rendered. Required: Journal entries to effect liquidation and close the books of the corporation. Comments. The work required in this problem is entirely in the form of journal entries and care should be used in stating the entries and the particulars for each entry. The problem is for the purpose of illustrating the entries necessary to close the books of a liquidated corporation. The procedure in this case is as follows: (1) Debit Cash with amount received in realizing on the assets and credit the various asset accounts; (2) Charge the various liability and expense accounts, and credit Cash for amounts paid for expenses and in liquidation of the liabilities; (3) Close the profit realized from the sale of store and equipment into 288 ACCOUNTING PROBLEMS: INTERMEDIATE a Profit and Loss in Liquidation account by debiting Store and Equipment account and crediting Profit and Loss in Liquidation; (4) Close the losses sustained in realizing on the remaining assets into the Profit and Loss in Liquidation account by charging this account and crediting the accounts with assets disposed of at less than book value; (5) Close the expenses incurred during the period of liquidation into Profit and Loss in Liquidation by debiting this account and crediting the detailed expense accounts; (6) Transfer the loss incidental to liquidation of the business from the Profit and Loss in Liquidation account to a Deficit account; (7) Charge Capital Stock account and credit a Stockholders account for the capital stock of the corporation and charge Stockholders and credit Deficit as follows: Capital Stock $50 000 Stockholders $50 000 Stockholders 00 000 Deficit 00 000 (8) The final entry is to record the distribution of proceeds of liquidation to stockholders by debiting Stockholders and crediting Cash. After making this entry, all accounts should be in balance. Problem 103 The following is the trial balance of the Rawdeal Corporation, June 1, 1920, on which day the directors resolve that the secre- tary of the corporation be authorized to call a meeting of the stockholders to vote on the immediate dissolution of the company. Trial Balance June 1, 1920 Land and Building $ 55 000 Machinery and Machine Tools 35 000 Shop and Hand Tools 5 000 P'urniture and Fixtures 9 700 Raw Materials 10 350 Accounts Receivable 23 400 Cash 11 320 Bond (Secured by 6% Mortgage on Land and Build- ing) $ 26 000 Interest Accrued on Bond 312 CLASSIFIED PROBLEMS AND EXERCISES 289 Accounts Payable , $21 700 Reserve for Depreciation of Building 5 300 Reserve for Depreciation of Machinery 9 000 Reserve for Depreciation of Furniture and Fixtures 4 100 Surplus 23 358 Capital Stock 60 OOP $149 770 $149 770 The stockholders' meeting was held on July 1, 1920, and dis- solution was voted. The company sold the land and building to the mortgagee for $44,000 as of August 15, 1920. On September 1, 1920, the cash book showed: Debits: Land and Building, $17,303; Machinery, $25,340; Shop and Hand Tools, $2,100; Furniture and Fixtures, $3,700; Raw Materials, $7,950; Accounts Receivable, $23,130. Credits : Accounts Payable, $21,700; Expenses, $1,530.20. Required: Journal entries to effect dissolution and close the books of the corporation. (Adapted from New York C. P. A. Examination) Comments. The procedure in this problem is similar to that in the preceding problem. It will be necessary, however, to close the Reserve accounts into the correlative asset accounts so as to arrive at the book value of the assets before transferring the profit or loss on realization to the Profit and Loss in Liquidation account. The loss on liquidation as shown by the Profit and Loss in Liquidation account in this case is transferred to Surplus account, and the balance of Surplus is then credited to the stockholders. As the Land and Building was sold to the mortgagee, the Bond and Interest Accrued on Bond accounts should be offset against the asset account, Land and Buildings, before closing that account. The cash re- ceived for the Land and Building, $17,633, represents the difference between the purchase price $44,000 and the Bond account plus accrued interest to date of sale. It would be well, therefore, to make an entry charging Bond Interest and crediting Interest Accrued on Bond for $325, the interest from June 1 to August 15, two and one-half months at 6 per cent. The total interest would then be credited to Land and Building account as indicated above. 290 ACCOUNTING PROBLEMS: INTERMEDIATE Group G Amalgamations and Mergers of Corporations Problem 104 Corporation C is organized in Massachusetts with an author- ized Capital Stock of $500,000, divided equally between Preferred and Common stock, the shares being of the par value of $100 each. Sufficient shares of Common Stock are subscribed and paid in cash to effect the incorporation, and a contract is entered into for the taking over of the business of Corporation A and of Corporation B, the balance sheets of which, at the time of the transfer, displayed financial condition as follows: Corporation A Assets Liabilities Plant and Machinery $ 35 000 Common Stock $ 50 000 Raw Material 6 500 Preferred Stock 42 500 Work in Process 9 200 Preferred Stock Scrip 7 500 Finished Product 16 700 Surplus 5 400 Accounts Receivable 33 500 Accounts Payable 14 200 Notes Receivable 14 500 Deferred Charges 1 200 Cash 3 OOP $119 600 $119 600 Corporation B Assets Liabilities Plant and Machinery $ 51 000 Capital Stock $100 000 Inventory of Merchan- Accounts Payable 31 500 dise 32 000 Accounts Receivable 47 500 Cash 1 OOP $131 500 $131 500 The contract provides, in settlement for the properties and businesses acquired, that preferred stock be issued in each case to the extent of the excess of the asset values, as stated, over the liabilities, and that an equal amount of common stock be issued in payment for the good-will. Required: (a) Opening entries for C and journal entries to record the taking over of the accounts of Corporations A and B CLASSIFIED PROBLEMS AND EXERCISES 291 (b) Balance eheet cf Corporation C after recording the above (c) Entries to close the Books of A. (Adapted from New York C. P. A. Examination) Comments. This problem illustrates the type of consolidation in which a new company is formed to take over the assets and liabilities of the A and B Corporations, which are then dissolved. Make opening entry for C in the usual form. If in doubt as to the number of shares necessary "to effect the incorporation" consult the Business Corporation Law. In taking over the assets of the Corporations A and B, it will be necessary to bring on the good- will purchased with Common Stock as per agreement. This provision should be carefully noted. Deferred Charges listed as an asset by Corporation A may be assumed to be prepaid expenses, and, as such, are properly chargeable as an asset in the accounts of C. Credit the Vendor for assets taken over including good-will, and charge him^with liabil- ities assumed and stock issued in payment for net assets as per contract. In closing A Company's books, open a Vendee account, charging same with assets and crediting with liabilities, also charge Vendee with good- will, crediting same to Capital Surplus. The stock received from C is then debited and Vendee credited, balancing the latter account. The Surplus and Capital Stock accounts are then closed into a Stock- holders account. An entry to record distribution of stock is now made, closing all accounts. Problem 105 The Arnold Manufacturing Company, with 1,000,000 capital stock; The Burke Manufacturing Company, with $500,000 cap- ital stock, and the Crown Manufacturing Company, with $400,000 capital stock, agree to consolidate as the Great Lakes Manufacturing Company, 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 fully paid stock of the new company, the old companies to pay off their own indebtedness : The appraisal values of the old companies are as follows: 292 ACCOUNTING PROBLEMS: INTERMEDIATE Total Arnold Burke Crown Real Estate and Building SI 133 000 $ 680 000 $327 000 $ 26 000 Plant 621 000 390 000 160 000 71 000 Cash 19 000 15 000 3 000 1 000 Notes Receivable 16 000 10 000 6 000 Horses and Wagons 8 500 4 000 3 000 1 500 Office Furniture 2 500 1 OOP 1 OOP __500 $1 800 OOP $1 1PP POO $500 OPP S2PO PPQ On this valuation, the Great Lakes Manufacturing Company 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. At the time of the consolidation, the ledger accounts of the Crown Manufacturing Company were as follows: Real Estate and Build- Capital Stock ' $400 000 ings $250 OOP Notes Payable 5P POO Plant 247 PPP Accounts Payable 51 000 Cash 1 OPP Horses and Wagons 1 8PP Furniture 1 200 $501 OOP $5P1 PPP Required: (a) Journal entries necessary to set up property accounts and credit old companies with their pro rata on books of new company (b) The proper journal entries to liquidate in stock of the new company the liabilities other than capital stock and to apportion the remaining stock and cash, and to close the books of the Crown Manufacturing Com- pany. Comments. This problem presents little that is new. Open books of the Great Lakes Manufacturing Company in the usual manner. Bring on assets acquired at appraised value, and set up good-will for excess of stock issued over appraised value of assets, credit the vendor corpora- tions with the appraised value of their assets plus a pro rata share of the good-will. Note the provision regarding fractional shares of stock. An account may be opened with the odd share of stock under the title of "Vendors' Stock." This account is credited when the odd share is sold and the cash is distributed to vendors in proper ratio. The procedure for closing Crown Manufacturing Company books is simi- lar to that outlined for Problem 1C4. CLASSIFIED PROBLEMS AND EXERCISES 293 Problem 106 The Newtown Gas Company had operated a gas plant for several years for the purpose of supplying local consumers. On January 1, 1920, the United Gas Corporation was incor- porated for the purpose of acquiring various local plants and merging them. The capital stock of the United Corporation was $1,000,000. First Mortgage 6% bonds were authorized to the extent of $500,000. The United Corporation acquired all of the capital stock of the Newtown Company, issuing therefor $100,000 of its capital stock and $50,000 bonds. On April 1, 1920, the Newtown Company was taken over and a new set of books opened. At the date of the merger, the balance sheet of the Newtown Company stood as follows: THE NEWTOWN GAS COMPANY Balance Sheet April 1, 1920 Assets Liabilities Cash $ 2 500 Notes Payable $ 5 000 Inventory 650 Accounts Payable 2 800 Accounts Receivable 3 520 Capital Stock 50 000 Notes Receivable 2 100 Surplus 37 829 Material and Tools 1 859 Plant, Machinery and Franchises 85 OOP $95 629 $95 629 Required: (a) Journal entries to open books of the United Gas Cor- poration (b) Journal entries to close the books of the Newtown Gas Company. 294 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 107 The Burn well Gas Company was incorporated on January 1, 1920, with an authorized capital of $300,000 (2/3 Preferred Stock and 1/3 Common, all the shares being of the par value of $100) to acquire and conduct the business of the Safety Gas Company, whose general balance sheet shows the following on December 31, 1919: Assets Buildings, Machinery and Equipment $100 000 Mains, Conduits, Meters, and Connections 70 000 Franchises, Rights, Privileges, etc. 50 000 Materials and Supplies 15 000 Tools and Emergency Equipment 10 000 Cash 11 800 Accounts Receivable 35 200 $292~000 Liabilities Notes Payable $ 10 000 Accounts Payable 52 000 Capital Stock (2,000 shares) 200 000 Surplus 30 OOP $292 OOP On January 15, 1920, all the Preferred Stock and Common Stock of the Burnwell Gas Company was issued to the twenty stockholders of the Safety Gas Company, in exchange for their holdings of stock in the latter company, in the proportion of two shares of Preferred and one share of Common for each two shares of stock exchanged. At a meeting of the board of directors of the Safety Gas Company held January 20, 1920, it was resolved to carry out the provisions of a plan or merger in accordance with which the Safety Gas Company was to transfer its assets and liabilities to the Burnwell Gas Company and surrender its charter. A cer- tificate of merger was issued at the close of the meeting. At a meeting held January 31, 1920, the board of directors of the Burnwell Gas Company resolved to open accounts on the general books of the company with the individual assets and liabilities taken over and assumed, at the figures shown by the balance sheet of the Safety Gas Company on December 31, CLASSIFIED PROBLEMS AND EXERCISES 295 1919, with the following exceptions: (a) franchise, etc., to be raised to $70,000; (b) surplus not to be carried. As to the January operating transactions, they were recorded in special books in order that they might be embodied at the proper time in the books of the Burnwell Gas Company. Required: (a) Chronological journal entries reflecting on the books of the Burnwell Gas Company the different stages of the merger. (b) Journal entries closing the books of the Safety Gas Company. (Adapted from New York C. P. A. Examination) Comments. This problem illustrates one of the methods of merging corporations. Make opening entry for the new company in the usual form. Bring on the assets and liabilities of the Safety Gas Company, opening up a Vendee account. The method of closing Safety Gas Com- pany's books will be as outlined for previous problems. 296 ACCOUNTING PROBLEMS: INTERMEDIATE Group H Holding Companies and Consolidated Balance Sheets Problem 108 The Armstrong Manufacturing Company has been engaged in the manufacture of a certain commodity for a number of years. In order to insure a ready market for their output, a separate company is organized which is to market the product of the Armstrong Company. The new company is to be known as the Smith Trading Company. The Smith Trading Company is incorporated for $100,000, of which $90,000 is subscribed for by the Armstrong Company, and the balance sold to outsiders for cash. The product is billed to the Trading Company at cost to the Manufacturing Company. On December 31, 1921, the Armstrong Manufacturing Com- pany balance sheet is as follows: THE ARMSTRONG MANUFACTURING COMPANY Balance Sheet December 31, 1921 Assets Liabilities Land $ 30 000 Accounts Payable $ 35 000 Buildings 130 000 Capital Stock 300 000 Equipment 20 000 Surplus 65 000 Raw Materials 40 000 Finished Goods 45 000 Cash 15 000 Due from Smith Trad- ing Company 30 000 Investment in Smith Trading Co. Stock 00 OOP $400 OOP $400 OOP CLASSIFIED PROBLEMS AND EXERCISES 297 The Smith Tracing Company submitted a balance sheet as of the same date as follows: THE SMITH TRADING COMPANY Balance Sheet December 31, 1921 Assets Liabilities Land $ 20 000 Accounts Payable $ 5 000 Buildings 50 000 Due Armstrong Corn- Equipment 10 000 pany 30 000 Inventory of Goods 20 000 Capital Stock 100 000 Accounts Receivable 25 000 Cash 10 OOP $135 OOP SfSirOOO Required: Prepare a consolidated balance sheet showing the condition of the two companies as a single organization, and showing only the status of the organization with reference to the outside public. Comments. In preparing a consolidated balance sheet it is important to bear in mind that all inter-company accounts are eliminated in order that the financial condition of the enterprise as a whole may be shown only in its relation to the outside world. In solving this problem, therefore, attention is called to the following: (1) The amount due the Armstrong Company from the Smith Company is eliminated because it represents an intercompany debt, and does not affect the financial condition of the company as it concerns outsiders. The amount due Armstrong Company is directly offset by the liability as shown on Smith Trading Company's books. (2) The investment of the Armstrong Company in the stock of the Smith Company is eliminated because it represents the value of the net assets of the Smith Company, which assets are shown in detail in the consolidated balance sheet. If the stock investment account were in- cluded in the consolidated balance sheet it, would have the effect of stating twice the value of the assets held by the holding company. The amount of the capital stock of the Smith Company owned by the Armstrong Company is eliminated. Capital Stock represents an owner- ship interest in the net assets. As the investment account is eliminated from the Armstrong Company assets a corresponding portion of the Smith Company Capital Stock is also eliminated. The balance of the stock being held by outsiders is known as the minority interest and is shown separately on the consolidated balance sheet. 298 ACCOUNTING PROBLEMS: INTERMEDIATE SOLUTION CONSOLIDATED WORKING PAPERS December 31, 1921 Armstrong Smith Inter Co. Consoli- Assets Manuf t'g Trading Elimina- dated Company Company tions P igures Land $ 30 000 008 20 000 00 $ 50 000 00 Buildings 130 000 00 50 000 00 180 000 00 Equipment 20 000 00 10 000 00 30 000 00 Raw Materials 40 000 00 40 000 00 Finished Goods 45 000 00 20 000 00 65 000 00 Due from Smith Com- pany 30 000 00 $ 30 000 00 Accounts Receivable 25 000 00 25 000 00 Investment in Smith Company Stock at par 90 000 00 90 000 00 Cash 15 000 00 10 000 00 25 000 00 $400 000 00 $135 000 00 $120 000 00 $415 000 00 Liabilities Accounts Pavable $ 35 000 00 $ 5 000 00 $ 40 000 00 Due Armstrong Com- pany 30 000 00 $ 30 000 00 Capital Stock: Armstrong Company 300 000 00 300 000 00 Smith Company 100 000 00 90 000 00 10 000 00 Surplus 05 000 00 65 000 00 $400 000 00 $135 000 00 $120 000 00 $415 000 00 1 CLASSIFIED PROBLEMS AND EXERCISES 299 THE ARMSTRONG MANUFACTURING COMPANY and THE SMITH TRADING COMPANY Consolidated Balance Sheet December 30, 1921 Assets Current Assets: Cash $ 25 000 00 Accounts Receivable 25 000 00 Finished Goods 65 000 00 Raw Materials 40 OOP 00 $155 000 00 Fixed Assets: Land $ 50 000 00 Buildings 180 000 00 Equipment 30 OOP 00 260 OOP 00 Total Assets $415 OOO'OQ Liabilities and Capital Current Liabilities: Accounts Payable $ 40 000 00 Capital Stock: Armstrong Company $300 000 00 Minority Interest in Smith Trading Com- pany 10 OOP 00 310 000 00 Surplus 65 OOP 00 Total Liabilities and Capital $415 OOP 00 300 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 109 A is an operating company and B is a holding company. The following statements are taken from the books of the respective companies, viz.: A COMPANY Assets: Cash on Hand Book Accounts Receivable Stock Inventory Prepaid Accounts Sinking Fund Trustee Premiums on Sinking Fund Bonds B Company Advances Investments, B Company Stock Other Investments Plant, Franchises, etc. Liabilities: Book Accounts Payable Wages Bills Payable Accrued Accounts Reserve Accounts Bonds Capital Stock Surplus B COMPANY Assets: Cash on Hand Accounts Receivable Investments: A Company's Stock Other Investments Plant, Franchises, etc. Deficit 35 000 00 25 000 00 21 OOP 00 12 000 00 8 000 00 50 000 00 12 OOP 00 14 000 00 6 000 00 $500 000 00 500 000 00 $ 81 000 00 7 000 00 15 000 00 700 00 45 000 00 25 000 00 5 000 00 1 400 OOP 00 $1 578 700 00 $ 82 000 00 65 000 00 750 000 00 500 000 00 181 700 00 $1 578 70CTOO $ 20 000 00 1 000 000 00 1 250 000 00 22 OOP 00 $2 292 OCKTOO CLASSIFIED PROBLEMS AND EXERCISES 301 Liabilities: Book Accounts Payable $ 7 000 00 Bills Payable 130 000 00 Accrued Accounts 10 000 00 $ 147 000 00 Due A Company 45 000 00 Bonds Issued 1 100 000 00 Capital Stock Issued 1 OOP OOP 00 $2 292 OOP 00 Required: A balance sheet combining the assets and liabilities of the two companies. (Submit your working papers with your solution.) (From Pennsylvania C. P. A. Examination) Comments. The stock of each company held by the other is eliminated from the assets and from the combined capital stock, the assets received by the companies for this stock showing elsewhere on the balance sheet. The advances by A Company to B Company are offset by the amount due A Company appearing as a liability on B Company's balance sheet. These items are therefore eliminated. Problem 110 A holding company, X, owns all of the capital stock of sub- sidiary companies Y and Z. The balance sheets of the various companies are as follows: X COMPANY Balance Sheet June 30, 1921 Assets Liabilities Cash $ 15 000 00 Accounts Payable $ 1 000 00 Notes Receivable 12 000 00 Notes Payable 35 000 00 Due from Y Com- Capital Stock 100 000 00 pany - 25 000 00 Surplus 15 250 00 Inventory 4 000 00 Prepaid Expense 250 00 Investment in Y and Z Companies' Stock (par) 55 000 00 Plant 50 OOP 00 $151 250 00 $151 250 00 302 ACCOUNTING PROBLEMS: INTERMEDIATE Y COMPANY Balance Sheet June 30, 1921 Assets Cash Accounts Receivable Notes Receivable Inventory Prepaid Expenses Plant Liabilities $ 4 000 00 10 000 00 1 000 00 8 000 00 500 00 55 OOP 00 $78 500 00 Accounts Payable Notes Payable* Due X and Z Com- panies Capital Stock Surplus $12 900 00 10 000 00 30 000 00 25 000 00 1 500 00 $78 500 00 * Includes $2,000 note owing by Y Company to X Company. Z COMPANY Balance Sheet June 30, 1921 Assets Liabilities Cash $ 2 000 00 Notes Payable $15 000 00 Notes Receivable 1 000 00 Accounts Payable 4 000 00 Accounts Receivable 3 500 00 Capital Stock 30 000 00 Due from Y Com- Surplus 2 200 00 pany 5 000 00 Inventory 5 000 00 Prepaid Expense 200 00 Plant 34 500 00 $51 200 00 Required: Prepare consolidated balance sheet. $51 200 00 (Submit working sheet.) CLASSIFIED PROBLEMS AND EXERCISES 303 Problem 111 The Copley Manufacturing Company has owned the control- ling interest in The H. E. Smith Company and The Clifford Company since the subsidiaries were organized. From the bal- ance sheets of the respective companies given below, prepare a consolidated balance sheet. Attach thereto your working papers showing how the consolidated balance sheet figures were arrived at, THE H. E. SMITH COMPANY Balance Sheet December 31, 1920 Assets Liabilities Plant and Equipment $ 50 000 Capital Stock $ 75 000 Inventories 30 000 Accounts Payable 27 000 Advance to The Clifford Notes Payable Coplej r Company 3 500 Mfg. Co. 8 500 Customers 26 000 Dividends Payable 3 000 Cash 5 OOP $113 500 $113 500 THE CLIFFORD COMPANY Balance Sheet December 31, 1920 Assets Liabilities Plant and Equipment $ 97 500 Capital Stock $125 000 Inventories 47 400 Accounts Payable 46 500 Customers 25 000 Advances from The H. Advances to Copley E. Smith Co. 3 500 Mfg. Co. 7 500 Surplus 6 250 Cash 3 850 $181 250 $181 250 304 ACCOUNTING PROBLEMS: INTERMEDIATE COPLEY MANUFACTURING COMPANY Balance Sheet December 31, 1920 Assets Liabilities Investment in the Capi- Capital Stock $250 000 tal Stock of the H. E. Advances from The Clif- Smith Co., 750 shares $100 000 ford Company 7 500 Investment in the Capi- Surplus 3 000 tal Stock of The Clif- ford Company, 1,000 shares 90 000 Notes Receivable of The Smith Company 8 500 Dividends Receivable 3 000 Cash 59 OOP _ $260 500 $260 500 Par value per share of all companies $100.00. Required: Consolidated balance sheet and working papers. Comments. Prepare consolidated working papers in the usual form. In eliminating the Investment in the Capital Stock of the H. E. Smith Com- pany, it should be noted that the entire issue or 750 shares, with par value of $75,000, was purchased for $100,000. The excess of purchase price over the net assets as represented by Capital Stock will be shown on consolidated balance sheet as good-will. It should be noted also that a minority interest exists in The Clifford Company since the holding company owns but 1,000 of the 1,250 shares outstanding. As the holding company has owned the controlling interest since The Clifford Company was organized, it may be assumed that the surplus has been earned since The Copley Company secured control, and was not purchased by them. Therefore, the minority stockholders have an equity in the surplus. Attention is also called to the' fact that the 1,000 shares were purchased for $90,000, or at less than par. The difference may be eliminated from good-will. CLASSIFIED PROBLEMS AND EXERCISES 305 Problem 112 The stockholders of corporations A, B, and C desire to merge same into a new corporation, the capital of which shall be the amount of the net worth of the consolidated corporations. Pre- pare a consolidated balance sheet showing the combined net worth of the three corporations. The final and audited balance sheets are here given: Assets Cash Due by Corporation B Due Corporation by C Inventories at cost or market, which- ever is lower Plant Stock in Corporation B Bonds in Corpora- tion B Bonds in Corpora- tion C CORPORATION A $ 5 000 00 20 000 00 5 000 00 130 000 00 50 000 00 100 000 00 40 000 00 50 OOP 00 $400 000 00 Liabilities Accounts Payable Notes Payable Due C Corporation Bonds Outstanding Reserve for Losses Capital Stock Surplus 5 5 000 00 20 000 00 10 000 00 100 000 00 5 000 00 100 000 00 160 000 00 $400 000 00 CORPORATION B Assets Cash Accounts and Notes, Miscellaneous Due by C Corpo- ration Inventories at cost or market, which- ever is lower Plant Account Bonds of A Corpo- ration Treasury Bonds $ 8 000 00 55 000 00 5 000 00 50 000 00 60 000 00 50 000 00 10 OOP 00 $238 000 00 Liabilities Accounts and Notes, Miscellaneous Due A Corporation Bonds Outstanding Capital Stock Surplus $20 000 00 20 000 00 50 000 00 100 000 00 48 000 00 $238 000 00 306 ACCOUNTING PROBLEMS: INTERMEDIATE CORPORATION C Assets Liabilities Cash $215 000 00 Accounts and Notes Due by Corporation Payable $ 35 000 00 A 10 000 00 Due Corporation A 5 000 00 Accounts and Notes Bonds Outstanding 50 000 00 Receivable, Mis- Reserve for Losses 2 000 00 cellaneous 56 000 00 Due to B Corpora- Inventories at cost tion 5 000 00 or market, which- Capital Stock 100 000 00 ever is lower 50 000 00 Surplus 234 000 00 Plant Account 100 OOP 00 $431 OOP 00 $431 OOP 00 Required: (a) Consolidated working papers (b) Consolidated balance sheet with assets and liabilities properly classified. (From North Carolina C. P. A. Examination) Problem 113 Company A purchased on January 1, 1917, the entire capital stock of Company B at $175 per share, and the entire stock of Company C at $80 per share. You are handed the balance sheet as understated at June 30, 1917, and are requested to prepare a consolidated balance sheet of the A Company and its subsidiary companies at that date. There are no intercompany accounts or inventories. Balance Sheet Company A Property and Good- Capital Stock $2 250 000 Will $ 850 000 Current Liabilities 150 000 Stock of Subsidiary Surplus, January 1 525 000 Companies 1 500 000 Undivided Profit for Current Assets 700 OOP one-half year 125 OOP $3 050 000 $3 050 000 CLASSIFIED PROBLEMS AND EXERCISES 307 Balance Sheet Company B Property and Good- Capital Stock $ 400 000 Will $ 650 000 Current Liabilities 10 000 Current Assets 60 000 Surplus, January 1 200 000 Undivided Profit for one-half year 100 OOP $ 710 OOP $ 710 OOP Balance Sheet Company C Property (as ap- Capital Stock $1 000 000 praised January 1, Current Liabilities 240 000 1917) 81 130 000 Surplus, January 1 30 000 Current Assets 180 000 Undivided Profit for one-half year 40 OOP $1 310 OOP SI 310 OOP Required: Consolidated Balance Sheet of A Company and its subsidiary companies as of June 30, 1917, together with working papers. (From American Institute Examination) Comments. The Surplus of subsidiaries on January 1 represents part of the book value of the stock purchased on that date. The undivided profits for one-half year are added to A Company surplus. The purchase price of B Company stock is $700,000 of which $400,000 represents par value, $200,000 surplus at date of purchase, and the balance, $100,000, good- will. When the purchase price of stock in a subsidiary ex- ceeds the book value of the stock purchased (as indicated by the capital stock and surplus shown on the subsidiary's books at time of purchase) the excess is shown on the consolidated balance sheet as an addition to Good-Will. The purchase price of C Company Stock is $800,000. The par value of this stock is $1,000,000, the surplus at date of purchase $30,000, making the book value of the stock $1,030,000. The excess of the book value over the purchase price, therefore, amounts to $230,000, which may be added to Surplus or deducted from Good-Will. The latter treatment is more conservative and will be followed in this problem. Property and good-will are merged in this problem eo that the amount of the original good-will is unknown. For the purpose of the problem it may be assumed that there is sufficient good-will to justify the deduction of the $23,000 from the Property and Good-Will item. Working papers will be set up in accordance with the above suggestions. 308 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 114 The balance sheet of the American Pin Company on June 30, 1920, was as follows: THE AMERICAN PIN COMPANY Balance Sheet June 30, 1920 Assets Land, Buildings, and Equipment Bronx Pin Ticket Co. Stock (par value $50,000) Patents Working and Trad- ing Assets Cash Accounts Receivable Due from Bronx Pin Ticket Company Prepaid Expenses $335 000 00 57 400 00 15 000 00 37 500 00 10 000 00 32 000 00 375 82 1 500 00 Liabilities First Mortgage 6% Gold Bonds Taxes Accrued Salaries and Wages Accrued Accounts Payable Notes Payable and Interest Interest Accrued on Bonds Payable Reserve for Depreci- ation of Building Capital Stock Pre- ferred Capital Stock Common Profit and Loss Sur- plus $488 775 82 $100 000 00 3 250 00 4 327 82 123 749 83 80 125 00 2 500 00 35 000 00 75 000 00 50 000 00 14 823 17 $488 775 82 The American Pin Company having acquired all the capital stock of the Bronx Pin Ticket Company, the balance sheet of which appears below, it is proposed to merge the two companies as of July 1, 1920. THE BRONX PIN TICKET COMPANY Balance Sheet June 30, 1920 Assets Land, Buildings, and Equipment $260 000 00 Blauscr Pin Trav Co. Stock Patents Working and Trad- ing Assets Cash 35 000 00 22 625 00 10 000 00 10 365 27 Liabilities First Mortgage 5% Gold Bonds $ 50 000 00 Taxes Accrued 2 750 00 Salaries and Wages Accrued 3 147 83 Accounts Payable 144 720 30 Due American Pin Company 375 82 CLASSIFIED PROBLEMS AND EXERCISES 309 Accounts Receivable $37 943 86 Notes Payable and Sinking Fund 3 236 92 Interest $31 372 53 Prepaid Expenses 1 200 00 Interest Accrued on Bonds Payable 1 250 00 Reserve for Depreci- ation of Plant 27 500 00 Capital Stock 50 000 00 Profit and Loss Sur- plus 69 254 57 $380 371 05 $380 371 05 (Adapted from American Institute Examination) Required: (a) Entries on the books of the American Pin Company in general journal form (b) Entries on the books of the Bronx Pin Ticket Company in general journal form (c) Balance sheet of the American Pin Ticket Company after merger. Comments. This problem illustrates the merger of a holding company and its subsidiary. The holding company having acquired all the stock of the subsidiary, the accounts of the latter will be taken onto the books of the holding company (The American Pin Company); all inter-company accounts eliminated; and the books of the subsidiary (The Bronx Pin Ticket Company) closed. The American Pin Company's entries would be as follows: (1) Charge each asset account taken over, and credit Bronx Pin Ticket Company (open account) for the total. (2) Charge Bronx Pin Ticket Company for total of liabilities assumed and credit each liability account. (3) Charge Bronx Pin Ticket Company for balance of that account and credit Bronx Pin Ticket Company Stock account for enough to balance that account, and credit the balance to Surplus. It is to be noted that the net assets of the Bronx Pin Ticket Company as represented by its Capital Stock and Surplus amount to $119,254.57, while in the investment account on the books of The American Pin Company this is carried at $57,400. The difference represents the excess of book value of net assets acquired over that at which they are carried in the investment account. When the assets take the place of the investment account, the result is an increase in the Surplus of the American Pin Company, hence the above entry. The entries to close Bronx Pin Ticket Company books would be as usual except assets are charged to American Pin Company to open account instead of a Vendee account. The liabilities will be credited to same account and the balance closed to Capital Stock and Surplus which closes all accounts. 310 ACCOUNTING PROBLEMS: INTERMEDIATE Group I Holding Companies and Consolidations Theory Questions T-73 What are the three leading types of corporation consolidation? Discuss in detail the advantages and disadvantages of each form from the standpoint of the corporation. (Pennsylvania C. P. A.) T-74 In the case of a consolidation of three manufacturing concerns, how would you determine the good-will of the consolidated company? (Illinois C. P. A.} T-75 In making an examination for an intended purchaser of a business, what are the principal matters that should be looked into? (Maine C. P. A.) T-76 In the case of a merger or consolidation of several companies it becomes necessary to equalize certain conditions. Name some items of this kind that would need attention. T-77 Explain in what respect the balance sheet of a holding com- pany fails to give satisfactory information in regard to the actual financial condition of the corporation. CLASSIFIED PROBLEMS AND EXERCISES 311 T-78 State at least four different methods of showing to the stock- holders the financial condition of a holding company and the subsidiaries. (Wisconsin C. P. A.) T-79 If in consolidating the accounts of a holding company and its subsidiary companies you find that in the case of the subsidiary companies the holding company owns only 60% of its voting stock, state briefly how you would treat the subsidiary company's accounts in the consolidated balance sheet and why your pro- posed treatment reflects the true financial position of the com- bined companies more clearly than other methods with which you are familiar. (American Institute) T-80 Four corporations which have been doing business with each other consolidated. In each set of books accounts are open with the other three. How will these be treated in the consoli- dated balance sheet? (Michigan C. P. A.) T-81 In making up a consolidated balance sheet of a holding or parent company and two subsidiary companies where, in the case of one of the subsidiary companies, its entire capital stock has been acquired at less than par, and in the case of the other, at a substantial premium, how would you deal with such dis- count and premium, respectively, in the consolidated balance sheet? In the event that all the stock of the subsidiary com- 312 ACCOUNTING PROBLEMS: INTERMEDIATE panies was not owned by the parent company, how should such proportion of said stock belonging to the minority stockholders, together with the proportion of surplus appertaining thereto, be stated in the balance sheet? (Maryland C. P. A.) T-82 At the close of a fiscal period you find the inventories of a subsidiary company contains merchandise, transferred from another subsidiary company at a price above the cost to manu- facture. How would you treat such inventories in making the balance sheet of the holding company? If included at the prices shown on the books of the subsidiary company, how would you treat the apparent profit? (North Carolina C. P. A.) T-83 A paint company holding notes receivable from a subsidiary company to the extent of $100,000 indorses and discounts said notes with its banks, thus creating a contingent liability. In preparing a consolidated balance sheet of the two companies, state if, where, and how the liability would appear. (Illinois C. P. A.) T-84 Corporation A, which owns all of the capital stock of Cor- poration B, purchases stock in Corporation C, and sells to subsidiary Corporation B at a profit of $50,000. How would this transaction affect the balance sheet of Cor- poration A? (North Carolina C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 313 T-85 Holding company A owns 80 per cent of the stock of company B. Company B loses $50,000 in a year's operation. Holding company A loans company B $50,000 and takes its notes for the amount. How would the whole transaction appear in hold- ing company A's books and in its balance sheet and profit and loss statements? Give reasons for your answer. (North Carolina C. P. A.) T-86 In the process of consolidating several competing establish- ments, Corporation A, the holding company, acquires $98,000, out of a total of $100,000, of the capital stock of Company B. At the time of the purchase, the balance sheet of Company B showed surplus and undivided profits of $50,000. Company A bought the stock of B at 200%. Almost immediately after the purchase Company B paid a cash dividend of 25%. In what ways would the payment of this dividend affect (a) the balance sheet of B; (b) the balance sheet of A; (c) the consolidated bal- ance sheet of A and its subsidiary companies? Give your rea- sons for your answer. (American Institute) 314 ACCOUNTING PROBLEMS: INTERMEDIATE Group J Bonds and Sinking Funds Problem 115 The Yardley Textile Company on September 1, 1921, issued $500,000 First Mortgage 6% Sinking Fund Coupon Bonds, interest payable semi-annually. The deed of trust provides that $30,000 shall be taken from profits on September 1, 1923, and each year thereafter, for the purpose of providing a sinking fund. This money shall be turned over to sinking fund trustees who shall purchase outstanding bonds of the company at 105. The bonds purchased are to be carried as live bonds and interest on same added to the fund. The entire bond issue was sold to a syndicate at 95. The bond discount is to be written off over the life of the bonds. Required: Outline in journal form entries on the corporate books to record the issue and sale of bonds, payment of interest, payment to sinking fund trustees, redemption of bond by trustee, amorti- zation of bond discount, etc., up to and including September 1, 1924. Comments. For the purpose of this problem it may be assumed that the trustee purchased bonds to the extent of his funds as provided by the sinking fund installment. Problem 116 The Bucks Public Service Corporation issued and sold to a bond house at 92, $100,000 General Mortgage 5% bonds, dated January 1, 1922, due in 20 years, interest payable semi-annually. The deed of trust provided that the corporation should pay the sum of $5,000 annually from earnings to sinking fund trus- tees, who should use the fund accumulated, beginning two years from the date of bond issue, for the purpose of redeeming such CLASSIFIED PROBLEMS AND EXERCISES 315 bonds as may be available at not more than 103. Such bonds as may be redeemed by the trustees are to be cancelled. Required: (a) Assuming that money is worth 6%, how many bonds can be redeemed January 1, 1924? (b) Journal entries to record the issue of bonds, payment of interest, bond discount written off, provision for an- nual payment of sinking fund installments, redemp- tion of bonds by trustees to the extent of funds avail- able, etc., up to January 1, 1925. Problem 117 You are called upon to state what is the annual sinking fund necessary to redeem a principal sum of $1,000,000 due 30 years hence, assuming that the annual sums set aside are invested at compound interest at 5%. State what computation you would make to arrive at the result desired. You need not work out the computation. (From American Institute Examination.) Problem 118 A company is under obligation to pay $10,000 to sinking fund trustees "out of profits." The following transactions take place: 1917 December 31: $10,000 cash paid to sinking fund trustees. 1918 January 5: Trustees invest in $10,000 of the 5% bonds of the company at 98 and interest (from January 1). 316 ACCOUNTING PROBLEMS: INTERMEDIATE July 1: Coupons on the above bonds collected. December 31: $10,000 paid to sinking fund trustees. 1919 January 1: Coupons collected. 2: $11,000 bonds bought for sinking fund at 95. July 1: Coupons collected. December 31: Paid $125 for expenses of sinking fund. 31: Paid $10,000 to sinking fund trustees. 1920 January 1: Coupons collected. 10: $10,000 bonds bought at 101 and interest. Required : Journal entries on the company's books for the above trans- actions. (From American Institute Examination) Problem 119 X. Y. Z. Corporation has an authorized issue of $5,000,000 First Mortgage 5% bonds, in $1,000 denominations; $2,502,000 of these are in the hands of the public, and the balance in escrow in the hands of trustees, to be taken down only to take up the bonds of underlying companies, or for new construction up to 80% of the expenditures; but the net earnings above operating expenses and taxes for the previous year must equal at least one and three-fourths times the interest on all outstanding bonds including those to be taken down. The net earnings for a cer- tain year were $273,990.44. There were also in the hands of the public the following bonds of subsidiary companies: $106,000 5's, and $295,500 4|'s. The expenditures for construction amounted to $300,000. Required. State how many bonds can be taken down for con- struction, showing how you arrive at the result. (From Massachusetts C. P. A. Examination) Comments. This problem is largely one of mathematics and should be closely studied. In figuring the total interest on bonds now outstanding, CLASSIFIED PROBLEMS AND EXERCISES 317 interest on bonds of -subsidiary companies should be included. This is done under the assumption that the holding company guarantees the inter- est on the bonds of the subsidiaries, which is frequently done. The term, "taken down" used in connection with the bonds in escrow means that the bonds are to be turned over to the company by the trustees and sold to the public, the proceeds to be used as indicated. Problem 120 Under the terms of the mortgage, securing the issue of bonds by a corporation, there is a sinking fund provision, by which 2 per cent per annum must be turned over to the trustees, who are empowered to invest the cash in their hands in purchasing these bonds whenever they can be obtained at par or below. During the year under review they have bought $50,000 at 90 flat and received one-half year's interest thereon at 6%. Show the entries on the company's books. Indicate whether its profit and loss or its surplus is affected by the discount and the interest. (American Institute) Problem 121 A corporation issued 10-year First Mortgage bonds on April 1, 1914, bearing 6% interest, payable semi-annually (April and October). The bonds provided for annual contributions to a sinking fund trustee, a trust company that allowed 2% compound interest. The bonds were sold at a premium and payment was received therefor on April 1, 1914. Show pro forma entries as of the following dates: (a) April 1, 1914; (b) October 1, 1914; (c) April 1, 1915; (d) April 1, 1924. (Maryland C. P. A.) 318 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 122 The stockholders of a corporation authorize an issue of $1,000,000 of bonds; $500,000 of these bonds, duly registered and certified by the trustee, were returned to the corporation and disposed of as follows: The Corporation sold $100,000 for cash at 99, $100,000 at 101, pledged $200,000 as collateral security for the payment of its notes and retained $100,000. How should this issue of bonds appear on the balance sheet of the corporation? (Maryland C. P. A.) Problem 123 The Fort William Manufacturing Company has created a first and second issue of mortgage bonds which have been placed through a syndicate. The first mortgage bonds are to run 20 years and were sold at 115. The second mortgage bonds are to run 40 years and were sold at 60. State how the same should be entered on the books of the company, assuming the total par value of the first mortgage to be $5,000,000 and the second $2,500,000. (Maryland C, P. A.} CLASSIFIED PROBLEMS AND EXERCISES 319 Group K Bonds and Bond Sinking Funds Theory Questions T-87 Name five classes of bonds, describing briefly each class with regard to issue, purpose, redemption, etc. (Michigan C. P. A.) T-88 A distinction is made between funded debt and unfunded debt. Please define and compare, discussing the advantages and disadvantages, if any, attaching to each. (American Institute) T-89 An issue of mortgage bonds of the par value of $100,000 and running for 5 years has been sold at 90, the money to be used in the erection of new buildings. How should the trans- action be recorded and why? (Michigan C. P. A.} T-90 (a) What factors determine the interest rate of bonds? (b) What is meant by the nominal rate of interest? The ef- fective rate? (c) How may the effective rate of interest be determined? T-91 An insurance company buys $50,000 7% 10-year bonds at 116 for investment. The bonds will mature at the expiration of 5 years. How should this purchase be entered on the balance sheet? What should be done with the premium? (Maine C. P. A.) 320 ACCOUNTING PROBLEMS: INTERMEDIATE T-92 A corporation, having issued first mortgage bonds to the amount of $50,000, sets aside out of profits $5,000 each year and pays off at par bonds to a similar amount. How shall these items appear in a balance sheet at the end of 5 years? (Massachusetts C. P. A.) T-93 What reason can you give for the creation of a reserve for a sinking fund when the reserve is not to be funded? Explain fully. (New York C. P. A.) T-94 (a) Give a definition of a sinking fund and state how the term is used generally in bond recitals. (b) Indicate the pro forma entries for 1. The creation of a sinking fund reserve. 2. The creation of a sinking fund. (c) State the disposition of a Reserve for Sinking Fund account which is no longer necessary. (d) State the plan most frequently approved by writers on corporation finance as being the most satisfactory for accom- plishing the purpose for which a sinking fund is created. (Wisconsin C. P. A.) T-95 A municipality borrowed $150,000 for 5 years at 4%, inter- est payable annually. To meet the debt when it became due a sinking fund was created by depositing at 5% compound inter- est an equal sum at the expiration of each of the 5 years. What was the annual amount deposited? (Michigan C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 321 T-96 A company under its articles of incorporation is required to set aside a certain percentage of its profits at the close of each year to provide a sinking fund for retiring its bonded indebted- ness when it matures. (a) Give necessary entries to be made in the books, setting up the reserve at the close of each year. (b) Give entries required when the bonds are paid off at maturity. (c) What relation has the sinking fund provision to deprecia- tion? (Massachusetts C. P. A.) T-97 Explain the relationship between a sinking fund and an allow- ance for depreciation. It is claimed that in municipal enter- prises the requirement that rates must be high enough to provide both for a sinking fund to pay off the bonds and also for a Reserve for Depreciation with which to replace the plant results in a double charge to consumers. Criticize or explain this theory. (American Institute) T-98 A city wishes to borrow $90,000 for 30 years, this debt to be extinguished either by a sinking fund or by an issue of serial loan bonds payable so much per annum. Which, in your opinion, would be the better method and why? Answer fully, and differentiate clearly between these two methods of extin- guishing the debt. (Massachusetts C. P. A.) 322 ACCOUNTING PROBLEMS: INTERMEDIATE Bibliography Corporations BELL, SPURGEON. Accounting Principles. New York, 1921. Chaps. xxiv-xxix. BENNETT, ROBERT J. Corporation Accounting. New York, 1916. COLE, WILLIAM MORSE. Accounts: Their Construction and Interpretation. Boston and New York, 1915. The Fundamentals of Accounting. Boston, 1921. Chap. xvi. CONYNGTON, THOMAS. Corporate Organization and Management. New York, 1917. Cox, HENRY C. Advanced and Analytical Accounting. Business Ac- counting, Vol. iv, New York, 1920. Chaps, v-vi and xiv-xv. DEWING, ARTHUR STONE. The Financial Policy of Corporations. New York, 1921. DICKINSON, ARTHUR LOWES. Accounting Practice and Procedure. New York, 1913. Chap. vin. ESQUERRE, PAUL-JOSEPH. Applied Theory of Accounts. New York, 1914. Chaps, n-iv. Practical Accounting Problems Theory Discussion and Solutions Part i. New York, 1921. GERSTENBERG, CHARLES W. Materials of Corporation Finance. New York, 1915. OILMAN, STEPHEN. Principles of Accounting. Chicago, 1916. Chap. x. GREELEY, HAROLD DUDLEY. Theory of Accounts Vol. i, Business Ac- counting. New York, 1920. Chap, xxxni. GREENDLINGER, LEO. Financial and Business Statements. New York, 1919. Modern Business, Vol. 22, Accounting Practice. New York, 1914. HATFIELD, HENRY RAND. Modern Accounting. New York, 1913. KESTER, ROY B. Accounting Theory and Practice. New York, 1917. Vol. i, chaps. XLVIII-XLIX. Vol. n, 1918. KLEIN, JOSEPH J. Elements of Accounting. New York, 1918. Chap. vi. MADDEN, JOHN T. Accounting Practice and Auditing. New York, 1917. Chaps, xi-xn. McKiNSEY, JAMES O. Bookkeeping and Accounting. Cincinnati, 1921. Vol. n, Series B, chaps. XXXBII-XLI. PATON, WILLIAM A., and STEVENSON, R. A. Principles of Accounting. New York, 1918. Chaps, xn-xiv. RITTENHOUSE, CHARLES F., and CLAP?, PHILIP F. Accounting Theory and Practice. New York, 1919. Vol. n, chaps, vn-xvu. SALIERS, EARL A. Accounts in Theory and Practice. New York, 1920. Part iv, pages 145-186. WALKER, WILLIAM H. Corporation Finance. New York, 1917. Mergers, Holding Companies and Consolidated Balance Sheets BENNETT, ROBERT J. Corporation Accounting. New York, 1917. Chaps, xxvm-xxxii. CLASSIFIED PROBLEMS AND EXERCISES 323 Cox, HENRY C. Advanced and Analytical Accounting. Business Ac- counting, vol. iv. New York, 1920. Chaps, xxvi-xxvni. DICKINSON, ARTHUR LOWES. Accounting Practice and Procedure. New York, 1913. Chap. vm. ESQUERRE, PAUL-JOSEPH. Applied Theory of Accounts. New York, 1914. Chap, xxxvin. GREENDLINGER, LEO. Financial and Business Statements. New York, 1919. Modern Business, vol. 22, chap. xx. KESTER, ROY' B. Accounting Theory and Practice. New York, 1918. Vol. ii. Pages 331-338 and chaps, xxvm-xxix and chap, xxxiv. KLEIN, JOSEPH J. Elements of Accounting. New York, 1915. Pages 145-154. MONTGOMERY, ROBERT H. Auditing Theory and Practice. New York, 1915. Chap. xxi. WILDMAN, JOHN R. Principles of Accounting. New York, 1914. Chap. XXVI. Bonds and Bond Sinking Funds BELL, SPURGEON. Accounting Principles. New York, 1921. Chap. xxvu. BENNETT, ROBERT J. Corporation Accounting. New York, 1917. Chaps. XIV-XXII. Cox, HENRY C. Advanced and Analytical Accounting. Business Ac- counting, vol. iv. New York, 1920. Chaps, ix-xi. DICKINSON, ARTHUR LOWES. Accounting Practice and Procedure. New York, 1914. Pages 133-143 and 148. ESQUERRE, PAUL-JOSEPH. The Applied Theory of Accounts. New York, 1914. Chap, xxvin. HATFIELD, HENRY R. Modern Accounting. New York, 1913. Chap. XIV. KESTER, ROY B. Accounting Theory and Practice. Vol. n. New York, 1918. Chaps, xv, xx and xxv. RITTENHOUSE, CHARLES F., and CLAP?, PHILIP F. Accounting Theory and Practice, vol. n. New York, 1919. Chap. x-xi. WILDMAN, JOHN R. Principles of Accounting. New York, 1913. Chaps. xxvi and xxix. SECTION III DEPRECIATION, RESERVES AND SURPLUS Group A Depreciation and Reserves Problem 124 A machine costing $81 is estimated to have a life of four years, with a residual value of Required: (a) Set up a schedule showing the annual depreciation un- der each of the following methods : Straight line, Con- stant percentage of diminishing value, Annuity method, Sinking Fund method (for convenience in arithmetical calculation, assume the rate of interest to be 10%) (b) Submit the formula used for each method, showing how you arrived at the figures shown in the schedule (c) Discuss the significance of each of the methods. (From American Institute Examination) Comments. The figures in this problem are such that the results may be readily worked out by arithmetic from the formulae. In preparing the schedule called for in (a), set the figures up in four columns properly labelled at the top for the various methods. Problem 125 A machine which cost $10,000 has an estimated life of 12 years and a scrap value of $75. The periodic charge for depre- ciation as determined from formula for annuity method at 4% interest is $1,060.50. 326 ACCOUNTING PROBLEMS: INTERMEDIATE Required: (a) Set up a schedule covering the first three years of the life of the asset (b) Assuming that Reserve for Depreciation account is to be kept, show the journal entry that would be made at the end of the first year. Problem 126 Cost Estimated Life Scrap Value Buildings $50 000 50 years $1 000 Machinery 20 000 20 years 2 000 Tools 5 000 5 years 100 Patterns 10 000 3 years 100 Required. Explain clearly and show figures illustrating three different methods of arriving at the amount to charge annually for the depreciation of the above items. (From Wisconsin C. P. A. Examination) Problem 127 A machine costing $10,000 was estimated to have a life of 10 years, with a residual value of $1,000. At the close of each year a charge of $900 was made and a similar amount credited to "Reserve for Depreciation." Just prior to closing the books at the end of the tenth year the machine was discarded and sold, bringing $2,000, and a similar machine was bought costing $15,000. CLASSIFIED PROBLEMS AND EXERCISES 327 Required. Journal entries to close the books at the end of the tenth year in order to cover these transactions and to make necessary adjustments. Interest is not to be calculated. (From American Institute Examination) Problem 128 A corporation has been accustomed to charge the purchase of machinery to the Machinery account at cost, and each year to charge the Manufacturing account and to credit a Reserve for Depreciation account with an amount which will offset the cost of the machinery by the time it is estimated that it will be advis- able to scrap the machines. During the period that you have been employed to audit the account, you find that the corpora- tion has sold two machines for $500 each, and this amount has been credited to the Machinery account. One of them cost $1,000, and the amount reserved for depreciation on this machine is $600. The other cost $1,500, and the amount reserved for depreciation is $850. Required. Adjusting entries to correct the books. (From Massachusetts C. P. A. Examination) Problem 129 The Auburn Manufacturing Company has an account with Fixtures showing a total cost of $46,880 which were bought as follows : 1915 $ 5 115 1919 $1 005 1916 3 002 1920 4 505 1917 2 150 1921 6 115 1918 17 810 1922 7 178 328 ACCOUNTING PROBLEMS: INTERMEDIATE No depreciation has ever been provided, a condition which it is now desired to correct. The estimated life is ten years from the date of purchase. Required. Make entry for setting up a reserve account cover- ing depreciation for the entire period during which the fixtures have been used, including depreciation for the current year ending December 31, 1922. Comments. Instead of figuring depreciation for each year separately the aggregate for each item may be used; for instance, 80% of the first item represents depreciation; 70% of second, etc. The total depreciation for 1922 represents a charge to Depreciation or to Profit and Loss, while that of previous years should be charged to Surplus. Problem 130 An account with Reserve for Depreciation of Delivery Equip- ment showed on December 31, 1920, a balance of $940.80. The Delivery Equipment account of the same date showed a balance of $13,968.40. In August, 1920, a horse died which cost $300, no entry being made at the time. Three years' depreciation had already been provided for at the time of the horse's death at the rate of 10% per annum, based on cost. In October, 1920, a horse which cost $275 was sold for $175, the difference between cost and selling price having been charged to the Reserve account. This horse was bought at the same time the other one was and the same depreciation has been provided for. Required. Make necessary adjusting entries. CLASSIFIED PROBLEMS AND EXERCISES 329 Problem 131 The Keystone Machine Company has followed the policy of crediting depreciation on fixed assets directly to the ledger accounts kept with such assets, arbitrary amounts being written off to cover depreciation at the close of each fiscal period. At the time of closing the books on June 30, 1917, on the advice of an accountant, it is decided to abandon such an unscientific policy and the accountant is authorized to outline a series of entries by which proper reserve accounts may be opened cover- ing the entire period during which the assets have been in use. To enable the accountant to do so, the following data are obtained regarding the accounts: Buildings: Cost Depreciation written off to 12/31/16 Estimated life from 12/31/16 Machinery and Equipment: Cost Cost of replacements Depreciation written off to 12/31/16 Estimated life from 12/31/16 Power Plant: Cost Cost of replacements Depreciation written off to 12/31/16 Estimated life from 12/31/16 Office Equipment: Cost Cost of replacements Depreciation written off to 12/31/16 Estimated life from 12/31/16 Horses, Wagons and Harness: Cost Cost of replacements Depreciation written off to 12/31/16 Estimated life from 12/31/16 $90 000 00 16 700 00 20 years $50 000 00 5 000 00 14 375 00 8 years $8 000 00 1 500 00 4 000 00 4 years $ 6 500 00 700 00 1 635 00 8 years 14 500 00 1 200 00 7 340 00 6 years Required. Prepare journal entries, with complete explana- tions, by which the new policy may be put into effect, provision being made at the same time for the depreciation applicable to the current 6 months' period. 330 ACCOUNTING PROBLEMS: INTERMEDIATE Comments. This problem requires considerable thought. In the first item, Buildings, the current depreciation will be based on the book value of the property at 12/31/16, inasmuch as the estimated life of 20 years dates from that time. On a basis of 20 years, the depreciation for the current 6 months will therefore be 2J^% of $73,300 ($90,000- $16, 700), or $1,832.50. In the item Machinery and Equipment, a new element, that of replace- ments, is introduced. The replacements were no doubt charged to the asset, while the depreciation was credited to the same account, so that the asset has actually been written down for the difference or $9,375 ($14,375 $5,000). The entry, then, to write the asset up to cost and set up the reserve for depreciation as of 12/31/16 is to charge Machinery and Equip- ment account and credit Reserve for Depreciation of Machinery and Equip- ment for $9,375. This is equivalent to setting up the reserve for the entire depreciation of $14,375, and then charging same with the $5,000 replace- ments which would be the proper procedure. The book value and current depreciation would then be found as in the item for Buildings. The remaining items will be handled the same as the Machinery and Equipment item. Problem 132 In your examination of the Automobile Delivery Truck ac- count of a company, you find the following entries: Debits Jan. 1, 1914, Trucks 1, 2, 3, 4, at $1,200 $4 800 July 1, 1914, Truck 5 1 500 Aug. 1, 1914, Truck 6 1 500 Credits Aug. 1, 1913, Truck 2 $ 900 Sept. 1, 1914, Truck 4 750 Balance, September 1, 1914 $6 150 The Reserve for Depreciation for Automobile Delivery Truck account stood credited on January 1, 1914, with $1,800. Upon analyzing the transactions represented by these items, you find the following facts: CLASSIFIED PROBLEMS AND EXERCISES 331 (a) Truck 5 purchased July 1 replaced Truck 1. The portion of the reserve for depreciation accumulated on January 1 for Truck 1 amounted to $900. Truck 5 was purchased on open account. (b) Truck 2 was traded in for $850 on the purchase of Truck 6 costing $1,500. The difference was paid in cash. The reserve which had accumulated for depreciation on Truck 2 on January 1 amounted to $300. (c) Truck 4 was totally destroyed in an accident September 1. The reserve for depreciation on this truck amounted on January 1 to $300 and it was insured for $750. Assume the rate of depreciation to be 25% per year. Required. Give journal entries which would properly record the above facts, and show the balances of all accounts affected as of September 1, 1914. (From Wisconsin C. P. A. Examination) Comments. In solving this problem, start with the balance of the Auto- mobile Delivery Trucks account on January 1, 1914, which is $4,800, repre- senting the cost of Trucks 1, 2, 3, and 4 at $1,200 each. Disregard the other items in the account, and set up journal entries for data in (a), (b), and (c) as they should have been set up at the time the transactions oc- curred. This will result in restating the asset account for Trucks and will affect various other accounts, the balances of which will be listed as a part of the solution. Problem 133 The Western Hardware Company has the following .fixed assets : Estimated Estimated Cost Scrap Value Life in Years Buildings $100 000 $35 000 20 Machinery 70 000 25 000 15 Tools 20 000 5 000 10 Patterns 10 000 8 332 ACCOUNTING PROBLEMS: INTERMEDIATE Required: (a) Determine the average life of the above assets (b) After determining the average life of the fixed assets, state the amount of annual depreciation by the straight line method. (From American Institute Examination) Problem 134 The A Manufacturing Company has four general types of depreciable assets. Rate Cost Scrap Value Buildings 2% $51 000 $1 000 Machinery A 10% 11 000 1 000 Machinery B 20% 12 000 2 000 Office Equipment 10% 4 100 100 The directors desire to keep but one Reserve for Depreciation account, and they request you to determine the composite rate which may be used in determining the annual depreciation charge. Required. Determine the composite rate as requested, tabu- late the necessary facts used in determining it, and comment upon the practicability of such a plan. (From Wisconsin C. P. A. Examination) CLASSIFIED PROBLEMS AND EXERCISES 333 Group B Depreciation and Reserves Theory Questions T-99 What do you understand by "depreciation" and how should it be provided for on the books of a manufacturing company owning its plant and equipment? Wherein does depreciation differ from renewals and repairs and can it be avoided through any system of bookkeeping? (C. P. A.} T-100 (a) Explain the theory upon which periodical depreciation charges are based. (b) How is the inclusion of such charges in production costs justified? (c) How should a Reserve for Depreciation be shown in the balance sheet? Why? (Ohio C. P. A.) T-101 Should depreciation be written off the accounts of a corpora- tion whose property is of a wasting nature, such as a quarry or a mine? Give reasons. T-102 The A Company had an appraisal made early in January and after completing the annual audit for the A company, the direc- tors authorize you to record upon the books the proper values as given in the appraisal. Among the terms used in the ap- praisal company's report are the following: 1. Sound value. 334 ACCOUNTING PROBLEMS: INTERMEDIATE 2. Depreciated value. 3. Replacement value. 4. Insurable value. 5. Book value. Define each of these terms and state definitely just what values it would be proper to record upon the books. (Wisconsin C. P. A.) T-103 The Cereal Food Company manufactures a brand of break- fast food according to a secret process. Their engineers design a special machine for its manufacture, ten machines of this design being made by the Beckworth Machine Company. The cost of each machine is $3,600; the estimated life is 10 years; the scrap value $100. As an accountant, you are asked to work out a method for reckoning depreciation on the machine, the depreciation to be included in the cost to produce the food. Your attention is called to the fact that the business has been quite profitable due largely to the extensive advertising done by the company. Their success, however, has attracted capital in large quantities to this field and new companies are constantly being organized for the manufacture of a variety of competing foods, with the result that the ability of the company to maintain their present sales and profits is rather uncertain. Prepare your report cover- ing the following points: (a) Method of reckoning depreciation. (b) Method of bringing it on the books. (c) Treatment of repairs. T-1Q4 The directors of a manufacturing corporation assert that, because the selling value of the land on which the plant is situated has increased beyond the probable amount of plant depreciation, no allowance for plant depreciation is necessary. CLASSIFIED PROBLEMS AND EXERCISES 335 State (a) your view o f the propriety of this; and (b) the reasons supporting your answer. (Massachusetts C. P. A.) T-105 The book value of the plant of a corporation has been reduced to a nominal sum. Under this condition, state: (a) whether periodically, a reservation should be made of an amount estimated to cover depreciation ; and (b) the reasons supporting your answer. (Massachusetts C. P. A.) T-106 A corporation makes a practice of charging to expense and carrying to depreciation reserve account every half year a cer- tain percentage of the book value of its plant and machinery. Should repairs and renewals be charged to profit and loss, or can they properly be charged to depreciation reserve account? Give reasons in full. (Massachusetts C. P. A.) T-107 A mill sells a lot of its old machinery for $7,300, and credits the amount to Repairs account. State (a) your opinion thereof, and (b) the reasons supporting your answer. (Massachusetts C. P. A.) T-108 Give some general principles which will guide you in deter- mining whether too much or too little provision has been made for depreciation of buildings, machinery, tools, good-will, pat- 336 ACCOUNTING PROBLEMS: INTERMEDIATE ents, franchises. Would a flat rate cover all these assets satis- factorily? (American Institute) T-109 On pointing out the insufficiency of the provision for depre- ciation on machinery, which the directors admit, you are met with the argument, supported by evidence, that the real estate values have appreciated to an even greater extent than the entire depreciation of other assets. As this latter is not taken up on the books you are asked to allow the one to offset the other. Give reasons for your agreement or disagreement. (American Institute) T-110 The X Y Z Company established for 10 years has a machinery and equipment account which has been increased from year to year as new equipment purchases have been made. It appears also that certain renewals and repairs have been charged to this account. Each year a credit has been made to the account for depreciation, offset by a corresponding debit to profit and loss account, the ratio of depreciation being adequate. The com- pany now disposes of a part of its plant at a price equal to what was paid for it 7 years previously and credits the entire amount to Machinery and Equipment account. What adjustments, if any, are needed to correct the account? (American Institute) T-lll You are asked by a client to discuss with him the question of reserves for depreciation and depletion of his various capital assets. State your position on this subject and enumerate the considerations you would advance in support thereof. Would CLASSIFIED PROBLEMS AND EXERCISES 337 you or would you not be guided by the rules laid down by the internal revenue authorities in deciding upon the rates to be used? (American Institute) T-112 How should a re-appraisal of capital assets be treated on the books of a going concern (a) When it involves an appreciation? (b) When it involves a depreciation? (American Institute) T-113 It has recently been urged that if the replacement cost of fixed assets is greatly in excess of their cost, depreciation should be computed on replacement values, so that the reserve for depreciation will be equal to the replacement value when the time comes for abandoning the old property and acquiring new. It is contended that if this procedure is followed the company will have sufficient cash to make replacements without impairing the capital. State your opinion in regard to this matter. (American Institute) 338 ACCOUNTING PROBLEMS: INTERMEDIATE Group C. Adjustments and Analysis of Surplus Problem 135 An accountant is engaged by a certain concern to draw up financial statements and to close the books as of December 31, 1920. He finds that no provision for accrued or prepaid items was made when the books were closed December 31, 1919, and he also locates certain errors as indicated in the following: Accrued wages and salaries, December 31, 1919, $1,460; Decem- ber 31, 1920, $2,000; Insurance paid in advance, December 31, 1919, $360; December 31, 1920, $180; Accrued interest on mortgage, December 31, 1919, $1,200; December 31, 1920, $1,200. Goods received prior to December 31, 1919, and included in the inventory of that date but not entered on the books until January, 1920, $9,000. Error in taking inventory, December 31, 1919, $2,500 too little. Depreciation on real estate esti- matedfor 1919, $6,500; for 1920, $7,000. Required. The necessary adjusting entries with full particulars. Comments. All items affecting profits of previous periods are adjusted through the Surplus account. In the first item given above, if the accrued wages and salaries had been properly recorded on December 31, 1919, Salaries and Wages account would have been charged $1,460, and the profit for the period ending on that date would have been reduced by that amount. In making adjusting entry on December 31, 1920, therefore, Sur- plus account is charged with $1,460. If wages and salaries had been accrued to the extent of $1,460 on December 31, 1919, and the accrual amounts to $2,000 on December 31, 1920, then the difference, or $540, is the amount chargeable to the current period's profits through the regular expense account, Salaries and Wages. The completed adjustment on December 31, 1920, will then appear: Surplus $1 460 Wages and Salaries 540 Wages and Salaries Accrued $2 000 The same general principle is followed in adjusting the other items given in this problem. If the adjustment increases profits of previous periods, Surplus account is credited and vice versa. The points to bear in mind are: (1) that each period must be credited with income and charged with expenses applicable to that period; (2) that in so doing at the end of a series of fiscal periods, Surplus represents prior periods' profits, while the usual expense and income accounts represent the current period's profits; (3) that the adjustment is made on the books at the close of the last fiscal period only in this problem on December 31, 1920. CLASSIFIED PROBLEMS AND EXERCISES 339 Problem 136 In taking up the audit of the accounts of a company for the year ending December 31, 1922, you find that the adjustments made at the previous audit for the year 1921 have not been taken on the books, and that, therefore, the books are not in agreement with the audited accounts as of that date. Assuming the following were the adjustments referred to, what, if any, disposition would you make of the items at this audit, illustrating your answer with journal entries, viz.: To record: (1) Invoices for Merchandise in Transit at December 31, 1921, not on books $ 5 000 00 (2) Invoices for Merchandise received, but not entered 10 000 00 (3) Reserve for Bad Debts (said debts were written off in 1922) 2 000 00 (4) Factory Expense Bills for 1921 not entered until Jan- uary, 1922 750 00 (5) Pay-Roll accrued at December 31, 1921 6 000 '00 (6) Insurance Premiums paid in advance at December 31, 1921 500 00 (7) Taxes for year ending December 31, 1921, not entered until May, 1922 1 000 00 (8) Reserve against excess valuation of Inventory, Decem- ber 31, 1921 10 000 00 (9) Depreciation not taken up on books prior to January, 1921, $5,000; year ending December 31, 1921, $1,000 6 000 00 (10) To write off an unlocated difference in the Accounts Re- ceivable Controlling Account at December, 1921, which, however, was located and canceled in 1922 1 500 00 Required. Necessary adjusting entries as of December 31, 1922. (From Illinois C. P. A. Examination) Comments. Assuming that the books are closed for 1922, it will be neces- sary to reopen the Profit and Loss account and adjust items applicable to 1922 through that account. Items affecting 1921 profits will be adjusted through Surplus account. It may be assumed in (2) that the merchandise has not been received, and, therefore, is not included in the inventory. This being the case, no entry is necessary. Item (3) means that bad debts applying to 1921 were written off in 1922, and adjustment should be made accordingly. 340 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 137 The books of the X Manufacturing Company were audited to December 31, 1920, and in making up the Balance Sheet and Profit and Loss Account at that date the auditors recommended the following adjustments: (a) Transferred to Profit and Loss $4,231.07 which had been charged to real estate and buildings in error. (b) Provided for depreciation of buildings, etc., $7,200. (c) Adjusted salaries amounting to $1,400 due for 1920 services but not entered on the books until January, 1921. (d) Reduced the amount of Inventory because of errors, $12,000. The same auditors were again called in to audit the books to June 30, 1921, and found that the above adjustments had not been entered on the books. They also found that during the half year $1,000 had been charged to real estate, buildings, etc., instead of to expense; that no provision had been made for depreciation for the period amounting to $3,600 and that the inventory had been footed $10,000 too much. Also, that the unexpired insurance amounted to $750 more than was entered on the books. The following are condensed trial balances of the X Manufacturing Company books as the auditor found them as of December 31, 1920, and June 30, 1921: December 31, 1920 June 30, 1921 Real Estate, Buildings, etc. $102 840 26 $115 226 80 Capital Stock $200 000 00 $200 000 00 Debentures 100 000 00 100 000 00 Cash 14 672 14 22 143 21 Accounts Payable 9 431 17 11 698 21 Accounts Receivable 22 436 10 28 250 40 Loans 10 000 00 5 000 00 Stocks and Bonds 17 502 50 19 150 00 Inventory 246 153 42 288 360 14 Unexpired Insurance 1 471 23 742 26 Surplus 85 644 48 85 644 48 Profit and Loss, 1914 71 530 12 $405 075 65 $405 075 65 $473 872 81 $473 872 81 Required: (a) A correct balance sheet, June 30, 1921 (b) State the adjusted amount of profits for the half year to June 30, 1921 CLASSIFIED PROBLEMS AND EXERCISES 341 (c) Prepare i*n analysis of the surplus account for the period ended June 30, 1921. (Adapted from Massachusetts C. P. A. Examination) Comments. The answers to this problem are worked out in reverse order to that stated in the requirement (c), (b), and (a). The condensed trial balances given in the problem are, in effect, balance sheets. In preparing (c), use six-column paper, heading the columns as follows : Adjusted Balance Sheet Adjustments Balance Sheet Assets Liabilities Dr. Cr. Assets Liabilities It may be headed "Reconciliation Statement, June 30, 1921." It is suggested that the necessary adjustments be journalized and trans- ferred to a working sheet. In the first two columns place the balance sheet above for June 30, 1921. In the adjustment columns, enter the adjusting entries, numbering each entry properly so that the debits and credits may be readily identified. In the last two columns place the adjusted figures of the balance sheet. The data for (a) will then be taken from the adjusted figures in the last two columns and set up in proper form. The answer to (b) will also be found in the adjusted balance sheet columns. The condensed trial balance or balance sheet for December 31, 1920, is not used at all in solving the problem. The adjustments are simple and need no comment. Problem 138 Watson and Daggett are engaged in the manufacture of lathes, and at the time of closing the books June 30, 1920, the following facts are discovered by the accountant: March 1, the Essex Machine Company ordered the delivery of two lathes, which had been manufactured for them and had been held for shipping instructions since September, 1919. The lathes had been charged to the Essex Machine Company on September 21, 1919, but by an oversight were included in the inventory taken December 31. One machine was billed at $962.50 and the other at $750. 342 ACCOUNTING PROBLEMS: INTERMEDIATE The inventory taken December 31 was also found to contain the following clerical errors: Finished stock, $3,100 too much. Raw materials, $1,000 too little. L. P. Fuller, a customer of the company, failed and his affairs were settled in the bankruptcy court. A final dividend was received March 1, 1914, leaving an unpaid balance of $610 which was charged off to Profit and Loss. Fuller began business anew, and desiring to make settlement in full with all creditors as he is able to do so, sends the company his check for $300 on account on June 30, 1915. What entry should the bookkeeper make? If the $610 had been charged to a Reserve for Doubtful Accounts, what entry would you advise at the time of recovering the $300? Required. Journal entries to record adjustments in accord- ance with above data. Problem 139 THE HALL MANUFACTURING COMPANY Balance Sheets Assets Current Assets Fixed Assets Good-Will Discount on Bonds Investments Deferred Assets Liabilities Current Liabilities Bonds Payable Reserve for Depreciation )ecember 31 December 31 1920 1921 $ 84 000 $ 84 800 301 000 393 000 30 000 28 000 2 000 25 000 800 1 250 $440 800 $ 80 000 200 000 20 000 $509 050 $ 15 000 300 000 29 000 CLASSIFIED PROBLEMS AND EXERCISES 343 Reserve for Bad Debts $1 200 $1 500 Reserve for Construction 16 000 20 000 Capital Stock 100 000 100 000 Surplus 23 600 43 550 $440 800 $509 050 An analysis of the Surplus account shows that the land was appreciated $30,000 during the year as the result of an appraisal ; good- will was depreciated $2,000; a dividend of 10% was declared and paid during the year; machinery which cost $7,000 was sold during the year for $6,000, the loss being charged against the reserve account; $4,000 was added to the reserve for con- struction; the asset value of tools was reduced $5,000. Required: From the above prepare the following : (a) Statement showing profit of the business from operations (b) Statement showing analysis of surplus account for the year. Problem 140 Following is a transcript of the Surplus account of a company covering the years 1916-1918: Credits December 31, 1916 Net Profit $129 600 December 31, 1917 Net Profit 110 000 June 30, 1917 Adjustment of Inventory 2 000 December 31, 1918 Net Profit 118 000 Debits January 15, 1916 Dividend $ 20 000 July 15, 1916 Dividend 20 000 January 15, 1917 Dividend 20 000 July 15, 1917 Dividend 20 000 December 31, 1917 Good-will reduced 100 000 January 15, 1918 Dividend 20 000 July 15, 1918 Dividend 20 000 344 ACCOUNTING PROBLEMS: INTERMEDIATE Early in 1918, accountants are called in to make an examina- tion of the books and to estimate the amount of Federal Income Tax which the company will pay. They discover the following: (a) No depreciation of the machinery was written off in 1916. They reckon the depreciation for this year to be $5,000. (b) Error in inventory of December 31, 1916, of $1,000 too much, which was never corrected. (c) Wages accrued as of December 31, 1917, estimated to be $3,000, were ignored. (d) Insurance premiums prepaid of $500 as of December 31, 1917, were ignored. (e) Error in inventory of December 31, 1918, resulting in the inventory being $2,000 less than it should have been. (f) A patent costing $5,000 was charged to Manufacturing Expenses in 1918. (g) Insurance Prepaid as of December 31, 1918, of $300, not shown on the books. (h) A Suspense account with a debit balance of $130 repre- senting unlocated errors in trial balances to be closed out. Required. Make adjusting entries for the above and set up an entirely new Surplus account for the three years, embodying all adjustments, and balancing the account as of December 31 each year, and carrying forward the balance to the following year. Comments. This problem illustrates the analysis of Surplus account for tax purposes. In making the analysis and adjustment of the account as it stands, it will be divided into three groups, each representing one year. The entries will be made as if there were three accounts labelled Surplus 1916; Surplus, 1917, and Surplus, 1918. For instance, the first entry (a) will be as follows: Surplus, 1916 $5 000 Reserve for Depreciation of Machinery $5 000 After making the journal entries, set up a ledger account for Surplus. Credit this account with 1916 profit, and charge it with 1916 dividends, the depreciation referred to above, and any other adjustments. Since there are no credit adjustments for 1916, the account is balanced, ruled, and the balance brought down as of January 1, 1917. The same process will be repeated for 1917 and 1918. CLASSIFIED PROBLEMS AND EXERCISES 345 Group D Surplus and Reserves Theory Questions. T-114 (a) What is a Reserve Account? (b) Name and define the two principal classes of reserves and distinguish between them as to origin, purpose, and ultimate disposition. (c) What is a funded reserve? (Ohio C, P. A.) T-115 How would you distinguish between (a) Earned surplus (b) Paid-in surplus (c) Capital surplus (d) Appropriated surplus? (American Institute) T-116 (a) What items do you consider should be charged or credited direct to surplus? (b) Would you regularly make small adjustments of sub- sequently discovered errors through this account? (c) Is the balance at credit of Surplus ever in any circumstances a liability, and, if so, to whom? (American Institute) T-117 Give some idea of what taxes you would charge against income and what against surplus. Of the former, which, if any, would you take up into manufacturing costs? What provision, if any, would you make for income and excess profits taxes in closing 346 ACCOUNTING PROBLEMS: INTERMEDIATE accounts before the passing of a pending act levying these taxes, either in general circumstances or when profits are partly divisible under some special contract or arrangement? ( American Institute) T-118 A company had its fixed assets valued by an expert, and the appraisal disclosed a valuation greatly in excess of the book value. The excess in value was credited to Surplus. If you see any objection ' to this procedure, state how you would treat the matter, giving your reasons. (Ohio C. P. A.) T-119 A manufacturing company sells land for which it has no use, at a price much in excess of the book value. How would you treat this excess on the books of the company, and on its balance sheet? (Ohio C. P. A.) T-120 How should substantial changes in the value of capital assets be treated in the accounts in respect to surplus? (Massachusetts C. P. A.) T-121 A corporation increases its capital stock, which it sells at auction, receiving therefor, as premiums above the par value, $3,000. The treasurer credits this amount to Profit and Loss account, and, in his statement, shows it as part of the profits. CLASSIFIED PROBLEMS AND EXERCISES 347 State: (a) your opinion thereof; (b) to what account, if other than Profit and Loss, the amount should be credited; (c) how it should be shown in the treasurer's statement; and (d) your reasons. (Massachusetts C. P. A.) T-122 It frequently happens that a corporation contracts to purchase property at an agreed price, which on the face of the contract is declared to be its value, and that by another clause in the contract, or by another contract, the vendors agree to provide, in addition to the property, a certain sum for working capital or even for free surplus. It is sometimes maintained that this free sum so provided is a profit or surplus of the new corporation available for payment of dividends if the directors so determine. Write a brief expression of your opinion as to the proper treatment of the sum turned back. (American Institute) T-123 A corporation owns nearly all of a block of land. The remain- ing portion is purchased subject to an existing lease. The corporation sets aside out of surplus an amount believed to be sufficient to extend its plant over the entire block at the expira- tion of the lease. What ledger title should be given to the amount set aside, and how should the amount be set up on the balance sheet? (American Institute) 348 ACCOUNTING PROBLEMS: INTERMEDIATE T-124 The balance sheet of a corporation shows the following credit balances : Reserve for depreciation Reserve for extension of plant Reserve for bad and doubtful debts Sinking fund reserve Insurance reserve Reserve for pensions Reserve for contingencies Reserves for taxes What would you assume to be the nature of each of these items? Can better terms be substituted for any of those used? In what circumstances would each of the above accounts be debited, and when debited what would be the corresponding credit? If the business were to be sold for 'the amount of its net worth as shown by the balance sheet, which of these items would represent a proper addition to the capital stock in determin- ing the selling price? (American Institute) T-125 Indicate, by appropriate journal entries, the various debits and credits you would make in setting up the following reserves for a balance sheet, explaining briefly how you would determine the proper amount of each reserve: (a) Reserve for bad and doubtful debts (b) Reserve for trade discounts (c) Reserve for cash discounts (d) Reserve for state, county, and city taxes accrued. (American Institute) CLASSIFIED PROBLEMS AND EXERCISES 349 Bibliography Depreciation, Reserves, and Surplus BENNETT, ROBERT J. Corporation Accounting. New York, 1917. Chap. XXIII. COLE, WILLIAM MORSE. Accounts: Their Construction and Interpretation. Boston, 1915. Chap. vm. The Fundamentals of Accounting. Boston, 1921. Chap. xvm. Cox, HENRY C. Advanced and Analytical Accounting. Business Ac- counting, vol. iv. New York, 1920. Chaps, vn, vm, xn and xin. DICKINSON, ARTHUR LOWES. Accounting Practice and Procedure. New York, 1915. Pages 148-152 and chap. vii. ESQUERRE, PAUL-JOSEPH. Applied Theory of Accounts. New York, 1914. Chap. xxxn. Practical Accounting Problems. Theory Discussion and Solutions, part i. New York, 1921. Problem 15. GREELEY, HAROLD DUDLEY. Theory of Accounts. Vol. i, Business Ac- counting. New York. 1920. Chap. xxix. GREENDLINGER, LEO. Accounting Practice. New York, 1914. Chap. xxv. Financial and Business Statements. New York, 1919. HATFIELD, HENRY RAND. Modern Accounting. New York, 1913. Chaps. vn and xin. KESTER, ROY B. Accounting Theory and Practice. New York, 1918. Vol. n, chaps, vi-xi and xxm. KLEIN, JOSEPH J. Elements of Accounting. New York, 1913. Chap. vm. MACFARLAND, G. A., and ROSSHEIM, I. D. A First Year in Bookkeeping and Accounting. New York, 1915. Chap. xxi. MADDEN, JOHN T. Accounting Practice and Auditing. New York, 1917. Chap. ii. McKiNSEY, JAMES O. Bookkeeping and Accounting. Cincinnati, 1921. Vol. n, Series B, chap. XLVII. MONTGOMERY, ROBERT H. Auditing Theory and Practice. New York, 1915. Chap. xvm. PA TON, WILLIAM A., and STEVENSON, R. A. Principles of Accounting. New York, 1918. Chaps, xxn and xxm. SALIERS, EARL A. Principles of Depreciation. New York, 1916. WALL, ALEXANDER. The Bankers' Credit Manual. Indianapolis, 1919. Chap. xi. WILDMAN, JOHN R. Principles of Accounting. New York, 1914. Chaps. xxx, xxxi and XL. SECTION IV PARTNERSHIP PROBLEMS Group A Admission of a Partner Problem 141 Allan and Baker form a partnership and agree to share profits and losses in proportion to capital invested. Allen invests $20,000, and Baker, $10,000. Crane offers to buy a one-third interest in the business for $10,000. (a) Make necessary entry to give Crane his interest and adjust capital accounts so that the interests of all three partners will be equal. (b) How should the $10,000 be divided between Allan and Baker? Comments. In this problem it is evident that Crane is buying an interest from the old partners, and that his purchase money is to go to them per- sonally. The capital of the firm will, therefore, not be increased. He buys a one-third interest in the combined capital of Allan and Crane. The only entry necessary is to credit Crane for his interest and charge the old partners for enough to make the capitals equal. The cash need not be brought onto the partnership books at all, but is shared by the old partners in proportion to capital given up. Problem 142 Burns and Fox bought merchandise to the amount of $12,000. Burns contributed $7,500; Fox, $4,500. They afterward sold Wolf a one-third interest for $6,000. How much of this amount should Burns and Fox receive, respectively, in order to make Burns, Fox, and Wolf equal partners? (From New York C. P. A. Examination) 351 352 ACCOUNTING PROBLEMS: INTERMEDIATE Comments. It should be noted that Wolf buys a one-third interest in assets amounting to $12,000 for $6,000. He, therefore, pays a bonus of $2,000, which in an ordinary firm would be termed Good-Will. This bonus represents a profit to the partners, Burns and Fox. An entry should be made to credit Wolf with his interest and charge Burns and Fox with such an amount as will make the capital accounts of all partners equal. The profit should be divided in proper ratio. Burns and Fox is each entitled to his share of the profits plus the amount of investment given up by each in order to make the three men equal partners. Problem 143 Ahern and Briggs have been conducting a shoe business. September 1, 1921, Ahern's capital account stands credited with $50,000, and Briggs' with $25,000. The firm is in need of a superintendent, and offers to sell a one-third interest to Carver for $20,000. Make the necessary entry to admit Carver. How will the cash be divided? Comments. In this problem, a one-third interest in net assets shown on the books at $75,000 is sold for $20,000, or $5,000 less than the book value. Charge the old partners' capital accounts and credit Carver's capital account for his proper proportion of the net assets. The difference between the value of Carver's share in the net assets and the amount paid by him for his share is a loss to be shared by Ahern and Briggs in their profit sharing ratio. To find cash each receives, deduct from the value of the share of assets given up, the share of loss due to sale. Problem 144 Chaffee, Dean, and Eller are partners with capital balances as follows: Chaffee, $14,000; Dean, $20,000; Eller, $26,000. Hearn desires to buy a one-fourth interest in the firm. The CLASSIFIED PROBLEMS AND EXERCISES 353 partners place a value of $12,000 on the good-will which is to be set up on the books before Hearn is admitted. (a) What amount should Hearn pay the old partners for his interest? (b) Make proper entries to record the good- will and to adjust the capital accounts so as to credit Hearn with his interest, the old partners to retain their relative interests. Comments. It is evident that Hearn must pay the old partners a sum equal to one-fourth of the net assets plus the good-will. The Good-Will will then be charged and the old partners credited in their profit-sharing ratio, after which each partner will be charged with his proper proportion, and Hearn credited with enough to give him his one-fourth interest. Problem 145 Two partners, Walker and Preston, find at the end of the first year's business that the balance sheet shows Walker's interest to be worth $18,000, and Preston's, $9,000. The good-will of the firm is worth $3,000. Each partner draws profits in propor- tion to his investment. The partners decide to take in another partner, and to give him a one-quarter interest in the new firm. What sum must the new partner contribute? How will the partnership accounts appear after the payment of the new capital? HOAV will the profits be divided? (From California C. P. A. Examination) Comments. The good- will of $3,000 must be brought onto the books and divided between Walker and Preston in the same ratio as profits are shared. If the new partner is to invest such an amount as will give him a one-quarter interest in the business, the existing net worth must be equal to three-fourths of the new capital. Find the new capital, and the differ- ence between that and the present capital will be the amount which the incoming partner must invest. It is to be noted that the new partner contributes capital; and, therefore, the net worth of the firm will be increased to the extent of his investment and the good-will. 354 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 146 William Smith, having been in business for himself a number of years, decides to take in a partner. His assets aggregate $18,000 and his liabilities $10,000. He makes the following proposition to his brother-in-law, John Gray, who has been his office manager for many years; the proposal is made in writing as follows: Give me $5,000 in cash and I will make you an equal partner, changing the firm name to Smith & Gray, Smith to draw a salary of $75 per week and Gray, $60 per week. Gray accepts this offer by writing across the face of the communication, in red ink; "This suits me. I accept." A few days later Gray turned over to Smith $1,200 in currency and a check for $3,800. Required. Prepare necessary entries and name the books in which they should be made, it being understood that the books of account previously kept by William Smith are to be continued by the partnership. Problem 147 (a) Frank has $5,000 invested in a business. He sells Johns a one-half interest for $3,000. (b) Frank has $5,000 invested in a business. By investing $3,000, Johns is given a one-half interest in the business. Make proper entries under (a) and (b). (From Michigan C. P. A. Examination) CLASSIFIED PROBLEMS AND EXERCISES 355 Problem 148 At the end of the first year of a partnership, Grover has an interest of $18,000, and Spencer, of $9,000, each drawing profits in proportion to his capital. O'Malley desires to secure a one- third interest in the firm. The partners are willing to admit him, and value their good-will at $6,000. In what two ways may O'Malley secure his interest? What will be the amount of his investment in each case? Set up journal entries to illustrate your answer. Problem 149 A and B carried on business in partnership and divided profits and losses in proportion to their capital, three-fifths and two- fifths, respectively. On January 1, 1915, A's capital was $52,500 and B's $35,000, as shown by a balance sheet of that date. They agreed to admit C as a partner from the same date on the following terms: (1) Assets and liabilities and capital to be taken as shown in the balance sheet. (2) $12,500 to be added to the assets for good-will. (3) The amount of good-will to be added to A's and B's capital in the proportion in which they divide profits. (4) C to pay to the partnership such a sum as will give him a one-fifth interest in the business. Required: (a) State what amount of capital C has to bring in (b) Set out the capital account of each partner in the new partnership (c) State in what proportion the profits will be divided in the future, A and B, as between themselves, sharing in the same proportion as before. (From Washington C. P. A. Examination} 356 ACCOUNTING PROBLEMS: INTERMEDIATE Comments. The terms upon which C is admitted are stated very clearly. No entry is necessary for (1). For (2) and (3) charge Good-Will and credit A and B in the proportion stated. For (4), as C contributes to the partnership such a sum as will entitle him to a one-fifth interest, the net worth, after bringing on the good-will, represents four-fifths of the new capital. Therefore, one-fifth of this amount will represent what C has to bring in. The capital accounts of the various partners snould be set up in state- ment form showing details of adjustments and the balance at the close. A transfer of an interest in the capital of a firm usually carries with it a like share in profits. Therefore, A and B will each be obliged to relinquish one-fifth of his share of profits to C, A giving up one-fifth of his three-fifths, and B one-fifth of his two-fifths. Their share in profits will then remain in same relative proportion as before, each having given up one-fifth of his share. Problem 150 December 31, 1915, the following trial balance was taken after closing from the books of Dudley and Sealy: Assets Liabilities Cash $ 460 000 Accounts Payable $ 800 000 Accounts Receivable 550 000 Notes Payable 490 000 Notes Receivable 75 000 Dudley, Capital 525 000 Merchandise 830 000 Sealy, Capital 450 000 Real Estate 350 000 $2~265 OOP $2~265 OOP Profits and losses are shared equally. On the date mentioned above an agreement is made to admit Willard into the partnership; he is to invest in the business sufficient cash to give him a one-third interest. Inspection of the accounting records shows that of the accounts and notes receivable now carried on the books, $30,000 of accounts receiv- able and $45,000 of notes receivable are worthless. A physical inventory shows the cost of goods on hand to be $890,000. The good-will is valued at $150,000. Make the entries necessary to adjust the books and to show CLASSIFIED PROBLEMS AND EXERCISES 357 the admission of Willard. Show a trial balance taken from the books after these entries have been made and posted. Comments. It is necessary to make adjusting entries to write off the worthless accounts and notes, to write up merchandise, and to set up good- will. The net profit or loss resulting from these adjustments is carried to the capital accounts. The adjusted capital will then represent two-thirds of the new capital, inasmuch as Willard's investment increases the capital. Problem 151 Allen and Brown are equal partners. Their balance sheet on June 30, 1921, was as follows: Assets Liabilities Merchandise $ 35 000 Accounts Payable $ 50 000 Accounts Receivable 61 000 Bank Overdraft 15 000 Furniture and Fixtures 2 500 Allen, Capital 21 000 Cash 500 Brown, Capital 16 000 Investments 3 OOP $102 OOP $102 OOP Connelly is to enter the firm. Preliminary thereto, Allen and Brown revise their balance sheet by writing off $15,000 for bad debts; $500 from Furniture and Fixtures; 15% from inventory; 25% for loss on investments; and they establish a good- will of $5,000. Connelly pays enough to entitle him to a one-third interest in the adjusted net assets. (a) What amount does Connelly invest? (b) Set up balance sheet of new firm. 358 ACCOUNTING PROBLEMS: INTERMEDIATE Group B Dissolution of Partnership Problem 152 Murphy and Nelson, of Laredo, Texas, engaged as equal partners in a stock-raising enterprise with a capital of $10,000, each contributing one-half. Murphy received a salary of $200 per month. At the end of three years they decided to terminate the business, and Nelson, who handled all the money of the co- partnership and kept the books, reported the following receipts and payments: Receipts Payments $ 5 000 Purchases of Cattle $57 000 5 000 Loans Repaid 14 000 80 359 Murphy's Salary 4 200 15 000 Interest 1 000 Expenses 9 000 Murphy's Drawings 2 200 Nelson's Drawings 1 800 A round-up and branding of the herd showed 328 head of live stock belonging to the partnership estimated to be worth $5,540. There remained with the bankers a balance of $16,159 and other assets were as follows: Horses, $800; Accounts Receivable, $750; Tools, etc., $100; Supplies, $150. Liabilities were as follows: Due T. Ranch for branding irons, $40; Salt, $100; Loan at Bank, $1,000; Unpaid Wages, $260. Required: (a) Balance sheet showing financial condition of the co- partnership at its termination (b) Profit and loss statement showing results of the three years ' operations (c) Detailed statement of each partner's interest to provide a basis for dissolution of the partnership. Comments. This problem presents a common type of partnership set- tlement, where a complete set of books has not been kept. From the data given, first prepare an ordinary report form of balance sheet. Note that while Murphy was to receive a salary of $200 per month he has drawn during the three years but $4,200. The balance of salary due should CLASSIFIED PROBLEMS AND EXERCISES 359 therefore be set up as a liability on the balance sheet. All other assets and liabilities are clearly set forth in the problem. Prepare the profit and loss statement with as much detail as possible. The accounts receivable for $750 represent sales in addition to those shown under cash receipts. Cattle represent the trading goods in this problem. All other inventories will be shown as deductions from operating expenses to which they have been charged. The items, Branding Irons and Salt, are not included in the $9,000 expense item, and will be added thereto. These items are, however, included in the Tools and Supplies inventories as shown in the problem. The details of partners' accounts are to be set up in statement form rather than in ledger form. Problem 153 Thatcher and Jones are partners, Thatcher having invested ),000 and Jones $9,000; profits and losses are shared equally. Upon liquidation, losses are suffered so that the amount available for distribution to the partners is only $10,000. How should the $10,000 be divided? Comments. Upon liquidation of a partnership it is first necessary to find the loss on account of liquidation of the assets and charge same to partners in their profit-sharing ratio. No liabilities being shown, the assets must equal the total net worth as shown by the partners' capital accounts. After charging loss on account of liquidation to capital accounts, each partner is given enough cash to balance his account, which will equal the amount of cash on hand. 360 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 154 Andrews, Ballou, and Clifton are partners, their capital accounts showing Andrews, $60,000; Ballou, $20,000, and Clifton, $45,000. Upon dissolution the assets of the concern are sold for $54,700. (a) How should the deficit be divided? (b) Ballou is insolvent and the claim against him is worthless. How should the amount available for distribution be divided? (c) Show the partners' accounts as they would appear after the books had been finally closed. Comments. (a) The same procedure should be followed as in Problem 153. (b) The deficit in Ballou's capital account should be charged to Andrews and Clifton in the ratio in which they share profits in this case, one-half each. Problem 155 Willis and Lewis are partners, sharing profits and losses equally. The partnership is dissolved December 31, 1922, at which time Willis's capital investment is $10,000, and Lewis's, $2,500. The total liabilities of the firm are $25,000, which includes $5,000 due Willis on loan account, and $2,500 due Lewis on loan account. The assets of the firm are disposed of for $30,000 on May 1, 1923. Prepare accounts closing the partnership and showing the position in which the partners stand to each other. No allowance for interest is required. Comments. Set up a balance sheet, and determine the loss due to liquida- tion. The distribution of the loss will leave Lewis with a deficit. The amount due outside creditors is first paid, then the loan of Willis. Willis would probably insist that sufficient cash be withheld from amount due Lewis on loan to cancel the deficit in his capital account. Show solution in form of skeleton journal entries. CLASSIFIED PROBLEMS AND EXERCISES 361 Group C Partnership Liquidation by Installments Problem 156 Ames, Beale, and Conley have suffered heavy losses. They decide to liquidate their assets, pay off their liabilities, and retire from business. Ames is given authority to close up the affairs of the firm, and is to pay off the partners in monthly installments as the assets are converted into cash. The balances of the capital accounts on June 30, 1921, are as follows: Ames $50 000 Beale 30 000 Conley 20 000 Profits and losses are shared in proportion to capital. After paying expenses and liabilities, the following amounts are available for distribution: July 31, 1921 $24 000 August 31, 1921 32 000 September 30, 1921 35 000 No more can be collected. Required. Prepare a statement showing distribution of the various installments and the final loss in liquidation. Comments. When profits and losses are shared in the same ratio as capital, the distribution of assets would be handled in the same manner as a distribution of profits. In this problem, therefore, Ames, Beale, and Conley would be paid one-half, three-tenths, and one-fifth, respectively, of the $24,000 available for distribution on July 31, an entry being made to charge their capital accounts and credit Cash. Proceed in like manner with the remaining installments. The balance of the capital accounts after payment of the third installment will represent the loss which should be charged off, closing all accounts. 362 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 157 Davis, Oilman, and Heath each has a credit to his capital account of $60,000. They share profits as follows: Davis, 60%; Oilman, 30%; and Heath, 10%. The accounts show a trading loss of $30,000, leaving assets of $150,000. The partners decide to liquidate and pay off the partners in installments as the assets are converted into cash. On September 1, 1921, they have cash to the amount of $60,000 to distribute. (a) How should the first installment of $60,000 be divided? (b) A second installment of $48,000 is available November 30, 1921. Show distribution of same. (c) A final installment of $36,000 is ready for distribution January 1, 1922. Show distribution. Comments. First divide the trading loss of $30,000 among the partners in the profit-sharing ratio given above. This leaves Davis with a capital balance of $42,000; Oilman, $51,000; and Heath, $57,000. (a) When profits and losses are not shared in the same ratio as capital, as illustrated in this problem, at time of distribution of first installment it cannot be foreseen as to what the balance of the assets will realize. To make an equitable distribution of the first installment the remaining assets should be treated as a potential loss to be divided in profit-sharing ratio. The credit balance resulting from such a loss would be the basis for distri- bution of the first installment. The potential loss in this case amounts to $90,000, the partners' shares being $54,000, $27,000, and $9,000, respec- tively. This leaves the capital accounts as follows: Davis, deficit, $12,000; Oilman, balance, $24,000; Heath, balance, $48,000. Davis's deficit will be borne by Oilman and Heath in the ratio in which they share profits as between themselves; namely, Oilman, three-fourths ($9,000) and Heath, one- fourth ($3,000). The capital accounts now stand: Davis, none; Oilman, $15,000; and Heath, $45,000. Of the first installment, therefore, Davis receives nothing; Oilman, $15,000; and Heath, $45,000. The new capital balances now are: Davis, $42,000; Oilman, $36,000; Heath, $12,000. (b) The capital and profits still being shared on a different ratio, the procedure above must be repeated, $42,000 being treated as the potential loss which, when distributed, leaves capital balances of $16,800, $23,400, and $7,800, respectively, which will be the basis of distribution of the second installment. The resulting capital balances are $25,200, $12,600, and $4,200, respectively. (c) The capital accounts are now in agreement with profit-sharing ratio, and the third installment will be distributed in accordance with such ratio as illustrated in problem 156 above. CLASSIFIED PROBLEMS AND EXERCISES 363 Problem 158 Three partners contribute capital as follows: X, $90,000; Y, $45,000 ;Z, $15,000. They share profits in the proportion of X, 50%, Y, 30%, and Z, 20%. X's salary is $5,000, Y's salary is $3,000, Z's salary is $2,000. At the end of their fiscal period Z dies. The books are closed and the net assets ascertained to be $152,500. X and Y liquidate the firm's affairs and distribute the surplus assets quarterly as follows: First quarter $42 410 20 Second quarter 74 622 30 Third quarter 31 967 50 $149 000 00 Prepare a statement of the partners ' accounts, showing how the distribution of assets should be made together with the apportionment of the loss. (From New York C. P. A. Examination) Comments. Credit each partner with his salary, which makes a total capital of $160,000. As the assets amount to only $152,500, there is a loss of $7,500 to be distributed to the partners in profit-sharing ratio. Having. done this, proceed as in problem 157. Problem 159 A, B and C were in partnership, A's capital being $90,000, B's, $50,000, and C's r $50,000. Their agreement is to share profits in the following ratio : A, 60% ; B, 15% ; C, 25%. During the year C withdrew $10,000. Net losses on the business during the year were $15,000, and it is decided to close out the business. It is uncertain how much the assets will ultimately yield, although none of them is known to be bad. The partners therefore mutually agree that as the assets are liquidated, distribution of cash on hand shall be made monthly in such a manner to avoid, so far as feasible, the possibility of paying to one partner cash which he might later have to repay to another. Collections are made as follows: May, $15,000; June, $13,000; July, $52,000. After this no more can be collected. Show the part- 364 ACCOUNTING PROBLEMS: INTERMEDIATE ners' accounts, indicating how the cash is distributed in each installment, the essential feature in the distribution being to observe the agreement given above. (From American Institute Examination) Problem 160 Burke, Tracy, King, and Rand enter into partnership with a capital of $100,000. Burke invests $40,000; Tracy, $30,000; King, $20,000; and Rand, $10,000. They are to share profits or losses in the following proportions: Burke, 35%; Tracy, 28%; King, 22%; and Rand, 15%. At the end of six months there is a loss of $8,000, and mean- time the partners have drawn against prospective profits as follows: Burke, $400; Tracy, $600; King, $600; and Rand, $400. They dissolve partnership and agree to distribute pro- ceeds of firm assets monthly as realized. The realization and liquidation lasts four months, and the transactions are as follows: First month Second month Third month Fourth month Prepare partners' accounts showing the amount payable monthly to each one. (Adapted from New York Examination) Comments. Distribute 'the $8,000 loss to partners' accounts in proper proportion. Close the drawing accounts into capital, and then proceed as in previous problems. The cash to be distributed each month is found by deduction. Expenses and Assets Liabilities losses on realized liquidated realization $ 30 190 00 $ 7 900 00 $ 400 00 50 300 00 6 100 00 750 00 20 010 00 3 800 00 340 00 9 500 00 2 200 00 110 00 $110 000 00 $20 000 00 $1 600 00 CLASSIFIED PROBLEMS AND EXERCISES 365 Problem 161 A, B, and C were partners in a business on the following basis: Capital Contributed Share of Profits Salaries $45 000 00 22 500 00 7 500 00 50% 40% 10% $6 000 00 4 000 00 2 400 00 A B C At the end of the second year's business, A died. The part- ners' drawing accounts before crediting their year's salaries appeared with the following debit balances: A, $2,572; B, $1,218; C, $1,710. The net assets of the business after finally closing the books were found to be $74,780. B and C liquidate the affairs of the partnership. Three distributions of the proceeds of liqui- dation were made as follows: $25,000; $35,000; $11,780. Required. You are asked to prepare a tabulation showing the share of each of the distributions to each of the partners. (From Wisconsin C. P. A. Examination) Problem 162 A, B, C, and D have decided to dissolve partnership. To that end, they have liquidated all their liabilities, and at the date of the first division of cash among the partners the conditions are as follows: Profit and Partners Capital Loans Loss ratio A $22 000 $ 7 000 40% B 19 000 6 000 30% C 12 000 14 000 20% D 7 OOP 13 OOP 10% $60 OOP $40 OOP 100% Cash available for distribution Other assets not yet realized (of doubtful value) 80 OOP $1PP OOP 366 ACCOUNTING PROBLEMS: INTERMEDIATE State which partners should participate in the distribution of the $20,000; how much cash each should receive; whether the payments should be applied against the capital accounts or the loan accounts. Explain the procedure of determining the distribution. Assume that none of the partners has any private property. (From American Institute Examination) CLASSIFIED PROBLEMS AND EXERCISES 367 Group D Miscellaneous Partnership Problems Problem 163 A invests $50,000, B, $25,000, and C, $10,000, as the capital of the firm of A, B, and C. The partnership agreement provides that they shall share profits and losses equally. At the end of a business term the balance sheet shows as follows: Assets Liabilities Cash $ 500 Notes Payable $ 10 000 Accounts Receivable 58 000 Accounts Payable 75 000 Merchandise Inventory 56 000 Partner's Capital, A 55 000 Manufacturing Plant 41 000 Partner's Capital, B 27 500 Various Stocks and Partner's Capital, C 5 000 Bonds at Market Prices 17 OOP $172 500 $172 500 The business is sold out, the assets realizing $140,000 gross. The expenses of the sale, including commissions, were $5,000. Show final accounts of the partners. (From New York C. P. A. Examination) Comments. The balance sheet in this problem does not necessarily represent the condition of the firm at the end of the first fiscal period, but rather at the end of some subsequent period. Assuming that A has made no withdrawals, his account at the date of balance sheet contains $5,000 profit. The investment figures may, therefore, be ignored in solving the problem. Using the balance sheet figures as a basis, the usual process of liquidation will be followed as illustrated in previous problems. The term "assets realizing $140,000 gross" may be assumed to mean that the expenses have not been deducted from receipts from sale of assets. You are required to set up journal entries outlining the process of liqui- dation, and prepare a statement of the partners' accounts, showing distri- bution of loss on realization and cash. 368 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 164 A and B, on winding up their partnership, found their assets realized as follows: Book Value Realized Factory Premises $10 000 $3 000 Machinery 7 500 2 500 Merchandise 5 500 4 500 Accounts Receivable 9 500 6 500 Their unpaid liabilities were $10,500. A's capital stood at $15,000, and B's capital at $7,000. In respect to profits and losses, they were equal partners. Divide the proceeds of the realization between them after paying off the liabilities, and debit them as having been paid the proportion to which each was entitled, and show what amount would be payable (if any) by either partner to the other to settle the accounts. (From Illinois C. P. A. Examination) Comments. First set up a trial balance of the items at the book value to be sure that the accounts are in balance. An account known as Realization and Liquidation may be opened. This will first be debited with all the assets to be realized at the book value, and credited with liabilities to be liquidated. It will then be charged with liabilities liquidated and credited with assets realized at the actual figure realized, the contra entry in each case being Cash. The balance of the Realization and Liquidation account will then represent the amount of loss on liquidation which will be charged to the partners in proper propor- tion, and the cash on hand distributed in the usual manner. Problem 165 According to the terms of the partnership agreement, profits and losses are to be shared as follows: Austin, one-half; and Beebe and Charlton, one-fourth each. Interest is to be charged on drawings at 6% and credited on capital at 5% per annum. The capital accounts -of the firm for the year ending September 31, 1921, are as follows: CLASSIFIED PROBLEMS AND EXERCISES 369 4V Austin Becbe Charlton Balance, September 30, 1920 $25 468 $16 245 $ 6 852 Additional Investment, June 30, 1921 4 000 Balance, September 30, 1921 $25 468 $16 245 $10 852 The drawing accounts of the partners for the year show the following results: Austin Beebe Charlton April 15, 1921 $1 500 $500 July 5, 1921 1 OOP $350 Balance, September 30, 1921 $2 500 $500 $350 You are asked to compute the interest on the partners ' capital and drawings for the year, and make journal entries for the same, after which you will distribute the final net profit of the firm by means of a journal entry. The net profit, exclusive of interest, is $12,500. Comments. In computing interest in this problem, find the time by compound subtraction. For instance, the time from April 15 to Septem- ber 30 would be five months and fifteen days. Use common interest. Allow interest on capital for time invested, and charge interest on drawings from date of withdrawal to the end of the year. Problem 166 A, B, and C were partners carrying on business with a capital December 31, 1900, of $60,000, of which A's share was $30,000; B's, $20,000; and C's, $10,000; each partner was entitled to 5% interest on his capital ; profits or losses to be shared as follows : A, 7/12; B, 1/4, and C, 1/6. The partners agree, July 1, 1901, to dissolve. After all partnership assets had been realized and all debts paid, except $500 legal expenses, there remained a balance in bank of $48,750. Final settlement takes place Decem- ber 31, 1901. Cash in bank bears interest at 2% from October 1, 1901. Show a statement for settlement and partners' capital accounts as of December 31, 1901. (From New York C. P. A. Examination) 370 ACCOUNTING PROBLEMS: INTERMEDIATE Comments. Find loss on realization by deducting balance in bank from total capital plus outstanding liabilities. While the agreement to dissolve the partnership was made on July 1, the capital draws interest until Decem- ber 31, as the capital was tied up until that date. Figure interest on bank balance by ordinary method, and for exact days. Assume that the legal expenses are not paid until date of final settlement, December 31, 1901. In addition to the statement of partner's capital accounts called for in the problem, set up journal entries covering adjustments necessary to record the interest and effect a final distribution of cash. Problem 167 A, B, and C engage in business, A contributing $10,000 and B $5,000, while C, in lieu of any capital contribution, agrees to undertake the active management at a salary of $3,000 per year, to be paid monthly. After allowing 5% interest on capital, they are to divide the net result in the proportions of 5, 3, and 2, respectively. At the end of eighteen months they ascertain the position to be unfavorable and decide to wind up. The assets realize $12,500; there are no liabilities except for capital and interest thereon and one month's salary due C. Make up the partners' accounts, showing the amount to be received by each. (From Massachusetts C. P. A. Examination) Problem 168 A and B form a partnership, A investing $30,000 and B, $50,000. They agree to share expenses and profits and losses equally. They further agree to and do leave their original in- vestments intact. At the end of the first year the profits from the CLASSIFIED PROBLEMS AND EXERCISES 371 operations of the business amount to $30,000, against which A has drawn in twelve equal monthly installments on the last day of each month an aggregate amount of $9,000; B has drawn against his profits on the last day of each quarter the sum of $2,500. Prepare journal entries adjusting interest at 5% per annum between the partners in respect to both their investment and drawing accounts, and render statements showing the amount each partner has in the business at the end of the year. (From Massachusetts C. P. A. Examination) Comments. Attention is called to the fact that drawings of $750 per month during the year on the last day of each month is equivalent to an interest charge on $750 for sixty-six months at 5%. In like manner, draw- ings of $2,500 on last day of each quarter is equivalent to an interest charge on $2,500 for eighteen months at 5%. Problem 169 A and B, partners, finding themselves in want of further capital in their business, and both being possessed of real prop- erty, A deposited deeds with the bankers of the firm as security for a loan of $2,000 to the firm. B arranged on some of his own property a mortgage for $1,500 with a private friend and paid the proceeds into the firm's bank account. The bankers were eventually obliged to realize the security held by them which produced, after payment of all expenses, the sum of $2,850. Prepare entries recording these transactions in the firm's books. (From Massachusetts C. P. A. Examination) Comments. Note that A merely deposits personal collateral to secure a firm loan, while B raises money on his private property and advances same to the firm in the nature of a loan. When security in both cases is realized by the bank, it amounts to a transfer of the firm's obligation to the bank to A. 372 ACCOUNTING PROBLEMS: INTERMEDIATE Group E Partnerships Theory Questions T-126 On buying an interest in a business, what entries should be made in the books of the business (a) When a direct sale is made of an interest, the money not to be used in the business? (b) When the money paid for the interest in the business is to be used in the business? (Michigan C. P. A.) T-127 (a) If the partners' capital accounts show capital investments to be unequal, profits being shared equally, which partner loses, with no allowance for interest on capital? (b) If the capital investments of the partners are equal and profits are shared unequally, which partner loses if interest is not allowed on capital invested? (c) Under what conditions would neither partner lose if interest were not figured on investments? T-128 Fiske and Miller share profits equally. Interest is to be allowed on capital at the rate of 5% per annum. Fiske invests $20,000 and Brown $25,000. During the fiscal year ended September 30, 1922, the firm suffers a loss of $2,000. What entries should be made under these circumstances? T-129 Is thore any difference in the rights of firm creditors as com- pared with those of the creditors of the separate partners? Explain. (C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 373 T-130 (a) Is a surviving partner entitled to compensation for winding up the affairs of the firm? (b) In absence of agreement may a partner claim compensation for managing the office of the firm? T-131 On dissolution, through death, of a partnership, is the sur- viving partner, in the absence of an express agreement, entitled to continue the business, or must he account for the good-will of the business to the representatives of the deceased? (C. P. A.) T-132 (a) A's Current, Loan, and Salary accounts all show credit balances. How would these items appear on the balance sheet? (b) Under what conditions would you recommend that a Salary account be kept with a partner? T-133 A firm having decided to liquidate and close out its affairs, has converted all its assets into cash and has paid its outside creditors. There are loans to the firm by partners in addition to their capital investment. Assuming that profits are shared in a different ratio from capital, and there is insufficient cash to pay capital in full, how should the assets be distributed? 374 ACCOUNTING PROBLEMS: INTERMEDIATE T-134 A partnership is dissolved as at January 1, both partners being in debt to the firm. Subsequently the assets are sold at less than the book value, and the liabilities are partly liquidated. The partners pay their indebtness as of January 1. How must the liquidating loss be adjusted as between the partners? Why? (.Kentucky C, P. A.) T-135 In an equal partnership with three partners, one was unable to meet his share of the investment with cash and gave his note drawing interest for part. When he paid the interest, the book- keeper credited each of the other partners for one-half of the same. He objected and the matter is referred to you at the time of audit. He claims that it should have been credited to the Interest and Discount account and thus have been divided between all three. Write your decision and reasons therefore. (Michigan C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 375 Bibliography Partnership Accounting COLE, WILLIAM MORSE. Accounts: Their Construction and Interpreta- tion. Boston and New York. Pages 342-346. ESQUERRE, PAUL-JOSEPH. The Applied Theory of Accounts. New York, 1916. Chap. i. GREELEY, HAROLD DUDLEY. Theory of Accounts. Vol. i, Business Ac- counting. New York, 1920. Chaps, xxxi-xxxn. GREENDLINGER, LEO. Accounting Practice. New York, 1914. Chaps, xv-xvi. HATFIELD, HENRY RAND. Modern Accounting. New York, 1919. Chap. XVII. KESTER, ROY B. Accounting Theory and Practice. Vol. i, New York, 1917, Chaps, xxxni-xxxiv. Vol. n, New York, 1920, Chap. xxxv. KLEIN, JOSEPH J. Elements of Accounting. New York, 1915. Chap. v. LISLE, GEORGE. Accounting in Theory and Practice. London, 1909. MADDEN, JOHN T. Accounting Practice and Auditing. New York, 1917. Chaps, m-vi. RITTENHOUSE, CHARLES F., and CLAPP, PHILIP F. Accounting Theory and Practice, Unit n. New York, 1919. Chaps, i and n. SECTION V CONSIGNMENTS, BRANCHES AND SELLING AGENCIES Group A Consignments and Joint Ventures Problem 170 A ships to B on consignment, under date of April 4, merchan- dise to the value of $1,500, paying $15 cartage and $6 insurance. B receives the consignment April 20, paying freight, $70, and cartage, $12. He subsequently disposes of the merchandise by sales as follows: April 30, $400; May 30, $800; June 30, $600, on which latter he pays storage charges, $30. He charges commissions on sales 5%, credits net interest at 6%, and transmits account sales with remittance of net proceeds to A, who receives them July 10. Required. Prepare Consigned Goods account as appearing on A's ledger and Consignments In account as appearing on B's ledger. Comments. This problem calls for Consigned Goods account only on the books of consignor. The detailed accounts with charges and sales of con- signed goods may, therefore, be omitted. Charge Consigned Goods account with cost of goods consigned and all charges prepaid, and credit this account with proceeds of account sales rendered by consignee. This is the simplest method of handling consignments accounts on consignor's books. The objection to this method is that details of the transaction are not spread upon the books, and appear only in the account sales which is placed on file. On the consignee's books, the account Consignments In is charged with expenses of handling the goods, such as storage, insurance, freight, etc., and with commission charged and with any advances. This account is credited with sales of consigned goods and with interest allowed. The balance represents the net proceeds of consignment due the consignor. This amount should be remitted in cash or by note, or transferred to credit of consignor's personal account. 377 378 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 171 Douglass & Company, of Cleveland, on September 1, 1921, shipped to Lloyd Brothers, Boston, on a 5% commission basis, goods to the value of $8,500, and prepaid freight amounting to $400. The goods were received by Lloyd Brothers on September 20. They were found to be damaged in transit to the extent of $1,500, certificate of which is duly forwarded to the consignor by the consignee. October 1, Douglass & Company draw at sight on Lloyd Brothers on account of the shipment to the amount of $2,500. The draft is paid by the consignee upon presentation. October 10, an account is rendered for sales to date amounting to $5,000 and a check remitted for proceeds. The balance of sales amount to $7,000. The charges exclusive of commission amount to $700. A final account is rendered November 1. Interest is not considered. Required. Entries in journal form covering the above trans- actions on the books of the consignor so as to show details of transactions and the profit on the consignment. Comments. In addition to the account with Consigned Goods, accounts will be set up with Commission, Charges, Sales of Consigned Goods, Con- signees, etc. To show profit on the consignment, the various charges, commission, and cost of goods will be closed into the Sales account. Problem 172 Sharp & Watson, Boston, received merchandise from Lane & Son, Philadelphia, for sale on their account and risk. The consignees paid freight, $73.50; cooperage, $17. They accepted draft of consignor on account for $1,000. An allowance for damaged goods returned was made by consignee, $72. A short- age on sales was adjusted for $8.75. Total sales, $2,625. Con- signees render an account: insurance, 3/4%; storage, $26; com- mission, 5%; net proceeds placed to credit of consignor. CLASSIFIED PROBLEMS AND EXERCISES 379 Required. Entries in journal form covering the above trans- actions as they would appear on the books of the consignee. Comments. In addition to consignments In account, set up accounts for the various charges. Problem 173 June 1. Shipped the Bronx Commission Company, New York, to be sold on consignment, goods costing $1,500. June 2. Paid Armstrong Transfer Company $68.75 for drayage and loading the goods on the car. June 10. The consignee accepted a 10-day draft for $1,000 on account of consignment. Paid $2 for telegram on account of draft. June 15. The consignee remits check for $500 on account of shipment. June 20. Consignee transfers to us note received in part payment of goods sold amounting to $125. June 30. Consignee renders an account sales and remits check for $426.50 for balance due. Required: (a) Entries in journal form covering the above data on the books of the consignor. Use memorandum accounts with consignee and do not show separately profit or loss from consignments (b) Account sales as rendered by consignee. Comments. Set up memorandum accounts with Consignee and Con- signed Goods for cost of goods shipped. Do not take this amount from Inventory or Purchases account. Open an account for Charges, Commis- sion, etc., as indicated in previous problems. Credit consignee for ad- vances. When account sales is received, record sales and charges, credit- ing consignee for latter and charging for former. Adjust the memorandum accounts and close them out. The result will be to show details of charges and sales while cost of the sales and profit on consignment is not shown separately. 380 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 174 Jan. 1. Received from Merville & Company, Cleveland, 10,000 baskets of grapes invoiced at 15^ per basket, to be sold on consignment. Jan. 2. Paid Boston & Albany Railroad $227.50 freight on consignment. Jan. 3. Sold 5,000 baskets grapes at 20^. Jan. 5. Sold on account 2,000 baskets grapes at 22^. Jan. 10. Paid consignor's sight draft for $500. Jan. 12. Sold balance of consignment at 18 i per basket. Jan. 15. Rendered an account to consignor: storage, 3/4^ per basket; drayage, 1^ per basket; insurance, $15; commission, 5%; net proceeds placed to credit of consignor. Required: (a) Entries in journal form to record above data on the books of consignee. Use memorandum accounts to record receipt of goods at invoice price (b) Account sales rendered to consignor. Comments. Charge Consigned Goods and credit consignor for invoice value of goods received. Set up the usual accounts with Charges, Com- missions, etc. When goods are all disposed of and account sales is ren- dered to consignor, adjust and close out the memorandum accounts. The consignor's personal account is then credited with balance due as shown by account sales. Problem 175 Two merchants, C. F. Munton and W. A. Spencer, agree to share equally in a joint adventure in trade to the West Indies. On March 1st, 1917, they charter a small vessel and purchase and ship materials which cost them $197, for which Munton gives his check. This cargo they consign to John Smith, their agent at Havana, which he disposes of, and in return ships on board the same vessel 4,000 cases of Commodity A, and 100 cases of Commodity B; CLASSIFIED PROBLEMS AND EXERCISES 381 and he draws on Munton at sight for $125, this being the amount of the agent's charges and disbursements over and above the net proceeds of the cargo consigned to him. Munton accepts and pays the bill. On April 1st the vessel arrives, whereupon Munton pays sundry charges of $337.50. Spencer pays the freight, amounting to $493. On April 4th Munton sells 1,000 cases of Commodity A to Henry Chamberlain for $239.58, and collects $150 and on April 10th Spencer collects the rest. About this time, Mr. Spencer happens to have occasion for 1,400 cases of Commodity A, which he takes on April 14th, and with Munton's consent values it at $291.66. He also takes 10 cases of Commodity B, valued at $47.50. Munton sells the other 1,600 cases of Commodity A on April 20th to John Walters for $383.33, and a month after accepts $382.50 in full payment. Mr. Munton next sells on April 25th the other 90 cases of Commodity B in barter for 30 cases of Commodity C, which he and Spencer divide equally between them. The goods being thus disposed of, Munton presents his bill of charges, which comes to $22.66, and desires to have accounts stated between Mr. Spencer and him. Required. Set up the ledger accounts of the joint adventure, recording the foregoing transactions under the following accounts : Joint Adventure, C. F. Munton, W. A. Spencer, Henry Chamber- lain, John Walters. (From Illinois C. P. A. Examination) Comments. Charge the Joint Adventure account with all costs and expenses in connection with the venture and credit same with all returns. The balance of the account will then represent the profit or loss from the venture. The first entry, therefore, from the above data is as follows: Joint Adventure account $197 00 C. F. Munton $197 00 382 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 176 A. B. & Co. agree with C. D. & Co. that the latter shall ship on consignment to Honolulu on joint account 20 cases of Com- modity X, the invoice price of which is $2,100, less 2^2 per cent. A. B. & Co. pay the packing charges, $25; also freight, insurance and other charges, $90, and they draw on their cor- respondents in Honolulu in advance for $1,600 at 90 days, which is discounted at a cost of $20, and the proceeds handed to C. D. & Co. as part payment. These transactions may be dated March 1st, 1909. On the 30th of November, 1909, A. B. & Co. receive the account sales and net proceeds, $418, arid they then pay C. D. & Co. the balance due to them. Required. Prepare a Joint Consignment Account charging in- terest on the amount lying out at 5 per cent per annum for eight months, closing it by dividing the loss; also an account to be rendered by A. B. & Co. to C. D. & Co. closed by payment of the balance, and prove that the losses borne by each are equal. (From Illinois C. P. A. Examination) Comments. Open accounts with Joint Consignment, A. B. & Com- pany, and C. D. & Company, and proceed as in the previous problem. "Charging interest on the amount lying out" is construed to mean that each company is to be credited, and the Joint Consignment account charged with interest for eight months at 5% on the balance to the credit of each company after entering transactions as of March 1, 1909. After charging A. B. & Company and crediting the Joint Consignment for the net proceeds, $418, the balance of the Joint account represents the loss which is to be divided equally between A. B. & Company and C. D. & Company. Problem 177 For the purpose of making a joint speculation A contributes $3,000, B, $2,000, and C, $1,000, and they agree to share the profits or losses in proportion to the amounts contributed. October 15, 1900,. A deposited the $6,000 with his broker, giving instructions to buy 300 shares New York Central and 300 shares Chicago, Burlington, & Quincy. The order was executed October 16, 1900, N. Y. C. at 130^8 and C. B. & Q. at 127. CLASSIFIED PROBLEMS AND EXERCISES 383 April 10, 1901, under instructions from A, N. Y. C. was sold at 15lK and C. B. & Q. at 191/^, a check being received from the broker to close the account. How much does A owe B and C for their interests in the deal, calculating interest at 6% (365 days to the year), commission at 3 / 8%, and revenue tax of $2 for each 100 shares? Required. Set up ledger account with Brokers and prepare statement showing final settlement between A, B, and C. (From New York C. P. A. Examination) Comments. Charge Broker account with margin, sales of stock, and interest on margin. Credit this account with purchases of stock, com- missions, tax, and interest on purchase price of stock plus commission. The balance represents amount due A, which after deducting the margin is the profit to be divided among A, B, and C. Problem 178 A, B, and C agree to purchase and sell coffee for their joint account. They purchase 3,000 bags of coffee for $58,500 and one month thereafter sell the same at 16^ per pound (say 130 pounds to the bag.) The warehouse charges, labor, cartage, weighing, brokerage, etc., amount to $600. A contributes cash $20 000 00 B contributes note at 4 months $19 000 00 Discount on same at 6% __? ? C contributes cash $18 800 00 C contributes note at 3 months $2 500 00 Discount on same at 6% ? ? ? $59 982 50 It was arranged that each should contribute equally to the requisite purchase money, in default of which, interest at 6% per annum for the month covering the transaction was to be cal- culated between them, to equalize their respective contributions. Required. Prepare an account of the venture; also separate accounts of A,B,and C, showing the share of each in the final net proceeds. (From (7. P. A. Examination) 384 ACCOUNTING PROBLEMS: INTERMEDIATE Comments. In solving this problem a Joint Cash account as well as a Joint Merchandise account should be used, and in addition accounts will be kept with A, B, and C. Debit Cash and credit each contributor for his cash contribution (assuming that the notes were discounted at the bank). Handle the Joint Merchandise account in the usual manner, charging lor costs (at which time Cash is credited) and crediting for returns (at which time Cash is debited). The profit on the venture is then credited to the contributors. Interest on the contributions is adjusted through the personal accounts only, after which each is given the balance of his account in cash, which closes all accounts. Problem 179 Drew & Company and Land & Company ship merchandise to South America on joint account. Land & Company gave Drew & Company $1,200 in cash and their acceptances at six months for $3,000. Drew & Company were to provide balance of cash required, to manage the venture and to receive a commission of 2% on amount of invoice for merchandise. The profits are to be divided equally. Drew & Company paid Smith & Brown for merchandise $5,000 and discounted Land & Company's acceptances for $3,000 at 2% discount. Drew & Company prepaid freight $420, insurance, $60. In due time Drew & Company received from South America an account sales for merchandise and a draft for the net proceeds, payable in London for $3,200, out of which Drew & Company paid $3,000 to retire bills for that amount. Later Drew & Company received a draft for $3,100, being balance of proceeds of sale of merchandise. The joint account with Land & Company was closed and a check for the balance due them was paid to Land & Company. Required. Prepare a statement showing details of the joint account, also a statement of Land & Company's account. (From Kentucky C. P. A. Examination) CLASSIFIED PROBLEMS AND EXERCISES 385 Group B Consignments and Joint Ventures Theory Questions T-136 Differentiate between Consignments, Adventures, and Joint Accounts. How should Consignments Received to be realized for and on behalf of another, be best treated? How should the managing partner of a joint venture treat the same in his books? Illustrate. (Michigan C. P. A.) T-137 (a) How should a trading company, acting also as agent for an individual trader, show on its balance sheet the unsold con- signed goods of the principal? (b) How should the principal show the goods on his own balance sheet ? (American Institute) T-138 State two ways of treating consignments inward, when goods are to be sold subject to commission, at the price at which they are consigned. Give the arguments for and against each method and your views thereon. (New York C. P. A.) T-139 In auditing the accounts of an engineering corporation you find a number of engines have been shipped to dealers on con- signment, against which the dealers have made deposits of 75 per cent of the invoice price. The engines were invoiced out to the dealers at the regular contract prices, being carried in Accounts Receivable, the deposits referred to being credited 386 ACCOUNTING PROBLEMS: INTERMEDIATE to the same accounts. In drawing up the balance sheet, how would you consider these items should be stated, and upon what basis of valuation? (Massachusetts C. P. A.) T-140 The amount of outstanding accounts receivable by a selling house for account of a consignor, whose account is unguaranteed, is $762,000; the selling house has advanced thereon, to the consignor, $80,000. The consignor shows, in his balance sheet: "Outstanding Accounts Receivable, $682,000," as embracing the above. State (a) your opinion of the propriety thereof, and if you would treat the items differently, (b) how and (c) why. (Massachusetts C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 387 Group C. Branch Houses and Selling Agencies Problem 180 The trial balance of Ashley and Bitzer, Boston Branch, on September 30, 1921, was as follows: Accounts Receivable $ 5 000 Cash in Bank 2 000 Expenses 3 800 Purchases 27 200 Sales '. $34 000 Home Office 4 OOP J38"0b6 $38 OOP Goods on hand, $2,000. Required: (a) Necessary journal entries to close the nominal accounts on the branch books (b) Entries in the home office to make the books agree. Comments. (a) Close ledger of branch in the usual manner, the net profit being credited to Home Office account. (b) Charge Branch Office account and credit Branch Profit and Loss for profit as shown by branch books. Problem 181 A branch office business was started the first of the year, the head office advancing $5,000 cash. During the first year merchandise was shipped to Branch, invoiced at $75,000. An auditor checking up the business at the close of the year finds the following: Merchandise sales were $60,000, with selling price of goods 20% advance on invoice. Proper vouchers were on file duly receipted for following pay- ments : Rebates and allowances on damaged goods $ 1 500 00 Salaries and other expenses 4 500 00 Freights 2 500 00 388 ACCOUNTING PROBLEMS: INTERMEDIATE The books also showed: Remittances to head office $35 000 00 Uncollected accounts 15 000 00 and the balance of the sales having been realized in cash, less rebates and allowances as noted. The cash on hand and inventory of unsold goods, together with the foregoing records, properly account for everything. Required. Prepare statements such as an auditor would make in reporting to the head office, balancing the business of the branch house. (From Illinois C. P. A. Examination) Comments. Prepare profit and loss statement for the branch, setting it up in the customary form. All the data for this statement is given in the problem except the amount of the inventory of goods on hand at the close of the period, which is found by deduction. The balance sheet items Cash and Accounts Receivable will also be found by deduction from information furnished in problem. The balance sheet will be quite simple, the total of the assets representing the balance of the Main Office account on the branch books. Problem 182 Harold J. Smith & Co. place you in charge of a branch store with goods valued at $2,150 and cash $75. You are to receive a salary of $40 per month, and 10% of the gross profits. During the year you pay store expenses of $210. The goods shipped from main store during the year amounted to $21,000, and your sales are $24,000. At the end of the year your books showed accounts receivable $400, and merchandise on hand, $2,000. It is decided to close the branch at the end of the year, and Smith takes over the accounts receivable and merchandise at book value. CLASSIFIED PROBLEMS AND EXERCISES 389 v Required: (a) Branch profit and loss statement for the year (b) Cash account showing balance due Smith & Co. at the end of the year (c) An abstract of the ledger account with Smith & Com- pany. Comments. In preparing the Cash account, assume that salary for a year has been paid and that sales were converted into cash with the excep- tion of the accounts receivable, $400. Problem 183 The condition of the Atlantic Co. at the close of business, December 31, 1919, is reported by them as follows: Assets Real Estate $ 150 000 00 Machinery 200 000 00 Cash 24 500 40 Accounts Receivable 320 800 50 Merchandise 375 480 70 $1 070 781 60 Liabilities Capital Stock $ 500 000 00 Mortgage on Real Estate 100 000 00 Accounts Payable 67 000 00 Notes Payable 100 000 00 Surplus 200 000 00 Profit and Loss 103 781 60 $1 070 781 60 The Company has a branch to which it sells its goods at 20% over inventory prices and carries this account together with other branch assets as a receivable. The statement of the branch on same date was: 390 ACCOUNTING PROBLEMS: INTERMEDIATE Assets Fixtures $ 6 205 79 Cash 1 107 55 Accounts Receivable 12 478 14 Merchandise at Price Billed to Branch 5 241 95 $25 033 43 Liabilities Atlantic Company $25 033 43 Required: (a) What was the inventory value of the branch mer- chandise? (b) Prepare a corrected balance sheet of the Atlantic Company set up in proper form. (From Massachusetts C. P. A. Examination.) Comments. The merchandise at branch is carried at 120% of cost. This must be reduced to cost and added to merchandise at main office. The Accounts Receivable item on the main office balance sheet includes the value of Main Office account as shown on branch books, $25,033.43. Deduct this amount and distribute the branch assets to the proper accounts. Problem 184 A manufacturing concern having a branch in another town presents the following trial balances on January 1, 1912: Main Office Plant $125 500 Capital Stock $250 000 Material and Supplies Notes Payable 30 000 (inventory Jan. 1, Accounts Payable 42 630 1911) 68300 Net Sales 480300 Purchases 245 800 Profit and Loss (Jan. 1, Labor 163 400 1911) 31 820 General Expense 24 900 Insurance (1 yr. to Jan. 1, 1912) 3 400 CLASSIFIED PROBLEMS AND EXERCISES 391 Accounts Receivable (worth 95%) Cash Dividends Paid Branch $84 600 4 870 20 000 93 980 $834 750 Branch Plant Material and Supplies (inventory Jan. 1, 1911) Purchases Labor Insurance (1 yr. to Apr. 1, 1912) General Expense Accounts Receivable (worth 100%) Cash $ 35 200 16 500 62 450 40 610 Net Sales Main Office $834 750 $ 97 620 93 980 260 820 24 600 3 160 $191 600 $191 600 Inventories of material and supplies on January 1, 1912, were: Main office, $45,300; branch, $28,400. No inventories of. finished goods, as same were sold on contract for daily shipments, and are all billed up on closing. In closing on January 1, 1911, the branch charged off all insurance. General Expense includes salaries, office expense, taxes, etc. Selling Expense has been deducted from the sales. Required. Construct one profit and loss statement and closing balance sheet for the entire concern, omitting estimate for depreciation. (From Massachusetts C. P. A. Examination) Comments. Prepare consolidated trial balance, eliminating the Branch and Main Office accounts, and adjusting Insurance and Accounts Receiv- able. Dividends Paid should be eliminated against Profit and Loss, Jan- uary 1, 1911. 392 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 185 The Gordon Manufacturing Company opened a branch store on July 1, 1920, in Boston, and installed X as manager. From that date to June 30, 1921, the following transactions took place. (1) Merchandise to the value of $12,380.75 was shipped during the year direct from the warehouse of the main office. (2) Freight charges on the above shipments were prepaid by the main office to the amount of $1,091.30. (3) Uncollected customers' accounts at June 30, 1921, amounted to $4,210.25. (4) Salaries and other expenses unpaid, June 30, 1921, amounted to $602.10. (5) Merchandise to the value of $8,520.60 was bought by and paid for direct by the branch. (6) The total sales of all kinds during the year ended June 30, 1921, amounted to $35,118.75. (7) Branch expenses paid (including salaries of salesmen and office clerks, rent, light, advertising, etc., but exclusive of the unpaid items above referred to), $7,268.50. (8) Charge of $725 rendered by the main office in respect to the proportion of management salaries and expenses chargeable to the branch office. (9) Inventory of materials on hand June 30, 1921, $1,210.25. A separate set of books was kept at the branch. Required: (a) The necessary entries to record the foregoing transac- tions on both the branch and main office books (b) The necessary closing journal entries for branch books (c) The necessary entries to take up the profit or loss on the main office books (d) The necessary statements to show the profits or losses from trading (e) A summary of the transactions between the branch and the main office as shown by the Branch account on the books of the main office. CLASSIFIED PROBLEMS AND EXERCISES 393 Problem 186 A Boston concern is about to open a branch selling office in Detroit. Full stock of goods will be carried in this office, the goods to be billed to the Detroit branch at selling price, freight on shipments to Detroit being paid by the Boston office. All sales made by the Detroit office are billed from Detroit, a copy of the bill being sent to the Boston office. Once a month a summary of sales billed is also submitted to the Boston office for checking purposes. All bills are payable at the Boston office. All the expenses of the branch are paid from the main office with the exception of petty expenses, for which a Petty Cash Fund is provided. If any sales are made by the Boston branch outside of a given territory, commission must be allowed to the dealer in whose territory such sales are made. Submit a list of the accounts which you would open on the books of the main office to show a proper accounting for the business done at the branch. Define the functions of such accounts and state what special books, if any, you would recommend for taking care of the business. Problem 187 The Marion Wholesale Provision Company has a number of retail branches which are supplied with goods from the wholesale store, but they keep their own sales ledgers, receive cash against ledger accounts, and pay in the whole of their cash every day to head office. They send out their own statements of account monthly. All wages and branch expenses are drawn by check from head office on the imprest system. The following particulars are supplied by the branches: 394 ACCOUNTING PROBLEMS: INTERMEDIATE ABC Six months' sales to June 30, 1920 $13 500 $13 000 $11 500 Returns from customers 100 120 80 Allowances to customers 25 20 30 Cash received on ledger accounts 11 900 12 000 10 000 Cash sales 7 100 6 250 6 500 Stock at commencement 2 700 2 400 2 500 Stock at end 3 100 2 900 2 400 Debtors, January 1, 1920 6 250 6 000 5 500 Debtors, June 30, 1920 7 650 6 810 6 890 Bad debts 75 50 Goods received from wholesale, less returns 10 600 10 300 10 000 Rent and taxes paid 400 350 375 Wages and sundry expenses 1 900 1 780 1 750 Required: (a) Compile each branch ledger account in the head office books (b) Prepare a profit and loss statement by branches and in total. Problem 188 A commission house, composed of three partners, is selling agent for sundry consignors whose accounts are unguaranteed. The rate of commission is 3% of the net sales. The fiscal terms end June 30 and December 31. The partners' capital accounts are to be credited with interest at 6% per annum and with the net earnings which are to be apportioned as follows: J. Doe, 60%; R. Roe, 30%; J. Smith, $10%. No interest is to be computed on J. Doe's drawing account; that account is to be credited with 1% of the net sales. Following is the trial balance, December 31, 1920: Cash $ 16 800 Sundry Creditors $ 100 Advances to Sundry Sundry Consignors' Sales Consignors, Account Accounts 235 600 of Sales 105 700 J. Doe, Capital Acct. Accounts Receivable, for (June 30, 1920) 100 00 Account of Sundry R. Roe, Capital Acct. Consignors 235 600 (June 30, 1920) 90 00 CLASSIFIED PROBLEMS AND EXERCISES 395 J. Doe, Drawing Acct. $5 800 J. Smith, Capital Acct. Salaries 3 400 (June 30, 1920) $4 000 Rents 700 Commissions 18 000 Traveling 600 Interest Received from Teaming 200 Consignors, on Ad- Miscellaneous Expenses 800 vances Account of Sales (to Dec. 31, 1920) 2 900 $369 600 $369 600 The net sales, during the six months, were $600,000. Required: (a) Profit and loss statement for the six months ended December 31, 1920, showing gross profit, operating expenses, interest credited to partners, and distribution of net earnings (b) Balance sheet, December 31, 1920. Show details of capital accounts. (From Massachusetts C. P. A. Examination) Comments. The commission house in this case may sell on credit, but as such accounts are not guaranteed, the commission house is not Liable to the consignors for sales on credit until the accounts have been paid; consequently, the net proceeds of such sales are not remitted to the con- signors until all accounts have been collected. On the other hand, the net proceeds of cash sales are remitted at once. Credit is taken for the commission on charge sales, being deducted from cash sales or from the first payment made on account of charge sales, the net proceeds being re- mitted to the consignor. Net sales for the period ended December 31, 1910, amount to $600,000. An item of "Accounts Receivable for Account of Sundry Consignors $235,600" appears in the trial balance. Cash has therefore been received for sales to the amount of $364,400, from which the commissions on the sales for the entire period have been deducted, the proceeds, $346,400, having been remitted in cash. This results in the consignors' accounts receivable being exactly offset by an account with Sundry Consignors Sales, repre- senting the liability of the commission house to the consignors on un- collected accounts. The Advances to Sundry Consignors, $105,700, are cash advances to consignors whose goods have been sold on account, interest being charged the consignor on such advances. When collections are made, the advances will of course be deducted and the balance remitted to the consignor. Prepare the profit and loss statement in the usual form as far as possible. Start with income consisting of commission and interest; deduct operating expenses; and from the results secured, deduct interest on partners' capital and Doe's commission of 1% on sales. This will give net income, which should be divided in the agreed ratio. 396 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 189 A San Francisco corporation builds a plant and establishes a branch in Glasgow, Scotland. At the expiration of its fiscal period a trial balance is forwarded to the San Francisco office, as follows : Plant 250 000 Accounts Receivable 187 500 Expenses 25 000 Inventory (end of fiscal period) 50 000 Remittance Account 150 000 Cash 12 500 Accounts Payable 87 500 Income from Sales 250 000 San Francisco Office 337 500 675 OOP 675 OOP A trial balance of the San Francisco books at the same date was as follows: Capital Stock $2 500 000 00 Patents $1 500 000 00 Glasgow Account 1 640 250 00 Remittance Account 729 281 25 Expenses at San Francisco 25 000 00 Cash 64 031 25 $3 229 281 25 $3 229 281 25 The Remittance Account is composed of four sixty (60) day drafts on Glasgow for 37,500 each, which were sold in San Francisco at $4.85^, $4.86, $4.86}^ and $4.86^ respectively. Required. Prepare a balance sheet of the San Francisco books after closing, and a statement of assets and liabilities of the Glasgow branch reconciled with the San Francisco books. Close the books at rate of exchange on last day of fiscal period, $4.87^ (conversion of remittance to be made at the average rate of the four bills). (From New York C. P. A. Examination) CLASSIFIED PROBLEMS AND EXERCISES 397 Group D Branch Houses Theory Questions T-141 What results are sought to be secured in the keeping of ac- counts with branch houses? Under what circumstances would you debit or credit such accounts? What would the balance of any such account show? (C. P. A.) T-142 On June 30, 1921, the home office of the Boston Textile Com- pany mailed $5,000 to its Cleveland branch and telegraphed the Cleveland office to that effect. How will the Cleveland branch handle this item on their books so that its account with the home office will be in agreement with the home office account with the Cleveland branch as of July 1, 1921? T-143 Should a manufacturing concern invoice its goods sent to a branch house (1) at selling price, or (2) at the prevailing whole- sale price of the same or similar goods obtainable in open market, or (3) at cost? State the reasons fully. (American Institute) T-144 A corporation, having several branch offices, maintains a gen- eral ledger account with each branch and charges, at selling value, all goods sent to the branches for stock. When preparing the balance sheet at the closing period, the balances due from the branch offices are included with the accounts receivable. If you see any objections to this method, state them and explain how you would deal with the accounts. (Ohio C. P. A.) 398 ACCOUNTING PROBLEMS: INTERMEDIATE T-145 A manufacturing concern having several branch offices for the sale of its product is in the habit of billing the branches at a wholesale price and expects each branch to show a profit. A balance sheet is prepared in which the current accounts with the branches (after closing out their profits and losses into head office) are carried as accounts receivable. These branches carry a considerable stock of merchandise and have their own accounts receivable and possibly some outstanding accounts payable. How would the above balance sheet have to be modified in order to show correctly the financial condition of the business? (American Institute) CLASSIFIED PROBLEMS AND EXERCISES 399 Bibliography Consignments and Joint Ventures BENNETT, GEORGE E. Accounting Principles and Practice. New York, 1920. Vol. ii, chaps, xin and xiv. ESQUERRE, PAUL-JOSEPH. The Applied Theory of Accounts. New York, 1920. Chaps, xvn and xvm. Practical Accounting Problems. Theory Discussion and Solutions. Part i. New York, 1921. Problem 20, pages 340-353. GREENDLINGER, LEO. Accounting Practice. New York, 1914. Chap. XXIII. KESTER, ROT B. Accounting Theory and Practice. New York, 1917. Vol. i, chaps. L and LI. MADDEN, JOHN T. Accounting Practice and Auditing. New York, 1917. Chaps, vii-vin. MCFARLAND, G. A., and ROSSHEIM, I. D. A First Year in Bookkeeping and Accounting. New York, 1915. Chap. xx. McKiNSEY, JAMES O. Bookkeeping and Accounting. Cincinnati, 1921. Vol. n, series B, chap. xxvm. WILDMAN, JOHN R. Principles of Accounting. New York, 1914. Chap. xxvin. Branches and Selling Agencies BENNETT, GEORGE E. Accounting Principles and Practice. New York, 1920. Vol. n, chap. xn. COLES, A. Company Accounts. London. ESQUERRE, PAUL-JOSEPH. Practical Accounting Problems. Theory [Dis- cussion and Solutions. Part i. New York, 1921. Problem 8, pages 153-163. GREENDLINGER, LEO. Accounting Practice. New York, 1914. Chap. XXI. KESTER, ROY B. Accounting Theory and Practice. New York, 1918 Vol. n, chaps, xxx and xxxi. MADDEN, JOHN T. Accounting Practice and Auditing. New York, 1917 Chap. xin. SECTION VI MISCELLANEOUS PROBLEMS Group A. Fire Loss and Insurance Adjustments Problem 190 A fire in a manufacturing concern resulted in a loss on machin- ery, $5,000; merchandise, $10,000; office equipment, $3,000; which amount of $18,000 was agreed on and paid by the insur- ance companies. Required. Give the journal entries necessary to record prop- erly the above transactions on the books of the concern. (From New York C. P. A. Examination) Comments. A Fire Loss Adjustment account should be used. Charge this account with all losses on account of the fire, at which time the proper asset account should be credited. Credit Fire Loss Adjustment with any salvage values and amount received from the insurance companies. Problem 191 The books of a concern recently burned out contained evidence of purchases, including inventory, of $200,000, and sales of $40,800 since the last closing. Upon investigation, however, the auditor ascertained that a sale of merchandise had been made just prior to the fire, and not recorded in the books, at an advance of two-fifths over cost, less a 10% cash discount, on which the profit was $31,928. The past history of the business indi- cated an average gross profit of 50% on cost of goods sold. 401 402 ACCOUNTING PROBLEMS: INTERMEDIATE Required: (a) What amount should be claimed as fire loss? (b) What rate of gross profit do the transactions finally yield? (From American Institute Examination) Problem 192 On April 1, 1921, the garage occupied by the Acme Grocery Company was totally destroyed by fire, together with its entire contents, including trucks and other equipment of the above company. The following accounts are found on the books of the company at the time of the fire: Delivery Equipment, $8,000; Reserve for Depreciation of Delivery Equipment, $1,600; Unexpired Insurance on Delivery Equipment, $240. Depreciation has been credited at the rate of 10% per annum up to January 1, 1921. The insurance is paid in advance until December 31, 1921. The Insurance Company settled for the book value of the equipment. Required. Necessary journal entries with complete particulars to record the above and adjust all accounts affected. Comments. Set up a Fire Loss Adjustment account as in the preceding problem. The various adjustments will be made in the following order: (1) Provide for depreciation from the beginning of the fiscal period to the date of the fire. (2) Close the reserve account into the asset account. (3) Close the book value of the asset account into the Fire Loss account. (4) Write off the unexpired insurance, charging the proportion to time of fire to Expense, and the balance to Fire Loss. (5) Assuming that cash is received from the Insurance Company in settlement of the claim, credit the same to Fire Loss Adjustment account. (6) Close the Fire Loss account into Surplus. CLASSIFIED PROBLEMS AND EXERCISES 4Q3 Problem 193 A company has several delivery trucks charged to Truck account at cost, against which it has set up depreciation at the end of each year by a credit to a separate Reserve for Deprecia- tion of Trucks, debiting the amount to Profit and Loss account. A truck was purchased January 1,1918, for $4,000. Deprecia- tion has been provided at 20% per annum. On December 31, 1919, the truck is wrecked by collision. $1,000 is obtained from the insurance company, and $250 from salvage. Required. Entries necessary to adjust the ledger accounts. (American Institute) Problem 194 On the evening of September 30, 1921, a fire broke out in the plant of the Zanesville Manufacturing Company and partially destroyed the power plant and equipment, the loss on the power plant building amounting to $30,000, and the equipment to $50,000. The power house was insured in the amount of $40,000, and the equipment, $100,000. The policies containing the 80% coinsurance clause were taken out on April 1, 1921, for a term of three years, the premium amounting to $1,850. On April 1, 1921, the value of the power house and equipment as shown on the balance sheet was as follows: Power House Building (cost) $ 80 000 Less Reserve for Depreciation 18 OOP $ 62 000 Power House Equipment (cost) $225 000 Less Reserve for Depreciation 77 500 $147 500 Depreciation has been figured at the rate of 5% per annum on the power house building, and 10% on the equipment. A settlement was effected with the insurance company on the above basis. 404 ACCOUNTING PROBLEMS: INTERMEDIATE Required. Journal entries necessary to record all of the ad- justments on account of the fire. Comments. All of the principles illustrated in this problem have been illustrated in previous problems with the exception of the 80% coinsurance clause. Where the policy contains this clause the insurance company will be liable only for that proportion of the loss that the face of the policy bears to 80% of the value of the property at the time of the fire (book value here). For instance, in the case of the Power House Building, it will be necessary to first find the book value of the property. The depreciation for the six months from April 1 to September 30, the date of the fire, .at 5% amounts to $2,000, which added to the reserve already set up makes that amount $20,000, which deducted from the cost, $80,000, leaves the book value $60,000. 80% of this book value amounts to $48,000. The face of the policy being only $40,000, the insurance company will only be liable for 40,000/48,000 or 5/6 of the loss. 5/6 of $30,000 loss amounts to $25,000. The loss on Power House Equipment will be figured in a similar manner. The journal entries to adjust the accounts will be made as in previous problems. Problem 195 The Graham Mercantile Company have a fire. It is ascer- tained that at the time of the fire their merchandise inventory was $10,000, on which they sustained a loss of $5,000. Their merchandise was insured for $7,000, subject to a coinsurance clause of 80%. What should the insurance company offer them in settlement of this loss? (Arkansas C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 405 Problem 196 It is now becoming quite common practice for corporations to insure the lives of their principal officers, so that upon their deaths the corporations may be in a measure reimbursed for the loss to the business. You are asked to indicate what sort of entries would be made by the company, from time to time, if it paid the insurance premiums on a policy of insurance for $50,000 carried on the life of its president under the four classes of insurance policies indicated below: 10 year renewable term policy 20 payment life policy Straight life policy 20 year endowment policy Also indicate -what entries should be made in the books for the receipt of the $50,000 principal of the different classes of policies, supposing the president of the company died during the fifth year of the insured term. (American Institute) Problem 197 The A. J. Schissler Company suffered a fire on June 25, 1921, resulting in the loss of its building, furniture, and the greater part of its stock. A trial balance taken on June 30, 1921, before any adjustments are made, shows the following: THE A. J. SCHISSLER COMPANY Trial Balance June 30, 1921 Cash $11 320 21 Notes Receivable 1 317 72 Accounts Receivable 2 559 94 Merchandise 3 342 80 Consignment 1 302 50 $ 336 87 Consignment 2 518 60 484 50 Consignment 3 (cost) 1 955 00 406 ACCOUNTING PROBLEMS: INTERMEDIATE Real Estate $7 125 00 Furniture and Fixtures 207 90 General Expense 549 62 Merchandise Discount 133 77 $217 21 Discount 32 11 81 77 Interest 2 04 25 24 Notes Payable 2 742 27 Accounts Payable 4 686 37 Capital Stock 20 000 00 Surplus 792 98 $29 367 21 $29 367 21 The furniture is a total loss. The damaged stock was sold for $1,500. A cash settlement is made with the insurance com- panies for $8,000; $3,000 on stock and $5,000 on building. In preparing the financial statements, you find that the books contain a general Merchandise account, an analysis of which shows the following charges and credits: Merchandise debits Inventory, January 1, 1921 $ 3 372 55 Purchases 14 152 39 Freight and Cartage In 377 52 Merchandise credits Sales regular $10 059 46 Sales of damaged goods 1 500 00 Insurance settlement 3 000 00 The cost of goods damaged and destroyed by the fire is esti- mated at $8,920.38. The cost of goods consigned to commission merchants- charged to Consignments in the above trial bal- ance amounting to $2,776.10, is not included in the purchases for June. These goods were shipped in May. The Real Estate account shows a debit of $12,125, represent- ing the original cost, and a credit of $5,000, representing the insurance settlement. The building lot is appraised at $6,000. Required: (c) Make the necessary adjusting entries, including the entry necessary to close the Merchandise account and open the detail accounts: Inventory, Purchases, Sales, Freight and Cartage In, and Fire Loss Statement showing fire loss Profit and loss statement showing the profit on sales to time of fire, followed by final net loss CLASSIFIED PROBLEMS AND EXERCISES 407 (d) Balance sheet in usual form (e) Necessary entries to close all the accounts. Comments. Set up a Fire Loss account to which all losses on account of fire will be transferred, and to which will be credited the amount received from the insurance company. The credits to the consignment accounts represent the proceeds of the account sales. Consignments 1 and 2 will therefore be closed into Profit and Loss account. Consignment 3 will be carried as an asset in the balance sheet, as it represents the cost of goods consigned and in the hands of commission merchants. Problem 198 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 assured contained two items for 600 cloaks, $12,000; silk, 1,000 yards, $1,500. An inventory of the stock on hand, consisting of cloaks, cloth and silk, had been taken January 1, amounting to $118,500, the particulars of which have been lost or destroyed. An analysis of the firm's books produced the following infor- mation: Purchase of cloth, 37,500 yards at $1. Purchases of silk, 10,000 yards at $2. 6,000 cloaks were manufactured, consuming cloth, 40,000 yards at $1. silk, 10,000 yards at $2. 9,000 cloaks were sold between Jan. 1 and Sept. 10. Cost of sales, per cloak, for material $10 00 Cost of sales, per cloak, for labor and sundries 7 00 $17 00 Inventory, September 11 2,500 cloaks at $17; 12,500 yards cloth at $1; 5,000 yards silk at $2. Required. Prepare a statement proving or disproving the claim. (From New York C. P. A. Examination) 408 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 199 The office of a firm of traders doing business in San Francisco was destroyed by an earthquake. The books of account, which had been fully posted, were badly damaged. The following ledger accounts were found to be legible : Purchases, net, $69,000; Discounts Lost, $640; Discounts Gained, $3,450; Sales, $54,000; Bills Receivable, $33,000. Inquiry at the bank disclosed a balance on deposit, $129,000. Bills receivable amounting to $45,000 had been discounted at the bank. An audit of the checks paid by bank showed that $99,000 had been paid creditors (including $60,000 notes payable). A balance sheet prepared at the last closing of the books was produced, con- taining the following items: Cash, $60,000; Accounts Receivable, $126,000; Loans Receivable, $24,000; Real Estate, $90,000; Notes Receivable, $78,000; Capital, $318,000; Notes Payable, $60,000. Required. A trial balance supplying the missing accounts. (From New York C. P. A. Examination) CLASSIFIED PROBLEMS AND EXERCISES 409 Group B Suspense Items and Adjustments Problem 200 In taking off a trial balance a bookkeeper finds that his debit footing exceeds the credit by $131.56, which amount he carries to a Suspense Account. Later he discovers that a purchase amounting to $417.50 had been debited to a creditor as $192.94; that $312.50 for depreciation of machinery had not been posted to Depreciation account; that $500 withdrawn by the proprietor had been charged to Wages account; that a discount allowed to a customer of $76.13 had been posted to the wrong side of Mer- chandise Discount account; and that the total of sales returned was footed $5 short. Required. Give entries showing how you would remedy these errors, and starting with the original difference prepare a supple- mentary schedule showing whether the books are now in balance. (From Illinois C. P. A. Examination) Comments. Make adjusting entries to correct all errors, charging or crediting Suspense account for those items not affecting other accounts. For instance, in the first item, in order to correct the creditor's account it will be necessary to credit same with $610.44, the entry being: Suspense Account $610 44 Accounts Payable $610 44 After making entries, set up a Suspense Ledger account with a credit of $131.56. To this will be added the credits to Suspense and from it will be deducted the debits. The result will determine whether or not the books are in balance. Problem 201 July 1. X Company arranges with Broker B to discount accounts receivable amounting to $24,000, consisting of fifty accounts, on a 20% margin, commission 5% gross. Aug. 1. A Company, whose account amounts to $500, fails, 410 ACCOUNTING PROBLEMS: INTERMEDIATE and the broker returns the account to X Company, who gives proper credit for the same. At the same time, the broker reports collection of ten accounts aggregating $4,000. Sept. 1. Broker B reports the remainder of the accounts col- lected and remits balance of collections. Required. Set up entries covering the above transactions. Comments. This problem illustrates the practice of discounting ac- counts receivable sometimes indulged in by firms in financial difficulty. At the time the accounts are discounted a contingent liability account called "Customers Accounts Discounted" should be credited. As the customers accounts are paid the contingent liability account is charged and the customer credited. Problem 202 Brown has a customers' ledger, a purchase ledger, and a gen- eral ledger, the latter containing controlling accounts with the other two. When his bookkeeper submitted to him trial bal- ances of the three he observed that White owed him $100, sub- ject to a cash discount of 2/^%, and an allowance for outward freight of $1.68, neither of which items has been entered in the books; and that he owed White $100, subject to a discount of 4%, which had not been entered. He directed the bookkeeper to adjust the accounts by a remittance of stamps. Required. Draft entry or entries that will close the two personal accounts and maintain the reconcilement of the ledgers. (From Massachusetts C. P. A. Examination) CLASSIFIED PROBLEMS AND EXERCISES 41 1 Problem 203 When auditing the books of a company which are not in balance the following errors are discovered: 1. A check drawn for $110 is entered in the cash book as a collection of $100 and posted to the debit of the creditor's account as $110. 2. A customer's credit memo of $25 is included as a sale and posted to the credit of the customer's account as $20. 3. The debit side of the cash book is underfooted $100, and a check drawn for $100 in payment of a creditfor's account is not entered in the cash book. 4. Discounts received of $250 are posted as discounts allowed. 5. Capital stock to the par value of $5,000 was issued and charged to the president. $2,500 of this stock was sold by him at par and the proceeds credited to the Capital Stock account. The balance of the issue, $2,500, was later canceled, the Capital Stock account charged and the president's account credited with that amount. Required. Prepare journal entries for accounts in the general ledger and subsidiary ledgers which are controlled by accounts in the general ledger, to correct the foregoing errors. (From Kansas and Missouri C. P. A. Examinations) Comments. The instructions are very clear as to what adjustments to make. Set up the journal entries for the adjustments with complete par- ticulars as to why the entry is made. The propriety of making some of these adjustments might well be commented upon in solving the problem. 412 ACCOUNTING PROBLEMS: INTERMEDIATE Problem 204 THE LANDSDALE MONOTILE COMPANY Balance-sheet December 31, 1918 Assets Liabilities and Capital Land and Buildings $500 000 Capital Stock $ 300 000 Less Reserve for Depreciation 120 OOP $ 380 000 Notes Payable 350 000 Machinery and Equipment $200 000 Accounts Payable 158 000 Less Reserve for Depreciation 80 000 120 000 Interest Accrued U. S. Victory Bonds 100 000 Payable 3 000 Merchandise Inventory 125 000 Surplus 314 000 Cash 58 000 Accounts Receivable 250 000 Less Reserve for Doubtful Ac- counts 12 500 237 500 Notes Receivable 100 000 Accrued Interest Receivable 4 500 Total $1 125 OOP Total SI 125 OOP The accruals at the time of closing were: Interest on notes payable, $3,000; depreciation of buildings, $20,000; interest on notes receivable, $2,000; depreciation of machinery and equip- ment, $30,000; interest on Victory bonds, $2,500; provision for doubtful accounts, $12,500. The other nominal accounts closed out were: sales, $325,000; administrative expense, $50,000; cost of goods sold, $125,000; selling expense, $25,000. Required. Trial balance before closing. (From American Institute Examinations) CLASSIFIED PROBLEMS AND EXERCISES 413 Group C Miscellaneous Theory Questions T-146 The Insurance account as kept upon the books of the Good Merchandise Company is charged with the premiums paid on the following kinds of insurance: Fire Insurance on Buildings, Merchandise and Fixtures; Sprinkler Leakage; Employer's Guarantee Bond; Safe Burglary; Robbery and Hold Up; Auto- mobile Fire, Theft, and Liability; General Liability; Elevator Liability; Steam Boiler; Tornado; Plate Glass; Use and Occu- pancy; Insurance on Officers' Lives. You are asked to indicate the proper treatment to be given each of the above items; i. e., indicate the name of the account or accounts to which they should be charged, give the adjusting entries, state the section of the profit and loss statement in which each would appear, etc. (Wisconsin C. P. A.) T-147 The entire stock on hand of a mercantile concern is destroyed by fire. The financial books are saved. How would you ascertain the amount of loss to claim against the insurance company? (Massachusetts C, P. A.) T-148 A fire occurred in the plant of A. C. Company, resulting in an estimated loss of $50,000, and settlement was made with the insurance companies on that basis. Upon receipt of check for $50,000 from the insurance com- panies, the treasurer of the company instructed the bookkeeper to credit the amount received to an Unexpended Fire Insurance Suspense account. All repairs and renewals together with all other expenses incident to the fire were charged by the treasurer's instructions to a Fire Repairs account. 414 ACCOUNTING PROBLEMS: INTERMEDIATE After the work had been completed, this account, which then showed a total of $35,000, was closed into the account with Unexpended Fire Insurance Suspense. No disposition has been made of the credit balance of $15,000 remaining in said account. Taking into consideration all of the facts as stated above, including the matter of Federal taxes, do you approve of the above method of handling the case? If not, what procedure would you recommend? T-149 (a) Explain the method of quoting French exchange in U. S. money. (b) With reference to the above, explain the following phrase in a certain work on foreign exchange: "The higher the rate, the lower the quotation." (c) What is the present rate of exchange on France? Give date used. (New York C. P. A.) T-150 A company in the manufacturing business has had an unusually profitable year due to large purchases of material made the previous year at a very low price. In reporting the earnings for the year during which the contract was made and the year in which the material was received and consumed, would you con- sider any adjustments necessary in view of the above? Answer fully. (North Carolina C. P. A.) T-151 Assuming an automobile manufacturing company made a contract for rubber tires at $35 each with the understanding that it was to receive a rebate of $5 a tire if the purchases exceeded CLASSIFIED PROBLEMS AND EXERCISES 415 40,000 tires and thp.t at the end of the season when the accounts were made up, say on July 31, it was found that 45,000 tires had been purchased and a claim for the rebates was thereupon made and a check in settlement was received on August 31 following. On July 31 there were 15,000 tires on hand. At what price should they be valued for inventory purposes and how should the rebate be dealt with in the accounts for the year ending July 31? (Illinois C. P. A.) T-152 At the date of closing two contracts are in hand and uncom- pleted) one for $1,200, estimated to cost $900, is three-quarters finished and is already charged to customer at $1,200; the other is $2,000, estimated to cost $1,500, is half finished, and no entry has been made therefor. Suggest entries necessary to adjust these accounts so that anticipation of profits will not occur. (New York C. P. A.) T-153 At the time of taking inventories and closing its accounts, preparatory to ascertaining its financial condition, a corporation has obligations under contracts to pay for raw materials to arrive, on which no payments have been made. At the time of closing the accounts, the prices of the contracts are in excess of the market prices for deliveries corresponding with the contracts. State: (a) how this condition should be reported in the accounts and statement of financial condition, and (b) your reasons. T-154 An ice company sells coupon books to its customers; the coupons are to be used in paying for ice delivered. These coupon books are paid for in advance by the customers. What 416 ACCOUNTING PROBLEMS: INTERMEDIATE accounts should be opened on the company's books to record such transactions and how should the sale of coupons and de- liveries of ice appear therein? (Wisconsin C. P. A.) T-155 Give some principles to determine a proper disposition of the cost of enlarging a plant including a partial re-building of the old portion. In case you have insufficient data to enable you to apply these principles satisfactorily, offer some solution of the difficulty. (American Institute) T-156 In a certain department of a large dry-goods house purchases for a year were $30,000. They were in the first place marked up for "selling" purposes to $45,000. Later additional mark-ups amounting to $2,000 were made and mark-downs were also recorded aggregating $5,000. At the end of the fiscal period there were found to be on hand goods of the marked selling value of $10,000. State how you would ascertain their inventory value for the purpose of closing the books and calculate the amount. Explain fully. (American Institute) T-157 Define and differentiate the following kinds of accounts: (a) Real and Nominal. (b) Personal and Impersonal (c) Current and Summary. (d) Controlling and Specific. (Michigan C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 417 T-158 (a) What different methods should be employed in books of account for keeping track of notes endorsed for accommodation and notes endorsed in the regular order of business? (b) How would you indicate in books of account the contingent liability arising in each case? (Michigan C. P. A.) T-159 A company packs a coupon in each box of goods sold. The company agrees to redeem 100 coupons with premiums costing $1 apiece. 25% of the coupons are never presented for redemp- tion. Prepare sample journal entries for the bookkeeper to follow which will give the last of each month the expense for the month of the coupons given out, the amount of premiums on hand, and the gross and net liability for outstanding coupons, and state briefly how these entries will produce the result wanted. (Massachusetts C. P. A.) T-160 A manufacturng company ships its products in packages cost- ing 7^2 i each. They are charged to customer at 10^ each but subject to credit when returned in good order at same price as charged. At close of year, Package account shows an apparent gain, being the difference between cost of package and amount of contingent sales. What disposition should be made of the ledger gain at close of year? (Michigan C. P. A.) T-161 A milk company sells to its customers strips of tickets which are good in payment of the milk delivered to them. These 418 ACCOUNTING PROBLEMS: INTERMEDIATE tickets arc paid for in advance by the customers. What accounts would you expect to find on the books and how should the entries be handled showing the transactions of the sales of tickets and the deliveries of milk? (Michigan C. P. A.) T-162 Where land is donated to a manufacturing concern under conditions requiring a number of years for their fulfillment, how would you treat the transaction on the books of the donee? (Ohio C. P. A.) T-163 In some trades it is customary to deduct cash discounts from invoices before taking the same into the accounts. What is the theoretical objection, if any, to so doing? (Ohio C. P. A.) T-164 A concern leases certain premises for a long term and makes extensive alterations and additions at its own expense. How would you treat such expenditures in the accounts? (Ohio C. P. A.) T-165 Explain the purpose and manner of keeping a private ledger as a part of the financial books of a corporation or firm and how the entries on same should be handled on the general ledger. Explain fully. (Maryland C. P. A.) CLASSIFIED PROBLEMS AND EXERCISES 419 Bibliography Miscellaneous BENNETT, GEORGE B. Accounting Principles and Practice. New York. Vol. i, 1920. Vol. n, 1921. Cox, HENRY C. Advanced and Analytical Accounting. Business Account- ing, vol. iv. New York, 1920. Chap. xx. ESQUERRE, PAUL-JOSEPH. Applied Theory of Accounts. New York, 1920. Chap. xn. GREELEY, HAROLD DUDLEY. Theory of Accounts. Vol. i. Business Ac- counting. New York, 1920. KESTER, ROY B. Accounting Theory and Practice. New York. Vol. I, 1917. Vol. n, 1918, chap. xxxn. WILDMAN, JOHN R. Principles of Accounting. New York, 1914. Chap, xu. INDEX Account : advances to sundry consignors, 395 altering and trimming depart- ment: function of, 138 how treated in profit and loss statement, 140 amounts due from consignees, 138 bonus, 248 bonus to department managers and salesmen, 148 branch office, 389 broker, 383 building and construction, 264 cash, cashier's shortage, how treated, 193 consigned goods, 377 consignments, 377, 380, 407 fire loss adjustment, 401, 402, 407 formulae, trade-marks, and pat- ents, 255 goods in hands of consignees, 138 home office, 389 joint adventure, 381 joint consignment, 382 premium paid for leasehold, how treated, 193 profit and loss in liquidation, 288, 289 realization and liquidation, 368 royalty, how treated, 193 sale of stock rights, 267 sundry consignors' sales, 395 surplus credit, 344 Account : suspense, 409 vendors' stock, 292 waste sales, how treated in profit and loss statement. 197 Accounts : customers', discounted, 410 payable, estimated discounts on, 195 receivable for account of sun- dry consignors, 395 Adjusting entries: illustrations: partnership, Hall and Mar- vin, 20 Adjustments: balance sheet, 341 capital, 357 effects of, 338 general, 338 surplus, 338 American Bankers' Association: illustrative form for credit pur- poses : firm or individual, manufac- turer or merchant, 64, 65 corporation, 66, 67 American Hide and Leather Com- pany and Subsidiaries' consolidated balance sheet, 58, 59 American International Corpora- tion : condensed balance sheet, 52 condensed income account, 53 American Locomotive Company: condensed income account, 90 consolidated balance sheet, 91, 92 421 422 INDEX Arlington Research Club: statement of cash receipts and disbursements, 68 American Writing Paper Company: balance sheet, 76 profit and loss statement, ' 77 surplus account, 76 Atchison, Topeka, and Santa Fe Railway Company Sys- tem: balance sheet, 93, 94 income account, 95 Audit : form of report, 118, 119, 120 B Balance sheet: grouping, 9 heading, 9 illustrations: a Massachusetts trust com- pany, 112, 113 Boston City Club, 107, 108 comparative : The Boston Dry Goods Company, 54, 55 consolidated : American Hide and Leather Company and Subsidiary Companies, 58, 59 American Locomotive Com- pany, 91 Northern State Power Com- pany of Delaware and Subsidiaries, 96, 97 The Willys-Overland Com- pany and Subsidiary Com- panies, 78, 79 United States Steel Corpo- ration, 82, 83, 84, 85 Westinghouse Electric and Manufacturing Company, 80 double account form : Royal Manufacturing Com- pany. 60 Balance sheet: illustrations : English form, 62, 63 Federal Reserve Board, form recommended by, 70, 71 Mutual Insurance Company, 109 National Bank, 111 Needham Co-operative Bank, 115 Newton Mercantile Com- pany, 121 The Atchison, Topeka, and Santa Fe Railway Com- pany System, 93, 94 University of Chicago, 99, 100 report form : George W. Dunn, 8 indentation, 9 punctuation, 9 underlining, 9 Bank statements: balance sheet: a Massachusetts trust com- pany, 112, 113 national bank, 111 Needham Co-operative Bank, 115 statement of condition: a Massachusetts savings bank, 112, 113 Bibliography : consignments and joint ven- tures, 399 corporations, 322, 323 depreciation, reserves, surplus, 349 financial statements, 240, 241 miscellaneous, 419 partnerships, 377 Bond: issue, 259, 260 premium and discount, 259, 260 Bonds : convertible, 268 interest on, 260 INDEX 423 Bonds : problems, Nos. 115-123, 314-318 "taken down," 317 theory questions, Xos. T-87 to T-98, 319-321 Boston City Club: balance sheet, 107, 108 comparative department oper- ating statement, 106 comparative profit and loss statement, 105 Branch houses, selling agencies: branch office account, 387 home office account, 387 problems, Nos. 180-189, 387-396 theory questions, Nos. T-141 to T-145, 397-399 Building contract, 271 Capital stock: increase of, 268 adjusted, 357 Cashier's shortage, how treated, 193 Certificate of condition: form of, 73, 74, 75 Closing entries: illustrative forms: corporation, The Harmon- Streeter Company, 35, 36 manufacturing, Model Manu- facturing Company, 42, 43 partnership, Hall and Mar- vin, 29 sole proprietorship, George W. Dunn, 15, 16, 17 Commission house accounting, 395 Consignments, joint ventures: problems, Nos. 170-179, 377-384 theory questions, Nos. T-136 to T-140, 385-386 Contingent asset, 264 Contracts : anticipating profits on, 156 Corporation statements, etc.: entries changing from partner- ship, 250, 251 illustrative forms: balance sheet : American Hide and Leather Company, consolidated, 58, 59 American International Cor- poration, condensed, 52 American Locomotive Com- pany, 91, 92 American Writing Paper Company, consolidated, 76 Model Manufacturing Com- pany, account form, 39 Roj'al Manufacturing Com- pany, account form, 60, 61 The Atchison, Topeka, and Santa Fe Railway Com- pany System, 93, 94 The Boston Dry Goods Company, 54, 55 The Harmon-Streeter Com- pany; account form, 30, 31 The Willys-Overland Com- pany and Subsidiary Com- panies, 78, 79 U. S. Steel Corporation, con- solidated, 82, 83, 84, 85 Westinghouse Electric and Manufacturing Company, 80 certificate of condition, to be filed by Massachusetts cor- porations, 73, 74, 75 closing journal entries, 35. 36 Model Manufacturing Com- pany, 42, 43 income account: American International Cor- poration, condensed, 53 American Writing Paper Company, 77 The Atchison, Topeka, and Santa Fe Railway Com- pany System, 95 424 INDEX Corporation statements, etc.: illustrative forms: income statement, compara- tive : The Boston Dry Goods Company, 56, 57 profit and loss statement : report form, Model Manu- facturing Company, 40 variation, report form, The Harmon - Streeter Com- pany, 33 statement of cost of goods manufactured : Model Manufacturing Com- pany, 41 supporting schedules: analysis of cost of goods manufactured, The Oaks Manufacturing Company, 44 analysis of cost of goods sold, The Craley Furni- ture Company, depart- mental, 46 analysis of operating ex- penses, The Copley Man- ufacturing Company, 47 analysis of surplus, 49 comparative analysis of operating expenses: The Boston Dry Goods Company, 50, 51 surplus account, Amciican Writing Paper Company, 76 trial balance, Model Manu- facturing Company, 37, 38 problems: amalgamations and mergers, Nos. 104-107, 290-295 bonds and sinking funds, Nos. 115-123, 314-318 changing a partnership to a corporation, Nos. 77-83, 250-258 Corporation statements, etc.: problems : corporate bond issues, Nos. 84-57, 259-260 general, Nos. 88-101, 261-274 holding companies and con- solidations, Nos. 108-114, 296-309 liquidation, Nos. 102-103, 287-289 opening the books of a new corporation, Nos. 63-76, 241-249 statements, Nos. 10-16, 149- 159 theory questions: corporate stock issues, Nos. T-49 to T-62, 279-283 dividends, Nos. T-63 to T-72, 284-286 general, Nos. T-36 to T-48, 275-278 holding companies and con- solidations, Nos. T-73 to T-86, 310-313 D Debts: inter-company, elimination of, 297 Depreciation and reserves: figuring of, 328, 330 problems, Nos. 124-134, 325-332 theory questions, Nos. T-99 to T-113, 333-337 Discounting accounts receivable, 410 Dividends : cumulative, in arrears, 270 effect of profits on, 249 Dunn, George W. : balance sheet, report form, 8, 9, 10 closing entries, 15, 16, 17 INDEX 425 Dunn, George W. : profit and loss statement, 11, 12, 13, 14 trial balance, 6 E Expenses : capitalization during construc- tion period, 267 classification of, 13 departmental, summarized anal- ysis of, 50, 51 organization, 264, 265 Federal Reserve Board: balance sheet, recommended by, 70, 71 profit and loss statement, rec- ommended by, 72 Financial statements and reports: abbreviations, 4 capitalization, 4 divisions of financial state- ment, 5 form of balance sheet, 5 grouping of items, 4 illustrative forms: audit report, 118-120 banking, 64-67, 111-115 certificate of condition, 73, 74, 75 condensed statements, 88, 89, 93, 94, 95 consolidations, 78-87, 91, 92, 96, 97, 98 corporation, 30-67, 76-77 English form of balance sheet, 62, 63 Federal Reserve Board, rec- ommended by, 70, 71, 72 partnership, 18-29, 121, 123 manufacturing, 39-60 special types: Arlington Research Club, 68 Financial statement and reports: illustrative forms: special types: Boston City Club, 105, 108 The Mutual Insurance Com- pany, 109, 110 University of Chicago, 99- 104 sole proprietorship, 6-17 indentations, 4 punctuation, 4 problems : analysis and interpretation of financial statements, Nos. 45-62, 202-228 corporation, Nos. 10-16, 149- 159 manufacturing, Nos. 17-25, 160-175 partnership, Nos. 5-9, 136-148 single entry records, Nos. 26- 34, 176-185 single proprietorship, Nos. l-A, 127-135 special types, Nos. 35-44, 186- 201 technique, importance of, 3 theory questions, Nos. T-l to T-30, 229-236 Freehold property, 271 G Good-will : how to value, 209, 261 H Hall and Marvin: adjusting journal entries, 20, 21 balance sheet, account form, 30, 31, 32 balance sheet, report form, vari- ation, 25, 26 closing journal entries, 29 profit and loss statement, 27,28 trial balance, 18, 19 working sheet, 22, 23, 24 426 INDEX Holding companies and consolida- Liquidation: tions : illustrative forms of statements, 58, 59, 78-35, 88, 89, 91, 92 merger of, 309 problems, Nos. 108-114, 296-309 theory questions, Nos. T-73 to T-86, 310-313 Income : illustrative accounts and state- ments : American Locomotive Com- pany, 90 Northern States Power Com- pany of Delaware and Sub- sidiaries, 98 U. S. Steel Corporation, 86, 87 The Atchison, Topeka, and Santa Fe Railway Com- pany System, 95 The Mutual Insurance Com- pany, 110 Installments : distribution of, 362 liquidation by, 361 Insurance : coinsurance clause, 404 Inter-company account, 297, 301 Interest : collected in advance on notes receivable, how treated, 131 Joint ventures, consignments: problems, Nos. 170-179, 377-384 theory questions, Nos. T-136 to T-140, 385-386 Liquidation: bv installments, 361 distribution of proceeds of, 288, 289 installments, distribution of, 362 of partnership, 358, 359, 360 M Manufacturing statements, etc.: illustrative forms: balance sheet: account form, Model Manu- facturing Company, 39 double account form, Royal Manufacturing Company, 60, 61 closing journal entries, Model Manufacturing Company, 42, 43 profit and loss statement, Model Manufacturing Com- pany, 40 statement of cost of goods manufactured, Model Manu- facturing Company, 41 supporting schedules: see "supporting schedules" under "corporation" problems : Nos. 17-25, 160-175 Merger, 294, 295, 309 Miscellaneous : problems : fire loss and insurance ad- justment, Nos. 190-199, 401, 408 suspense items and adjust- ments, Nos. 200-204. 409- 412 theory questions, Nos. T-146 to T-165, 413-418 Model Manufacturing Company: balance sheet, 39 closing journal entries, 42, 43 profit and loss statement, 40 INDEX 427 Model Manufacturing Company: statement of cost of goods manufactured, 41 trial balance, 37, 38 N National bank: balance sheet, 111 Newton Mercantile Company: balance sheet, 121 estimated cash or credit re- quirements, 123 profit and loss statement, 122 Northern States Power Company: consolidated balance sheet, 96, 97 consolidated income account, Q8 QQ E/O, 7*7 Notes receivable discounted: how treated on balance sheet, 131 Partnership : buying an interest, 351, 352 changing to corporation, entries, 250, 251 contributing to, 353, 356 illustrative forms: adjusting journal entries, Hall and Marvin, 20 balance sheet. Hall and Mar- vin, 25 closing journal entries, Hall and Marvin, 29 profit and loss statement, Hall and Marvin, 27 trial balance, Hall and Mar- vin, 18 liquidation of. 358, 359, 360 problems : admission of a partner, Nos. 141-151, 351-357 dissolution of partnership, Nos. 152-155, 358-360 Partnership : problems : liquidation by installments, Nos. 156-162, 361-366 miscellaneous, Nos. 163-169, 367-373 statements, Nos. 5-9, 136-148 selling an interest, 352, 353 theory questions, Nos. T-126 to T-135, 372-374 transfer of interest, 356 Potential loss, 362 Profit and loss statement: classification of expenses, 13 grouping, 12 heading, 12 illustrative forms: comparative, Boston City Olub, 105 condensed, U. S. Steel Cor- poration, 88, 89 consolidated, Westinghouse Electric and Manufacturing Company and its Proprie- tary Companies, 81 corporation : Harmon-Streeter Company, 33 Model Manufacturing Com- pany, 40 Federal Reserve Board, rec- ommended by, 72 partnership : Hall and Marvin, 27 Newton Mercantile Com- pany, 122 sole proprietorship, George W. Dunn, 11 indentation, 13 punctuation, 12 underlining, 12 variation in form of goods sold section, 13 R Real estate: appreciation, how treated, 146 428 INDEX Realization and liquidation: account, 370 loss on liquidation, how found. 370 Reconciliation statement, 341 Replacements, 330 Reserves, depreciation, and surplus: not carried on books, 127, 129 problems, Nos. 124-134, 325-332 shown as deductions from cor- relative asset accounts, 30 theory questions, Nos. T-99 to T-113, 333-337; T-114 to T-125, 345-348 "Rights": calculation of theoretical value, 267, 268 Royal Manufacturing Company: balance sheet, 60, 61 S Selling agencies: problems, Nos. 180-189, 387-396 Single entry records: changing to double entry, 179 problems on financial state- ments, prepared from, Nos. 26-34, 176-185 theory questions, Nos. T-31 to T-35, 237 Sinking funds : problems, Nos. 115-123, 314-318 theory questions, Nos. T-87 to T-98, 319-321 Sole proprietorship : illustrative forms: balance sheet, George W. Dunn, 6 profit and loss statement, George W. Dunn, 11 trial balance. George W. Dunn, 6 problems, Nos. 1-4, 127-135 Statements, special types: illustrative forms: comparative department oper- ating, Boston City Club, 106 condition, a Massachusetts savings bank, 114 receipts and expenditures, University of Chicago, 101, 102, 103, 104 problems, Nos. 35-44, 186-201 Stock : book value: how found, 202 excess over purchase price, 307 capital, increase of, 268 defaulting subscribers to, 273, 274 donated, sale of, 245, 247, 253 fluctuation, in market value, how treated, 146 installment, 264, 273 inter-company, elimination of, 301 minority interest, 304 no par value, on books, 243 on allotment, how handled, 246 sale at public auction, 273 subscribed, to be paid later, how treated, 242 unpaid subscriptions, realizing upon, 274 vendors', 292 Supporting schedules: analysis of cost of goods manu- factured, The Oaks Manu- facturing Company, 44 analysis of cost of goods sold, departmental, The Craley Furniture Company, 46 analysis of operating expenses, The Copley Manufacturing Company, 47 analysis of surplus account, 49 INDEX 429 Supporting schedules: comparative analysis of oper- ating expenses, The Boston Dry Goods Company, 50, 51 Surplus : adjustments and analysis: problems, Nos. 135-140, 338- 344 analysis for tax purposes, 344 theory questions, Nos. T-114 to T-125, 345-348 Suspense account, 409 The Boston Dry Goods Company: balance sheet, comparative. 54, 55 income statement, comparative, 56, 57 The Harmon-Streeter Company: closing journal entries, 35, 36 profit and loss statement, re- port form, 33, 34 The Mutual Life Insurance Com- pany: balance sheet, 109 statement of income, 110 The Oaks Manufacturing Com- pany: analysis of cost of goods manu- factured, 44, 45 The Willys-Overland Company: balance sheet, 78, 79 U Uniform systems for trade associa- tions : list of those who have adopted such, 116, 117 United States Steel Corporation: condensed profit and loss ac- count, 88, 89 consolidated balance sheet, 82, 83, 84, 85 consolidated income account, 86, 87 University of Chicago: balance sheet, 99, 100 statement of receipts and ex- penditures, 101, 102, 103, 104 Vendors' stock, 292 W Westinghouse Electric and Manu- facturing Company: consolidated balance sheet, 80 consolidated statement of in- come and profit and loss, 81 Working sheet: illustration, 22, 23, 24 UNIVERSITY OF CALIFORNIA LIBRARY Los Angeles This book is DUE on the last date stamped below. 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