UC-NRLF 3%& $& D7E XT -^ AMERICAN INSTITUTE OF ACCOUNTANTS BOARD OF EXAMINERS Questions Set for Examinations, June, 1917 Price Ten Cents 20 VESEY STREET, NEW YORK N Copyright, 1917, by THE AMERICAN INSTITUTE OF ACCOUNTANTS AMERICAN INSTITUTE OF ACCOUNTANTS BOARD OF EXAMINERS Auditing* JUNE 14, 1917, 9 A. M. TO 12.30 P. M. The candidate is required to answer all of the follow- ing questions: 1. What do you understand to be meant by a balance sheet audit ? What is its scope ? 2. The officers of a company of which you are the auditor elected by the stockholders submit to you for audit a bal- ance sheet in which the following item appears : Miscellaneous reserves (including premium on stock) $248,000.00 On investigation you find the item is made up as follows : General reserve $86,000.00 Operating reserves 6,000.00 Provision for plant depreciation 46,000.00 Provision for amortization of lease- holds 40,000.00 Provision for bad debts 36,000.00 Premium on capital stock sold 34,000.00 $248,000.00 Wihat recommendation would you make to the officers and what course would you take if your recommendation were not followed? 3. In auditing the accounts of a corporation, for the first year of its existence, what records and documents should be examined in addition to the books of accounts and the vouchers ? 'Questions in auditing were the same for both classes of applicants. 4. What steps should >an auditor take to ensure, as far as pos- sible, that accounts presented to him for audit contain all the liabilities of the company? 5. You are appointed auditor of a charitable institution sup- ported by annual subscriptions and other gifts. What steps would you take to verify the accounts submitted to you. Draft a certificate such as you would give if the results of your audit were entirely satisfactory. 6. To what extent do you think it is necessary to verify the outstanding capital stock of a corporation and what pro- cedure would you follow in such verification? 7. State what you consider to be the most important special problems arising in one of the following classes of audits and how you would deal with such problems : (a) Stock brokers. (b) Moving picture producers. (c) Breweries. (d) Clubs and institutions. (e) Retail stores. (f) Land companies. (g) Executorship accounts. 8. What steps should be taken to verify the cash balance ap- pearing on a balance sheet of a company in whose cash book bank and cash transactions are kept together where the auditor has not had the opportunity of making the verification on the date of the balance sheet? To what points should special attention be given? 9. What is meant by a qualified certificate ? Give an illustration of a case in which a qualified certificate might properly be given and draft a qualification applicable to that case. 10. An inventory is submitted to you certified by the manager of a business. Mention some of the principal steps you would take to confirm the correctness of the inventory figure appearing in the balance sheet. AMERICAN INSTITUTE OF ACCOUNTANTS BOARD OF EXAMINERS Commercial Law JUNE 14, 1917, 1.30 P. M. TO 4.30 P. M. The candidate may select any ten of the questions sub- mitted but must not answer more than ten. The intelli- gence disclosed by the answers will materially affect the markings. 1. State all the legal requisites of a valid sale. 2. What is the provision of the statute of frauds with respect to sales of goods, wares and merchandise? 3. Define or describe void, voidable and unenforcible contracts. 4. What simple contracts are required to be in writing ? 5. A contract executed and delivered in California is the sub- ject matter of a suit in New York. What laws will govern the validity of the contract, and what laws will govern the remedy? State the rule in such cases. 6. State all of the essential legal requirements of a contract constituting a valid negotiable note. 7. Are the following notes negotiable or not? Give reasons. (a) No date, nor place. I promise to pay to bearer One Hundred Dollars. Signed A. B. (b) January 5, 1917. Due A. B. or order on demand One Hundred Dollars. Signed C. D. Chicago, Sept. 5, 1916. On or before Dec. 1, 1916, I promise to pay to C. D. or order One Hundred Dollars. Signed A. B. 'Questions in commercial law were the same for both classes of applicants. (d) New York, April 10, 1916. On I promise to pay to the order of C. D. One Hundred Dollars. Signed A. B. 8. New York, April 10, 1916. Thirty days after date I promise to pay to the order of C. D. One Hundred Dollars. Signed A. B. Endorsed in blank "without recourse." C. D. What does the endorser warrant by his endorsement ? 9. What is the legal significance and effect of the word "nego- tiable" when applied to commercial instruments? 10. What is considered a reasonable time for the presentation for payment of a check? 11. Under what circumstances may a director incur a personal liability in respect of dividends paid by a corporation? 12. To what extent are dividends received by (a) an individual and (b) a corporation subject to payment of tax by the recipients under the income tax law of 1916? Answers to the following questions may be based on any statute of any state or on the principles fundamental to all corporations, in the absence of any statute: 13. Have directors of a corporation the right to rescind, alter or amend by-laws adopted by stockholders? If so, state under what conditions. If not, why not? 14. To what extent may directors delegate their powers to an executive committee? Give reasons for your answer. 15. Have directors the power to vote or pay increased salaries to officers for past services rendered in the usual and ordinary course of business? Give reasons for your answer. 16. How far are by-laws binding upon strangers : (a) When they have no notice of them? (b) When they have notice of them? AMERICAN INSTITUTE OF ACCOUNTANTS BOARD OF EXAMINERS Examination for Admission as Member Accounting Theory and Practice Part I. JUNE 15, 1917, 9 A. M. TO 12.30 P. M. Candidates arc required to answer questions one and tzvo and one of the three remaining questions but no more. A, B and C formed a partnership. A agreed to furnish $10,000, B and C each $7,000. A was to manage the busi- ness and receive one half of the profits ; B and C were each to receive one fourth. A supplied merchandise worth $8,500. but no additional cash. B turned over to A, as man- aging partner, $9,000 cash, and C turned over $5,500. The business was conducted by A for some time, but without keeping exact books. While managing the business A pur- chased additional merchandise amounting altogether to $75,000 and made sales of $100,000. The cash received and paid out for the partnership was not kept separate from A's personal cash. In order to straighten out matters, B took over the management. He found receivables amounting to $20,000, and of these he collected $4,500. The merchandise still on hand he sold for $500. These receipts he deposited in a bank to the credit of the firm. The remaining accounts proved worthless. The outstand- ing accounts payable amounted to $2,000, of which $1,500 had been incurred in purchasing merchandise and $500 for expenses. These accounts he paid. A presented vouchers showing that during his management he had paid other expenses of $2,400. By mutual agreement B was held to be entitled to $100 on account of interest on excess capital contributed and A and C were to be charged $75.00 each for shortage in contribution of capital. (a) Prepare trading and profit and loss accounts and ac- counts of each of the partners, indicating the final adjust- ment to be made in closing up the partnership, (b) Show how the above final adjustment would be modified if A proved to have no assets or liabilities outside the part- nership. 2. Write a reply to the following letter and prepare a statement as requested therein: Dear Sir: SMITH AND JONES. Our bank has asked us for a statement for credit purposes. 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 depreciation of $10,200. There is a mortgage for $20,000 on the plant and interest on the mortgage is at 6 per cent and is paid up to 3 months ago. We hold $10,000 of notes receivable and have discounted $25,000 of notes with the bank. Our accounts receivable, which we con- sider good, amount to $18,000, including $3,000 due from one of our employees on personal account. Our trade accounts receivable are subject to 5 per cent discount if paid at due date, and only $1,000 is now past due. Our accounts in sus- pense amount to $4,000. I believe these are 50 per cent 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. Co., 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, inter- est paid to date. We own 50 shares of stock in the company from which we buy raw material. They cost us $2,800 and are surely worth it, though we might have some difficulty in selling them in a hurry. Our inventory is taken at a low selling price, which is 10 per cent 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 responsi- bility for the figures 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 let me have them. (Signed) H. A. SMITH. 3. BALANCE SHEET OF A. Property leases and goodwill $470,133 Fixtures 81,791 Merchandise inventory.. 126,538 Sundry debtors 54,642 Sinking fund assets 11,690 Cash on hand 20,204 $764,998 Capital stock $400,000 Bonds 100,000 Sundry creditors 59,975 Surplus 135,886 Pension fund 5,460 Sinking fund 11,690 Profit and loss 51,987 $764,998 BALANCE SHEET OF B. Cash $51,195 Investments: Short time loans 108,000 Stock of A at par 100,000 Stock of C at par 20,000 Bonds of Company A at par (cost) 50,000 Railroad and other bonds at present value 126,070 Merchandise 366,437 Sundry debtors 15,563 Prepaid expense 12,715 Goodwill and trade marks 422,900 Plant and machinery... 173,337 $1,446,217 Preferred stock $800,000 Common stock 123,000 Surplus 160,000 Accounts payable 141,235 Notes payable 4,728 Profit and loss 217,254 $1,446,217 BALANCE SHEET OF C. Land and buildings $41,438 Capital stock $120,000 Machinery 20,577 Merchandise 19,610 Office furniture 50 Cash 14,730 Accounts receivable 21,245 Goodwill at cost 81,867 Bonds of Company A, 5,000 at cost 5,030 $204,547 Bonds 30,675 Surplus 34,000 Dividend declared 1,650 Accounts payable 5,879 Profit and loss 12,343 $204,547 Company D is organized for the purpose of consolidating the three companies whose balance sheets are given above, engaged in allied businesses. Company D is authorized to issue $2,000,000 preferred stock, and $350,000 common stock. It arranges to buy stock of the subsidiary companies on the following terms : FOR EACH SHARE OF Is OFFERED OF D. Preferred Stock D. Common Stock A. stock 1 share J4 share B. preferred 2 shares B. common 1 share C. stock 1 share % share On these terms D acquires $290,000 of A stock, all the pre- ferred stock of B, $100,000 of common stock of B, and $100,000 of C stock- The stock bought was obtained from individual holders, the stock of A and C held by B, as well as some stock held by non-consenting stockholders, not being acquired. The remaining preferred stock of D was held by the company. The rest of the common stock authorized was sold for cash at par. The expenses of organization amounted to $5,000 and were paid in cash. Of the accounts receivable held by C, $20,000 were due from B. Of the sundry debtors on the books of B, $5,500 were due from A. Company D also issues $500,000 bonds which it sells at 105 and pays $500,000 cash for a plant which it buys direct. Prepare a consolidated balance sheet. 4. A, B and C were in partnership, A's capital being $90,000, B's $50,000, and C's $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 partners' accounts, indicating how the cash is distributed in each instalment, the essential feature in the distribution being to observe the agreement given above. 5. A machine costing $81.00 is estimated to have a life of four years, with a residual value of $16.00. Prepare a statement showing the annual charge for depreciation according to each of the following methods: (a) Straight line. (b) Constant percentage of diminishing value. (c) Annuity method. (For convenience in arithmetical calculation assume the rate of interest to be 10 per cent.) Discuss the significance of each of the methods. AMERICAN INSTITUTE OF ACCOUNTANTS BOARD OF EXAMINERS Examination for Admission as Member Accounting Theory and Practice Part II. JUNE 15, 1917, 1.30 P. M. TO 4.30 P. M. Candidates are required to answer six of the following questions but no more. 1. 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 ex- ceeded the true value of the assets (including goodwill) 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? 2. (a) Explain in full the theoretical difficulties in regard to each of three commonly used methods of distributing overhead burden in cost accounting. (b) Show how the appropriateness of each system may be affected by the nature of the business in which it is employed. (c) Give briefly your views on the proper treatment of "Idle- time." 3. Discuss the propriety of writing off goodwill, giving your reasons in full. 4. What are organization expenses ? How are they to be treated in accounts? At what point do expenses cease to be or- ganization expenses and become operating expenses? Is the deficiency in the early years of a corporation's activities (whether an actual loss or a deficiency between the earn- ings 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 balance sheet? If so, should they be written off, and how and when? May the deficiencies rep- resenting 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 different methods of treating the items mentioned above. 5. 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. 6. Argument has been strongly urged that aside from any ques- tion of possible mismanagement, or of the difficulty of making satisfactory investments to yield the same rate as is paid on the bonds, a sinking fund for bonds is more expen- sive than an arrangement for the serial repayment of bonds. This is illustrated by the case of $20,000 5% bonds. If these are paid off in a series, one each year, the total pay- ment made will be principal $20,000, interest $10,500, total $30,500- The annual sinking fund to pay these bonds would on a 5% basis amount to $604.85, making in twenty years $12,097, and the interest paid on the bonds would be $20,000, total payments $32,097. The apparent excess burden is accordingly $1,597. Discuss the above argument and show clearly just what the figures mean and in what the apparent saving actually con- sists. 7. When a corporation undertakes its own construction work on what basis is it permissible for it to make charges to prop- erty account in respect thereof ? On what basis would you personally recommend that the charges should be made? Give your reasons. (a) How would you deal in the balance sheet of a corpora- tion with shares recovered from a vendor to whom they had been issued as fully paid and who had re- turned them in settlement of a claim for fraudulent misrepresentation in respect of the property sold by him to the corporation ? (b) How would you deal with these shares for the purposes of a dividend? AMERICAN INSTITUTE OF ACCOUNTANTS BOARD OF EXAMINERS Examination for Admission as Associate Accounting Theory and Practice Part I JUNE 15, 1917, 9 A. M. TO 12.30 P. M. Candidates are required to answer questions one and two and one of the remaining three questions, but no more. 1. The firm of A and B have the following statement: Store $15,000 Accounts payable $10,000 Accounts receivable 12,000 Bills payable 5,000 Cash..... 9,000 A Capital 30,000 Furniture and fixtures.... 2,800 B Capital 35,000 Merchandise 37,000 Miscellaneous equipment. 4,200 $80,000 $80,000 C is admitted as a special partner with the following arrange- ment : C to contribute $30,000 and to be entitled to one-third of the profit for one year. Before making the contribution the following changes to be made in the books: store to be marked down 5 per cent; allowance for doubtful accounts to be created amounting to 2 per cent; merchandise to be revalued at $35,000; furniture and fixtures to be valued at $2,500. At the end the amount of goodwill is to be fixed at 3 times the net profits for the year in excess of $20,000, this goodwill to be set up on the books, the corresponding credit being to A and B equally A, B and C each to draw $3,000 in cash, the remaining profits to be carried to their capital accounts. During the year the following transactions took place: Merchandise bought on credit $240,000 Cash purchases 25,000 Cash sales 125,000 Sales on credit 175,000 Accounts payable paid (face $245,000, discount 2 per cent) 240,100 Accounts receivable collected (face $170,000, all net except $50,000 on which 2 per cent allowed) 169,000 Buying expenses, paid cash 1,500 Selling expenses, paid cash 21,000 Delivery expenses, paid cash 9,000 Management expenses, paid cash 4,500 Miscellaneous expenses, paid cash 3,000 Interest on notes payable, paid cash 250 Partners each withdrew $3,000 cash as agreed. In closing the books for determining profits and goodwill the following were agreed upon : Value of merchandise on hand $60,000 Depreciation on store 285 Additional allowance for doubtful debts 165 Furniture and fixtures written down 200 Goodwill having been estimated and duly entered C then con- tributes enough cash so that his capital account equals just one-third of the total capital. Prepare statements showing how the accounts are to be ad- justed and the balance sheet after the final adjustment. 2. BALANCE SHEET OF AB Real estate $140,000.00 Capital $229,652.00 Equipments 75,150.00 Mortgages on real Patents 54,700.00 estate 75,000.00 Investments 33,500.00 Accounts payable 124,615.24 Cash 4,348.64 Notes payable 80,000.00 Notes receivable 2,479.75 Reserve for deprecia- Accounts receivable.. 31,108.15 tion 821.00 Inventories 81,423.70 Goodwill 40,000.00 Trading losses 47,378.00 $510,088.24 $510,088.24 AB, whose balance sheet appears above, having been unfor- tunate in business, goes into liquidation. Prepare statement of affairs and deficiency account. The real estate is valued at $90,000, the equipment at $30,000. The patents are considered worthless, with the ex- ception of one thought to have a market value of $5,000. Bonds, with a par value of $27,500, were pledged to secure a collateral loan of $25,000. These have, however, shrunk in value so as to be worth at present prices only $22,000. In- cluded in investments are $5,000 other bonds which are clearly worthless; the other investments have a doubtful value of 50 per cent. The notes receivable are thought to be good. Of the accounts receivable $10,000 are known to be good, $5,000 are known to be bad, and the remainder are expected to pay 80 per cent. The inventories are estimated as worth not more than half of their book value. Goodwill is purely fictitious. Interest accrued on the mortgage is $800, on notes payable, $523. Wages accrued are $1,200. Assuming the foregoing estimates of value are correct and the expenses of liquidation amount to $3,000, what per- centage of their claims will the general creditors receive? 3. A company organized with $1,000,000 capital stock which it placed at par, and $1,000,000 5 per cent bonds which it sold at 90, this being a 6 per cent basis. It paid to contractors, etc., for construction $1,800,000 and this amount of invest- ment ran, on the average, for one year before the property was ready for operation. When operation began the com- pany had therefore paid one year's interest on the issue of bonds. No dividends were 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. How should the accounts appear when the property was ready for operation ? 4. A corporation having issued its capital stock at par buys 1,000 shares at 95. It later sells 500 of these shares at 98, and 300 at 85, and 200 at 101. Give the journal entries covering these transactions. How should the items appear on the balance sheet imme- diately after purchasing the stock, and immediately after each of the sales? 5. The following items represent the combined statement of all the national banks. Rearrange them in the form of a balance sheet. You need not follow the form used by the Comptroller of the Currency, but make a balance sheet in the form that seems the most desirable. Banking house, furniture and fixtures $160,800. Bills of other national banks 31,200. Bills payable 44,700. Bonds borrowed 60,000. Bonds, securities, etc 700,300. Capital stock paid in 896,400. Cashier's checks outstanding 1,000. Certified checks 1,000. Checks and other cash items 26,900. Circulating notes 551,900. Demand certificates of deposit 1,000. Deposits of U. S. disbursing officers 17,800. Dividends unpaid 1,600. Due from approved reserve agents 614,500. Due from other national banks 334,600. Due from state banks 123,000. Due from the Treasurer of the U. S 4,700. Due to approved reserve agents 38,100. Due to other national banks 823,000. Due to state banks 395,800. Due to trust companies 337,900. Exchanges for the clearing house 190,600. Fractional currency 2,300. Individual deposits subject to check 4,315,000. Lawful money reserve in banks 701,600. Loans and discounts 4,678,600. Notes and bills rediscounted 14,400. Bonds (other than U. S.) to secure U. S. deposits.. . 68,200. Other liabilities 6,900. Real estate owned other than banking house 20,200. Overdrafts 30,500. Premium on bonds for circulation 14,600. Redemption fund with the U. S. Treasurer 27,300. Reserve for taxes 4,400. State bank circulation outstanding 100. Surplus fund 548,300. Time certificates of deposit 1,000. Undivided profits 186,600. U. S. bonds on hand 7,400. U. S. bonds to secure circulation 557,300. U. S. bonds to secure U. S. deposits 95,600. U. S. deposits 143,300. AMERICAN INSTITUTE OF ACCOUNTANTS BOARD OF EXAMINERS Examination for Admission as Associate Accounting Theory and Practice Part. II JUNE 15, 1917, 1.30 P. M. TO 4.30 P. M. Candidates are required to answer six of the following questions but no more. 1. 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 reasons for your answer. 2. 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 Reserve 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 ac- counts 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 determining the selling price? 3. A machine costing $10,000 was estimated to have a life of ten 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 ma- chine was bought costing $15,000. Give the journal entries that you would make 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. 4. How should the following items be treated in the balance sheet : Notes receivable endorsed and discounted at a bank; Accommodation endorsements made for friends; Contracts for future delivery at a stated price, the work being in part completed, and in part, but to a smaller percentage, paid for: Guarantee given that machinery sold will last five years? 5. A company is under obligations to pay $10,000 to sinking fund trustees "out of profits." The following transac- tions take place. 1914 Dec. 31 $10,000 cash paid to sinking fund trustees. 1915 Jan. 5 Trustees invest in $10,000 of the 5 per cent bonds of the company at 98 and interest (from Jan. 1). July 1 Coupons on above bonds collected. Dec. 31 $10,000 paid to sinking fund trustees. 1916 Jan. 1 Coupons collected. 2 $11,000 bonds bought for sinking fund at 95. July 1 Coupons collected. Dec. 31 $125 paid for expenses of sinking fund. 31 $10,000 paid to sinking fund trustees. 1917 Jan. 1 Coupons collected. Jan. 10 $10,000 bonds bought at 101 and interest.