Realization and Liquidation Account

The realization and liquidation account is a statement which has played a somewhat prominent part in C. P. A. examinations. It is never used in practice and has no value other than to test the ability of the student to analyze and present in logical form facts and activities which are sometimes difficult to analyze and present in a condensed form and in such fashion as to show the relation of the various items. Presumptively, the purpose of the statement is to show the activities of the trustee after the appraisal of the bankrupt’s estate. In some instances the realization and liquidation statement takes the values of the assets as appraised by the trustee or other party making up the statement of affairs and shows the activities carried on through the realization of the assets and the liquidation of the liabilities. In other cases the realization and liquidation account is tied up with the values at which the assets are carried on the account books. There is no principle at issue as between the two methods. It seems perhaps more logical to look upon the two accounts, namely, the statement of affairs and the realization and liquidation account, as a unit statement covering the entire bankruptcy proceedings. Under that interpretation the “expected-to-realize” value as shown by the statement of affairs would form the basis for the realization and liquidation account, but, as stated above, either method is correct and no accounting or legal principle is involved.

Evolution of the Realization and Liquidation Account

The development of the realization and liquidation account through its various stages seems to have been based on three theories. When first used it was supposed to represent an account actually opened on the books of the bankrupt through which his assets and liabilities were shown transferred to the receiver or trustee.

The theory underlying the account was that it represented the trustee, who was to be charged with all the assets turned over to him and credited with the liabilities assumed. During the process of realization and liquidation he was to be credited in the same account with the assets at the amount realized therefrom, and debited with the liabilities as liquidated. Under this theory, strangely enough, the account was charged also with the expenses incurred by the trustee and credited with any income items received during his trusteeship. The balance of the account was the profit or loss on the realization and liquidation transactions. This theory of the realization and liquidation account as an account actually opened on the books has given place to a second theory, though the account itself as set up for showing solutions to problems set in certified public accountants’ examinations is still sometimes constructed according to this first theory.

The advocates of the second theory maintain that the realization and liquidation account represents the trustee’s report to the court, accounting for the charges and credits therein on that basis. The nature of such a report has been explained earlier in the chapter, from which it is seen that the formal realization and liquidation account as usually set up cannot represent nor take the place of the trustee’s report to the court.

Under a third theory the realization and liquidation account is looked upon simply as a condensed summary of the trustee’s activities analyzed into sections, the purpose of which is to present all the information needed for almost any report which the trustee may have to make. The theory of its debits and credits is not so important here and in some cases may not apply, the effort being simply to arrange the data in such fashion that a full accounting can be given for all the properties turned over to the trustee and all the liabilities assumed by him, the whole being supported by a statement of the trustee’s operations. This information is set up in account form and brought together in one account supplementary to which there must be carried also a summary of the trustee’s cash transactions. The information as given in these two accounts provides the data for any reports which the trustee may have to make. The two forms are shown in skeleton form just below:

Realization and Liquidation Statement—
Usual Form
Assets to be Realized Liabilities to be Liquidated
(In detail)(In detail)
New Assets Acquired New Liabilities Assumed
(In detail)(In detail)
Liabilities Liquidated Assets Realized
(In detail)(In detail)
Supplementary Charges Supplementary Credits
(In detail)(In detail)
Liabilities Not Liquidated Assets Not Realized
(In detail)(In detail)
Gain on Realization Loss on Realization
       
Assets to be Realized Liabilities to be Liquidated
(Balance brought down)(Balance brought down)
Realization and Liquidation Statement—
Improved Form
Assets Taken Over Liabilities Assumed
(Original and after-acquired) (Original and after-acquired)
(In detail)(In detail)
Disposition of Liabilities Disposition of Assets
(A full accounting for all values(A full accounting for all values
assumed as above, per contra)assumed as above, per contra)
       
Operations of the Trustee: Operations of the Trustee:
Expenses Income
(In detail)(In detail)
Values Continued or Returned Values Continued or Returned
to the Owner: to the Owner:
Assets Liabilities
(In detail)(In detail)

In the first example, which may be termed the usual form, the net balance of the account indicates the profit or loss incurred in winding up the business. If the values used as the basis for the statement are those of the statement of affairs, this profit or loss is in addition to the expected loss shown by the deficiency account. If, however, the book values are used as the basis for the statement, the profit or loss will be the net profit or loss on the entire realization and liquidation. Under the new and second form a full accounting is made for the value at which every asset is brought into the statement so that a separate figure of profit or loss is not shown excepting in so far as that is made a part of the operating section of the statement. Sometimes a third form is used which is not a formal statement but consists rather of the auditor’s working sheet. In this, columns are used to show the assets taken over by the trustee; the new assets acquired by him; the realization of the assets; the losses incurred on realization; the net assets remaining to be realized or to be returned to the owner; a similar statement in columnar form showing the liabilities to be liquidated; the full or partial liquidation of the liabilities; and the portion turned back to the owner or continued for further liquidation.

Supporting Schedules

Where the first form of the realization and liquidation statement is made use of, the profit or loss as shown by that statement should be explained by means of a supporting statement known as the realization and liquidation profit and loss account in which will be shown the losses on realization of the assets and any other items which have entered into profit or loss as shown by the realization and liquidation statement. Another schedule known as the trustee’s cash account is also usually presented. In this appears a more or less summarized statement of cash receipts and disbursements, indicating the main lines of activity of the trustee and their results.

The Question of Cash

It is sometimes maintained that inasmuch as cash is a realized asset it has no place in the realization and liquidation statement. Accordingly, under that theory the cash appears only in the trustee’s cash account. There is a good reason, however, for the insistence of some that the realization and liquidation statement should show all the assets taken over by the trustee or receiver and a full accounting for them. Therefore, the cash taken over by the trustee and all subsequent cash acquired by him must be shown in the realization and liquidation statement and fully accounted for as disbursed or still on hand. Inasmuch as the statement has no foundation in practice, it has no standardized form and therefore such matters of opinion will largely be left to the individual student except so far as the force of logic may in the course of time indicate the best method of treatment.

The Handling of Valuation Reserves

In both the statement of affairs and the realization and liquidation statement the handling of valuation reserves presents some difficulty. Either they must be included among the liabilities, which is awkward inasmuch as they cannot be shown as belonging to any of the classes of creditors, or the asset value as set up in the Book Value column must be the value after deducting the reserve therefrom. This latter method, which seems to present the least difficulties and raise the fewest objections, is the one followed here.

Illustration of Realization and Liquidation Statement

Problem. The Kay Corporation became embarrassed because of the tying up of current funds in fixed properties. A friendly receiver was appointed to operate the plant until the assets could be realized upon sufficiently to reduce the most pressing of the claims against the insolvent corporation. At the time the receiver took possession, the balance sheet of the company showed as follows, in summarized form:

Kay Corporation
Balance Sheet

AssetsLiabilities and Capital
Cash$ 4,000.00 Notes Payable$ 80,000.00
Accounts Receivable120,000.00 Accounts Payable110,000.00
Merchandise60,000.00 Accrued Expenses14,000.00
Other Property500,000.00 Bonds Payable200,000.00
Capital Stock250,000.00
Surplus30,000.00
$684,000.00 $684,000.00

A summary of the receiver’s transactions showed that he made sales of $131,000, of which $51,000 were for cash. He purchased $70,000 worth of merchandise for which he paid $12,500 cash, $25,000 in notes of the corporation, and the rest was carried on account. He bought other property for $20,000, giving therefor $10,000 cash and $10,000 notes. He collected $100,000 cash from customers and wrote off $25,000 as uncollectible. Other property carried on the books at $75,000 was sold for $69,000 cash. He collected from rentals $1,000. Selling expenses amounted to $10,000 and the receiver’s administrative expenses were $7,500, both of which were paid. Of the liabilities he liquidated $70,000 of notes payable and $100,500 of accounts payable. All the accrued expenses were paid. The inventory of merchandise was $20,000 when the receiver turned the property back to the owners.

Set up a realization and liquidation statement and receiver’s cash summary to show the receiver’s stewardship and result of his operations.

Solution

Kay Corporation
Realization and Liquidation Account

Original Acquired under
Receivership		 Total
Assets Taken Over:
Cash
(see Receiver’s Cash Account)$ 4,000.00$221,000.00$225,000.00
Accounts Receivable120,000.0080,000.00200,000.00
Merchandise60,000.0070,000.00130,000.00
Other Property500,000.0020,000.00520,000.00;
$684,000.00$391,000.00$1,075,000.00
LiquidatedContinued
Disposition of Liabilities:
Notes Payable$ 70,000.00$ 45,000.00115,000.00
Accounts Payable100,500.0042,000.00142,500.00
Accrued Expenses14,000.00 14,000.00
Bonds Payable 200,000.00200,000.00
$184,500.00$287,000.00$1,546,500.00
Operations of the Receiver:
Expenses:
Merchandise originally taken over$60,000.00
Purchases70,000.00$130,000.00
Merchandise Returned to Owner 20,000.00
Cost of Goods Sold $110,000.00
Profit on Sales (carried down) 21,000.00
 $131,000.00
Selling Expenses $10,000.00
Expenses of Receiver’s Adm. 7,500.00
Losses on Realization:
Accounts Receivable: 25,000.00
Other Property 6,000.00$48,500.00
Values Returned to Owner: $48,500.00
Cash $ 500.00
Accounts Receivable 75,000.00
Merchandise 20,000.00
Other Property 445,000.00
$540,500.00

Kay Corporation
Realization and Liquidation Account
(Continued)

Original Acquired under
Receivership		 Total
Liabilities Assumed:
Notes Payable$ 80,000.00$ 35,000.00$115,000.00
Accounts Payable110,000.0032,500.00142,500.00
Accrued Expenses14,000.00 14,000.00
Bonds Payable200,000.00 200,000.00
$404,000.00$67,500.00$471,500.00
Disposed ofContinued
Disposition of Assets:
Cash (see Receiver’s Cash Acct.)$224,500.00$ 500.00225,000.00
Accounts Receivable:
Amount Collected$100,000.00
Loss on Bad Debts25,000.00125,000.0075,000.00200,000.00
Merchandise:
Sold for (see next section) $131,000.00
Profit on 21,000.00110,000.0020,000.00130,000.00
Other Property:
Sold for$ 69,000.00
Loss on 6,000.0075,000.00445,000.00520,000.00
$534.500.00$540,500.00$1,546,500.00
Operations of the Receiver:
Income:
Sales $131,000.00
$131,000.00
Profit on Sales (brought down) $21,000.00
Rental 1,000.00
Decrease in Value of Business
under Receivership 26,500.00
$48,500.00
Values Returned to Owner:
Notes Payable $ 45,000.00
Accounts Payable 42,000.00
Bonds Payable 200,000.00
$287,000.00

Receiver’s Cash Account

Balance Taken Over by Receiver$ 4,000.00 Purchase$ 12,500.00
Sales$ 51,000 Other Property10,000.00
Accts. Rec.100,000 Selling Expenses.10,000.00
Other Property69,000 Receiver’s Administration7,500
Rentals1,000 Accrued Expenses14,000.00
Notes Payable70,000.00
Cash Acquired under Accounts Payable100,500.00
Receivership 221,000.00 Balance Returned to Owner500.00
$225,000.00 $225,000.00

Comments on Problem. Under the method of solution presented here, it will be noted that the trustee is held to an accounting for both the original assets which have been turned over to him, and all new assets acquired during the course of his receivership. Inasmuch as all income items, usually from sales and, in this case, from rentals also, are reflected in the assets acquired under the receivership, the receiver is thus charged with the income received by him.

In rendering his accounting for the assets acquired, he must make a full accounting for all values turned over to him. Accordingly, in the “Disposition of Assets” section are shown not only the amount realized from the sale of the assets, but also the loss incurred in their sale. This makes possible the tying up of the assets accounted for with the value at which they were turned over to the receiver. It is to be noted that in the case of merchandise there is a profit on sales and not a loss. This is shown by setting up the merchandise disposed of at its sales figure—as is also indicated in the next section below under the head of “Operations of the Receiver: Income”—and deducting from it the profit made as shown by the next section contra under the head of “Operations of the Receiver: Expenses.” The difference between these two figures of merchandise at sales price and the profit on the merchandise gives the value of the merchandise with which the receiver is charged. By showing in parallel columns the values disposed of and the values still on hand, the final column accounts for the full value with which the receiver has been charged contra.

As a supplement to his accounting for the assets and liabilities, the receiver’s expenses and income are incorporated as a part of the statement. This is done not with the idea that he is to be charged with the one and credited with the other, for the principles of debit and credit, as stated above, have little logical application to the statement, but in order to bring onto the face of the statement informational data which are essential to an intelligent reading of his accounting.

The difference between the two sides of this section of the statement—in this case $26,500—is the decrease in net worth of the business during the period of the receivership. This figure is capable of proof by comparing the net worth of the business as originally turned over to the receiver with the net worth as turned back by him. In the one case it is $280,000, as shown by the difference between total assets of $684,000 and liabilities of $404,000. In the other case it is $253,500, as shown by the difference between the total assets of $540,500 returned to the owner and the total liabilities of $287,000 turned back.

When this information is given in the one statement, the latter becomes somewhat complex, but by careful analysis all the information desired can be secured from it and the attached receiver’s cash summary.

Uses to which Realization and Liquidation Statement May be Put

The realization and liquidation statement is frequently used also to analyze the activities of a receiver in equity. Where such is the case, the final section of the statement shows the assets and liabilities returned to the business at the close of the term of the receivership. The statement is sometimes used also to summarize by instalments a trustee’s activities, in which case at the end of the first period (at which time the realization and liquidation have been only partially completed) the final section of the statement will be the inventories of the assets yet to be realized and the liabilities yet to be liquidated which are carried over to the second instalment period. The statement for the second instalment period follows exactly the lines of that presented for the first period.

It should be understood always that the statement has no basis in practice, is purely theoretical, and any discussion of it is largely academic. It is presented here only because it is so frequently met in the formal examinations for the C. P. A. certificate.

Liquidation of a Partnership
by Instalments

Nature of the Problem

In connection with the problem of realization and liquidation, a similar problem is sometimes met upon the voluntary dissolution of a partnership. This, as stated in Volume I, Chapter XLIV, is briefly:

Where the process of liquidation is of long duration, the partners may desire to receive what is due them by instalments rather than wait until the termination of proceedings and receive their respective shares in one amount. If the profit and loss sharing ratios of the partners are the same as their capital ratios, no trouble will be encountered in making the liquidating dividends on capital account as the dividends will be in the profit and loss sharing ratio. Trouble is encountered, however, when the two ratios are different inasmuch as it is not known at the time the various instalments, except the last, are made what the expenses and losses will be in the end. Because of the fact that these expenses and losses are shared in a different ratio from the capital ratios, their capital ratios are constantly changing after the losses and expenses to be borne by the various partners are charged in each case. Liquidating dividends are always made on the basis of capital investment ratios rather than profit and loss ratios. By this is meant simply that after all expenses and losses have been determined and charged to the partners in their profit and loss sharing ratios, their capital accounts show their respective interests in the business, and upon dissolution payment must be made to them in accordance with the showing of their capital accounts. Where, however, payment is made in instalments, neither the capital ratio nor the profit and loss sharing ratio, if these are different, gives the correct basis for making the distribution of the instalment. If payment of the instalments is made on some arbitrary basis or on the ratio of the profit and loss or of their capitals, it may result in an overpayment of some of the partners and an underpayment of others. Accordingly, the only safe method of handling the situation is to pay the first instalments to those partners whose capital ratios are in excess of their profit and loss ratios until their capitals are reduced to the point where the capital ratios of all the partners are the same as their profit and loss ratios. Thereafter further instalment payments are made in the profit and loss ratio, not because it is the profit and loss ratio but because now the capital ratios are the same as the profit and loss ratios so that whatever loss or expense must ultimately be cared for will automatically be distributed to the partners’ accounts in this way.

The solution of the problem is perhaps best handled, at the time of the first instalment, by deducting the amount of the first instalment from the total net capitals of the partners at that time. This leaves the capital remaining after payment of the instalment. A distribution of this net remaining capital is made in the profit and loss ratio. A comparison of the former capital to the credit of each partner with his new capital as derived by means of the distribution just made in profit and loss ratio indicates the share each partner is to receive of the first instalment. If the first instalment is sufficiently large to adjust the partners’ capital ratios to their profit and loss sharing ratios, no trouble will be experienced with future instalments. However, it very frequently happens that the first instalment is not sufficiently large to adjust the capitals to the profit and loss sharing basis. To do this would require the contribution of additional capital by those partners whose capital ratio is less than their profit and loss ratio, and it is doubtful if such a contribution would ever be made. Accordingly, it becomes necessary to distribute the instalments only to those partners whose capital ratios are in excess of their profit and loss ratios.

A new problem is met here, namely, the determination of the respective shares of the deficiency which must be borne by partners sharing the first instalment. How this is to be treated can perhaps be seen best in the illustrative problem on page 654. There it is seen that with the distribution in profit and loss ratio of the capital remaining after the first instalment, a deficiency of $6,000 arises representing the amount of C’s capital deficiency. This $6,000 must be borne by A and B and their shares therein are based on their relative profit and loss sharing ratios. Since A bears 25% of the profits or losses and B 35%, A should bear ⁵/₁₂ of C’s capital deficiency and B ⁷/₁₂—amounting to $2,500 for A and $3,500 for B. This reduces their shares in the first instalment to $3,000 each, as shown in the columns headed “Actual Distribution.” Similarly, the second instalment still results in a capital deficiency for C of $2,700 which must be borne by A and B in the amounts indicated. The third instalment is sufficiently large to give all of them something and at the same time reduce their capital ratios to a profit and loss sharing ratio. Thereafter all instalments are distributed on the profit and loss sharing basis.

After the final instalment is distributed, it will be noted that a net loss results on liquidation of $20,000 which is distributed automatically to the partners in the sums of $5,000 to A, $7,000 to B, and $8,000 to C, which represent their profit and loss sharing ratios. In conclusion it should be said that the problem is theoretical and academic and will perhaps seldom, if ever, be met in practice because of the objections which the partner whose account shows a deficiency would raise to non-participation in all instalments until his capital deficiency had been eliminated. It may be said that where such objections are raised the only course of the liquidating partner or agent is to refuse distribution of any instalment until a sufficiently large sum has accumulated to place the partners’ capitals on a profit and loss sharing basis. Such is the exact situation in strict theory. In practice, however, any agreement which the partners might make as among themselves would have to be carried out by the liquidating partner and would, of course, protect him in case of ultimate overpayment to any of the partners.

Illustration of Liquidation by Instalments

To illustrate the liquidation of a partnership by instalments, a typical problem is appended shown in summarized form.

Problem. A, B, and C, sharing profits in the ratios of 25%, 35%, and 40% respectively, decide to dissolve partnership and distribute the net assets by instalments as realized. A balance sheet as on the date of dissolution showed net worth of $100,000, in which A’s interest was $30,000, B’s $40,000, and C’s $30,000. The liquidator distributed a first instalment of $10,000, a second instalment of $8,250, a third instalment of $15,000, a fourth instalment of $16,750, and a final instalment of $30,000. Show the shares which each of the partners will have in the various instalments.

Solution

Net
Capital
of the firm 		A, 25%
Theoretical
Distribution 		Actual
Distribution
Original Capital$100,000.00$30,000.00$30,000.00
First Instalment10,000.00
Net Capital$90,000.0022,500.00
$ 7,500.00
Instalment Deficiency
to be borne by A & B 2,500.005,000.00
$25,000.00$25,000.00
2nd Instalment8,250.00
Net Capital$81,750.0020,437.50
$ 4,562.50
Instalment Deficiency
to be borne by A & B 1,125.003,437.50
3rd Instalment.15,000.00$21,562.50$21,562.50
Net Capital$66,750.0016,687.504,875.00
$16,687.50
4th Instalment16,750.00 4,187.50
Net Capital$50,000.00 $12,500.00
Final Instalment.30,000.00 7,500.00
Net Loss on Liquidation $20,000.00 $5,000.00
Net
Capital
of the firm 		B, 35%
Theoretical
Distribution 		Actual
Distribution
Original Capital$100,000.00$40,000.00$40,000.00
First Instalment10,000.00
Net Capital$90,000.0031,500.00
$ 8,500.00
Instalment Deficiency
to be borne by A & B 3,500.005,000.00
$35,000.00$35,000.00
2nd Instalment8,250.00
Net Capital$81,750.0028,612.50
$ 6,387.50
Instalment Deficiency
to be borne by A & B 1,575.004,812.50
3rd Instalment.15,000.00$30,187.50$30,187.50
Net Capital$66,750.0023,362.506,825.00
$23,362.500
4th Instalment16,750.00 5,862.50
Net Capital$50,000.00 $17,500.00
Final Instalment.30,000.00 10,500.00
Net Loss on Liquidation $20,000.00 $7,000.00
Net
Capital
of the firm 		C, 40%
Theoretical
Distribution 		Actual
Distribution
Original Capital$100,000.00$30,000.00$30,000.00
First Instalment10,000.00
Net Capital$90,000.0036,000.00
[78]$6,000.00
Instalment Deficiency
to be borne by A & B
$30,000.00$30,000.00
2nd Instalment8,250.00
Net Capital$81,750.0032,700.00
[79]$2,700.00
Instalment Deficiency
to be borne by A & B
$30,000.00$30,000.00
3rd Instalment.15,000.00
Net Capital$66,750.0026,700.003,300.00
$26,700.00
4th Instalment16,750.00 6,700.00
Net Capital$50,000.00 $20,000.00
Final Instalment.30,000.00 12,000.00
Net Loss on Liquidation $20,000.00 $8,000.00

APPENDIX A
PRACTICE WORK FOR STUDENT—
FIRST HALF-YEAR

Instead of the student’s practice work appearing at the close of each chapter of the text as in Volume I, it has seemed best in this volume to place this material in a separate appendix at the end of the text because of the impracticability of dividing the text matter into uniform sections with one or two chapters constituting a lesson assignment. In some classes more practice work may be undertaken than in others. The practice work is, however, laid out in fairly uniform portions and it is expected that the student will be able to handle one practice assignment for each hour of class work. Thus, if the lecture period is of two hours’ duration, two assignments of work should be set.

The practice work is given in three parts. Appendix A will be found to contain sufficient material for the first semester of approximately 30 hours of lecture work. This appendix, in the main, is comprised of a formal set of accounts relating to a manufacturing corporation, to be worked out with suitable blanks. A few miscellaneous problems bearing particularly on some portions of the text are also provided. Appendix A should be covered in connection with the first twenty-seven chapters of the text.

Appendix B contains a series of well-graded problems more or less closely connected, illustrating, by means of its method of keeping accounts, the growth of the business. Single entry is changed to double entry, a simple trading business into a complex manufacturing concern, and many of the problems peculiar to such types of business organization are incorporated. Some unrelated problems illustrating special forms of statements, combinations, capitalization, and the consolidated balance sheet are also included.

Appendix C contains a group of unrelated, miscellaneous problems, taken mostly from C. P. A. examinations. These can be used to supplement the assignments from Appendices A and B and to give variety to the work during succeeding years.

I

Problems

1. J. B. Rogers and B. R. Jay, owners of similar businesses, agree to consolidate under a partnership agreement whereby each turns over his business as it stands, subject to the liabilities shown, and the deficient partner contributes sufficient cash to equalize their capitals. Rogers’ standing is: cash $750; merchandise $3,900; notes receivable $1,000, with interest accrued on same $10.25; accounts receivable $750, estimated as worth $725; furniture $975; notes payable $1,000, being his personal non-interest bearing note at 60 days discounted at 8% with 20 days yet to run; accounts payable $325. Jay’s standing is: cash $365; merchandise $4,500; accounts receivable $1,350, guaranteed as good; furniture $825; delivery equipment $325, valued at $300; accounts payable $265; notes payable $1,200, with accrued interest of $8.69; salaries earned but unpaid $50. The furniture in each case is taken in at its face value.

Make the opening journal entry and balance sheet for the new firm. Make journal entries for each partner to close his old set of books.

2. From the following information take a trial balance, make closing journal entries and summary statements as of December 31.

Notes receivable on hand $3,000; accounts receivable $7,500; notes payable $2,100; accounts payable $4,600; real estate $6,000; plant and machinery $8,000; rent and taxes $600; general expense $2,000; salaries $1,500; wages $600; freight $150; duty $200; cash on hand $150; cash in bank $1,800; bad debts written off $140; goods on hand at beginning of year $9,500; purchases $26,000; sales $40,000; interest paid $210; furniture $600; Jas. Buckham, partner, invested $10,000, withdrew $1,450; E. J. Cockburn invested $14,000, withdrew $1,300; the merchandise on hand is valued at $9,000; rent unpaid $250; insurance unexpired $140; interest accrued on notes receivable $25; wages accrued $115. Allow 10% depreciation on plant and machinery, and 12½% on furniture. Estimate losses from bad debts as 5% of accounts and notes outstanding. Losses and gains are divided ⁴/₇ to Cockburn and ³/₇ to Buckham. Interest on capitals at 6% is to be allowed.

3. At the end of the first year of a partnership, Wilson has an interest of $18,000 and Peters of $9,000, each drawing profits in proportion to his capital.

They decide to admit Johnson into the partnership, selling him a one-quarter interest, valuing their good-will at $3,000. Under the conditions named, in what two ways may Johnson secure his interest? What will be the amount of his investment in each case?

Instructions

Problem 1. The student is referred to Volume I, pages 458-459, where a similar problem is illustrated.

Problem 2. See Volume I, pages 285-286.

II

Problems

1. The Ibex Manufacturing Co. is incorporated with an authorized capital stock of $500,000 common and $250,000 6% preferred; $150,000 of the preferred is subscribed for and paid in full. One-half of the common is subscribed for and 50% paid in, the balance to be paid in five monthly instalments. The remaining preferred stock is later subscribed for at 101 and 50% paid, and half of the remaining common is subscribed for at 90 and paid in full. After operating for six months the remaining common is sold at 102 to provide funds for enlargement, one-half paid in cash and the balance in one month. Balance of preferred subscriptions are paid in cash. Show all the above transactions by means of journal entries.

2. At the close of the first year, the Ibex Manufacturing Co., being short of ready funds and not desiring to extend its credit further, secures from its stockholders a donation of $50,000 common and $10,000 preferred, one-half of which is immediately sold at 90 and 101 respectively. At the end of the second year the remainder of the donated stock was disbursed to the stockholders as a dividend, net profits for the year amounting to $45,000. Journalize all the above transactions, showing ultimate disposition of the working capital.

3. The Smith Brooks Publishing Co. has a capital stock of $750,000, of which one-third is 6% cumulative preferred stock. The company has a surplus of $65,000. It has an outstanding bond issue of $200,000 at 4½% interest. The profits for the year are $61,392.75. No profits have been distributed for three years. The directors pay the bond interest, declare a 3% dividend on common, and carry $7,500 to the sinking fund. Bring all of the above onto your books.

4. A corporation has been formed with an authorized capital stock of $200,000, one-fourth of which is 7% cumulative preferred. The entire issue of preferred is subscribed for at par and 50% paid in. When the balance is paid, one share of common is to be given as a bonus with every five shares of preferred. The promoter of the company is given $15,000 in common for his services. The company paid cash $250 for a set of stock records; $25 for corporate seal; $500 for lawyer’s fees in incorporating; $250 for state charter, and $375 for sundry expenses in organizing. $75,000 of the common stock has been subscribed for at par to be paid in five monthly instalments. The balance has been paid on the preferred stock and three instalments on the common. Make journal entries covering the above transactions.

Instructions

For the opening entries of a corporation, the student is referred to Volume I, Chapter XLIX, in addition to Chapter I of the present volume.

Problem 1. Make entries covering the five monthly instalments.

Problem 2. Assume that no preferred dividend was paid during the first year.

III

Problems

1. Draw up a form of voucher check suitable for a professional man.

2. Draw up a form of voucher check suitable for a trading concern.

3. Draw up a form of voucher register for a manufacturing concern desiring to segregate manufacturing, trading, and general expenses under which there are twelve, ten, and fifteen subdivisions of expense, respectively. Provide for other possible expenditures. Treat purchase discounts as a reduction of cost price.

4. Using the voucher register you drew up for Problem 3, from your own data make at least one entry in each column and three in the Sundries column. Show the register footed, closed, and posted.

5. What change would you make in the form of a voucher register in order to treat purchase discount as a financial management item?

6. Using your own data for a purchase ledger in which there are at least six open accounts, show the entries necessary to close it and open a voucher register to take its place.

Instructions

See Chapter II where all these points are discussed.

IV

Problem

Caxton & Dolton began business January 1, 1916. Caxton invested $12,000, and Dolton invested $11,000. May 1, 1916, Caxton withdrew $3,000, and Dolton invested $1,000. July 1, 1917, Evans was admitted to the partnership, investing $8,000. October 1, 1917, Evans invested $4,000 more, and Dolton withdrew $2,000. July 1, 1918, Dolton and Evans purchased Caxton’s interest in the business. On that date their books showed the following financial condition: cash $19,364.50; merchandise $17,500; notes receivable $10,000; accounts receivable $8,945; interest receivable $248.50; real estate $6,500; accounts payable $14,000; notes payable $5,130; interest payable $167.40; accrued expenses $325.60. For the purpose of the sale good-will was estimated at $5,000; depreciation on real estate 5%; bad debts at 3% of the outstanding notes and accounts. Each partner was to share in profits on the basis of capital and the length of time the capital was invested. Of the purchase price of Caxton’s share, Dolton and Evans were to pay such amounts respectively as would make their new capitals equal. Set up the partners’ ledger accounts and show all entries to them in order to take effect of all the above data.

Instructions

For explanation of this method of sharing profits, see Volume I, pages 281-284.

V

Practice Data

This set contains material for the student’s practice work in keeping the records of a corporation engaged in trading and manufacture. Two blank books will be used for the record. Of the “Journals,” pages 1-32 comprise the general journal; pages 34-44 the cash book; pages 45-48, the sales journal; page 49 the sales returns and allowances journal; page 51 the purchase journal (to be used for the month of September only); and pages 54-57 the voucher register (to be used after the purchase journal is discontinued). Pages 58-60 are to be used for the record of continuous trial balances. Of the “Ledger” blank, pages 1-44 comprise the general ledger; pages 45-51 the sales ledger; and pages 52-56 the purchase ledger. Column headings for the different journals are given in the blanks.

It is expected that the student has already acquired correct habits of the daily posting of customers’ and creditors’ accounts. In addition to a training in some peculiarities of manufacturing accounts, the purpose of the course is to give the student practice in handling some of the larger problems of accounting which are not of daily occurrence. For the first few assignments considerable detail is given to provide a necessary minimum of practice in the summarization and posting of the different books of original entry. After this the ordinary transactions are given in condensed form to save unnecessary repetition and burdening the student. In the use of the analytical general journal, the student must be very careful to make entries in the proper column, as otherwise trouble will be experienced with the controlling accounts. (See Volume I, pages 410, 430, and 431.)

Open the following accounts in the various ledgers as indicated. The numeral preceding the account title indicates the ledger folio on which the particular account is to be opened.

General Ledger—Give one-third page to each account except Notes Receivable, Trade Debtors, Merchandise Inventory, Notes Payable, Vouchers Payable, and Subscribers, for each of which allow 4 additional lines, shortening the allowance for the account next following in each case.

The column headings for the different books are given in the blanks with a few exceptions. The fourth columns of the sales and sales returns and allowances journals are left blank. The student should write in here “Sundry Office Supplies.” This will be used till October 31, 1916, at which time it will be necessary to write in its place, “Knoxfrauds.” The heading for voucher register, column No. 5, which is left blank, must be written in as above, “Sundry Office Supplies Purchases,” for use until October 31, when “Raw Materials Purchases” will be substituted.

Messrs. Stanley Jackson, J. T. Edwards, and P. Hansen, on September 1, 1915, made application as incorporators to the Secretary of State for a certificate of incorporation authorizing the Acme Office Furnishings Co. to transact a general business of all kinds in trading, manufacturing, and printing, as principals or as agents, to acquire and trade in real estate, patents, trade-marks, licenses, and the like, and to act as promotion and financial agents. The customary certifications were made, the organization tax of $50 was paid, and the certificate duly issued. The authorized capital stock was $100,000, divided into 1,000 shares of common stock only, of par value $100 each. Subscriptions at par to capital stock had been made as follows:

Stanley Jackson225 shares
J. T. Edwards162”
P. Hansen113”
T. J. Noble100”
A. H. Lawrence75”
H. C. McCullough  50”

At the first meeting of the incorporators and subscribers, after the adoption of a set of by-laws and organization thereunder, a proposal of sale made by the Jackson, Edwards, Hansen firm of their business and good-will at a stated figure of $50,120.97 was referred to the board of directors for their consideration and investigation, with authority to act. After looking over the properties, all of which it was found would be advantageous to the company, the proposal was accepted and transfer was made. A committee from the board was appointed to make a careful appraisal of the purchased properties and report as soon as possible. Accordingly, on September 15, the following report of valuation was made and accepted and authority given for the opening up of a set of accounting records with the stated values of the properties. The services of a public accountant were secured to plan and install a system that would meet the needs of the proposed business and to open the books.

The properties acquired were: cash $5,269.14; accounts receivable, as per schedule following, $10,125.61; notes receivable $1,250; desks and tables inventory $15,694; bookcases and filing cabinets inventory $18,392; sundry office supplies inventory $8,196.27; rent prepaid $125; insurance unexpired $95.36; delivery equipment $492.50; store furniture and fixtures $526; office furniture and fixtures $274; good-will $4,500.

The liabilities assumed were: accounts payable, as per schedule following, $10,126.73; notes payable $4,692.18. Upon the guaranty by Jackson, Edwards, Hansen of the accounts and notes receivable taken over, the company assumed the contingent liability on notes receivable under discount amounting to $250. No cognizance was taken of prepaid discount.

Payment was made to Jackson, Edwards, Hansen by the cancellation of indebtedness on their subscription contracts in the amounts severally shown, and in cash for the balance (distributed in the ratio of their subscriptions)—Jackson $54.44, Edwards $39.19, and Hansen $27.34.

A. H. Lawrence and H. C. McCullough on September 20 paid in cash 75% of their subscriptions, the balance due in 30 days. Certificates of stock, properly executed, were issued September 20 to all the above-mentioned parties, except Noble, in the amounts of their subscriptions.

Open the books and prepare a balance sheet of the company according to the data given.

Instructions

The fourth method illustrated in Volume I, pages 454 and 457, is to be used for opening the books.

Record the cash payment of organization tax as on September 1.

The purchase of the Jackson, Edwards, Hansen business is to be recorded under date of September 1, making use of the accounts “Jackson, Edwards, Hansen, Vendors” and “Plant and Sundry Assets.” Upon receipt of the appraisal committee’s report, bring the detailed assets and liabilities onto the books. It is to be noted that only one Inventory account is carried, in which the detail must be shown, using one line for each kind of commodity. Bring the discounted note on the books. This is not included in the amount given for notes receivable outstanding.

In a small corporation with stock closely held, certificates are sometimes issued although not yet fully paid for.

VI

Practice Data

The following schedules support their respective titles found among the assets and liabilities taken over and appraised by the Acme Office Furnishings Co.:

Accounts Receivable
Smith Brooks Stationery Co., June 24, $750; July 7, $100;
August 22, $113.14; 2/10$963.14
The Brush Co., May 20, $825; August 15, $216.69; 2/10, 1/30  1,041.69
The Kistler Stationery Co., April 18, $1,000; June 15, $250;
August 20, $317.40; 2/101,567.40
C. F. Hoeckle Office Supply Co., March 12, $1,000;
July 18,$123.901,123.90
John Bach & Sons, June 13, $300; July 30, $119.36419.36
T. J. Stewart Office Specialties Co., July 20, $319.45;
August 12, $523.12842.57
Saxon Edwards, February 10, $585; May 23, $206.75791.75
T. C. Macie & Co., May 11, $115.10; June 21, $210.15;
July 8, $450; August 25, $465.15; 2/10, n/301,240.40
The Alexander Jacobs Co., August 28, $362.25; 3/5, 2/10362.25
Field & Co., June 15, $1,015.05; July 6, $250;
August 24, $508.10; 2/10, n/301,773.15
Accounts Payable
The P. J. Johnson Mills Co., January 15, $1,895.60;
August 5, $736.15; 1/30$2,631.75
B. F. Brainard & Co., April 18, $590.10;
July 11, $802.151,392.25
Jackson City Supply Co., June 10, $512.60;
June 25, $428.20; July 18, $6221,562.80
F. C. Good Rubber Co., July 1, $175.19;
August 13, $300; 2/10, 1/30475.19
B. A. Franklin Press, May 2, $850; June 22, $262.151,112.15
Brickley Desk Co., March 8, $912.50; May 6, $1,500;
August 16, $540.09; 2/10, 1/302,952.59
Notes Receivable
John Bach & Sons, dated July 3, for 3 months with interest
at 6% and discounted at the Drew National Bank,
August 16, at 8%. Face of note $250.
Andrew Jackson, dated August 25 for 60 days, without interest.
Face $750.
The Brush Co., dated July 29, for 2 months, with interest
at 6%. Face $500.
Notes Payable
No. 91, favor Second National Bank for $2,500, dated July 15,
at 3 months, discounted at 6%.
No. 95, favor Brickley Desk Co. for $1,261.40, dated August 20,
at 4 months, interest 6%.
No. 96, favor B. F. Brainard & Co., for $930.78, dated
August 25, at 60 days, interest 6%.
The new system provides for a voucher register, but due to
delay on the part of the printer, a creditors ledger will
have to be opened temporarily. Open the sales and purchase
ledgers according to the data given.

Instructions

Record the above data directly (i.e., not via journal) in the various ledgers. The details of the various sales and purchases should be shown, and not just the total to be charged or credited to each account.

VII

Practice Data

The board, having completed negotiations with T. J. Noble, authorizes the purchase from him of the whole of his right, title, and interest in a patent device known as Knoxfraud to be used for the purpose of preventing the raising of the amounts of commercial paper. The transfer is made, including the trade-mark covering “Knoxfraud,” and payment to Noble is made by the cancellation of 90 shares on his subscription contract and full-paid stock is issued him therefor. Make the entry under date of September 20.

In order to avoid detail, all additional customers will be handled under a collective account in the sales ledger called “Sundry Customers.” Transactions will be grouped and summarized wherever possible. Make record under proper dates. (Figures at beginning of paragraphs signify September dates.)

September 1. Received check for $311.05 from Kistler Stationery Co. in payment of their bill of August 20, $317.40, less $6.35 discount.

3. Alexander Jacobs Co. paid their bill of August 28, $362.25 less $10.87 discount. Sold the Brush Co. at 2/10, n/30, desks and tables $875.40, and bookcases $469.75.

4. Drew petty cash check for $150 and placed it in petty cash drawer in charge of bookkeeper. Field & Co. paid their bill of August 24, $508.10 less $10.16 discount, and $500 on account.

5. Paid P. J. Johnson Mills Co. bill of August 5, $736.15 less discount $7.36, and $500 on account. Smith Brooks Stationery Co., paid their bill of August 25, $113.14 less $2.26 discount. T. C. Macie & Co. paid their bill of August 25, $465.15 less $9.30.

6. Bought of R. M. Goddard Furniture Co. at 1/30, n/60, desks and tables $5,912.60, bookcases $3,190.10, and office supplies $837.40. Sold C. F. Hoeckle Office Supply Co. n/30, desks $1,512.75, filing cabinets $647.80, office supplies $215.69.

8. C. F. Hoeckle Office Supply Co. paid $750 on account.

9. Paid B. F. Brainard & Co. bill of April 18, $590.10. Sold T. C. Macie & Co. at 2/5, 1/10, tables $1,575.50, filing cabinets $440.25, office supplies $175.30.

11. Paid Jackson City Supply Co. bill of June 10, $512.60.

12. Sold C. F. Hoeckle Office Supply Co. at 1/30, n/60, tables and desks $1,895, bookcases $625.30, office supplies $110.85.

13. Paid F. C. Good Rubber Co. bill of August 13, $300 less $3 discount. Jno. Bach & Sons paid $250 on account. The Brush Co. paid their bill of September 3, $1,345.15 less $26.90 discount.

15. Paid Brickley Desk Co. bill of August 16, $540.09 less $5.40 discount, and bill of March 8, $912.50 less special discount of $12.50 in consideration of giving our note No. 1, for $1,500 at 6%, payable in 6 months, in settlement of bill of May 6, $1,500. Brush Co. paid bill of August 15, $216.69 less $2.17 discount. Sold Jno. Bach & Sons at 2/10, n/30, desks $1,680, filing cabinets $725.90, office supplies $240.60.

16. Bought of P. J. Johnson Mills Co., at 2/10, n/30, tables $3,085.95, bookcases and filing cabinets $5,293.85, office supplies $1,750.90.

18. T. J. Stewart Office Specialties Co. paid their bill of July 20, $319.45. Sold Alexander Jacobs Co., at 1/30, n/60, desks $1,465.85, bookcases $625.95, office supplies $145.60.

19. T. C. Macie & Co. paid their bill of September 9, $2,191.05 less $21.91 discount.

21. Sold Saxon Edwards at 2/5, 1/10, tables and desks $1,327.85, bookcases $842.60, office supplies $222.60.

24. Sold Field & Co. at 1/30, n/60, tables and desks $1,825, bookcases and filing cabinets $735, office supplies $246.

25. Saxon Edwards paid on account $500.

26. Bought of B. F. Brainard & Co., at 1/30, n/60, desks $4,675, filing cabinets $5,080, office supplies $1,280. Jno. Bach & Sons paid bill of September 15, $2,646.50 less $52.93 discount. Paid P. J. Johnson Mills Co. bill of September 16, $10,130.70 less $202.61 discount.

Instructions

For the transactions of September, the cash disbursements journal will be operated as a full posting medium, i.e., all charges for cash paid out will be posted from it.

VIII

Practice Data

(Figures at beginning of paragraphs signify September dates.)

September 27. Sold Smith Brooks Stationery Co. at 2/5, 1/10, tables and desks $1,200, bookcases and filing cabinets $1,150, office supplies $175.

28. Paid B. A. Franklin Press bill of May 2, $850.

29. Brush Co. paid their note of July 29, $500 with interest $5. The board of directors authorized the purchase of a piece of land lying outside the city limits, with good shipping and warehouse facilities, to be used as a site for a factory for the manufacture of Knoxfrauds, paying the Hoboken Development Co. $10,000 cash (with the current year’s taxes of $75 unpaid and due the City of Hoboken, February 1, 1916), and $125 to J. N. Hicks for fees in connection with special search of title and recording of deed. Plans and specifications which Noble had had prepared six months ago when negotiations with him had been opened by Jackson in behalf of the Jackson, Edwards, Hansen firm were adopted and ordered, placed with contractors for bids to be received not later than October 6, the board reserving the right to accept any or reject all bids.

30. Sold Brush Co. at 2/5, 1/10, tables $1,475.80, bookcases $723.85, office supplies $340. Paid salesmen’s salaries $2,500; commission to salesmen $500; salesmen’s traveling expense $1,500; in-freight and delivery $525.69, delivery expense $200; rent September 15 to October 15, $250; receiving and shipping room expense $150; sundry office expense $100.25; office salaries $600; advertising $275; petty cash voucher $137.10, of which $45.50 was for telegraph, telephone and postage, $50 for office stationery, $25 for sundry selling expense, and $16.60 for sundry office expenses. Cash sales for the month were: office supplies $1,325.40, bookcases $2,150, desks and tables $4,250.

Summarize and post completely all books of original entry. (See Volume I, page 431, for general journal summary.) Take a trial balance, recording it in the first two columns on pages 58-60, “Journal Blank.” Enter all accounts—whether needed for this trial balance or not—in the order in which they are carried in the general ledger. Leave bottom and top lines free for totals and forwarding where necessary.

Instructions

September 29. Record the accrued taxes on land in the general journal as a liability to the City of Hoboken.

30. Distribute the cash sales through the sales journal, entering only the total for all departments in the cash book.

IX

Practice Data

The directors plan to keep sufficient funds on hand to take advantage of all discounts offered on purchases. All invoices will therefore be entered “net” in the Vouchers Payable column of the voucher register. Extension will be “gross,” however. Postings to Purchase Discount account will be made from the voucher register. Purchase Discount column in the cash book will be used as a memo column of discounts actually taken. The difference between the totals of the purchase Discount columns in voucher register and cash book at the end of a month (or other posting period) shows the amount of unearned discount on that date. This should always be checked against the discounts entered in detail in the voucher register, for the unpaid vouchers as shown in Unpaid Vouchers column of the register. (Figures at beginning of paragraphs signify October dates.)

October 1. Delivery of the voucher register having been made, your accountant closes the purchase ledger and opens the voucher register, transferring the balances thereto. The Kistler Stationery Co. presented their bill for $150 ($95.50 for stock books, records, etc., and $54.50 for stationery and printing). Paid New York Novelty Works $15 for corporate seal. Paid Northwestern Fire Insurance Co. $125 for 1-year policy on stock of goods.

3. Sold Jno. Bach & Sons at 2/10, n/30, desks $1,755, bookcases and filing cabinets $658.90, office supplies $140. In order to raise money for the purpose of building and equipping the Knoxfraud factory, the board of directors authorized the sale of the rest of the unsubscribed stock at not less than 95. Accordingly subscriptions were received from A. J. Scobey for 90 shares at 96, from A. K. Ladd for 125 shares at 95, and from J. B. Gaynor for 60 shares at 97. One-half is received in cash, the rest due on October 25. Certificates of stock are issued the new stockholders.

4. Smith Brooks Stationery Co. paid their bill of September 27, $2,525 less $50.50 discount.

5. The bank notified you John Bach & Son’s note for $250, dated July 3, for 3 months at 6% and under discount with them since August 16, has gone to protest; you took up the note, drawing your check in favor of the Drew National Bank for $256.25 including protest fees, and notified John Bach & Sons. Paid R. M. Goddard Furniture Co. bill of September 6, $9,940.10 less $99.40 discount.

6. Bought of Jackson City Supply Co. at 1/30, n/60, office supplies $3,028.95. Sold T. C. Macie & Co. at 2/5, 1/10, desks $1,685, bookcases $642, office supplies $156. Paid Hoboken Electric Co. light and power bill for September, $50 ($30 was for sign display).

7. The bids for the construction of the factory were opened and all found to exceed the architect’s estimate by $10,000 or more. It was accordingly decided to reject all bids and construct the factory upon their own responsibility, retaining I. M. Builder as supervising architect and appointing J. T. Noble as purchasing agent and general superintendent during construction. All funds from the sale of stock were ordered placed under a Building Fund account in the Drew National, subject to drawing by Hansen in payment of all bills when passed for payment by Edwards and Noble. The transfer of funds was accordingly made. Alexander Jacobs returned desks and tables $465.85 of their purchase of September 18. Brush Co. paid their bill of September 30, $2,539.65 less $50.79 discount. C. F. Hoeckle Office Supply Co. paid their bill of September 6, $2,376.24.

8. Drew check for $500, advances to salesmen, which the bookkeeper charged to an account entitled Salesmen’s Advances opened in the customers’ ledger. Paid N. G. Goodman, accountant, $250 for services, in connection with installation of the system of accounts.

9. Sold Kistler Stationery Co. at 1/30, n/60, tables and desks $1,858.95, bookcases and cabinets $720, and office supplies $248.

10. Took at cost price, furniture from stock for store and office (desks and tables, $150 for office and $300 for store; bookcases and filing cabinets, $175 for office and $75 for store).

11. Bought from the New Model Truck Co., delivery trucks for $3,000, giving our note with 6% interest at 6 months for $2,500 and $500 cash.

12. Sold C. F. Hoeckle Supply Co. at 1/30, n/60, tables and desks $1,625, bookcases and cabinets $720, and office supplies $140.

13. Received J. T. Noble’s demand note without interest for $1,000 in payment of balance of subscription contract. The C. F. Hoeckle Office Supply Co. paid bill of September 12, $2,631.15 less $26.31 discount. T. C. Macie & Co. paid their bill of October 6, $2,483 less $49.66 discount.

15. Sold Alexander Jacobs Co. at 1/30, n/60, desks $1,825.85, bookcases $642, office supplies $240. Paid note No. 91, $2,500. Jno. Bach & Sons paid their bill of 10/3, $2,553.90 less $46.98 discount, and an allowance of $50 on bookcases and $155 on tables account of damage.

16. Bought of R. M. Goddard Furniture Co. at 1/30, n/60, tables and desks $9,425, bookcases and cabinets $8,227, office supplies $1,025.

18. Sold T. J. Stewart Office Specialties Co. at 2/5, 1/10, desks and tables $1,878, bookcases and cabinets $580, office supplies $249.

19. Alexander Jacobs & Co. paid their bill of September 18, $1,771.55 less $17.72 discount.

20. T. J. Stewart Office Specialties Co. returned office supplies $49.50 and cabinets $75, of their purchase of October 18. A. H. Lawrence and H. C. McCullough paid $3,125, the balance on their subscriptions.

24. Andrew Jackson paid his note of August 25, $750. The T. J. Stewart Office Supplies Co. paid their bill of October 18, $2,582.50 less $51.65. Sold Field & Co. at 1/30, n/60, desks and tables $1,789, bookcases and cabinets $680, office supplies $348. Sold Sundry Customers at n/30, desks and tables $1,100, bookcases and cabinets $860, office supplies $350. Paid note No. 96, $930.78 with interest $9.31.

25. A. J. Scobey, A. K. Ladd, and J. B. Gaynor paid the balance on their subscriptions, $13,167.50.

26. Bought from Brickley Desk Co. at 2/10, n/30, tables and desks $6,240, bookcases and cabinets $3,780. Paid B. F. Brainard & Co. bill of September 26, $11,035 less $100.35. R. M. Goddard Furniture Co. made us an allowance on purchase of October 16, of $200 on desks and $150 on cabinets due to latent defects.

27. Paid Kistler Stationery Co. bill of October 1, $150.

Instructions

October 1. [See page 39] for method of transferring purchase ledger accounts to voucher register.

October 5. See Volume I, page 327, for handling Bach’s protested note. Here the record will be partly in the voucher register and partly in the general journal.

October 7. Where a special bank account is kept temporarily, oftentimes a separate cash book is used. One additional column on each side of the cash book will also serve to segregate the charges and credits to it. Here, since receipts are few, they will be entered in the regular bank column with an “X” placed in front of them to secure periodic analysis. All disbursements will be made by regular voucher check, but recorded in the first column of the cash disbursements journal instead of the regular bank column. Inasmuch as only the one account is kept on the ledger with the bank, postings to it will have to be made in two items—one the regular, the other the building fund—for both receipts and disbursements. An alternative method is to carry the detail of the account only in the cash book, posting only totals of all receipts and disbursements to the ledger bank account. However handled, the cash book should show, when balanced, the amounts in both funds and the trial balance should contain the same information.

To effect the transfer of cash to the Building Fund account at the bank, a regular voucher check is drawn to order of Building Fund account. This is distributed in the voucher register to Sundry columns as a charge to Voucher Payable and must be entered on both sides of the cash book but, of course, not posted.

October 8. Charge payment to Goodman to Organization Expense.

October 10. Distribute the merchandise taken from stock through the sales journal, with the necessary correcting entry in the general journal. (See Volume I, pages 423 et seq.) Since but one Furniture and Fixtures account is carried, the detail necessary for analysis must be shown in it just as with Merchandise Inventory.

October 11. The Model Truck Co. transaction must be split, the cash portion being recorded in the voucher register, the rest in the general journal. ([See page 43] for method of handling notes payable under the voucher system.)

October 13. Certificate of stock is issued to Noble.

October 20. These receipts from subscribers are regular items.

October 25. These receipts from subscribers are building fund items.

October 26. The student will perhaps detect at once that the discount of $100.35 on the Brainard bill is incorrect. It is to be entered as given, however; correction will be made later.

X

Practice Data

October 30. Sold Jno. Bach & Sons at 2/10, n/30, tables and desks $1,465, bookcases and cabinets $456, office supplies $435. Sold Sundry Customers at n/30, desks and tables $1,800, bookcases and cabinets $620, office supplies $300. Cash sales for the month were desks and tables $3,500, bookcases and cabinets $2,832.60, office supplies $3,167.40. Office supplies drawn from stock for use by the office, $350. Pay-roll check on Building Fund carried $1,950.70 for excavating and foundation labor, Noble $200 salary, Builder $350 commission. Paid Hoboken City Hospital $50 bill for workmen injured during construction. Paid regular pay-roll $5,769 (salesmen’s salaries $2,650; salesmen’s commission $580; salesmen’s traveling expense $1,525.50; delivery men $250; receiving and shipping clerks $163.50; office salaries $600); N. Y. C. Ry., freight-in $631.72; N. Y. Paper Co. for sundry office expense $84.75; Ward & Gow Publicity Co. for advertising $280, and sundry selling expense $50.25; petty cash voucher $144.95, of which $50.75 was for telegraph, telephone, and postage, $5 to Bullinger Publicity Co. for entry in city directory, $62.50 for stationery and printing, $10 for credit information to R. G. Dunn & Co., $16.70 for sundry office expenses. Paid the Builders Testing Laboratories $50 for test of cement and concrete for use in factory construction. Paid J. P. Landown rent, October 15 to November 15, $250. Sundry Customers returned tables $150, bookcases $85, and sundry office supplies of $52.50 of their purchase of October 24 as not being what they had ordered; we returned bookcases $500 to the Brickley Desk Co. of our purchase of October 26, because of failure of patent doors to operate.

Summarize all the books of original entry and post completely. For method of summarizing the voucher register, [see page 36]. Extend into the Unpaid Vouchers column all unpaid vouchers as shown by the Manner of Payment column. Take a trial balance as of October 30, 1915, recording it in the third and fourth columns of pages 58-60 of the journals. Be sure to show the two balances for cash, the regular and the building fund.

When posting, make the sales ledger self-balancing and take a trial balance of it, recording it on page 61, journal blank. (See Volume I, page 420, for method of making ledger self-balancing.)

Verify the balance of Vouchers Payable account by checking against the Unpaid Vouchers column of the voucher register.

Instructions

Charge office supplies drawn from stock to Stationery and Printing.

Pay-roll checks are usually drawn to the order of treasurer or other company official. Make the necessary distribution in the voucher register.

Bookcases, $500, returned to Brickley Desk Co. are priced at billed price, i.e., the net credit allowed us will be $490 ($500 less 2%). Be careful to make the proper voucher register entry, as three columns are affected, viz., Vouchers Payable, Purchase Discount, and Bookcases and Filing Cabinets Purchases.

It should be noted that wherever an allowance is made, the figure given in the practice data will always be the gross figure, unless specifically stated otherwise.

Charge credit information cost to Sundry Office Expense.

XI

Practice Data

Make the following detailed entries for transactions with customers and creditors under the dates given:

November 2. Field & Co. gave their note for 1 year at 6% for $3,571.05 in payment of invoices of July 6, September 24, and balance June 15. Gave P. J. Johnson Mills Co. our note at 6 months for $1,462.59, which included $66.99 interest to date at 6% for balance of bill of January 15, $1,395.60.

3. Kistler Stationery Co. honored our sight draft for $1,250 payment of bills of April 18 and June 15.

4. Wrote B. F. Brainard & Co. claiming a $10 adjustment on account of overpayment on October 26 of bill of September 26, on which the discount allowed was $110.35.

5. Paid Jackson City Supply Co. bill of October 6, $3,028.95 less $30.29 discount. Gave Brickley Desk Co., our note for $9,329.60 at four months at 6% for bill of October 26, $10,020 less $190.40 discount and credit memo of October 30 for $500.

6. Field & Co. wrote stating that our monthly statement of account to them carried a charge for October 24 of $2,817, whereas their bill of that date carried $2,310. An investigation showed their contention correct, the error being due to a transposing of charges between them and Sundry Customers for sales on October 24 when the sales journal entry was made. The error was corrected and correct statements were sent out. The Brush Co. paid their bill of May 20, $825.

7. Received credit memo from B. F. Brainard & Co. for $10 in reply to letter of November 4.

10. Kistler Stationery Co. gave their note for 6 months at 6% for $2,826.95, payment of bill of October 9.

12. Jno. Bach & Sons paid their bill of October 30, $2,356 less $47.12. Saxon Edwards paid their bill of May 23, $206.75, and balance on February 10, $85. Paid B. F. Brainard & Co. bill of July 11, $802.15 less credit memo of November 7, $10.

15. Paid R. M. Goddard Furniture Co. bill of October 16, $18,677, less credit memo of October 26 for $350 and discount of $183.27. C. F. Hoeckle Office Supply Co. paid their bill of October 12, $2,485 less $24.85 discount.

18. Alexander Jacobs paid their bill of October 15, $2,707.85 less $27.08 discount.

21. Saxon Edwards paid their bill of September 21, $2,393.05.

24. Sundry Customers paid their bills of October 24, $2,529.50.

25. Field & Co. paid their bill of October 24, $2,310 less $23.10 discount.

27. T. C. Macie & Co. gave their note for $775.25 in payment of bills of May 11, June 21, and July 8.

30. Sundry Customers paid their bills of October 30, $2,720. C. F. Hoeckle Office Supply Co. paid their bill of July 18, $123.90, and balance on March 12, $250.

December 4. Paid Jackson City Supply Co. $1,050.20 for bills of June 25, and July 18.

9. Smith Brooks Stationery Co. gave their note for $873.15, including interest $23.15 on unpaid bills of June 24 and July 7.

13. T. J. Stewart Office Specialties Co. honored sight draft for bill of August 12, $523.12.

17. Offered Field & Co. a discount of $71.05 from the face of their note of November 2 if they would pay $2,000 cash and give a new note for $1,500 for the balance. Offer was accepted and cash and new note for $1,500 received on December 20. (In making adjustment take account of accrued interest on old note of $26.79.)

18. Paid F. C. Good Rubber Co. bill of July 1, $175.19.

20. Paid our note No. 95, $1,261.40, with $25.23 interest, held by the Brickley Desk Co.

23. Honored B. A. Franklin Press draft at sight for bill of June 22, $262.15. Bank’s statement of account showed charges of $1.25 and 75c respectively for collection of Kistler Stationery Co. draft of November 3, and T. J. Stewart Office Specialties Co. draft of December 13.

Instructions

November 2. Treat all sight drafts when honored as cash transactions.

November 6. Field & Co. adjustment is made in the general journal. Be careful to make entry in proper columns.

November 7. The $10 allowance made us by B. F. Brainard & Co. must be recorded in red in the voucher register close beside the next voucher which will be paid to Brainard—in this case the bill for $802.15 dated October 1. No entry will need to be made in the general journal to secure the proper posting of this item, as the entry in the voucher register is merely a memo to prevent overpayment at time of next settlement. ([See page 40] for discussion of the problem of returns and allowances.)

December 17. Handle the Field & Co. note transaction with care. The discount is a charge to Interest and Discount.

December 23. Run the bank’s collection charges through on a voucher which must be recorded in voucher register and cash book.

XII

Practice Data

The following transactions took place during the remainder of the fiscal year which ended August 31, 1916, and are to be entered as of the given date:

January 3. A one year’s insurance policy at a cost of $250 cash was taken out on a stock of merchandise which had been removed to a warehouse, as stated below.

February 1. The accrued taxes of $75 at date of purchase of factory site were paid.

March 1. On account of the flourishing condition of the sales, an interim dividend of 4% was declared and paid. Noble’s was applied as a partial payment on his stock note.

June 15. The Boston Office Co. sent $5,000 of office specialties to be sold on a 5% commission basis for their account.

July 1. A statement of affairs was received from Jno. Bach & Sons showing their insolvency and copy of an agreement signed by several creditors to accept settlement of all claims on a 40% basis. Your attorney, having been unable to collect and having investigated, advised the acceptance by you of their offer. Accordingly on July 27, a check was received from Bach & Sons for 40% of the balance as shown by your books. (Charge Jackson, Edwards, Hansen with 60% of $169.36, the part guaranteed by them, and Reserve for Doubtful Accounts with 60% of $256.25.)

On August 15, 1916, the factory building was completed. The following expenditures had been made: for steel, concrete, brick and other materials $15,740.20; for labor of all sorts $11,579.35; for insurance, injuries incurred during construction, legal expense in defense, and interest on moneys borrowed for the building fund, $750; J. T. Noble’s salary $2,000; I. M. Builder’s fees and commission $1,113.51; and Builders’ Testing Laboratories $250. The factory was largely of concrete and numerous tests were necessary. Several purchases of cement had been returned as not being of the required standard. The company’s note for $10,000 had been discounted for $9,800 and the proceeds placed in the Building Fund to finance the undertaking. The $200 discount is included in the $750 mentioned above.

Noble reported that orders for machinery and equipment had been placed with sundry firms and that about three months would be required before the machinery could be placed and ready for operation as some of the machines were of delicate and complex construction and would require careful testing before acceptance. He suggested that orders for the raw materials used in the manufacture of the Knoxfraud be now placed to take advantage of a low market. Accordingly $10,000 worth was ordered, an advance payment of $2,500 being made on August 25 and charged to New Method Manufacturing Co. in the sales ledger to show our claim against them for the prepayment—the balance to be paid when delivery is made, not earlier than October 31.

Due to lack of floor space in the sales department and the necessity of carrying a large assortment of styles in stock at all times, on January 2, 1916, a warehouse was rented nearby for a monthly rental of $100 payable in advance. Under date of August 31, 1916, enter a payment of $900.

The receiving and shipping room quarters were also removed to the warehouse. On March 1, a portion of the warehouse was sublet at a monthly rental of $40 payable in advance. Enter a receipt of $280 under date of August 31, 1916. Services of A. Pinkerton for $20 a month beginning March 1 were secured to watch store, warehouse, and factory. Record on August 31, 1916, a payment of $120.

It was decided to close out the division of sundry office supplies and dispose of the balance on hand October 31 at a lump sum.

Instructions

February 1. Refer to Practice Data VIII for the original booking of this item.

March 1. Charge the interim dividend to Dividend account, since there is no Surplus on the books against which to charge it.

June 15. No entry will be made of the Boston Office Co. consignment. (A memo entry in the journal may be made, if desired. This would consist merely of a statement of the receipt of the goods, with no extension of amount into the money column.)

July 1. Handle the Jno. Bach bankruptcy with care. The basis for the entries indicated rests on the original sale agreement between the Acme Office Furnishings Co. and Jackson, Edwards, Hansen, Vendors. (See Practice Data V.)

August 15. Record the discounted note for $10,000 as usual. Be careful not to post the discount twice. All expenditures are cash items.

August 31. Charge A. Pinkerton’s salary to Warehouse Expense. This is not quite accurate, but sufficiently so.

XIII

Practice Data

In addition to the special data given in Practice Data XII, the following transactions in due course took place:

Make the record as of August 31, 1916 with summary entries.

Sales Journal—Sales to Sundry Customers were: desks and tables $200,670.20, bookcases and filing cabinets $153,803.40, and sundry office supplies $16,115.26. Cash sales were: desks and tables $35,000, bookcases and filing cabinets $21,500, and sundry office supplies $2,825.15. Return sales and allowances to Sundry Customers were: desks and tables $4,240.15, bookcases and filing cabinets $4,250.65, and sundry office supplies $675.50.

Cash Book—Received: from cash sales as above; from Sundry Customers $269,359.50 less sales discount of $3,940.20; from notes receivable $5,000; from notes payable discounted $42,500 less $350 discount; from notes receivable discounted $15,000 less discount of $50. Disbursed for vouchers payable $359,720.40, of which $100 is chargeable to Building Fund (Noble’s salary).

Journal—Gave our notes to Sundry Creditors for $8,500; received notes from Sundry Customers $25,200.50; notes receivable discounted were paid by makers at maturity $10,250; stationery was drawn from stock $250 and used for advertising purposes.

Voucher Register—Bought desks and tables $99,842.95, bookcases and filing cabinets $73,758.15, and sundry office supplies $12,684.40. Purchases discount was $2,153.40; in-freight and delivery $3,740.28; receiving and shipping room expense $2,690.14; light, heat, and power $725.16; salesmen’s salaries $65,840.20; salesmen’s commissions $20,730.30; traveling expenses $42,420.70; advertising $12,280; sundry selling expense $940.03; delivery expense $7,280.90; warehouse expense $50; office salaries $11,600; stationery and printing $450; collection and exchange $30.05; interest and discount $1,096.27; sundry office expense $72.15; telephone, telegraph, and postage $475.03; notes payable $47,250.19; rent $3,250; power equipment $5,000; taxes $160.15; Noble’s salary for August $200. (Charge $100 to Factory Building and $100 to Power Equipment.)

Instructions

These transactions are listed in summarized form to avoid detailed entry and, at the same time, to provide the necessary volume of business. They are to be entered as indicated. Use as little space as possible.

Sales Journal—Use 2 lines for the entries. Enter returns and allowances in their proper journal.

Cash Book—Be careful to indicate by some distinctive mark all interest and discount items recorded in the Sales Discount column. No purchase discount on paid vouchers is given inasmuch as the cash book record of it is merely a memo, although providing data for checking the amount of unearned discount at the close of a period. It will doubtless be found that in this summarized method of stating transactions much detailed information is omitted (because not absolutely essential), that would be available under ordinary conditions.

Journal—Treat stationery taken from stock as a credit to Sundry Office Supplies Sales; this is not included in the sales journal data given above.

Voucher Register—For the sake of saving space, run all these transactions through on one voucher, using just one line for the entry, except in Sundry column, where use as many as are needed. $100 of Noble’s salary comes out of building fund cash, as indicated on page 675.

XIV

Practice Data

Summarize the various books and post completely. Be careful, in summarizing, to show any extraneous items recorded, for the sake of convenience, in theoretically improper columns or books.

XV

Practice Data

Take a trial balance of the general and sales ledgers and record them as usual.

XVI

Practice Data

Draw up statements for the year, supporting both the profit and loss statement and the balance sheet by schedules. (See Volume I, pages 411-412 and 509-510, for suggestive forms and instructions as to methods of condensation of data.)

Take into consideration the following data:

Rent income received in advance $40; warehouse rent paid in advance $100; interest accrued on notes receivable $50; salesmen’s salaries accrued $420; salesmen’s commissions accrued $125; advertising bills unpaid $100; advertising paid in advance $250; stationery on hand $50.

Insurance: first policy, one year, bought October 1, cost $125, part unexpired $10.04; second policy, one year, bought January 2, cost $250, ⁴/₁₂ unexpired $83.33. Taxes for the year 1916, estimated $565.42, ⅔ used $376.95. Purchases discount not yet taken advantage of on unpaid vouchers, $475.

The Knoxfraud patent had 15 years to run when purchased. Write off ¹/₁₅ of its value, it being the policy of the company to maintain an experimental laboratory and so overcome any possible supersession. Write off organization expense and good-will 5% each. Create reserves for: furniture and fixtures 10%; delivery equipment 15%; doubtful accounts ½% on all sales gross. Take no account of depreciation on factory building or power equipment.

Inventories of stock-in-trade: desks and tables $4,943.86, bookcases and filing cabinets $1,521.31, sundry office supplies $3,197.20, total $9,662.37.

In-freight and delivery: charge $2,500 to Desks and Tables purchases, $2,100 to Bookcases and Filing Cabinets Purchases, $297.69 to Sundry Office Supplies Purchases.

Light, heat, and power: charge ¾ to Selling, ¼ to General Administrative.

Receiving and shipping room: charge ¾ to Shipping, ¼ to Receiving, of which 50% to Desks and Tables, 45% to Bookcases and Filing Cabinets, 5% to Sundry Office Supplies.

Rent: charge ⁴/₅ to Selling, ¹/₅ to General Administrative.

Insurance: charge $335.24 to Selling, $41.75 to General Administrative.

Taxes: charge all of the 1915 taxes ($160.15) Surplus.

Discount on stock: charge to Factory Buildings.

Instructions

Most of the above data are necessarily arbitrary, particularly the basis for distribution of the various expense items. For many such items, even in practice, a more or less arbitrary basis must be adopted. See Chapters III, XIV, and XXVII for a brief discussion of this point.

The student may object to the indicated methods of handling some of the items but is asked to make the record as suggested. Any necessary corrections will be made later.

Draw up all formal statements, for presentation to the instructor, on blank paper, letter size, i.e., 8½ x 11 inches.

XVII

Practice Data

Adjust and close the books in accordance with the information given in the preceding Practice Data XVI.

The student is referred, for illustration of the work of adjusting and closing the books, to Volume I, Chapters XXIX, XXX, and XLIII, and to certain portions of [Chapters XIV] and [XIX of Volume II].

XVIII

Practice Data

The results for the year proving very unsatisfactory in comparison with the volume of business transacted, N. G. Goodman was retained to make an audit of the year’s operations in an effort to locate the trouble. In his report covering the audit, he called attention to the following items:

(a) In the Trade Debtors are included two charges, viz., advances to salesmen $500, and New Method Manufacturing Co. for purchases $2,500, which are in no sense charges to customers.

(b) In the Notes Receivable is included Noble’s note given in payment of the balance on his subscription to capital stock $1,000 but now reduced to $600 through the application of his March dividend as a partial payment. This does not belong in Notes Receivable account.

(c) There is on the books no record of the Boston Office Co. consignment received on June 15, 1916. Investigation showed that on July 2, a sale of $4,500 was made from the consignment and the balance was included in the Sundry Office Supplies Inventory, being there valued at $1,000. It was ascertained that the freight and cartage paid on the incoming consigned goods amounted to $25.12, and had been charged to the In-freight and Cartage account.

(d) The inadequacy of the purchases system was shown. Perhaps due to the fact that during the year the main stock was withdrawn from the store and the immediate supervision of the responsible head and placed in the warehouse, the stock had been allowed to run down so that it amounted at the close of the year to only $9,662.37—correct value being $8,662.37 when allowance for the inclusion of the Boston Office Co. consigned goods was made—as compared with $42,282.27 on hand at the beginning. Suggestion for the installation of a distinct purchasing department and the introduction of a stock record was made in order to keep track of the condition of the stock.

(e) The depreciation of good-will is to be reversed.

(f) The discount on capital stock, charged to Factory Building, is to be taken out and shown as a separate item under its own name.

(g) An analysis of the sales developed that: on desks and tables sales gross profit was 47%, and rate of turnover was 9+; on bookcases and filing cabinets gross profit was 38% and turnover 6.4+; and on sundry office supplies a gross loss of 17+% was sustained and the turnover was only 3+. Taken as a whole, the selling expense was too high, very probably due to salesmen’s abnormal traveling expenses and commissions. The present commissions policy was severely condemned as tending to an increase of sales without regard to the financial standing of the customer. For the purpose of establishing a consistent policy of passing on credits and following up collections, the installation of a department of credits and collections was advised.

(h) It was advised that the petty cash be taken out of the bookkeeper’s control.

(i) Of the 1915 taxes charged to Surplus, one-third should have been charged to Profit and Loss.

Make all of the entries necessary to adjust the books in accordance with the auditor’s suggestions. Post, close, and draw up corrected statements, including the adjustments to Surplus. Supporting schedules may be omitted; the condensed statements will be sufficient.

Instructions

Study carefully all the suggestions made by Goodman and determine the proper correcting entries. All necessary accounts have already been set up on the books.

The principles involved in suggestions (a) and (b) are covered in [Chapter XII]. For (c) see Volume I, Chapter L, and [Volume II, Chapter XIII]. Take cognizance of the accrued commission. For (e) [see Chapter XVIII], and for (f) [see Chapter XXI]. For the surplus statement to show all adjustments made through it, [see Chapter XXIII].

XIX

Practice Data

September 2, 1916, the remainder of the Boston Office Co. consignment was sold for $1,250 cash and our check sent for the balance due them. Desks and tables $575, and filing cabinets $250, were taken from stock for use in the factory. Additional benching and racks were bought for $450 cash. Shop and hand tools cost $875.25 cash.

September 10, 1916 a one-year fire insurance policy covering factory building and equipment was bought from the Northwestern Fire Insurance Co. for $584.68.

At a meeting of the directors and stockholders for the purpose of reviewing Goodman’s report and forecasting a policy for the coming year, the following items were thoroughly considered:

(a) In order to pursue a vigorous sales policy such as would now be necessary and along the lines suggested by Goodman, immediate purchases in large amounts would have to be made.

(b) The company’s credit, at the present time, with more than $70,000 of current payables outstanding, would not bear further expansion. Ready funds of at least $20,000 would have to be provided within the next month to take up outstanding notes and the more pressing bills, to say nothing of the amount needed to take advantage of all discounts offered on new purchases.

(c) The contracts entered into for purchases of machinery and raw materials would soon have to be fulfilled, requiring an additional sum of $20,000 to $25,000.

(d) In view of the policy previously determined to close out the division of sundry office supplies on October 31 and push with vigor the new Knoxfraud, a widespread advertising campaign was decided upon for the next six months in order fully to present the need for the new device and its merits. It was estimated that $15,000 or $20,000 would be required for this.

(e) The absolute necessity for additional capital was apparent. Before the company could hope successfully to secure subscriptions to a new issue of stock, not only would that stock have to be made attractive, but the company’s condition as to surplus would have to be improved. Accordingly, it was voted to donate 10% of the capital stock into the treasury and offer it for sale first to the present stockholders and then to the public at not less than 90. Then it was ordered that the capital stock be increased by the issuance of $50,000 of first preferred 6% cumulative, and $25,000 of second preferred 8% non-cumulative, both classes of stock to have further participation on the following basis:

In the event of dividends in excess of the requirements for the preferred stock and 6% on the common, the first preferred should share ⅓ and the common ⅔ of such excess for an additional dividend until they should have received in all an 8% dividend and so be placed on an equality with the second preferred. Of all further dividends the common was to share ¾ of the amount of such excess dividends, and the two preferred classes the other ¼ distributable between them in the ratio which the amount of each outstanding bore to the total of both classes outstanding. It was decided, at the time of the application for an increase of capitalization, to change the name of the corporation to the Knox-Davis Manufacturing Company.

The necessary legal requirements for increasing their capital having been met, the present stockholders took all the treasury stock at 90, and the two classes of preferred were entirely subscribed for at par, payable ½ down and the remainder subject to two equal calls at the end of 4 and 8 months respectively. Cash was received for treasury stock in full and for the preferred as indicated, i.e., for the ½ down in cash at the date of subscription. Permission was granted to change the name of the corporation as requested.

Make the entries to record the above data under date of October 25, 1916. (Charge the discount on stock against the surplus received from donation.) Transfer the cash balance in the Building Fund into the General Cash, there being no longer any need of the separation.

Instructions

September 2. Make careful calculation of the balance due Boston Office Co. Record in the general journal the stock drawn for factory furniture and fixtures, as a credit to proper sales account.

October 25. Transfer of the balance of Building Fund cash back to General Cash is effected in the same way as the original creation of the fund. Issue certificates of stock to new holders.

XX

Practice Data

By October 31, 1916, all of the sundry office supplies had been closed out for $2,000 cash.

The raw materials contracted and partially paid for on August 25, were received, and on November 10 a check for the balance due less 2% discount on the contract, was sent to the New Method Manufacturing Co. (Be sure to book the proper charge to Raw Materials.) Materials were insured for one year at a cost of $175 cash.

On November 30, the last of the machinery was received from the Harvey Machine Manufacturing Co. and installed. The invoice cost was $15,000, of which $12,000 was paid in cash and the company’s note secured by mortgage on the machinery was given for the balance. In-freight and delivery on the machinery amounted to $675.40, and placement expense (not including concrete platforms and piers which had been charged to the building at a cost of $750) amounted to $225, all of which were paid in cash. Noble’s salary for the three months while passing upon and superintending the placing and erection of machinery is to be charged $400 to Machinery and $200 to Power Equipment. The additional expenditure of connecting the machinery with the power—including shafting, belting, labor, etc.—amounted to $550.50 cash.

On December 2 an insurance policy for one year covering machinery was purchased for $275.40 cash from the New Jersey Mutual.

Full factory operations were commenced on December 1, 1916, and orders were taken for Knoxfrauds for delivery beginning with the first of the year.

It was determined to extend the current fiscal period and not close the books until December 31, 1917.

Call No. 1 on unpaid subscriptions to capital stock for one-half the outstanding was made on February 25, 1917.

The advertising campaign was producing results so that to fill orders the factory had to work two shifts of men beginning with March 1, 1917. As a result of seeming prosperity and a discontent engendered by labor leaders who had recently unionized the works, a demand for a 15% increase in wages was made and refused, resulting in a walk-out on March 30. A patrol against strike-breakers was established on April 2, after about one-third of the full complement of workers needed for operation had been secured. Some of these defected and the rest were quartered in the shops to prevent violence. After three weeks of partial operation at an increased expense of $1,500 directly attributed to the strike, one of the boilers exploded damaging the building and equipment, the resulting fire consuming supplies and damaging raw materials. An investigation placed the blame on a half-crazed workman whose sympathies were with the strikers. Hospital fees for injured workmen amounted to $500. (Record these two items as cash expenditures for the purposes named under date of April 20.) The insurance companies settled the losses as follows: the building and the power equipment on which the estimated damage was $3,500 were placed in complete repair; the estimated damage on materials, determined after an inventory and comparison with stock records, amounted to $4,000 and was covered by $3,200 insurance which was paid. In making the estimate, scrap value of damaged goods was placed at $1,000 but only realized $750 when sold; machinery costing $3,500 on November 30, with a scrap value of $500, realized on sale by the company $650, the insurance received being $2,000. (Depreciation on the machinery at the rate of 8⅓% annually on cost value is to be taken into account, and the portion of the unexpired insurance—roughly estimated at $150—now canceled by the payment of the insurance on both raw materials and machinery is to be considered in making charges to the Fire Loss account.) Additional loss and expense due to decreased production and cancellation of orders because of not being able to deliver goods when promised was estimated at $7,500. The strike was finally settled by granting a 5% increase in wages.

The directors had under consideration the incorporation with the Knoxfraud of a patent listing and adding device owned by J. Q. Osgood. In view of the need of some additional capital anyway due to the strike losses, it was decided to incorporate the new device now, since it would be easier to make the needed changes at this time than after operations had been resumed. Accordingly, a rearrangement of the machinery was necessary to make room for the new machinery and place it for proper routing of the product. This entailed a cash expenditure of $750 for the rearrangement, and $5,500 for new machines to replace those disposed of and to manufacture the new device. (Make the record as of April 30.) The contract entered into with Osgood was on a royalty basis per unit turned out by the machines and for one year’s time beginning May 1, 1917. The directors decided on a continuation of the advertising campaign. To provide funds for these purposes a bond issue was determined upon—$20,000 20-year 6%, interest coupons redeemable November 1, and May 1,—secured by mortgage on the factory and its equipment. The trust agreement provided for the payment at the close of each fiscal year of $750 out of profits into the hands of the Guaranty Trust Co. for investment in securities until a sinking fund sufficient to retire the bonds at their maturity shall have been established. $15,000 of the bonds were offered for sale and were purchased at 95 for cash except one purchase on a note for $950. The remaining $5,000 were held in the treasury until needed.

Record the above transactions as of the dates given—the bond transactions took place on May 1.

Instructions

October 31. The columns in sales journal, sales returns and allowances journal, and voucher register headed “Sundry Office Supplies,” will now be given the headings “Knoxfraud” for the first two journals, and “Raw Materials” for the voucher register.

November 10. A part of the charge to Raw Materials must be made in the general journal. “Prepayment on Purchases” account will be closed.

November 30. Record the note payable secured by mortgage under the title “Purchase Money Mortgage on Machinery.” Voucher the cash portion of this purchase of machinery. Transfer the cost of concrete platforms from Buildings to Machinery account. This had previously been charged to Buildings and is merely a transfer entry here. Run Noble’s salary through the voucher register as a cash transaction, making the proper distribution of it. The payment of $550.50 for connecting power is to be charged to Power Equipment.

April 20. Charge these two items as cash expenditures to Strike Costs. In accounting for the fire losses, clear the accounts of their original values by transfer to Fire Loss account (Raw Materials Purchases $5,000, and Machinery $3,500 less depreciation for 4⅔ months, i.e., from November 30 to April 20). Credit Fire Loss from the cash book with the insurance received and with the cash received from sale of scrap. Charge Fire Loss also with the canceled insurance premiums. Record all of this under date of April 20. (The student is referred to [Chapter XXXII] for a full treatment of fire loss adjustments.)

Indirect losses due to strike must not be brought onto the books.

No sinking fund entries will be made till the close of the fiscal year.

May 1. Handle the sale of bonds in cash book and general journal.

Treat the note received as a “Note Receivable Special.” No record will be made of the unissued bonds.

XXI

Practice Data

The remaining data for the 16 months ending December 31, 1917, have been summarized in most instances and were as follows: (In making record, use the dates given or December 31, where none are given.)

June 1. A dynamo costing $525 on August 31, 1916, was sold for $415 and a larger one purchased from the General Electric Co. at a cost of $975.50 installed. (Take into account depreciation at 12½% per annum.) Additional motor trucks were purchased from the New Model Truck Co. for $1,790. (Entry was made at $1,740, taking into account a special discount of $50 for payment within 10 days. Through oversight the voucher was not paid till July 1, thus losing the discount.)

June 25. Call No. 2 was made for the balance of unpaid subscriptions to capital stock.

Voucher Register—Bought desks and tables $200,431.95, bookcases and filing cabinets $149,878.79, raw materials $62,749.63. Purchases discount was $4,290.89; in-freight and delivery $8,650; pay-roll, direct labor $99,475.50, indirect labor $11,900.17; engineers and firemen’s wages $5,125.67; building maintenance and repairs $200; machinery repairs $193.50; receiving and shipping clerks $1,550.20; assembling and setting up labor $500.80; salesmen’s salaries $173,790.25; traveling expense $91,475.89; salesmen’s commissions $79,612.40; delivery men $3,500; office salaries $15,900; patterns $1,250; factory work benches $75; experimental laboratory $2,500. Materials purchased for building maintenance and repairs $326.40, for machinery repairs $85, for patterns $550. Coal and water cost $11,193.40; sundry light, heat, and power expense $1,062.60; packing and shipping supplies $4,469.70; delivery expense, including motor-truck repairs and maintenance, $12,989.14; taxes for 1916 $585.43; factory supplies $1,124.17; sundry factory expense $750.28; royalties $875; insurance, including employers’ liability insurance for factory workmen, $2,277.45; warehouse expense $540; warehouse rent $850; sundry selling expense $2,196.40; rent $7,500; stationery and printing $2,310.17; telephone, telegraph, and postage $1,092.15; sundry office expense; $1,312.43; collection expense $1,025.43; interest and discount $902.20; bond interest $450; materials for laboratory $1,500; legal expense in defending patents $175; street and sewer improvement tax on factory site $525.60; advertising $123,470.10; notes payable paid $25,261.75; notes receivable discounted but protested and charged back, $1,260.50; advances to salesmen $1,500.

Sales Journal—Sales to sundry customers: desks and tables $290,721.15; bookcases and filing cabinets $204,422.20, Knoxfrauds $351,622.50. Cash sales were: desks and tables $91,213.10, bookcases and filing cabinets $71,253.20, Knoxfrauds $124,121.25. Sales returns and allowances were: desks and tables $10,192.50; bookcases and filing cabinets $8,269.10, Knoxfrauds $21,569.65.

Cash Book—Received: from cash sales as above; from Sundry Customers $624,736.74 less sales discount of $15,962.14; from interest $750; from notes receivable discounted $19,260.25 less bank discount of $210.25; from notes receivable $10,192.60; from rent income $160—the sub-lease on the warehouse was canceled because the room was needed for increased stock; from first call on outstanding subscriptions to capital stock $18,250, from second call $18,000. Disbursed: for vouchers payable $1,005,833.95.

Journal—Received notes from Sundry Customers $59,370.50. Gave notes to Sundry Creditors $45,000. Notes receivable discounted were paid by makers at maturity $12,379.60. Trade debts proved uncollectible from bankruptcy or other cause to the amount of $3,572.40.

Instructions

June 1. Charge the loss on sale of dynamo to Loss from Sale of Power Equipment. Accrued depreciation for 9 months must be taken into account. Run the neglected discount item through on a new voucher, making cross-reference to the original. Be sure to make proper distribution of it.

June 25. Call No. 2 is for $18,750.

Voucher Register. Make careful distribution of all items—particularly as between capital and revenue charges. Discounted notes receivable protested will be charged to Sundry Customers.

Journal. Make here also the entry necessary to complete the record of the discounted notes which went to protest, as indicated by the voucher register entry above.

XXII

Practice Data

Summarize and post the books and take a trial balance as of December 31, 1917. Record the trial balance in the usual place.

XXIII

Problem

A trial balance taken from the general ledger of the Metal Bed Manufacturing Co. for December 31, 1917, showed as follows:

Bed Sales $325,198.67
Bed Sales Returns and Allowances$10,240.80
Bed Accessories Sales 192,460.90
Bed Accessories Sales Returns
and Allowances8,175.25
Raw Material Inventory25,240.16
In-Freight and Drayage1,460.24
Beds in Process15,970.20
Finished Beds42,490.70
Accessories Inventory19,580.65
Direct Labor35,918.60
Indirect Labor10,372.40
Light, Heat, and Power8,917.18
Manufacturing Expense5,890.10
Rent3,300.00
Machinery Repairs and Renewals575.00
Raw Materials Purchases175,460.18
Raw Materials Purchases Returns
and Allowances 9,840.60
Accessories Purchases95,640.81
Accessories Purchases Returns
and Allowances 4,890.06
Advertising4,800.00
Salesmen’s Salaries13,690.75
Salesmen’s Commissions4,610.15
Traveling Expense10,111.25
Out-Freight and Shipping790.20
Delivery Expense3,816.25
Insurance on Sales Room Stock475.00
Insurance on Factory Materials820.00
Insurance on Buildings and Equipment1,890.00
Miscellaneous Selling Expense4,175.30
Office Salaries15,210.40
Interest and Discount3,620.55
Bank Expense125.45
Office Furniture and Fixtures1,240.00
Depreciation Reserve Office Furniture
and Fixtures 620.00
Office Supplies720.20
Miscellaneous Office Expense1,810.65
Leasehold (99 years)99,000.00
Extinction Reserve for Leasehold 24,000.00
Buildings125,000.00
Depreciation Reserve for Buildings 50,000.00
Machinery72,520.70
Depreciation Reserve for Machinery 21,490.16
Tools5,140.17
Patterns7,500.00
Depreciation Reserve for Patterns 5,405.14
Factory Furniture and Fixtures8,100.00
Depreciation Reserve Factory
Furniture and Fixtures 3,190.20
Sales Room Furniture and Fixtures10,250.00
Depreciation Reserve Sales Room
Furniture and Fixtures 4,330.10
Sales Discount8,440.05
Purchases Discount 10,375.90
Good-Will50,000.00
Accounts Receivable110,472.05
Notes Receivable5,640.10
Accounts Payable 62,490.35
Notes Payable 10,000.00
Mortgage Payable 15,000.00
Petty Cash150.00
Surplus 150,154.24
Reserve for Doubtful Accounts 3,519.72
Capital Stock Common 100,000.00
Capital Stock Preferred 6% 50,000.00
Harriman National Bank10,114.55
Common Dividend No. 372,000.00
Preferred Dividend No. 25    1,500.00          
$1,042,966.04 $1,042,966.04

The company conducts a factory for the manufacture of metal beds. It deals also in mattresses, springs, bed furnishings, etc., which it buys ready-made and sells to the retail trade. Its two classes of sales, beds and accessories are kept distinct.

Draw up a balance sheet and profit and loss statement for the year, taking into account the following inventories and other adjustments:

Inventories:
Raw Materials$31,216.15
Beds in Process18,793.80
Finished Beds31,470.95
Bed Accessories24,640.10
Accrued Expenses:
Direct Labor690.20
Indirect Labor325.00
Rent300.00
Light, Heat, and Power180.20
Advertising590.00
Sales Commissions319.40
Interest150.00
Prepaid Expenses:
Coal, Waste, Oil, etc.$125.00
Advertising300.00
Office Supplies75.00
Bank Discount125.00
Insurance on Sales Room Stock50.00
Insurance on Factory Materials125.00
Insurance on Buildings and Equipment256.40
Interest earned on Notes Receivable but not yet due75.20
Depreciation is estimated as follows on a yearly basis:
Office Furniture and Fixtures8⅓%
Factory Furniture and Fixtures10%
Sales Room Furniture and Fixtures10%
Buildings2%
Machinery10%
Patterns20%

The leasehold was originally for 99 years of which 25 years have now expired. Bad debts are calculated as 2% of the accounts and notes outstanding. Tools now on hand amount to $4,800.25. In-freight and drayage is to be charged 55% to Factory and 45% to Selling. Light, heat, and power charge 90% to Factory, 9% to Selling, and 1% to Office. Rent, charge 60% to Factory, 35% to Selling, and 5% to Office. Insurance on buildings and equipment distribute according to the values invested, separating buildings’ values on the same basis as rent. Dividends No. 26 for 3% on preferred and No. 38 for 6% on the common are declared and paid.

Instructions

The leasehold was purchased for a lump sum with provision for the payment of a small annual rental in addition. The rent item on the books covers this charge. $1,000 a year is the amortization charge on the leasehold.

Insurance on buildings and equipment covers buildings, machinery, tools, patterns, and office, salesroom, and factory furniture and fixtures. Be careful to distribute this among the manufacturing, selling, and office sections of the profit and loss summary. Separate the asset values of these items, which show investment in the factory, the selling section, and the office section of the plant, and distribute the insurance on the basis of the investment shown.

Depreciation on buildings will be distributed also on the same basis as rent.

Dividends 25 and 37 have evidently been paid but not yet charged against Surplus. This is sometimes done when it is desired to charge an interim dividend against profits of the current year. In drawing up the balance sheet take cognizance of the fact that dividends 26 and 38 have also been declared and paid though not yet booked.

Support the balance sheet and profit and loss statement with the customary schedules. The “Cost of Goods Sold” schedule must in turn be supported by a schedule showing the “Cost to Manufacture.” As explained in Chapter III, in the cost of goods sold schedule the cost of goods manufactured—shown by the cost to manufacture schedule—takes the place of the item “Net Purchases” in a trading business. A typical form of manufacturing statement is shown below.

Exhibit B—Schedule 1
Cogswell & Sons, Manufacturers
Cost to Manufacture, for the Year Ending December 31, 1917

Fireless Cookers:
Raw Materials:
Inventory, January 1, 1917 $25,000.00
Purchases, Net$125,000.00
In-Freight and Cartage  5,000.00 130,000.00
$155,000.00
Less Inventory, December 31, 1917  28,100.00
Cost of Raw Materials Used in Manufacture$126,900.00
Direct Labor 178,600.00
Prime Cost$305,500.00
Factory Expenses:
Indirect Labor $30,000.00
Light, Heat, and Power 20,000.00
Factory Supplies 5,000.00
Sundry Factory Expense 1,500.00
Machinery Repairs 750.00
Building Maintenance and Repairs1,225.00
Depreciation 6,210.00
Insurance 850.00
Taxes 2,195.00
Royalties 15,276.00 83,006.00
$388,506.00
Deduct, excess of:
Goods in Process, December 31, 1917 over$40,210.00
Goods in Process, January 1, 1917 32,794.00 7,416.00
Cost of Finished Cookers (carried to Schedule 2)$381,090.00

As stated above, this “Cost of Finished Cookers” is carried to Schedule 2, “Cost of Goods Sold,” where it is combined with its initial and final inventories to develop the cost of the cookers sold during the period. With the exception noted, this schedule, for a departmental business, follows the forms already shown and will not be repeated here. The same thing is true of the other supporting schedules.

XXIV

Problem

Using the information of Problem XXIII and the statements drawn up there, prepare adjusting and closing journal entries covering just the manufacturing activities of the business.

Instructions

It is desired here to give the student practice with the group of entries with which he is not yet familiar. The adjusting and closing entries covering the other activities of the business follow the methods already explained. In summarizing the manufacturing group of entries, the process is the same, in the main, as other summary entries. The exact entries necessary depend, of course, on the accounts carried and the way in which they are used. This applies particularly to the use of one or several different inventory accounts and the Goods in Process account.

To bring the goods in process inventory on the books requires a debit to Manufacturing and a credit to Goods in Process to clear it—i.e., Goods in Process—of the initial inventory, and then a debit to Goods in Process and a credit to Manufacturing to set up the present inventory. This secures the proper charge or credit, for the excess of the one inventory over the other, necessary to develop the correct cost to manufacture.

Where a Finished Goods account is carried, it is sometimes used as an inventory account, in which case the method of handling it is similar to that of Goods in Process excepting that the Finished Goods account is used in connection with the Profit and Loss (or Trading) account instead of the Manufacturing account. When Finished Goods account is used in this way, the balance of the Manufacturing account, i.e., the cost of goods manufactured, is transferred in toto to the Profit and Loss account in which the cost of the manufactured goods sold is developed. Where other commodities are dealt in, in addition to the manufactured product, this may result in an awkward and inconsistent method of developing the costs of the different commodities sold. This has sometimes led to the use of the Finished Goods account somewhat on the lines of a purchases account. To it the balance of the Manufacturing account is transferred, and the cost of finished goods sold is developed in it by bringing the two inventories into this account. This necessitates the use of a Finished Goods Inventory account in addition to Finished Goods account—or finished goods inventory may be set up in Merchandise Inventory account, where only one inventory account is carried. The cost of manufactured goods sold is then transferred from Finished Goods account to Profit and Loss account, where, together with the costs of the other commodities sold, it helps to effect the closing of the books.

In this problem use the Finished Beds account as an inventory account.

XXV-XXVI

Practice Data

Prepare a condensed balance sheet and profit and loss statement as of December 31, 1917, taking account of the following adjustments and inventories. Also draw up a statement of surplus for the 16 months of the current fiscal period.

Coal and Power Supplies on Hand$ 1,240.19
Packing Materials on Hand340.20
Gasoline on Hand125.00
Factory Supplies100.00
Insurance Unexpired540.23
Warehouse Rent Prepaid150.00
Stationery on Hand150.00
Experimental Laboratory Materials on Hand425.00
Advertising Prepaid500.00
Purchases Discount Not Yet Taken on Unpaid Vouchers840.22
Advertising Unpaid1,000.00
Direct Labor Accrued1,793.75
Indirect Labor Accrued225.33
Engineers and Firemen’s Wages Accrued125.67
Receiving and Shipping Clerk’s Wages Accrued75.50
Assembling and Setting Up Wages Accrued15.00
Salesmen’s Salaries Accrued2,524.50
Salesmen’s Commissions Accrued1,360.18
Deliverymen’s Wages Accrued67.50
Royalties Accrued150.00
Rent Accrued400.00
Interest Payable17.25
Taxes on Factory Accrued819.37
Taxes on Stock Accrued395.62
Bond Interest Accrued150.00
Inventories of stock-in-trade and raw materials were:
Desks and Tables$20,855.10
Bookcases and Filing Cabinets17,671.40
Knoxfrauds, Finished2,511.20
Raw Materials15,241.92
Goods in Process9,255.65

Calculate depreciation at the yearly rates given below. The balance in the account is to be used as the basis, reckoning for 16 months.

Power Equipment12½%
Machinery8⅓%
Factory Buildings1½%
Patterns20%
Patents¹/₁₇
Delivery Equipment15%
Furniture and Fixtures, Factory12½%
Furniture and Fixtures, Store and Office  10%
Organization Expense5% of the original cost
Tools Inventory$825.50

Allocate the following charges as indicated:

Insurance: $2,196.43 to Factory and $519.24 to Selling.

Taxes: $1,012.24 to Factory and $411.23 to Selling.

Receiving and shipping: ¾ to Shipping and ¼ to Receiving, of which 40% to Desks and Tables, 35% to Bookcases and Filing Cabinets, 25% to Raw Materials.

In-freight and delivery: $4,400 to Desks and Tables, $3,500 to Bookcases and Filing Cabinets, $750 to Raw Materials.

Rent: $6,400 to Selling, $1,500 to Office.

Light, heat, and power: 92% to Factory, 6% to Selling, 2% to Office.

Create a reserve for doubtful accounts of ½% of all gross sales for the period. It is decided to take into account as an additional expense chargeable to this period 1¼% of outstanding trade debtors for sales discounts that will probably still be taken advantage of.

Close Loss on Sale of Dynamo against Surplus.

Close Fire Loss and Strike Costs to Surplus.

In closing, bond discount is to be amortized on a straight line basis, i.e., ¹/₄₀ each half-year. Take account of accrued amortization for the two-month period since November 1.

The experimental laboratory has succeeded in securing a patent for a listing and adding device for use with the Knoxfraud, of much simpler operation and cheaper to manufacture, than the one on which royalty is being paid. Hence, when the royalty contract expires it will not be renewed. Capitalize the laboratory expense to date.

A very careful analysis of the advertising costs shows an expenditure of $78,445.25 above normal. It is decided to transfer this to Good-Will.

Claims for damage have been filed against the railways amounting to $1,025.10. (Bring this on to the books with an offsetting reserve of the same amount.)

A dividend of 12½% on the common is declared payable January 20, 1918.

Take into consideration the sinking fund requirements of the bond mortgage.

Instructions

On the condensed balance sheet, show all receivables (other than the claims against customers on note and open account) under the title “Other Accounts Receivable,” immediately following but separate from the current asset group. Carry all inventories under one title “Inventories.” All fixed assets, except the intangibles, show under the title “Plant and Equipment,” from which show deducted the total of the various depreciation reserves. List the intangible assets individually. Set up supporting schedules for all condensations effected. The profit and loss statement must have supporting schedules, also.

Although some inaccuracies result from using the bases indicated for the calculation of depreciation, they are insignificant. Note that the basis for writing down patents has been changed since the last period. This indicates a policy of intention to secure patented improvements on the various devices owned. ([See Chapter XVIII] for discussion of this point.)

Declaration of a dividend on common stock means, of course, that the required dividends on both issues of preferred have also been authorized. The student is required to calculate the rates on these.

XXVII-XXVIII

Practice Data

Adjust and close the books in accordance with the data given in assignments XXV-XXVI.

Treat the account “Knoxfrauds Manufactured” as a purchase account as explained in assignment XXIV.

Handle the estimate of 1¼% of trade debtors for expected sales discounts, as an accrued item in Sales Discount account.

There is no accrual on sinking fund provisions, inasmuch as the trust deed requires that payment out of profits be made at the close of the fiscal period and not at the time bond interest falls due.

The Knox-Davis blanks, with all statements, are due at the time of the last class period and must be turned in whether completed or not, if credit is desired for the course.

APPENDIX B
PRACTICE WORK FOR STUDENT—
SECOND HALF-YEAR

In this appendix enough material is furnished for approximately 30 hours of classroom work. If more time is devoted to the work, this material may well be supplemented by drawing on Appendix C.

The student will find it convenient to have a supply of standard-ruled journal paper and of analysis paper—10-or 12-column—to be used for working sheets.

For all formal statement work prepared for presentation to the instructor, it is suggested that plain, unruled paper of uniform size (8½ × 11 inches, letter size) be used. The chief purpose of this second semester’s work is to give training in analysis—the ability to grasp the essentials of a given set of conditions and to see the significance and interrelations of the various parts. Next in importance to this is the ability to draw up a statement or statements which shall present clearly and in proper order the results of your analysis. The student should develop the habit of thinking clearly and setting forth conclusions in intelligent, clean-cut form. In ninety-nine cases out of every hundred, slovenly, sloppy work evidences a like characteristic of reasoning ability. If the course develops clear thinking and clean-cut presentation, it will have accomplished its two main purposes.

The problems have a more or less direct relation to Chapters XXVIII to XXXV of this volume, but of course they are not limited to the principles developed there. Many of the problems are somewhat closely connected and relate to each other while some are entirely disconnected. They are graded, proceeding from the simpler to the more difficult by easy stages. Where necessary, instructions are given, although the student is thrown more on his own resources than previously. In the solution of problems involving trial balance, adjustments, and financial statements, the method of the accountant’s working sheet will be found to offer the best procedure. See Volume I, Chapter XLIII, pages 386-391, for explanation and illustration.

As to the method of attacking problems, the student is perhaps already aware that before attempting solution it is best to read and study the problem carefully to determine exactly what is called for and then to decide as to the treatment of all doubtful points and items—what they mean and how they must be handled to arrive at what is called for. With these preliminary points cleared up, the solution itself is mostly a matter of accuracy and form. In all problems calling for financial statements, the trial balance should first be tested as to the equality of debits and credits. As stated above, the method of the work sheet is usually the best method for summarizing results, although sometimes skeleton ledger accounts will be found helpful in order to visualize the effect of entries and to trace their course through the accounts. Only painstaking work and the solution of many problems will produce facility and confidence in work of this kind.

The instructor should direct the student to take Problem XXVIII under consideration throughout the whole semester, in order adequately to get his material together and into shape. It may well be treated as a thesis for the semester.

I

At the close of the fiscal year ended June 30, 1913, Thomas J. Howe called you in to determine his financial condition. From the books, which were kept on the single-entry plan, and from other sources, you gathered the following information:

The ledger contained the following accounts: Thomas J. Howe, Capital, $4,000; Thomas J. Howe, Drawing (debit) $472; Expense (debit) $184; Sales $18,945; Purchases $17,450; customers’ accounts considered good: H. E. Brewer $110; D. Cohen $85; Will Benton $190; Linn Bros. $77; customers’ accounts which have proved uncollectible and are considered bad: Peter Metz $43; L. C. Fish $101; creditors’ accounts: Stone Bros. $942; Little & Co. $1,082; H. Hudson $1,220; also accounts with Salaries $375; Advertising $112.

Other sources yielded this information: stock of goods on hand inventoried at $5,641; horses and wagons estimated as worth $730; store fixtures $1,114; rent of store building unpaid $300; clerks’ salaries unpaid $84; notes receivable $2,300; notes payable outstanding (non-interest bearing) $2,400. Bill of goods received from Stone Bros., which has been included in the inventory but which has not been entered in Stone Bros.’ account, $193; interest accrued on notes receivable $16; cash in the bank and safe $1,724.

It was found that the following information was available for determining his financial condition as at the close of the preceding fiscal year, June 30, 1912: cash $1,478; notes receivable $500; notes payable $800; Howe’s capital $4,000; store fixtures $900; inventory of goods in stock $2,800; horses and wagons at an estimated value of $800; customers’ accounts total $2,314; creditors’ accounts total $3,609.

From the foregoing prepare:

(a) Statement of financial condition of Thomas J. Howe as of June 30, 1913.

(b) Statement showing the amount of profit made or loss sustained for the fiscal year ended June 30, 1913.

(c) Statement setting forth in numerical order the advantages of double-entry over single-entry accounting systems.

(d) As a result of your convincing argument Mr. Howe has decided to change his system of accounting from single- to double-entry. Prepare the necessary entries to change the accounting system to double-entry, continuing the use of the old ledger and providing for controlling accounts for customers and creditors.

Instructions

See Volume I, Chapters LV and LVI.

II

The following trial balance was taken from the books of Thomas J. Howe at the close of the next fiscal year.

Thomas J. Howe
Trial Balance, June 30, 1914

Cash$ 894.00
Notes Receivable5,000.00
Accounts Receivable18,000.00
Thomas J. Howe, Capital 6,000.00
Thomas J. Howe, Drawing560.00
Notes Payable 3,000.00
Accounts Payable 15,640.00
Purchases77,100.00
Sales 93,620.00
Merchandise Inventory, June 30, 19135,641.00
Purchase Discounts 743.00
Sales Discounts1,420.00
Freight Inward 2,884.00
Insurance300.00
Interest Earned 146.00
Returned Sales930.00
Returned Purchases 760.00
Furniture and Fixtures2,000.00
Horses, Wagons, and Harness1,200.00
Rent1,500.00
Advertising300.00
Expense180.00
Salaries1,600.00
Commissions Paid on Sales    400.00        
$119,909.00$119,909.00

At this date, you will find that the following items must be considered to determine the financial condition of Mr. Howe: Merchandise inventory $2,470; insurance unexpired $100; interest accrued on notes receivable $66; interest accrued on notes payable $30; he owes for two months’ rent $300.

1% of net sales is to be set aside as a reserve for uncollectible accounts. Furniture and fixtures are to be written off in the amount of 10%. Provide for a reserve of 10% for depreciation of horses, wagons, and harness.

Advertising carried forward to the next period $75; unused stationery and other expense items $42; commissions on sales due but unpaid $90.

(a) Prepare the working sheet.

(b) Construct the balance sheet as of June 30, 1914.

(c) Prepare profit and loss statement—percentages based on net sales.

(d) Write the adjusting and closing journal entries.

III

Joseph Mason was Howe’s greatest competitor. After getting better acquainted with each other, Howe conceived the plan of uniting their capital and services in the form of a partnership. After some discussion it was decided to operate as Howe & Mason, the capital to consist of $12,000, of which Howe is to contribute $8,000 in the form of his existing business. The excess of Howe’s net worth, as shown by the balance sheet of June 30, 1914, over $8,000, his investment in the partnership, is to be considered as a loan to the firm. Mason is to transfer his entire business—assets and liabilities—and sufficient cash to make his net investment $4,000, or one-third of the total capitalization.

As of July 1, 1914, the date of the formation of the partnership, Mason’s assets and liabilities were as follows: cash $1,340; accounts receivable $2,460; notes receivable $1,120; stock of goods inventoried at $4,590; furniture and fixtures appraised at $1,316; accounts payable $5,280; notes payable $1,770; rent unpaid $320.

Prepare journal entries to give effect to the foregoing on Howe’s books, which are to be continued for the partnership.

During the year Charles Palmer purchased one-third interest in the capital and profits of the firm by contributing $9,000 in cash. The total capital of the new firm is set at $18,000. Business is to be conducted under the old firm name, the old partners retaining their respective capital investments. Howe’s loan account is to be continued at its original amount.

Write the necessary journal entries to record on the books of the firm the admission of the new partner and the adjustments between Howe and Mason.

Before determining the profits for the year Palmer assigns his interest in the capital and profits of the firm to John H. Bartlett, who settles directly with Palmer for $10,000. Howe and Mason agree to admit Bartlett as a partner in place of Palmer and new articles of partnership are signed by the members.

Give journal entries to show the effect on the partnership books.

Instructions

Note carefully the terms under which Palmer is admitted. His capital will appear on the books as $6,000. Make the adjustment through a good-will account. Howe and Mason withdraw cash to effect their respective adjustments.

IV

The business has been in operation as a partnership one year. At the conclusion of this period the trial balance given below shows the condition of the accounts on the books of the firm.

Howe & Mason
Trial Balance, June 30, 1915

Cash$ 1,872.00
Accounts Receivable22,945.00
Reserve for Bad Debts $ 384.00
Horses, Wagons, and Harness3,100.00
Reserve for Depreciation,
Horses, Wagons, and Harness 120.00
Furniture and Fixtures5,390.00
Merchandise Inventory June 30, 19147,060.00
Notes Receivable12,456.00
Notes Receivable Discounted 4,780.00
Accounts Payable 24,220.00
Notes Payable 8,500.00
Thomas J. Howe, Loan 1,540.10
Thomas J. Howe, Capital 8,000.00
Thomas J. Howe, Drawing2,440.00
Joseph Mason, Capital 4,000.00
Joseph Mason, Drawing1,710.00
John H. Bartlett, Capital 6,000.00
Sales 158,335.00
Returned Sales and Allowances3,890.00
Purchases144,244.60
Freight Inward3,518.50
Warehouse Labor and Supplies1,002.00
Returned Purchases and Allowances 2,714.00
Salesmen’s Salaries2,215.00
Advertising872.00
Freight and Cartage Outward316.00
Office Salaries2,619.00
Postage82.00
Stationery and Printing116.00
Legal Expenses85.00
Office Heat and Light212.00
Interest Earned 117.00
Interest on Bank Balances 14.00
Cash Discount on Sales2,306.00
Cash Discount on Purchases 3,041.00
Interest Paid143.00
Telephone and Telegrams17.00
Insurance500.00
Rent2,200.00
Miscellaneous Expense74.00
Commissions on Sales    380.00        
$221,765.10$221,765.10

Additional information is as follows:

Merchandise inventory, June 30, 1915, $13,260; stationery and printed matter on hand $35; unused postage stamps $17.00. One-fourth of advertising is to be applied to the next year. Warehouse labor of $130, due but unpaid, has not been recorded on the books. Interest accrued but not recorded: on notes receivable $71, on notes payable $47, on bank balances $8. Rent prepaid $200.

You find that no record has been made on the books for $750 worth of merchandise received from Marsh & Co., but that these goods have been included in the current inventory. Four-fifths of the insurance has expired. Interest is to be accrued on Howe’s Loan account at 6%. Through error $100 of commissions on sales has been charged to Salesmen’s Salaries account.

It has been decided to provide for depreciation and reserves as follows: 10% reserve on reducing balances for horses, wagons, and harness; a reserve of ½% on sales for uncollectible accounts; by writing off 10% of the book value of furniture and fixtures.

Profits and losses are to be shared according to the original investments of the partners.

Give due consideration to the foregoing and construct:

(a) The working sheet as of June 30, 1915.

(b) Balance sheet.

(c) Profit and loss statement containing percentages on sales.

(d) Adjusting and closing journal entries.

Instructions

Note the bases for the various depreciation reserves and that depreciation on furniture and fixtures is to be written off the books, i.e., no reserve is to be set up.

V

July 1, 1915, the capital of the firm of Howe & Mason is increased to $30,000 and Wm. R. Gray is admitted as a partner.

Among other things, the articles of copartnership provide that:

Business is to be conducted under the firm name of Howe, Mason & Co.

The representation of the partners in the capital of the firm shall be Howe, 8/20; Mason, 5/20; Bartlett, 3/20; Gray, 4/20.

Profits and losses shall be shared according to the capital representation of the partners as at the time of formation of this partnership. In the event of the death of a partner an accounting shall be made at the close of the fiscal year in which the death occurs and the value of the deceased partner’s estate determined as of the date of his death by prorating profits on a monthly basis.

Gray is to pay for one-fifth interest in the capital of the firm by giving the firm his note for $2,000 and $4,000 in cash. The difference in capital is to be supplied by good-will, which is to be distributed among the three partners constituting the firm of Howe & Mason on the basis of their original capital representations in that firm, i.e., in the ratio of $8,000, $4,000, $6,000 respectively.

After adjustments have been made, the respective partners’ drawing accounts shall be settled in cash.

(a) Write the necessary journal entries to admit Gray as a partner and to adjust the several partners’ capital and drawing accounts.

(b) Set up the capital and drawing accounts of all the partners.

Instructions

The partnership agreement is to be interpreted to mean that, after distribution of the good-will, Howe, Mason, and Bartlett are to contribute or withdraw cash necessary to give them the respective capital shares agreed upon for the new firm.

VI

Wm. R. Gray died November 30, 1917, two years and five months after he became a partner in the firm of Howe, Mason & Co. As provided in the articles of partnership, the business continued until the end of the fiscal year, June 30, 1918, at which date an accounting was made on the basis of the following trial balance and subjoined data.

Howe, Mason & Co.
Trial Balance, June 30, 1918

Land$ 10,000.00
Buildings40,000.00
Reserve for Depreciation, Buildings $ 2,000.00
Delivery Equipment6,000.00
Reserve for Depreciation, Equipment 1,200.00
Furniture and Fixtures5,990.00
Good-Will6,000.00
Cash2,010.00
Accounts Receivable36,000.00
Reserve for Bad Debts 1,460.00
Notes Receivable7,500.00
Notes Receivable Discounted 4,500.00
Merchandise Inventory—Bags, June 30, 19176,770.00
Merchandise Inventory—Trunks, June 30, 191712,410.00
Mortgage Payable 25,000.00
Accounts Payable 26,000.00
Notes Payable 14,400.00
Thomas J. Howe, Loan 2,000.00
Thomas J. Howe, Capital 12,000.00
Thomas J. Howe, Drawing1,210.00
Joseph Mason, Capital 7,500.00
John H. Bartlett, Capital 4,500.00
Wm. R. Gray, Capital 6,000.00
Wm. R. Gray, Drawing1,100.00
Sales—Bags 71,432.00
Returned Sales and Allowances—Bags3,690.00
Sales—Trunks 222,386.00
Returned Sales and Allowances—Trunks1,508.00
Purchases—Bags59,315.00
Returned Purchases and Allowances—Bags 4,230.00
Purchases—Trunks184,824.00
Returned Purchases and Allowances—Trunks 2,716.00
Freight Inward7,020.00
Warehouse Labor and Supplies1,875.00
Salesmen’s Salaries4,303.00
Salesmen’s Traveling Expenses2,809.00
Advertising2,146.00
Freight and Cartage Outward1,154.00
Commissions on Sales981.00
Office Salaries2,274.00
Miscellaneous Office Supplies170.00
Legal Expense200.00
Postage127.00
Telephones and Telegrams93.00
Interest Earned on Notes Receivable 385.00
Cash Discounts on Purchases 3,547.00
Rent Collected 1,500.00
Taxes1,312.00
Insurance680.00
Interest Paid472.00
Cash Discounts on Sales2,789.00
Collection and Exchange    24.00      
$412,756.00$412,756.00

The books have been closed at the end of each fiscal year.

Merchandise inventories, June 30, 1918, bags $2,431, trunks $4,380. A reserve of ½% of the sales is to be provided for bad debts. The furniture and fixtures are to be written down 10% of their book value.

The old account of Horses, Wagons, and Harness was closed and Delivery Equipment opened when the horses were sold and an automobile service installed. It is deemed advisable to increase the reserve by 10% of the declining value.

An additional 5% of the original cost of the buildings will be set aside as a reserve for depreciation.

Accruals are as follows: taxes $370; interest on mortgage 9 months at 5%; interest on notes receivable $80; interest on notes payable $520; interest on bank balances $61.20; office salaries $150; interest on Howe loan 6% for one year.

Advances made to salesmen on salaries $400; tenants paid $300 in advance rent; unused postage $32; miscellaneous office supplies on hand $30; one-fourth of the insurance remains in force; advertising deferred $600. Distribute in-freight and warehouse labor on the basis of gross purchases.

Profits and losses are to be shared according to the original investments, as stated in the articles of partnership.

One clause in the partnership agreement entered into July 1, 1915, read as follows:

“In the event of dissolution, good-will is to be increased at the rate of 24% per year of the original value.” Take this into account now as effective for 2 years and 5 months.

As of June 30, 1918:

(a) Prepare working sheet.

(b) Construct balance sheet.

(c) Construct income statement.

(d) Write the closing journal entries.

(e) The three remaining partners, as a firm, take over the interest of Gray’s estate, paying therefore cash $1,000 and three equal notes with interest at 6%, maturing in one, two, and three years, for the balance.

(f) Write entries which will adjust the partnership interest represented by Gray’s estate and show settlement of that interest.

VII

The Ironclad Trunk Corporation was organized and incorporated November 1, 1912, for the purpose of manufacturing trunks, bags, and brushes of all kinds and dealing in traveling requisites of every description.

The authorized capital of $100,000 consists of 750 shares of common stock having a par value of $100 per share, and 250 shares of preferred stock of the same par value.

The incorporators subscribed for at par and paid for the common stock as indicated below:

Arthur Butler, 250 shares in cash.

A. J. Lindsey, 150 shares by transferring the following assets and liabilities: cash $3,000; accounts receivable $7,000; notes payable $3,000; notes receivable $2,000; stock of raw material $9,000; accounts payable $5,000; furniture and fixtures $2,000.

Edward Harrison, 100 shares by giving bill of sale of machinery appraised at $6,000; the balance to be paid in one year.

Charles E. Wells, 50 shares by his personal note for $5,000 with interest at 6%, due in one year.

In connection with the organization of the corporation the following items were paid in cash: corporation tax $50; filing fees $20; recording fees $12; legal expenses $500.

(a) Write journal entries to record this information on the books of the corporation.

(b) Prepare a balance sheet showing the condition of the corporation at this date.

Instructions

Refer to trial balance of VIII to see the method pursued in making the opening entries for the corporation.

VIII

The following trial balance was taken from the books of the Ironclad Trunk Corporation at the close of its first year. From it and the additional notations appended thereto you are asked to furnish:

Ironclad Trunk Corporation
Trial Balance, October 31, 1913

Fifth National Bank$ 7,940.00
Imprest Cash200.00
Land10,000.00
Buildings30,000.00
Machinery and Tools25,000.00
Materials and Supplies, October 31, 19129,000.00
Accounts Receivable12,000.00
Notes Receivable10,000.00
Notes Receivable Discounted $ 4,000.00
Advertising Unexpired1,000.00
Insurance Prepaid200.00
Purchases—Material108,000.00
Notes Payable 18,000.00
Taxes Accrued 200.00
Wages Accrued 3,400.00
Returned Sales2,200.00
Returned Purchases 2,800.00
Factory Supplies2,600.00
Labor—Direct70,000.00
Superintendence4,000.00
Heat, Light, and Power12,000.00
Miscellaneous Wages—Factory3,620.00
Factory Expense400.00
Accounts Payable 26,000.00
Reserve for Depreciation, Buildings 3,000.00
Interest Accrued on Notes Payable 700.00
Sales 214,706.00
Interest on Bank Balances 46.00
Freight Inward2,770.00
General Expense1,920.00
Taxes350.00
Rent of Building 1,000.00
Reserve for Depreciation, Machinery 2,500.00
Salesmen’s Salaries4,200.00
Repairs to Machinery630.00
Reserve for Bad Debts 1,000.00
Cash Discount on Purchases 3,110.00
Interest Earned 418.00
Commissions—Salesmen3,600.00
Office Salaries2,800.00
Insurance150.00
Freight Outward1,100.00
Bad Debts1,000.00
Furniture and Fixtures3,700.00
Authorized Capital Stock—Preferred 25,000.00
Authorized Capital Stock—Common 75,000.00
Unissued Stock—Preferred12,000.00
Unissued Stock—Common20,000.00
Subscriptions4,000.00
Notes Received—Stock Subscription6,000.00
Bonding Employees—Office100.00
Cash Discount on Sales2,300.00
Depreciation5,500.00
Advertising    600.00        
$380,880.00$380,880.00

You are presented with properly certified statements showing the present inventory of materials and supplies to be $16,300; goods in process $1,400; finished goods $9,800, and factory supplies in storeroom $700. It has been estimated that $200 of the freight inward is applicable to the present inventory of materials and supplies. Salesmen have been overpaid $600 on their salary accounts. Items aggregating $400 which have been charged to Expense are found to be on hand. In the customers ledger you find accounts having credit balances amounting to $1,500, and uncollectible accounts to the amount of $710. You decide to write down furniture and fixtures 10%.

Instructions

It will be noted that the trial balance presented indicates that the books have been partially adjusted. The uncollectible accounts of $710 were taken into consideration when the estimate for reserve for doubtful accounts was made. Charge them against the reserve.

IX

After Edward S. White, the inventor of a process for constructing a superior fiber for trunk-making, demonstrated the practicability of his process, the Ironclad Trunk Corporation purchased all his rights in patents granted by United States, Canada, Mexico, and Great Britain. The sale went into effect January 1, 1914. The consideration of $100,000 was made payable $60,000 in cash, $20,000 in bonds at par, and $20,000 in two-year interest bearing notes of the company.

To provide for payment of the patent, the corporation, after duly complying with all legal requirements, issued $100,000 in 20-year 6% sinking fund bonds, under date of December 1, 1913, interest payable June 1 and December 1. During the month $70,000 of the bonds were sold for cash on a 7% basis, and the remainder at the same price during the following month.

The trust agreement provided that a sinking fund should be established by a charge against profits every interest period, of an amount sufficient on a 4% compound interest basis—interest compounded semiannually—to retire the bonds at maturity. The fund was placed in a trust company for accumulation.

(a) Give journal entries to effect the foregoing on the corporation’s books.

(b) Prepare a statement setting forth the condition of the sinking fund at each interest date during the last five years previous to maturity of the bonds.

Instructions

It will be noted that the problem requires the calculation of the selling price of the bonds, i.e., their valuation on the given basis. This may be found from bond tables but preferably by the formula of [Chapter XV]. The sinking fund may also be found from tables or the formula of [Chapter XXV].

(1.035⁴⁰ = 3.95925972; 1.02³¹ = 1.84758882; and 1.02⁴⁰ =2.20803966)

X

(a) Prepare an amortization schedule covering the first five years life of the bonds.

(b) Write the journal entries for:

Instructions

Averaging the bonds sold at par with those sold on a 7% basis places the whole issue approximately on a 6.787% basis. Use that as the effective rate for the amortization schedule.

XI

Several customers of the Ironclad Trunk Corporation protested vigorously against paying their accounts when we sent them statements requesting payment. They denied that they owed the amounts shown on our books and produced receipts and canceled checks to prove their contentions. In many cases we found that the receipts and checks were dated several weeks before the credits appeared on the books and in some cases no credits had been entered.

The manager immediately requested Leroy Swift, a certified public accountant, to make a thorough audit. Among other things, the accountant’s report disclosed the following:

The petty cash sales had been entered in the cash book at smaller amounts than the records showed. The discrepancy between cash book and sales records was: trunks $1,040, bags $360.

Freight bills had been raised $300. The Railroad Company had been overpaid this amount but refunded it on the request of our bookkeeper, S. O. Bright, who cashed the checks and retained the money.

The Customers column and Net Cash column in the cash book were short-footed $8,430. To make the balance in the Customers’ controlling account agree with the total of the individual accounts, the sales book was short-footed the same amount—bags $2,790, and trunks $5,640.

Credits to customers’ accounts in the amount of $4,740 were missing. Not a trace of a record for this amount or any part thereof could be found in any book.

Leather novelties amounting to $1,560 had been sold from the National Novelty Co.’s consignment but no remittance had been made. The only record of the transactions were duplicate bills of the sales made. The money received for these sales had not been deposited and was appropriated by the embezzler.

Nine productive labor pay-rolls had been over-footed $100 each.

A $1,000 note receivable had been transferred by forged indorsement as $950 part payment on a $1,300 automobile bought by the embezzler for his personal use. The Self-Starter Auto Co. were the holders of the note.

Checks for $1,800 were drawn to the order of fictitious creditors. The indorsements were forged by Bright and the checks duly passed through the bank.

The relatives and friends of Bright agreed to repay the company the greater part or all of the losses due to his embezzlement. In order to provide funds for immediate needs the present stockholders donate 20% of their present holdings of stock, both common and preferred.

Prepare journal entries to give effect to the foregoing as of December 13, 1913.

XII

The City of Oswego donated to the Ironclad Trunk Corporation a building site having a market value of $40,000, on condition that the company build a factory worth at least $100,000 and operate at least five years, employing not less than 100 factory operators.

To take advantage of this offer the corporation obtained permission to issue $100,000 of 7% cumulative preferred stock having a par value of $100 per share, dividends payable semiannually. A condition of the issue made the stock redeemable by lot at the call of the company, the shareholder having the option of receiving 110 in cash or 120 in common stock. A redemption fund is to be created out of profits at the yearly rate of 10% of the issue.

The entire issue was sold for cash May 1, 1914 at 100½. On the same day 101 Blue Valley R. R. 4% bonds, par $1,000, were purchased at 98 with accumulated interest. The bonds are payable July 1, 1924; interest payable January 1 and July 1. The entire bond investment was set aside as a building fund.

Record as of July 31, 1914, the transactions that took place in connection with the erection of the building and the removal from the old to the new plant.

The corporation paid taxes of $400 on the building site and partially completed building. Of this amount $100 applied to the uncompleted building. During the period the manager devoted two-thirds of his time to superintending building operations and one-third to supervising installation of machinery and equipment. His salary amounted to $3,000.

The old land and building and part of the machinery were sold to the American Harness Company for $49,000, payable $11,000 in cash and the balance covered by mortgage for five years at 6%. The amount of the sale was distributed—land $12,000, building $29,000, machinery and tools $8,000. At the date of the sale the accounts appeared on the books as follows: land $10,000; buildings $31,000, with a reserve of $3,000 and nine months’ depreciation on a 5% basis still to be provided for; machinery and tools $25,000 with a reserve for depreciation of $2,500. The machinery and tools sold cost $12,000, on which depreciation has been booked for one year at 10% on original cost. Take into consideration an additional period of nine months.

The remaining machinery, having been designed especially for our use, could not be sold for more than one-half its cost; accordingly, the directors had the machines moved to the new plant. The old machines appear on the books at a cost of $13,000, with reserve recorded for one year at 10% and nine months’ depreciation still to be booked. Additional expenses of removing were as follows: dismantling $40; crating, drayage and freight $170; labor for setting up machines $60; superintendent’s time for moving and installation $150.

The manager, not being sure as to the amount at which to book the machinery, obtained an estimate to duplicate this particular machinery and put it in running order for $9,000.

(a) Write the journal entries to place the above data on the company’s books.

(b) Explain briefly the theory underlying your treatment of the old machinery transferred to the new plant.

Instructions

See Chapters [V], [XI], [XVI], and [XVII], where most of these matters are discussed.

XIII-XIV

The directors of the Ironclad Trunk Corporation, after receiving full authority from the stockholders, set December 31 as the close of the fiscal year, thereby making the present fiscal period fourteen months instead of one year.

From the following trial balance and supplementary data prepare:

Trial Balance, December 31, 1918

Land Donated$ 40,000.00
Buildings129,000.00
Machinery47,000.00
Tools4,680.00
Delivery Equipment5,900.00
Furniture and Fixtures2,300.00
Patents108,000.00
Loans to Employees6,320.00
Dividend No. 6, Cumulative Preferred Stock
(Payable January 10, 1919) $ 1,400.00
Dividend No. 7, Preferred Stock
(Payable January 10, 1919) 1,500.00
Dividend No. 8, Common Stock
(Payable January 10, 1919) 3,000.00
Interest Accrued on Bonds Receivable3,200.00
Freight Inward4,334.82
Freight and Express Outward 2,613.07
Royal Leather Preferred Stock (100 shares)7,480.00
Fire Loss6,000.00
Strike Loss4,200.00
Credit Department Expenses2,950.40
Pamphlets, Price Lists, and Posters973.00
Advertising Space Prepaid260.00
Advertising731.40
Directors’ Fees200.00
Entertainment of Customers’ Agents174.50
Charity60.00
Workmen’s Compensation Insurance Premiums640.00
Rent from Houses for Employees 2,390.00
Maintenance of Houses for Employees318.30
Watchmen’s Wages700.00
Bonuses Paid to Employees (Direct Labor)1,980.10
Experimental Expense2,300.00
Contingent Royalties Fund2,140.00
Mercantile Agency Reports80.00
Accounting Expense500.00
Legal Expenses300.00
Claims Against Transportation Companies3,792.00
Bright—Special14,500.00
Suspense 370.00
Delivery Expense1,194.50
Due to Consignors 4,387.20
Imprest Cash200.00
Raw Materials Inventory, October 31, 191721,304.00
Trade Customers108,946.63
Finished Goods Inventory, October 31, 191722,100.00
Notes Receivable18,000.00
Notes Receivable Discounted 3,460.00
Insurance Prepaid200.00
Insurance480.00
Raw Materials Purchases240,000.00
Accrued Office Salaries 760.40
Accrued Taxes 1,220.00
Accrued Advertising 190.00
Sales, Trunks 416,775.00
Sales, Bags 93,518.80
Returned Sales, Trunks1,750.00
Returned Sales, Bags619.00
Returned Purchases, Raw Material 2,320.00
Returned Purchases, Bags 974.00
Factory Supplies2,436.00
Labor, Direct78,751.20
Labor, Indirect3,497.00
Factory Superintendence3,200.00
Heat, Light, and Power Service7,147.10
Miscellaneous Factory Expense283.14
Trade Creditors 40,309.00
Reserve for Depreciation, Buildings 13,810.00
Reserve for Depreciation, Machinery 18,411.00
Reserve for Depreciation, Delivery Equipment 2,300.00
Reserve for Depreciation, Furniture and Fixtures 750.00
Reserve for Expiration of Patents 21,000.00
Reserve for Sinking Fund—Bonds of 1933 18,128.08
Reserve for Contingent Royalties 2,140.00
Reserve for Supersession of Patents 20,000.00
Interest Earned 7,810.00
Interest Paid11,200.00
Office Expense1,873.38
Warehouse Labor on Raw Materials1,143.26
Salesmen’s Salaries4,500.00
Salesmen’s Commissions12,305.40
Repairs to Machinery1,748.80
Repairs to Buildings3,755.50
Reserve for Doubtful Accounts 3,330.70
Discount on Purchases 3,751.30
Discount on Sales6,400.00
Office Salaries7,974.00
Provision for Doubtful Accounts2,379.12
Capital Stock, Cumulative Preferred 100,000.00
Capital Stock, Preferred 50,000.00
Capital Stock, Common 200,000.00
Unissued Stock, Common10,000.00
Treasury Stock, Common40,000.00
Assessment for Street Improvements
(Donated Land)2,000.00
Bonding Employees—Office200.00
Surplus 41,394.49
Drawings and Patterns4,606.00
Mortgage Receivable (due 1923) 38,000.00
Accrued Pay-Roll 957.75
Reserve for Land Donated 40,000.00
Bonds Payable 100,000.00
Employees’ Pension Fund47,500.00
Reserve for Employees’ Pension Fund 47,500.00
Discount on Bonds Payable7,332.33
Wrapping and Crating Supplies1,418.90
Ralston National Bank17,841.53
Bond Sinking Fund18,128.08
Redemption Fund—Cumulative Preferred Stock40,000.00
Reserve for Redemption of Cumulative
Preferred Stock 40,000.00
Houses and Land for Employees24,600.00
Purchases—Bags91,360.00
Trunks in Process, October 31, 19174,984.20
Commissions Earned 564.80
Notes Payable 7,108.00
Taxes1,520.00
Accrued Interest Receivable    250.00        
$1,314,143.59$1,314,143.59

A careful investigation disclosed the following:

Interim dividends had been paid May 15, 1918: No. 5, cumulative preferred stock, $1,400; No. 6, preferred stock, $1,500; No. 7, common stock, $3,000.

The Royal Leather Co. stock now has a market value of $90 per share.

Items to be distributed:

AccountDistribution
Buildings ExpensesSelling ¼; Office ⅛; Factory ⅝.
Furniture & Fixtures ExpenseSelling ¼; Office ⅛; Factory ⅝.
Light, Heat, and Power.Selling $842.90; Office $392; Factory $5,912.20.
Freight InwardMaterials ¾; Bags ¼.
TaxesBuilding and Equipment $1,300;
Employees’ Houses $220.

The Suspense account was credited for $370 received from a former customer in payment of an old account which had been charged off as uncollectible some years ago.

In many cases notes payable have been issued with interest included in the face of the notes. Of this interest $290 is applicable to the succeeding period.

Provision for contingent royalties was begun two years ago in anticipation of an unfavorable decision in an action brought against us for infringement of patents. Recently the action was decided in our favor.

Legal expenses of $1,500 for prosecution of infringements of patents had been charged against profits at the close of the previous year. Of the present legal expenses, $100 was paid for services in protecting patents.

Inventories as at December 31, 1918:

Wrapping and Crating Supplies Unused$ 387.50
Factory Supplies on Hand718.50
Pamphlets, Price Lists, and Posters on Hand450.00
Workmen’s Compensation Insurance Prepaid  160.00
Bags in Stock12,542.00
Trunks in Stock28,050.00
Raw Materials8,000.00
Trunks in Process as under:
materials$6,497.10
direct labor$2,680.40
manufacturing expense $976.50

Fire Loss was debited for $6,000 which represents damage to buildings of $4,000 and loss of machinery of $2,000 after making due allowance for depreciation. Just after the trial balance was made a check for $5,400 was received from the insurance company in full settlement of our claims for fire damage.

The Repairs to Buildings account contains $3,500 of charges for replacing the parts destroyed by fire.

Provision for reserve for depreciation is to be made on a straight line basis, at the following yearly rate: buildings 5%; machinery 10%; delivery equipment 12%; furniture and fixtures 12%.

It was deemed advisable to write off 20% of the accounts of Tools, and Drawings and Patterns. Also, to reserve from profits $2,000 for supersession of patents in addition to providing for the reduction in the life of the patent.

Interest has accrued on bonds payable for one month, and there is accrued amortization.

Bright—Special account shows the balance due on Bright’s embezzlement. The company holds good collateral in the form of stock for the full amount.

Trunks in Process, October 31, 1917, comprised raw materials $3,115, direct labor $1,120, and factory burden $749.20.

The account, Freight and Express Outward, represented items charged to customers on account of outward freight charges assumed by us and still owing to the transportation companies.

It was ascertained that on Oct. 31, 1917, the patents had 164 months yet to run, and that the policy is to depreciate the value remaining at the end of each fiscal period over the remaining life of the patents.

Royal leather stock was being held because of trade advantages secured thereby.

Claims against transportation companies represented claims for damage acknowledged as good by the companies.

Instructions

In a footnote to the balance sheet call attention to the contingent value of donated land. Extreme conservatism might require the setting aside of a reserve of surplus covering any expenditures on the land, such as assessments for street improvements, inasmuch as the same contingency attaches to them as to the land. So long as a good balance of general surplus is maintained, a special reserve is not usually considered necessary.

Note that both the Contingent Royalty Fund and its reserve are free. Transfer the fund to general cash, and the reserve to surplus.

Note that the reserve for supersession of patents is a reserve created out of surplus and therefore to be treated as a part of net worth. This is, of course, contrary to best practice.

Fire Loss account, as it appears in the trial balance, has been properly charged with the values of the assets destroyed but has not yet been credited with the insurance. Consider carefully the proper booking of the repairs to buildings on account of the fire.

See Problem XXVI, Appendix A, for instructions as to content of condensed balance sheet. See also Problem XV, this Appendix.

XV

From the information furnished in the preceding problem.

Treat the surplus statement as a schedule supporting the balance sheet.

XVI

Some time ago the stockholders of the A. M. Strong Fiber Co. and the Randall Manufacturing Co. appointed committees on merger. At a joint meeting of the two committees a plan for merger of the two companies was adopted. The stockholders of the respective companies accepted the plan for the joint committee and instructed and authorized their boards of directors to carry out the terms of the merger. The agreement provided that a new corporation be formed to acquire the assets and assume the liabilities of the two companies as shown on their balance sheets of December 31, 1916, except as noted.

The subjoined balance sheets show the conditions of the two companies. The balance sheet of the Randall Co. has already been adjusted to meet the conditions of the merger. The agreement provided, however, that the machinery and tools of the Strong Co. should be taken over at a 10% reduction of their present book valuation; that the book value of the Special War Plant assets be written up $20,000 on account of their adaptability to the regular needs of the merger; and that the reserve for bad debts be increased to $5,000. The surplus, after these adjustments, was reduced to even multiples of $10,000.

A. M. Strong Fiber Co.
Balance Sheet, December 31, 1916

AssetsLiabilities and Capital
Machinery$ 60,000.00 Notes Payable$ 10,000.00
Tools4,000.00 Accounts Payable75,000.00
Furniture and Fixtures7,500.00 Reserve for Bad Debts3,000.00
Good-Will150,000.00 Depreciation Reserve
Raw Materials75,000.00 for Machinery7,000.00
Cash25,000.00 Depreciation Reserve
Notes Receivable47,500.00 for Furn. and Fixt.1,500.00
Accounts Receivable112,500.00 Depreciation Reserve
Special War Plant130,000.00 for War Plant50,000.00
Bonds Payable (6%)100,000.00
War Munition Bonds (7%)60,000.00
Reserve for Sinking Fund30,000.00
Capital Stock, Common150,000.00
Capital Stock, Preferred (6%)100,000.00
        Surplus  25,000.00
$611,500.00 $611,500.00

Randall Manufacturing Co.
Balance Sheet, December 31, 1916

AssetsLiabilities and Capital
Land$ 90,000.00 Accounts Payable$ 35,800.00
Machinery70,000.00 Notes Payable20,000.00
Tools10,000.00 Wages Payable2,000.00
Motor Trucks12,000.00 Interest Accrued1,000.00
Furniture and Fixtures3,000.00 Reserve for Bad Debts1,200.00
Patents60,000.00 Bonds Payable (5%)100,000.00
Raw Material14,000.00 Capital Stock, Preferred50,000.00
Goods in Process8,000.00 Capital Stock, Common100,000.00
Finished Goods19,000.00 Surplus40,000.00
Cash8,000.00
Notes Receivable16,000.00
Accounts Receivable   40,000.00        
$350,000.00 $350,000.00

To effect the reduction of the surplus of the Strong Co. to even multiples of $10,000, by consent of all the stockholders, a special dividend was declared to be shared by both common and preferred stockholders equally on the basis of their respective holdings; and it was further agreed that because the preferred stock carried a participation privilege and preference as to assets, in the distribution of the stock of the merger in payment of the respective interests of the present stockholders, the preferred holders should be considered as being entitled to a pro rata share of the adjusted surplus and good-will.

The net profits for the last period, after deduction therefrom of 8% interest on the respective capitals as adjusted by taking effect of the foregoing items, were capitalized in even thousands of dollars on a 20% basis, to determine the value of the good-will of the two companies; the good-will of the Strong Co. so determined to be in addition to its present good-will. It was ascertained that the net profits for the last period were: Strong Co. $41,750, Randall Co., $30,000.

To carry out the plan of the merger, the Sterling Trunk Corporation was organized with sufficient capital in 7% cumulative preferred stock and common stock to acquire the two other companies, and additional common—to remain unissued for the present—to bring the total capitalization to $750,000.

(a) Submit a statement showing the capitalization of the Sterling Trunk Corporation and the distribution of the capital stock to the other companies.

(b) Prepare the balance sheet of the Sterling Trunk Corporation as of December 31, 1916.

(c) Write the journal entries necessary to adjust the books of the A. M. Strong Fiber Co. and to show its sale and the transfer of its properties to the Sterling Trunk Corporation.

XVII

1. A fire partially destroyed the power plant and equipment of the Zehner Manufacturing Co. on the night of June 30, 1918, entailing a loss of $25,000 on the building, and a ⅔ loss on the equipment. Insurance for one year, with the 80% coinsurance clause, had been purchased January 1, 1918, for $1,775, covering the above property. The policies carried $40,000 on the power house and $100,000 on the power house equipment. On that date—January 1, 1918—the values of the power house and equipment as shown on the balance sheet were:

Power House$75,000.00
Less Depreciation Reserve 12,000.00$ 63,000.00
Power House Equipment$200,000.00
Less Depreciation Reserve 80,000.00120,000.00

Depreciation was estimated at the rate of 4% per annum on the power house, and 10% on the equipment.

The insurance company settled on the above basis.

Show the journal entries necessary to make all the adjustments in the accounts.

For the purpose of the problem assume that the rate on the power house was the same as on the equipment.

2. The Colorado Rock Drill Co. authorized the issue of $100,000 of 6% cumulative preferred stock callable by lot in amounts as follows:

The entire issue was sold for cash at 103.

Set up the accounts showing the handling of all redemption transactions at the five periods above referred to, with these additional facts: It is the expectation of the company to provide for a permanent increase in capital of $100,000, the amount of the preferred stock issue, during the life of the issue; and at the end of the 20 years, the company exercises its option by converting $30,000 of the preferred into common stock out of unissued common to that amount held in the treasury.

Instructions

XVIII

The Sterling Trunk Corporation, hoping to recoup excessive trade losses, engaged more extensively in the manufacture of war supplies. Instead of realizing the enormous anticipated profits, they sustained a severe loss through an explosion followed by a disastrous fire on August 1, 1918. The assets destroyed were only partially protected by insurance because of difficulty in getting a reasonable rate. Also some policies which had expired had not been renewed.

The following information was accepted by the insurance companies as a basis for settlement. Date of policies January 1, 1918.

(A)(B)(C)(D)(E)(F)(G)(H)
Buildings$110,000$10,500 5%$30,000$80,000$20080%
Machinery76,00014,00010%20,000¾ 150100%
Furniture & Fixtures4,7001,20012%4,00070%1080%
Patterns & Drawings 3,500 20% 1,500All None 60%
Finished Goods[83]16,400 80% of
selling
price		90% of
selling
price		12080%

(a) What is the effect of the coinsurance clause?

(b) Determine the amount of insurance received for each asset.

(c) Indicate, by means of journal entries, the effect on the various accounts involved in the settlement of the losses.

XIX

The European War caused a reduction in the income of the Trunk Company by an abrupt falling off of sales; also as a result of the rapid increase in materials several contracts were completed at a loss. These losses together with the unexpected loss by fire placed the company in an embarrassing financial condition. There was great pressure from bondholders because the interest for the last year had not been paid, and dissatisfaction among stockholders because dividends had been passed. Current debts could not be met and it was clearly evident that the business could not continue long in its present condition. To remedy this a meeting of the stockholders was called and a committee on reorganization appointed. The recommendations of the committee, which are given below, were put into effect on December 31, 1918.

The holders of the 6% bonds were given one share of new cumulative 7% preferred stock in payment of defaulted interest on each bond. The holders of the $100,000 of 5% bonds assumed for Randall Manufacturing Co. contributed in cash 5% of the amount of their bonds and received for each $1,000 bond a new $500 bond bearing 5% interest and $700 in non-cumulative 6% preferred stock. The holders of $60,000 7% war munitions bonds received for each $1,000 bond $600 in 6% preferred stock and $500 in common stock. The old cumulative preferred stockholders were given new non-cumulative preferred stock, share for share. The old common stockholders were given new common stock and were assessed $20 per share for which they were given new cumulative preferred stock.

(a) Determine the amount of cash, bonds and various classes of stock to carry into effect the reorganization.

(b) Present the journal entries necessary to record these data.

See Problem XVI for other necessary data. Assume all common stock outstanding. Par value of old issue bonds, $1,000; stock, $100.

XX

The Hillsdale Co. operates a factory and general sales organization from its main plant and conducts two branches, A and B, as distribution centers at conveniently located points. The branches maintain independent records which are subject to periodic audit by the head office. At the close of the fiscal period the branch trial balances are sent to, and incorporated with, the head office trial balance to determine the results of combined operation. Below are given the trial balances of the head office and branches with the data necessary to close the books and determine results. You are asked to present closing journal entries for Branch A and the entries necessary to incorporate the branch results with the head office and to close the head office books. Also present a consolidated balance sheet after closing.

Trial Balances, June 30, 1918

   Branch A       Branch B   
Cash$3,000.00 $ 1,000.00
Notes and Accounts Receivable70,000.00 50,000.00
Salaries15,000.00 5,000.00
Rent2,700.00 1,500.00
Other Expenses10,000.00 7,000.00
Sales $ 75,000.00 $ 48,500.00
Sundry Accounts Payable 5,000.00 7,200.00
Purchases from Head Office70,000.00 50,000.00
Head Office Merchandise 70,000.00 50,000.00
Head Office General          20,700.00          8,800.00
$170,700.00$170,700.00$114,500.00$114,500.00

Inventories, at billed price: Branch A $10,000, Branch B $5,000.

Create on the branch books reserves for doubtful accounts of 1% of the sales at each branch.

Head Office

Plant and Equipment$250,000.00
Depreciation Reserve Plant and Equipment $50,000.00
Cash25,000.00
Notes and Accounts Receivable100,000.00
Reserve for Doubtful Accounts 5,000.00
Merchandise Inventory, June 30, 191727,500.00
Notes and Accounts Payable 45,000.00
Purchases170,000.00
Sundry Expenses35,250.00
Depreciation12,500.00
Bad Debts1,125.00
Sales 225,000.00
Sales to Branches 120,000.00
Branch A, Merchandise70,000.00
Branch B, Merchandise50,000.00
Branch A, General20,700.00
Branch B, General8,800.00
Capital Stock 250,000.00
Surplus          75,875.00
$770,875.00$770,875.00
Head office inventory, $30,000.
Goods were billed to the branches at 150% of cost.

XXI

A New York company doing business in London, received the following trial balance from its London office at the end of a fiscal year:

Trial Balance—London Office

Plant£100,000
Accounts Receivable75,000
Accounts Payable £35,000
Expenses10,000
Income 100,000
Merchandise20,000
New York Office Account 135,000
Remittance Account60,000
Cash   5,000      
£270,000£270,000

The New York books showed as follows:

Trial Balance—New York Books

Capital Stock $1,000,000.00
Patents $600,000.00
London Office Account656,100.00
Remittance Account 291,712.50
Expenses10,000.00
Cash   25,612.50        
$1,291,712.50$1,291,712.50

The remittance account consisted of four 60-day drafts on London for £15,000 each, which were sold in New York at 4.85½, 4.86, 4.86½, and 4.86¾ respectively.

Make such journal entries as are necessary to incorporate with the New York accounts the results of the year’s business in London (conversion to be made at the average rate of exchange of the four remittances), and establish the new balance of the London office account so that it will agree with the London books when converted into sterling at 4.87¼, the rate of exchange ruling on the last day of the year. Show also trial balance of the New York books after closing.

XXII

Company A owns the entire capital stock of Companies B and C. The assets and liabilities of the respective companies are as follows:

Company A: cash $10,000; deferred charges $150; inventories $1,000; due from allied companies $25,000; notes receivable $15,000; petty cash $100; trade creditors $1,000; capital stock $100,000; surplus $5,250; notes payable $50,000; other investments $55,000; investments in allied companies $50,000.

Company B: trade debtors $10,000; cash $4,000; deferred charges $200; notes receivable $1,000; petty cash $500; inventories $8,000; land $10,000; buildings $25,000; equipment $20,000; surplus $1,000; dividends payable $500; due allied companies $30,000; notes payable $10,000; accrued liabilities $200; capital stock $25,000; trade creditors $12,000.

Company C: capital stock $30,000; notes payable $15,000; cash $2,000; trade creditors $4,000; notes receivable $1,000; petty cash $200; accrued expenses $100; trade debtors $3,500; allied companies $5,100; surplus $2,300; inventories $5,000; land $7,500; deferred charges $100; equipment $15,000; buildings $12,000.

Prepare consolidated balance sheet. Submit with your solution your working papers.

Criticize briefly (not to exceed 500 words) the condition of each company and state whether, in your opinion, the investments in allied companies are valued correctly.

XXIII

Jones & Robinson, merchants, are unable to meet their obligations. From their books and the testimony of the insolvent debtors, the following statement of their condition is ascertained:

Cash on Hand$ 5,500.00
Debtors ($1,000 good; $600 doubtful but
estimated to produce $200, $1,000 bad)2,600.00
Property (estimated to produce $9,000)14,000.00
Notes Receivable, Good4,250.00
Other Securities ($3,000 pledged with
partially secured creditors; the
remainder held by the fully
secured creditors)28,000.00
Jones, Drawings9,000.00
Jones, Capital10,000.00
Robinson, Drawings8,400.00
Robinson, Capital16,050.00
Sundry Losses13,500.00
Preferential Claims—Wages, Salaries, and Taxes700.00
Trade Expenses7,400.00
Creditors Unsecured25,000.00
Creditors Partially Secured23,900.00
Creditors Fully Secured17,000.00

Prepare a statement of affairs and deficiency account.

XXIV

Parker & Riley, being unable to meet their obligations, have made an assignment. You are asked to prepare a statement of affairs for presentation at a meeting of their creditors. Some of the creditors are entirely or partially secured, the security being a part of the assets. The following is a trial balance of their ledger at the date of the assignment:

Cash$ 1,200.00
Stock and Material (old inventory)12,000.00
Reliance Trust Co. Stock (20 shares at cost)2,200.00
Accounts Receivable10,550.00
Notes Receivable2,000.00
Mortgage Receivable (second mortgage)1,000.00
Real Estate (store building and lot)14,000.00
Fixtures1,700.00
Horses, Trucks, and Harness (asset account)1,400.00
Accounts Payable $ 28,000.00
Loans Payable 7,000.00
Mortgage on Real Estate 5,000.00
Purchases30,000.00
Sales 36,000.00
Rents 1,200.00
Salaries3,500.00
Interest and Discount960.00
Taxes Accrued 740.00
Insurance Unexpired500.00
General Expenses 4,130.00
Parker, Capital 8,000.00
Riley, Capital 4,000.00
Parker, Drawings 3,000.00
Riley, Drawings  1,800.00      
$89,940.00$89,940.00

The accounts receivable are classed as: good $8,000; doubtful $1,500 (estimated to produce $1,000); worthless, $1,050. Notes receivable will realize $1,800; the second mortgage is estimated to produce $800; the trust company shares $1,800; delivery equipment $900; fixtures $1,000; and real estate $12,500.

Of the accounts payable $20,000 is unsecured and $8,000 is secured by the second mortgage and trust company stock. The loans payable are secured by the equity in the real estate. The inventory of merchandise on hand which foots $5,000 is expected to realize $3,000. Other liabilities not booked are employees’ wages $550, and interest on mortgage $125. The unexpired insurance is expected to yield $150 upon redemption.

Draw up a statement of affairs and deficiency account.

XXV

The Metropolitan Book Co., a corporation, goes into voluntary liquidation and a trustee is appointed. The following is the trial balance of the company on July 1, 1918, the date when its affairs are turned over to the trustee.

Capital Stock $ 20,000.00
Cash$ 553.69
Office Furniture1,666.92
Meter Deposit60.00
Accounts Receivable26,153.95
Rogers & Co.
(moneys collected for their account) 14,738.00
Notes Payable 27,573.50
Accounts Payable 4,197.22
Purchases27,404.74
Sales 8,045.35
Expense10,751.97
Surplus  7,962.80      
$74,554.07$74,554.07

Value of merchandise on hand is $20,183.86, and the other assets are appraised at book value. The trustee’s cash receipts and disbursements are:

Dr.Cash Cr.
Balance taken over$ 553.69 Notes Paid$ 27,573.50
Meter Deposit60.00 Accounts Paid4,197.22
Office Furniture487.90 Merchandise Bought562.55
Accounts Receivable22,872.75 Expenses5,697.01
Additional Collections for Rogers & Co. (in full)16,703.24
Rogers & Co. (in full)1,965.24
Sales of Merchandise22,090.70
Commission from Rogers & Co. 6,703.24      
$54,733.52 $54,733.52

Accounts receivable not collected are worthless.

Prepare a realization and liquidation account in technical form.

XXVI

Messrs. Sharp and Green having given the firm’s notes to a friendly company as an accommodation, became embarrassed through failure of the payee and appointed a trustee to realize and liquidate. The following is a statement of their condition January 1, 1916:

AssetsLiabilities and Capital
Cash$ 500.00 Mortgage on Real Estate$ 5,000.00
Merchandise20,000.00 Mortgage Interest Accrued250.00
Real Estate25,000.00 Taxes Accrued375.00
Notes Receivable5,000.00 Accounts Payable (including
Accounts Receivable accommodation paper as contra)61,550.00
(including accommodated Notes Payable1,000.00
party $58,000)62,000.00 Henry Maxwell, Special Partner10,000.00
Samuel Green, Capital20,325.00
        James Sharp, Capital 14,000.00
$112,500.00 $112,500.00

The following is a memorandum of the trustee’s transactions for the year: purchases to complete contract orders $70,000; sales for the year for cash $108,000; uncollected accounts $2,000; stock of goods on hand December 31, 1916, $10,000; notes receivable collected at a loss of $600; accounts receivable collected $3,600, balance lost; received 75% in full settlement of accommodation notes and paid cash on account of same $48,000 giving renewal notes for $10,000. The legal fees and petty expenses paid on account of accommodation paper amounted to $2,400. The following payments were also made: mortgage, with interest, and one year’s accrued interest to December 31, 1916; all taxes, notes payable, and accounts payable; and clerk hire, wages, and other expense, including an allowance of $100 per month to each of the active partners, one year’s interest at 6% to Maxwell, interest on Green’s excess capital ($6,325) for one year at 6%, and trustee’s fee of $5,000—in all $10,000.

The special partner had a ¹/₁₀ interest and the general partners shared alike in the residue of the net profits.

On January 1, 1917, the estate was returned to the owners.

Prepare the trustee’s realization and liquidation account in technical form, supported by trustee’s cash account. Show a balance sheet of the estate as turned back to the partners, and set up the partners’ accounts.

XXVII

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%, 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 X dies. The books are closed and the net assets ascertained to be $152,500. Z and Y liquidate the firm’s affairs and distribute the surplus assets quarterly as follows:

First quarter$42,410.20
Second quarter74,622.30
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. Give your authorities.

XXVIII

Use the following instructions as a guide in preparing a special report on a business with which you are familiar, either by experience or through investigation.

(a) Write a short history of the business, giving:

(b) Submit:

(c) Prepare:

1. A list of the different books and blanks used to record the financial transactions.

2. A sample page or blank or a copy of each item listed under 1.

Note: If the copy should require a great deal of space, simply give the form of ruling, headings, and size of page.

(d) Write one or two typical entries in each book and show the form of closing in actual use.

(e) As a separate problem:

1. Outline the course of an article from the time the order is placed until the goods reach you. This would be a purchase department record.

2. Outline the course of an article from the time you receive the order until the goods reach your customer. This would be a sales department record.

Note: For both 1 and 2 attach actual forms used or copy of same, if possible.

(f) Information in regard to:

(g) Give:

1. Adverse criticism of any department or part of same which you know from actual experience does not work out as it should.

2. Your opinion as to the cause.

(h) Constructive criticism of any department or part of same which you think would make it more effective or less expensive if conducted according to your plan.

(i) Anything peculiar to your business which has not been included in any of the previous divisions.

APPENDIX C
MISCELLANEOUS PROBLEMS
FOR SUPPLEMENTARY WORK[84]