Sinking Fund
28. A corporation issues 10-year bonds to the amount of $50,000, securing same by a mortgage on its property, which is placed in the hands of a trust company.
The trust deed provides for the establishment of a sinking fund to retire the bonds at maturity and that equal annual payments be made on the first of January in each year. Give the amount of this annual payment, interest compounded at 6%.
29. The United Manufacturing Co., on January 1, 1918, placed in service a piece of machinery which would depreciate, according to its chief engineer, at the rate of 15% per annum. The original cost of this machinery was $84,000 and the board of directors agreed to set aside annually a sinking fund which, together with interest thereon, will amount to the original cost at the end of the prospective life of the machinery.
This sinking fund is to be deposited with a trust company on December 31 of each year, and a proportionate amount at the end of the last partial year of the life of the machine. Interest is to be credited by the trust company at each of these dates at the rate of 4% per annum.
Show how the amount of the annual sinking fund payments may be arrived at, and prepare a detailed statement for the board of directors proving that the amount so obtained is correct.
Consolidations, Mergers,
and Reorganizations
30. Three manufacturers, each having an independent business and wishing to effect a consolidation of their respective interests, organize the United States Manufacturing Corporation, with an authorized capital stock of $1,500,000, consisting of 7,500 shares of preferred stock and 7,500 shares of common stock, of $100 each. They sell to the new company all of their real estate, buildings, machinery, tools, fixtures, merchandise, and supplies, in consideration of $1,500,000, and agree to accept in payment $750,000 of preferred and $750,000 of common stock of the United States Manufacturing Corporation at par. The vendors donate to the treasury of the company $150,000 of preferred stock and $150,000 of common stock to provide for working capital. The company sells $100,000 of its preferred stock in the treasury for 80% cash, giving a bonus to the purchaser of 20% in common stock.
For the purpose of raising additional funds for improvements and additions to plants, the company mortgages its real estate and buildings, as security for an issue of bonds amounting to $250,000. These bonds the company sells to bankers at 90%, giving as a bonus 10% of preferred stock and 20% of common stock.
Draft entries to express correctly the above transaction on the books of the corporation, and prepare a statement of assets and liabilities of the company.
31. It is proposed to organize a corporation for the purpose of acquiring the stock and controlling three existing corporations, A, B, and C, two of which latter, A and B, have been in operation for five and three years, respectively, while C has been newly organized. The assets and liabilities of the several existing companies and the dividends paid are as follows:
| Assets | |||
| A | B | C | |
| Plant | $400,000.00 | $300,000.00 | |
| Material | 295,000.00 | 425,000.00 | |
| Cash | 40,000.00 | 15,000.00 | $500,000.00 |
| $735,000.00 | $740,000.00 | $500,000.00 | |
| Liabilities | |||
| A | B | C | |
| Capital | $100,000.00 | $300,000.00 | $500,000.00 |
| Surplus | 60,000.00 | 40,000.00 | |
| 6% Bond at 5 years | 500,000.00 | 300,000.00 | |
| Current Liabilities | 75,000.00 | 100,000.00 | |
| $735,000.00 | $740,000.00 | $500,000.00 | |
| Dividends Paid | |||
| $120,000.00 | $30,000.00 | ||
For the purpose of the issuance of stock in the new company to the holders of stock in the three existing companies, it is proposed to capitalize the latter upon the following basis:
Money assets at double their value; plant at 80% of book values; material at 70% of book values; annual net earnings at 8%; and the liabilities at par.
The new company will be organized with a capital stock of $2,200,000, all of which is to be used in acquiring the stock of the existing companies.
(a) What amount of stock in the new company are the owners of the stock in each of the existing companies entitled to receive?
(b) Give a short criticism attacking the above basis of stock allotment and submit a more equitable basis.
32. The Smith Brewing Co. with $1,000,000 capital stock, the Young Brewing Co. with $500,000 capital stock, and the Star Brewery with $400,000 capital stock, agree to consolidate as the Universal Brewing Corporation, the new company to buy all the properties of the old companies at a valuation to be fixed by appraisal, payment therefor to be made in full-paid stock of the new company, the old companies to pay off their own indebtedness.
The appraised values of the old companies are as follows:
| Real Estate and Buildings | Plant | Cash | Bills Receivable | Horses, Wagons and Harness | Office Furniture | Total | |
|---|---|---|---|---|---|---|---|
| Smith | $680,000 | $390,000 | $15,000 | $10,000 | $4,000 | $1,000 | $1,100,000 |
| Young | 327,000 | 160,000 | 3,000 | 6,000 | 3,000 | 1,000 | 500,000 |
| Star | 126,000 | 71,000 | 1,000 | 1,500 | 500 | 200,000 | |
| Total Appraised Value | $1,800,000 | ||||||
On this valuation, the Universal Brewing Corporation issued $2,000,000 of stock, shares $100 each, which was divided pro rata among the old companies on the basis of their appraised value, no fractional shares of stock to be issued, odd amounts to be paid old companies in cash.
Give journal entries necessary to set up property accounts and credit old companies with their pro rata on books of the new company.
At the time of the consolidation the ledger accounts of the Star Brewery were as follows:
| Real Estate and Buildings | $250,000.00 | Capital Stock | $400,000.00 |
| Plant | 247,000.00 | Bills Payable | 50,000.00 |
| Cash | 1,000.00 | Accounts Payable | 51,000.00 |
| Horses, Wagons, and Harness | 1,800.00 | ||
| Office Furniture | 1,200.00 | ||
| $501,000.00 | $501,000.00 | ||
Make the proper journal entries to liquidate in stock of the new company the liabilities other than capital stock, to apportion the remaining stock and cash, and to close the books of the Star Brewery.
33. The Elton Manufacturing Co. and the Star Manufacturing Co. were engaged in manufacturing the same kind of goods. To avoid the losses due to competition, the two companies decided to combine their plants into one corporation under the name of the Union Manufacturing Co. and finally agreed upon the following plan for the merger:
The assets received from, and the liabilities assumed for, the separate companies were taken at the values given in the respective balance sheets, subject to the following adjustments: the buildings, machinery, and patents at 90% of their stated value; delivery equipment, and furniture and fixtures at 80% of their value. A reserve of 2% on accounts receivable was established by the Star Manufacturing Co.
Elton Manufacturing Co.
Balance Sheet, June 30, 1918
| Land | $10,000.00 | Accounts Payable | $ 30,000.00 |
| Buildings | 60,000.00 | Mortgage Payable | 14,000.00 |
| Machinery and Tools | 30,000.00 | Accrued Wages | 1,500.00 |
| Delivery Equipment | 3,500.00 | Reserve for Bad Debts | 1,500.00 |
| Furniture and Fixtures | 1,500.00 | Stock, Capital | 100,000.00 |
| Inventory, Materials | 10,000.00 | Surplus | 10,000.00 |
| Finished Goods | 2,500.00 | ||
| Accounts Receivable | 35,000.00 | ||
| Unexpired Insurance | 500.00 | ||
| Cash | 4,000.00 | ||
| $157,000.00 | $157,000.00 | ||
Star Manufacturing Co.
Balance Sheet, June 30, 1918
| Machinery and Tools | $35,000.00 | Accounts Payable | $30,000.00 |
| Motor Trucks | 4,000.00 | Notes Payable | 19,000.00 |
| Patents | 6,000.00 | Capital Stock | 50,000.00 |
| Furniture and Fixtures | 500.00 | Surplus | 11,000.00 |
| Inventory, Materials, etc. | 8,000.00 | ||
| Finished Goods | 5,000.00 | ||
| Accounts Receivable | 50,000.00 | ||
| Cash | 1,500.00 | ||
| $110,000.00 | $110,000.00 | ||
After making the adjustments and allowing interest at 6% on the invested capital, the excess earnings were capitalized on a basis of 10% to obtain the amount of the good-will.
Average net profits for a period of three years: Elton Manufacturing Co. $17,000; Star Manufacturing Co. $10,800.
The Union Manufacturing Co. was capitalized at an amount equal to the net assets (after adjustments) and the good-will of the two merged companies.
(a) Find the capitalization of the Union Manufacturing Co. and the amount of preferred and common stock allotted to each of the merged companies.
(b) Write the journal entries to open the books of the Union Manufacturing Co.
(c) Prepare the balance sheet for the Union Manufacturing Co.
(d) Write the closing journal entries for the Star Manufacturing Co.
34. The following is abstracted from an agreement of merger and consolidation made December 31, 1917, between the Pennsylvania Tool Co., party of the first part, and the Keystone Tool Co., party of the second part. Said parties of both parts being corporations duly organized and existing under the laws of the State of Pennsylvania, by this agreement merge and consolidate into a single corporation.
The name of the corporation hereby formed by said consolidation shall be the Pennsylvania Tool Co.
The amount of capital stock of the new corporation is $100,000, all of which shall be common stock divided into 1,000 shares of a par value of $100. The manner of distributing capital stock shall be as follows:
The capital stock of the Pennsylvania Tool Co., party of the first part, shall be exchangeable for capital stock of the new corporation, share for share, and the balance of the capital stock of the new corporation hereby formed shall be distributed to the stockholders of the Keystone Tool Co., in proportion to their present holdings.
The Pennsylvania Tool Co., party of the first part, was incorporated shortly before the date of the merger, and had transacted no business other than the issuance of ten shares of capital stock, $100 each, for which payment of $1,000 had been received, and which was on hand in the treasury of the company on the date of the merger, and directly after the merger transferred to the bank deposit account of the consolidated company and credited to an account called “Suspense.”
The Keystone Tool Co. had for a number of years been actively engaged in business. Its fiscal year ended September 30, 1917, at which time an inventory was taken and its accounts had been properly closed. At the date of the merger the following trial balance was drawn from the books:
| Cash | $ 20,000.00 | |
| Accounts Receivable | 15,000.00 | |
| Merchandise Inventory, September 30, 1917 | 130,000.00 | |
| Merchandise Purchased | 250,000.00 | |
| Expenses | 25,000.00 | |
| Accounts Payable | $ 10,000.00 | |
| Sales | 300,000.00 | |
| Capital Stock | 30,000.00 | |
| Undivided Profits Balance, September 30, 1917 | 100,000.00 | |
| $440,000.00 | $440,000.00 |
The account books of this concern were not closed at the date of the merger and no inventory was taken, although the exchange of capital stock was effected and also all business after December 31, 1917, was transacted under the name of the Pennsylvania Tool Co., and it was not until March 31, 1918, that an accountant was asked to state the accounts of the new company from the date of the consolidation.
At March 31, 1918, before the accountant had commenced his work, an inventory was taken which showed the value of merchandise on hand as at that date, to be $216,250, and the following trial balance was abstracted from the books:
Trial Balance, March 31, 1918
| Cash | $ 26,000.00 | |
| Accounts Receivable | 10,000.00 | |
| Merchandise Inventory, September 30, 1917 | 130,000.00 | |
| Merchandise Purchased | 600,000.00 | |
| Expenses | 60,000.00 | |
| Accounts Payable | $ 10,000.00 | |
| Sales | 685,000.00 | |
| Suspense | 1,000.00 | |
| Capital Stock | 30,000.00 | |
| Undivided Profits | 100,000.00 | |
| $826,000.00 | $826,000.00 |
Prepare:
(a) Balance sheet of the consolidated company as at March 31, 1918.
(b) Profit and loss account arranged to show the profits of the consolidated company for the three months ended March 31.
(c) Profit and loss account of the Keystone Tool Co., for the three months ended December 31.
(d) Statement showing the disposition of profits taken over by the new company.
(e) State what basis you make use of in determining the approximate value of merchandise on hand at December 31.