ACCOUNTS AND REPORTS OF RECEIVERS AND TRUSTEES
Appointment of Assignee or Receiver
A condition of bankruptcy does not necessarily exist in order to
secure the appointment of an officer of the court or a representative
of a business for the purpose of taking possession and disposing of
the property and applying the proceeds to the liquidation of some or
all of the debts. The titles given to the various capacities of the
representative of the business or the court are assignee, receiver,
and trustee. An assignee is a party to whom the owner of a business
makes a general assignment of his business, usually for the benefit of
his creditors. The owner is usually bankrupt or verging on bankruptcy
at such a time. The assignee becomes a representative of the owner,
appointed by him, and to that extent the owner is able to regulate
the distribution of his estate. As a usual thing the creditors must
consent to the appointment of the assignee if the estate is to be
liquidated and distributed under his control. If such consent is not
given or if the appointment of the assignee and his conduct of the
liquidation prove unsatisfactory, it is possible for certain creditors
to bring bankruptcy proceedings against the owner and secure the
settlement of the estate under bankruptcy procedure. It is usually
held, however, that no creditor who has given active approval of the
liquidation under assignment can become a party to an application in
bankruptcy. The procedure of the assignee in winding up the affairs
of the owner does not differ in any essential respect, so far as the
accounting is concerned, from that of the receiver or trustee. The
accounting features, therefore, will be treated under the later heads
of “Receiver” and “Trustee.”
If everything is satisfactory to both parties, a complete settlement
of the estate will be effected by the assignee and the affairs of the
owner will thus be wound up. In case of dissatisfaction, or in the
absence of a general assignment in favor of creditors, proceedings in
bankruptcy may be brought against the owner. As was pointed out in
Chapter XXVIII, a receiver as an agent of the court may act in two
capacities, he may be either a receiver in bankruptcy or a receiver in
equity.
The receiver in bankruptcy takes possession of all the property of
the bankrupt with the expectation of its ultimate disposal and the
application of the amounts realized therefrom to the liquidation of
the debts of the bankrupt. The receiver in equity, however, usually
comes into possession of only a part of the property, which he is
to use in whatever way seems best for the liquidation of the more
pressing current claims of creditors. In this latter case a condition
of insolvency cannot be said to exist because usually the assets exceed
the liabilities. Simply because the management has allowed the current
assets to become tied up in a more or less unrealizable form which
is inapplicable to payment of liabilities, the business finds itself
in difficulty. It becomes necessary temporarily to turn the property
over to a representative of the owner and his creditors in order to
satisfy their claims and at the same time to preserve the property
from needless dissipation until such time as a satisfactory settlement
with creditors can be made and the business placed on a sound footing
once again. In case, however, a condition of insolvency exists, i.e.,
a condition in which the liabilities exceed the assets, a receiver
in bankruptcy may be appointed by the court upon application of the
creditors or at the request of the owner.
Appointment of Trustee
If the owner makes a voluntary application for settlement in bankruptcy
there is usually no need to appoint a receiver. The creditors may come
together almost immediately and elect a trustee who takes charge of
the property and applies it to settlement with the creditors. If the
bankruptcy is involuntary, it is frequently necessary for the court to
appoint a receiver to whom the property of the proposed bankrupt is
turned over for safe-keeping until the exact status of the owner can be
determined and a trustee appointed. The primary duty of the receiver
and the purpose of his appointment is to prevent the dissipation of the
owner’s property and to maintain its integrity, thus insuring its full
application to the claims of creditors. Hence, whether the procedure
is one in voluntary or in involuntary bankruptcy, the receiver may be
appointed if the court deems that the conditions so warrant. A receiver
will almost always be appointed in case any of the properties of the
proposed bankrupt are of a perishable nature and must be disposed
of immediately to secure any return from them. In the absence of a
receiver, sometimes the marshal in bankruptcy is called upon to take
possession of the property and preserve it.
The receiver holds the property until the first meeting of the
creditors which must be called by the court within 30 days after
the owner has been adjudged a bankrupt by the court. Creditors are
entitled to 10 days’ notice of the meeting in order to make their
plans to attend. The chief business of this first meeting of creditors
is the appointment of a trustee who takes over the property from the
receiver in case one has been appointed, or from the bankrupt in the
absence of the intermediary receiver. It is the duty of the trustee to
take charge of the entire property, to turn it into cash as quickly
and advantageously as possible, and to apply the proceeds to the
liquidation of all claims against it.
It is purposed now to discuss some of the accounting phases of the
receiver’s and trustee’s activities and to present also some more or
less academic theories with regard to such accounting.
Accounts and Reports of a Receiver in Equity
When a receiver in equity is appointed by the court, he is entrusted
with property for a specific purpose and must render a full accounting
of his stewardship. It becomes necessary, therefore, for him to keep
full record of all his activities. In simple situations where his
activities are not complex, the keeping of a record of cash receipts
and disbursements is sometimes deemed all that is required. Usually,
however, it is much better for the receiver to keep a complete set
of books showing the detail of his operation of the business, thus
enabling him to furnish any desired information. The receiver generally
acts under the somewhat specific orders of the court and must be
careful to follow out those instructions in all matters. The opening
up of the accounts of the receiver will depend somewhat on the court’s
order specifying the property to be taken over.
It frequently happens that only a portion of the property passes
into the possession and control of the receiver. As a usual thing he
does not take onto his records the liabilities of the corporation
incurred prior to his appointment, although he may be ordered by the
court to pay those liabilities or some portion of them. His books
will show, however, the liabilities incurred by him in his conduct
of the business. Sometimes this requires a nice distinction and care
must be exercised in making it—as in the case of goods ordered prior
to the appointment of the receiver but not received until after his
appointment. At the time the receiver takes over the properties, an
account is opened with him on the books of the corporation, in which
he is charged with all properties turned over to him and credited with
all valuation reserves applicable to those properties. But, as stated
above, no credit for liabilities is entered. The offsetting entries
to the receiver’s account are credits and debits respectively to the
accounts of the assets taken over and the valuation reserve accounts.
On the books of the receiver these entries are reversed, i.e., the
various asset accounts will be charged and their valuation reserves
credited and a credit will be made to the corporation in receivership
for the net values taken over. In case he is required by the order of
the court to pay any of the prior liabilities of the corporation, the
entry for such becomes a debit to an account called Debts Paid for the
Corporation, or other similar title, and a credit to his cash.
In keeping account of the regular operations of the receiver, nothing
new in principle is met. The receiver must at all times be careful
to keep distinct all payments on his own account from those for the
corporation. Similarly, he must keep separate the expenses which are
incurred by him and those which belong to the corporation but which
he pays. It is held, for instance, that the interest charges on the
corporation’s obligations are not an operating expense of the receiver
although he may be ordered by the court to pay them. Some of his duties
will more than likely be to realize partly or fully on some of the
assets turned over to him, in addition to the regular trading assets
with which he conducts most of the business. These are accounted for
on his books just as they would be on the books of the corporation.
In a similar way any liabilities liquidated, record of which appears
on his books, will be shown canceled in the usual way. As mentioned
above, care must be exercised to keep his liabilities separate from
those of the corporation. In the payment of liabilities the question of
priority often arises. He must be careful in passing on their priority
and he may have to secure the instructions of the court before settling
the matter. This will be true particularly with regard to receiver’s
certificates, the court usually determining at the time of their
issue their relative priority as compared with the other liabilities.
On the books of the receiver certain expenses will appear which are
peculiar to the receivership. These include such items as lawyers’ and
accountants’ fees, bonding company costs, etc., and are, of course, to
be treated as his expenses. He should close his books periodically, and
so far as possible the period of closing should correspond with the
regular fiscal period of the corporation for the sake of preserving the
continuity of the records for purposes of comparison.
Reports to the Court
The receiver must make periodic reports to the court—the first report
to be made shortly after the assumption of his duties. In it he
presents schedules or inventories of the properties taken over. If
some of these are mortgaged or have other liens on them, the facts
should be indicated. At the same time schedules of the corporation’s
creditors should be drawn up, grouped under the heads of preferential,
secured, unsecured, and contingent. In the preferential group appear
those claims against the corporation which are given preference by law,
such as taxes due the state, wages due workmen, mechanics’ liens, etc.
In the secured group appear the claims of creditors who hold property
as partial or full security for their claims. In the unsecured group
appear all claims not secured; while in the contingent group appear the
usual items of contingent liability such as were discussed in Chapter
XIX.
Subsequent reports will be made to the court at its will or at least
once yearly. No standardized form is followed in the submission of
these reports, the attorney’s wishes usually governing. The report is
designed for the purpose of apprising the court of the progress of the
receiver’s administration and should cover such items as the assets
realized during the period since the last report, the liabilities
liquidated, and the results of the operation of the properties held
by the receiver. A convenient form for the showing of this report is
that known as the “charge and discharge” form. Under it the receiver
is shown charged with certain items of property and income received,
and discharged with liabilities paid and other similar items. Whatever
variations from this form are needed to meet particular conditions,
these should be incorporated. The report may follow somewhat the order
of the items shown below.
“The receiver charges himself with:
1. The assets at the date of the receivership (or at the
date of the last report), exclusive of permanent or
fixed assets.
2. Additions to such assets since discovered.
3. Increments upon realization of such assets.
4. Amounts realized from the sale of permanent or
fixed assets.
5. Amounts realized from the sale of receiver’s certificates.
6. Increases in the amount of receiver’s liabilities.
7. Gross income from the operation of the property.
“The receiver credits himself with:
1. Preferred or other liabilities of the company paid.
2. Decreases in the assets stated as taken over at the
date of the receivership.
3. Losses on realization of such assets.
4. Expenditures on permanent or fixed assets.
5. Receiver’s certificates repaid.
6. Decreases in the amount of receiver’s liabilities.
7. Interest charges paid.
8. Expenses of operation of the property.
9. Receivership expenses.
10. The assets at the close of the period covered by the
report, exclusive of permanent or fixed assets.”[75]
[75] From a paper by Herbert C. Freeman, entitled “Accounting for
Receivership,” presented at the annual meeting of the American
Institute of Accountants at Washington, D. C., 1917.
This report may well be supported by a comparative balance sheet
showing the condition at the time of the previous report and now. A
profit and loss account to show the operations of the receiver is also
helpful. A summary of all cash transactions may be included.
In a final report to the court a summary should be presented of all the
operations since the beginning of the receiver’s control. This will,
of course, show whatever property is turned back to the corporation.
Upon the close of the receivership the receiver’s books may be closed
up by crediting the accounts of the various assets which are turned
back to the corporation, charging the corporation’s account which
was originally set up at the time the property was taken over by the
receiver and through which adjustments of the values of the assets have
been made at the time of sale or otherwise. An important thing to keep
in mind in connection with all accounts and reports of the receiver is
the necessity for making full and adequate explanations of all entries,
giving the authority for them and their source.
ACCOUNTS AND REPORTS IN BANKRUPTCY PROCEEDINGS
Initial Statements Presented to the Court
In the case of a voluntary bankrupt, as was stated in Chapter
XXVIII, at the time of the petition to the court a schedule must be
presented of all the property owned by the bankrupt and a list of his
creditors giving the address, if known, the amount of the claim, the
consideration, and the security held, if any. If the bankrupt makes any
claim for exemption of any properties, that claim should be presented
at this time. These schedules must follow the forms prescribed by the
court. In the case of an involuntary bankrupt, these various schedules
will, of course, not be available at the time the petition is made,
inasmuch as the condition of the proposed bankrupt is undetermined; the
amounts of his assets and of his liabilities are unknown. It becomes
necessary, therefore, to examine him in the presence of the court for
the purpose of securing a statement of all property owned and of all
claims against it. This information, as elicited by court examination,
becomes the basis for the receiver’s and trustee’s records. If a
receiver is appointed by the court and remains in possession of the
property for any length of time, it will be necessary for him to
present periodic reports to show the condition of the property at
various times and a statement of his operations. The reports which
he will make will be similar to those which a trustee would make had
he been appointed immediately; therefore, the matter of reports and
accounts for both the receiver and the trustee can be treated together.
Reports and Accounts of Receiver or Trustee
The law provides that the trustee must keep regular accounts showing
all amounts received and the sources from which received, and all
amounts expended and on what account such expenditures were made.
This would seem to imply merely the keeping of a record of the cash
received and expended. The trustee, however, is looked upon both as
the representative of the bankrupt, as custodian of his property, and
as the representative of the creditors for the purpose of liquidating
their claims. Immediately upon assuming office he must make, or
cause to be made, a complete inventory of all property coming into
his possession. In valuing this inventory all real and personal
property belonging to the bankrupt’s estate must be appraised by three
disinterested appraisers appointed by the court. The trustee must make
a written report to the court of the condition of the estate, as to the
amount of money on hand and any other details demanded by the court,
within the first month after his appointment, and bimonthly thereafter
unless otherwise ordered by the court. His final report must be made 15
days before the final meeting of the creditors is called by the court.
In disposing of the property of the bankrupt, provision is made that
without court order the trustee cannot sell any of the property for
less than 75% of the value at which it was appraised by the court’s
appraisers. The right of set-off is allowed, i.e., if the bankrupt
has a claim against any of his creditors, the amount of the claim is
canceled dollar for dollar against the creditor’s claim and only the
balance of the claim is to be prorated on the same basis as the other
creditors.
The trustee must keep a careful record of all properties disposed of
by him and of all liabilities liquidated. What constitutes a careful
record will depend largely on the circumstances in each case. Sometimes
merely a record of cash received and disbursed will fulfill all
requirements. In other cases it may be necessary to keep a full set
of books in order properly to secure the information needed in the
accounting to the court and the creditors. All reports made should be
narrative in form rather than consisting only of formal schedules and
accounts. A straightforward statement of all the activities of the
trustee, supported by schedules in order to show summarized results, is
the desideratum.
Liquidating Dividends
Whenever the cash in the hands of the trustee is sufficient to pay
the claims of preference creditors and a 5% dividend to the unsecured
creditors, a dividend must be declared. The declaration of the dividend
is placed in the hands of the referee in bankruptcy who is a direct
representative of the court in most bankruptcy matters. The trustee
must pay the dividend within 10 days after its declaration by the
referee who prepares and delivers to the trustee dividend sheets
showing the dividend declared and the parties to whom payable. All
dividend checks drawn by the trustee must be countersigned by the
referee.
Relative Standing of the Creditors
In connection with the creditors of a receiver in equity a statement
was made above of the various classes of creditors whose claims are to
be satisfied. These consist of preference creditors, secured creditors,
and unsecured creditors. The trustee in making his liquidating
dividends will pay first those creditors who are given preference by
law. Within the preference class the order of priority of claims is as
follows:
1. Taxes due the government, the state, or the municipality.
2. The actual costs incurred by the trustee or receiver
in the preservation of the estate subsequent to
time of filing the petition in bankruptcy.
3. The filing fees paid by creditors in the case of
a petition in involuntary bankruptcy.
4. The costs of administration by the trustee.
5. The wages due workmen, clerks, servants, etc.,
earned within three months prior to the date
of commencement of proceedings—not exceeding
$300 to each claimant.
6. Debts owing to any person who, by federal or state
law, is entitled to priority. In the State of
Pennsylvania claims on account of rent are
frequently entitled to this kind of priority.
Creditors who are fully secured rest their claims against the security
held by them and not against the trustee. Any surplus realized on the
property held must be turned over to the trustee for the benefit of
unsecured creditors. The general rule in the case of a lien is that the
remedy against the property must be exhausted first before any creditor
may share with the unsecured creditors. When all the property has been
realized upon and all the cash which has come into the hands of the
trustee has been disbursed in satisfaction of the claims of the various
creditors, the trustee’s duties are at an end and his records may be
closed up.
Statement of Affairs
While having no legal status in this country, the statement of affairs,
as it is called, is used to serve certain purposes in connection
with matters in insolvency proceedings. Under the English bankruptcy
laws such a statement is required of every insolvent debtor. Its
complementary schedule, known as the deficiency account, is also
required. In this country the chief significance of these two forms
of statement is found in the examinations set by the various state
boards of certified public accountants. They may, however, serve some
additional purposes, chief of which are the following:
1. To show whether a receiver in equity should be
appointed to manage the affairs of the business.
2. To show whether the creditors should advance
funds in order to allow the business to continue,
and perhaps in this way be able to meet its
debts in full.
3. To show whether bankruptcy should be forced.
4. It may prove a valuable method of showing the
exact condition of affairs to an incoming partner
or investor.
The statement of affairs presents lists of all assets at their book
values and also at the values which they might fairly be expected
to realize upon a forced sale. Against this showing of the assets,
an analysis is set up of all the claims against the business by its
outside creditors on the basis of the various classes of creditors
referred to above, namely, preference creditors, fully secured
creditors, partially secured creditors, and unsecured creditors. Such
a statement gives information in such form that it can be used for
the purposes enumerated above. There are two forms of presenting this
information. In the one the liabilities are shown on the left-hand side
and the assets on the right-hand side, as is the case with the English
form of balance sheet. The reason sometimes given for this is either
that it is analogous to the English form of balance sheet or that in
such a case the liabilities may be expected to exceed the assets and
are therefore of prime importance. In the other form the assets are
shown on the left and the liabilities on the right, as in the usual
form of balance sheet. This latter form is the one shown here. The
statement of affairs thus ties together the values shown on the balance
sheet as taken from the books, with a fair estimate of the values which
may be realized, and so indicates the shrinkage in value expected by
forced realization of the assets.
Basis of Valuations in Statement of Affairs
The basis for the estimate of valuations is the same as in the case
of bankruptcy proceedings where appraisers are appointed to determine
the value of properties. Here, however, the matter is not under court
control and the best appraisal possible must be made by the parties
concerned, although if proceedings have progressed to the point where
the appraisers’ report is available, these values may be incorporated.
The order of marshalling the assets and liabilities in the statement is
not standardized although it would seem best to follow the customary
balance sheet order for the assets, running perhaps from the most
liquid to the fixed. With the liabilities, those entirely unsecured may
be shown first, followed by the partly secured, the fully secured, and
the preferred creditors. A comparison of the total values expected to
be realized from the sale of the assets with the total of the unsecured
creditors gives some indication of the share which each creditor in the
unsecured class may expect to receive. The student is referred to the
type solution and form shown on pages 635-638.
STATEMENT OF AFFAIRS
------+----------------------------------+------+--------+----------
Book | | |Expected| Expect’d
Values| _Assets_ |Items | to | Loss on
| | | Realize|Realizat’n
------+----------------------------------+------+--------+----------
|Cash | | |
|Notes Receivable (see Schedule 1) | | |
|Accounts Receivable | | |
| (see Schedule 2) | | |
| Good |$.....| |
| Doubtful | .....| |
| Bad | .....| |
| |======| |
|Merchandise | | |
|Securities on Hand | | |
| (see Schedule 3) | | |
|Securities Pledged with Creditors:| | |
| Partly Secured |$.....| |
| Fully Secured | .....| |
| |------| |
| Deducted contra | | |
| |======| |
|Excess of Pledged Securities over | | |
| Claims of Creditors Fully | | |
| Secured (see contra) | | |
|Other Properties (see Schedule 4) | |--------|
| Total Unpledged Assets | |$ ......|
|Less Preferential Claims | | |
| (see contra) | | ......|
| | |--------|
|Net Free Assets for Unsecured | |$ |
| Claims | | |
|Deficiency (see Deficiency | | |
| Account) | | |
------| | |--------|----------
| | | |
======| +======+========+==========
------+-----------------------------------+--------+---------
Book | _Liabilities_ | Items |Expected
Values| | |to Rank
------+-----------------------------------+--------+---------
|Creditors Unsecured | |
| (see Schedule 5) | |$......
|Creditors Partly Secured | |
| (see Schedule 6) |$...... |
| Less Securities Held (see contra)| ...... |
| |--------|
| Portion Unsecured | | ......
| Creditors Fully Secured | |
| (see Schedule 7) |$...... |
| Less Securities Held | ...... |
| |--------|
| Excess Carried contra |$...... |
| |========|
|Contingent Liabilities | |
| (see Schedule 8) | |
|Preferential Creditors | |
| (see Schedule 9): | |
| Deducted contra | ...... |
| |========|
|Capital | |
|Surplus | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |---------
| | |
=====| |========|=========
Deficiency Account
It is customary to support the statement of affairs by a deficiency
account, which bears somewhat the same relation to the statement
of affairs that the profit and loss account does to the balance
sheet, i.e., it is a statement of the expected losses incurred upon
realization of the assets and must prove against the losses or
deficiency as shown by the statement of affairs. Sometimes on the asset
side of the statement of affairs a third column is shown in which is
indicated in detail the expected loss on realization for each asset.
Where this is done the information which makes up the deficiency
account is readily available. On the debit side of the deficiency
account appears such items as losses on trading, shrinkages in value
of the assets, and, if a partnership, withdrawals of capital. On the
credit side appear the capital as shown by the books. The difference
between the two sides is the amount of deficiency as shown by the
statement of affairs. It may sometimes happen that the assets will
realize more than enough to meet the claims of all creditors, leaving
a remainder to be distributed among the owners. Where such is the case
the deficiency account, instead of being technically described as such,
is sometimes called an impairment of capital account—carrying, however,
essentially the same information. The balance of the account is on the
opposite side and indicates the present capital as impaired by the
losses incurred. The skeleton form on page 633 and that given below
show the way in which the various items may be presented.
DEFICIENCY ACCOUNT
=================================+==================================
Detailed Shrinkage in | Appreciation in Values as
Values as per Statement | per Statement of Affairs
of Affairs | Capital
(Net Impairment of Capital) | Surplus
| Net Deficiency as per
| Statement of Affairs
----- | ------
|
===== | ======
Illustration of Statement of Affairs and Deficiency Account
_Problem._ The following balance sheet shows the condition of the A B C
Company as on December 31, 1918.
A B C COMPANY
BALANCE SHEET, DECEMBER 31, 1918
======================================+==============================
Cash $ 3,000.00 | Notes Payable $ 25,000.00
Notes Receivable 55,000.00 | Accounts Payable 310,000.00
Accts. Rec. $255,000 | Accrued Expenses 10,000.00
Res. for Bad Debts 5,000 250,000.00 | Bonds Payable 175,000.00
-------- | -----------
Merchandise 77,000.00 | Total Liabilities $520,000.00
X Y Co. Stock 30,000.00 |
Mach. & Equip $ 95,000 | Capital Stock 250,000.00
Depr. Res 25,000 70,000.00 | Surplus 25,000.00
-------- |
Buildings $ 88,000 |
Depr. Res 13,000 75,000.00 |
-------- |
Land 110,000.00 |
Good-Will 125,000.00 |
----------- | -----------
$795,000.00 | $795,000.00
=========== | ===========
The company has had difficulty in meeting its current claims. Interest
to the amount of $5,000 on its bonds is past due. On January 10,
1919, it would become liable for $30,000 on accommodation paper to
that amount, because of the bankruptcy of the makers. It is estimated
that the creditors will receive 50% of their claims. At a meeting of
its creditors, where this condition of affairs was disclosed, it was
decided to have a statement prepared to show the condition of the
company on a liquidating basis, any action respecting a petition in
bankruptcy to be deferred until after receipt of such statement. An
appraisal committee made the following report, to be used as the basis
for the statement.
In the cash are found I O U memos, not collectible, $500. The notes
receivable, all estimated good, are pledged with creditors on open
account to secure claims of $61,000. Of the accounts receivable,
$100,000 are good, $80,000 doubtful, estimated at 50% of their
value, and the remainder bad. The merchandise is estimated to bring
in $50,000, the machinery $20,000, and the land $125,000. The land
and buildings are expected to yield no surplus above the claims of
bondholders. The X Y Co. stock is pledged with the holders of notes
payable and should produce a surplus of $10,000. The accrued expenses
comprise taxes $1,500, unpaid pay-roll $3,500, and bond interest $5,000.
_Solution_
A B C COMPANY
STATEMENT OF AFFAIRS, DECEMBER 31, 1918
===========+========================+===========+===========+===========
Book Values| _Assets_ | Items |Expected to|Shrinkages
| | | Realize |
-----------+------------------------+-----------+-----------+-----------
$ 3,000.00|Cash | |$ 2,500.00| $ 500.00
250,000.00|Accounts Receivable: | | |
| Good |$100,000.00| 100,000.00|
| Doubtful— | | |
| worth 50% | 80,000.00| 40,000.00| 40,000.00
| Bad $75,000.00| | |
| Less Reserve 5,000.00| 70,000.00| | 70,000.00
| ---------+-----------| |
| |$250,000.00| |
| |===========| |
30,000.00|Claim Against | | |
| Accommodated Party | | |
|(Estimated to yield 50%)| | 15,000.00| 15,000.00
77,000.00|Merchandise | | 50,000.00| 27,000.00
70,000.00|Machinery | | 20,000.00| 50,000.00
|Securities Pledged | | |
| with Creditors: | | |
| Partly Secured: | | |
55,000.00| Notes Receivable | | |
| (Deducted contra) |$ 55.000 00| |
| |===========| |
| Fully Secured: | | |
75,000.00| Buildings |$ 55,000.00| | 20,000.00
110,000.00| Land (at market) | 125,000.00| [76] 15,000.00
| |-----------| |
| Deducted contra |$180,000.00| |
| |===========| |
30,000.00| X Y Co. Stock | 35,000.00| [77] 5,000.00
| (at market) | | |
| Deducted contra | | |
| Excess over Claims | | |
| against it | | 10,000.00|
125,000.00|Good-Will. | | | 125,000.00
| | |-----------|
|Total Unpledged Assets | |$237,500.00|
| Less Preferential | | |
| Creditors | | |
| (see contra) | | 5,000.00|
| | |-----------|
|Net Free Assets for | | |
| Unsecured Claims | |$232,500.00|
|Deficiency | | |
|(see Deficiency Account)| | 52,500.00|
-----------| | |-----------|-----------
$825,000.00| | |$285,000.00|$327,500.00
===========+ +===========+===========+===========
[76] Increments in value.
[77] Increments in value.
A B C COMPANY
STATEMENT OF AFFAIRS, DECEMBER 31, 1918
(Continued)
===========+================================+=======================
Book Values| _Liabilities_ | Items |Expected
| | | to Rank
-----------+--------------------------------+-----------+-----------
|Unsecured Creditors: | |
$249,000.00| Accounts Payable |$310,000.00|
| Less Partly Secured | 61,000.00|$249,000.00
|Partly Secured Creditors: |===========|
61,000.00| Accounts Payable | $61,000.00|
| Less Notes Receivable | |
| Held as Security | 55,000.00| 6,000.00
|Fully Secured Creditors: |-----------|
25,000.00| Notes Payable | $25,000.00|
| X Y Co. Stock | |
| Held as Security | 35,000.00|
| |-----------|
| Excess of Security | |
| Carried contra | $10,000.00|
175,000.00| Bonds Payable. $175,000.00 |===========|
5,000.00| Accrued Interest | |
| on Bonds 5,000.00 | |
| ----------- |$180,000.00|
| | ==========|
| Land & Buildings | |
| Held as Security | 180,000.00|
|Contingent Liabilities: | |
30,000.00| Accommodation Notes. | |
| Maker, now bankrupt, | |
| will pay 50% | 30,000.00|
|Preferential Creditors: | |
1,500.00| Taxes | $1,500.00|
3,500.00| Wages | 3,500.00|
| |-----------|
| Deducted contra | $5,000.00|
| |===========|
250,000.00|Capital Stock | |
25,000.00|Surplus | |
| | |
| | |
| | |
-----------| | |-----------
$825,000.00| | |$285,000.00
===========| | |===========
ABC Co. will be able to pay, on the basis of the above showing, 81.6
cents on the dollar of all unsecured claims.
A B C COMPANY
DEFICIENCY ACCOUNT, DECEMBER 31, 1918
==================================+================================
Estimated Shrinkages in Value: | Estimated Increments in Value:
Cash $ 500.00 | Land $ 15,000.00
Accounts Receivable. 110,000.00 | X Y Co. Stock 5,000.00
Claim against | Capital Sunk:
Accommodated Party 15,000.00 | Capital Stock 250,000.00
Merchandise 27,000.00 | Surplus 25,000.00
Machinery 50,000.00 | Net Deficiency to be
Buildings 20,000.00 | borne by Creditors
Good-Will 125,000.00 | (see Statement of
| Affairs) 52,500.00
----------- | -----------
$347,500.00 | $347,500.00
=========== | ===========
_Comments on Problem._ From the above solution it will be noted that
the order of showing the assets is not quite the same as would be
ordinarily followed on a balance sheet. A separate group is made to
indicate the securities pledged with creditors, shown under the two
heads “Partly Secured,” and “Fully Secured.” It is to be further noted
that the securities in the hands of partly secured creditors have no
realizable value applicable to general _unsecured_ creditors; hence,
they are always shown deducted on the liability side of the statement
from the claims of partly secured creditors, the difference giving the
amount of such claims which must rank with other unsecured creditors.
In the case of fully secured creditors, if the value of the security
held is estimated to exceed the claims against it, this excess will
be shown on the asset side of the statement as property to which the
unsecured creditors may look for the satisfaction of their claims.
It should be noted that the amount of net worth is included in the Book
Values column of the liabilities, chiefly for the purpose of showing
a complete balance sheet. This makes possible an easy estimate of the
deficiency figure, as shown on the face of the statement. The estimate
is made by subtracting the figure of net worth from the total of the
Shrinkages column. This is, of course, the same figure as shown in
the Deficiency account and is arrived at in practically the same way.
In the solution given, the two items indicated by asterisk in the
Shrinkages column represent increments in value, and in arriving at the
total of that column these are, of course, subtracted from the total
shrinkages.
Inasmuch as the accommodation notes were not previously carried on the
books of the bankrupt, they must here be inserted in the balance sheet
columns both as an asset and a liability.
It is to be noted that the amount due the preferential creditors must
be shown deducted from the total unpledged assets because the creditors
have no claim against any specific asset although a first claim against
all unpledged assets. After deducting the amount from the total
unpledged assets, the figure of net free assets which can be applied to
the claims of unsecured creditors is arrived at. A comparison of this
figure of net free assets with the total amount due unsecured creditors
gives the percentage which the creditors may expect on their claims.
It is to be understood that the expenses of winding up the business
will also be a charge against the net assets before the creditors can
receive anything. It therefore usually happens that the estimate of
this percentage is higher than is actually realized at the time of
final settlement.
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 | (A full accounting for all
values assumed as above, | the values taken over as
per contra) | 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
=================================+==============================
_Assets_ | _Liabilities and Capital_
|
Cash $ 4,000.00 | Notes Payable $ 80,000.00
Accounts Receivable 120,000.00 | Accounts Payable 110,000.00
Merchandise 60,000.00 | Accrued Expenses 14,000.00
Other Property 500,000.00 | Bonds Payable 200,000.00
| Capital Stock 250,000.00
| Surplus 30,000.00
---------- | -----------
$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 $20,000
when the receiver turned the property back to the owners.
Set up a realization and liquidation statement and receiver’s
cash summary to show the receiver’s stewardship and result of his
operations.
_Solution_
KAY CORPORATION
REALIZATION AND LIQUIDATION ACCOUNT
===========================+===========+==============+=============
| Original |Acquired under| Total
| | Receivership |
---------------------------+-----------+--------------+-------------
Assets Taken Over: | | |
Cash | | |
(see Receiver’s | | |
Cash Account) |$ 4,000.00| $221,000.00 | $225,000.00
Accounts Receivable | 120,000.00| 80,000.00 | 200,000.00
Merchandise | 60,000.00| 70,000.00 | 130,000.00
Other Property | 500,000.00| 20,000.00 | 520,000.00
|-----------| ------------ | ------------
|$684,000.00| $391,000.00 |$1,075,000.00
|===========| ============ | ============
| | |
| Liquidated| Continued |
+-----------+--------------+-------------
| | |
Disposition of Liabilities:| | |
Notes Payable |$ 70,000.00| $ 45,000.00 | 115,000.00
Accounts Payable | 100,500.00| 42,000.00 | 142,500.00
Accrued Expenses | 14,000.00| | 14,000.00
Bonds Payable | 200,000.00| 200,000.00 |
| | |
| | |
| | |
+-----------+--------------+-------------
|$184,500.00| $287,000.00 |$1,546,500.00
+===========+==============+=============
Operations of the Receiver:| | |
Expenses: | | |
Merchandise originally | | |
taken over | $60,000.00| |
Purchases | 70,000.00| $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
| | ========== | ===========
| | | $48,500.00
+===========+==============+=============
Values Returned to Owner: | | |
Cash | | $ 500.00 |
Accounts Receivable | | 75,000.00 |
Merchandise | | 20,000.00 |
Other Property | | 445,000.00 |
| | ------------ |
| | | $540,500.00
| | +=============
KAY CORPORATION
REALIZATION AND LIQUIDATION ACCOUNT
(Continued)
===============================+===========+============+=============
| | Acquired |
| Original | under | Total
| |Receivership|
+-----------+------------+-------------
Liabilities Assumed: | | |
Notes Payable |$ 80,000.00| $35,000.00| $115,000.00
Accounts Payable | 110,000.00| 32,500.00| 142,500.00
Accrued Expenses | 14,000.00| | 14,000.00
Bonds Payable | 200,000.00| | 200,000.00
| | |
|-----------|------------|-------------
|$404,000.00| $67,500.00| $471,500.00
|===========|============|
|Disposed of| Continued |
|-----------+------------|
Disposition of Assets: | | |
Cash (see Receiver’s | | |
Cash Acct.) |$224,500.00| $ 500.00| 225,000.00
Accounts Receivable: | | |
Amount Collected $100,000.00| | |
Loss on Bad Debts 25,000.00| 125,000.00| 75,000.00| 200,000.00
-----------| | |
Merchandise: | | |
Sold for (see next | | |
section) $131,000.00| | |
Profit on 21,000.00| 110,000.00| 20,000.00| 130,000.00
-----------| | |
Other Property: | | |
Sold for $69,000.00| | |
Loss on 6,000.00| 75,000.00| 445,000.00| 520,000.00
----------|-----------| -----------|-------------
|$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 | Purchase $ 12,500.00
Receiver $ 4,000.00 | Other Property 10,000.00
Sales $ 51,000 | Selling Expenses. 10,000.00
Accts. Rec. 100,000 | Receiver’s
Other Property 69,000 | Administration 7,500.00
Rentals 1,000 | Accrued Expenses 14,000.00
-------- | Notes Payable 70,000.00
Cash Acquired under | Accounts Payable 100,500.00
Receivership 221,000.00 | Balance Returned to
| Owner 500.00
----------- | -----------
$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 || A, 25%
| Capital ++------------+------------
| of the firm ||Theoretical | Actual
| ||Distribution|Distribution
+--------------++------------+------------
Original Capital | $100,000.00 || $30,000.00 | $30,000.00
First Instalment | 10,000.00 || |
| ------------ || |
Net Capital | $90,000.00 || 22,500.00 |
| || ---------- |
| || $ 7,500.00 |
Instalment Deficiency | || |
to be borne by A & B | || 2,500.00 | 5,000.00
| || ========== | ----------
| || $25,000.00 | $25,000.00
2nd Instalment | 8,250.00 || |
| ------------ || |
Net Capital | $81,750.00 || 20,437.50 |
| || ---------- |
| || $ 4,562.50 |
Instalment Deficiency | || |
to be borne by A & B | || 1,125.00 | 3,437.50
| || ========== | ----------
| || $21,562.50 | $21,562.50
3rd Instalment. | 15,000.00 || |
| ------------ || |
Net Capital | $66,750.00 || 16,687.50 | 4,875.00
| || ---------- | ----------
| || | $16,687.50
4th Instalment | 16,750.00 || | 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 || B, 35%
| Capital ++------------+------------
| of the firm ||Theoretical | Actual
| ||Distribution|Distribution
+--------------++------------+------------
Original Capital | $100,000.00 || $40,000.00 | $40,000.00
First Instalment | 10,000.00 || |
| ------------ || |
Net Capital | $90,000.00 || 31,500.00 |
| || ---------- |
| || $ 8,500.00 |
| || |
| || |
Instalment Deficiency | || |
to be borne by A & B | || 3,500.00 | 5,000.00
| || ========== | ----------
| || $35,000.00 | $35,000.00
2nd Instalment | 8,250.00 || |
| ------------ || |
Net Capital | $81,750.00 || 28,612.50 |
| || ---------- |
| || $ 6,387.50 |
| || |
Instalment Deficiency | || |
to be borne by A & B | || 1,575.00 | 4,812.50
| || ========== | ----------
| || $30,187.50 | $30,187.50
3rd Instalment. | 15,000.00 || |
| ------------ || |
Net Capital | $66,750.00 || 23,362.50 | 6,825.00
| ------------ || ---------- | ----------
| || |
| || | $23,362.50
4th Instalment | 16,750.00 || | 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 || C, 40%
| Capital ++------------+------------
| of the firm ||Theoretical | Actual
| ||Distribution|Distribution
+--------------++------------+------------
Original Capital | $100,000.00 || $30,000.00| $30,000.00
First Instalment | 10,000.00 || |
| ------------ || |
Net Capital | $90,000.00 || 36,000.00|
| || -----------|
| ||[78]$6,000.00|
| || ===========|
| || |
Instalment Deficiency | || |
to be borne by A & B | || |
| || | ----------
| || $30,000.00| $30,000.00
2nd Instalment | 8,250.00 || |
| ------------ || |
Net Capital | $81,750.00 || 32,700.00 |
| || -----------|
| ||[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 | $66,750.00 || 26,700.00| 3,300.00
| ------------ || -----------| ----------
| || |
| || | $26,700.00
4th Instalment | 16,750.00 || | 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
| ============ || ===========| ===========
[78] Represent capital deficiencies at the time of the 1st and 2nd
instalments.
[79] Represent capital deficiencies at the time of the 1st and 2nd
instalments.
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.
1. Drew National Bank
1. Petty Cash
1. Sinking Fund Trustee
2. Notes Receivable
2. Notes Receivable Discounted
2. Notes Receivable Special
3. Trade Debtors
3. Reserve for Doubtful Accounts
3. Accounts Receivable Special
4. Prepayment on Purchases
4. Merchandise Inventory
4. Raw Materials Inventory
5. Goods in Process Inventory
5. Plant and Sundry Assets
5. Jackson, Edwards, Hansen, Vendors
6. Delivery Equipment
6. Depreciation Reserve Delivery Equipment
7. Patterns
7. Depreciation Reserve Patterns
8. Furniture and Fixtures
8. Depreciation Reserve Furniture and Fixtures
9. Power Equipment
9. Depreciation Reserve Power Equipment
10. Factory Buildings
10. Depreciation Reserve Factory Buildings
10. Tools
11. Machinery
11. Depreciation Reserve Machinery
11. Factory Land
12. Patents and Trade-Marks
12. Good-Will
12. Organization Expense
13. Notes Payable
13. Vouchers Payable
13. Boston Office Company
14. Dividends on Common
14. Dividends on First Preferred
14. Dividends on Second Preferred
15. Purchase Money Mortgage on Machinery
15. Bonds Payable (Authorized Issue $20,000)[A]
15. Discount on Bonds
16. Subscribers
16. Call No. 1
16. Call No. 2
17. Capital Stock Subscriptions
17. Capital Stock Common (Authorized Issue $100,000)[80]
17. Capital Stock First Preferred (Authorized Issue $50,000)[81]
18. Capital Stock Second Preferred (Authorized Issue $25,000)[82]
18. Discount on Stock
18. Treasury Stock
19. Surplus
19. Donated Working Capital
19. Sinking Fund Reserve
20. Manufacturing
21. Profit and Loss
22. Desks and Tables Sales
22. Desks and Tables Sales Returns and Allowances
22. Bookcases and Filing Cabinets Sales
23. Bookcases and Filing Cabinets Sales Returns and Allowances
23. Sundry Office Supplies Sales
23. Sundry Office Supplies Sales Returns and Allowances
24. Knoxfraud Sales
24. Knoxfraud Sales Returns and Allowances
24. Desks and Tables Purchases
25. Bookcases and Filing Cabinets Purchases
25. Sundry Office Supplies Purchases
25. Raw Materials Purchases
26. Knoxfrauds Manufactured
26. In-Freight and Delivery
26. Receiving and Shipping Room Expense
27. Direct Labor
27. Indirect Labor
27. Factory Supplies
28. Light, Heat, and Power
28. Building Maintenance and Repairs
28. Machinery Repairs
29. Assembling and Setting Up Expense
29. Depreciation
29. Sundry Factory Expense
30. Royalties
30. Experimental Expense
31. Salesmen’s Salaries
31. Salesmen’s Commissions
31. Salesmen’s Traveling Expense
32. Delivery Expense
32. Warehouse Expense
32. Warehouse Rent
33. Sundry Selling Expense
33. Advertising
34. Office Salaries
34. Stationery and Printing
34. Telephone, Telegraph, and Postage
35. Sundry Office Expense
35. Insurance
35. Taxes
36. Rent
36. Interest and Discount
36. Collection Expense
37. Bond Interest
37. Sales Discount
37. Bad Debts
38. Purchase Discount
38. Rent Income
38. Commission Income
39. Loss from Sale of Power Equipment
39. Fire Loss
39. Strike Costs
40. Damage Claims
40. Damage Claims Reserve
SALES LEDGER—Allow one-third page to each account.
45. Smith Brooks Stationery Co.
The Brush Co.
The Kistler Stationery Co.
46. C. F. Hoeckle Office Supply Co.
John Bach & Sons
T. J. Stewart Office Specialties Co.
47. Saxon Edwards
47. T. C. Macie & Co.
The Alexander Jacobs Co.
48. Field & Co.
Sundry Customers
49. Salesmen Advances
New Method Manufacturing Co.
General Ledger Adjustment
PURCHASE LEDGER—Allow one-third page to each account.
52. P. J. Johnson Mills Co.
B. F. Brainard & Co.
Jackson City Supply Co.
53. F. C. Good Rubber Co.
53. B. A. Franklin Press
Brickley Desk Co.
54. R. M. Goddard Furniture Co. City of Hoboken
[80] The account title may be written just as given or, better, the
parenthetical part may be put on the small half-line space immediately
below the title line as that is usually ruled. (See ruling at top of
any ledger page.)
[81] The account title may be written just as given or, better, the
parenthetical part may be put on the small half-line space immediately
below the title line as that is usually ruled. (See ruling at top of
any ledger page.)
[82] The account title may be written just as given or, better, the
parenthetical part may be put on the small half-line space immediately
below the title line as that is usually ruled. (See ruling at top of
any ledger page.)
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 Jackson 225 shares
J. T. Edwards 162 ”
P. Hansen 113 ”
T. J. Noble 100 ”
A. H. Lawrence 75 ”
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; 2/10 1,567.40
C. F. Hoeckle Office Supply Co., March 12, $1,000;
July 18,$123.90 1,123.90
John Bach & Sons, June 13, $300; July 30, $119.36 419.36
T. J. Stewart Office Specialties Co., July 20, $319.45;
August 12, $523.12 842.57
Saxon Edwards, February 10, $585; May 23, $206.75 791.75
T. C. Macie & Co., May 11, $115.10; June 21, $210.15;
July 8, $450; August 25, $465.15; 2/10, n/30 1,240.40
The Alexander Jacobs Co., August 28, $362.25; 3/5, 2/10 362.25
Field & Co., June 15, $1,015.05; July 6, $250; August 24,
$508.10; 2/10, n/30 1,773.15
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, $802.15 1,392.25
Jackson City Supply Co., June 10, $512.60;
June 25, $428.20; July 18, $622 1,562.80
F. C. Good Rubber Co., July 1, $175.19;
August 13, $300; 2/10, 1/30 475.19
B. A. Franklin Press, May 2, $850; June 22, $262.15 1,112.15
Brickley Desk Co., March 8, $912.50; May 6, $1,500;
August 16, $540.09; 2/10, 1/30 2,952.59
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.