XIII

PRACTICE DATA

In addition to the special data given in Practice Data XII, the

following transactions in due course took place:

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

SALES JOURNAL—Sales to Sundry Customers were: desks and tables

$200,670.20, bookcases and filing cabinets $153,803.40, and sundry

office supplies $16,115.26. Cash sales were: desks and tables $35,000,

bookcases and filing cabinets $21,500, and sundry office supplies

$2,825.15. Return sales and allowances to Sundry Customers were: desks

and tables $4,240.15, bookcases and filing cabinets $4,250.65, and

sundry office supplies $675.50.

CASH BOOK—Received: from cash sales as above; from Sundry Customers

$269,359.50 less sales discount of $3,940.20; from notes receivable

$5,000; from notes payable discounted $42,500 less $350 discount; from

notes receivable discounted $15,000 less discount of $50. Disbursed for

vouchers payable $359,720.40, of which $100 is chargeable to Building

Fund (Noble’s salary).

JOURNAL—Gave our notes to Sundry Creditors for $8,500; received notes

from Sundry Customers $25,200.50; notes receivable discounted were paid

by makers at maturity $10,250; stationery was drawn from stock $250 and

used for advertising purposes.

VOUCHER REGISTER—Bought desks and tables $99,842.95, bookcases and

filing cabinets $73,758.15, and sundry office supplies $12,684.40.

Purchases discount was $2,153.40; in-freight and delivery $3,740.28;

receiving and shipping room expense $2,690.14; light, heat, and

power $725.16; salesmen’s salaries $65,840.20; salesmen’s commissions

$20,730.30; traveling expenses $42,420.70; advertising $12,280; sundry

selling expense $940.03; delivery expense $7,280.90; warehouse expense

$50; office salaries $11,600; stationery and printing $450; collection

and exchange $30.05; interest and discount $1,096.27; sundry office

expense $72.15; telephone, telegraph, and postage $475.03; notes

payable $47,250.19; rent $3,250; power equipment $5,000; taxes $160.15;

Noble’s salary for August $200. (Charge $100 to Factory Building and

$100 to Power Equipment.)

_Instructions_

These transactions are listed in summarized form to avoid detailed

entry and, at the same time, to provide the necessary volume of

business. They are to be entered as indicated. Use as little space as

possible.

SALES JOURNAL—Use 2 lines for the entries. Enter returns and allowances

in their proper journal.

CASH BOOK—Be careful to indicate by some distinctive mark all interest

and discount items recorded in the Sales Discount column. No purchase

discount on paid vouchers is given inasmuch as the cash book record of

it is merely a memo, although providing data for checking the amount of

unearned discount at the close of a period. It will doubtless be found

that in this summarized method of stating transactions much detailed

information is omitted (because not absolutely essential), that would

be available under ordinary conditions.

JOURNAL—Treat stationery taken from stock as a credit to Sundry Office

Supplies Sales; this is not included in the sales journal data given

above.

VOUCHER REGISTER—For the sake of saving space, run all these

transactions through on one voucher, using just one line for the entry,

except in Sundry column, where use as many as are needed. $100 of

Noble’s salary comes out of building fund cash, as indicated on page

675.

XIV

PRACTICE DATA

Summarize the various books and post completely. Be careful, in

summarizing, to show any extraneous items recorded, for the sake of

convenience, in theoretically improper columns or books.

XV

PRACTICE DATA

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

as usual.

XVI

PRACTICE DATA

Draw up statements for the year, supporting both the profit and loss

statement and the balance sheet by schedules. (See Volume I, pages

411-412 and 509-510, for suggestive forms and instructions as to

methods of condensation of data.)

Take into consideration the following data:

Rent income received in advance $40; warehouse rent paid in advance

$100; interest accrued on notes receivable $50; salesmen’s salaries

accrued $420; salesmen’s commissions accrued $125; advertising bills

unpaid $100; advertising paid in advance $250; stationery on hand $50.

Insurance: first policy, one year, bought October 1, cost $125, part

unexpired $10.04; second policy, one year, bought January 2, cost $250,

⁴/₁₂ unexpired $83.33. Taxes for the year 1916, estimated $565.42, ⅔

used $376.95. Purchases discount not yet taken advantage of on unpaid

vouchers, $475.

The Knoxfraud patent had 15 years to run when purchased. Write off

¹/₁₅ of its value, it being the policy of the company to maintain an

experimental laboratory and so overcome any possible supersession.

Write off organization expense and good-will 5% each. Create reserves

for: furniture and fixtures 10%; delivery equipment 15%; doubtful

accounts ½% on all sales gross. Take no account of depreciation on

factory building or power equipment.

Inventories of stock-in-trade: desks and tables $4,943.86, bookcases

and filing cabinets $1,521.31, sundry office supplies $3,197.20, total

$9,662.37.

In-freight and delivery: charge $2,500 to Desks and Tables purchases,

$2,100 to Bookcases and Filing Cabinets Purchases, $297.69 to Sundry

Office Supplies Purchases.

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

Administrative.

Receiving and shipping room: charge ¾ to Shipping, ¼ to Receiving, of

which 50% to Desks and Tables, 45% to Bookcases and Filing Cabinets, 5%

to Sundry Office Supplies.

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

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

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

Discount on stock: charge to Factory Buildings.

_Instructions_

Most of the above data are necessarily arbitrary, particularly the

basis for distribution of the various expense items. For many such

items, even in practice, a more or less arbitrary basis must be

adopted. See Chapters III, XIV, and XXVII for a brief discussion of

this point.

The student may object to the indicated methods of handling some of

the items but is asked to make the record as suggested. Any necessary

corrections will be made later.

Draw up all formal statements, for presentation to the instructor, on

blank paper, letter size, i.e., 8½ x 11 inches.

XVII

PRACTICE DATA

Adjust and close the books in accordance with the information given in

the preceding Practice Data XVI.

The student is referred, for illustration of the work of adjusting and

closing the books, to Volume I, Chapters XXIX, XXX, and XLIII, and to

certain portions of Chapters XIV and XIX of Volume II.

XVIII

PRACTICE DATA

The results for the year proving very unsatisfactory in comparison with

the volume of business transacted, N. G. Goodman was retained to make

an audit of the year’s operations in an effort to locate the trouble.

In his report covering the audit, he called attention to the following

items:

(a) In the Trade Debtors are included two charges, viz., advances to

salesmen $500, and New Method Manufacturing Co. for purchases $2,500,

which are in no sense charges to customers.

(b) In the Notes Receivable is included Noble’s note given in payment

of the balance on his subscription to capital stock $1,000 but now

reduced to $600 through the application of his March dividend as a

partial payment. This does not belong in Notes Receivable account.

(c) There is on the books no record of the Boston Office Co.

consignment received on June 15, 1916. Investigation showed that on

July 2, a sale of $4,500 was made from the consignment and the balance

was included in the Sundry Office Supplies Inventory, being there

valued at $1,000. It was ascertained that the freight and cartage

paid on the incoming consigned goods amounted to $25.12, and had been

charged to the In-freight and Cartage account.

(d) The inadequacy of the purchases system was shown. Perhaps due to

the fact that during the year the main stock was withdrawn from the

store and the immediate supervision of the responsible head and placed

in the warehouse, the stock had been allowed to run down so that it

amounted at the close of the year to only $9,662.37—correct value being

$8,662.37 when allowance for the inclusion of the Boston Office Co.

consigned goods was made—as compared with $42,282.27 on hand at the

beginning. Suggestion for the installation of a distinct purchasing

department and the introduction of a stock record was made in order to

keep track of the condition of the stock.

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

(f) The discount on capital stock, charged to Factory Building, is to

be taken out and shown as a separate item under its own name.

(g) An analysis of the sales developed that: on desks and tables sales

gross profit was 47%, and rate of turnover was 9+; on bookcases and

filing cabinets gross profit was 38% and turnover 6.4+; and on sundry

office supplies a gross loss of 17+% was sustained and the turnover

was only 3+. Taken as a whole, the selling expense was too high, very

probably due to salesmen’s abnormal traveling expenses and commissions.

The present commissions policy was severely condemned as tending to

an increase of sales without regard to the financial standing of the

customer. For the purpose of establishing a consistent policy of

passing on credits and following up collections, the installation of a

department of credits and collections was advised.

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

control.

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

charged to Profit and Loss.

Make all of the entries necessary to adjust the books in accordance

with the auditor’s suggestions. Post, close, and draw up corrected

statements, including the adjustments to Surplus. Supporting schedules

may be omitted; the condensed statements will be sufficient.

_Instructions_

Study carefully all the suggestions made by Goodman and determine the

proper correcting entries. All necessary accounts have already been set

up on the books.

The principles involved in suggestions (a) and (b) are covered in

Chapter XII. For (c) see Volume I, Chapter L, and Volume II, Chapter

XIII. Take cognizance of the accrued commission. For (e) see Chapter

XVIII, and for (f) see Chapter XXI. For the surplus statement to show

all adjustments made through it, see Chapter XXIII.

XIX

PRACTICE DATA

September 2, 1916, the remainder of the Boston Office Co. consignment

was sold for $1,250 cash and our check sent for the balance due them.

Desks and tables $575, and filing cabinets $250, were taken from stock

for use in the factory. Additional benching and racks were bought for

$450 cash. Shop and hand tools cost $875.25 cash.

September 10, 1916 a one-year fire insurance policy covering factory

building and equipment was bought from the Northwestern Fire Insurance

Co. for $584.68.

At a meeting of the directors and stockholders for the purpose of

reviewing Goodman’s report and forecasting a policy for the coming

year, the following items were thoroughly considered:

(a) In order to pursue a vigorous sales policy such as would now be

necessary and along the lines suggested by Goodman, immediate purchases

in large amounts would have to be made.

(b) The company’s credit, at the present time, with more than $70,000

of current payables outstanding, would not bear further expansion.

Ready funds of at least $20,000 would have to be provided within the

next month to take up outstanding notes and the more pressing bills,

to say nothing of the amount needed to take advantage of all discounts

offered on new purchases.

(c) The contracts entered into for purchases of machinery and raw

materials would soon have to be fulfilled, requiring an additional sum

of $20,000 to $25,000.

(d) In view of the policy previously determined to close out the

division of sundry office supplies on October 31 and push with vigor

the new Knoxfraud, a widespread advertising campaign was decided upon

for the next six months in order fully to present the need for the new

device and its merits. It was estimated that $15,000 or $20,000 would

be required for this.

(e) The absolute necessity for additional capital was apparent.

Before the company could hope successfully to secure subscriptions

to a new issue of stock, not only would that stock have to be made

attractive, but the company’s condition as to surplus would have to

be improved. Accordingly, it was voted to donate 10% of the capital

stock into the treasury and offer it for sale first to the present

stockholders and then to the public at not less than 90. Then it was

ordered that the capital stock be increased by the issuance of $50,000

of first preferred 6% cumulative, and $25,000 of second preferred 8%

non-cumulative, both classes of stock to have further participation on

the following basis:

In the event of dividends in excess of the requirements for the

preferred stock and 6% on the common, the first preferred should share

⅓ and the common ⅔ of such excess for an additional dividend until

they should have received in all an 8% dividend and so be placed on

an equality with the second preferred. Of all further dividends the

common was to share ¾ of the amount of such excess dividends, and the

two preferred classes the other ¼ distributable between them in the

ratio which the amount of each outstanding bore to the total of both

classes outstanding. It was decided, at the time of the application for

an increase of capitalization, to change the name of the corporation to

the Knox-Davis Manufacturing Company.

The necessary legal requirements for increasing their capital having

been met, the present stockholders took all the treasury stock at 90,

and the two classes of preferred were entirely subscribed for at par,

payable ½ down and the remainder subject to two equal calls at the end

of 4 and 8 months respectively. Cash was received for treasury stock in

full and for the preferred as indicated, i.e., for the ½ down in cash

at the date of subscription. Permission was granted to change the name

of the corporation as requested.

Make the entries to record the above data under date of October 25,

1916. (Charge the discount on stock against the surplus received from

donation.) Transfer the cash balance in the Building Fund into the

General Cash, there being no longer any need of the separation.

_Instructions_

September 2. Make careful calculation of the balance due Boston Office

Co. Record in the general journal the stock drawn for factory furniture

and fixtures, as a credit to proper sales account.

October 25. Transfer of the balance of Building Fund cash back to

General Cash is effected in the same way as the original creation of

the fund. Issue certificates of stock to new holders.

XX

PRACTICE DATA

By October 31, 1916, all of the sundry office supplies had been closed

out for $2,000 cash.

The raw materials contracted and partially paid for on August 25,

were received, and on November 10 a check for the balance due less 2%

discount on the contract, was sent to the New Method Manufacturing Co.

(Be sure to book the proper charge to Raw Materials.) Materials were

insured for one year at a cost of $175 cash.

On November 30, the last of the machinery was received from the Harvey

Machine Manufacturing Co. and installed. The invoice cost was $15,000,

of which $12,000 was paid in cash and the company’s note secured by

mortgage on the machinery was given for the balance. In-freight and

delivery on the machinery amounted to $675.40, and placement expense

(not including concrete platforms and piers which had been charged to

the building at a cost of $750) amounted to $225, all of which were

paid in cash. Noble’s salary for the three months while passing upon

and superintending the placing and erection of machinery is to be

charged $400 to Machinery and $200 to Power Equipment. The additional

expenditure of connecting the machinery with the power—including

shafting, belting, labor, etc.—amounted to $550.50 cash.

On December 2 an insurance policy for one year covering machinery was

purchased for $275.40 cash from the New Jersey Mutual.

Full factory operations were commenced on December 1, 1916, and orders

were taken for Knoxfrauds for delivery beginning with the first of the

year.

It was determined to extend the current fiscal period and not close the

books until December 31, 1917.

Call No. 1 on unpaid subscriptions to capital stock for one-half the

outstanding was made on February 25, 1917.

The advertising campaign was producing results so that to fill orders

the factory had to work two shifts of men beginning with March 1,

1917. As a result of seeming prosperity and a discontent engendered

by labor leaders who had recently unionized the works, a demand for a

15% increase in wages was made and refused, resulting in a walk-out on

March 30. A patrol against strike-breakers was established on April

2, after about one-third of the full complement of workers needed

for operation had been secured. Some of these defected and the rest

were quartered in the shops to prevent violence. After three weeks of

partial operation at an increased expense of $1,500 directly attributed

to the strike, one of the boilers exploded damaging the building and

equipment, the resulting fire consuming supplies and damaging raw

materials. An investigation placed the blame on a half-crazed workman

whose sympathies were with the strikers. Hospital fees for injured

workmen amounted to $500. (Record these two items as cash expenditures

for the purposes named under date of April 20.) The insurance companies

settled the losses as follows: the building and the power equipment on

which the estimated damage was $3,500 were placed in complete repair;

the estimated damage on materials, determined after an inventory and

comparison with stock records, amounted to $4,000 and was covered by

$3,200 insurance which was paid. In making the estimate, scrap value of

damaged goods was placed at $1,000 but only realized $750 when sold;

machinery costing $3,500 on November 30, with a scrap value of $500,

realized on sale by the company $650, the insurance received being

$2,000. (Depreciation on the machinery at the rate of 8⅓% annually

on cost value is to be taken into account, and the portion of the

unexpired insurance—roughly estimated at $150—now canceled by the

payment of the insurance on both raw materials and machinery is to be

considered in making charges to the Fire Loss account.) Additional loss

and expense due to decreased production and cancellation of orders

because of not being able to deliver goods when promised was estimated

at $7,500. The strike was finally settled by granting a 5% increase in

wages.

The directors had under consideration the incorporation with the

Knoxfraud of a patent listing and adding device owned by J. Q. Osgood.

In view of the need of some additional capital anyway due to the strike

losses, it was decided to incorporate the new device now, since it

would be easier to make the needed changes at this time than after

operations had been resumed. Accordingly, a rearrangement of the

machinery was necessary to make room for the new machinery and place

it for proper routing of the product. This entailed a cash expenditure

of $750 for the rearrangement, and $5,500 for new machines to replace

those disposed of and to manufacture the new device. (Make the record

as of April 30.) The contract entered into with Osgood was on a royalty

basis per unit turned out by the machines and for one year’s time

beginning May 1, 1917. The directors decided on a continuation of the

advertising campaign. To provide funds for these purposes a bond issue

was determined upon—$20,000 20-year 6%, interest coupons redeemable

November 1, and May 1,—secured by mortgage on the factory and its

equipment. The trust agreement provided for the payment at the close of

each fiscal year of $750 out of profits into the hands of the Guaranty

Trust Co. for investment in securities until a sinking fund sufficient

to retire the bonds at their maturity shall have been established.

$15,000 of the bonds were offered for sale and were purchased at 95 for

cash except one purchase on a note for $950. The remaining $5,000 were

held in the treasury until needed.

Record the above transactions as of the dates given—the bond

transactions took place on May 1.

_Instructions_

October 31. The columns in sales journal, sales returns and allowances

journal, and voucher register headed “Sundry Office Supplies,” will now

be given the headings “Knoxfraud” for the first two journals, and “Raw

Materials” for the voucher register.

November 10. A part of the charge to Raw Materials must be made in the

general journal. “Prepayment on Purchases” account will be closed.

November 30. Record the note payable secured by mortgage under the

title “Purchase Money Mortgage on Machinery.” Voucher the cash portion

of this purchase of machinery. Transfer the cost of concrete platforms

from Buildings to Machinery account. This had previously been charged

to Buildings and is merely a transfer entry here. Run Noble’s salary

through the voucher register as a cash transaction, making the proper

distribution of it. The payment of $550.50 for connecting power is to

be charged to Power Equipment.

April 20. Charge these two items as cash expenditures to Strike Costs.

In accounting for the fire losses, clear the accounts of their original

values by transfer to Fire Loss account (Raw Materials Purchases

$5,000, and Machinery $3,500 less depreciation for 4⅔ months, i.e.,

from November 30 to April 20). Credit Fire Loss from the cash book with

the insurance received and with the cash received from sale of scrap.

Charge Fire Loss also with the canceled insurance premiums. Record all

of this under date of April 20. (The student is referred to Chapter

XXXII for a full treatment of fire loss adjustments.)

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

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

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

Treat the note received as a “Note Receivable Special.” No record will

be made of the unissued bonds.

XXI

PRACTICE DATA

The remaining data for the 16 months ending December 31, 1917, have

been summarized in most instances and were as follows: (In making

record, use the dates given or December 31, where none are given.)

June 1. A dynamo costing $525 on August 31, 1916, was sold for $415

and a larger one purchased from the General Electric Co. at a cost of

$975.50 installed. (Take into account depreciation at 12½% per annum.)

Additional motor trucks were purchased from the New Model Truck Co.

for $1,790. (Entry was made at $1,740, taking into account a special

discount of $50 for payment within 10 days. Through oversight the

voucher was not paid till July 1, thus losing the discount.)

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

capital stock.

VOUCHER REGISTER—Bought desks and tables $200,431.95, bookcases and

filing cabinets $149,878.79, raw materials $62,749.63. Purchases

discount was $4,290.89; in-freight and delivery $8,650; pay-roll,

direct labor $99,475.50, indirect labor $11,900.17; engineers and

firemen’s wages $5,125.67; building maintenance and repairs $200;

machinery repairs $193.50; receiving and shipping clerks $1,550.20;

assembling and setting up labor $500.80; salesmen’s salaries

$173,790.25; traveling expense $91,475.89; salesmen’s commissions

$79,612.40; delivery men $3,500; office salaries $15,900; patterns

$1,250; factory work benches $75; experimental laboratory $2,500.

Materials purchased for building maintenance and repairs $326.40,

for machinery repairs $85, for patterns $550. Coal and water cost

$11,193.40; sundry light, heat, and power expense $1,062.60; packing

and shipping supplies $4,469.70; delivery expense, including

motor-truck repairs and maintenance, $12,989.14; taxes for 1916

$585.43; factory supplies $1,124.17; sundry factory expense $750.28;

royalties $875; insurance, including employers’ liability insurance

for factory workmen, $2,277.45; warehouse expense $540; warehouse rent

$850; sundry selling expense $2,196.40; rent $7,500; stationery and

printing $2,310.17; telephone, telegraph, and postage $1,092.15; sundry

office expense; $1,312.43; collection expense $1,025.43; interest and

discount $902.20; bond interest $450; materials for laboratory $1,500;

legal expense in defending patents $175; street and sewer improvement

tax on factory site $525.60; advertising $123,470.10; notes payable

paid $25,261.75; notes receivable discounted but protested and charged

back, $1,260.50; advances to salesmen $1,500.

SALES JOURNAL—Sales to sundry customers: desks and tables $290,721.15;

bookcases and filing cabinets $204,422.20, Knoxfrauds $351,622.50. Cash

sales were: desks and tables $91,213.10, bookcases and filing cabinets

$71,253.20, Knoxfrauds $124,121.25. Sales returns and allowances were:

desks and tables $10,192.50; bookcases and filing cabinets $8,269.10,

Knoxfrauds $21,569.65.

CASH BOOK—Received: from cash sales as above; from Sundry Customers

$624,736.74 less sales discount of $15,962.14; from interest $750; from

notes receivable discounted $19,260.25 less bank discount of $210.25;

from notes receivable $10,192.60; from rent income $160—the sub-lease

on the warehouse was canceled because the room was needed for increased

stock; from first call on outstanding subscriptions to capital stock

$18,250, from second call $18,000. Disbursed: for vouchers payable

$1,005,833.95.

JOURNAL—Received notes from Sundry Customers $59,370.50. Gave notes

to Sundry Creditors $45,000. Notes receivable discounted were paid by

makers at maturity $12,379.60. Trade debts proved uncollectible from

bankruptcy or other cause to the amount of $3,572.40.

_Instructions_

June 1. Charge the loss on sale of dynamo to Loss from Sale of Power

Equipment. Accrued depreciation for 9 months must be taken into

account. Run the neglected discount item through on a new voucher,

making cross-reference to the original. Be sure to make proper

distribution of it.

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

Voucher Register. Make careful distribution of all items—particularly

as between capital and revenue charges. Discounted notes receivable

protested will be charged to Sundry Customers.

Journal. Make here also the entry necessary to complete the record of

the discounted notes which went to protest, as indicated by the voucher

register entry above.

XXII

PRACTICE DATA

Summarize and post the books and take a trial balance as of December

31, 1917. Record the trial balance in the usual place.

XXIII

PROBLEM

A trial balance taken from the general ledger of the Metal Bed

Manufacturing Co. for December 31, 1917, showed as follows:

Bed Sales $325,198.67

Bed Sales Returns and Allowances $10,240.80

Bed Accessories Sales 192,460.90

Bed Accessories Sales Returns

and Allowances 8,175.25

Raw Material Inventory 25,240.16

In-Freight and Drayage 1,460.24

Beds in Process 15,970.20

Finished Beds 42,490.70

Accessories Inventory 19,580.65

Direct Labor 35,918.60

Indirect Labor 10,372.40

Light, Heat, and Power 8,917.18

Manufacturing Expense 5,890.10

Rent 3,300.00

Machinery Repairs and Renewals 575.00

Raw Materials Purchases 175,460.18

Raw Materials Purchases

Returns and Allowances 9,840.60

Accessories Purchases 95,640.81

Accessories Purchases Returns and Allowances 4,890.06

Advertising 4,800.00

Salesmen’s Salaries 13,690.75

Salesmen’s Commissions 4,610.15

Traveling Expense 10,111.25

Out-Freight and Shipping 790.20

Delivery Expense 3,816.25

Insurance on Sales Room Stock 475.00

Insurance on Factory Materials 820.00

Insurance on Buildings and Equipment 1,890.00

Miscellaneous Selling Expense 4,175.30

Office Salaries 15,210.40

Interest and Discount 3,620.55

Bank Expense 125.45

Office Furniture and Fixtures 1,240.00

Depreciation Reserve

Office Furniture and Fixtures 620.00

Office Supplies 720.20

Miscellaneous Office Expense 1,810.65

Leasehold (99 years) 99,000.00

Extinction Reserve for Leasehold 24,000.00

Buildings 125,000.00

Depreciation Reserve for Buildings 50,000.00

Machinery 72,520.70

Depreciation Reserve for Machinery 21,490.16

Tools 5,140.17

Patterns 7,500.00

Depreciation Reserve for Patterns 5,405.14

Factory Furniture and Fixtures 8,100.00

Depreciation Reserve Factory

Furniture and Fixtures 3,190.20

Sales Room Furniture and Fixtures 10,250.00

Depreciation Reserve Sales Room

Furniture and Fixtures 4,330.10

Sales Discount 8,440.05

Purchases Discount 10,375.90

Good-Will 50,000.00

Accounts Receivable 110,472.05

Notes Receivable 5,640.10

Accounts Payable 62,490.35

Notes Payable 10,000.00

Mortgage Payable 15,000.00

Petty Cash 150.00

Surplus 150,154.24

Reserve for Doubtful Accounts 3,519.72

Capital Stock Common 100,000.00

Capital Stock Preferred 6% 50,000.00

Harriman National Bank 10,114.55

Common Dividend No. 37 2,000.00

Preferred Dividend No. 25 1,500.00

------------- -------------

$1,042,966.04 $1,042,966.04

============= =============

The company conducts a factory for the manufacture of metal beds. It

deals also in mattresses, springs, bed furnishings, etc., which it buys

ready-made and sells to the retail trade. Its two classes of sales,

beds and accessories are kept distinct.

Draw up a balance sheet and profit and loss statement for the year,

taking into account the following inventories and other adjustments:

Inventories:

Raw Materials $31,216.15

Beds in Process 18,793.80

Finished Beds 31,470.95

Bed Accessories 24,640.10

Accrued Expenses:

Direct Labor 690.20

Indirect Labor 325.00

Rent 300.00

Light, Heat, and Power 180.20

Advertising 590.00

Sales Commissions 319.40

Interest 150.00

Prepaid Expenses:

Coal, Waste, Oil, etc. $125.00

Advertising 300.00

Office Supplies 75.00

Bank Discount 125.00

Insurance on Sales Room Stock 50.00

Insurance on Factory Materials 125.00

Insurance on Buildings and Equipment 256.40

Interest earned on Notes Receivable but not yet due 75.20

Depreciation is estimated as follows on a yearly basis:

Office Furniture and Fixtures 8⅓%

Factory Furniture and Fixtures 10%

Sales Room Furniture and Fixtures 10%

Buildings 2%

Machinery 10%

Patterns 20%

The leasehold was originally for 99 years of which 25 years have now

expired. Bad debts are calculated as 2% of the accounts and notes

outstanding. Tools now on hand amount to $4,800.25. In-freight and

drayage is to be charged 55% to Factory and 45% to Selling. Light,

heat, and power charge 90% to Factory, 9% to Selling, and 1% to

Office. Rent, charge 60% to Factory, 35% to Selling, and 5% to Office.

Insurance on buildings and equipment distribute according to the values

invested, separating buildings’ values on the same basis as rent.

Dividends No. 26 for 3% on preferred and No. 38 for 6% on the common

are declared and paid.

_Instructions_

The leasehold was purchased for a lump sum with provision for the

payment of a small annual rental in addition. The rent item on the

books covers this charge. $1,000 a year is the amortization charge on

the leasehold.

Insurance on buildings and equipment covers buildings, machinery,

tools, patterns, and office, salesroom, and factory furniture and

fixtures. Be careful to distribute this among the manufacturing,

selling, and office sections of the profit and loss summary. Separate

the asset values of these items, which show investment in the factory,

the selling section, and the office section of the plant, and

distribute the insurance on the basis of the investment shown.

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

rent.

Dividends 25 and 37 have evidently been paid but not yet charged

against Surplus. This is sometimes done when it is desired to charge an

interim dividend against profits of the current year. In drawing up the

balance sheet take cognizance of the fact that dividends 26 and 38 have

also been declared and paid though not yet booked.

Support the balance sheet and profit and loss statement with the

customary schedules. The “Cost of Goods Sold” schedule must in turn be

supported by a schedule showing the “Cost to Manufacture.” As explained

in Chapter III, in the cost of goods sold schedule the cost of goods

manufactured—shown by the cost to manufacture schedule—takes the place

of the item “Net Purchases” in a trading business. A typical form of

manufacturing statement is shown below.

EXHIBIT B—SCHEDULE 1

COGSWELL & SONS, MANUFACTURERS

COST TO MANUFACTURE, FOR THE YEAR ENDING DECEMBER 31, 1917

FIRELESS COOKERS:

Raw Materials:

Inventory, January 1, 1917 $25,000.00

Purchases, Net $125,000.00

In-Freight and Cartage 5,000.00 130,000.00

----------- -----------

$155,000.00

Less Inventory, December 31, 1917 28,100.00

-----------

Cost of Raw Materials Used in Manufacture $126,900.00

Direct Labor 178,600.00

-----------

Prime Cost $305,500.00

Factory Expenses:

Indirect Labor $30,000.00

Light, Heat, and Power 20,000.00

Factory Supplies 5,000.00

Sundry Factory Expense 1,500.00

Machinery Repairs 750.00

Building Maintenance and Repairs 1,225.00

Depreciation 6,210.00

Insurance 850.00

Taxes 2,195.00

Royalties 15,276.00 83,006.00

--------- -----------

$388,506.00

Deduct, excess of:

Goods in Process, December 31, 1917 over $40,210.00

Goods in Process, January 1, 1917 32,794.00 7,416.00

---------- -----------

Cost of Finished Cookers $381,090.00

(carried to Schedule 2) ===========

As stated above, this “Cost of Finished Cookers” is carried to Schedule

2, “Cost of Goods Sold,” where it is combined with its initial and

final inventories to develop the cost of the cookers sold during the

period. With the exception noted, this schedule, for a departmental

business, follows the forms already shown and will not be repeated

here. The same thing is true of the other supporting schedules.

XXIV

PROBLEM

Using the information of Problem XXIII and the statements drawn up

there, prepare adjusting and closing journal entries covering just the

_manufacturing_ activities of the business.

_Instructions_

It is desired here to give the student practice with the group of

entries with which he is not yet familiar. The adjusting and closing

entries covering the other activities of the business follow the

methods already explained. In summarizing the manufacturing group

of entries, the process is the same, in the main, as other summary

entries. The exact entries necessary depend, of course, on the accounts

carried and the way in which they are used. This applies particularly

to the use of one or several different inventory accounts and the Goods

in Process account.

To bring the goods in process inventory on the books requires a debit

to Manufacturing and a credit to Goods in Process to clear it—i.e.,

Goods in Process—of the initial inventory, and then a debit to Goods in

Process and a credit to Manufacturing to set up the present inventory.

This secures the proper charge or credit, for the excess of the one

inventory over the other, necessary to develop the correct cost to

manufacture.

Where a Finished Goods account is carried, it is sometimes used as an

inventory account, in which case the method of handling it is similar

to that of Goods in Process excepting that the Finished Goods account

is used in connection with the Profit and Loss (or Trading) account

instead of the Manufacturing account. When Finished Goods account is

used in this way, the balance of the Manufacturing account, i.e., the

cost of goods manufactured, is transferred _in toto_ to the Profit

and Loss account in which the cost of the manufactured goods sold is

developed. Where other commodities are dealt in, in addition to the

manufactured product, this may result in an awkward and inconsistent

method of developing the costs of the different commodities sold.

This has sometimes led to the use of the Finished Goods account

somewhat on the lines of a purchases account. To it the balance of

the Manufacturing account is transferred, and the cost of finished

goods sold is developed in it by bringing the two inventories into

this account. This necessitates the use of a Finished Goods Inventory

account in addition to Finished Goods account—or finished goods

inventory may be set up in Merchandise Inventory account, where only

one inventory account is carried. The cost of manufactured goods sold

is then transferred from Finished Goods account to Profit and Loss

account, where, together with the costs of the other commodities sold,

it helps to effect the closing of the books.

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

XXV-XXVI

PRACTICE DATA

Prepare a condensed balance sheet and profit and loss statement as of

December 31, 1917, taking account of the following adjustments and

inventories. Also draw up a statement of surplus for the 16 months of

the current fiscal period.

Coal and Power Supplies on Hand $1,240.19

Packing Materials on Hand 340.20

Gasoline on Hand 125.00

Factory Supplies 100.00

Insurance Unexpired 540.23

Warehouse Rent Prepaid 150.00

Stationery on Hand 150.00

Experimental Laboratory Materials on Hand 425.00

Advertising Prepaid 500.00

Purchases Discount Not Yet Taken on Unpaid Vouchers 840.22

Advertising Unpaid 1,000.00

Direct Labor Accrued 1,793.75

Indirect Labor Accrued 225.33

Engineers and Firemen’s Wages Accrued 125.67

Receiving and Shipping Clerk’s Wages Accrued 75.50

Assembling and Setting Up Wages Accrued 15.00

Salesmen’s Salaries Accrued 2,524.50

Salesmen’s Commissions Accrued 1,360.18

Deliverymen’s Wages Accrued 67.50

Royalties Accrued 150.00

Rent Accrued 400.00

Interest Payable 17.25

Taxes on Factory Accrued 819.37

Taxes on Stock Accrued 395.62

Bond Interest Accrued 150.00

Inventories of stock-in-trade and raw materials were:

Desks and Tables $20,855.10

Bookcases and Filing Cabinets 17,671.40

Knoxfrauds, Finished 2,511.20

Raw Materials 15,241.92

Goods in Process 9,255.65

Calculate depreciation at the yearly rates given below. The balance in

the account is to be used as the basis, reckoning for 16 months.

Power Equipment 12½%

Machinery 8⅓%

Factory Buildings 1½%

Patterns 20%

Patents ¹/₁₇

Delivery Equipment 15%

Furniture and Fixtures, Factory 12½%

Furniture and Fixtures, Store and Office 10%

Organization Expense 5% of the original cost

Tools Inventory $825.50

Allocate the following charges as indicated:

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

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

Receiving and shipping: ¾ to Shipping and ¼ to Receiving, of which 40%

to Desks and Tables, 35% to Bookcases and Filing Cabinets, 25% to Raw

Materials.

In-freight and delivery: $4,400 to Desks and Tables, $3,500 to

Bookcases and Filing Cabinets, $750 to Raw Materials.

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

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

Create a reserve for doubtful accounts of ½% of all gross sales for the

period. It is decided to take into account as an additional expense

chargeable to this period 1¼% of outstanding trade debtors for sales

discounts that will probably still be taken advantage of.

Close Loss on Sale of Dynamo against Surplus.

Close Fire Loss and Strike Costs to Surplus.

In closing, bond discount is to be amortized on a straight line basis,

i.e., ¹/₄₀ each half-year. Take account of accrued amortization for the

two-month period since November 1.

The experimental laboratory has succeeded in securing a patent for a

listing and adding device for use with the Knoxfraud, of much simpler

operation and cheaper to manufacture, than the one on which royalty is

being paid. Hence, when the royalty contract expires it will not be

renewed. Capitalize the laboratory expense to date.

A very careful analysis of the advertising costs shows an expenditure

of $78,445.25 above normal. It is decided to transfer this to Good-Will.

Claims for damage have been filed against the railways amounting to

$1,025.10. (Bring this on to the books with an offsetting reserve of

the same amount.)

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

Take into consideration the sinking fund requirements of the bond

mortgage.

_Instructions_

On the condensed balance sheet, show all receivables (other than the

claims against customers on note and open account) under the title

“Other Accounts Receivable,” immediately following but separate

from the current asset group. Carry all inventories under one title

“Inventories.” All fixed assets, except the intangibles, show under the

title “Plant and Equipment,” from which show deducted the total of the

various depreciation reserves. List the intangible assets individually.

Set up supporting schedules for all condensations effected. The profit

and loss statement must have supporting schedules, also.

Although some inaccuracies result from using the bases indicated for

the calculation of depreciation, they are insignificant. Note that the

basis for writing down patents has been changed since the last period.

This indicates a policy of intention to secure patented improvements on

the various devices owned. (See Chapter XVIII for discussion of this

point.)

Declaration of a dividend on common stock means, of course, that

the required dividends on both issues of preferred have also been

authorized. The student is required to calculate the rates on these.

XXVII-XXVIII

PRACTICE DATA

Adjust and close the books in accordance with the data given in

assignments XXV-XXVI.

Treat the account “Knoxfrauds Manufactured” as a purchase account as

explained in assignment XXIV.

Handle the estimate of 1¼% of trade debtors for expected sales

discounts, as an accrued item in Sales Discount account.

There is no accrual on sinking fund provisions, inasmuch as the trust

deed requires that payment out of profits be made at the close of the

fiscal period and not at the time bond interest falls due.

The Knox-Davis blanks, with all statements, are due at the time of the

last class period and must be turned in whether completed or not, if

credit is desired for the course.

APPENDIX B

PRACTICE WORK FOR STUDENT—SECOND HALF-YEAR

In this appendix enough material is furnished for approximately 30

hours of classroom work. If more time is devoted to the work, this

material may well be supplemented by drawing on Appendix C.

The student will find it convenient to have a supply of standard-ruled

journal paper and of analysis paper—10- or 12-column—to be used for

working sheets.

For all formal statement work prepared for presentation to the

instructor, it is suggested that plain, unruled paper of uniform size

(8½ × 11 inches, letter size) be used. The chief purpose of this second

semester’s work is to give training in analysis—the ability to grasp

the essentials of a given set of conditions and to see the significance

and interrelations of the various parts. Next in importance to this

is the ability to draw up a statement or statements which shall

present clearly and in proper order the results of your analysis. The

student should develop the habit of thinking clearly and setting forth

conclusions in intelligent, clean-cut form. In ninety-nine cases out of

every hundred, slovenly, sloppy work evidences a like characteristic of

reasoning ability. If the course develops clear thinking and clean-cut

presentation, it will have accomplished its two main purposes.

The problems have a more or less direct relation to Chapters XXVIII

to XXXV of this volume, but of course they are not limited to the

principles developed there. Many of the problems are somewhat

closely connected and relate to each other while some are entirely

disconnected. They are graded, proceeding from the simpler to the

more difficult by easy stages. Where necessary, instructions are

given, although the student is thrown more on his own resources than

previously. In the solution of problems involving trial balance,

adjustments, and financial statements, the method of the accountant’s

working sheet will be found to offer the best procedure. See Volume I,

Chapter XLIII, pages 386-391, for explanation and illustration.

As to the method of attacking problems, the student is perhaps already

aware that before attempting solution it is best to read and study the

problem carefully to determine exactly what is called for and then to

decide as to the treatment of all doubtful points and items—what they

mean and how they must be handled to arrive at what is called for. With

these preliminary points cleared up, the solution itself is mostly a

matter of accuracy and form. In all problems calling for financial

statements, the trial balance should first be tested as to the equality

of debits and credits. As stated above, the method of the work sheet

is usually the best method for summarizing results, although sometimes

skeleton ledger accounts will be found helpful in order to visualize

the effect of entries and to trace their course through the accounts.

Only painstaking work and the solution of many problems will produce

facility and confidence in work of this kind.

The instructor should direct the student to take Problem XXVIII under

consideration throughout the whole semester, in order adequately to

get his material together and into shape. It may well be treated as a

thesis for the semester.

I

At the close of the fiscal year ended June 30, 1913, Thomas J. Howe

called you in to determine his financial condition. From the books,

which were kept on the single-entry plan, and from other sources, you

gathered the following information:

The ledger contained the following accounts: Thomas J. Howe, Capital,

$4,000; Thomas J. Howe, Drawing (debit) $472; Expense (debit) $184;

Sales $18,945; Purchases $17,450; customers’ accounts considered good:

H. E. Brewer $110; D. Cohen $85; Will Benton $190; Linn Bros. $77;

customers’ accounts which have proved uncollectible and are considered

bad: Peter Metz $43; L. C. Fish $101; creditors’ accounts: Stone

Bros. $942; Little & Co. $1,082; H. Hudson $1,220; also accounts with

Salaries $375; Advertising $112.

Other sources yielded this information: stock of goods on hand

inventoried at $5,641; horses and wagons estimated as worth $730;

store fixtures $1,114; rent of store building unpaid $300; clerks’

salaries unpaid $84; notes receivable $2,300; notes payable outstanding

(non-interest bearing) $2,400. Bill of goods received from Stone Bros.,

which has been included in the inventory but which has not been entered

in Stone Bros.’ account, $193; interest accrued on notes receivable

$16; cash in the bank and safe $1,724.

It was found that the following information was available for

determining his financial condition as at the close of the preceding

fiscal year, June 30, 1912: cash $1,478; notes receivable $500; notes

payable $800; Howe’s capital $4,000; store fixtures $900; inventory of

goods in stock $2,800; horses and wagons at an estimated value of $800;

customers’ accounts total $2,314; creditors’ accounts total $3,609.

From the foregoing prepare:

(a) Statement of financial condition of Thomas J. Howe

as of June 30, 1913.

(b) Statement showing the amount of profit made or loss

sustained for the fiscal year ended June 30, 1913.

(c) Statement setting forth in numerical order the advantages

of double-entry over single-entry accounting systems.

(d) As a result of your convincing argument Mr. Howe

has decided to change his system of accounting from

single- to double-entry. Prepare the necessary entries

to change the accounting system to double-entry,

continuing the use of the old ledger and providing for

controlling accounts for customers and creditors.

_Instructions_

See Volume I, Chapters LV and LVI.

II

The following trial balance was taken from the books of Thomas J. Howe

at the close of the next fiscal year.

THOMAS J. HOWE

TRIAL BALANCE, JUNE 30, 1914

Cash $894.00

Notes Receivable 5,000.00

Accounts Receivable 18,000.00

Thomas J. Howe, Capital 6,000.00

Thomas J. Howe, Drawing 560.00

Notes Payable 3,000.00

Accounts Payable 15,640.00

Purchases 77,100.00

Sales 93,620.00

Merchandise Inventory, June 30, 1913 5,641.00

Purchase Discounts 743.00

Sales Discounts 1,420.00

Freight Inward 2,884.00

Insurance 300.00

Interest Earned 146.00

Returned Sales 930.00

Returned Purchases 760.00

Furniture and Fixtures 2,000.00

Horses, Wagons, and Harness 1,200.00

Rent 1,500.00

Advertising 300.00

Expense 180.00

Salaries 1,600.00

Commissions Paid on Sales 400.00

----------- -----------

$119,909.00 $119,909.00

=========== ==========

At this date, you will find that the following items must be considered

to determine the financial condition of Mr. Howe: Merchandise inventory

$2,470; insurance unexpired $100; interest accrued on notes receivable

$66; interest accrued on notes payable $30; he owes for two months’

rent $300.

1% of net sales is to be set aside as a reserve for uncollectible

accounts. Furniture and fixtures are to be written off in the amount of

10%. Provide for a reserve of 10% for depreciation of horses, wagons,

and harness.

Advertising carried forward to the next period $75; unused stationery

and other expense items $42; commissions on sales due but unpaid $90.

(a) Prepare the working sheet.

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

(c) Prepare profit and loss statement—percentages based

on net sales.

(d) Write the adjusting and closing journal entries.

III

Joseph Mason was Howe’s greatest competitor. After getting better

acquainted with each other, Howe conceived the plan of uniting their

capital and services in the form of a partnership. After some

discussion it was decided to operate as Howe & Mason, the capital to

consist of $12,000, of which Howe is to contribute $8,000 in the form

of his existing business. The excess of Howe’s net worth, as shown by

the balance sheet of June 30, 1914, over $8,000, his investment in

the partnership, is to be considered as a loan to the firm. Mason is

to transfer his entire business—assets and liabilities—and sufficient

cash to make his net investment $4,000, or one-third of the total

capitalization.

As of July 1, 1914, the date of the formation of the partnership,

Mason’s assets and liabilities were as follows: cash $1,340; accounts

receivable $2,460; notes receivable $1,120; stock of goods inventoried

at $4,590; furniture and fixtures appraised at $1,316; accounts payable

$5,280; notes payable $1,770; rent unpaid $320.

Prepare journal entries to give effect to the foregoing on Howe’s

books, which are to be continued for the partnership.

During the year Charles Palmer purchased one-third interest in the

capital and profits of the firm by contributing $9,000 in cash. The

total capital of the new firm is set at $18,000. Business is to be

conducted under the old firm name, the old partners retaining their

respective capital investments. Howe’s loan account is to be continued

at its original amount.

Write the necessary journal entries to record on the books of the firm

the admission of the new partner and the adjustments between Howe and

Mason.

Before determining the profits for the year Palmer assigns his

interest in the capital and profits of the firm to John H. Bartlett,

who settles directly with Palmer for $10,000. Howe and Mason agree to

admit Bartlett as a partner in place of Palmer and new articles of

partnership are signed by the members.

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

_Instructions_

Note carefully the terms under which Palmer is admitted. His capital

will appear on the books as $6,000. Make the adjustment through a

good-will account. Howe and Mason withdraw cash to effect their

respective adjustments.

IV

The business has been in operation as a partnership one year. At the

conclusion of this period the trial balance given below shows the

condition of the accounts on the books of the firm.

HOWE & MASON

TRIAL BALANCE, JUNE 30, 1915

Cash $ 1,872.00

Accounts Receivable 22,945.00

Reserve for Bad Debts $384.00

Horses, Wagons, and Harness 3,100.00

Reserve for Depreciation, Horses, Wagons,

and Harness 120.00

Furniture and Fixtures 5,390.00

Merchandise Inventory June 30, 1914 7,060.00

Notes Receivable 12,456.00

Notes Receivable Discounted 4,780.00

Accounts Payable 24,220.00

Notes Payable 8,500.00

Thomas J. Howe, Loan 1,540.10

Thomas J. Howe, Capital 8,000.00

Thomas J. Howe, Drawing 2,440.00

Joseph Mason, Capital 4,000.00

Joseph Mason, Drawing 1,710.00

John H. Bartlett, Capital 6,000.00

Sales 158,335.00

Returned Sales and Allowances 3,890.00

Purchases 144,244.60

Freight Inward 3,518.50

Warehouse Labor and Supplies 1,002.00

Returned Purchases and Allowances 2,714.00

Salesmen’s Salaries 2,215.00

Advertising 872.00

Freight and Cartage Outward 316.00

Office Salaries 2,619.00

Postage 82.00

Stationery and Printing 116.00

Legal Expenses 85.00

Office Heat and Light 212.00

Interest Earned 117.00

Interest on Bank Balances 14.00

Cash Discount on Sales 2,306.00

Cash Discount on Purchases 3,041.00

Interest Paid 143.00

Telephone and Telegrams 17.00

Insurance 500.00

Rent 2,200.00

Miscellaneous Expense 74.00

Commissions on Sales 380.00

----------- -----------

$221,765.10 $221,765.10

=========== ===========

Additional information is as follows:

Merchandise inventory, June 30, 1915, $13,260; stationery and printed

matter on hand $35; unused postage stamps $17.00. One-fourth of

advertising is to be applied to the next year. Warehouse labor of

$130, due but unpaid, has not been recorded on the books. Interest

accrued but not recorded: on notes receivable $71, on notes payable

$47, on bank balances $8. Rent prepaid $200.

You find that no record has been made on the books for $750 worth

of merchandise received from Marsh & Co., but that these goods have

been included in the current inventory. Four-fifths of the insurance

has expired. Interest is to be accrued on Howe’s Loan account at

6%. Through error $100 of commissions on sales has been charged to

Salesmen’s Salaries account.

It has been decided to provide for depreciation and reserves as

follows: 10% reserve on reducing balances for horses, wagons, and

harness; a reserve of ½% on sales for uncollectible accounts; by

writing off 10% of the book value of furniture and fixtures.

Profits and losses are to be shared according to the original

investments of the partners.

Give due consideration to the foregoing and construct:

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

(b) Balance sheet.

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

(d) Adjusting and closing journal entries.

_Instructions_

Note the bases for the various depreciation reserves and that

depreciation on furniture and fixtures is to be _written off the

books_, i.e., no reserve is to be set up.

V

July 1, 1915, the capital of the firm of Howe & Mason is increased to

$30,000 and Wm. R. Gray is admitted as a partner.

Among other things, the articles of copartnership provide that:

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

The representation of the partners in the capital of the firm shall be

Howe, 8/20; Mason, 5/20; Bartlett, 3/20; Gray, 4/20.

Profits and losses shall be shared according to the capital

representation of the partners as at the time of formation of this

partnership. In the event of the death of a partner an accounting shall

be made at the close of the fiscal year in which the death occurs and

the value of the deceased partner’s estate determined as of the date of

his death by prorating profits on a monthly basis.

Gray is to pay for one-fifth interest in the capital of the firm by

giving the firm his note for $2,000 and $4,000 in cash. The difference

in capital is to be supplied by good-will, which is to be distributed

among the three partners constituting the firm of Howe & Mason on the

basis of their original capital representations in that firm, i.e., in

the ratio of $8,000, $4,000, $6,000 respectively.

After adjustments have been made, the respective partners’ drawing

accounts shall be settled in cash.

(a) Write the necessary journal entries to admit Gray as a

partner and to adjust the several partners’ capital and

drawing accounts.

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

_Instructions_

The partnership agreement is to be interpreted to mean that, after

distribution of the good-will, Howe, Mason, and Bartlett are to

contribute or withdraw cash necessary to give them the respective

capital shares agreed upon for the new firm.

VI

Wm. R. Gray died November 30, 1917, two years and five months after he

became a partner in the firm of Howe, Mason & Co. As provided in the

articles of partnership, the business continued until the end of the

fiscal year, June 30, 1918, at which date an accounting was made on the

basis of the following trial balance and subjoined data.

HOWE, MASON & CO.

TRIAL BALANCE, JUNE 30, 1918

Land $10,000.00

Buildings 40,000.00

Reserve for Depreciation, Buildings $2,000.00

Delivery Equipment 6,000.00

Reserve for Depreciation, Equipment 1,200.00

Furniture and Fixtures 5,990.00

Good-Will 6,000.00

Cash 2,010.00

Accounts Receivable 36,000.00

Reserve for Bad Debts 1,460.00

Notes Receivable 7,500.00

Notes Receivable Discounted 4,500.00

Merchandise Inventory—Bags, June 30, 1917 6,770.00

Merchandise Inventory—Trunks, June 30, 1917 12,410.00

Mortgage Payable 25,000.00

Accounts Payable 26,000.00

Notes Payable 14,400.00

Thomas J. Howe, Loan 2,000.00

Thomas J. Howe, Capital 12,000.00

Thomas J. Howe, Drawing 1,210.00

Joseph Mason, Capital 7,500.00

John H. Bartlett, Capital 4,500.00

Wm. R. Gray, Capital 6,000.00

Wm. R. Gray, Drawing 1,100.00

Sales—Bags 71,432.00

Returned Sales and Allowances—Bags 3,690.00

Sales—Trunks 222,386.00

Returned Sales and Allowances—Trunks 1,508.00

Purchases—Bags 59,315.00

Returned Purchases and Allowances—Bags 4,230.00

Purchases—Trunks 184,824.00

Returned Purchases and Allowances—Trunks 2,716.00

Freight Inward 7,020.00

Warehouse Labor and Supplies 1,875.00

Salesmen’s Salaries 4,303.00

Salesmen’s Traveling Expenses 2,809.00

Advertising 2,146.00

Freight and Cartage Outward 1,154.00

Commissions on Sales 981.00

Office Salaries 2,274.00

Miscellaneous Office Supplies 170.00

Legal Expense 200.00

Postage 127.00

Telephones and Telegrams 93.00

Interest Earned on Notes Receivable 385.00

Cash Discounts on Purchases 3,547.00

Rent Collected 1,500.00

Taxes 1,312.00

Insurance 680.00

Interest Paid 472.00

Cash Discounts on Sales 2,789.00

Collection and Exchange 24.00

----------- -----------

$412,756.00 $412,756.00

=========== ===========

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

Merchandise inventories, June 30, 1918, bags $2,431, trunks $4,380.

A reserve of ½% of the sales is to be provided for bad debts. The

furniture and fixtures are to be written down 10% of their book value.

The old account of Horses, Wagons, and Harness was closed and Delivery

Equipment opened when the horses were sold and an automobile service

installed. It is deemed advisable to increase the reserve by 10% of the

declining value.

An additional 5% of the original cost of the buildings will be set

aside as a reserve for depreciation.

Accruals are as follows: taxes $370; interest on mortgage 9 months at

5%; interest on notes receivable $80; interest on notes payable $520;

interest on bank balances $61.20; office salaries $150; interest on

Howe loan 6% for one year.

Advances made to salesmen on salaries $400; tenants paid $300 in

advance rent; unused postage $32; miscellaneous office supplies on hand

$30; one-fourth of the insurance remains in force; advertising deferred

$600. Distribute in-freight and warehouse labor on the basis of gross

purchases.

Profits and losses are to be shared according to the original

investments, as stated in the articles of partnership.

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

as follows:

“In the event of dissolution, good-will is to be increased at the rate

of 24% per year of the original value.” Take this into account now as

effective for 2 years and 5 months.

As of June 30, 1918:

(a) Prepare working sheet.

(b) Construct balance sheet.

(c) Construct income statement.

(d) Write the closing journal entries.

(e) The three remaining partners, as a firm, take over the

interest of Gray’s estate, paying therefore cash $1,000

and three equal notes with interest at 6%, maturing in

one, two, and three years, for the balance.

(f) Write entries which will adjust the partnership interest

represented by Gray’s estate and show settlement of that

interest.

VII

The Ironclad Trunk Corporation was organized and incorporated November

1, 1912, for the purpose of manufacturing trunks, bags, and brushes of

all kinds and dealing in traveling requisites of every description.

The authorized capital of $100,000 consists of 750 shares of common

stock having a par value of $100 per share, and 250 shares of preferred

stock of the same par value.

The incorporators subscribed for at par and paid for the common stock

as indicated below:

Arthur Butler, 250 shares in cash.

A. J. Lindsey, 150 shares by transferring the following assets and

liabilities: cash $3,000; accounts receivable $7,000; notes payable

$3,000; notes receivable $2,000; stock of raw material $9,000; accounts

payable $5,000; furniture and fixtures $2,000.

Edward Harrison, 100 shares by giving bill of sale of machinery

appraised at $6,000; the balance to be paid in one year.

Charles E. Wells, 50 shares by his personal note for $5,000 with

interest at 6%, due in one year.

In connection with the organization of the corporation the following

items were paid in cash: corporation tax $50; filing fees $20;

recording fees $12; legal expenses $500.

(a) Write journal entries to record this information on the

books of the corporation.

(b) Prepare a balance sheet showing the condition of the

corporation at this date.

_Instructions_

Refer to trial balance of VIII to see the method pursued in making the

opening entries for the corporation.

VIII

The following trial balance was taken from the books of the Ironclad

Trunk Corporation at the close of its first year. From it and the

additional notations appended thereto you are asked to furnish:

(a) Working sheet.

(b) Balance sheet.

(c) Income statement.

(d) Closing journal entries.

IRONCLAD TRUNK CORPORATION

TRIAL BALANCE, OCTOBER 31, 1913

Fifth National Bank $7,940.00

Imprest Cash 200.00

Land 10,000.00

Buildings 30,000.00

Machinery and Tools 25,000.00

Materials and Supplies, October 31, 1912 9,000.00

Accounts Receivable 12,000.00

Notes Receivable 10,000.00

Notes Receivable Discounted $4,000.00

Advertising Unexpired 1,000.00

Insurance Prepaid 200.00

Purchases—Material 108,000.00

Notes Payable 18,000.00

Taxes Accrued 200.00

Wages Accrued 3,400.00

Returned Sales 2,200.00

Returned Purchases 2,800.00

Factory Supplies 2,600.00

Labor—Direct 70,000.00

Superintendence 4,000.00

Heat, Light, and Power 12,000.00

Miscellaneous Wages—Factory 3,620.00

Factory Expense 400.00

Accounts Payable 26,000.00

Reserve for Depreciation, Buildings 3,000.00

Interest Accrued on Notes Payable 700.00

Sales 214,706.00

Interest on Bank Balances 46.00

Freight Inward 2,770.00

General Expense 1,920.00

Taxes 350.00

Rent of Building 1,000.00

Reserve for Depreciation, Machinery 2,500.00

Salesmen’s Salaries 4,200.00

Repairs to Machinery 630.00

Reserve for Bad Debts 1,000.00

Cash Discount on Purchases 3,110.00

Interest Earned 418.00

Commissions—Salesmen 3,600.00

Office Salaries 2,800.00

Insurance 150.00

Freight Outward 1,100.00

Bad Debts 1,000.00

Furniture and Fixtures 3,700.00

Authorized Capital Stock—Preferred 25,000.00

Authorized Capital Stock—Common 75,000.00

Unissued Stock—Preferred 12,000.00

Unissued Stock—Common 20,000.00

Subscriptions 4,000.00

Notes Received—Stock Subscription 6,000.00

Bonding Employees—Office 100.00

Cash Discount on Sales 2,300.00

Depreciation 5,500.00

Advertising 600.00

----------- -----------

$380,880.00 $380,880.00

=========== ===========

You are presented with properly certified statements showing the

present inventory of materials and supplies to be $16,300; goods

in process $1,400; finished goods $9,800, and factory supplies in

storeroom $700. It has been estimated that $200 of the freight inward

is applicable to the present inventory of materials and supplies.

Salesmen have been overpaid $600 on their salary accounts. Items

aggregating $400 which have been charged to Expense are found to be on

hand. In the customers ledger you find accounts having credit balances

amounting to $1,500, and uncollectible accounts to the amount of $710.

You decide to write down furniture and fixtures 10%.

_Instructions_

It will be noted that the trial balance presented indicates that the

books have been partially adjusted. The uncollectible accounts of

$710 were taken into consideration when the estimate for reserve for

doubtful accounts was made. Charge them against the reserve.

IX

After Edward S. White, the inventor of a process for constructing a

superior fiber for trunk-making, demonstrated the practicability of his

process, the Ironclad Trunk Corporation purchased all his rights in

patents granted by United States, Canada, Mexico, and Great Britain.

The sale went into effect January 1, 1914. The consideration of

$100,000 was made payable $60,000 in cash, $20,000 in bonds at par, and

$20,000 in two-year interest bearing notes of the company.

To provide for payment of the patent, the corporation, after duly

complying with all legal requirements, issued $100,000 in 20-year 6%

sinking fund bonds, under date of December 1, 1913, interest payable

June 1 and December 1. During the month $70,000 of the bonds were sold

for cash on a 7% basis, and the remainder at the same price during the

following month.

The trust agreement provided that a sinking fund should be established

by a charge against profits every interest period, of an amount

sufficient on a 4% compound interest basis—interest compounded

semiannually—to retire the bonds at maturity. The fund was placed in a

trust company for accumulation.

(a) Give journal entries to effect the foregoing on the

corporation’s books.

(b) Prepare a statement setting forth the condition of

the sinking fund at each interest date during the last

five years previous to maturity of the bonds.

_Instructions_

It will be noted that the problem requires the calculation of the

selling price of the bonds, i.e., their valuation on the given basis.

This may be found from bond tables but preferably by the formula of

Chapter XV. The sinking fund may also be found from tables or the

formula of Chapter XXV.

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

X

(a) Prepare an amortization schedule covering the first

five years life of the bonds.

(b) Write the journal entries for:

1. The first sinking fund instalment.

2. The first bond interest payment.

3. The liberation of the sinking fund at maturity.

4. The retirement of the bonds at maturity.

_Instructions_

Averaging the bonds sold at par with those sold on a 7% basis places

the whole issue approximately on a 6.787% basis. Use that as the

effective rate for the amortization schedule.

XI

Several customers of the Ironclad Trunk Corporation protested

vigorously against paying their accounts when we sent them statements

requesting payment. They denied that they owed the amounts shown on

our books and produced receipts and canceled checks to prove their

contentions. In many cases we found that the receipts and checks were

dated several weeks before the credits appeared on the books and in

some cases no credits had been entered.

The manager immediately requested Leroy Swift, a certified public

accountant, to make a thorough audit. Among other things, the

accountant’s report disclosed the following:

The petty cash sales had been entered in the cash book at smaller

amounts than the records showed. The discrepancy between cash book and

sales records was: trunks $1,040, bags $360.

Freight bills had been raised $300. The Railroad Company had been

overpaid this amount but refunded it on the request of our bookkeeper,

S. O. Bright, who cashed the checks and retained the money.

The Customers column and Net Cash column in the cash book were

short-footed $8,430. To make the balance in the Customers’ controlling

account agree with the total of the individual accounts, the sales book

was short-footed the same amount—bags $2,790, and trunks $5,640.

Credits to customers’ accounts in the amount of $4,740 were missing.

Not a trace of a record for this amount or any part thereof could be

found in any book.

Leather novelties amounting to $1,560 had been sold from the National

Novelty Co.’s consignment but no remittance had been made. The only

record of the transactions were duplicate bills of the sales made.

The money received for these sales had not been deposited and was

appropriated by the embezzler.

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

A $1,000 note receivable had been transferred by forged indorsement as

$950 part payment on a $1,300 automobile bought by the embezzler for

his personal use. The Self-Starter Auto Co. were the holders of the

note.

Checks for $1,800 were drawn to the order of fictitious creditors. The

indorsements were forged by Bright and the checks duly passed through

the bank.

The relatives and friends of Bright agreed to repay the company the

greater part or all of the losses due to his embezzlement. In order to

provide funds for immediate needs the present stockholders donate 20%

of their present holdings of stock, both common and preferred.

Prepare journal entries to give effect to the foregoing as of December

13, 1913.

XII

The City of Oswego donated to the Ironclad Trunk Corporation a building

site having a market value of $40,000, on condition that the company

build a factory worth at least $100,000 and operate at least five

years, employing not less than 100 factory operators.

To take advantage of this offer the corporation obtained permission

to issue $100,000 of 7% cumulative preferred stock having a par value

of $100 per share, dividends payable semiannually. A condition of the

issue made the stock redeemable by lot at the call of the company, the

shareholder having the option of receiving 110 in cash or 120 in common

stock. A redemption fund is to be created out of profits at the yearly

rate of 10% of the issue.

The entire issue was sold for cash May 1, 1914 at 100½. On the same

day 101 Blue Valley R. R. 4% bonds, par $1,000, were purchased at 98

with accumulated interest. The bonds are payable July 1, 1924; interest

payable January 1 and July 1. The entire bond investment was set aside

as a building fund.

Record as of July 31, 1914, the transactions that took place in

connection with the erection of the building and the removal from the

old to the new plant.

The corporation paid taxes of $400 on the building site and partially

completed building. Of this amount $100 applied to the uncompleted

building. During the period the manager devoted two-thirds of his time

to superintending building operations and one-third to supervising

installation of machinery and equipment. His salary amounted to $3,000.

The old land and building and part of the machinery were sold to the

American Harness Company for $49,000, payable $11,000 in cash and the

balance covered by mortgage for five years at 6%. The amount of the

sale was distributed—land $12,000, building $29,000, machinery and

tools $8,000. At the date of the sale the accounts appeared on the

books as follows: land $10,000; buildings $31,000, with a reserve of

$3,000 and nine months’ depreciation on a 5% basis still to be provided

for; machinery and tools $25,000 with a reserve for depreciation

of $2,500. The machinery and tools sold cost $12,000, on which

depreciation has been booked for one year at 10% on original cost. Take

into consideration an additional period of nine months.

The remaining machinery, having been designed especially for our use,

could not be sold for more than one-half its cost; accordingly, the

directors had the machines moved to the new plant. The old machines

appear on the books at a cost of $13,000, with reserve recorded for

one year at 10% and nine months’ depreciation still to be booked.

Additional expenses of removing were as follows: dismantling $40;

crating, drayage and freight $170; labor for setting up machines $60;

superintendent’s time for moving and installation $150.

The manager, not being sure as to the amount at which to book the

machinery, obtained an estimate to duplicate this particular machinery

and put it in running order for $9,000.

(a) Write the journal entries to place the above data on

the company’s books.

(b) Explain briefly the theory underlying your treatment

of the old machinery transferred to the new plant.

_Instructions_

See Chapters V, XI, XVI, and XVII, where most of these matters are

discussed.

XIII-XIV

The directors of the Ironclad Trunk Corporation, after receiving full

authority from the stockholders, set December 31 as the close of the

fiscal year, thereby making the present fiscal period fourteen months

instead of one year.

From the following trial balance and supplementary data prepare:

(a) Condensed balance sheet, supported by schedules.

(b) Condensed income statement, supported by schedules.

TRIAL BALANCE, DECEMBER 31, 1918

Land Donated $ 40,000.00

Buildings 129,000.00

Machinery 47,000.00

Tools 4,680.00

Delivery Equipment 5,900.00

Furniture and Fixtures 2,300.00

Patents 108,000.00

Loans to Employees 6,320.00

Dividend No. 6, Cumulative Preferred Stock

(Payable January 10, 1919) $ 1,400.00

Dividend No. 7, Preferred Stock

(Payable January 10, 1919) 1,500.00

Dividend No. 8, Common Stock

(Payable January 10, 1919) 3,000.00

Interest Accrued on Bonds Receivable 3,200.00

Freight Inward 4,334.82

Freight and Express Outward 2,613.07

Royal Leather Preferred Stock (100 shares) 7,480.00

Fire Loss 6,000.00

Strike Loss 4,200.00

Credit Department Expenses 2,950.40

Pamphlets, Price Lists, and Posters 973.00

Advertising Space Prepaid 260.00

Advertising 731.40

Directors’ Fees 200.00

Entertainment of Customers’ Agents 174.50

Charity 60.00

Workmen’s Compensation Insurance Premiums 640.00

Rent from Houses for Employees 2,390.00

Maintenance of Houses for Employees 318.30

Watchmen’s Wages 700.00

Bonuses Paid to Employees (Direct Labor) 1,980.10

Experimental Expense 2,300.00

Contingent Royalties Fund 2,140.00

Mercantile Agency Reports 80.00

Accounting Expense 500.00

Legal Expenses 300.00

Claims Against Transportation Companies 3,792.00

Bright—Special 14,500.00

Suspense 370.00

Delivery Expense 1,194.50

Due to Consignors 4,387.20

Imprest Cash 200.00

Raw Materials Inventory, October 31, 1917 21,304.00

Trade Customers 108,946.63

Finished Goods Inventory, October 31, 1917 22,100.00

Notes Receivable 18,000.00

Notes Receivable Discounted 3,460.00

Insurance Prepaid 200.00

Insurance 480.00

Raw Materials Purchases 240,000.00

Accrued Office Salaries 760.40

Accrued Taxes 1,220.00

Accrued Advertising 190.00

Sales, Trunks 416,775.00

Sales, Bags 93,518.80

Returned Sales, Trunks 1,750.00

Returned Sales, Bags 619.00

Returned Purchases, Raw Material 2,320.00

Returned Purchases, Bags 974.00

Factory Supplies 2,436.00

Labor, Direct 78,751.20

Labor, Indirect 3,497.00

Factory Superintendence 3,200.00

Heat, Light, and Power Service 7,147.10

Miscellaneous Factory Expense 283.14

Trade Creditors 40,309.00

Reserve for Depreciation, Buildings 13,810.00

Reserve for Depreciation, Machinery 18,411.00

Reserve for Depreciation, Delivery Equipment 2,300.00

Reserve for Depreciation, Furniture and Fixtures 750.00

Reserve for Expiration of Patents 21,000.00

Reserve for Sinking Fund—Bonds of 1933 18,128.08

Reserve for Contingent Royalties 2,140.00

Reserve for Supersession of Patents 20,000.00

Interest Earned 7,810.00

Interest Paid 11,200.00

Office Expense 1,873.38

Warehouse Labor on Raw Materials 1,143.26

Salesmen’s Salaries 4,500.00

Salesmen’s Commissions 12,305.40

Repairs to Machinery 1,748.80

Repairs to Buildings 3,755.50

Reserve for Doubtful Accounts 3,330.70

Discount on Purchases 3,751.30

Discount on Sales 6,400.00

Office Salaries 7,974.00

Provision for Doubtful Accounts 2,379.12

Capital Stock, Cumulative Preferred 100,000.00

Capital Stock, Preferred 50,000.00

Capital Stock, Common 200,000.00

Unissued Stock, Common 10,000.00

Treasury Stock, Common 40,000.00

Assessment for Street Improvements (Donated

Land) 2,000.00

Bonding Employees—Office 200.00

Surplus 41,394.49

Drawings and Patterns 4,606.00

Mortgage Receivable (due 1923) 38,000.00

Accrued Pay-Roll 957.75

Reserve for Land Donated 40,000.00

Bonds Payable 100,000.00

Employees’ Pension Fund 47,500.00

Reserve for Employees’ Pension Fund 47,500.00

Discount on Bonds Payable 7,332.33

Wrapping and Crating Supplies 1,418.90

Ralston National Bank 17,841.53

Bond Sinking Fund 18,128.08

Redemption Fund—Cumulative Preferred Stock 40,000.00

Reserve for Redemption of Cumulative

Preferred Stock 40,000.00

Houses and Land for Employees 24,600.00

Purchases—Bags 91,360.00

Trunks in Process, October 31, 1917 4,984.20

Commissions Earned 564.80

Notes Payable 7,108.00

Taxes 1,520.00

Accrued Interest Receivable 250.00

------------- -------------

$1,314,143.59 $1,314,143.59

============= =============

A careful investigation disclosed the following:

Interim dividends had been paid May 15, 1918: No. 5, cumulative

preferred stock, $1,400; No. 6, preferred stock, $1,500; No. 7, common

stock, $3,000.

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

Items to be distributed:

Account Distribution

Buildings Expenses Selling ¼; Office ⅛; Factory ⅝.

Furniture & Fixtures Expense Selling ¼; Office ⅛; Factory ⅝.

Light, Heat, and Power. Selling $842.90; Office $392;

Freight Inward Factory $5,912.20.

Taxes Materials ¾; Bags ¼.

Building and Equipment $1,300;

Employees’ Houses $220.

The Suspense account was credited for $370 received from a former

customer in payment of an old account which had been charged off as

uncollectible some years ago.

In many cases notes payable have been issued with interest included

in the face of the notes. Of this interest $290 is applicable to the

succeeding period.

Provision for contingent royalties was begun two years ago in

anticipation of an unfavorable decision in an action brought against

us for infringement of patents. Recently the action was decided in our

favor.

Legal expenses of $1,500 for prosecution of infringements of patents

had been charged against profits at the close of the previous year. Of

the present legal expenses, $100 was paid for services in protecting

patents.

Inventories as at December 31, 1918:

Wrapping and Crating Supplies Unused $387.50

Factory Supplies on Hand 718.50

Pamphlets, Price Lists, and Posters on Hand 450.00

Workmen’s Compensation Insurance Prepaid 160.00

Bags in Stock 12,542.00

Trunks in Stock 28,050.00

Raw Materials 8,000.00

Trunks in Process as under:

materials $6,497.10

direct labor $2,680.40

manufacturing expense $976.50

Fire Loss was debited for $6,000 which represents damage to buildings

of $4,000 and loss of machinery of $2,000 after making due allowance

for depreciation. Just after the trial balance was made a check for

$5,400 was received from the insurance company in full settlement of

our claims for fire damage.

The Repairs to Buildings account contains $3,500 of charges for

replacing the parts destroyed by fire.

Provision for reserve for depreciation is to be made on a straight

line basis, at the following yearly rate: buildings 5%; machinery 10%;

delivery equipment 12%; furniture and fixtures 12%.

It was deemed advisable to write off 20% of the accounts of Tools,

and Drawings and Patterns. Also, to reserve from profits $2,000 for

supersession of patents in addition to providing for the reduction in

the life of the patent.

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

accrued amortization.

Bright—Special account shows the balance due on Bright’s embezzlement.

The company holds good collateral in the form of stock for the full

amount.

Trunks in Process, October 31, 1917, comprised raw materials $3,115,

direct labor $1,120, and factory burden $749.20.

The account, Freight and Express Outward, represented items charged to

customers on account of outward freight charges assumed by us and still

owing to the transportation companies.

It was ascertained that on Oct. 31, 1917, the patents had 164 months

yet to run, and that the policy is to depreciate the value remaining at

the end of each fiscal period over the remaining life of the patents.

Royal leather stock was being held because of trade advantages secured

thereby.

Claims against transportation companies represented claims for damage

acknowledged as good by the companies.

_Instructions_

In a footnote to the balance sheet call attention to the contingent

value of donated land. Extreme conservatism might require the setting

aside of a reserve of surplus covering any expenditures on the land,

such as assessments for street improvements, inasmuch as the same

contingency attaches to them as to the land. So long as a good balance

of general surplus is maintained, a special reserve is not usually

considered necessary.

Note that both the Contingent Royalty Fund and its reserve are free.

Transfer the fund to general cash, and the reserve to surplus.

Note that the reserve for supersession of patents is a reserve created

out of surplus and therefore to be treated as a part of net worth. This

is, of course, contrary to best practice.

Fire Loss account, as it appears in the trial balance, has been

properly charged with the values of the assets destroyed but has not

yet been credited with the insurance. Consider carefully the proper

booking of the repairs to buildings on account of the fire.

See Problem XXVI, Appendix A, for instructions as to content of

condensed balance sheet. See also Problem XV, this Appendix.

XV

From the information furnished in the preceding problem.

(a) Construct a surplus statement.

(b) Write the adjusting and closing journal entries.

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

XVI

Some time ago the stockholders of the A. M. Strong Fiber Co. and the

Randall Manufacturing Co. appointed committees on merger. At a joint

meeting of the two committees a plan for merger of the two companies

was adopted. The stockholders of the respective companies accepted

the plan for the joint committee and instructed and authorized their

boards of directors to carry out the terms of the merger. The agreement

provided that a new corporation be formed to acquire the assets and

assume the liabilities of the two companies as shown on their balance

sheets of December 31, 1916, except as noted.

The subjoined balance sheets show the conditions of the two companies.

The balance sheet of the Randall Co. has already been adjusted to meet

the conditions of the merger. The agreement provided, however, that

the machinery and tools of the Strong Co. should be taken over at a

10% reduction of their present book valuation; that the book value

of the Special War Plant assets be written up $20,000 on account of

their adaptability to the regular needs of the merger; and that the

reserve for bad debts be increased to $5,000. The surplus, after these

adjustments, was reduced to even multiples of $10,000.

A. M. STRONG FIBER CO.

BALANCE SHEET, DECEMBER 31, 1916

==================================+=================================

_Assets_ | _Liabilities and Capital_

|

Machinery $60,000.00 | Notes Payable $10,000.00

Tools 4,000.00 | Accounts Payable 75,000.00

Furniture and Fixtures 7,500.00 | Reserve for Bad Debts 3,000.00

Good-Will 150,000.00 | Depreciation Reserve

Raw Materials 75,000.00 | for Machinery 7,000.00

Cash 25,000.00 | Depreciation Reserve

Notes Receivable 47,500.00 | for Furn. and Fixt. 1,500.00

Accounts Receivable 112,500.00 | Depreciation Reserve

Special War Plant 130,000.00 | for War Plant 50,000.00

| Bonds Payable (6%) 100,000.00

| War Munition Bonds

| (7%) 60,000.00

| Reserve for Sinking

| Fund 30,000.00

| Capital Stock, Common 150,000.00

| Capital Stock,

| Preferred (6%) 100,000.00

| Surplus 25,000.00

----------- | -----------

$611,500.00 | $611,500.00

=========== | ===========

RANDALL MANUFACTURING CO.

BALANCE SHEET, DECEMBER 31, 1916

==================================+=================================

_Assets_ | _Liabilities_

|

Land $90,000.00 | Accounts Payable $35,800.00

Machinery 70,000.00 | Notes Payable 20,000.00

Tools 10,000.00 | Wages Payable 2,000.00

Motor Trucks 12,000.00 | Interest Accrued 1,000.00

Furniture and Fixtures 3,000.00 | Reserve for Bad Debts 1,200.00

Patents 60,000.00 | Bonds Payable (5%) 100,000.00

Raw Material 14,000.00 | Capital Stock,

Goods in Process 8,000.00 | Preferred 50,000.00

Finished Goods 19,000.00 | Capital Stock,

Cash 8,000.00 | Common 100,000.00

Notes Receivable 16,000.00 | Surplus 40,000.00

Accounts Receivable 40,000.00 |

----------- | -----------

$350,000.00 | $350,000.00

=========== | ===========

To effect the reduction of the surplus of the Strong Co. to even

multiples of $10,000, by consent of all the stockholders, a special

dividend was declared to be shared by both common and preferred

stockholders equally on the basis of their respective holdings;

and it was further agreed that because the preferred stock carried

a participation privilege and preference as to assets, in the

distribution of the stock of the merger in payment of the respective

interests of the present stockholders, the preferred holders should

be considered as being entitled to a pro rata share of the adjusted

surplus and good-will.

The net profits for the last period, after deduction therefrom of 8%

interest on the respective capitals as adjusted by taking effect of the

foregoing items, were capitalized in even thousands of dollars on a 20%

basis, to determine the value of the good-will of the two companies;

the good-will of the Strong Co. so determined to be in addition to its

present good-will. It was ascertained that the net profits for the last

period were: Strong Co. $41,750, Randall Co., $30,000.

To carry out the plan of the merger, the Sterling Trunk Corporation

was organized with sufficient capital in 7% cumulative preferred

stock and common stock to acquire the two other companies, and

additional common—to remain unissued for the present—to bring the total

capitalization to $750,000.

(a) Submit a statement showing the capitalization of the Sterling Trunk

Corporation and the distribution of the capital stock to the other

companies.

(b) Prepare the balance sheet of the Sterling Trunk Corporation as of

December 31, 1916.

(c) Write the journal entries necessary to adjust the books of the

A. M. Strong Fiber Co. and to show its sale and the transfer of its

properties to the Sterling Trunk Corporation.

XVII

1. A fire partially destroyed the power plant and equipment of the

Zehner Manufacturing Co. on the night of June 30, 1918, entailing

a loss of $25,000 on the building, and a ⅔ loss on the equipment.

Insurance for one year, with the 80% coinsurance clause, had been

purchased January 1, 1918, for $1,775, covering the above property. The

policies carried $40,000 on the power house and $100,000 on the power

house equipment. On that date—January 1, 1918—the values of the power

house and equipment as shown on the balance sheet were:

Power House $75,000.00

Less Depreciation Reserve 12,000.00 $ 63,000.00

----------

Power House Equipment $200,000.00

Less Depreciation Reserve 80,000.00 120,000.00

-----------

Depreciation was estimated at the rate of 4% per annum on the power

house, and 10% on the equipment.

The insurance company settled on the above basis.

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

accounts.

For the purpose of the problem assume that the rate on the power house

was the same as on the equipment.

2. The Colorado Rock Drill Co. authorized the issue of $100,000 of 6%

cumulative preferred stock callable by lot in amounts as follows:

$10,000 at the end of 5 years at 107 in cash.

$10,000 at the end of 7 years at 106 in cash.

$15,000 at the end of 10 years at 105 in cash.

$15,000 at the end of 12 years at 104 in cash.

$50,000 at the end of 20 years at par in cash

or convertible into the company’s common

stock at the option of the company.

The entire issue was sold for cash at 103.

Set up the accounts showing the handling of all redemption transactions

at the five periods above referred to, with these additional facts: It

is the expectation of the company to provide for a permanent increase

in capital of $100,000, the amount of the preferred stock issue, during

the life of the issue; and at the end of the 20 years, the company

exercises its option by converting $30,000 of the preferred into common

stock out of unissued common to that amount held in the treasury.

_Instructions_

Problem 1. Refer to Chapter XXXII.

Problem 2. Refer to Chapters I and XXI.

XVIII

The Sterling Trunk Corporation, hoping to recoup excessive trade

losses, engaged more extensively in the manufacture of war supplies.

Instead of realizing the enormous anticipated profits, they sustained

a severe loss through an explosion followed by a disastrous fire on

August 1, 1918. The assets destroyed were only partially protected by

insurance because of difficulty in getting a reasonable rate. Also some

policies which had expired had not been renewed.

The following information was accepted by the insurance companies as a

basis for settlement. Date of policies January 1, 1918.

LEGEND:

(A) = Name of Property Insured

(B) = Original Value of the Property

(C) = Reserve for Depreciation, Jan 1, 1918

(D) = Yearly Rate of Depreciation

(E) = Face of Ppolicy

(F) = Amount of Property Destroyed on Aug 1, 1918

(G) = Unexpired Premium on Policy Aug 1, 1918

(H) = Coinsurance Clause in the Policy

===========+=========+=========+=====+=======+========+======+=====

(A) | (B) | (C) | (D) | (E) | (F) | (G) | (H)

-----------+---------+---------+-----+-------+--------+------+-----

Buildings | $110,000| $10,500 | 5% |$30,000| $80,000| $200| 80%

Machinery | 76,000| 14,000 | 10% | 20,000| ¾ | 150| 100%

Furniture &| | | | | | |

Fixtures | 4,700| 1,200 | 12% | 4,000| 70% | 10| 80%

Patterns & | | | | | | |

Drawings | 3,500| | 20% | 1,500| All | None | 60%

Finished | | | | | | |

Goods[83]| 16,400| | | 80% of| 90% of| 120| 80%

| | | |selling|selling | |

| | | |price |price | |

-----------+---------+---------+-----+-------+--------+------+-----

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

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

(c) Indicate, by means of journal entries, the effect on the various

accounts involved in the settlement of the losses.

[83] The finished goods were listed at the factory cost but the policy

covered the selling price which was based on a profit of 60% on the

factory cost, with 10% on sales added for selling expenses.

XIX

The European War caused a reduction in the income of the Trunk Company

by an abrupt falling off of sales; also as a result of the rapid

increase in materials several contracts were completed at a loss. These

losses together with the unexpected loss by fire placed the company

in an embarrassing financial condition. There was great pressure from

bondholders because the interest for the last year had not been paid,

and dissatisfaction among stockholders because dividends had been

passed. Current debts could not be met and it was clearly evident that

the business could not continue long in its present condition. To

remedy this a meeting of the stockholders was called and a committee on

reorganization appointed. The recommendations of the committee, which

are given below, were put into effect on December 31, 1918.

The holders of the 6% bonds were given one share of new cumulative 7%

preferred stock in payment of defaulted interest on each bond. The

holders of the $100,000 of 5% bonds assumed for Randall Manufacturing

Co. contributed in cash 5% of the amount of their bonds and received

for each $1,000 bond a new $500 bond bearing 5% interest and $700

in non-cumulative 6% preferred stock. The holders of $60,000 7% war

munitions bonds received for each $1,000 bond $600 in 6% preferred

stock and $500 in common stock. The old cumulative preferred

stockholders were given new non-cumulative preferred stock, share for

share. The old common stockholders were given new common stock and

were assessed $20 per share for which they were given new cumulative

preferred stock.

(a) Determine the amount of cash, bonds and various classes

of stock to carry into effect the reorganization.

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

See Problem XVI for other necessary data. Assume all common stock

outstanding. Par value of old issue bonds, $1,000; stock, $100.

XX

The Hillsdale Co. operates a factory and general sales organization

from its main plant and conducts two branches, A and B, as distribution

centers at conveniently located points. The branches maintain

independent records which are subject to periodic audit by the head

office. At the close of the fiscal period the branch trial balances

are sent to, and incorporated with, the head office trial balance to

determine the results of combined operation. Below are given the trial

balances of the head office and branches with the data necessary to

close the books and determine results. You are asked to present closing

journal entries for Branch A and the entries necessary to incorporate

the branch results with the head office and to close the head office

books. Also present a consolidated balance sheet after closing.

TRIAL BALANCES, JUNE 30, 1918

Branch A Branch B

--------------------- -----------------------

Cash $3,000.00 $1,000.00

Notes and Accounts

Receivable 70,000.00 50,000.00

Salaries 15,000.00 5,000.00

Rent 2,700.00 1,500.00

Other Expenses 10,000.00 7,000.00

Sales $ 75,000.00 $48,500.00

Sundry Accounts

Payable 5,000.00 7,200.00

Purchases from

Head Office 70,000.00 50,000.00

Head Office

Merchandise 70,000.00 50,000.00

Head Office General 20,700.00 8,800.00

----------- ----------- ----------- -----------

$170,700.00 $170,700.00 $114,500.00 $114,500.00

=========== =========== =========== ===========

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

Create on the branch books reserves for doubtful accounts of 1% of the

sales at each branch.

HEAD OFFICE

Plant and Equipment $250,000.00

Depreciation Reserve Plant and Equipment $50,000.00

Cash 25,000.00

Notes and Accounts Receivable 100,000.00

Reserve for Doubtful Accounts 5,000.00

Merchandise Inventory, June 30, 1917 27,500.00

Notes and Accounts Payable 45,000.00

Purchases 170,000.00

Sundry Expenses 35,250.00

Depreciation 12,500.00

Bad Debts 1,125.00

Sales 225,000.00

Sales to Branches 120,000.00

Branch A, Merchandise 70,000.00

Branch B, Merchandise 50,000.00

Branch A, General 20,700.00

Branch B, General 8,800.00

Capital Stock 250,000.00

Surplus 75,875.00

----------- -----------

$770,875.00 $770,875.00

=========== ===========

Head office inventory, $30,000.

Goods were billed to the branches at 150% of cost.

XXI

A New York company doing business in London, received the following

trial balance from its London office at the end of a fiscal year:

TRIAL BALANCE—LONDON OFFICE

Plant £100,000

Accounts Receivable 75,000

Accounts Payable £35,000

Expenses 10,000

Income 100,000

Merchandise 20,000

New York Office Account 135,000

Remittance Account 60,000

Cash 5,000

-------- --------

£270,000 £270,000

======== ========

The New York books showed as follows:

TRIAL BALANCE—NEW YORK BOOKS

Capital Stock $1,000,000.00

Patents $600,000.00

London Office Account 656,100.00

Remittance Account 291,712.50

Expenses 10,000.00

Cash 25,612.50

------------- -------------

$1,291,712.50 $1,291,712.50

============= =============

The remittance account consisted of four 60-day drafts on London for

£15,000 each, which were sold in New York at 4.85½, 4.86, 4.86½, and

4.86¾ respectively.

Make such journal entries as are necessary to incorporate with the New

York accounts the results of the year’s business in London (conversion

to be made at the average rate of exchange of the four remittances),

and establish the new balance of the London office account so that it

will agree with the London books when converted into sterling at 4.87¼,

the rate of exchange ruling on the last day of the year. Show also

trial balance of the New York books after closing.

XXII

Company A owns the entire capital stock of Companies B and C. The

assets and liabilities of the respective companies are as follows:

Company A: cash $10,000; deferred charges $150; inventories $1,000; due

from allied companies $25,000; notes receivable $15,000; petty cash

$100; trade creditors $1,000; capital stock $100,000; surplus $5,250;

notes payable $50,000; other investments $55,000; investments in allied

companies $50,000.

Company B: trade debtors $10,000; cash $4,000; deferred charges

$200; notes receivable $1,000; petty cash $500; inventories $8,000;

land $10,000; buildings $25,000; equipment $20,000; surplus $1,000;

dividends payable $500; due allied companies $30,000; notes payable

$10,000; accrued liabilities $200; capital stock $25,000; trade

creditors $12,000.

Company C: capital stock $30,000; notes payable $15,000; cash $2,000;

trade creditors $4,000; notes receivable $1,000; petty cash $200;

accrued expenses $100; trade debtors $3,500; allied companies $5,100;

surplus $2,300; inventories $5,000; land $7,500; deferred charges $100;

equipment $15,000; buildings $12,000.

Prepare consolidated balance sheet. Submit with your solution your

working papers.

Criticize briefly (not to exceed 500 words) the condition of each

company and state whether, in your opinion, the investments in allied

companies are valued correctly.

XXIII

Jones & Robinson, merchants, are unable to meet their obligations. From

their books and the testimony of the insolvent debtors, the following

statement of their condition is ascertained:

Cash on Hand $ 5,500.00

Debtors ($1,000 good; $600 doubtful but estimated to

produce $200, $1,000 bad) 2,600.00

Property (estimated to produce $9,000) 14,000.00

Notes Receivable, Good 4,250.00

Other Securities ($3,000 pledged with partially

secured creditors; the remainder held by

the fully secured creditors) 28,000.00

Jones, Drawings 9,000.00

Jones, Capital 10,000.00

Robinson, Drawings 8,400.00

Robinson, Capital 16,050.00

Sundry Losses 13,500.00

Preferential Claims—Wages, Salaries, and Taxes 700.00

Trade Expenses 7,400.00

Creditors Unsecured 25,000.00

Creditors Partially Secured 23,900.00

Creditors Fully Secured 17,000.00

Prepare a statement of affairs and deficiency account.

XXIV

Parker & Riley, being unable to meet their obligations, have made

an assignment. You are asked to prepare a statement of affairs for

presentation at a meeting of their creditors. Some of the creditors are

entirely or partially secured, the security being a part of the assets.

The following is a trial balance of their ledger at the date of the

assignment:

Cash $ 1,200.00

Stock and Material (old inventory) 12,000.00

Reliance Trust Co. Stock (20 shares at cost) 2,200.00

Accounts Receivable 10,550.00

Notes Receivable 2,000.00

Mortgage Receivable (second mortgage) 1,000.00

Real Estate (store building and lot) 14,000.00

Fixtures 1,700.00

Horses, Trucks, and Harness (asset account) 1,400.00

Accounts Payable $ 28,000.00

Loans Payable 7,000.00

Mortgage on Real Estate 5,000.00

Purchases 30,000.00

Sales 36,000.00

Rents 1,200.00

Salaries 3,500.00

Interest and Discount 960.00

Taxes Accrued 740.00

Insurance Unexpired 500.00

General Expenses 4,130.00

Parker, Capital 8,000.00

Riley, Capital 4,000.00

Parker, Drawings 3,000.00

Riley, Drawings 1,800.00

---------- ----------

$89,940.00 $89,940.00

========== ==========

The accounts receivable are classed as: good $8,000; doubtful $1,500

(estimated to produce $1,000); worthless, $1,050. Notes receivable will

realize $1,800; the second mortgage is estimated to produce $800; the

trust company shares $1,800; delivery equipment $900; fixtures $1,000;

and real estate $12,500.

Of the accounts payable $20,000 is unsecured and $8,000 is secured by

the second mortgage and trust company stock. The loans payable are

secured by the equity in the real estate. The inventory of merchandise

on hand which foots $5,000 is expected to realize $3,000. Other

liabilities not booked are employees’ wages $550, and interest on

mortgage $125. The unexpired insurance is expected to yield $150 upon

redemption.

Draw up a statement of affairs and deficiency account.

XXV

The Metropolitan Book Co., a corporation, goes into voluntary

liquidation and a trustee is appointed. The following is the trial

balance of the company on July 1, 1918, the date when its affairs are

turned over to the trustee.

Capital Stock $20,000.00

Cash $553.69

Office Furniture 1,666.92

Meter Deposit 60.00

Accounts Receivable 26,153.95

Rogers & Co. (moneys collected

for their account) 14,738.00

Notes Payable 27,573.50

Accounts Payable 4,197.22

Purchases 27,404.74

Sales 8,045.35

Expense 10,751.97

Surplus 7,962.80

---------- ----------

$74,554.07 $74,554.07

========== ==========

Value of merchandise on hand is $20,183.86, and the other assets are

appraised at book value. The trustee’s cash receipts and disbursements

are:

_Dr._ CASH _Cr._

=======================================+============================

Balance taken over $553.69 | Notes Paid $27,573.50

Meter Deposit 60.00 | Accounts Paid 4,197.22

Office Furniture 487.90 | Merchandise Bought 562.55

Accounts Receivable 22,872.75 | Expenses 5,697.01

Additional Collections for | Rogers & Co.

Rogers & Co. (in full) 1,965.24 | (in full) 16,703.24

Sales of Merchandise 22,090.70 |

Commission from Rogers & Co. 6,703.24 |

---------- | ----------

$54,733.52 | $54,733.52

========== | ==========

Accounts receivable not collected are worthless.

Prepare a realization and liquidation account in technical form.

XXVI

Messrs. Sharp and Green having given the firm’s notes to a friendly

company as an accommodation, became embarrassed through failure of the

payee and appointed a trustee to realize and liquidate. The following

is a statement of their condition January 1, 1916:

================================+===================================

_Assets_ | _Liabilities and Capital_

|

Cash $ 500.00 | Mortgage on Real Estate $5,000.00

Merchandise 20,000.00 | Mortgage Interest Accrued 250.00

Real Estate 25,000.00 | Taxes Accrued 375.00

Notes Receivable 5,000.00 | Accounts Payable (including

Accounts Receivable | accommodation paper

(including | as contra) 61,550.00

accommodated | Notes Payable 1,000.00

party $58,000) 62,000.00 | Henry Maxwell,

| Special Partner 10,000.00

| Samuel Green, Capital 20,325.00

| James Sharp, Capital 14,000.00

----------- | -----------

$112,500.00 | $112,500.00

=========== | ===========

The following is a memorandum of the trustee’s transactions for the

year: purchases to complete contract orders $70,000; sales for the

year for cash $108,000; uncollected accounts $2,000; stock of goods

on hand December 31, 1916, $10,000; notes receivable collected at a

loss of $600; accounts receivable collected $3,600, balance lost;

received 75% in full settlement of accommodation notes and paid cash

on account of same $48,000 giving renewal notes for $10,000. The

legal fees and petty expenses paid on account of accommodation paper

amounted to $2,400. The following payments were also made: mortgage,

with interest, and one year’s accrued interest to December 31, 1916;

all taxes, notes payable, and accounts payable; and clerk hire, wages,

and other expense, including an allowance of $100 per month to each of

the active partners, one year’s interest at 6% to Maxwell, interest on

Green’s excess capital ($6,325) for one year at 6%, and trustee’s fee

of $5,000—in all $10,000.

The special partner had a ¹/₁₀ interest and the general partners shared

alike in the residue of the net profits.

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

Prepare the trustee’s realization and liquidation account in technical

form, supported by trustee’s cash account. Show a balance sheet of

the estate as turned back to the partners, and set up the partners’

accounts.

XXVII

Three partners contribute capital as follows: X $90,000, Y $45,000, Z

$15,000. They share profits in the proportion of X 50%, Y 30%, Z 20%.

X’s salary is $5,000, Y’s salary is $3,000, Z’s salary is $2,000. At

the end of their fiscal period X dies. The books are closed and the net

assets ascertained to be $152,500. Z and Y liquidate the firm’s affairs

and distribute the surplus assets quarterly as follows:

First quarter $42,410.20

Second quarter 74,622.30

Third quarter 31,967.50 $149,000.00

---------

Prepare a statement of the partners’ accounts, showing how the

distribution of assets should be made, together with the apportionment

of the loss. Give your authorities.

XXVIII

Use the following instructions as a guide in preparing a special report

on a business with which you are familiar, either by experience or

through investigation.

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

1. Title.

2. Character of business in which engaged.

3. Date of beginning and amount of capital invested.

4. Successive changes affecting:

The ownership (individual, partnership, or corporate).

The amount of capital.

The character of the business in which engaged.

(b) Submit: