APPENDIX B PRACTICE WORK FOR STUDENT— SECOND HALF-YEAR
Reading edition
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; Factory $5,912.20.
Freight Inward Materials ¾; Bags ¼.
Taxes 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 and Capital
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, Preferred 50,000.00
Goods in Process 8,000.00 Capital Stock, Common 100,000.00
Finished Goods 19,000.00 Surplus 40,000.00
Cash 8,000.00
Notes Receivable 16,000.00
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 selling price 90% of selling price 120 80%
(a) What is the effect of the coinsurance clause?
(b) Determine the amount of insurance received for each asset.
(c) Indicate, by means of journal entries, the effect on the various accounts involved in the settlement of the losses.
XIX
The European War caused a reduction in the income of the Trunk Company by an abrupt falling off of sales; also as a result of the rapid increase in materials several contracts were completed at a loss. These losses together with the unexpected loss by fire placed the company in an embarrassing financial condition. There was great pressure from bondholders because the interest for the last year had not been paid, and dissatisfaction among stockholders because dividends had been passed. Current debts could not be met and it was clearly evident that the business could not continue long in its present condition. To remedy this a meeting of the stockholders was called and a committee on reorganization appointed. The recommendations of the committee, which are given below, were put into effect on December 31, 1918.
The holders of the 6% bonds were given one share of new cumulative 7% preferred stock in payment of defaulted interest on each bond. The holders of the $100,000 of 5% bonds assumed for Randall Manufacturing Co. contributed in cash 5% of the amount of their bonds and received for each $1,000 bond a new $500 bond bearing 5% interest and $700 in non-cumulative 6% preferred stock. The holders of $60,000 7% war munitions bonds received for each $1,000 bond $600 in 6% preferred stock and $500 in common stock. The old cumulative preferred stockholders were given new non-cumulative preferred stock, share for share. The old common stockholders were given new common stock and were assessed $20 per share for which they were given new cumulative preferred stock.
(a) Determine the amount of cash, bonds and various classes of stock to carry into effect the reorganization.
(b) Present the journal entries necessary to record these data.
See Problem XVI for other necessary data. Assume all common stock outstanding. Par value of old issue bonds, $1,000; stock, $100.
XX
The Hillsdale Co. operates a factory and general sales organization from its main plant and conducts two branches, A and B, as distribution centers at conveniently located points. The branches maintain independent records which are subject to periodic audit by the head office. At the close of the fiscal period the branch trial balances are sent to, and incorporated with, the head office trial balance to determine the results of combined operation. Below are given the trial balances of the head office and branches with the data necessary to close the books and determine results. You are asked to present closing journal entries for Branch A and the entries necessary to incorporate the branch results with the head office and to close the head office books. Also present a consolidated balance sheet after closing.
Trial Balances, June 30, 1918
Branch A Branch B
Cash $3,000.00 $ 1,000.00
Notes and Accounts 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. (in full) 16,703.24
Rogers & Co. (in full) 1,965.24
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 as contra) 61,550.00
(including 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:
1. A trial balance at the close of a fiscal period.
2. A balance sheet for the same period.
3. A profit and loss statement for the same period.
4. Adjusting and closing journal entries for the same period.
Note: If possible, give 1, 2, 3, for two successive periods
and prepare a comparative balance sheet and profit and loss
statement.
(c) Prepare:
1. A list of the different books and blanks used to record the financial transactions.
2. A sample page or blank or a copy of each item listed under 1.
Note: If the copy should require a great deal of space, simply give the form of ruling, headings, and size of page.
(d) Write one or two typical entries in each book and show the form of closing in actual use.
(e) As a separate problem:
1. Outline the course of an article from the time the order is placed until the goods reach you. This would be a purchase department record.
2. Outline the course of an article from the time you receive the order until the goods reach your customer. This would be a sales department record.
Note: For both 1 and 2 attach actual forms used or copy of same, if possible.
(f) Information in regard to:
1. Terms of sale.
2. Treatment of C. O. D. or approval sales on the books.
3. Treatment of freight inward on the books.
4. Treatment of freight outward on the books.
5. Treatment of accounts for containers or boxes to be returned by
your firm; by your customers.
6. Treatment of petty cash. If this has not been furnished under
(c) 2, give sample page of petty cash.
7. Treatment of consigned goods on the books.
8. Closing journal entries. If this has been furnished under
(b) 4, omit.
9. Treatment of instalment sales.
10. Pay-roll system.
11. Your method of entering payment from customers.
12. Provision for bad debts.
13. Method of providing for depreciation. Give an example.
14. Provision for redemption of bonds payable.
15. Interest on daily or other balances.
16. Proportional discount.
17. Assignment of accounts receivable.
18. Use of check figures.
19. Number of customers.
20. Amount of gross sales.
21. Amount of gross purchases.
22. Methods of obtaining inventories and basis for valuation.
23. Usual gross profit.
24. Usual gross expense.
25. Figuring profits. On selling price or cost price.
26. Figuring expenses. On selling price or cost price.
27. Use of selling or expense charts or charts of any other kind.
28. Insurance carried and manner in which it is written off.
29. System of branch or agency accounts.
30. Nature of items found in allowances.
31. Use of mechanical appliances in offices.
32. Filing systems, other than for correspondence.
33. Frequency of audits by firm’s staff. By outside parties.
34. Cost system in use.
35. Date of installation of present system.
36. Rate of turnover.
37. Treatment of cash sales.
(g) Give:
1. Adverse criticism of any department or part of same which you know from actual experience does not work out as it should.
2. Your opinion as to the cause.
(h) Constructive criticism of any department or part of same which you think would make it more effective or less expensive if conducted according to your plan.
(i) Anything peculiar to your business which has not been included in any of the previous divisions.