Business Accounting Vol 5 1920

THE LIBRARY
OF
THE UNIVERSITY
OF CALIFORNIA
LOS ANGELES
VH, Y OF CALIFORNIA,
-iZiRARY,
LDS ANGELES, CALIF.
BUSINESS ACCOUNTING
Harold Dudley Greeley, C.P.A., Editor
Volume I —Theory of Accounts

By Harold Dudley Greeley
II —Constructive Accounting
By George E. Bennett
III — Cost Accounting

By DeWitt Carl Eggleston
IV —Advanced and Analytical Accounting

By Henry C. Cox
V— Illustrative Accounting Problems

By Charles F. Rittenhouse and
Harold Dudley Greeley
Business Accounting
A VOLUME V
ILLUSTRATIVE ACCOUNTING
PROBLEMS
By
CHARLES F. RITTENHOUSE, B.C.S.
Certified Public Accountant; Professor of Accounting, Boston
University; Member of American Institute of Accountants;
Member of National Association of Cost Accountants
and
HAROLD DUDLEY GREELEY, LL.M,

Certified Public Accountant; Member of the New York
Bar;Member of National Association of Cost Account-
Member of American Institute of Accountants;
ants;
New York Manager of the Walton School of Com-
merce; Formerly, Lecturer on Accounting, Columbia
Universit}^ New York
Third Prinling
NEW YORK
THE RONALD PRESS COMPANY
1921
40010
Copyright, 1920, by
The Ronald Press Compant
All Rights Reserved

Bos. Admin.
Library
HF
EDITORIAL PREFACE
Ten years ago almost any contribution to the liter'
ature ofaccountancy would have been welcomed.

Today, however, with the increasing number of excel-
lent publications, it is incumbent upon one who puts
forth a new accounting work to justify his action.
Much more is it necessary to explain the publication
of a set of accounting books. Hence it is desirable to
state at the outset thepurpose of "Business Account-
ing" and to outline its scope and general methods of
presentation.
While many books have been published on account-
ing topics, in almost every case they are unrelated vol-
umes. In some few instances, a volume on accounting
has logically followed another by the same author, but
with these few exceptions every one published has been
written without connection with, or adjustment to, any
of those already existing. Under these conditions, the
student of accounting, to get any connected and logical
knowledge of must find one of his books
his subject,
here, another there, a third somewhere else, and bridge
over the gaps between them as best he may. The proc-
ess is difficult, and the accounting knowledge he obtains
is not always well co-ordinated and logically developed.
The volumes of "Business Accounting" are intended

to meet this situation. They cannot, it is true, provide
a course of study in the sense that prescribed readings
are recommended, written answers to questions required,
and personal instruction given. Neither do they con-
iii
iv EDITORIAL PREFACE
stitute an encyclopaedia of unconnected and isolated

articles. Rather are they an attempt to present in
simple, non-technical language the basic principles of
account-keeping and their application to various hues
of business, together with general directions for prepar-
ing, analyzing, and interpreting accounting statements.
One who beginning of Volume I and
starts at the
works faithfully through to the end of Volume IV, and
then solves the problems and examines the solutions of
Volume V, should acquire some real understanding of
the theory and practice of accounts — a knowledge that,
supplemented by experience, should enable him success-
fully to stand the test of practical work in any ordinary
business office and furnish a foundation for going as
much further into the study of accountancy as he may
desire.
It may
be noted in passing that the volumes of
"Business Accounting" have been indexed in such a
way as to provide many of the features of an encyclo-
paedia, so that the person desiring the practice on a
particular point or accounting ideas of suggestive value
in particular lines of industry will be able to use the set
to advantage.
Taking up the volumes of the set in order—Volume
I presents the fundamental principles of account-keep-
ing and statement preparation. Upon these basic prin-
ciples all systems of account are built. Volume II ex-
plains the principles governing the development of the
simple accounting procedures described in Volume I
to meet the needs of more complicated and more exten-
sive systems of financial accounting. Volume III ex-
plains in much the same way how the basic principles
EDITORIAL PREFACE v
have been applied to factory or cost accounting. Hav-

ing thus traced the fundamental principles into more
elaborate financial and cost accounting procedures, Vol-
ume IV treats accounting principles and practices
which are more advanced than the basic ones described
in Volume I. These advanced principles are in most
cases subject to differences of opinion, as to their nature
or application, among persons qualified to deal with
them, and it is for this reason that their discussion is
confined to Volume IV. Supplementing the illustra-
tions of accounting principles and statement prepara-
tion, there follows in Volume IV a practical discussion
of the methods of verifying accounts and statements and
of their interpretation and analysis.
The set closes with Volume V, which gives a num-
ber of problems of a practical nature, together with
their solutions. The working of these problems will
not only clarify the reader's ideas but in many cases
will provide models upon which he can base accounting
procedures and build statements to meet concrete situa-
tions arising in his own work.
The readers to whom this set will appeal most
strongly may be divided roughly into two classes. There
will be, on the one hand, business and professional men,
bankers, office managers, and other executives who feel
the need of understanding in a general way the methods
of modem account-keeping and statement preparation.
There can hardly be excuse nowadays for them to con-
sider bookkeeping methods and accounting statements
as too complicated to understand or of such slight im-
portance as to merit no attention. They need a grasp
of the subject so that they may judge for themselves
vi EDITORIAL PREFACE
whether bookkeepers and other persons who keep ac-

counts for them and render statements to them are
giving information which is accurate, adequate, and
presented in the most intelligible form. The entire
tendency of modem business and civic life is toward
more exact accounting, of which the accounting re-
quirements of the present income tax legislation are but
one indication. Any person having substantial inter-
ests at stake should be able to appraise intelligently
the stewardship of those to whom his interests are in-
trusted and the volumes of "Business Accounting" will
give him the technical information this demands.
The whom "Business Ac-
other class of persons to
counting" will appeal composed of those whose duty
is
it is to keep accounts and to prepare statements. They

should find in this set an inspiration and an aid to more
intensive study, which in turn wiU result in improved
accounting ability and an enhanced wage. The careful
and intelligent use of these books will lead beyond ques-
tion to increased power of service to employer and com-
munity.
Haeold Dudley Gbeeley,
Editor, Business Accounting Set.
New York City,
April 1, 1920
PREFACE
Assuming a thorough knowledge of the theory of
accounts and the method of their keeping, accounting
ability is then developed by the training of the mental
faculties in the art of reasoning and of making logical
deductions from given premises. The problems in this
volume have been collected with this object in view.
Where the source of a problem is not indicated, it has
been either compiled or selected by the authors because
they believe that the practice work involved in its
solution will prove valuable as a means of impressing
important or difficult points of accounting theory on the
student's mind; the problems taken from the examina-
tion papers of various C. P. A. examination boards
have been selected with a view to covering as wide a
field of accounting as possible; the problems which
relate wholly to cost accounting procedure have been
compiled by D. C. Eggleston, M. E., C. P. A.,
author of Volume III of this series and assistant pro-
fessor of cost accounting in the College of the City of
New York.
Bookkeeping may be compared to the routine work
of the factory operative; accountancy to the designing,
planning, and control of this work. Thus, between the
routine work of the bookkeeper and the professional
work of the accountant the broad distinction may be
drawn of a daily task which is endlessly repeated and a
task in which the daily problems are never quite the
viii PREFACE
same. It is possible to impart a working knowledge
of bookkeeping by the mechanical process of exercise
and drill in the manner of recording business transac-
tions —
as the factory operative learns his trade. It is
impossible to become an accountant by any system of
drill in account-keeping or by any method of grouping
like accounting problems and studying the method of

their solution.
has been the intention of the authors to
It
present a series of problems the solution of which is
based on theory of accounting as developed in the pre-
ceding volumes but it is not expected that every difficult
;
point involved in the solution will become clear by

referring to the discussion bearing upon that point in
the preceding volumes. So far, however, as theory and
illustration can be helpful in the working out of problems
the solutions of which depend upon the exercise of the
analytical and reasoning faculties, this help is afforded
by the "tie-up" between each problem and the points
of accounting theory which it illustrates — as indicated
in the notes which follow the solutions.
With the *' Points Illustrated " to guide him, and with
the necessary amount of mental perspiration, the student,
it is hoped, will find in this book ample practice work of
the kind which develops analytical accounting ability

and leads to a mastery of the subject of accountancy.
Charles F. Rittenhouse
Harold Dudley Greeley
April 1, 1920
Illustrative Accounting
Problems
Illustrative Accounting Problems
Problem 1
The cash book of a firm at a given date showed a

balance available amounting to $10,000. The firm's
bank pass-book showed a balance of $10,010. The
firm had deposited checks $3,264, which had not been
collected by the bank and for which no credit had been
given. They had also issued various checks which had
not been presented for payment, the numbers and
amounts thereof being as follows:
337 $200.00
351 400.00
352 750.00
355 586.00
356 182.00
357 241.00
360 346.00
361 150.00
362 125.00
363 294.00
Required
Statement reconciling cash book and pass-book.
Solution to Problem 1
RECONCILIATION
Balance, per pass-book $10,010.00
Add— Checks not credited 3,264.00
$13,274.00
ILLUSTRATIVE PROBLEMS
Deduct — Checks outstandiog
337 $200.00
351 400.00
352 750.00
355 586.00
356 182.00
357 241.00
360 346.00
361 150.00
362 125.00
363 294.00. 3,274.00
Balance, per cash book $10,000.00
Points Illustrated in Problem 1
(a) Bank Reconcilement. This solution follows the lines pro-

posed in Volume I, Chapter XX, § 12.
Problem 2
The cash book of a general trading concern shows for

the month of January, 1912, the following:
Receipts
1912
Jau. 4 Collections from custoi 2,818.62
7 1,147.33
10 1,064.87
13 1,232.55
16 1.463.24
23 2.417.14
26 1,283.84
29 1,543.62
31 1,054.27
Total receipts, per cash book $13,925.48

Disbursements
Jan. Overdraft on bank $ 10.32

Sundry checks . . . .
2,153.27
1,427.83
926.84
853.87
428.32
647.83
2,437.38
Balance as shown by cash book 5,029.82
$13,925.48
Cash on hand undeposited amounted to $56.23.

A petty cash fund is operated on the imprest system.
The books had been audited to the 31st of December,
1911, and the fact estabHshed that the overdraft of
$10.32 was correct, after all checks drawn had been
presented and paid by the bank.
The deposits in the bank for the month of January,
as shown by the bank pass-book, after having it bal-
anced at the close of business January 31, amounted to
$13,854.37, and the checks returned by the bank for the
same period totaled $8,832.43.
There were checks outstanding at the time of bal-
ancing, January 31, amounting to $53.27.
Fraud is suspected on the part of the cashier, and
you are asked to check the transactions recorded by
him as shown in cash book.
Prepare a statement showing the results of your
investigation. Also state, with reasons, what further
documents and records you will require, if any, to trace
the cash transactions fully.
(Ohio C. P. A. Examination.)
6 ILLUSTRATIVE PROBLEMS
Solution to Problem 2*
Exhibit A
BANK STATEMENT AND RECONCILIATION
1912
Jan. 1 Debit balance 0/D $ 10.32
31 Debit total checks cashed 8,832.43 $ 8,842.75
Credit deposits 13,854.37
Credit balance pass-book $ 5,011.62

Deduct outstanding checks 53.27
Company's bank balance $ 4,958.35

Add —Cash on hand 56.23
Company's actual cash $^5,014.58
Exhibit B
RECEIPTS, DEPOSITS, AND DISBURSEMENTS
Receipts and Deposits:
January cash book receipts $14,025.48
—
Less Cash not deposited 56.23
Receipts that should have been deposited $13,969.25

Actual deposits 13,854.37
.\ctual shortage in deposits, January 31 $114.88
Cash Book Disbursements:

As footed on cash book in January. . . $8,885.34
Less— To correct error 10.00 $ 8,875.34
Bank Disbursements:
Actually paid in January $8,832.43
Checks outstanding as issued 53.27
Disbursements that should appear on cash book 8,885.70
Disbursements in excess of cash book (Exhibit C) $ 10.36
•Solution by W. P. Kohr. C. P. A.
ILLUSTRATIVE PROBLEMS 7
Exhibit C
CASH BOOK—STATEMENT AND CORRECTIONS
1912
Jan. 31 Receipts per footings $13,925.48
Add — To correct error in footing 100.00
$14,025.48
1 Balance overdrawn $ 10.32
31 Disbursements, per footing . . . $8,885.34
Deduct— To correct error .... 10.00 8,875.34
Add — To correct, per checks drawn (Ex-

hibit B) 10.36 8,896.02
SI Cash book balance •.

$ 5,129.46
Less — Bank balance and cash on hand (Exhibit A) . . . 5,014.58
Net amount of shortage (Exhibit B) $ 114.88
Points Illustrated in Problem, 2
(a) Reconcilement of Bank Balance. The necessity for and

method of reconciling bank balances are explained in
Volume I, Chapter XX, § 12.
(b) Verification of Balance on Deposit. The advisability of
having the balance on deposit verified by the proprietor
or some one entirely in his confidence is pointed out in
Volume IV, Chapter XXXII, § 8.
Problem 3
The Universal Company handles its currency dis-

bursements by the imprest system. As of January 1,
1920, the amount of the fund is $1,000. At the close of
each month, the petty cashier submits to the treasurer
a statement of payments for the month, and receives
the amount required to replenish the fund. The

voucher system is not used.
On January 31, 1920, a statement is received from
the petty cashier showing payments of $462.50. These
are analyzed by the bookkeeper as being chargeable
to the following accounts
General Administrative Expense $212.60

Expense
Selling 191.40
Manufacturing Expense 58.50
It is decided as of this date to reduce the fund by

$200.
Show entry or entries for accomplishing the above.
On the credit side of the cash book a check for

$462.50 should be entered and charged as follows:
General Administrative Expense $212.60

Expense
Selling 191.40
Manufacturing Expense 58.50
This check should be cashed and the money placed in

the petty cash fund, thus restoring the fund to $1,000.
Thereupon $200 should be withdrawn from the fund
and deposited in the bank. An entry to cover this
item should be made on the debit side of the cash book,
the credit being to the Petty Cash account.
Points Illustrated in Problem S
(a) Imprest Petty Cash Fund. This problem illustrates the

operation of an imprest petty cash fund as described in
Volume I, Chapter XX, § 15.
Problem 4
A manufacturing concern buys its raw product from

comparatively few dealers. A simple purchase journal
has been in use since the company began business, in
which only invoices of stock purchased are recorded.
Accounts with individual creditors are kept in the
general ledger. In revising their accounting methods it
is decided to install a voucher system and to discontinue
the accounts with individual creditors. This change

takes place as of July 1, 1919. On that date, the fol-
lowing creditors' accounts appear in the trial balance
taken from the general ledger:
Thomas Groom and Son $ 496.85

R. W. Irwin and Company 1,138.00
George Newton Company 912.55
Begg and Bragg, Inc 637.50
General Chemical Company 48.90
Make such entries and accompanying comments as

would be necessary to give effect to the change.
In order to install the voucher system, a voucher

register must be opened and the first entry in it will be
to record the five following vouchers:
Thomas Groom and Son $ 496.85

R. W. Irwin and Company 1,138.00
George Newton Company 912.55
Begg and Bragg, Inc 637.50
General Chemical Company 48.90
These vouchers should be numbered and entered in

the vouchers payable column, but they should not be
distributed to purchase or expense accounts. They

should be entered in the sundries column of the voucher
register, tobe debited to the individual accounts pay-
able with these various creditors now appearing on the
ledger.
Points Illustrated in Problem 4-
(a) Controlling Account. The purpose and use of controlling

accounts are explained in Volume I, Chapter XXIV,
§4.
(b) Voucher System. The theory underlying the voucher sys-
tem and a general description of its methods of operation,
together with forms, are explained in Volume I, Chapter
XXII.
Problem 5
A mercantile concern which began in a small way

and with a few customers has always kept its accounts
with customers in the general ledger. The number of
such accounts has increased to such an extent that it is
now desired to transfer all accounts with customers to
a loose-leaf sales ledger and to establish a controlling
account therewith in the general ledger.
Using the following customers' balances as of Janu-
ary 1, 1920, show how the transfer of accounts and the
opening of the control account would be effected
James Conway and Company $ 63.90

Henry Jones 197.63
Thomas W. Small 212.15
Charles W. Cutter 94.50
L. W. Hunter and Company 147.96
To close out the customers' accounts in the general

ledger, and to set up a controlling account for a sales
ledger, the following entry would be made in the journal
Accounts Receivable $716.14

James Conway and Company $ 63.90
Henry Jones 197.63
Thomas W. Small 212.15
Charles W. Cutter 94.50
L. W. Hunter and Company 147.96
(a) Need for Controlling Account. This problem illustrates the

need for controlling accounts in order to insure convenience
and speed in handling the numerous details. For a gen-
eral discussion of the functions of controlling accounts, see
Volume I, Chapter XXIV, § 3.
(b) Opening Entry. The entry opening the controlling account
is in accordance with the plan outlined in Volume I, Chap-
ter XXIV, § 4.
Problem 6
Brown has a customers ledger, a purchase ledger,

and a general ledger, the latter containing controlling
accounts with the other two. A\Tien his bookkeeper
submitted to him trial balances of the three he observed
that White owed him $100, subject to a cash discount of
23^%, and an allowance for outward freight of $1.68,
had been entered in the books;
neither of which items
and that he owed White $100, subject to a discount of
4%, which had not been entered. He directed the

bookkeeper to adjust the accounts by a remittance of
stamps. Draft entry or entries that will close the
two personal accounts and maintain the reconcilement
of the ledgers. Separate accounts are kept for cus-
tomers' discount and purchase discount.
{Massachusetts C.P.A. Examination.)
Accounts Payable (White) $100.00

Discounts on Sales 2.50
Freight and Cartage Out 1.68
Accounts Receivable (White) $100.00
Discounts on Purchases 4.00
Postage .18
(Explanation to set forth all the details of the entry.)
(a) Unusual Transactions. As pointed out in Volume I, Chap-

ter XXIV, § 12, care must be exercised in recording unusual
transactions such as the one in this solution, to make sure
that the controlling account is adjusted for every item
posted in any detail account. If this procedure is not
followed, the controlling account will be thrown out of
balance with the subsidiary ledger.
(b) Cash Discounts. For a discussion of cash discounts and the
proper method of recording them, see Volume I, Chapter
XXV.
(c) Anticipation of Cash Discounts. Cash discounts depend
entirely on promptness payment and thus are earned
of
and should be recorded only when taken at the time of
payment. In this solution the cash discounts are taken by
the settlement of the mutual accounts. (See Volume I,
Chapter XXV, §8.)
Problem 7
A and Company sold to B and Company a bill of

goods for $1,000— terms 2% 10 days, net 30 days.
B and Company did not take advantage of the cash
discount, but, when the invoice was due, offered in
settlement cash $333.34 and two notes for $333.33
each, one at 60 days and one at 90 days, due at their
bank.
A and Company accepted and car-
this settlement,
ried the notes for 30 days. They then discounted them
at their bank at 5%.
B and Company paid the 60 days' note when due.
Three days before the 90 days' note was due, A and
Company received from B and Company a 30 days' note
for $200 due at B and Company's bank, and a check for
the balance plus the discount on the new note at 6%,
with a request that A and Company take care of the
90 days' note, which they agreed to do.
A and Company discount the new note at at 5%
their bank when they take up the 90 days' note.
The $200 note is paid by B and Company when due.
Journalize the above transactions for A and Com-
pany.
{Pennsylvania C.P.A. Examination.)
*
The transactions as specified in the above question

can be expressed by means of the following journal
entries
Solution by E. P. Morey, C. P. A.
B and Company $1,000.00
Sales $1,000.00
Sold bill of goods 2/10, net 30.
Cash 333.34
Notes Receivable 666.66
B and Company 1,000.00
Received cash and notes in settlement of account.
Cash 662.49
Bank Discount 4.17
Notes Receivable Discounted 666.66
Discounted notes of B and Company at bank. Rate
of discount, 5%.

Note of B and Company due today and paid by
maker.
Cash 134.33
Bank Discount 1.00
Received from B and Company cash and new note
in renewal of their 90-day note.

Bank Discount .83
Cash 134.16
Payment of B and Company's note due today and
discount received from B and Company.

Note of B and Company due today and paid by
maker.
(a) Cash Discounts. For a discussion of the nature of cash

discounts and the proper method of recording them, see
Volume I, Chapter XXV.
(b) Time of Taking Discount. See Volume I, Chapter XXV,

§ 8, for a discussion concerning the time when cash dis-
counts become effective and may properly be recorded.
(c) Provision for Future Cash Discounts. As pointed out in
Volume I, Chapter XXV, § 16, at the time a balance sheet
is prepared it is sometimes advisable to provide for possible
losses due to the taking of cash discounts by customers.
Problem 8
A corporation has been accustomed to charge the

purchase of machinery to the Machinery account at
cost, and each year to charge the Manufacturing ac-
count and to credit a Reserve for Depreciation account
with an amount which will offset the cost of the ma-
chinery by the time it is estimated that it will be advis-
able to scrap the machines. During the period that
you have been employed to audit the account, you find
that the corporation has sold two machines for $500
each, and this amount has been credited to the Machin-
ery account. One of them cost $1,000, and the amount
reserved for depreciation on this machine is $600. The
other cost $1,500, and the amount reserved for depre-
ciation is $850.
Make the adjusting entries to correct the books.
Reserve for Depreciation $600.00

Machinery $ 500.00
Surplus '.
100.00
Machine costing $1,000 sold for $500, on which $600
had been reserved. Entry previously made: Cash,
debit, to Machinery, credit, for $500.
Reserve for Depreciation 850.00

Surplus 150.00
Machinery 1.000.00
Machine costing $1,500 sold for $500, on which $850
—
had been reserved loss charged against Surplus.
Entry previously made: Cash, debit, to Machinery,
credit, for $500.
(a) Bookkeeping for Depreciation Reserves. The method of

recording depreciation reserves is discussed in Volume I,
Chapter XXIX, § 4.
(b) Replacements. The bookkeeping to record replacements is
Volume I, Chapter XXIX, § 5.
discussed in
(c) Surplus Adjustment. The necessity for adjusting surplus,
capital, undivided profits, or other similar accounts to
record items applicable to prior fiscal periods is discussed
in Volume IV, Chapter VII, § 4.
Problem 9
A machine was estimated to have a

costing $10,000
life of ten years, with a residual value of $1 ,000. At the
close of each year a charge of $900 was made and a
similar amount credited to Reserve for Depreciation.
Just prior to closing the books at the end of the tenth
year the machine was discarded and sold, bringing
$2,000, and a similar machine was bought costing
$15,000. Give the journal entries that you would make
to close the books at the end of the tenth year in order
to cover these transactions and to make necessary

adjustments. Interest is not to be calculated.
Depreciation $ 900.00
Reserve for Depreciation $ 900.00
To set up the 10th and last annual reserve for
depreciation.
Cash 2,000.00
Machinery 2,000.00
To show sale of old machine for cash.
Reserve for Depreciation 8,000.00

Machinery 8,000.00
To charge the loss due to replacement to the re-
serve account.

Surplus 1,000.00
To restore to Surplus the amount of reserve in
excess of the actual loss due to replacement.
Machinery 15,000.00
Cash 15,000.00
To show purchase of new machinery.
(a) Depreciation Reserves. The nature of depreciation reserves

and the bookkeeping necessary to record them are outlined
in Volume I, Chapter XXIX, § 4.
(b) Retirement of Assets. The bookkeeping procedure to re-
cord the retirement of assets when their useful life has
ceased is described in Volume Chapter XXIX, § 5.
I,
(c) Surplus Adjustments. In Volume IV, Chapter VII, § 4, the

necessity for adjusting surplus or other similar account to
record items applicable to prior fiscal periods is discussed.
(d) Straight-Line Depreciation. The depreciation in this prob-

lem was calculated on the straight-line method. A de-
scription of this method and arguments for and against
its use are outlined in Volume I, Chapter XXIX, § 7, and
in Volume IV. Chapter XII, § 7.
Problem 10
Anaccount with Reserve for Depreciation of De-

livery Equipment showed on December 31, 1919, a
balance of $940.80. The Delivery Equipment account
of the same date showed a balance of $13,968.40.
In August, 1919, a horse died which cost $300, no
entry being made at the time. Three years' deprecia-
tion had already been provided for at the time of the
horse's death at the rate of 10% per annum, based on
cost.
In October, 1919, a horse which cost $275 was sold
for $175, the difference between cost and selling price
having been charged to the reserve account. This
horse was bought at the same time the other one was
and the same depreciation has been provided for.
Make necessary adjustments.
Reserve for Depreciation of Delivery Equipment $ 90.00

Surplus 210.00
Delivery Equipment $300.00
To adjust loss caused by death of a horse: cost
depreciation 10% for three years $90.
Surplus 17.50
Reserve for Depreciation of Delivery Equipment . . 17.50
To correct a previous entry charging $100 to reserve
when only $82.50 had been reserved. Cost of horse
$275; sold for $175; three years' depreciation at 10%
$82.50.
(a) Replacements and Retirements. The accounting procedure

for recording replacements and retirements is discussed in
Volume I, Chapter XXIX, §§ 4 and 5.
(b) Surplus Adjustment. The necessity for recording any sur-
plus adjustments applicable to prior fiscal periods is dis-
cussed in Volume IV, Chapter VII, § 4.
(c) Straight-Line Depreciation. Depreciation in this problem
has been calculated on the straight-line method. This
method is discussed in Volume I, Chapter XXIX, § 7, and
Volume IV, Chapter XII, § 7.
Problem 11
December 31, 1918, at the time of closing the books,

the Henry Hudson Company set aside 13^% of ac-
counts receivable as a reserve for bad debts. The ac-
counts receivable on that date showed a balance of
$62,747.93.
June 30, 1919, the accounts of R. W. Rollins and
Company for $137.20 and of J. C. Cutter for $42.25
are written off, as repeated attempts have been made to
collect them.
September 1, 1919, a final dividend of 20% from
trustees in bankruptcy for Thomas Knight on a claim of
$638.20 was received. Previous to this, dividends of

30% and 20% had been received.
July 2, 1920, J. C. Cutter paid us in full the amount
written off on June 30, 1919.
Make necessary entries.
Profit and Loss $941.22

Reserve for Bad Debts $941.22
1/^% of accounts receivable ($62,747.93) set aside as a
reserve for bad debts.
Reserve for Bad Debts 179.45

Accounts Receivable 179.45
Accounts written off as worthless:
R. W. Rollins & Co $137.20
J. C. Cutter 42.25
Cash 127.64
Final dividend of 20% from trustees of Thomas Knight
—claim $638.20, previous dividends, 30% and 20%.
Balance 30% charged off.
J. C. Cutter 42.25
Surplus 42.25
Cutter pays amount previously written off; above en-
try is to reopen his account.
Cash 42.25
J. C. Cutter 42.25
Received of J. C. Cutter amount previously written off
as uncollectible.
- Points Illustrated in Problem 11
(a) Provision for Bad Debts. In this problem the provision for
bad debts was based on the amount of accounts receivable
outstanding. It is more customary to base this provision
on the volume of sales. This matter is discussed in

Volume I, Chapter XXIX, § 11. .
(b) Charging Off Accounts. The procedure involved in charging

uncollectible accounts against the reserve for bad debts is
covered in Volume I, Chapter XXIX, § 11.
(c) Collection of Accounts Previously Written Off. The book-
keeping required upon the collection of an account pre-
viously written off as uncollectible is described in Volume
IV, Chapter VII, § 4.
Problem 12
French and Dysart, engaged in the manu-

Inc., are
facture of lathes. At the time of closing the books
June 30, 1920, the following facts are discovered by the
accountant
March 1, the Essex Machine Company ordered the
delivery of two lathes, which had been manufactured
for them and had been held for shipping instructions
since September, 1919. The lathes had been charged
to the Essex Machine Company on September 21, 1919,
but by an oversight were included in the inventory
taken December 31. One machine was billed at
$962.50 and the other at $750.
The inventory taken December 31 was also found
to contain the following clerical errors: finished stock,
$3,100 too much; raw materials, $1,000 too little.
L. P. Fuller, a customer of the company, failed and
his affairs were settled in the bankruptcy court. A
finaldividend was received March 1, 1919, leaving an
unpaid balance of $610 which was charged off to Profit
and Loss. Fuller began business anew and desiring to
make settlement in full with all creditors as he is able

to do so, sends the company his check for $300 on
account on June 30, 1920. What entry should the
bookkeeper make?
If the $610 had been charged to a Reserve for Doubt-
ful Accounts, what entry would you advise at the time
of recovering the $300?
ADJUSTMENTS
June 30, 1920
Surplus $1,712.50
Inventory $1,712.50
To adjust error in including two lathes billed to the
Essex Machine Company in the inventory of
December 31, 1919.
Surplus 2,100.00
Inventory 2,100.00
To adjust clerical errors in figuring inventory of
December 31, 1919:
Finished stock $3,100 too much
Raw materials 1,000 too little
$2,100 net error

Surplus 610.00
To bring on balance of claim against L. P. Fuller
(charged off March 1, 1919) who desires to make
a settlement.
Cash 300.00
L. P. Fuller on account.
If the $610 had been charged off against a reserve the

entries would be as follows
AccouDts Receivable $ 610.00

Reserve for Bad Debts $ 610.00
Cash 300.00
(a) Surplus Adjustment. In Volume IV, Chapter VII, § 4,

will be found a discussion of the adjustments of surplus
or other similar account required upon the entry of items
affecting prior fiscal periods.
(b) Collection of Account Charged Off. The adjustment neces-
sary when an account previously charged off has been
collected is discussed in Volume IV, Chapter VII, § 4.
Problem 13
The following facts are recorded in a Merchandise

account in A's ledger:
Sales $45,000.00
Purchases 30,000.00
Freight and Cartage (on sales $500, on purchases $500) 1,000.00
Returns by Us 2,500.00
Cash Discounts Allowed Customers 6,750.00
Cash Discounts Taken by A 750.00
Allowances to Customers 1,000.00
Inventory at the close of the year is valued at 5,000.00
(a) Set up the Merchandise account as it now stands

in A's ledger, afterwhich make journal entry or entries
which will close the old Merchandise account and open
such new accounts as you think necessary to show a
complete classification of the trading activities of A.
(b) Submit a statement showing the profit on

merchandise sales.
(c) Make entries for closing all the accounts into a
Trading account.
(Wisconsin C.P.A. Examination.)
Merchandise
Purchases $30,000.00 Sales $45,000.00

Freight and Cartage In . 500.00 Purchase Returns 2,500.00
Freight and Cartage Out. 500.00 Cash Discounts on Pur-
Cash Discounts on Sales 6,750.00 chases 750.00
Sales Allowances 1,000.00
Purchases $30,000.00
Freight and Cartage In 500.00
Freight and Cartage Out 500.00
Cash Discounts on Sales 6,750.00
Sales Returnsand Allowances 1,000.00
Merchandise 9,500.00
Sales $45,000.00
Purchase Returns and Allowances 2,500.00
Cash Discounts on Purchases 750.00
The above entry is to close out the Merchandise
account and to set up instead separate ac-
counts showing the various trading activities.
STATEMENT OF PROFIT
Sales
Gross Sales $45,000.00
Deduct — Returns and Allowances 1,000.00
Net Sales $44,000.00
Cost of Goods Sold:

Purchases (including opening inventory, if any) . . $30,000.00
—
Add Freight and Cartage In 500.00
Total Cost of Purchases $30,500.00

Deduct —Returns and Allowances 2,500.00
Net Purchases $28,000.00

—
Deduct Inventory at close of year 5,000.00
Cost of Goods Sold 23,000.00
Gross Profit on Sales $21,000.00
JOURNAL ENTRIES
Sales $ 1,000.00
Sales Returns and Allowances $ 1,000.00
To show net sales in Sales account.
Purchases 500.00
To show total cost of purchases in Purchases ac-
count.

Purchases 2,500.00
To show net purchases in Purchases account.
Sales 44,000.00
Trading Account 44,000.00
Trading Account 28,000.00

Purchases 28,000.00
To transfer balances of Sales and Purchases ac-
counts.
Merchandise Inventory 5,000.00

Trading Account 5.000.00
To record inventory at close of year.
Points Illustrated in Problem IS
(a) Interpretation of Problem. The problem requires the clos-

ing of "all the accounts into a Trading account." In view
of the fact that some of the accounts listed do not properly
belong in a Trading account, it is assumed that the prob-
lem requires the closing of only those accounts that do
belong in a Trading account. Any other interpretation
would reduce the problem to a simple exercise in journaliza-
tion. Accordingly, some of the items are not closed into
the Trading account in the solution given.
(b) Inadequate Merchandise Account. This problem illustrates
the old-fashioned type of Merchandise account which con-
tains all the elements from which the gross profit is
determined. Such an account is inadequate, for reasons
explained in Volume I, Chapter VIII, § 3.
(c) Separate Accounts for Sales and Purchases. The desirability
of having a separate account for each element from which
the gross profit is determined is explained in Volume I,
Chapter VI, § 13.

(d) Determination of Gross Profit. The method of calculating
gross profit as exemplified in this solution is described in
Volume I, Chapter VIII, § 4.
(e) Cash Discounts. Cash discounts form no part of the trading
income or expense, in accordance with principles explained
in Volume I, Chapter XXV, § 8.
(f) Freight and Cartage Inward. This is an addition to the cost
of purchases, as described in Volume I, Chapter IX, § 8.
(g) Freight and Cartage Outward. This item does not appear in
the Trading account because it is not an expense to be
considered in determining the gross profit. For a discus-
sion of it see Volume I, Chapter IX, § 7.
(h) Bookkeeping to Facilitate Statement Preparation. The
accounts are stated in this solution in a way to facilitate the
preparation of financial statements. The desirability of
this is pointed out in Volume I, Chapter VI, § 9.
(i) Account for Merchandise Inventory. A separate account
is opened for the merchandise inventory, as suggested in
Volume I, Chapter VIII, § 4. This account may be kept

on the ledger during the next fiscal period, being closed into
Merchandise Purchases or into Trading account at the
end of the period; or it may be closed into Purchases at the
beginning of the next fiscal period. Instead of opening a
separate account for merchandise inventory, the amount of

the inventory may
be brought down as a balance of the
Purchases account. The journal entry to effect this would
be Purchases (new account) to Purchases (old account).
(j) Closing Entries. The preparation of closing entries in the
journal is described in Volume I, Chapter VIII, § 7.
(k) Trading Account. The purpose of a Trading account is to
show the gross profit on the books. This account is a
subdivision of the Profit and Loss account, to which its
balance is transferred.
Problem 14
A, B, and C agree to start in business with a capital

of $200,000, of which A is to furnish $100,000 and B and
C $50,000 each. A is to have 3^ interest in the business
and B and C each }^. Interest at 5% is to be credited
on excess, or charged on deficiency of capital. A con-
tributes $100,000, B $45,000, and C $40,000. How
would the capital accounts stand on the books after
adjusting the interest at the end of the year?
{New York C. P. A. Examination.)
First Solution
B is charged interest on his deficiency of $5,000,

resulting in a debit of $250 to his account and a credit
to Profit and Loss.
C charged interest on his deficiency of $10,000,
is
resulting in a debit of $500 to his account and a credit to

Profit and Loss.
The total credit to Profit and Loss is divided, A 3^;

B and C }/i each, leaving A with a credit of $100,375;
B $44,937.50; C $39,687.50.
Second Solution
The total capital contributed is $185,000; had this

been contributed in such proportion as to give A a J^
interest, B 34, and C 34, the investments of each would
have been: A $92,500; B $46,250; and C $46,250. In-
stead, A contributed $7,500 more than his share; B
$1,250 less, and C $6,250 less. Crediting A with inter-
est on this excess and charging B and C with interest
on their deficiencies, we arrive at the results shown in
the solution above.
(a) Division of Profits. As pointed out in Volume I, Chapter

XXXI, § 6, any basis for the division of profits may be
adopted by the partners. In this problem a percentage
basiswas adopted which was to prevail regardless of the
capital contributions.
(b) Interest on Capital. The expedient for compensating a
partner for a capital contribution in excess of that by
another partner by means of allowing interest on capital is
discussed in Volume I, Chapter XXXI, § 9.
Problem 15
D. E. Draper and H. M. Monroe are partners in a

wholesale dry goods business. Among other things,
the partnership agreement states that 5% interest is to
be allowed each partner on his investment and 6%

charged on all drawings in excess of salary allowances,
after which the net profit is to be divided as follows:
Draper, two-thirds; Monroe, one-third.
On January 1, 1920, Draper's capital account
showed a credit of $18,512.60, and Monroe's a credit of
$12,678.52. During the year their drawings in excess of
salary were as follows:
Draper Monroe
February 23 $ 600.00 January 25 $1,000.00
May 26 1,000.00 March 1 500.00
October 15 900.00 September 1 2,000.00
(a) Make entries to give effect to the interest clause

of the agreement and to show the distribution of the
remaining profit.
(b) Which partner would lose in this case, in the
absence of an interest clause.'^
(a)
Interest on Capital $1,559.56

D. E. Draper, Capital Account $925.63
H. M. Monroe, Capital Account t 633.93
Interest on capital for one year at 5%.
D. E. Draper, Capital Account .T 78.03

Interest on Capital 78.03
Interest on drawings at 6% as follows:
$ 600 for 10 mos. 8 days $30.80
1,000 " 7 " 5 " 35.83
900 " 2 " 16 " 11.40
$78.03
so ILLUSTRATIVE PROBLEMS
H. M. Monroe, Current Account 121.00
Interest on drawings at 6% as follows:
$1,000 for 11 mos. 6 days $ 56.00
500 " 9 " 30 " 25.00
2,000 " 3 " 30 " 40.00
$121.00
The balance on Capital account as

of the Interest
brought on the books by the above entries is $1,360.53,
of which Draper is charged with two-thirds and Monroe
with one-third. The net result is a debit in Draper's
account and a credit in Monroe's, amounting to $59.42.
The analysis of each account, so far as the interest
entries are concerned, follows:
DRAPER, CAPITAL ACCOUNT

Debits:
Interest on Drawings $ 78.0S
Two-thirds of debit balance of Interest Account 907.02
Total $985.05
Credit:
Net debit $ 59.42
MONROE, CAPITAL ACCOUNT

Credit:
Interest on Capital $633.93
Debits:
Interest on Drawings $121.00
One-third of debit balance of Interest Account 453.51
Total 574.51
Net credit $ 59.42

ILLDSTRATIVE PROBLEMS 81
(b)
Monroe would have suffered if the agreement had

contained no interest clause, because his investment is
more than one-third of the total capital, whereas he is
entitled to only one-third of the profits.
(a) Interest on Capital. The nature of interest on capital and

the correct methods of recording it are outlined in Volume
I, Chapter XXXI, §§ 9-11.
(b) Interest on Drawings. The connection between interest on

capital and interest on drawings is pointed out in Volume
I, Chapter XXXI, § 10. As this matter is commonly
misunderstood, it is suggested that this reference be ex-
amined with considerable care.
Problem 16
A and B form a partnership, A investing $30,000 and

B $50,000. They agree to share profits and losses
equally. They further agree to and do leave their
original investments intact. At the end of the first
year, the profits from the operation of the business
amount to $30,000, against which A has drawn in twelve
equal monthly instalments on the last day of each
month an aggregate amount of $9,000; B has drawn
against his profits on the last day of each quarter the
total sum of $2,500.
Prepare journal entries adjusting interest at 5%
per annum in respect to both investments and drawings;
and render statements showing what each partner has in

the business at the end of the year.
Interest on Capital $4,000.00

A, Capital $1,500.00
B, Capital 2,500.00
To credit each partner with interest on his capital
at 5%.
A, Capital 206.25
To charge A with interest on drawings at 5% as
follows: Drawings of $9,000 for the year on the
last day of each month amount to a monthly
drawing of $750; the first drawing would be
charged interest for 11 months, the second, 10
months, etc., making an interest charge on $750
for a total of 66 months or 5j^ years, or $206.25.
B, Capital 187.50
Intereston Capital 187.50
As B drew $2,500 on the last day of each quarter,
he would be charged interest on the first drawing
for 9 months, on the second for 6 months, on the
third for 3 months, making a total of 18 months'
interest charge on $2,500 at 5%, or $187.50.
The account with Interest on Capital would be

closed into Profit and Loss, reducing the balance of such
account to $26,393.75, which would be closed out by
the following entry:
Profit and Loss $26,393.75

A, Capital $13,196.87
B, Capital 13,196.88
The following statements show each partner's in-

terest in the business at the end of the year.
A
Investment $30,000.00
Less— Drawings 9,000.00
Net Investment $21,000.00
Add:
Interest on Capital $ 1,500.00
One-half Net Profit 13,196.87 $14,696.87
Less— Interest on Drawings 206.25 14,490.62
Net Capital, December 31 $35,490.62
B
Investment $50,000.00
Less— Drawings 10,000.00
Net Investment $40,000.00
Add:
Interest on Capital $ 2,500.00
One-half Net Profit 13,196.88 $15,696.88
Less —Interest on Drawings 187.50 15,509.38
Net Capital, December 31 $55,509.38
(a) Basis of Profit Distribution. In this problem profits and

losses are shared equally by agreement between the
partners. The various bases upon which profits are
usually divided and the law which governs in case no
provision is made are discussed in Volume I, Chapter
XXXI, §§ 6 and 7.
(b) Interest on Capital. The net effect of the interest on capital
in this problem was to increase B's capital by $509.38, with
a corresponding reduction in A's capital. This provides
extra compensation to B for his excess capital contribu-
tion. This matter is discussed in Volume I, Chapter
XXXI, § 11.
Problem 17
Wilson and Lawson are partners, sharing profits and

losses equally. The partnership is dissolved December
31, 1919, atwhich time Wilson's capital investment was
$10,000, and Lawson's $2,500. The total liabilities of
the firm are $25,000 which includes $5,000 due Wilson
on loan account and $2,500 due Lawson on loan ac-
count. The assets of the firm are disposed of for $30,-
000 on May 1, 1920. Prepare accounts closing the
partnership and showing the position in which the
partners stand to each other. No allowance for interest
is required.
BALANCE SHEET OF WILSON AND LAWSON

December 31, 1919
Cash $30,000.00 Wilson Capital $10,000.00

Profit and Loss 7,600.00 Lawson Capital 2,500.00
Trade Creditors 17,500.00
Wilson's Loan Account . 5,000.00
Lawson's Loan Account. 2,500.00
$37,500.00 $37,500.00
The net $7,500 is divided equally between

loss of
Wilson and Lawson, leaving Wilson's account with a
credit of $6,250, and Lawson's account with a debit
of $1,250.
The amount due outside creditors is paid, after
which Wilson's loan of $5,000 is paid, leaving a cash
balance of $7,500. Inasmuch as Lawson's capital
account has been overdrawn $1,250, Wilson should

insist that $1,250 of the amount due Lawson on his
loan should be withheld to cancel his deficit. Wilson
would take $6,250 of the remaining cash balance, and
Lawson, $1,250, closing all the accounts.
(a) Distribution of Loss. The loss in this case was distributed

between partners on their profit and loss sharing basis.
This is in accordance with principles explained in Volume
I, Chapter XXXII, § 6.
(b) Distribution of Assets. The asset cash was distributed

between partners in the amounts called for by their capital
accounts. The reason for this is stated in Volume I,
Chapter XXXII, § 6.
(c) Offsetting Loan with Deficit. As explained in Volume I,
Chapter XXXII, § 9, the deficit in one partner's account

should be offset by his credit for loans.
Problem 18
Brown, Smith, and Jones are partners sharing profits

and losses equally, their original investments being
$20,000, $5,000, and $45,000 respectively. Upon agree-
ment to dissolve partnership, the debts are liquidated
and the remaining assets converted into cash, realizing
$22,000. How should the cash be divided?
Setting up a balance sheet, will give us the fol-

lowing:
BALANCE SHEET OF BROWN, SMITH, AND JONES
Cash $22,000.00 Brown $20,000.00
De6cit 48,000.00 Smith 5,000.00
Jones 45,000.00
$70,000.00 $70,000.00
Dividing the deficit of $48,000 equally leaves

Brown's account with a credit of $4,000, Smith's with
a debit of $11,000, and Jones' with a credit of $29,000.
Brown and Jones thus have a claim against Smith
for $11,000, which wh^n paid increases the cash to
$33,000, this being shared by Brown and Jones in ac-
cordance with their capital interests: Brown $4,000;
Jones $29,000.
If the claim against Smith is uncollectible, there
would be a loss of $11,000 to be borne equally by Brown
and Jones, leaving Brown's capital account with a debit
of $1,500, and Jones' with a credit balance of $23,500.
Jones would then take the cash of $22,000 and have a
claim against Brown for $1,500.
(a) Distribution Deficit and of Assets.

of As explained in
Volume I, Chapter XXXII, §6, the deficit should be
distributed on the profit and loss sharing basis, whereas
the cash should be divided according to the amounts called
for by the capital accounts.
(b) Loss on Partner's Account. Where one partner has a debit
balance which is uncollectible by the other partners, the
latter share this loss in the ratio of their profit and loss
sharing percentages.This matter is discussed in Volume
I, Chapter XXXII, § 9. In this connection the partner-
ship law (Chapter XXXIX of the Consolidated Laws),
passed in New York State on May 5, 1919, provides in

Section 71, "If any, but not all, of the partners are in-
solvent, or, not being subject to process, refuse to con-
tribute, the other partners shall contribute their share
of the liabilities, and, in the relative proportions in
which
they share the profits, the additional amount necessary
to pay the liabilities."
Problem 19
If the liquidation of a partnership consumes some

time, it may be desired, in settlement, to pay off the
partners in instalments as the assets are converted into
cash.
To illustrate the procedure in such a case, we will
consider the case of a partnership consisting of R, G, and
L, each with a credit to his capital account of $20,000.
Profits and losses are divided, 50% to R, 30% to G, and
20% to L. The firm suffers a loss of $10,000, leaving
assets of $50,000. The partners proceed to convert the
assets into cash and later have cash to the amount of
$20,000 to distribute.
(a) How should the first instalment be divided.'^
(b) The next instalment for distribution is $16,000
and the final instalment is $12,000. How should each
of the last two instalments be divided?
(a) Dividing the loss of $10,000 among R, G, and

L in the proportions stated above, leaves R with a
capital balance of $15,000, G with $17,000, and L with

$18,000.
To make an equitable division of the first instalment,
we should treat the unliquidated assets as a potential
loss to be divided in proper proportions. This poten-
amounts to $30,000, the partners' shares being
tial loss
$15,000, $9,000, and $6,000 respectively. This leaves

the capital accounts as follows: R none; G $8,000; L
$12,000. On the first instalment, R therefore would
receive nothing, G would receive $8,000, and L $12,000.
R would then have a capital of $15,000, G $9,000, and
L $6,000, which accounts now stand in the same ratio
as that by which profits and losses are shared in ac-
cordance with the contract.
(b) The second instalment of $16,000 would be
shared in the proportion of .50, 30, and 20, R receiving
$8,000, G $4,800, and L $3,200. The capital accounts
would then show R $7,000, G $4,200, and L $2,800, or a
total of $14,000.
As the final instalment is only $12,000, a loss of
$2,000 in liquidation has been sustained, which pro-
rated leaves R
with a capital of $6,000, G $3,600, and L
$2,400. This is the basis on which the $12,000 would
be divided.
(a) Preventing Overpayment of Partner. The principal point in

this problem concerns the method of distributing assets
in partial payments upon dissolution of a firm in such a
way as to prevent the overpayment of any one partner.
This very important matter is fully discussed in Volume
I, Chapter XXXII, § 8.
Problem 20
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%, and 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 Z dies. The books are
closed and the net assets ascertained to be $152,500.
X 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, show-

ing how the distribution of assets should be made, to-
gether with the apportionment of the loss.
(New York C.P.A. Examination.)
Capital contributed $150,000.00

Salary credited to partners 10,000.00
Accountability to partners 160,000.00
As there are net assets of only $152,500, there is a

loss of $7,500 to be distributed: $3,750 to X, $2,250 to
Y, $1,500 to Z.
The assets are distributed m
cash instalments as
they are liquidated. In such a case, the basis of dis-
tribution must anticipate any shrinkage in assets in
order that no partner shall be overpaid. The method
is as follows:
When the first instalment is ready for. distribution,
treat the remaining assets as a potential loss, and see

what balances would remain to the credit of each part-
ner such a loss were to be divided in the proportion
if
agreed upon. The credit balances resulting in such a

case would be the basis for distribution of the first
instalment.
Proceeding in accordance with the method outlined
we find that if the first instalment of $42,410.20 was
all that would ever be realized from the assets, there
would be a shrinkage of $110,089.80, which divided

would show X's share to be $55,044.90, Y's $33,026.94,
Z's $22,017.96. If these were charged against the
partners, the resulting balances to the accounts would
be: X, credit, $36,205.10; Y, credit, $12,723.06; and Z,
debit, $6,517.96.
must be treated as an additional
Therefore, Z's debit
potential loss to be borne by X and Y in the proportion
of ^ and %, X's share being $4,073.73 and Y's
$2,444.23. Deducting these losses from the balances
above, gives X a credit balance of $32,131.37 and Y
$10,278.83, the basis for the division of the first in-
stalment.
This does not yet leave the accounts standing in the
ratio of 50, 30,and 20, Z's account being proportionately
less; since the purpose is to establish the above ratio as
soon as possible, the second instalment is treated the
same as the first. After it is ready for distribution the
remaining assets of $35,467.50 are treated as a potential
loss shared, X $17,733.75, Y $10,640.25, and Z $7,093.50,
leaving X a credit balance of $41,384.88, Y $24,830.92,
and Z $8,406.50, which is the basis for distribution of
second instalment.
The accounts of X, Y, and Z now show credit bal-

ances in the ratio of 50, 30, and 20, the same as the basis
for sharing of profits. The third instalment is dis-
tributed in this proportion. As nothing then remains,
there is a final loss in liquidation of $3,500, which is
borne in the agreed ratio and in accordance with the

capital accounts as they then stand.
Following are skeleton ledger accounts with each
partner.
50% Net Loss $ 3,750.00 Investment $90,000.00

First Instalment 32,131.37 Salary 5,000.00
Second " 41,384.88
Third " (50%). 15,983.75
50% Net Loss 1,750.00
$95,000.00 $95,000.00

First Instalment 10,278.83 Salary .... 3,000.00
Second " 24,830.92
Third " (30%). 9,590.25
30% Net Loss 1,050.00
$48,000.00 $48,000.00

Second Instalment 8,406.50 Salary 2,000.00
Third " (20%). 6,393.50
20% Net Loss 700.00
$17,000.00 $17,000.00
4« ILLUSTRATIVE PROBLEMS
(a) Prevention of Overpayment. The point in regard to the

prevention of overpayment of a partner upon dissolution
is a very practical one which is likely to arise in almost
every partnership dissolution. It is discussed and ex-

plained in Volume I, Chapter XXXII, § 8.
Problem 21
A, B, and C engage in business, A contributing

$10,000 and B $5,000, while C, in lieu of any capital
contribution, agrees to undertake the active manage-
ment at a salary of $3,000 per year, to be paid monthly.
After allowing 5% interest on capital, they are to
divide the net result in the proportions of 5, 3, and 2
respectively.
At the end months they ascertain the
of eighteen
position to be unfavorable and decide to wind up. The
assets realize $12,500; there are no liabilities except for
capital and interest thereon and one month's salary due C.
Make up the partners' accounts, showing the amount
to be received by each.
UNADJUSTED BALANCE SHEET OF A, B, AND C AT

DISSOLUTION
Cash $12,500.00 A, Capital $10,000.00
Profit and Loss 2,750.00 B, Capital 5,000.00
C, Salary Account 250.00
$15,250.00 $15,250.00
Profit and Loss
Loss on Realization $2,750.00 A, Net Loss

}/2 . . . $1,937.50
Interest on Capital 1,125.00 B, 3/10 Net Loss 1.162.50
C, 2/10 Net Loss .... 775.00
$3,875.00 $3,875.00
Interest on Capital
Interest on A's Capital . . $ 750.00 Profit and Loss $1,125.00

Interest on B's Capital . . 375.00
$1,125.00 $1,125.00
A Capital
^ Net Loss $ 1,937.50 Investment $10,000.00

Balance . . . 8,812.50 Interest . . 750.00
$10,750.00 $10,750.00
Balance $ 8,812.50
B Capital
3/10 Net Loss $1,162.50 Investment $5,000.00

Balance 4,212.50 Interest . . 375.00
$5,375.00 $5,375.00
Balance $4,212.50
C Salary Account
2/10 Net Loss $775.00 Salary due $250.00
Balance . . 525.00
$775.00 $775.00
Balance $525.00
After crediting interest on capital and distributing

the net loss, A's capital account shows a credit of
$8,812.50; B's a credit of $4,212,50; and C's a debit of

$5^5, A and B should insist that the $250 salary due A
be treated as a set-off against the debit balance in his
account. This being the case, his remaining balance
of $525 could be regarded as a potential loss to be
shared by A and B in the proportion in which they share
losses, the $12,500 cash then being divided between
them in accordance with their adjusted capital ac-
counts. If the claim of $5^5 against C could be col-
lected, there would be $13,025 in cash with which to pay
off the amounts due A and B.
(a) Interest on Capital. The nature of interest on capital and

the accounting means by which it is recorded are described
in Volume I, Chapter XXXI, § 10.
(b) Distribution of Loss and of Assets. As explained in Volume
I,Chapter XXXII, § 6, the loss is distributed on the profit
and loss sharing basis, whereas the cash is divided in
accordance with the capital accounts after they have been
adjusted.
(c) Loss on Partner's Account. The distribution of such a loss
among solvent partners is discussed in Volume I, Chapter
XXXII, § 9. This point is covered also by the New
York Partnership Law which is quoted in the points
illustrated for Problem 18 to which reference should be
made.
(d) Salary of Partner. As explained in Volume I, Chapter
XXXI, § 12, there can be, strictly speaking, no salary
for any partner. The so-called salaries of partners which
are chargeable against profits before the determination of
the net amount divisible are discussed and explained in
this reference. The New York Partnership Law passed
May 5, 1919 (Chapter XXXIX of the Consolidated Laws)
provides in Section 40 " No partner is entitled to remunera-

:
tion for acting in the partnership business." This, how-

ever, does not prevent the allowance of the so-called sala-
ries in the way explained in Volume I, Chapter XXXI, § 12.
Problem 22
JONES AND ROSS

TRIAL BALANCE
June 30, 1920
Land (cost) $ 55,000.00

Building (cost) 37,500.00
Furniture and Fixtures (cost) 5,820.00
Cash 7,682.53
Accounts Receivable 23,731.40
Inventory, December 31, 1919 (cost) 24,260.75
Mortgage Payable $ 35,000.00
Accounts Payable 9,840.62
Notes Payable 5,000.00
C. R. Ross, Salary 250.00
Reserve for Depreciation of Building 7,500.00
Reserve for Depreciation of Furniture and Fixtures 1,750.00
Reserve for Loss on Bad Accounts and Notes Re-
ceivable 169.80
H. B. Jones, Capital 60,000.00
H. B. Jones, Drawings 1,869.00
C. R. Ross, Capital 30,000.00
C. R. Ross, Drawings . .^ . .-. 4,705.00
Sales 82,687.19
Purchases 53,321.60
Freight, Express, and Cartage Inward 1,924.34
Traveling Expenses 2,107.40
Salaries and Wages 9,369.72
Delivery Expenses 1,200.81
Office Expenses 1,587.10
Insurance 435.00
Interest on Notes Receivable 136.24
Interest on Notes Payable 238.90
Interest on Mortgage Payable 875.00
Cash Discounts on Sales 372.02
$232,820.57 $232,820.57
Cost of merchandise on hand June 30, 1920, $25,710.40.
The firm of Jones and Ross conducts a wholesale

and retail hardware business, owning its own real estate.
By
the terms of the partnership agreement, profits
and losses are shared two-thirds by Mr. Jones and
one-third by Mr. Ross: Mr. Ross who acts as general
manager, is allowed a salary of $250 a month, which is
considered as an expense of operating the business;

profits not withdrawn by partners are not considered a
part of their capital investments, but are credited to the
partners' drawings accounts, and may be withdrawn by
the partners at their convenience. On December 31,
1919, Mr. Jones' drawings account contained a credit
balance of $3,629.40. Mr. Ross' drawings account had
no balance.
The item of freight, express, and cartage inward on
merchandise purchases is not considered a part of the
cost of goods purchased. The stock is very varied,
and to distribute properly the cost of freight and cart-
ing among the numerous commodities would be diflScult
and unsatisfactory.
During the six months ending June 30, 1920, the
Sales account has been credited for $86,108.89 repre-
senting gross sales, and debited for $3,421.70 represent-
ing sales returns and allowances; the Purchases account
has been debited for $57,529.46 gross purchases, and

credited for $4,207.86 purchase returns and allowances.
In order that the results of the period may be cor-
rectly shown, the following items require adjustment:
Unexpired insurance as of June 30 $260.00

Taxes accrued to June 30 102.50
Interest accrued on interest-bearing notes receivable to
June 30 24.60
Interest accrued on interest-bearing notes payable to June 30 75.00
OflBce supplies on hand which cost 150.89
Depreciation on the building is figured at the rate of

2% per annum; on the furniture and fixtures, at 10% per
annum. It is desired to set aside out of the profits for
the period a further reserve for loss on bad accounts and
notes receivable amounting to 3^% of the net sales.
Required
(a) Adjusting entries
(b) Working sheet
(c) and loss statement
Profit
(d) Balance sheet
(e) Closing entries
(a)
JONES AND ROSS

ADJUSTING ENTRIES
June 30, 1920
Unexpired Insurance $260.00

Insurance $260.00
To bring onto the books the unexpired insurance as of
this date.
Taxes 102.50
Taxes Accrued 102.50
To bring onto the books the taxes accrued to date.
Accrued Interest on Notes Receivable 24.60

To bring onto the books the interest accrued to date on
interest-bearing notes receivable:
J. A. Shore's note of October 15, 1919, $500,
8 months, 15 days, at 6% $21.25
R. C. Cram's note of April 3, 1920, $230, 2
months, 27 days, at 6% 3.35

Interest Accrued on Notes Payable- 75.00
To bring onto the books the interest accrued to date on
interest-bearing notes payable:
Note of April 1, 1920, favor First National Bank,
$5,000, 90 days at 6%.
OflSce Supplies on Hand 150.89

Expenses
Office 150.89
To bring onto the books the cost of office supplies on
hand as of this date.
Depreciation of Building 375.00

Reserve for Depreciation of Building 375.00
Estimated depreciation on the building for the six
months ending June 30, 1920. Figured on cost
($37,500) at the rate of 2% per annum.
Depreciation of Furniture and Fixtures 291.00
Reserve for Depreciation of Furniture and Fixtures 291.00
Estimated depreciation on furniture and fixtures for
the six months ending June 30, 1920. Figured on
cost ($5,820) at the rate of 10% per annum.
Loss on Bad Accounts and Notes Receivable 413.44

Reserve for Loss on Bad Accounts and Notes Re-
ceivable 413.44
To set aside from the profits of the period 3^% of the
net sales to provide for future losses on bad accounts
and notes receivable.
(For [b] see pages 50 and 51.)

(c)
JONES AND ROSS

TRADING AND PROFIT AND LOSS STATEMENT
For Six Months Ending June 30, 1920
Net Sales:
Less— Returns and Allowances 3,421.70 $82,687.19
—
Deduct Cost of Sales:
Goods on Hand January 1, 1920 $24,260.75
Net Purchases:
Gross Purchases $57,529.46
Less — Returns and
Allowances 4,207.86 53,321.60 $77,582.35
Less— Goods on Hand June 30, 1920 25,710.40 51.871.95
Gross Trading Profit $30,815.24
Deduct — Operating Expenses:

Freight, Express, and Cartage Inward $ 1,924.34
Taxes 102.50
Insurance 175.00
Depreciation of Buildings 375.00
Depreciation of Furniture and Fixtures 291.00 17,071.98
Net Trading Profit $13,743.26
Add — Extraneous Income Items:

Interest on Notes Receivable $ 160.84
Cash Discounts on Purchases 486.72 647.56
Total Income $14,390.82
Deduct — Extraneous Expense Items:

Intereston Notes Payable $ 313.90
Interest onMortgage Payable 875.00
Loss on Bad Debts and Accounts Receivable 413.44 1,974.36
Net Profit for Period:

H. B. Jones— two-thirds $ 8,277.64
C. R. Ross—one-third 4,138.82
$12,416.46
(b)
JONES
WORKING
Six Months Period, January 1,
Tbial Balance peb

Books Adjustments
AcCXJtTNTS
Debits Credits Debits Credits
Land $ 55.000.00
Building 37,500.00
Furniture and Fixtures. 6,820.00
Cash. 7,682.53
Inventory 24,260.75
Mortgage Payable 35,000.00
C. R. Ross, Salary. 250.00
Reserve for Depreciation of Building. 7,500.00 (6) $375.00
Reserve for Depreciation of Furn. and Fixtures. 1,750.00 (7) 291.00
Reserve for Loss on Bad Accts. and Notes Rec 169.80 (8) 413.44
H. B. Jones, Capital 60,000.00
C. R. Ross, Capital 30,000.00
C. R. Ross, Drawings 4,705.00
Sales. 82,687.10
Purchases 53,321.60
Freight, Express, and Cartage In. 1,924.34
Office Expenses 1,587.10 (5) 150.89
Insurance 435.00 (1) 260.00
Intereston Notes Receivable. . . . 186.24 (3) 24.60
Intereston Notes Payable 238.90 (4) $75.00
Intereston Mortgage Payable . . . 875.00
Cash Discounts on Purchases .... 486.72
$232,820.57 $232,820.57
Unexpired Insurance (1) 260.00

Taxes (2) 102.50
.\ecrued Taxes (2) 102.50
.Accrued Interest on Notes Receivable (3) 24.60
.Accrued Interest on Notes Payable (4) 75.00
Office Supplies on Hand (5) 150.
Depreciation of Building (6) 375.00
Depreciation of Furniture and Fixtures .... (7) 291.00
Loss on Bad AccountB and Notes Receivable (8) 413.44
$1,692.43 $1,692.43
AND ROSS
SHEET
1920, to June 30, 1920
Adjcsted Triai, Assets and

B.\L.\NCE Tb.\ding Profit and Loss Liabilities
Debits Credits Debits CrediU Expenses Income Assets Liabilities
1 % 55,000.00 $ 55,000.00
9. 37,500.00 37,500.00
3 5,820.00 5,820.00
4 7,682.53 7.682.53
5 23,731.40 23,731.40
6 730.00 730.00
7 24,260.75 $ 24,260.75 $ 25,710.40 25,710.40
8 $ 35,000.00 $ 35,000.00
9 9,840.62 9 840 62
in 5,000.00 5,000 00
11 250.00 250.00
1"? 7,875.00 7,875 00
13 2,041.00 2,041.00
14 583.24 583.24
15 60,000.00 60,000.00
16 1,869.00 5,498.40 3,629.40
17 30,000.00 30,000.00
18 4,705.00 4,705.00
19 82.687.19 3,421.70 86.108.89
90 53,321.60 57.529.46 4,207.86
9\ 1,924.34 $ 1,924.34
2? 2,107.40 2,107.40
93 9,369.72 9,369.72
24 1,290.81 1,290.81
25 1,436.21 1,436.21
?n 175.00 175.00
27 160.84 $ 160.84
98 313.90 313.90
99 875.00 875.00
30 486.72 486.72
SI 372.02 372.02
39 260.00 260.00
33 102.50 102.50
34 102.50 102.60
35 24.60 24.60
36 75.00 75JM)
37 150.89 150.89
38 375.00 375.00
39 291.00 291.00
40 413.44 413.44
$234,102.11 $234,102.11
ng Profit.. 30,815.24 30,815.21
$116,027.15 ni6,027.I6
Net f rofit 12,416.46 /Jones 8,277.6

lRc8S 4,138.82
$31,462.80 $31,462.80 ;166.813.22 $166,813.22

(d)
JONES AND ROSS

BALANCE SHEET
June 30, 1920
Assets
Fixed Assets:
Land (cost) $55,000.00
Building (cost) $37,500.00
Less— Reserve for Depreciation . . 7,875.00 29,625.00
Furniture and Fixtures (cost) $ 5,820.00

Less— Reserve for Depreciation . . 2,041.00 3,779.00 $ 88,404.00
Current Assets:
Cash on Hand $ 7,682.53
Accounts Receivable $23,731.40
$24,461.40
Less — Reserve for Bad Debts and
Notes Receivable 583.24 23,878.16

Merchandise on Hand 25,710.40 57,295.69
Deferred Charges to Profit and Loss:

Unexpired Insurance $ 260.00
on Hand
OflSce Supplies 150.89 410.89
Total Assets $146,110.58
Liabilities and Net Worth
Fixed Liabilities:
Current Liabilities:
Accounts Payable $ 9,840.62
Accrued Interest on Notes Payable 75.00
Accrued Taxes 102.50

Due C. R. Ross on Salary Account 250.00 15,268.12
Total Liabilities $ 50,268.12
H. B. Jones' Net Worth:

Capital Investment $60,000.00
Add:
Profits Accumulated to January
1, 1920 $ 3,629.40
Two-thirds Net Profit for six
months ending June 30, 1920 .. 8,277.64
$11,907.04
Less — Drawings, January 1, 1920,
to June 30, 1920 5,498.40 6,408.64 66,408.64
C. R. Ross' Net Worth:

Capital Investment $30,000.00
Deduct — Drawings, January 1920, 1,
to June 30, 1920 $ 4,705.00

Less — One-third Net Profit for six
months ending June 30, 1920 . . 4,138.82 566.18 29,433.82
Total Liabilities and Net Worth $146,110.58
(e)
JONES AND ROSS

CLOSING ENTRIES
June 30, 1920
Trading $24,260.75
Inventory $24,260.75
Goods on hand January 1, 1920, per inventory.
Trading 53,321.60
Purchases 53.321.60
Net purchases for six months ending June 30,
1920.
Sales 82,687.19
Trading 82.687.19
Net sales for six months ending June 30. 1920.
Inventory 25,710.40
Trading 25,710.40
Goods on hand June 30, 1920, per inventory.
Trading 30,815.24
Profit and Loss 30,815.24
To transfer to Profit and Loss account the gross
trading profit for the six months ending June
30, 1920, as represented by the balance of the
Trading account.
Intereston Notes Receivable 160.84

Profit and Loss 647.56
To transfer to Profit and Loss account the bal-
ances of the accounts representing extraneous
income for thesix months ending June 30, 1920.

Freight, Express, and Cartage Inward 1,924.34
OflBce Expenses 1,436.21
Taxes 102.50
Insurance 175.00
Depreciation of Building 375.00
ances of the accounts representing operating
expenses for the six months ending June 30,
1920.

on Notes Payable
Interest 313.90
Interest on Mortgage Payable 875.00
Loss on Bad Accounts and Notes Receivable . .
'
413.44
ances of the accounts representing extraneous
expenses for the six months ending June 30,
1920.

C. R. Ross, Drawings 4,138.82
To transfer to the partners' drawings accounts
the net profit for the six months ending June
30, 1920, in the proportion of two-thirds to
H. B. Jones and one-third to C. R. Ross.
(a) Deferred Debits. This problem illustrates the setting up of

deferred charges for unexpired insurance and unused
office supplies, in order to record accurately the true
amount of expense applicable to the period. (See Volume
IV, Chapter II, § 4.)
(b) Arrangement of Items in Balance Sheet. In the balance
sheet in this solution the fixed assets and fixed liabilities
are listed first. This arrangement is unusual except for a
corporation. (SeeVolume I, Chapter XI, § 2.)
(c) Reserves for Depreciation. The reserves for depreciation
and for bad debts are deducted from the assets to which
they relate, in accordance with the principles outlined in
Volume I, Chapter XXIX, § 11.
(d) Working Sheet. This problem illustrates the use of a work-
ing sheet to show clearly the relation between adjusting
and closing entries. (See Volume I, Chapter VIII, § 2.)
The adjusting entries are entered on the working sheet at
the time that they are posted to the ledger, whereas the
closing entries are prepared from the working sheet. In
fact, the purpose of the working sheet is to facilitate the
preparation of closing entries and to minimize the chances
of bookkeeping errors.
(e) Post-Closing Trial Balance. This solution shows the differ-
ence between a trial balance after closing and a balance
sheet. As explained in Volume I, Chapter XI, § 18, the
only difiFerence between these statements is in form and
arrangement.
(f) Form of Balance Sheet. This balance sheet is printed (for
convenience) with the section devoted to HabiHties and
net worth appearing below the section devoted to assets.
There is no essential difference between this form and the
more common one in which the assets section is printed to
the left of the other. This balance sheet is not in what is
known as the statement or report form. In that type of
balance sheet the total of the liabilities is deducted from
the total of the assets, leaving a balance to represent the
capital in the business. As explained in Volume I, Chap-
ter XI, § 2, the report or statement form is most convenient
when the items in the balance sheet are not very numerous.
Problem 23
Smith, Jones and Company, a partnership conduct-

ing a wholesale business and sharing profits in proportion
to investments, concludes to incorporate. The follow-
was prepared as of December 1, 1919,
ing balance sheet
the day on which the corporation is to succeed to the
business.
BALANCE SHEET
December 1, 1919
Cash $ 5,000.00 Accounts Payable $ 25,000.00

Accounts Receivable . 30,000.00 Notes Payable 5,000.00
Inventory 120,000.00 Smith. Capital 60,000.00
Sundry Assets 25,000.00 Jones, Capital 60,000.00
Clark, Capital 30,000.00
$180,000.00 $180,000.00
They incorporate "The Smith-Jones Company"

with an authorized capital stock of $175,000, all the
stock to be issued to the three partners in exchange for

their respective interests in the business.
Closing entries for the partnership books and open-
ing entries for the corporation are required.
ENTRIES TO CLOSE PARTNERSHIP BOOKS

Good- Will $ 25,000.00
Smith.Capital $ 10,000.00
Jones, Capital 10,000.00
To bring good-will on the partnership books,
its value being determined by the excess of
the capital stock to be issued to the partners
over the net worth of their business as shown
by the balance sheet prepared December 1.
Good- Will is divided among them in the pro-
portion in which they share profits.
The Smith-Jones Company '. 205,000.00

Cash 5,000.00
Inventory 120,000.00
Sundry Assets 25,000.00
Good- Will 25,000.00
To record the transfer of assets taken over by
The Smith-Jones Company.

The Smith-Jones Company 30,000.00
To record the transfer of liabilities assumed by
The Smith-Jones Company.
Capital Stock (The Smith-Jones Company) 175.000.00

The Smith- Jones Company 175,000.00
To bring onto the books the 1,750 shares of
stock received from The Smith-Jones Com-
pany in exchange for the partnership business.
Smith, Capital 70,000.00
Jones, Capital 70,000.00
Capital Stock 175,000.00
To show the issue to the individual partners of
the capital stock of The Smith-Jones Com-
pany, thus closing all the accounts on partner-
ship books.
ENTRIES TO OPEN CORPORATION BOOKS

December 1, 1919
The Smith-Jones Company has been incorporated this

day under the laws of the State of Massachusetts, with
an authorized capital stock of $175,000, divided into
1,750 shares of the par value of $100 each.
Cash $ 5,000.00
Sundry Assets 25,000.00
Smith, Jones and Company $205,000.00
To bring onto the books the assets acquired
from Smith, Jones and Company.
Smith, Jones and Company 30,000.00

To bring onto the books the liabilities of Smith,
Jones and Company assumed by the cor-
poration.
Smith, Jones and Company 175,000.00

To show the issue to Smith, Jones and Com-
pany of 1,750 shares of stock in exchange for
the business formerly conducted by them as
a partnership.
(a) Good-Will on Dissolution. As explained in Volume I,

Chapter XXXII, § 10, a partnership upon its dissolution
under circumstances such as those given in this problem

may record a good-will upon its books. Such good-will
constitutes a profit and is divisible among partners in the
profit and loss sharing ratio.
(b) Closing Partnership Accounts. The customary procedure
involved in closing the accounts of a partnership upon
its dissolution is fully described in Volume I, Chapter
XXXII, § 10.
(c) Opening Entry for Corporation. The entry
required to open
corporation books when purchased under
good-will is
conditions similar to those in this problem is discussed in

Volume I, Chapter XXXIII, § 8.
Problem 24
Ralph H. Wilson, George D. Light, and Frank L.

Spear organize the R. H. Wilson Company with an
authorized capital stock of $50,000. The subscription
books close June 1 , all the stock having been subscribed
for. The subscribers pay their subscriptions in cash
July 1, and receive stock certificates covering their
holdings.
Show by pro forma journal entries how the books
would be opened.
June 1
Subscriptions Receivable $50,000.00

Capital Stock Subscribed $50,000.00
The authorized issue of stock of the R. H.
full
Wilson Company has been subscribed for,

subscriptions payable July 1.
Julyl
Cash 50,000.00
Subscriptions Receivable 50,000.00
Cash received in payment of subscriptions.
Capital Stock Subscribed 50,000.00

Stock certificates are issued to the stockholders.

(a) Subscriptions to Capital Stock. In this problem the capital
stock not immediately issued for cash or other considera-
is
tion but is subscribed for by various individuals. The

bookkeeping necessary under these conditions is outlined
in Volume I, Chapter XXXIII, § 6, and in Volume IV,
Chapter XIV, § 4.
Problem 25
Following is the liabilities and capital section of the
balance sheet of a corporation:
Capital Liabilities:
Preferred Stock $100,000.00
Common Stock 500,000.00
First Mortgage Bonds 100,000.00 $ 700,000.00
Notes Payable $ 40,000.00
Acceptances Payable 120,000.00
Accounts Payable 10,000.00 170,000.00
Reserves:
Depreciation $ 20,000.00
Bad Debts 5,000.00
Insurance 10,000.00
Contingencies 20,000.00 55,000.00
Surplus 136,418.20
Total $1,061,418.20
Calculate the book value of the common stock (par

value $50 per share).
Net Worth of Company:
Surplus 136,418.20
Insurance Reserve 10,000.00
Contingent Reserve 20,000.00
$766,418.20
Deduct— Preferred Stock Equity 100,000.00
Common Stock Equity $666,418.20
$666,418.20 divided by 10,000 shares equals $66.64

book value of common stock.
(a) Preferred Stock. The nature of preferred stock is explained

in Volume I, Chapter XXXIII, § 5.
Problem 26
The Nassau Engineering Company fails and a re-
ceiver is appointed on March 1, 1920, who on taking
charge finds the company's liabilities and assets to be

as follows: creditors, unsecured $59,100, partly secured
$16,500, fully secured $13,500. The company owns
real estate $15,000,which is mortgaged for $10,000;
machinery and tools $30,000; materials $3,000, and
book debts $9,000, including $2,500 in litigation on
which a loss of 50% is expected; also securities of the
value of $22,500 acquired in settlements, of which $7,500

are pledged with partly secured creditors and $14,000
with fully secured creditors. There are engineering
contracts in force to the amount of $60,000, on which
$45,000 has been expended. Cash in bank $750. The
capital stock of the company is $75,000, and the ac-
cumulated losses on contracts, bad debts written off,
and expenses show a deficiency of $48,850. Customers'
bills have been discounted to the amount of $4,500, of
which $1,500 will be dishonored in consequence of

failure of obligor. The machinery and tools are ex-
pected to realize only 50% of the book value, and the
real estate is appraised at $12,000. The cost to com-
plete contracts is estimated at $30,000 by the sureties
who offer $2,250 for the stock of materials on hand.
Unpaid taxes and assessments amounting to $216 are
discovered but no entry thereof appears in the company's
books.
Prepare a statement of affairs and deficiency account
in technical form.
NASSAU ENGINEERING COMPANY

STATEMENT OF AFFAIRS
''
March 1, 1920
Assets
Expected to
Book Value Realize Deficiency
$ 750.00 Cash $ 750.00

9,000.00 Accounts Receivable .... 7,750.00 $ 1,250.00
$2,500 in liquidation on
which a loss of 50% is
expected.
Expected to
Book Value Realize Deficiency
22,500.00 Securities Owned 1,500.00
$14,000 pledged with
fully secured creditors
having claims of ... . $13,500.00
Pledged with partly se-
cured creditors 7,500.00
\ $21,000.00
3,000.00 Materials 2,250.00 750.00

45,000.00 Engineering Contracts . . 30,000.00 15,000.00
Contract Price $60,000.00
Less —
Estimated cost to
complete 30,000.00
$30,000.00
15,000.00 Real Estate 2,000.00 3,000.00

Appraised Value $12,000.00
Less — Mortgage (per
contra) 10,000.00
$ 2,000.00
30,000.00 Machinery and Tools .... 15,000.00 15,000.00
$125,250.00 Totals $59,250.00 $35,000.00
Deduct — Preferred Claims

(per contra)
Unpaid Taxes and As-
sessments 216.00
Balance available for Un-

secured Creditors (Indi- ^
eating a dividend to
creditors of approxi-
mately 85%) $59,034.00
Deficiency, per Deficiency
Account 10,566.00
$69,600.00
Liabilities
Expected to
Book Value Rank
$ 89.100.00 Accounts Payable $68,100.00
Deducted contra $21,000.00
10,000.00 Mortgage Payable
Deducted contra 10,000.00
Notes Receivable Dis-
counted 1,500.00
Unpaid Taxes and Assess-
ments
Deducted contra 216.00
$ 99,100.00 Total $69,600.00
Capital Obligations:
Capital Stock $75,000.00
Less— Deficit 48,850.00
26,150.00 Net Worth $26,150.00
$125,250.00
NASSAU ENGINEERING COMPANY

DEFICIENCY ACCOUNT
March 1, 1920
Loss on Accounts Re- Capital Stock $75,000.00

ceivable $ 1,250.00 Deficiency per State-
Loss on Materials 750.00 ment of Affairs 10,566.00
Loss on Uncompleted
Contracts 15,000.00
Loss on Real Estate .... 3,000.00
Machinery and Tools . . . 15,000.00
Losses Not on Books:
Taxes and Assess-
ments 216.00
Loss on Discounted
Note 1,500.00
Debit Balance of Profit
and Loss Account .... 48,850.00
$85,566.00 $85,566.00
(a) Statement of Affairs. The reasons for the technical and

special form of this statement are given in Volume I,
Chapter XII, § 9.
(b) Differences from Balance Sheet. The points in which a
statement of affairs differs from a balance sheet are de-
scribed in Volume I, Chapter XII, § 3. The principal
differences are in the valuation of assets and in the deduc-
tions of assets from liabilities, or vice versa, to record the
securities held by creditors.
(c) Deficiency Account. This account is in the account form
but it might be presented equally well in the statement or
running form. The purpose of the account is described
in Volume I, Chapter XII, § 11.
(d) Preferred Claims. The nature of preferred claims and the
method of stating them in the statement of affairs are
discussed in Volume I, Chapter XII, § 6, and in Volume
IV, Chapter XXV, § 6.
(e) Expected Dividend. This solution indicates that creditors
may reasonably expect a dividend of approximately 85%.
In other words, each creditor is likely to receive 85 cents
on the dollar. The practicability of showing this informa-
tion is discussed in Volume I, Chapter XII, § 10.
(f) Notes Receivable Discounted. This is a contingent liability
which is expected to become an actual one. For a dis-
cussion of this kind of liability and the importance of
indicating it, see Volume I, Chapter XXVII, § 8.
(g) Distribution of Loss. The deficiency account shows that
the total loss is borne in part by the owners and in part by
the creditors. The portion borne by the latter is $10,566,
as shown by the statement of affairs. For a discussion of
this function of the deficiency account, see Volume I,
Chapter XII, § 10.

(h) Net Worth. On the statement of affairs the deficit is de-
ducted from the capital stock to secure the net worth.
This procedure is discussed in Volume IV, Chapter XXI,
§ 7. Another reason for deducting this from the capital

stock is to distinguishbetween the operating loss which
resulted in the deficit and the loss on the realization of the
assets.
Problem 27
The following is a trial balance of the books of the

XY Z Manufacturing Company, which has been de-
clared bankrupt:
TRIAL BALANCE
At June 30, 1914
Real Estate and Buildings $125,000.00
Machinery and Equipment 160,000.00
Customers' Accounts Receivable 170,000.00
Insurance Premiums Unexpired 3,000.00
Mortgage on Buildings 65,000.00
Notes Receivable 26,000.00
Interest Accrued on Mortgage 2,500.00
Cash on Hand and in Bank 6,500.00
Inventory of Raw Material 85,000.00
Inventory of Finished Goods 121,000.00
Investments 12,000.00
Deficit 221,000.00
$929,500.00 $929,500.00
The real and buildings are appraised at

estate
$101,000, and the machinery and equipment at $135,000.
An examination of the customers' accounts shows the
following condition: good $95,000, doubtful (expect to
collect 33}^%) $51,000, bad $24,000. The holders of
the notes payable of $12,000 hold notes receivable in
security of face value of $15,000, but worth only $10,000.

A creditor of $55,000 on open account has in his posses-
sion the stock certificates for the investments assigned
in blank and finished goods pledged to the value of
$16,000. The insurance premiums unexpired have a
cash value of $2,200. An examination of the notes
receivable shows $9,000 good for collection, and
$17,000 doubtful on which 50% will be collected. The
investments have a marketable value of $16,500.
Prepare statement of affairs for submission to credi-
tors, showing the amount on the dollar the creditors
may expect to receive; also prepare deficiency statement.
{Missouri C.P.A. Examination.)
THE X, Y, MANUFACTURING COMPANY

Z,
STATEMENT OF AFFAIRS
At June 30, 1914
Assets
Estimated to
Book Value Realize
Cash on Hand and in Bank $ 6,500.00 $ 6,500.00

.\ccounts Receivable:
Good 95,000.00 95,000.00
Doubtful 51.000.00 17,000.00
Bad 24,000.00
Notes Receivable:
Good ... 9,000.00 $ 9,000.00
Doubtful 17,000.00 8,500.00
$17,500.00
Less — Notes held to secure Notes
Payable:
Book Value $15,000.00
Will Realize 10.000.00 10,000.00 7,500.00
Estimated to
Book Value Realize
Finished Goods 121,000.00 $121,000.00
Less — Pledged to secure Account
Payable 16,000.00 105,000.00
Investments 12,000.00 $ 16,500.00

—
Less Pledged to secure Account
Payable 16,500.00
Inventory Raw Material 85,000.00 85,000.00

Insurance Premium Unexpired .... 3,000.00 2,200.00
Machinery and Equipment 160,000.00 135,000.00
Real Estate and Buildings 125,000.00 $101,000.00
Less— Mortgage and Interest .... 67,500.00 33,500.00
De6cit 221,000.00
Total $929,500.00
Amount available for distribution

to Unsecured Creditors, being
93.68% of their claims, subject
to realization and liquidation ex-
pense $486,700.00
Deficiency, per Deficiency Account . 32,800.00
$519, ''00.00
Liabilities
Estimated
Book Value to Rank
Preferred Claims (none)
Fully Secured Claims:
Mortgage on Buildings $ 65,000.00
Mortgage
Interest on 2,500.00
Deducted from Assets (per contra)
Partly Secured Claims:
Less —
Notes Receivable (de-
ducted per contra) $ 10,000.00 $240,000.00

Less:
Finished Goods Pledged (per
contra) $ 16,000.00
Investments Pledged (per
contra) 16,500.00 22,500.00
Estimated
Book Value to Rank
Unsecured Claims:
Total $929,500.00
Total Unsecured Claims $519,500.00
DEFICIENCY ACCOUNT
Book Deficit $221,000.00 Capital Stock $300,000.00
Shrinkage in Accounts Appreciation of Invest-
Receivable 58,000.00 ments 4,500.00
Shrinkage in Insurance Net Deficiency, per
Premium Unexpired . 800.00 Statement of Affairs 32,800.00
Shrinkage in Notes Re-
ceivable 8,500.00
Shrinkage in Machinery
and Equipment .... 25,000.00
Shrinkage in Real
Estate 24,000.00
$337,300.00 $337,300.00
(a) Condensed Form. This form of statement of affairs differs

from that in Problem 26 in that the shrinkage of each asset
is not indicated in the statement. Such losses on realiza-
tion are shown only in the deficiency account. Reference
should be made to Volume I, Chapter XII, § 11.
(b) Ambiguity in Problem. There is an ambiguity in the prob-
lem in the statement, "A creditor of $55,000 on open
account has in his possession the stock certificates for the
investments assigned in blank and finished goods pledged
to the value of $16,000." From this statement one may
assume either that the creditor holds a total security of
$16,000 consisting of $12,000 in securities and $4,000 in
finished goods, or thathe holds $12,000 in securities and
$16,000 in finished goods, making his total $28,000. The
above solution is based on the second assumption. It is
to be regretted that state boards of examiners do not avoid
ambiguities of this sort.
(c) Interest on Mortgage. The solution properly shows that
interest on the mortgage is secured in the same way that
the principal is secured. In other words, when a mortgage
loan is secured, the security applies to both principal and
interest.
(d) Unexpired Insurance. The problem states that unexpired
insurance has a cash value of $2,200. Accordingly, the
solution states this amount "Estimated to Realize"
in the
account. It is questionable whether this treatment is cor-
rect. If the problem were less definite in its statement
of the cash value, the unexpired insurance would be taken
to have no realizable value because it would be assumed
that the insurance must be continued.
(e) Appreciation of Asset. The investments have a book value
of $12,000 but are expected to realize $16,500. This gain
on realization would, of course, be an offset to the loss and
would constitute an increase in the capital of the business.
Problem 28
The firm of Smith and Jones, of Columbus, Ohio,

a partnership, was forced into bankruptcy. To protect
creditors, each of the partners has also filed a voluntary
petition in bankruptcy.
A trial balance taken from the firm books at October
31, 1913, is as follows:
John Smith $ 35,000.00

William Jones 45,000.00
Cash $ 875.00
Land 10,000.00
Buildings 30,500.00
Machinery, Tools, etc 35,000.00
Furniture and Fixtures 1,500.00
Horses and Wagons 2,350.00
Notes Receivable 18.700.00
Mortgage Payable— Real Estate 25,000.00
Merchandise Inventory, January 1, 1913 59,725.00
Sales 516,875.00
Purchases 196,375.00
Productive Labor 130,500.00
Manufacturing Expenses 125,000.00
Selling Expenses 70,500.00
Administrative and All Other Expenses 29,700.00
$769,625.00 $769,625.00
The mortgage is past due interest 6%— —

last inter-
est payment, July 1, 1913.
Accrued interest on notes receivable (good) amounts
to $225.
Accrued interest on notes payable amounts to $900.
There were invoices for purchases amounting to
$1,800, and wages $2,010, not recorded on books.
Unexpired insurance premiums amount to $350.
Accrued taxes amount to $425.
There is a chattel mortgage on the machinery secur-
ing notes payable, amounting to $10,000, and one of the
creditors on open account holds a chattel mortgage of
$4,000 on merchandise worth $2,500 given for pur-
chases, the balance due on which is $3,000.
$7,500 of the good notes receivable have been as-
signed to secure notes payable for borrowed money.
The notes receivable are classified: $14,500 good;

$1,800 doubtful; and the balance worthless.
The accounts receivable are classified: $40,500 good;
$3,500 doubtful; and the balance worthless.
The land was appraised at $12,000; buildings
$25,000; machinery and tools $26,000; furniture and
fixtures $600; horses and wagons $1,500; and the mer-
chandise inventory at $32,200.
The personal estate of Jones consists of a house and
lot valued at $18,000, and securities valued at $7,500,
and he owes for household debts $750, and to his father-
in-law, in notes payable $20,000, for money borrowed
from him.
The personal estate of Smith consists of a house and
lot valued at $12,000, upon which there is a mortgage of
$5,000; securities valued at $20,000, pledged as collat-
eral for a loan of $15,000. He has other unsecured debts
amounting to $2,990. From the foregoing prepare:
(a) Statement of affairs. Smith and Jones, Octo-
ber 31, 1913, exhibiting thereon also the
percentage of their claims likely to be
realized by unsecured creditors.
(b) Deficiency account,
ôhio C. P. A. Examination.)
ADJUSTING ENTRIES
October 31, 1913
Interest on Mortgage Payable (Administrative and

Other Expense) $ 500.00
Interest Accrued on Mortgage $ 500.00
Interest accrued on mortgage of $25,000, from July
1, 1913, to October 31, 1913.
Interest Accrued on Notes Receivable 2£5.00

Accrued interest on notes receivable.

Interest Accrued on Notes Payable 900.00
Accrued interest on notes payable.
Purchases 1,800.00
To enter on the books invoices for purchases which
were omitted.

Wages Accrued 2,010.00
To enter on the books wages accrued and not paid
to October 31, 1913.
Unexpired Insurance 350.00

Administrative Expense 350.00
To show unexpired insurance as of October 31, 1913.
Manufacturing Expenses 425.00

Taxes accrued to October 31, 1913.
PROFIT AND LOSS STATEMENT

January 1, 1913, to October 31, 1913
Sales $516,875.00
Deduct —
Cost of Sales:
Add— Difference in Inventories . 27,525.00 $225,700.00

Manufacturing Expenses . . . 125,425.00 483,635.00
Gross Profit on Sales $ 33,240.00
Deduct
Selling Expenses $ 70,500.00
Administrative and All Other Expenses 30,525.00 101,025.00
Net Loss $ 67,785.00

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(b)
Deficiency Account
Loss on Accounts Re- Appreciation of Land . $ 2,000.00

ceivable $ 18,400.00 William Jones:
Loss on Notes Receiv- Investment 45,000.00
able 4,200.00 Personal Estate . . . . 4.750.00
Loss on Unexpired In- John Smith:
surance 350.00 Investment 35,000.00
Loss on Real Estate . . 5,500.00 Personal Estate . . . . 9,010.00
Loss on Machinery, Deficiency 11,225.00
Tools, etc 9,000.00
Loss on Furniture and
Fixtures 900.00
Loss on Horses and
Wagons 850.00
Net Trading Loss for
period 67,785.00
$106,985.00 $106,985.00
(a) Rights of Personal Creditors. be noted that the

It will
personal estate of each partner produce the
is listed to
value of his assets minus his personal liabihties. This
follows from the fact that under the procedure of filing
individual petitions in bankruptcy the personal creditors
would be given precedence over the firm creditors so far
as the personal assets are concerned. (See Volume I,
Chapter XXXII, § 4, and Chapter XXXIII, § 3.)

(b) Interest on Mortgage. The security for the principal of the
mortgage covers also the interest. See comments on
Problem 27.
(c) Appreciation of Land. See comments on Problem 27 for a
similar situation.
(d) Unexpired Insurance. In this case the unexpired insurance
premiums are stated as having no realizable value. See
the discussion of this point under Problem 27.
(e) Valuation of Accounts Receivable. The doubtful accounts
receivable are stated as having no realizable value because
the problem does not give any indication of the percent-
age which might be recovered. In a case of this sort it is
better to be conservative in the statement of realizable

value because otherwise the receiver or trustee would be
overcharged and the loss on realization of assets would be
overstated,
(f) Merchandise Inventory, The problem states that the mer-
chandise inventory was appraised at $32,200. This
amount is stated as realizable because assumed that
it is
the appraisal was on the liquidating basis and not on the

assumption that the business would continue. Conse-
quently, a loss on realization of merchandise is shown. It
is more customary to value the merchandise on a going
concern basis and then to appraise it on the liquidating

basis in order to indicate the loss on realization. Since
the problem does not give this information the solution
cannot supply it.
Problem 29
The Peter Post, a manufacturer, were in a

affairs of
very critical condition, for, although he had an unim-
paired investment of $62,500, and his books showed a
clear increase of $6,022, he owed his trade creditors
$25,289 and had only $265 in cash and $4,062 in receiv-
able book accounts on which to rely for funds. The
rest of his business estate was tied up in the following
chattels which he had acquired in an effort to keep pace
with a business growth that had outrun his capital:
machinery and tools $31,497; raw materials $18,838;
partly made goods $31,562; and finished wares $7,587.
It was also necessary, in order to continue operations,

to have immediate cash for pay-rolls and incidental
expenses.
A meeting of his principal creditors was called, and,
as appeared that the business was well established,
it
profitable, and had a sure and growing market, they

decided to advance him $6,000 in cash for immediate
needs and extend his credit in a sufficient amount to
permit of the purchase of necessary materials and gener-
ally to continue operations till the present stock of
materials could be made up and realized on.
In order to insure the proper application of the
funds and credit so provided, a trustee was appointed to
administer the finances till the creditors' claims were
satisfied, at which time the control would revert to the

proprietor.
The subsequent operations under the trusteeship
were as follows cash paid for labor $15,725 for expenses
: ;
$5,430; for additional tools $750; purchases on book ac-

count, charged to materials $6,300, to expenses $15,000;
sales on book account $72,300; loss on collection on book
debts $380; personal drawings of Peter Post $3,500.
The unliquidated values at the close of the trustee-
ship were as follows: inventory of raw materials $5,000;
finished wares $27,900; accounts receivable outstanding
$3,382; and accounts payable $89.
Prepare, with due regard to the grouping, order, and
arrangement of the items, as best calculated clearly to
display the facts, (a) realization and liquidation ac-
count, (b) trustee's cash account, (c) balance sheet of
business as restored to Peter Post.
PETER POST
REALIZATION AND LIQUIDATION ACCOUNT
Assets to be Realized: be Liquidated:

Liabilities to
$ 81,497.00 Trade Creditors $ 25,289.00
18,838.00
Goods in Process 31,562.00 Assets Realized:
7,587.00 By Trustee's Trading Account:
4,062.00 Raw Material $18,838.00
Goods in Process . . 31,562.00
Total $ 93,546.00 Finished Goods.. . . 7,587.00
Liabilities Liquidated: Total $57,987.00

25,289.00 Accounts Receivable. 3,682.00 61,669 00
Assets Not Realized:

Machinery and Tools 31,497.00
1x188 on Realization, per Balance
Sheet 380.00
$118,835.00 $118,835.00
TRUSTEE'S TRADING ACCOUNT

Sales $72,300.00
Cost of Goods Sold

Opening Inventory, per Realization and Liquida-
tion Account $57,987.00
Purchases 6,300.00
Labor 15,725.00
Total $80,012.00
Closing Inventories:
Raw Material $ 5,000.00
Finished Goods 27,900.00 32,900.00
Net 47,112.00
Gross Profit $25,188.00

Expenses 20,430.00
Net Profit, per Balance Sheet $ 4,758.00

TRUSTEE'S CASH ACCOUNT

Balance, received from Peter Post $ 265.00
Receipts:
Loan from Principal Creditors $ 6,000.00
Accounts Receivable:
Collections on Old Accounts 8,682.00
Collections on Trading Accounts 68,918.00 78,600.00
Total Available Funds $78,865.00
Payments:
Labor $15,725.00
Expenses 5,430.00
Machinery and Tools 750.00
Personal Drawings by Peter Post 3,500.00
Loan from Principal Creditors 6,000.00
Trade Creditors:
Payments on Old Accounts 25,289.00
Payments on Trading Accounts 21,211.00 77,905.00
Balance, at close of Trusteeship $ 960.00
BALANCE SHEET AT CLOSE OF TRUSTEESHIP

Assets
Current Assets:
Cash $ 960.00
Inventory
Finished Goods 27,900.00
Raw Material 5,000.00
Total $37,242.00
Fixed Assets:
Total $69,489.00
Liabilities
Trade Creditors $ 89.00
Peter Post, Capital:

Balance at beginning of Trusteeship $68,522.00
6
Add— Net Profit on Trustee's Trading 4,758.00
Total $73,280.00
Deduct
Loss on Realization of Assets $ 380.00
Cash Drawings by Peter Post .... 3,500.00 3,880.00
Balance at close of Trusteeship 69,400.00
Total $69,489.00
Points Illustrated in Problem, 29
(a) Realization and Liquidation Statement. The reasons for the

technical form of this statement are discussed in Volume
I,Chapter XIII, § 3.
(b) Omission of Cash. In this solution, cash
is not included
among has already been

the assets to be realized because it
realized, "realization" meaning the reduction of assets to

cash. It may, however, be included among the "assets to
be realized" and among the "assets realized" but such
inclusion would have no effect upon the determination of
the loss on realization. As pointed out in Volume I,
Chapter XIII, § 9, the inclusion of cash facilitates to some
extent the comparison of the assets listed on the realization
and liquidation statement with the assets listed on a balance
sheet or a statement of affairs.
(c) Trading Result. It is essential that the profit or loss from
trading be distinguished from the loss or gain on reali-
zation. Consequently, a trustee's trading account is
presented in addition to the realization and liquidation
statement. For a discussion of the principles involved
see Volume IV, Chapter XXV, § 5.
(d) Form of Trading Statement. The trading statement is in
simple form, prepared in accordance with principles out-
lined in Volume I, Chapter IX, § 15.
(e) Proprietor's Drawings. The drawings by the proprietor are
stated in a way to indicate that they are not expenses.
This is in accordance with the discussion in Volume Ij
Chapter VIII, § 7.
(f) Tie-Up between Statements and Balance Sheet. As pointed

out in Volume IV, Chapter XXI, § 13, it is desirable to
connect statements of trading, or profit or loss, or others
of an operating nature such as the realization and liquida-
tion account, with the balance sheet, which shows the
financial position after the operations are recorded. In
this solution this connection is indicated by the analysis of
the Capital account shown on the balance sheet.
Problem 30
X, Y, and Z, foundry men, unable to meet their

obligations, suspend payment January 1, 1908, and
appoint a trustee to realize and liquidate for the benefit
of their creditors. The books showed the following
assets and liabilities:
Assets
Land and Buildings $125,000.00

Materials and Supplies 95,000.00
Cash 450.00
$435,450.00
Liabilities
Mortgage on Foundry Premises $100,000.00

Taxes Accrued (estimated) 835.00
Capital 93,365.00
$435,450.00
The trustee's cash receipts and payments during the

year 1908 are as follows:
Receipts
Notes Receivable (outstanding January 1, 1908) $ 15,000.00

Accounts Receivable (outstanding January 1, 1908) 106,500.00
Cash Sales 5,435.00
Notes Receivable (contracted during 1908) 13,500.00
Accounts Receivable (contracted during 1908) 212,000.00
Total Receipts $352,435.00
Payments
Interest on Mortgage, one year at 5% 5,000.00
Taxes for year 1907 865.00
Purchase of Material and Supplies 98,000.00
Labor 135,000.00
General Expenses 45,000.00
Interest on Bills Payable to September 30, 1908. at 5% 2,800.00
Total Payments $346,665.00
Other transactions were as follows:
Sales on credit $335,000.00

Bad debts written off accounts prior to January 1,
1908 $8,000.00
Bad debts written off accounts subsequent to Janu-
ary 1, 1908 2,000.00 10,000.00
Discounts and allowances to customers' accounts

prior to January 1, 1908 $ 500.00
Discounts and allowances to customers' accounts
subsequent to January 1, 1908 300.00 800.00
Notes received from customers 20,000.00

Notes given to creditors ($110,000 being renewals) 180,000.00
Inventory of materials, December 31, 1908 92,000.00
At the end of the year the business was returned to

the owners.
Prepare reahzation and Hquidation account, and
balance sheet.
(Michigan C. P. A. Examination.)
X, Y, AND Z
REALIZATION AND LIQUIDATION ACCOUNT

December 31, 1908
Assets to be Realized
Materials and Supplies 95,000.00
Accounts Receivable 115,000.00 $435,000.00
Liabilities Liquidated:
Taxes Accrued (estimated) 835.00 62,085.00
Liabilities Not Liquidated:

Mortgage Payable $100,000.00
Supplementary Charges:
Taxes in Excess of Estimated Amount 30.00
$777,115.00
Liabilities to be Liquidated:
Taxes Accrued (estimated) 835.00 $342,085.00
Assets Realized:
Notes Receivable $ 15,000.00
Materials and Supplies, per Trustee's Trading
Account 95,000.00 216,500.00
AssetsNot Realized:
Furniture and Fixtures 10,000.00 210,000.00
Loss on Realization and Liquidation, per Balance

Sheet 8,530.00
$777,115.00
X, Y, AND Z
TRUSTEE'S TRADING ACCOUNT

For the Year Ended December 31, 1908
Sales $340,435.00
Cost of Goods Sold:

Inventory, January 1, 1908, per Realization and
Liquidation Statement $ 95,000.00
Purchases 98,000.00
Labor 135,000.00
Total $328,000.00
Inventory, December 31, 1908, per Balance
Sheet 92,000.00 236,000.00
Expenses:
General Expense $ 45,000.00
Interest on Mortgage 5,000.00
Interest on Notes Payable 2,800.00
Bad Debts Written Off 2,000.00
Taxes (estimated) 865.00
Discounts and Allowances 300.00 55,965.00
Net Profit, per Balance Sheet $ 48,470.00

X, Y, AND Z
BALANCE SHEET
December 31, 1908
Assets
Fixed Assets:
Furniture and Fixture:^ 10,000.00 $210,000.00
Current Assets:
Cash $ 6,220.00
Merchandise 92,000.00 205,420.00
Liabilities and Capital

Fixed Liabilities
Current Liabilities
Notes Payable $180,000.00
Taxes Accrued 865.00 182,115.00
Total Liabilities $282,115.00
Capital
Balance, January 1, 1908 $ 93,365.00
Profit on Trading 48,470.00
$141,835.00
Loss on Realization and Liquidation, per Reali-
zation and Liquidation Account 8,530.00
Balance, December 31, 1908 133,305.00
Total Liabilities and Capital $415,420.00

(a) Realization and Liquidation Statement. The reasons for

the technical form of this statement are explained in
Volume I, Chapter XIII, § 3.
(b) Trading Result. The necessity for distinguishing the result
of trading from the loss or gain on realization is pointed
out in Volume IV, Chapter XXV, § 5.
(c) Form of Trading Statement. The trading statement given
in the solution is a simple form following the lines laid
down in Volume I, Chapter IX, § 15.
(d) Accrued Liability for Taxes. The desirability of setting up
an estimated amount for this liability is pointed out in
Volume IV, Chapter III, § 1.
(e) Supplementary Charges. The purpose of the section of the
realization and liquidation account entitled "Supplemen-
tary Charges" is explained in Volume I, Chapter XIII,
§12.
(f) Omission of Cash. See the discussion on this point under
Problem 29.
Problem 31
Smith and Murray have been doing business as

equal partners and have kept their books by single
entry. They wish to admit Davis as a partner and
have their books kept by double entry. Their books
and inventory taken show the following assets and
liabilities: merchandise $9,241; cash $850; real estate
$3,000; accounts receivable $6,941; store fixtures $571;

Smith's investment account, credit $6,400; Murray's
investment account, credit $5,390; accounts payable
$4,175; notes payable $975.
Prepare statement of assets and liabilities and find

each partner's present worth, after which make opening
entry for the double-entry set of books. Davis is
admitted and invests cash $3,000; merchandise $2,000;
notes receivable $1,000. Make opening entry for
Davis.
SMITH AND MURRAY

STATEMENT OF ASSETS AND LIABILITIES
Assets
Cash $ 850.00
Real Estate 3,000.00
Store Fixtures 571.00
Liabilities
Notes Payable $ 975.00

Total Liabilities 5,150.00
Net Worth $15,453.00
STATEMENT SHOWING NET PROFIT

Net Worth $15,453.00
—
Deduct Net Balances of Capital Accounts:
Smith $6,400.00
Murray 5,3.90.00 11.790.00
Net Profit:
Smith, one-half $1,831.50
Murray, one-half 1,831.50 $ 3,663.00
OPENING ENTRIES
Cash $ 850.00
Store Fixtures 571.00
Smith, Capital 8,231.50
Murray, Capital 7,221.50
Cash 3,000.00
Davis, Capital 6,000.00
(a) Single-Entry Statement. The preparation of statements as

required in this problem, where the books of account
have not been kept by double entry, is outlined in Vol-
ume I, Chapter XXXV, § 9.
(b) Opening Entry for Partnership. The entries required for
opening partnership accounts are outlined in Volume I,
Chapter XXXI, § 3.
Problem 32
On January 1, 1920, Robert A. Grant began business
as a retail dry goods merchant. His capital at the
time consisted of the following assets: merchandise
$12,300, cash $1,150, furniture and fixtures $600.
There were no liabilities to be recorded at the outset
of the business enterprise.
He sold most of his goods for cash, although credit
was extended in certain cases.
The books of account, which had been kept by single

entry, consisted of a ledger and a cash book, and various
supporting memorandum records, which, however, from
their nature were not entirely reliable.
At the end of three months, Mr. Grant desired to
ascertain whether he was making any money. The
clerks were set to work taking inventory, and the book-
keeper was instructed to prepare a list showing all out-
standing accounts receivable and payable, and all other
assets not recorded in the accounts. This produced
the following results
Merchandise on Hand $24,062.62

Cash in Bank 2,572.43
Cash in Drawer 224.17
Purchases of office equipment during the period

amounting to $275 were disclosed by an inspection of
the paid invoices on file.
Invoices have been received and entered on the
books covering the purchase of goods amounting to
$375.20. The goods had not yet arrived and accord-
ingly were not included in the inventory.
Feeling the need of more working capital, Mr. Grant
sold, on February 10, certain bonds which he had been
holding as investments, realizing thereon $1,250, which
amount was placed in the business.
Prepare
(a) Statements showing the assets and liabilities

and the net profit or loss for the period.
(b) Entry to open double-entry books.
(a)
ROBERT A. GRANT
COMPARATIVE STATEMENT OF ASSETS AND
LIABILITIES
For Three Months
Assets
Jan. 1 Mar. 31 Increase
Cash in Bank $ 1,150.00 $ 2,572.43 $ 1,422.43

Inventory 12,300.00 24,437.82 12,137.82
Accounts Receivable 2,165.74 2,165.74
Cash Drawer
in 224.17 224.17
Furniture and Fixtures 600.00 875.00 275.00
Total Assets $14,050.00 $30,275.16 $16,225.16
Liabilities
Accounts Payable $15,203.21 $15,203.21
Total Liabilities $15,203.21 $15,203.21
Net Worth $14,050.00 $15,071.95 $ 1,021.95
Net Increase in Net Worth $ 1,021.95

—
Deduct Additional Investment 1,250.00
Net Loss $ 228.05
(b)
March 31, 1920
Cash in Bank $ 2,572.43

Cash in Drawer 224.17
Inventory 24,437.82
Furniture and Fixtures 875.00
Robert A. Grant, Capital $15,071.95
To change from single to double entry.
(a) Single-Entry Statements. The method of preparing state-

ments and loss from single-entry accounts is de-
of profit
scribed in Volume I, Chapter XXXV, § 7. This method
would necessarily be used wherever the accounts had not
been kept by double entry.
(b) Invoices for Merchandise Not Received. It is necessary at
the close of each fiscal period to ascertain that all invoices
for merchandise purchased but not received are correctly
recorded in the accounts. In view of the fact that the
invoice represents a current account payable, whereas the
merchandise, although a current asset, must be sold before
cash can be realized upon it, it is necessary to record both
the merchandise in the inventory and the invoice among the
accounts payable. Otherwise, the true financial condition
of the business will not be indicated.
(d) Furniture and Fixtures. Attention is invited to the fact
that the purchase of furniture and fixtures in this example
does not represent an expense of the business. (See
Volume I, Chapter IX, § 5, and Volume IV, Chapter IV,
§13.)
(e) Capital Contributions. This problem illustrates the fact
that the contribution by a proprietor of additional capital
does not constitute income of the business. This is ex-
plained in Volume I, Chapter III, § 4, and Chapter X,
§15.
'
Problem 33
A "single-entry" set of books for 1912 are sent to

you with an order to prepare a profit and loss statement
for the year and a balance sheet at December 31. The
starting capital was $34,500.
The accounts receivable Jan. .. $26,500.00 Dec. 31 . . . $44,000.00
The accounts payable Jan. 7,500.00 Dec. 31 . 9,750.00
The merchandise Jan. 8,500.00 Dec. 31 . 9,500.00
The plant and machinery Jan. . . 10,000.00 Dec. 31 . 10,000.00
The furniture and fixtures Jan. 700.00 Dec. 31 . 700.00
A summary of cash book for the year shows as

follows
Received
Capital Paid In 2,500.00
Disbursed
Bank Overdraft, January 1 $ 3,700.00
General Expense 5,000.00
Wages 7,750.00
Personal Account 1,500.00
Leaving a bank account of $2,000, and currency on hand $50.
Provide 5% on capital, disregarding addi-

interest
tions during the year and personal drafts, deducting
10% for plant and machinery depreciation, 5% for
furniture and fixtures, and 5% for bad debts reserve.
{Illinois C. P. A. Examination.)
COMPARATIVE STATEMENT OF ASSETS AND

LIABILITIES
Assets Jan- 1 Dec. 31 Increase Decrease
Cash $ 2,050.00 $ 2,050.00

Accounts Receivable $26,500.00 44,000.00 17,500.00
Merchandise 8,500.00 9,500.00 1,000.00
Plant and Machinery 10,000.00 9,000.00 $1,000.00
Furniture and Fixtures 700.00 665.00 35.00
Total Assets $45,700.00 $65,215.00 $19,515.00

Liabilities Jan. l Dec. 31 Increase Decrease
Accounts Payable $ 7,500.00 $ 9,750.00 $ 2,250.00

Bank Overdraft 3,700.00 $3,700.00
Reserve for Bad Debts 2,200.00 2,200.00
Total Liabilities .... $11,200.00 $11,950.00 $ 750.00
Net Worth $34,500.00 $53,265.00 $18,765.00
Net Increase in Net Worth $18,765.00

Add— Drawings 1,500.00
$20,265.00
Less:
Capital Paid In $2,500.00
5% Interest on Capital of January I 1,725.00 4,225.00
Net Profit for the year $16,040.00

One Year Ending December 31
Less —
Cost of Goods Sold:
Merchandise on Hand, January 1 $ 8,500.00
Net Purchases 14,750.00
$23,250.00
Less— Merchandise on Hand, December 31 9,500.00 13,750.00
Deduct:
General Expenses $ 5,000.00
Wages 7,750.00
Depreciation of Plant and Machinery 1,000.00
Loss on Bad Debts 2,200.00
Interest on Capital (5% on $34,500) 1,725.00 17,710.00

BALANCE SHEET
December 31
Assets
Cash $ 2,050.00
Less— Reserve for Bad Debts 2,200.00 41,800.00
Merchandise on Hand 9,500.00

Plant and Machinery 9,000.00
Liabilities — Accounts Payable $ 9,750.00
Net Worth:
Capital, January 1 $34,500.00
Add:
Capital Paid In 2,500.00
5% on Capital of January 1 1,725.00 20,265.00
$54,765.00
Less— Drawings 1,500.00 53,265.00
Total Liabilities and Net Worth $63,015.00
(a) Single-Entry Statements. For the method of preparing

statements from single-entry records, see Volume I,
Chapter XXXV, § 7.
(b) Proprietor's Drawings. The fact that drawings by the pro-
k prietor are not expenses of the business and must not be
so construed in preparing single-entry statements is dis-
cussed in VolumeChapter XXXV, § 7.

I,
(c) Interest on Capital. This problem illustrates the fact that

calculation of interest on capital has no effect upon the
net profit of the business. This is further described in

Volume Chapter XXXI,
I, § 10.
(d) Depreciation and Bad Debts. The principles underlying the

handling of these items are described in Volume I, Chapter
XXIX, and in Volume IV, Chapter XII.
(e) Depreciated Asset Accounts. In this problem the plant and
machinery and the furniture and fixtures are stated in the
balance sheet at their net amounts after the deduction of
the amount of depreciation. This is generally not con-
sidered good practice. Instead, reserve accounts should
be set up to record the depreciation. This is explained in
Volume I, Chapter XXIX, and in Volume IV, Chapter XII.
(f) Calculation of X"et Sales and X'et Purchases. In this prob-
lem the amount of net sales determined by adding the
is
cash collections to the increase in the accounts receivable.

The calculation of net purchases is similarly made by
adding the increase in accounts payable and the cash pay-
ments. This latter step is based on the assumption that
all the accounts payable are incurred for merchandise
purchases.
Problem 34
You are asked to prepare an account showing the
profitearned by a concern for a certain period. The
books have been kept by single entry and you gather
from them the following:
Capital $19,;560.00
Cash 2,()00.00
Fixtures 1,650.00
Accounts Payable :i,850.00
Bills Payable 5,000.00
Merchandise used by Proprietor 800.00
The above set out is the balance of the ac-

capital
count after $1,500 withdrawn during the period, and
$1,200 for salary, have been charged up against it.
Set up the Profit and Loss account.
CALCULATION OF NET PROFIT

Capital at End of Period:
Assets
Cash $ 2,600.00
Fixtures 1,650.00 $30,250.00
Liabilities:
Bills Payable 5,000.00 8,850.00
Capital $21,400.00
Canital at Beginning of Period:

Ledger Balance $19,360.00
Add:
Cash Drawings by Proprietor .... $ 1,500.00
Salary Drawn by Proprietor 1,200.00 2,700.00 22,060.00
Decrease in Capital $ 660.00
Deduct:
Cash Drawings by Proprietor $ 1,500.00
Salary Drawn by Proprietor 1,200.00
Merchandise Drawn by Proprietor 800.00 3,500.00
Net Profit for the Period $ 2,840.00
Points Illustrated in Problem 3^
(a) Profitand Loss Account. In this problem the State Board of

Examiners ask for a Profit and Loss account when obviously
what is meant is, not an account, but a statement showing
the calculation of profit. As pointed out in Volume I,

Chapter IX, § 6, care must be exercised when a Profit and
Loss account is asked for to determine whether or not an
account is really required. In this case, as explained in
Volume I, Chapter XXXV, § 11, it would be impossible to
set up a Profit and Loss account, strictly speaking, because
no nominal accounts have been kept and the factors or
elements that would enter into a Profit and Loss account
are not known. Accordingly, the solution does not show an
account but a calculation.
(b) Inadequacy of Single Entry. This problem illustrates the
inadequacy of profit and loss statements prepared from
single-entry accounts. While the net profit can be ascer-
tained, the various elements that cause it and the various
kinds of expenses that affect it cannot be known. This
inadequacy is one of the reasons why double-entry book-
keeping is almost universally preferred. (See Volume I,
Chapter XXXV, §11.)
(c) Capital. Capital is the excess of assets over liabilities, as
explained in Volume I, Chapter III, § 1.
(d) Bills Payable. As explained in Volume I, Chapter XXVII,
§§ 2 and 3, it is better to use the term "notes payable"
instead of "bills payable."
(e) Proprietor's Salary. The fact that this so-called salary is
actually a drawing on account of profits and does not

constitute a real expense of the business is explained in
Volume I, Chapter XXXI, § 12. It is customary in many
businesses to record these so-called salaries for statistical
purposes and to enable one partner to draw more than
another when he renders greater or more valuable service.
(f) Merchandise Withdrawn. The problem does not state
whether the $800 is the cost or the selling price of the mer-
chandise. When a proprietor withdraws merchandise for
his own use he should be charged with it at cost, care being
taken not to include such drawings among the regular sales
of the business. This matter is explained in Volume I,
Chapter X, § 20.
(g) Decrease in Capital. Notwithstanding the fact that there

was a net profit of $2,840, the capital in the business de-
creased $660. This resulted from the fact that the cash
drawings and salary of the proprietor together with the
merchandise withdrawn by him exceeded the net profits of
the business. This problem illustrates the fact that the
decrease or increase in capital does not indicate the net
profit or loss. (See Volume I, Chapter XXXV.)
Problem 35
Classify and group the following accounts of a manu-

facturing company according to kind of asset, liability,
loss, and gain:
1. Accounts Payable 23. General Office Expenses

2. Accounts Receivable 24. Good- Will
3. Accrued Salaries and Wages 25. Insurance
4. Advertising 26. Insurance Premiums Unexpired
5. Bad Debts Written OflF 27. Interest on Bills Payable
6. Bills Payable 28. Interest on Bonds
7. Bills Receivable 29. Income from Investments
8. Bond Discount 30. Inventory, Raw Materials
9. Bond Premium 31. Inventory, Goods in Process
10. Bond Interest Accrued 32. Inventory, Manufactured Goods
11. Capital Stock 33. Investments (Outside)
12. Cash 34. Maintenance of Buildings, Ma-
13. Credit Department Expenses chinery, and Plant
14. Depreciation of Buildings, Ma- 35. Maintenance of Workmen's Cot-
chinery, and Plant tages
15. Depreciation of Workmen's Cot- 36. Manufacturing Power, Heat, and
tages Light
16. Directors' Fees 37. MiscellaneousFactory Expenses
17. Discount on Purchases 38. Miscellaneous SellingExpenses
18. Discount on Sales 39. Non-productive Labor
19. Federal Corporation Tax 40. Office Equipment
20. First Mortgage Bonds 41. Office Salaries
21. Freight and Cartage Inward 42. Officers' Salaries and Expenses
22. Freight and Cartage Outward 43. Organization Expenses
44. Patent Rights 55. Reserve for Doubtful Accounts

45. Patterns and Drawings 56. Reserve for Sinking Fund
46. Plant Site 57. Returns and Allowances on Pur-
47. Plant Buildings chases
48. Plant,Machinery, and Equipment 58. Returns and Allowances on Sales
49. Productive Labor 59. Sales of Manufactured Goods
50. Purchasing Department Ex- 60. Sales of Waste Material
penses 61. Sales Agents' Commissions
51. Raw Materials Purchased 62. Salesmen's Salaries
52. Rent of Workmen's Cottages 63. Salesmen's Expenses
53. Reserve for Depreciation of 64. Sinking Fund Investments
Buildings, Machinery, and 65. Surplus
Plant 66. Taxes on Plant and Equipment
54. Reserve for Depreciation of 67. Taxes Accrued
Workmen's Cottages 68. Workmen's Cottages
{Wisconsin C. P. A. Examination.)
Assets
Fixed Assets:
46. Plant Site
47. Plant Buildings
48. Plant, Machinery, and Equipment
68. Workmen's Cottages
40. Office Equipment
24. Good- Will
44. Patent Rights
45. Patterns and Drawings
Investments:
33. Investments (Outside)
64. Sinking Fund Investments
Current Assets:
12. Cash
2. Accounts Receivable
7. Bills Receivable
Current Assets Continued
Inventories:
30. Inventory, Raw Materials
31. Inventory, Goods in Process
32. Inventory, Manufactured Goods
Deferred Charges and Prepaid Items:

43. Organization Expenses
26. Insurance Premiums Unexpired

Fixed Liabilities:
20. First Mortgage Bonds
1. Accounts Payable
6. Bills Payable
Accrued Items:
3. Accrued Salaries and Wages
10, Bond Interest Accrued

67. Taxes Accrued
Reserves
53. Reserve for Depreciation of Buildings, Machinery,
and Plant
54. Reserve for Depreciation of Workmen's Cottages
55. Reserve for Doubtful Accounts
56. Reserve for Sinking Fund
Capital
11. Capital Stock
65. Surplus
Income and Expense
Manufacturing Cost Accounts:

49. Productive Labor i
51. Raw Materials Purchased (after elimination of 1
inventory) I
j
Manufacturing Cost Accounts Continued

21. Freight and Cartage Inward
57. Returns and Allowances on Purchases
50. Purchasing Department Expenses
Manufacturing Expenses
39. Non-productive Labor
34. Maintenance of Buildings, Machinery, and Plant
36. Manufacturing Power, Heat, and Light
66. Taxes on Plant and Equipment
25. Insurance
14. Depreciation of Buildings, Machinery, and Plant
37. Miscellaneous Factory Expenses
15. Depreciation of Workmen's Cottages
35. Maintenance of Workmen's Cottages
Deductions from Manufacturing Cost:

52. Rent of Workmen's Cottages
60. Sales of Waste Material
Trading Accounts:
59. Sales of Manufactured Goods
58. Returns and Allowances on Sales
Selling Expenses:
4. Advertising
62. Salesmen's Salaries
61. Sales Agents'Commissions
63. Salesmen's Expenses
13. Credit Department Expenses
22. Freight and Cartage Outward
38. Miscellaneous Selling Expenses
General Administrative Expenses:

42. Officers' Salaries and Expenses
16. Directors' Fees
41. Office Salaries
23. General Office Expenses
19. Federal Corporation Tax
Capital Expenses:
18. Discount on Sales
5. Bad Debts Written OflF
27. Interest on Bills Payable

8. Bond Discount
28. Interest on Bonds
Capital Income:
17. Discount on Purchases
29. Income from Investments
9. Bond Premium
(a) General Classification of Accounts. This problem illus-
trates the general classification of accounts as described in

Volume I, Chapter VI.
(b) Working Capital. The solution is arranged to indicate the
excess of current assets over current liabilities, which
constitutes the working capital. The necessity for this

form is explained in Volume I, Chapter XI, § 14.
(c) Separate Account for Buildings. The buildings are represented
by an account distinct from that for land. The desirability
of this is pointed out in Volume IV, Chapter XVII, § 4.
(d) Bills Receivable and Payable. Attention is invited to the
fact that this problem refers to "bills receivable" and
"bills payable." It is generally better to designate such
items by the terms "notes receivable" and "notes pay-
able," as pointed out in Volume I, Chapter XXVII, § 3.
As this problem was set by a state board of examiners, the
terminology could not be changed. It is customary, how-
ever, to use the term "notes" instead of "bills." His-
torical explanation of the latter term is given in the chap-
ter to which reference is here made.
(e) Deferred Charges. The advisability of setting up deferred
charges is pointed out in Volume IV, Chapter II, § 3.
(f) Accrued Liabilities. The desirability of recording accrued
liabilities is pointed out in Volume IV, Chapter III, § 1.
(g) Separate Reserve Accounts. This problem illustrates the use

of separate reserves as advocated in Volume I, Chapter
XXIX, § 4.
(h) Balance Sheet Treatment of Reserves. In this solution the
reserves for depreciation and for doubtful accounts are
shown on the right-hand side of the balance sheet, but it
is generally considered better to deduct them from the

asset accounts to which they apply. This matter is dis-
cussed in Volume IV, Chapter VIII, § 2. The reserve for

sinking fund may properly be shown in the position in
which itappears in this solution. This kind of reserve
is Volume IV, Chapter XI, § 10.
discussed in
(i) Capital Stock and Surplus Combined. It will be noted that
the capital stock and the surplus are combined to show
the total capital. This is in accordance with the principles
stated in Volume I, Chapter II, § 8.
(j) Separate Account for Surplus. The necessity for recording

the surplus in a separate account is explained in Volume
I, Chapter XXXIII, § 3.
(k) Freight and Cartage Inward. This item is treated as a part
of the cost of merchandise in accordance with the prin-
ciples explained in Volume I, Chapter IX, § 8.
(1) Depreciation. The depreciation of buildings, machinery,
and plant is treated as a manufacturing expense in accord-
ance with Volume Chapter XXIX, §§ 1 and 4.
I,
(m) Freight and Cartage Outward. This item is shown as a sell-

ing expense but by some accountants it is usually treated
as a deduction from sales. This phase of the problem is
discussed in Volume I, Chapter IX, § 7.
(n) Cash Discounts. Cash discounts on sales and purchases are
shown as capital expenses and capital income respectively!
This is considered better than to show them as adjust-
ments of the sale or purchase price. (See Volume I,
Chapter XXV, § 8.)
(o) Bond Discount and Premium. These items appear under
capital expense and capital income respectively. As
pointed out in Volume IV, Chapter X, § 10, they are pro-
ratable adjustments of the bond interest and should be

extended over the life of the bonds.
(p) Income from Investments. This item is properly shown as
capital income because it is extraneous to the operations
of the business. This matter is discussed in Volume I,
Chapter IX, § 12.
(q) Workmen's Cottages. The accounts concerning workmen's
cottages may be treated either as operating or as extran-
eous matter. In a specific case the decision should be
made in consideration of the purpose of the cottages. If
they safeguard the health of workmen and encourage good
living conditions which are vital to the quality of the daily
labor, the operation of the cottages may be considered a
manufacturing or operating item. In any event, the rent
income is a reduction of the expense involved and if the
latter is regarded as a manufacturing or operating item the
rent income should not be considered as capital income.
The net expense or income should be shown.
(r) Taxes and Insurance on Plant and Equipment. These two
items are shown as manufacturing expenses. Economists
would be likely to regard them as capital expenses. A
discussion of the reasons for such treatment can be found
in any standard text-book on economics, but as it is be-
yond the scope of this set this point is not elaborated in
any of these volumes. From the point of view of the
business accountant these items may properly be regarded
as manufacturing expenses.
(s) Federal Corporation Tax. This item is shown as a general
administrative expense. The same comments apply as
are noted in the preceding point.
Problem 36
Goods are supplied to a branch at 120% of cost, or
$24,000, The branch reports an inventory of $15,000;
sales $30,000; expenses paid $8,000; collections $10,500;

and bad debts $750.
Formulate all entries necessary to record transac-
tions, including entries to close accounts of branch for
year to show profit on branch home oflSce books.
Branch A $24,000.00
Branch A, Contingent Profit 4,000.00
To record transfer of merchandise of $20,000 at
20% above cost.
Branch A 6,250.00
Branch A, Profit and Loss 6,250.00
For Sales $30,000.00
Less Inventory 15,000.00

Less:
Expense $8,000.00
Bad Debts 750.00 8,750.00
$ 6,250.00
To record operating result reported by Branch A.
Branch A, Contingent Profit 1,500.00

Branch A, Profit and Loss 1,500.00
For transfer the portion of contingent profit ap-
plicable to sales made by Branch A.
(a) Controlling Account. The account with Branch A, which is

kept on the books of the home office, is a controlling ac-
count which controls the branch ledger. A trial balance
of the latter book should indicate a net debit or credit
equal to the balance of the controlling account. (See
Volume I, Chapter XXIV, § 13.)
(b) Deferred Credit. This is an illustration of the necessity for
deferring the credit in the case of an income which is not
actually earned during the period. The excess of the
amount at which goods are billed to Branch A over the
cost of the goods credited to a contingent profit account
is
instead of to Sales or a present profit. (See Volume IV,

Chapter IV, § 6.)
Problem 37
A firm having several branches maintains an account

with each branch in the ledger and charges to such ac-
count all goods sent to the agents for stock. Wlien
stock is taken the balance of each branch account is
treated as ordinary accounts receivable, and is included
in the general debts owing to the firm.
What objections are there to this method? If any,
state how you would deal with the accounts.
{Ohio C. P. A. Examination.)
The method of bookkeeping is not

objection to this
that the inventory is overvalued, because, in the absence
of information in the problem, we must assume that the
stock was billed to the branch at cost. The objection
is that the unsold stock on hand at the branch is an
asset of asomewhat different character from an account

receivable. The accounts receivable represent a com-
pleted turnover and an asset which includes an earned
profit. Merchandise inventory, on the other hand,
represents merely an investment which has not been
turned over and on which the profit, if any, is yet to
be realized. An account receivable is more liquid than
merchandise inventory and thus it is advisable to state

it separately in the accounts.
The accounts with each branch should be separate
and distinct from the accounts receivable and should be
marked in such a way as to indicate that they represent
merchandise stock on hand at the branch for sale.
(a) Deferred Credit. This problem illustrates the deferring of

a credit in the case of the shipment of goods to a branch.
There can be no income until the goods have been actually
sold. Accordingly, the credit upon the transfer of the
merchandise to the branch should be to a temporary
account and not to a Sales account. (See Volume IV,
Chapter IV, § 5.)
(b) Inventory as an Asset. When merchandise is shipped from
one branch to another, or from one warehouse to another,
the value at which it is recorded on the books should not
be increased, except possibly for the freight, cartage, and
similar handling charges necessarily involved in the trans-
fer. To bill a branch at a figure in excess of cost would be
to anticipate a profit. (See Volume I, Chapter XI, § 13.)
(c) Intercompany Profits. Where one branch transfers mer-
chandise to another at an increase over cost, a situation
analogous to intercompany profits arises. Such inter-
branch, or interdepartment, or intercompany profits must
be eliminated when the profit or loss of the business as a
whole is sought. (See Volume IV, Chapter IV, § 6, and
Chapter XXVIII, § 9.)
Problem 38
The Good Music Company sells pianos on the instal-
ment plan. On January 2, 1914, Jones purchased a
no ILLUSTRATIVE PROBLEMS
piano from the company for $375, to be paid as follows:

$25 down and the balance in quarterly instalments of
$50 each, bill of sale to be given on date of final pay-
ment. The piano cost the company $125. The first
instalments for 1914 were duly received, the last one
having been paid on December 31.
Required
(a) Ledger accounts covering sale and payments
thereon.
(b) Yearly closing journal entry to credit year
with its proper proportion of the profit on
this transaction.
(Wisconsin C. P. A. Examination.)
Jones
Jan. 2 Instalment Sales $375.00 Jan. 2 Cash . . . $ 25.00

Apr. 1 " ... 50.00
July 1 " ... 50.00
Oct. 1 " ... 50.00
Dec. 31 "... 50.00
Dec. 31 Balance 150.00
$375.00
$375.00
Jan. 1 Balance . $150.00
Instalment Sales
Jan. 2 Sales . . $ 25.00 Jan. 2 Jones $375.00

Apr. 1 " ... 50.00
July 1 " ... 50.00
Oct. 1 " . . 50.00
Dec. 31 " ... 50.00
Dec. 31 Balance 150.00
$375.00
$375.00
Jan. 1 Balance $150.00

Sales
Jan. 2 Instalment Sales . $ 25.00

Apr. 1 " " .. 50.00
July 1 " " .. 50.00
Oct. 1 " " .. 50.00
Dec. 31 " " .. 50.00
$225.00
Cash
Jan. 2 Jones . . $ 25.00

Apr. 1 " .... 50.00
July 1 " ... 50.00
Oct. 1 50.00
Dec. 31 " ... 50.00
$225.00
Sales $225.00
Piano Purchase $ 75.00
150.00
To credit Profit and Loss with 3/5 f $250.
Paints Illustrated in Problem 38
(a) Instalment Sales. The method of accounting for instalment

sales is explained in Volume II, Chapter XVI, § 23.
(b) Deferred Credit. In this problem the profit on the instal-
ment sale is recorded as earned only in the proportion that
the cash collected bears to the total sale price. As the
piano which cost $125 was sold for $375, a profit of $250
will result when the sale is finally paid for. Of the $375,
however, only $225 has been collected. Accordingly,
225/375 or Vs of the profit of $250 is recorded as earned
during the period. The rest of the profit is deferred as
explained in Volume IV, Chapter IV, § 4.
Problem 39
On January 1, 1908, the condition of a small trading
company was as follows
Assets
Furniture and Fixtures $2,000.00
Cash 500.00
Merchandise on Hand 4,000.00 $14,500.00
Capital Stock and Liabilities:

Surplus 500.00 $14,500.00
During the month bookkeeper made

of January, the
all entries in the cash book and in the sales book, but
made no journal entries and did not post his ledger. In

addition to the entries appearing in the cash book and
on the sales book, the following transactions took place
during January: merchandise purchases on credit
amounting to $6,000; notes payable amounting to
$6,000 renewed; special allowance of $500 made to
customers.
The credit sales journal had two columns, one for
the billed amounts and the other for the cost of the
goods sold. The billed amount was $8,000, and the
cost $5,000.
The following statement gives a summary of the
cash receipts and disbursements for January
Cash Received:
Collected from Customers $4,000.00
Collected on Notes Receivable 2,000.00
Collected on Merchandise Sold and not entered on
sales book (cost $500) 600.00 $6,600.00
Cash Payments:
Interest on Notes Payable $ 45.00
Salaries 500.00
Rent 200.00
Sundry Expenses 300.00
Accounts Payable 5,000.00 $6,045.00
Prepare balance sheet, January 31, 1908, and state-

ment of profit and loss, based on the book value of the
merchandise.
{Iowa C. P. A. Examination.)
BALANCE SHEET
January 31, 1908
Assets
Furniture and Fixtures $2,000.00

Cash 1,055.00
Merchandise on Hand 4,500.00
Capital Stock and Liabilities

Surplus:
Balance, January 1, 1908 $ 500.00
Profit for January 1,555.00 2,055.00
8
SCHEDULES SHOWING DETERMINATION OF
SUNDRY BALANCE SHEET ITEMS
Cash:
Balance, January 1 $ 500.00
Received 6,600.00 $ 7,100.00
Paid 6,045.00
Balance, January 31 $1,055.00
Notes Receivable:
Balance, January 1 $ 3,000.00
Collected 2,000.00
Accounts Receivable:
Net Charge Sales 7,500.00 $12,500.00
Received on Account 4,000.00
Accounts Payable:
Purchases on Credit 6,000.00 $12,000.00
Payments:
By Cash $5,000.00
By Notes 3,000.00 8,000.00
The Notes Payable account shows a $3,000 balance

on January 1, 1908, whereas the problem states that
notes to the sum of $6,000 were renewed. It must be
assumed that additional notes to the amount of $3,000
were given during January to trade creditors, and
that, therefore, at January 31, 1908, the total amount
of notes payable outstanding was $6,000, as stated in
the above balance sheet.

For the Month of January, 1908
Gross Sales $ 8,600.00

Less — Allowances 500.00
Net Sales $8,100.00
Deduct — Cost of Goods Sold:

Inventory, January 1, 1908 $4,000.00
Add— Purchases 6,000.00 $10,000.00
Less— Inventory, January 31, 1908 4,500.00 5,500.00
Deduct — Expenses
Salaries $ 500.00
Rent 200.00
Sundry Expenses 300.00 1,000.00
Profit from Operations $1,600.00
Deduct — Other Charges:

Net Profit $1,555.00
The gross sales comprise $8,000 charge sales per sales

book, and $600 cash sales per cash book.
The inventory as of January 31 is found by deduct-
ing from the sum of goods on hand January 1 and pur-
chases for the month the cost of goods sold as found in
the sales and cash books.
(a) Sing'le-Entry Statements. The method of preparing state-

ments from single-entry records and the points to be borne
in mind in the determination of the financial condition and
the profit or loss, are explained in Volume I, Chapter
XXXV, § 7.
(b) Interest on Notes Payable. This interest is stated on the

profit and loss statement as a deduction from the profit
due to the operations of the business. The theory under-
lying thismethod of treatment is explained in Volume I,
Chapter IX, § 11.
(c) Cost of Goods Sold. In this problem the cost of the goods
sold is recorded daily by means of a price list or other
record from which the information can be secured. Usu-
ally in a mercantile business the cost of goods sold isnot
exactly known until the end of a fiscal period, when it is
calculated through the use of the closing inventory, as

described in Volume I, Chapter IX, § 8. It is seldom that
the keeping of a running inventory is practicable unless
required by a cost system. (See Volume III.)
(d) Drawings by Proprietor. In this problem there were no
drawings by the proprietor. This is an unusual situation
because the usual practice is for the proprietor to with-
draw cash from the business on account of the profits
earned by it.
Problem 40
The firm of Gray and Green has insured the life of
Gray for $50,000, the policy being payable to the firm.
The annual premium is $989.60. The policy does not
have a cash surrender value until the end of the third
year; at that time the surrender value is $2,150.62;
fourth year $2,862.20; year $3,567.25. The pre-
fifth
mium is paid at the beginning of the year.
At the end of the fifth year Gray dies and the policy
is paid to the firm in full.
Show by journal entries how the transactions per-

taining to the above would be recorded.
The insurance policy may be capitalized on some

conservative basis, instead of treating each year's
premium as an expense, because, unlike fire insurance,
there is being created an asset which can be realized
upon either by the death of the assured or by the
surrender of the policy.
The basis of capitalization is often the annual pre-
miums paid to the insurance company, but a more con-
servative practice and one which is sound from an
accounting standpoint is to capitalize the premiums at
the cash surrender value of the policy, charging the
difference between the premium and the increase in the
cash surrender value to an expense account.
In the above case the policy has no cash surrender
value until the third premium has been paid, which
brings up the question as to how to treat the first three
premiums. Such premiums may be charged to expense
and the policy capitalized at its cash surrender value at
the end of the third year, crediting at the same time the
partners' capital accounts. This method is objection-
able for the reason that there is an abrupt change in the
amount of insurance expense after the third year and
likewise the capital accounts are suddenly increased due
to a condition which has been in effect for three years.
A better plan would seem to be to capitalize in each
of the first three years, one-third of the cash surrender
value of the policy at the end of that time, charging
the difference between this value and the amount of the
premium to expense; this method tends to equalize the
amount of insurance expense during the time the policy
is in force and also brings the policy on the books as an

asset at the time it is taken out.
By this method, the following entries would be

made:
First Payment:
Life Insurance Policy — Gray $ 716.87
Life Insurance Expense ili.lS
Cash $ 989.60
Second and Third Payments:

Same entry as for the first.
Fourth Payment:
Life Insurance Policy — Gray 711.58
Life Insurance Expense 278.02
Cash 989.60
Fifth Payment:
Life Insurance Policy — Gray 705.05
Life Insurance Expense 284.55 /
Cash 989.60
End of Fifth Year:
Cash 50,000.00
Life Insurance Policy — Gray 50,000.00
Received cash in settlement from insurance com-
pany.
Life Insurance Policy — Gray 46,432.75

Gray, Capital 23,216.38
Green, Capital 23,216.37
To credit to each partner's capital account the
increase in capital resulting from the excess of
the insurance received over the capitalized
value of the policy at the time of Gray's death..
Points Illustrated in Problem JiO
(a) Deferred Debits. This problem illustrates the desirability

of setting up deferred debits where expenditures of one
period involve expense applicable to a subsequent one.

This is explained in Volume IV, Chapter II. For an ex-
planation of "expenditures" and their classification into
capital and revenue expenditures, see Volume I, Chapter
X,§4.
(b) Adjustment of Capital. In this problem adjustment of the
capital accounts is necessary in order to record the sudden
acquisition of the life insurance cash. This sort of ad-
justment of capital where the increase does not result
from current profits is explained in Volume IV, Chapter
VII, § 4.
(c) Distribution of Profits. As stated in Volume I, Chapter
XXXI, § 6, profits and losses in a partnership are dis-
tributed equally in the absence of an agreement. In this
case, as there was no agreement, the distribution is in
equal parts.
(d) Dissolution by Death. A partnership is dissolved upon the
death of a partner unless there is some agreement binding
upon his personal representatives. (See Volume I, Chap-
ter XXXII, § 3.) Notwithstanding the death of partner
Gray, his share of the life insurance policy is credited to
his capital account. This is necessary because that
account, when finally adjusted, will measure his interest
in the firm business.
Problem 41
A company with head office in Chicago and factory

at South Bend, Indiana, conducts three selling branches
in New York, San Francisco, and Montreal, which are
supplied with goods from the factory, the invoices being
sent out from the head office.
The branches keep their own sales ledgers, send out

monthly statements to customers, and receive cash
against their ledger accounts, which they remit weekly

to Chicago.
branch expenses, including salaries and wages,
All
are paid by the branches from petty cash accounts,
kept at a fixed balance of $500, by draft on head office.
The following information is supplied by the
branches at December 31, 1913, summarizing the trans-
actions of the previous six months:
New York San Francisco Montreal
Rent and Taxes Paid 5 200.03 ^ 175.00 g 75.00

Sales for 6 mos. to Dec. 31, 1913 12,500.00 11,800.00 10,225.00
Salaries and Wages 1,650.00 1,520.00 1,600.00
Returned Sales 200.00 100.00 250.00
Allowances to Customers 50.00 40.00 30.00
Bad Debts 125.00 60.00
Cash Sales 6,250.00 5,380.00 6,100.00
Cash Received from Customers on
Ledger Accounts 10,850.00 10,260.00 9,150.00
Debtors, July 1, 1913 5,820.00 6,140.00 7,240.00
Debtors, Dec. 31, 1913 7,220.00 7,415.00 7,975.00
Petty Cash, July 1, 1913 500.00 500.00 500.00
Petty Cash, Dec. 31, 1913 500.00 500.00 500.00
Stock, July 1, 1913 3,450.00 3,820.00 3,650.00
Stock, Dec. 31, 1913 4,300.00 4,720.00 4,500.00
Groods Received from Head OflBce
Factory 11,500.00 10,240.00 10,350.00
Required:
(a) Branch accounts on head office books.

(b) Final general trial balance.
(c) Branch Profit and Loss accounts.
{Illinois C.P.A. Examination.)
(a)
New York — Current Account

Balance. July 1, 1913: Cash $17,100.00
Debtors $5,820.00 Balance, December 31. 1913:
Petty Cash 500.00 Debtors $7,220.00
Stock 3,450.00 $ 9,770.00 Petty Cash 500.00
Stock 4,300.00 12.020.00
Rent and Taxes 200.00
Salariesand Wages 1,650.00
Goods from Factory 11,500.00
Net Profit 6,000.00
$29,120.00 $29,120.00
San Francisco —Current Account
Balance, July 1, 1913: Cash $15,640.00

Debtors $6,140.00 Balance. December 31. 1913:
Stock 3,820.00 $10,460.00 Petty Cash 500.00
Stock 4,720.00 12,635.00
Net Profit 5,880.00
$28,275.00 $28,275.00
Montreal —Current Account
Balance, July 1. 1913: Cash $15,250.00

Debtors $7,240.00 Balance, December 31, 1913:
Stock 3,650.00 $11,390.00 Petty Cash 500.00
Stock 4,500.00 12,975.00
Net Profit 4,810.00
$28,225.00 $28,225.00
•Solution by D. Himmelblau, C. P. A.
1«2 ILLUSTRATIVE PROBLEMS
(b)
A COMPANY
GENERAL TRIAL BAL
December
Head Office* New York
Dr. Cr. Dr. Cr.
Investment in Branch Houses

(July 1, 1913) $ 30,120.00
2 New York — Current Account $ 23,120.00 17,100.00
3 San Francisco — Current Ac-
count 22,395.00 15,640.00
4 Montreal — Current Account . 23,415.00 15,250.00
5 Factory 32,090.00
6 Cash 47,990.00 6,720.00 $17,100.00 $17,100.00
7 Petty Cash 2,350.00 1,850.00
8 Debtors 7,220.00
9 Stock (July 1, 1913) 3,450.00
10 Sales 18,750.00
11 Returned Sales 200.00
12 Allowances to Customers .... 50.00
13 Goods from Factory 11,500.00
14 Salaries and Wages 1,650.00
15 Rents and Taxes 200.00
16 Bad Debts
17 —
Head OflSce Current Account 6.020.00
$116,920.00 $116,920.00 $43,720.00 $43,720.00
'Consists of items indicated by the sales branch house transactions. Other general office or factory
AND BRANCHES
ANCE (BEFORE CLOSING)
31, 1913
San Francisco Montreal COMBI NED*
Dr. Cr. Dr. Cr. Dr. Cr.
1 $ 30,120.00
2 $ 6,020.00
3 6,755.00
4 8,165.00
5 32,090.00
6 $15,640.00 $15,640.00 $15,250.00 $15,250.00 41,270.00
7 2,195.00 1,695.00 2,175.00 1,675.00 1,500.00
8 7,415.00 7,975.00 22,610.00
9 3,820.00 3,650.00 10,920.00
10 17,180.00 16,325.00 52,255.00
11 100.00 250.00 550.00
12 40.00 30.00 120.00
13 10,240.00 10,350.00 32,090.00
14 1,520.00 1,600.00 4,770.00
15 175.00 75.00 450.00
16 125.00 60.00 185.00
17 6,755.00 8,165.00 20,940.00
$41,270.00 $41,270.00 $41,415.00 $41,415.00 $135,405.00 $135,405.00
transactions would be included if data were available.

(c)
A COMPANY
STATEMENT OF PROFIT AND LOSS
For Six Months Ending December 31, 1913
Total New York San Francisco Montreal
Sales:
On Account $34,525.00 $12,500.00 $11,800.00 $10,225.00
Cash 17,730.00 6,250.00 5,380.00 6,100 00
Total Sales $52,255.00 $18,750.00 $17,180.00 $16,325.00

Less — Returned Sales and
670.00 250.00 140.00 280 00
Net Sales $51,585.00 $18,500.00 $17,040.00 $16,045.00
Cost of Sales:
Inventory, July 1, 1913 . . . $10,920.00 $ 3,450.00 $ 3,820.00 $ 3,650.00
Goods from Factory 32,090.00 11,500.00 10,240.00 10,350.00
$43,010.00 $14,950.00 $14,060.00 $14,000.00

Less —Inventory, December
31, 1913 13,520.00 4,300.00 4,720.00 4,500.00
$29,490.00 $10,650.00 $ 9,340.00 $ 9,500.00
Gross Sales Profit $22,095.00 $ 7,850.00 $ 7,700.00 $ 6,545.00
Deduct —Expenses
Salaries and Wages $ 4,770.00 $ 1,650.00 $ 1,520.00 $ 1,600.00
Rents and Taxes 450.00 200.00 175.00 75.00
Bad Debts 185.00 125.00 60.00
$ 5,405.00 $ 1,850.00 $ 1,820.00 $ 1,735.00
Net Profit $16,690.00 $ 6,000.00 $ 5,880.00 $ 4,810.00

Points Illustrated in Problem 4-1
(a) Analysis of Profit and Loss. As explained in Volume I,
Chapter IX, § 1,the profit and loss should be analyzed in

the way designed to give the best information for adminis-
trative control. Where there are branches it is obvious
that the operating result of each branch must be known,
because otherwise a branch might be operated at a loss
without the facts being discovered.
(b) Controlling Account. This problem illustrates the use of
the controlling account which in this case controls the
accounts at each branch. The theory underlying the
and the rules governing its use are
controlling account
explained inVolume I, Chapter XXIV.
(c) Deferred Credit. The method of deferring credits where
income not be earned until succeeding periods is illus-
will
trated in this problem. The goods received by the branch
from the factory should be handled at cost and not at an
increased value. There can be no profit on such goods
until they have been sold. (See Volume IV, Chapter III,
§5.)
Problem 42
A corporation desires to close its books on December

31, 1919; on January 15, 1920, an accountant is called in
to make an audit of the accounts for the year, make
all necessary adjustments, and check up the financial
statements.
The accountant discovers that the following accrued
and prepaid items were ignored by the bookkeeper at
the time of closing the books on June 30, 1919, the date
of the preceding closing, and also at December 31, 1919,
when he had prepared tentative closing entries
June 30, 1919 Dec. 31, 1919
Overstatement of Inventory $1,850.00

Interest Prepaid on Notes Payable 375.00 $ 150.00
Wages Accrued 1,957.00 3,984.00
Insurance Premiums Prepaid 290.00 680.00
Interest Accrued on Bonds 500.00 500.00
Taxes Prepaid 500.00
Make the necessary adjusting entries.
ADJUSTMENTS
December 31, 1919
Surplus $1,850.00
Profit and Loss $1,850.0C
To charge Surplus with amount of inventory over-
stated as of June 30, 1919.
Interest Prepaid on Notes Payable 150.00

Surplus 375.00
To set up interest prepaid at December 31, 1919, as
an asset, and to credit Surplus with amount of
interest prepaid on June 30, 1919.

Surplus 1,957.00
To set up the liability for wages accrued December
31, 1919, and to charge Surplus with wages ac-
crued June 30, 1919.
Insurance Premiums Prepaid 680.00

Surplus 290.00
To set up insurance prepaid at December 31, 1919,
as an asset, and to credit Surplus with insurance
prepaid as of June 30, 1919.
Taxes Prepaid *500.00

Surplus 600.00
Profit and Loss $1,100.00
To set up taxes prepaid as at December 31, 1919, as
an asset, and to charge Surplus with taxes accrued
as of June 30, 1919.
Surplus 500.00
Interest Accrued on Bonds 500.00
To record the liability for interest on bonds accrued
December 31, 1919, and to charge Surplus with
bond interest accrued as of June 30, 1919.
Points Illustrated in Problem Jf2
(a) Accrued Expenses. The necessity of accruing all expenses

applicable to the period under review is explained in
(b) Deferred Expenses. In Volume I, Chapter VI, § 10, the de-
sirability of recording all deferred charges or prepaid
expenses is discussed.
(c) Surplus Adjustments. The principles underlying the ad-
justment of surplus to record errors prior to the last pre-
ceding closing of the books is explained in Volume I,
Chapter XIV, § 9, and in Volume IV, Chapter VII, § 3.
Problem 43
John Adams lost his stock of merchandise. May 1,

1914, through a flood in the Mississippi River.
Adams appHed to the local Mutual Flood Insurance
Society for reimbursements, claiming a loss of $5,886.35
on merchandise stock. From the following data ascer-
tain his merchandise inventory:
Net profits, May I, 1914, $4,452.91; drawings
$1,598; legal expenses $17.50; interest debit $313; ad-
vertising $14; commissions, debit $961.01; insurance
$196.23; sales $81,688.04; inventory, December, 1911,
$1,568.62; purchases $55,415.82; labor, productive
$19,499.58; telephone $416.06; sundry factory expenses
$3,201.92; repairs $16; surplus. May 1, 1914, $2,854.91.
(New York C.P. A. Examination.)
(I)
Establishment of Gross Profit on Sales for Purposes of

Ascertaining Inventory
Net Profit, per Profit and Loss account $ 4,452.91
Add:
Administration Expense, and Income Deductions:
Legal Expense $ 17.50
Interest Charges 313.00
Insurance 196.23
Telephone 416.06
Total 942.79
Selling Profit $ 5,395.70
Add:
Selling Expense:
Advertising $ 14.00
Commissions 961.01
Total , 975.01
•Solution by P.-J. Esquerr^, C. P. A.

(ID
Establishment of Closing Inventory

Income from Sales $81,688.04
Less — Gross Profit on Sales 6,370.71
Cost of Goods Sold $75,317.33
Cost of Goods Manufactured

Initial Inventory, December, 1911 $ 1,568.62
Purchases of the period 55,415.82
Factory E.xpense 3,201.92
Repairs 16.00
Total 79,701.94
Remainder, Cost of Goods Unsold, i.e.. Inventory of Finished

Goods at time of flood $ 4,384.61
(HI)
Reconstruction of Statement of Income

Income from Sales $81,688.04
Cost of Goods Sold:

Initial Inventory, December, 1911 $ 1,568.62
Purchases 55,415.82
Factory Expense 3,201.92
Repairs 16.00
$79,701.94
Deduct— Inventory, May 1, 1914 4,384.61
Cost of Goods Sold 75,317.33
Selling Expense:
Advertising $ 14.00
Commissions 961.01
Totel 975.01
Selling Profit $ 5,395.70

9
Administration Expense:
Legal Expense $ 17.50
Interest Charges 313.00
Insurance 196.23
Telephone 416.06
Total 942.79
Net Profit $ 4,452.91
(IV)
Validity of Claim for Flood Loss
Inventory Claimed $ 5,886.35

Actual Inventory 4,384.61
Excess of Claim over Loss $ 1,501.74
Points Illustrated in Problem J/S
(a) Estimating of Inventory. In Volume I, Chapter XVIII,

§ 8, and in Volume IV, Chapter XX, § 7, will be found
discussions of the method by which inventories are usually
estimated between stock-taking times.
(b) Cost of Goods Sold. This problem illustrates some of the
principal elements of the cost of goods sold. For others
see Volume I, Chapter IX, § 8.
Problem 44
You are instructed to make an examination of a

business for the purpose of preparing a statement of
assetsand liabilities as of December 31, 1913. The
inventory was taken on January 10, 1914, and amounted
The sales billed between
at that time to $7,689.25.
December 31 and January 10 amounted to $945, but
you discover that $300 worth of these goods had been

shipped, and therefore should have been billed, before
December 31. The goods received between December
31 and January 10 cost $678.25. The average gross
profit of this concern is 25% above cost.
Calculate the inventory as of December 31.
(Massachusetts C. P. A. Examination.)
Sales billed January 1 to January 10, 1914 $ 945.00

Less — Portion of goods shipped before January 1 300.00
Shipments since January 1, at selling price $ 645.00
Cost of shipments : $645 divided by 1.25 $ 516.00
Actual inventory, January 10 $7,689.25

—
Deduct Purchases, January 1 to January 10 678.25
$7,011.00
Add —Shipments, January 1 to January 10, at cost 516.00
Inventory, December 31, 1913 $7,527.00
Note: $300 for goods shipped but not billed, as shown by books on
December 31, should be added to accounts receivable.
Points Illustrated in Problem 4^4-
(a) Calculation of Inventory. This problem illustrates the

calculation or estimating of inventories. This matter is
discussed in Volume I, Chapter XVIII, § 8, and in Volume
IV, Chapter XX, § 7.
(b) Percentage of Gross Profit. It will be noted that in this
problem the gross profit is calculated on the cost of the
goods sold instead of on the selling price. The latter
method is more commonly used as explained in Volume
IV, Chapter XXX, § 5.
Solution by Hazen P. Philbrick, C. P. A.

Problem 45
The books of the X Manufacturing Company were
audited to December 31, 1913, and in making up the
balance sheet and the profit and loss account at that
date the auditors recommended the following adjust-
ments :
1. Transferred to Profit and Loss, $4,231.07, which

had been charged to real estate and buildings
in error.
2. Provided for depreciation of buildings, etc.,
$7,200.
3. Adjusted salaries amounting to $1,400, due for
1913 services but not entered on the books
until January, 1914.
4. Reduced the amount of inventory because of
errors, $12,000.
The same auditors were again called in to audit the

books to June 30, 1914, and found that the above ad-
justments had not been entered in the books. They also
found that during the half-year $1,000 had been charged
to real estate, buildings, etc., instead of to expense; that
no provision had been made for depreciation for the
period, amounting to $3,600, and that the inventory
had been footed $10,000 too much. Also that the un-
expired insurance amounted to $750 more than was
entered on the books.
The condensed trial balances of
following are
the X
Manufacturing Company books as the auditor
found them as of December 31, 1913, and June 30,
1914:
i
December 31, 1913 June 30, 1914
Real Estate, Buildings, etc. $102,840.26 $115,226.80

Capital Stock $200,000.00 $200,000.00
Debentures 100,000.00 100,000.00
Cash 14,672.14 22,143.21
Accounts Payable 9.431.17 11,698.21
Accounts Receivable 22,436.10 28,250.40
Loans 10,000.00 5,000.00
Stocks and Bonds 17,502.50 19,150.00
Inventory 246,153.42 288,360.14
Unexpired Insurance 1,471.23 742.26
Surplus 85,644.48 85,644.48
Profit and Loss, 1914 ... 71,530.12
$405,075.65 $405,075.65 .73,872.81 $473,872.81
From the above facts prepare
(a) A correct balance sheet, June 30, 1914.

(b) State the adjusted amount of profits for the
half-year to June 30, 1914.
(c) Prepare statement reconciling the balance
sheet figures with the original trial balance
of June 30, 1914.
(a)
BALANCE SHEET
June 30, 1914
Assets
Cash $ 22,143.21
•Solution by Hazen P. Philbrick, C. P. A.

Inventories 278,360.14
Total Current Assets $328,753.75

Stocks and Bonds 19,150 00
Real Estate and Buildings $109,995.73
Less —Reserve for Depreciation thereon 10,800.00 99,195.73
Unexpired Insurance - 1,492 26
$448,591.74

Loans 5,000.00
Total Current Liabilities . $ 16,698.21

Debentures 100,000.00

Surplus:
Balance, January 1, 1914 . $60,813.41
Gain, 6 months to June 30 71,080.12
Balance, June 30, 1914 131,893.53
Net Worth 331,893.53
$448,591.74
(b)
Adjusted amount of profits for half- year to June 30, 1914 $ 71,080.12
(c)
In making up this reconciliation table, the four ad-

justments for June 30, 1914, have been assigned, re-
spectively, the numbers (5), (6), (7), and (8), correspond-
ing to the numbers (1), (2), (3), and (4), assigned in the
statement of the problem to the four adjustments for
December 31, 1913.
The three answers required are, of course, obtained
in the reverse order, (c), (b), and (a).
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Points Illustrated in Problem ^5

(a) Surplus Adjustments. In Volume IV, Chapter VII, § 4,
the necessity for recording surplus adjustments when cor-
rections applicable to prior periods are made is discussed.
(b) Capital and Revenue Expenditures, This problem illus-
trates the distinction between capital and revenue expen-
ditures as explained in Volume I, Chapter X, § 4. An
expenditure a payment or an obligation to pay for some-
is
thing, and a is one which results in

capital expenditure
the acquisition of a fixed asset. All other expenditures
are revenue expenditures.
(c) Depreciation. The theory underlying depreciation and the
means of recording it are explained in Volume I, Chapter
XXIX, and in Volume *IV, Chapter XII.
(d) Accrued Liabilities. In Volume IV, Chapter III, § 1, the
necessity for recording accrued liabilities is explained.
(e) Deferred Charges. Setting up deferred charges, as was done
in this problem, is required if the exact operating result
for the current fiscal period is sought. This matter is
covered in Volume IV, Chapter II.
(f) Adjusting Entries. In this problem a number of adjusting
entries are necessary prior to the closing of the nominal
accounts. These entries are made in accordance with the
suggestions outlined in Volume I, Chapter VIII, § 2.
(g) Real Estate and Buildings. It is preferable to have a separate
account for buildings in order that the depreciation on
them may be more exactly calculated. In this problem
real estate and buildings are covered by one account, which
is not considered best practice. (See Volume IV, Chapter
XVII, § 4.)
(h) Tie-Up of Statements. This problem illustrates the tying
up of the balance sheet and the statement of profit and
loss in order that each may support the other. This is ad-
visable, as suggested in Volume IV, Chapter XXI, § 13.
(i) Debentures. A description of the usual kinds of bonds issued
and the accounting treatment required to record them is
given in Volume IV, Chapter IX.
Problem 46
Following is a transcript of the Surplus account of a
company covering the years 1918 to 1920.
Credits
Dec. 31, 1918 NetProfit $129,600.00

Dec. 31, 1919 Net Profit 110,000.00
June 30, 1919 Adjustment of Inventory 2,000.00
Dec. 31, 1920 Net Profit 118,000.00
Debits
Jan. 15, 1918 Dividend $ 20,000.00

July 15, 1918 Dividend 20,000.00
Jan. 15, 1919 Dividend 20,000.00
July 15, 1919 Dividend 20,000.00
Dec. 31, 1919 Good- Will reduced 100,000.00
Jan. 15, 1920 Dividend 20,000.00
July 15, 1920 Dividend 20,000.00
Early in 1920, accountants are called in to make an

examination of the books and to estimate the amount of
federal income tax which the company will pay. They
discover the following:
1. No depreciation on the machinery was written

They reckon the depreciation for
off in 1918.
year to be $5,000.
this
2. Error in inventory of December 31, 1918, of
$1,000 too much, which was never corrected.
3. Wages accrued as of December 31, 1919, esti-
mated to be $3,000, were ignored.
4. Insurance premiums prepaid of $500 as of
December 31, 1919, ignored.
5. Error in inventory of December 31, 1920, re-
sulting in the inventory being $2,000 less than
it should have been.
6. A patent costing $5,000 was charged to manu-

facturing expenses in 1920.
7. Insurance prepaid as of December 31, 1920, of
$300 not shown on the books.
8. A Suspense account with a debit balance of $130
representing unlocated errors in trial balances
to be closed out.
You are required to make adjusting entries for the

above and to up an entirely new Surplus account for
set
embodying all adjustments, and balance
the three years,
the account as of December 31, each year, carrying
forward the balance to the following year.
ADJUSTING ENTRIES
(1)
Surplus, 1918 $5,000.00

Reserve for Dapreciation of Machinery $5,000.00
(2)
Surplus, 1918 1,000.00

Surplus, 1919 1,000.00
(3)
Surplus, 1919 3,000.00

Surplus, 1920 3,000.00
(4)
Surplus, 1920 500.00

Surplus, 1919 500.00
(5)
Inventory 2,000.00
Surplus, 1920 2,000.00
Patents 5,000.00
Surplus, 1920 5,000.00
(7)
Insurance Prepaid 300.00

Surplus, 1920 300.00
(8)
Surplus, 1920 130.00

Suspense Account 130.00
Revised Surplus Account
1918 1918
Jan. 15 Dividend $ 20.000,00 Dec. 31 Net Profit. $129,600.00
July 15 Dividend 20.000.00
Dec. 31 Depreciation (1 5,000.00
Adj. of Inventory (2) 1,000.00
Balance 83,600.00
$129,600.00 $129,600.00
1919 1919
Jan. 15 Dividend $ 20,000.00 Jan. 1 Balance $ 83,600.00
July 15 Dividend 20,000.00 Adj. of Inventory (2) 1,000.00
Dec. 31 Good-will 100,000.00 June 30 Adj. of Inventory 2,000.00
Wages (3) 3,000.00 Dec. 31 Net Profit 110,000.00
Balance 54,100.00 Dec. 31 Adj. of Insurance (4) 500.00
$197,100.00 $197,100.00
1920 1920
Jan. 1 Adj. of Insurance (4) $ 500.00 Jan. 1 Balance $54,100.00
Jan. 15 Dividend 20,000.00 Adj. of Wages (S) 3,000.00
July 15 Dividend 20,000.00 Dec. 31 Net Profit 118,000.00
Dec. 31 Suspense (8) 130.00 Adj. of Inventory (5) 2,000.00
Balance 141,770.00 Patent (6) 5,000.00
Insurance (7) 300.00
$182,400.00 $182,400.00
1921
Jan. 1 Balance $141,770.00

(a) Surplus Adjustments. In this problem the adjustment of
surplus comparatively simple because a separate Surplus
is
account for each year is required. The necessity of adjust-

ing surplus for corrections such as those in this problem is
discussed in Volume IV, Chapter VII, § 4.
(b) Deferred Charges. The accounting necessity for recording
deferred charges where expenses apply to succeeding
periods is covered in Volume IV, Chapter II.
(c) Accrued Liabilities. As outlined in Volume IV, Chapter III,
§ 1, all accrued liabilities should be recorded in order that
the financial condition of the business may be exactly
shown.
(d) Dividends. The nature of dividends which are distributions
of profit and not expenses is described in Volume IV,
Chapter V. This problem illustrates the procedure in
recording them. It will be noted that they are charged
against Surplus and not against Profit and Loss.
(e) Cost of Patents. The principles underlying the valuation
of patents are explained in Volume IV, Chapter XIX, § 10.
There is no information in this problem with which to
check the correctness of the valuation placed upon the
patent.
(f) Trial Balance Errors. The unlocated errors in the trial
balance, the net result of which was carried in a suspense
account, should have been located if practicable. The
necessity for locating such errorsand suggestions as to
the most expeditious procedure are explained in Volume
IV, Chapter XXXI.
Problem 47
A and B were partners, trading under the name of
A, B and Company. June 30, 1920, the following bal-
ances appear on their ledger:
A, Capital $70,000.00
Buildings 20,000.00
Furniture and Fi.xtures 2,000.00
Accounts Receivable . , 50,000.00
Cash 7,000.00
Materials and Merchandise 53,000.00
On June 30, 1920, the business is incorporated as the

X Company, on the following plan
1. Capital stock, $150,000.
2. X Company
takes over the entire assets and
A,
liabilities of and B
Company at the book figures as
above, except (a) real estate of the book value of $5,000,
which is retained by A, B and Company; (b) the ac-
counts receivable, which are taken over at $48,000; and
(c) the capital accounts of the partners.
3. X Company pays A, B and Company $30,000
for the good-will of the business.
4. Payments to A, B and Company are made as
follows, viz. : $50,000 in first mortagage bonds, and the
balance in capital stock of the Company. X
5. After paying off A, B and Company the re-
mainder of the capital stock is sold for cash to sundry

persons.
The which is retained by A, B and Com-
real estate
pany is bought from A, B and Company by A, for $7,000
and is charged to A's capital account.
After the conclusion of the foregoing described trans-
actions A and B dissolve partnership.
You are required
(a) To
prepare closing entries for the books of
A, B and Company.
(b) A statement setting forth the partners'
accounts down to their final closing, be-
ginning with the balances shown by the
books on June 30, 1920.
(c) Opening entries for the Company. X
(a)
A, AND COMPANY
B
LEDGER BALANCES
June 30, 1920
Cash $ 7,000.00
Buildings 20,000.00
A, Capital 70,000.00
$203,000.00 $203,000.00
JOURNAL ENTRIES OF A, B AND COMPANY

June 30, 1920
Good- Will $ 30,000.00
A, Capital $ 15,000.00
To bring good-will on the partnership books as
valued, same being divided equally between
partners.

To provide for estimated loss on account of bad
debts.
X Company 226,000.00
Cash 7,000.00
Buildings 20,000.00
To show sale of assets to the X Company.

X Company 83,000.00
To record transfer of liabilities assumed by the
X Company.
First Mortgage Bonds — X Company 50,000.00

Capital Stock— X Company 93,000.00
X Company 143,000.00
Received from the X Company in exchange for
the partnership business.
A, Capital 7,000.00
To show sale to A of real estate of the book
value of $5,000, realizing a profit of $2,000
therefrom.
First Mortgage Bonds 50,000.00
To show transfer to the individual partners of
the bonds and capital stock of the Com- X
pany. This closes all partnership accounts.
STATEMENT OF PARTNERS' ACCOUNTS—
Balance, June 30, 1920 $ 70,000.00
Share of Good- Will (50%) 15,000.00
Share of Loss on Bad Debts $ 1,000.00
Share of Profit on Sale of Real Estate 1,000.00
Purchase of Real Estate 7,000.00
First Mortgage Bonds— X Company 25,000.00
$ 86,000.00 $ 86,000.00
STATEMENT OF PARTNERS' ACCOUNTS—

Balance, June 30, 1920 $ 50,000.00
Share of Good- Will (50%) 15,000.00
Share of Loss on Bad Debts $ 1,000.00
Share of Profit on Sale of Real Estate 1,000.00
First Mortgage Bonds— X Company 25,000.00
$ 66,000.00 $ 66,000.00
OPENING ENTRIES OF X COMPANY

June 30, 1920
The X Company has been incorporated this day with
an authorized capital stock of $150,000, divided into 1,500
shares of the par value of $100 each.
Cash $ 7,000.00
Xotes Receivable 5,000.00
Buildings 20,000.00
A, B and Company $226,000.00
To bring onto the books the assets acquired
from A, B and Company.
A, B and Company 83,000.00

To bring onto the books the liabilities of A, B
and Company assumed by the new corpora-
tion.
A, B and Company 143,000.00

First Mortgage Bonds 50,000.00
To show the issue to A, B and Company of first
mortgage bonds and 930 shares of capital
stock, at par, in exchange for the business
formerly conducted by them.
Cash 57,000.00
Balance of the capital stock (570 shares) has
been sold for cash.
Points Illustrated in Problem, It.7
(a) Distribution of Profits. Volume I, Chapter

As explained in
XXXI, § 6. profits are divisible equally among the partners
in the absence of an agreement. This is illustrated by this
problem where the capital accounts are not equal in
amount. The rule of law is based on the fact that the
relative values of partners to a business cannot be deter-
mined and if the partners do not agree upon any basis for
the distribution of profits the law presumes that the part-
ners are of equal value to the business.
(b) Closing of Partnership Books. This problem illustrates the
closing of all partnership accounts upon dissolution of the
firm. The points to be covered in the preparation of the
necessary entries are explained in Volume I, Chapter
XXXIL § 10.
(c) Good-Will upon Dissolution. The principles underlying
the creation of good-will upon the dissolution of a partner-
ship and the distribution of it among the partners are
explained in Volume I, Chapter XXXII, § 10. This
problem illustrates such good-will and the bookkeeping
entries necessary to record it.
(d) Opening Entry for Corporation. The entries necessary to

open the books of a corporation are explained in Volume I,
Chapter XXXIII, § 8.
(e) Bond Issue. In Volume IV, Chapter X, § 8, the principles
underlying the issue of bonds by a corporation and the
recording of the issue on the corporate books are discussed.
Problem 48
The present value of an annuity of $1 for four

periods at 2% is $3.80772870.
What is the value on January 1, 1914, of a 5% per
annum bond issue of $100,000, bought on a 4% per
annum basis (semiannual coupons), due January 1,
1916?
Prepare amortization table as follows:
Total Interest Income Par

Date Amortization Book Value
2% $100,000.00
Jan. 1, 1914
July 1, 1914
Jan 1, 1915
July 1, 1915
Jan. 1, 1916
Insert values under the various heads to the nearest

cent.
(Kansas and Missouri C.P.A. Examinations.)
These bonds yield an effective rate of 4% per annum.

If the coupons also were 4%, the bonds would be worth
exactly $100,000. Since the coupons are 5%, the

amounts to be valued (in order to find the excess value
above $100,000) are the present worths on a 4% basis
(interest payable semiannually) of the diflFerence be-
tween $2,000 and $2,500. In other words, we have to
find the present worth of an annuity of $500 for four
periods at 2% per period. Using the data given in the
first paragraph of the problem, we find this present
worth to be $1,903.86. This amount added to $100,000

gives $101,903.86 as the required value of the bonds
on January 1, 1914.
The amortization table asked for is as follows:
Total
Coupon Income Amorti- Book
Date Par Value
Receipts at 2% zation Value
at ^y^%
Jan. 1, 1914 .. $101,903;86 $100,000.00

Julv 1, 1914 $ 2,500.00 $2,038.0^ $ 461.92 101,441.94
Jan. 1, 1915 2,500.00 2,028.84 471.16 100,970.78
ulv 1, 1915 2 500 00 2,019.42 480.58 100,490.20
Jan. 1, 1916 2,500.00 2,009.80 490.20 100,009.00
Total ... $10,000.00 $8,096.14 $1,903.86
k
(a) Annuities.
The theory of annuities is explained in Volume

IV, Chapter XI, and this problem illustrates one of the
simpler phases of elementary actuarial science.
(b) Effective Interest. The distinction between nominal in-
terest and effective interest on bonds and the necessity for
recording accurately the effective interest are explained
in Volume IV, Chapter IX, § 5.
(c) Amortization. The theory of amortization and the proce-

dure for recording it are explained in Volume IV, Chapter
IX, § 6.
Problem 49
You are engaged in auditing the accounts of a cor-
poration for the calendar year 1914 and find on the
ledger an account with the Short Line Railroad bonds,
which was charged on April 1, 1912, with $110,072.42
as the cost of $100,000 first mortgage bonds, payable
January 1, 1917, and bearing interest at 6% payable
January 1 and July 1 of each year.
You observe that no part of the premium has been
charged off, and on investigation you find the following
credits were made to Interest on Investments for the
interest received on the bonds: July 10, 1912, $3,000;
January 8, 1913, $3,000; July 9, 1913, $3,000; January
12, 1914, $3,000; July 10, 1914, $3,000.
You are informed that these bonds were purchased
on a 4%, semiannual basis. Possessed of this informa-
tionyou are required to prepare a schedule showing the
book value of the bonds April 1, 1912, and July 1 and
January 1 of each year; the interest received; the income
and the amortization for each period on the basis on
which the bonds were purchased; the conventional
method being used for the initial fractional period, so
as to furnish necessary information for making future
entries as toincome and amortization. From this data
you are to submit the necessary journal entries to adjust
the accounts to December 31, 1914*
The schedule
of amortization which follows has been
setup by the reverse of the usual procedure, that is by-
working backwards, and obtaining each value from the
next later by addition and division.
Thus, beginning at maturity with par $100,000.00

and adding to it the coupon then due 3,000.00
$103,000.00
Then discounting this by dividing by 1.02, which

gives $100,980.39
namely, the value one period before maturity.
To obtain the next value add the coupon next
before the last 3,000.00
$103,980.39
and divide again by 1.02, giving the next previous

value $101,941.56
and by proceeding in like manner successive terms
may be obtained as far as desired.
On April 1, 1912, when the bonds were bought, mid-

way between interest-paying dates, the divisor is 1.01.
Thus, $110,072.42, the cost of the bonds, divided by
1.01 gives the book value of these bonds on January 1,
1912, as $108,982.59, which with accrued interest
amounts to $110,072.42, i.e., the flat price inclusive of
interest.
In other words, to the book value on January 1,
1912 $108,982.59
add simple interest at 4% for three months 1,089.83
giving the flat price (with interest included) $110,072.42
•SoluUon by W. P. Kohr, C. P. A.
"This practice of adjusting the price at intermediate

dates by simple interest is conventionally correct, but is
scientifically inaccurate, and always works a slight in-

justice to the buyer. The seller is having his interest
compounded at the end of two* months instead of six
months, and receives a benefit therefrom at the expense
of the buyer, "f
SCHEDULE OF AMORTIZATION
6% Bonds of the Short Line Railroad Company payable
January 1, Purchased April 1, 1912, at
1917.
$108,572.42 and Accrued Interest.
Jl-Jl
Total Net
Amorti- Book Par
Year Date Interest Income
zation Value Value
6% 4%
1917 Jan. 1 $ 3,000.00 $ 2,019.61 $ 980.39 $100,000.00 $100,000.00

1916 July 1 3,000.00 2,038.83 961.17 100,980.39
Jan. 1 3,000.00 2,057.68 942.32 101,941.56
1915 July 1 3,000.00 2.076.15 923.85 102,883.88
Jan. 1 3,000.00 2,094.27 905.73 103,807.73
1914 July 1 3,000.00 2,112.01 887.99 104,713.46
Jan. 1 3,000.00 2,129.45 870.55 105,601.45
1913 July 1 3,000.00 2,146.51 853.49 106,472.00
Jan. 1 3,000.00 2,163.25 836.75 107,325.49
1912 July 1 3,000.00 2,179.65 410.18 108,162.24
Apr. 1 410.17 108,572.42
Jan. 1 108,982.59
$30,000.00 $21,017.41 $8,982.59
*In the problem stated herewith, the interest for the intermediate period is, of course, for three
months.
t"The Accountancy of Investment," by Sprague and Perrine, page 96.
ADJUSTING JOURNAL ENTRIES

December 31, 1914
Prior Surplus Adjustment $1,500.00

Bond Premium (Short Line 6's) 8,572.42
Bonds (Short Line 6's) $10,072.42
To set up premium on Short Line R.R. 6's as of
date of purchase, April 1, 1912, and to charge
"Prior Surplus Adjustment" with accrued in-
terest paid on that date and included in pur-
chase price, which latter was received July 10,
1912, and was credited to "Interest on Invest-
ments."
Prior Surplus Adjustment 2,970.97

Bond Premium (Short Line 6's) 2*970.97
To charge "Prior Surplus Adjustment" and write
down the premium account with the amortiza-
tion of the premium included in former account-
ing periods in the credits to "Interest on Invest-
ments," as follows:
June 30, 1912 .$ 410.18
.
Dec. 31, 1912 . . 836.75

June 30, 1913 . . 853.49 See Schedule of
Dec. 31, 1913 . . 870.55 Amortization
$2,970.97
Intereston Investments 3,000.00

Prior Surplus Adjustment 3,000.00
To charge "Interest on Investments" with 6%
interest received on Short Line 6's January 12
1914, applicable to the year 1913.
Interest on Investments 887.99

Bond Premium (Short Line 6's) 887.99
To charge "Interest on Investments" and write
down the premium account with the amortiza-
tion of the premium, per Schedule, included in
the credit during current year to "Interest on
Investments" as follows:
June 30, 1913 $887.99
Bond Interest Receivable 3,000.00
Interest on Investments 2,094.27
Bond Premium (Short Line 6's) 905.73
To set up value of accrued interest to December
31, 1914, and credit Income and Bond Premium
accounts, according to the Schedule of Amorti-
zation.
Interest on Investments 4,206.28

Profitand Loss 4,206.28
To close.
(a) Surplus Adjustments. The adjustments of surplus in this

problem are in accordance with the procedure laid down in
Volume IV, Chapter VII, § 4.
(b) Bond Investments. The accounting procedure required to
record bond investments and the income therefrom is out-
lined in Volume IV, Chapter X.
(c) Effective Interest. In Volume IV, Chapter IX, § 5, the
distinction between and nominal in-
effective interest
terest is pointed out clearly and the accounting pro-
cedure required in discriminating between them is
explained.
(d) Amortization. The theory of amortization and the neces-
sary accounting procedure involved are outlined in Volume
IV, Chapter IX, § 6.
Problem 50
The ABC Estate Company was formed on January

1, and the following is the trial balance as at
1912,
December 31, 1913, before closing the income and ex-
penditure accounts for the current year:
THE ABC ESTATE COMPANY

TRIAL BALANCE
December 31, 1913
Dr. Cr.
Capital Stock Authorized and Issued $140,000.00
Bonds Issued: 130,000 20-year 5% Bonds, issued
January 1, 1912, at a discount of 5% 120,000.00
Discount on Bonds Issued $ 6,000.00
Property (January 1, 1913) 250,280.50
Capital Stock in Treasury 12,000.00
Calls Unpaid 500.00
Additions to Property 1913: Sinking Artesian Well 5,000.00
ABC Estate Company: Bonds Purchased 1912
(canceled) $6,000.00 5,850.00
Bonds Purchased 1913 6,000.00 5,750.00
Rents Collected 24,500.00
Firelnsurancepaidforyearending June 30, 1914 . 300.00
Agents' Fees and Expenses 2,850.00
General OflBce Expenses 1,050.00
Cash at Bankers and on Hand 1,389.50
Secretary's Salaryand Commission 2,380.00
Income and Expenditure Account, 1912 14,250.00
Interest on Bonds (paid annually) 5,400.00
$298,750.00 $298,750.00
The rent collections include rents paid in advance

$750 —and there are sundry rents outstanding not taken
up on the books, amounting to $2,650, of which it is
estimated $15 will not be collected.

No provision has been made in the year's accounts
for depreciation of the buildings, included in the Prop-
erty account, the original cost of which was $120,000.
In the year 1912 the amount written off was based on an
estimated life of 20 years.
Prepare balance sheet as at December 31, 1913, and
income and expenditure account for the year ended that
date, after making the necessary adjustments.
{Illinois C.P.A. Examination.)
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a
Exhibit B
STATEMENT OF INCOME AND EXPENDITURES
For the Year Ending December 31, 1913
Income:
Rents $26,400.00
Expenditures:
Agents' Fees and Expenses $2,850.00
General OflSce Expenses 1,050.00
Depreciation of Buildings 6,000.00
Insurance Expired 150.00
Provision for Bad Debts 15.00
Secretary's Salary and Commission 2,380.00
Loss on Bonds Purchased 20.00 12,465.00
from Operations
Profit $13,935.00
—
Deduct Interest on Bonds 5,685.00
Net Income for year $ 8,250.00

ADJUSTING ENTRIES
Rents Collected $ 750.00
Rents Paid in Advance $ 750.00
Rent paid in advance, credited to income in error.
Rents Uncollected 2,650.00

Rents Collected 2,650.00
Rents due and uncollected not taken up.
Bad Debts 15.00

Reserve for Uncollectible Rents 15.00
Estimated loss on uncollected rents.
Depreciation of Buildings 6,000.00

Reserve for Depreciation of Buildings 6,000.00
5% per annum.
Note: No information is given as a basis for
providing for depreciation on the remaining
property.
Property 6,000.00
Reserve for Depreciation of Buildings 6,000.00
1912 provision credited direct to Property.
Insurance Expired 150.00

Fire Insurance 150.00
To charge off expired portion of premium.
Income and Expenditures Account, 1912 300.00

Discount on Bonds 300.00
To charge off proportion of discount applicable to
the year 1912.
Bonds Issued 6,000.00

Surplus 135.00
ABC Estate Company 5,850.00
Bonds purchased 1912 canceled.
Interest on Bonds 285.00

Bond Discount 285.00
To charge off proportion of discount applicable to
the current year:
Original discount $6,000.00
Less— 1912 adjustment . . . 585.00
Balance to be charged off during sub-

sequent 19 periods $5,415.00
Bonds Purchased 270.00

To adjust discount on bonds purchased during
1913 (and presumably not canceled).

Bonds Purchased 20.00
To charge ofiF on purchase of six
loss sustained
bonds at a higher price than was received there-
for when issued.
Comments on Problem 50
The object in adjusting the Property account as of

January 1, 1913, was to restore it to the original cost and
to carry the reserve for depreciation as a distinct ac-

count. It might be advisable to show the detailed ad-
justment on the balance sheet.
The uncanceled treasury bonds are carried as an
asset until they are retired. In some cases it is advisable
to show them as a deduction from funded debt, in order
to set forth the amount of bonds in the hands of the
public.
When bonds are canceled, an adjustment of the
bond discount must be made. Bonds canceled are not
an asset. As to bonds purchased and held in treasury,
such adjustment is optional. As a general rule, it may
be said that if the intention is to hold the bonds, an
adjustment is proper. But if the intention is to dispose
of them, the best procedure would be to carry the bonds
at cost.
Unpaid calls may be shown as a current asset, if so
desired.
Depreciation has been provided for by the simplest
method, i.e., dividing the original cost by the estimated
life. There are no residual values to be considered in
this problem.
Bond discount. The between the nominal
difference
and be credited periodically to
effective interest should
Discount on Bonds account. However, the simplest
method of disposing of the discount would be to divide
the $6,000 by the 20-j;ear life of the bonds, and charge
each year with $300.
But the retirement of $6,000 bonds during the first
year necessitates an adjustment of the Discount on
Bonds account, for the reason that since the outstanding
bonds have been reduced, the proportion of the discount
chargeable to the subsequent periods must also be

correspondingly reduced. Assume the bonds were
canceled December 31, 1912. The original discount
on the canceled bonds was $300, 1/20 of the total dis-
count. But of this section of the discount, there has
already been charged off in the aforementioned entry,
the discount pertaining to the first fiscal period (1/20 of
$300, or $15). So the adjusting entry in respect of
bonds canceled would be:
Bonds Purchased $285.00
Discount on Bonds $285.00
To write off discount on canceled bonds not charged
off at date of cancelation.
The effect of this entry is to raise the book value of

the purchased bonds from $5,850 to $6,135. The excess
over par represents the loss sustained
of the latter figure
by the company on the redemption of bonds at a higher
price than was received when same were issued. The
entry to redeem the bonds would be:
Bonds Issued $6,000.00

Bonds Purchased $6,000.00
Six bonds, par value $1,000, canceled.
and the balance of $135 in the Bonds Purchased account

should be charged to Surplus as the loss occurred in
1912. The entry required is
Surplus $135.00
Bonds Purchased $135.00
'^
Loss on bonds canceled during 1912.
In the case of the bonds purchased in 1913, a similar

adjustment must be made if the bonds are to be carried
at par.
(a) Bond Issues. The accounting for bond issues is explained in

Volume IV, Chapter X, § 8.
(b) Discount on Bonds, The true nature of discount on bonds is
explained in Volume IV, Chapter X, § 10, and this problem
illustrates some of the difficulties in recording the discount.
(c) Treasury Stock. The nature of treasury stock and the
accounting treatment of it are explained in Volume I,
Chapter XXXIII, § 9, and in Volume IV, Chapter XV.
It will be noted in the solution that the par value of the
treasury stock is deducted from the par value of the capital
stock authorized. The facts given in the problem do not
definitely show whether this capital stock in the treasury
represents unissued stock or real treasury stock. It is
assumed to be the latter.

(d) Subscriptions to Capital Stock. This problem illustrates the
recording of subscriptions to capital stock, as explained in
Volume IV, Chapter XIV, § 2.
(e) Deferred Charges and Credits. In Volume IV, Chapters II
and III, the nature of deferred charges and credits and the
accounting treatment required for them are explained.
(f) Depreciation Reserve. The handling of depreciation reserves
and the theory underlying them are explained in Volume I,
Chapter XXIX, § 4, and in Volume IV, Chapter XIII, § 2.
(g) Expenditures. Attention is invited to the use of the word
"expenditure" in this problem when the word expense
would be preferable. This failure to discriminate between
the two words is noted in Volume I, Chapter X, § 4, and in
Volume IV, Chapter IV, § 13.
Problem 51
A Corporation authorized a total issue of $500,000

of 5% bonds in denominations of $1,000 and $500,
with interest payable January 1 each year, and sold

the whole issue to underwriters January 1, 1918, at 90.
The company issued the bonds for the underwriters at
95 and received the cash in payment February 1, 1918.
The trust deed provides that "there shall be estab-
lished a fund to be called the Bond Sinking Fund, to
the account of which there shall on the 31st day of
December of each year be carried a sum equal to seven
per cent of the total par value of the bonds issued, and
that, out of the moneys so carried to the account of
the said fund, the company shall pay the interest on
the bonds as the same becomes due, and the balance
of said moneys shall be expended each year in purchas-
ing the bonds of the company in the open market."
In January, 1919, the company purchased $10,000
of its bonds at 97 and retired and canceled them. In
January, 1920, the market price of the bonds is 98.
(a) How many bonds may be purchased from the
bond sinking fund in January, 1920.'^
(b) Make journal entries for all the transactions
from the date of the bonds to and including
sale of the
the purchase for the sinking fund in January, 1920.
(c) Show trial balance after posting above entries.
{Massachusetts C. P. A. Examination.)
(a)
The company purchased $11,000 of its bonds in

January, 1920. At the time there was a balance in
the fund of $10,800. The $11,000 bonds bought at 98
consume $10,780, leaving a balance of $20 in the fund.
(b)
January 1, 1918
Underwriters $450,000.00
Bond Discount 50,000.00
Bonds Authorized $500,000.00
Corporation authorizes an issue of $500,000 5%
bonds in denominations of $500 and $1,000,
interest payable January 1 of each year.
Entire issue of bonds was sold to under-
writers at 90.
February 1, 1918
Cash 475.000.00
Bonds Authorized 500,000.00
Bonds 500,000.00
Underwriters 475,000.00
The company issued the bonds for the under-
writers and received cash in payment.
Underwriters 25,000.00
Cash 25,000.00
Payment of underwriters' profit on issue at
95.
December 31, 1918
Bond Sinking Fund 35,000.00

Cash 35,000.00
The trust deed provides for the establishment of
a fund into which shall be paid on December
31 of each year a sum equal to 7% of the par
value of the bonds.
January 1, 1919
Bond Interest 25,000.00

The trust deed provides that the company shall
pay the interest on the bonds as it becomes
due out of the bond sinking fund. Above
entry is for the payment of interest of Jan-
uary 1, 1919.
January, 1919
Bonds 10,000.00
The company purchased $10,000 of its bonds in
the open market at 97 and retired and can-
celed them. Interest accrued on the bonds
purchased must be ignored as the exact date
of purchase is not given.
January 1, 1919
Bonds
Interest on 1,000.00
To remove from Bond Discount the entire
amount of discount applicable to the $10,000
bonds retired.
December 31, 1919
Bond Sinking Fund 35.000.00

Cash 35,000.00
To show the payment of the second instalment
into the sinking fund.
January 1, 1920
Bond Interest . 24,500.00
To show payment of January, 1920, interest
on bonds outstanding on that date.
January 1, 1920
Bonds 11,000.00
To show purchase of 11 $1,000 bonds from the
bond sinking fund at 98.
January 1, 1920
on Bonds
Interest 1,100.00
To remove from Bond Discount the entire
amount of discount applicable to the $11,000
bonds retired on above date.
(c)
TRIAL BALANCE
January, 1920
Cash $380,000.00
Bond Sinking Fund 20.00
Bond Discount Unextinguished 47,380.00
Bonds $479,000.00
$479,000.00 $479,000.00
The bond discount should be amortized but no
basis is given by which this may be done inasmuch as
the Hfe of the bonds is not given. From the fact that
7% of the bond issue, or $35,000, is set aside annually
into the sinking fund, $25,000 of which was used the
first year in paying interest, leaving $10,000 to redeem
the bonds, it may possibly be presumed that the life

of the bonds is 50 years, in which case $10,000 of the
bond discount would be charged to Bond Interest each
year. This seems like an extreme assumption, however,
and is even then only approximately correct as it does
not take into account the diminishing interest charge
and the discount at which bonds are purchased in the
open market.
(a) Bond The accounting required to record bond issues

Issues.
is Volume IV, Chapter X, § 8.
outlined in
(b) Sinking Funds. The theory underlying sinking funds and
the accounting necessary to record them are outlined in
Volume IV, Chapter XI.
(c) Bonds in Sinking Fund. The accounting required when a

company's own bonds are purchased by it and held in
its sinking fund is discussed in Volume IV, Chapter XI,
§12.
(d) Bond Discount. The nature of bond discount and the ac-
counting means for distributing it over the life of the bond
issue are discussed in Volume IV, Chapter X, § 10.
(e) Underwriters' Profit. This case illustrates the profit made
by underwriters to whom bonds were issued at 90 and for
whom they were sold at 95.
Problem 52
If will amount to $3.3863549

a principal of one dollar
in 25 years, at 5% per annum, what would be the
present value of an annuity of $1,250 for 30 years at
the same rate?
The solution of this problem is based upon the fact

that the present worth of an annuity of $1 for a given
period and at a given rate is equal to the compound
discount on $1 for this period and at this rate, divided
by the rate of interest per period.
If $1 in 25 years at 5%
per annum will amount to
$3.3863549, then in 30 years, by five successive multi-
plicationsby 1.05, $1 will amount to $4.3219423. If
$1 amounts to this figure, then by division, $.2313775
will amount to $1 on the same basis. From this result
we obtain the fact that the compound discount on $1
for 30 years at 5% per annum is $.7686225. Dividing
this figure by the annual rate, .05, we obtain $15.37245

as the present worth of an annuity of $1 for 30 years
at 5% per annum. The present worth of a like annuity
of $1,250 would be $19,215.56, which is the answer to
the problem.
This solution is based upon the assumption that the
annuity is payable at the end of each year, which is or-
dinarily the case, and not at the beginning of each year.
(a) Annuities. The only point of interest in this problem is the

calculation of annuities. The principles underlying this
fundamental phase of actuarial science are described in
Volume IV, Chapter XL
Problem 53
A contractor proposes to build a bridge to Belle

Isle and accept the city's 4% 20-year bonds to the
amount of $2,000,000 in payment. He advocates, as a
means of retiring the bonds, the establishment of a toll
system on foot passengers and automobiles at the
respective rates of 1 and 5 cents each. Assuming the
ratio of foot passengers to automobiles to be ten to one,
how many would be necessary to pay the in-
of each
terest annually and create a fund which, placed at the
same rate of interest, would be suflicient to retire the
bonds at maturity .^^
Note: $1 compounded at 4% for 20 years equals

$2.19112314.
{Michigan C. P. A. Examination.)
The first part of this problem is to find the annuity

which will, at 4%, build up to $2,000,000 in 20 years.
The amount of an annuity equals the compound in-
terest for the period divided by the rate per period,
that is, the amount
an annuity of $1 for 20 years at
of
4 %
equals $1.19112314 (i.e., $2.19112314 $1) di- —
vided by .04, which equals $29.7780785. Hence we
have the proportion:
$1 : $29.7780785 : : X dollars : $2,000,000
By long division X = $67,163.57, i.e., the amount of

the annual sinking fund, which at 4% will in 20 years
build up to $2,000,000.
The annual interest charge = $80,000. Therefore,
the total annual charge which is to be met from tolls
on foot passengers and automobiles will be $147,163.57
($80,000 + $67,163.57).
The revenue from ten foot passengers, as per prob-
lem, would be 10 cents, and likewise the revenue from
one automobile would be 5 cents. In other words, %
of the annual tolls, or $98,109.05, must come from foot
passengers, and 3^, or $49,054.52, from automobiles.
$98,109.05 -^ .01 = 9,810,905, required number of
foot passengers per annum.
$49,054.52 ^ .05 = 981,090, required number of
automobiles per annum.
(a) Annuities. The theory of annuities and the proper method

of calculating and recording them are explained in Volume
IV, Chapter XI.
(b) Sinking Fund. Sinking funds and their accounting treat-

ment are outlined in Volume IV, Chapter XL
Problem 54
From the data given below, state clearly and ex-

plain at least three different methods of arriving at the
amount to charge annually for the depreciation of any
one or all of the following items:
Value Estimated Life Scrap Value
Buildings . $50,000.00 50 years $1,000.00

"
Machinery 20,000.00 20 2,000.00
"
Tools .... 5,000.00 5 100.00
Patterns . 10,000.00 3 " 100.00
{Wisconsin C. P. A. Examination.)
1. Fixed proportion method:
Buildings, 1/50 of $49,000 equals $ 980 yearly

Machinery, 1/20 " 18,000 900 "
Tools, 1/5 " 4,900 980 "
Patterns. 1/3 " 9,900 3,300 "
16,160 annual charge
2. Sum of year digit method (illustrated by Tools

account)
5/15 of $4,900 equals $1,633.33 charge first year

4/15 ' 4,900
'
1,306.67 " second
3/15 '
4,900 980.00 '
third
2/15 ' '
4,900 653.33 '
fourth
1/15 ' '
4.900 326.67 •
fifth
$4,900.00 total charge
3. Composite life method:
Total Ex-
Scrap Deprecia- Times Dollar
Value Life penditure
Value tion Replaced Years
in 50 Yrs.
$50,000.00 50 $1,000.00 $49,000.00 1 $ 49,000.00 $2,450,000.00

20,000.00 20 2,000.00 18,000.00 45,000.00 900,000.00
5,000.00 5 100.00 4,900.00 10 49,000.00 245,000.00
10,000.00 3 100.00 9,900.00 16% 165,000.00 495,000.00
$85,000.00 $308,000.00 $4,090,000.00
308,000-5-4,090.000 equals r^-r^, composite life, or 7.53%.
Reserve for depreciation would therefore be 7.53% of $85,000 =$6,400.50

annual charge.
The composite life method contemplates the deter-

mination of one rate which may be applied to the total
asset account and its reduction to scrap value in an
average number of years.

(a) Depreciation. The theory of depreciation and the methods
of recording it are discussed in Volume I, Chapter XXIX,
and in Volume IV, Chapter XIII.
(b) Straight-Line Depreciation. This method of calculating de-
preciationand the arguments for and against its use are
explained inVolume I, Chapter XXIX, § 7, and in Volume
IV, Chapter XII, § 7.
(c) Percentage of Diminishing Value. This method which is
approximated in the solution is explained in Volume I,
Chapter XXIX, § 8, and in Volume IV, Chapter XII, § 8.
(d) Composite-Life Method. This method is illustrated in Vol-
ume IV, Chapter XII, § 10.
Problem 55
The Prosperous Company is organized under the

laws of the State of New York to conduct a manufac-
turing business. The authorized capital stock is
$500,000, divided into $250,000 common and $250,000

preferred stock, par value of shares $100. Five incor-
porators subscribe each for one share of common stock
at face value. John Peters, one of the incorporators,
purchases from three manufacturing companies their
complete plants for $499,500 and transfers said plants
to the Prosperous Company for the remaining $499,500
of common and preferred stock and $100,000 of first
mortgage 5% bonds out of a total issue of bonds
amounting to $150,000, leaving $50,000 of bonds in the
treasury. The incorporators then pay in cash for their
respective subscriptions.
The individual assets acquired are as follows: land
and buildings $75,000; plant and machinery $200,000;
tools, equipment, and fixtures $50,000; inventories
$100,000; accounts receivable, good $28,000, doubtful
$5,000; cash $12,000.
Prepare (a) opening entries for the books of the

Prosperous Company, (b) initial balance sheet showing
the company's financial condition.
{New York C.P.A. Examination.)
The Prosperous Company, a corporation incorporated
under the laws of the State of New York, with an author-
ized capital stock of $250,000 preferred stock, and $250,000
common stock, shares being of the par value of $100 each.
Common Stock
Subscribers to $ 500.00
Common Stock Subscriptions $ 500.00
To record subscriptions to five shares of com-
mon stock, one share each, by the five in-
corporators.
Plant, Good-will, and Sundry Assets 599,500.00

John Peters, Vendor 699,500.00
To record purchase of certain assets, per con-
tract of sale on file, as under:
Mortgage Bonds 100,000.00
$599,500.00
John Peters, Vendor 599,500.00

Preferred Stock 250,000.00
First Mortgage 5%
Bonds 100,000.00
To record full payment for assets acquired
from John Peters.
Cash 500.00
Subscribers to Common Stock 500.00
To record payment of subscriptions.
Common Stock Subscriptions 500.00

Common Stock 500.00
Land and Buildings 75,000.00
Tools, Equipment, and Fixtures 50,000.00
Cash 12,000.00
Good- Will 134,500.00
Reserve for Bad and Doubtful Accounts . 5,000.00
Good- Will and Sundry Assets
Plant, 599,500.00
To place upon the records the various assets
acquired in accordance with decisions of the
directors. A reserve is set up to provide for
possible loss on doubtful accounts receivable.
THE PROSPEROUS COMPANY

BALANCE SHEET
As at
Assets
Cash $ 12,500.00
Less— Reserve 5,000.00 28,000.00
Land and Buildings 75,000.00
Tools, Equipment, and Fixtures 50,000.00
Good- Will 134,500.00
$600,000.00
Liabilities
First Mortgage 5% Bonds ($150,000 authorized) $100,000.00

Capital Stock (authorized and outstanding)
Preferred $250,000.00
Common 250,000.00 500,000.00
$600,000.00
(a) Corporation Opening Entries. In Volume I, Chapter

XXXIII, and in Volume IV, Chapter XIV, the entries
§ 6,
usually required to open the books of a corporation are
explained.
(b) Subscriptions to Capital Stock. The recording of subscrip-
tions to capital stock is Volume IV, Chapter
described in
XIV, § 2.
(c) Plant and Sundry Assets Account. The use of this account
is described in Volume I, Chapter XXXIII, § 8.
(d) Capital Stock Accounts. This problem illustrates the use of

a separate account for each kind of capital stock issued.
This is in accordance with the principles outlined in Volume
I, Chapter XXXIII, § 5, and in Volume IV, Chapter XIV,
§5.
(e) Reserve for Bad Debts. The practical method of determin-
ing the amount to be set aside as a reserve for bad debts
is disclosed in Volume I, Chapter XXIX, § 11, and in
Volume IV, Chapter XVI, § 2.
Problem 56
A organized with a capital stock of

corporation is
$100,000, par value of shares $100, to acquire a busi-

ness formerly conducted by A. The business shows
sundry assets $150,000, and sundry liabilities $80,000.
One share of stock each is sold at par to X, Y, and Z,
who afterward become directors of the new corporation.
The remaining stock is issued to A, who immediately
donates $10,000 of stock to the treasury to procure
additional capital.Two months later $5,000 of the do-
nated stock is sold at 48, and six months later the
remainder is sold at 62.
Set up journal entries necessary to record the above

transactions.
Cash $ 300.0
Capital Stock 300.00
To record the sale for cash of a share of stock
each to X, Y, and Z.
Sundry Assets 150.000.00

A, Vendor 150,000.00
To record the assets acquired from A.
A, Vendor 80,000.00
Sundry Liabilities 80,000.00
To record the liabilities assumed.
A, Vendor 70,000.00
To show the issue to A of the entire capital
stock of the company with the exception of
the three shares sold for cash. As the
amount of stock issued to A is $29,700 in
excess of the net worth of the property ac-
quired from him, the excess represents the
valuation expressed in stock which was
placed upon the good-will of the business
acquired from him.
Treasury Stock 10,000.00

Treasury Stock Donated 10,000.00
To record the donation of 100 shares of stock to
the corporation by A; to be sold to procure
additional capital.
Cash 2,400.00
Treasury Stock 2,400.00
To record the sale of 50 shares of treasury
stock at 48.
Cash 2,600.00
Treasury Stock 2.600.00
To record the sale of the remaining 50 shares of
treasury stock at 52.

Treasury Stock 5.000.00
To close the Treasury Stock account.

Surplus 5,000.00
Torecord the surplus secured through the do-
nation of treasury stock.
(a) Treasury Stock. The nature of treasury stock and the pur-
pose for which it is used are described in Volume I, Chap-
ter XXXIII, § 9, and further elaborated in Volume IV,
Chapter XV, § 3.
(b) Surplus. When the donated treasury stock is sold, a clear
increase in surplus results. Some accountants prefer to
show surplus from this source in a special account ear-
marked by some title which will indicate its nature. There
seems to be no reason for this because such surplus is
avâilable for distribution as dividends. If the corpora-
tion as a matter of financial policy decides not to dis-
tribute then a reserve should be created, but the original
it,
credit should be made in the general Surplus account.

(See Volume I, Chapter XXXIII, § 9, and Volume IV,
Chapter XV.)
(c) Treasury Stock Donated. The purpose of this account is to
guard against the anticipation of a surplus increase before
the treasury stock has been disposed of. There can be no
increase in surplus unless the donated stock is sold for
more than the consideration, if any, that was paid for it.
If the treasury stock was acquired through outright do-
nation, then any amount received for it would constitute
an increase in surplus. This increase, however, should not
be recorded until the disposition has been made. (See
Volume I, Chapter XXXIII, § 9, and Volume IV, Chapter
XV, § 4.)
Problem 57
A corporation organized under the laws of the

State of New York has an authorized capital stock of
$200,000, consisting of 1,000 shares common and 1,000
shares preferred stock, par value $100 each. Patents
were acquired of a patentee for $50,000 common and
$50,000 preferred stock. The patentee donated one-
half of each issue of his stock to the company for its
use in securing working capital.
Show the journal entries necessary to record the
above transactions, and submit balance sheet prepared
from these entries.
Unissued Preferred Stock $100,000.00

Unissued Common stock 100,000.00
Capital Stock Preferred Authorized $100,000.00
Capital Stock Common Authorized 100,000.00
To bring onto the books as a matter of record
the full authorized issue of both common and
preferred stock.
Patents 100,000.00
Unissued Preferred Stock 50,000.00
Unissued Common Stock 50,000.00
Patents are acquired of the patentee, preferred
stock to the amount of $50,000 and common
stock of the same amount being issued in
payment thereof.
Treasury Stock, Preferred 25,000.00

Treasury Stock, Common 25,000.00
Surplus from Treasury Stock 50,000.00
The patentee donated one-half of each issue
of his stock to the company for its use in
securing working capital.
BALANCE SHEET
As at
Assets
Patents $100,000.00

Capital Stock Preferred Authorized $100,000.00
Less — Unissued 50,000.00
Issued .
$ 50,000.00
Less — Held in Treasury 25,000.00
Outstanding $ 25,000.00
Capital Stock Common Authorized $100,000.00

Less — Unissued 50,000.00
Issued $ 50,000.00
Less — Held in Treasury 25,000.00
Outstanding 25,000.00
Surplus from Treasury Stock Donated 50,000.00
$100,000.00
(a) Treasury Stock. For a discussion of the nature and uses

of treasury stock, see Volume I, Chapter XXXIII, § 9,
and Volume IV, Chapter XV.
(b) Surplus from Treasury Stock. This account is used in order
to guard against showing a surplus before the treasury
stock has been disposed of. Attention is invited to the
comments under "Treasury Stock Donated" in the com-
ments on Problem 56. (See also Volume I, Chapter
XXXIII, § 9, and Volume IV, Chapter XV, § 4.)
(c) Reduction of Cost of Patent. It has been suggested that the
final surplus secured from the disposition of donated
treasury stock might be deducted from the cost of the
asset acquired at the time the stock was originally issued.
The argument in favor of this is that, if the vendor from
whom the asset was acquired was willing to donate to the
corporation a portion of the capital stock that was paid
him in consideration for the asset, it must follow that the
asset was not worth the par value of the stock issued for
it. This view, however, would contravene the corporation
laws which require that stock cannot be issued for con-
sideration worth less than its par. For a discussion of this
phase of corporation law, see Volume IV, Chapter XV, § 1.
(d) Treasury Stock on Balance Sheet. In the balance sheet in
this case the treasury stock was deducted from the total
stock issued. This is in accordance with the procedure
suggested in Volume IV, Chapter XV, § 8.
(e) Authorized Capital Stock. An account is opened in this
solution for the authorized capital stock. The way in
which such an account is operated and an argument in
favor of its adoption will be found in Volume IV, Chapter
XIV, § 2.
Problem 58
A company packs a coupon in each box of goods

sold. The company agrees to redeem 100 coupons
with premiums costing $1 apiece. 25% of the coupons
are never presented for redemption.
Prepare sample journal entries for the bookkeepers
to follow which will give the last of each month the
expense for the month for coupons given out, the
amount of premiums on hand, and the gross and net
liability for outstanding coupons, and state briefly how
these entries will produce the result wanted.
JOURNAL ENTRIES
Coupon Advertising (at 75 cents per 100) $
Estimated Lapses (at 25 cents per 100)
Unredeemed Coupons (at $1 per 100) $
Coupons contained in hundred boxes sold
during month.
Premiums
Accounts Payable (or Cash)
Premiums purchased during the month (at $1
each).
Unredeemed Coupons
Premiums ,
Premiums exchanged for coupons redeemed during

month (at $1 per 100).
"Coupon Advertising" covers the expense for the
month.
Balance of " Premiums " is value of premiums on
hand.
Balance of " Unredeemed Coupons " is gross liabil-
ity.
Balance of " Unredeemed Coupons " less balance of

" Estimated Lapses " is net liability on account of out-
standing coupons.
Note that the fact that the premiums given in ex-
change for 100 coupons cost $1 apiece is essential. For
instance, in case they cost 90 cents apiece, the expense
for the month would be 75 cents per 100 boxes sold
during the month less 10 cents per 100 coupons re-
deemed during the month.

(a) Contingent Liabilities. The only point in this problem of

especial interest is the recording of contingent liabilities.
The necessity for this procedure is indicated in the dis-

cussion in Volume IV, Chapter III, § 1, and in Chapter
XVIII, § 5.
Problem 59
An accountant engaged by a certain concern to

is
draw up financial statements and to close the books as

of December 31, 1920. He finds that no provision for
accrued or prepaid items was made when the books were
closed December 31, 1919, and he also locates certain
errors as indicated in the following:
Goods received prior to December 31, 1919, and
included in themerchandise inventory taken as of that
date but not entered on the books until January, 1920,
$8,000.
Error in taking inventory December, 31, 1919,
$1,500 too little.
Depreciation on real estate —estimated— for 1919,
$6,500; for 1920, $7,000.
Make the necessary adjusting entries.
Accrued Wages and Salaries:

December 31, 1919 $1,040.00
December 31, 1920 2,000.00
Insurance Paid in Advance:
December 31, 1919 360.00
December 31, 1920 180.00
Accrued Interest on Mortgage:
December 31, 1919 1,200.00
December 31, 1920 1,200.00
December 31, 1920
Surplus $1,640.00
Wages and Salaries $1,640.00
The above entry is to debit Surplus account with
wages paid in 1920 but representing expenses of
the preceding year.
Wages and Salaries 2,000.00

Wages and Salaries Accrued 2,000.00
To set up accrued wages and salaries as at this date.
Insurance 360.00
Surplus 360.00
To credit Surplus account with insurance unex-
pired as at December 31, 1919, but incorrectly
considered as an expense of 1919.
Insurance Paid in Advance 180.00

Insurance 180.00
To set up as an asset the insurance unexpired as at
this date.
Surplus 1,200.00
To debit Surplus account with interest on mortgage
paid in 1920, but representing an expense of the
preceding year.

Interest on Mortgage Accrued 1,200.00
To set up as a liability such interest as has accrued,
on mortgage.
Surplus 8,000.00
To credit Inventory account with goods received
in 1919, but which were not recorded as pur-
chases, and hence should not have entered into
the profit computation for 1919. Surplus ac-
count should show a consequent reduction, and is
therefore debited.
Surplus 1,500.00
To adjust the Inventory account as at the beginning
of this year, it having been figured at too small an
amount by $1,500. A consequent increase in
profits for 1919 results, hence Surplus account
is credited.
Surplus 6,500.00
Reserve for Depreciation on Real Estate 6,500.00
Estimated depreciation on real estate was not com-
puted in 1919. The above entry reduces the
Surplus account on the basis of the depreciation
that should have been considered as an expense of
1919.
Depreciation on Real Estate 7,000.00

Reserve for Depreciation on Real Estate 7,000.00
To record the estimated depreciation on real estate
for the current year, the amount being added to
the reserve account.
(a) Adjustment of Surplus. The various surplus adjustments in

this problem are made in accordance with principles out-
lined in Volume IV, Chapter VII, § 4.
(b) Accrued Liabilities. As explained in Volume IV, Chapter
III, § 1, liabilities accrued but not yet due should be re-
corded on the books in order that the financial position of
the business may be exactly stated.
(c) Prepaid Expenses. The recording of prepaid expenses is
in accordance with principles outlined in Volume IV,
Chapter II.
(d) Depreciation on Real Estate. In view of the fact that land
does not depreciate, as explained in Volume IV, Chapter
XVII, § 4, the fact that in this case depreciation is taken
on real estate would indicate that the real estate account
covered buildings as well as land. This is not in accordance
with the best accounting practice.
(e) Merchandise Invoices. Care must be exercised to enter on

the books all invoices for merchandise received and taken
into stock.
Problem 60
A is the proprietor of a business. His books were
December 31, 1919, at which time his capital
closed as of
account showed a credit balance of $18,000. He oflFers
to sell B
a one-third interest in the business for $10,000,
which offer is accepted by B. Prepare balance sheet
of A and B.
The a one-third interest in the business for

sale of
$10,000 is equivalent to a valuation of $30,000 upon the
business as a whole. As A's capital account shows a net
worth according to the books of only $18,000, the excess
is a measure of the good-will which is brought onto the
books by an entry debiting Good-Will and crediting A

with $12,000. An entry would then be made debiting
A with $10,000 and crediting B with $10,000, which
would result in the following balance sheet:
BALANCE SHEET OF A & B

Sundry Net Assets $18,000.00 A, Capital $20,000.00
Good- Will 12,000.00 B, Capital 10,000.00
$30,000.00 $30,000.00
A different treatment of the case by which good-will

is ignored would be to make an entry debiting A with
$6,000 and crediting B with $6,000, giving the following

balance sheet:

Sundry Net Assets $18,000.00 A, Capital $12,000.00
B, Capital 6,000.00
$18,000.00 $18,000.00
By either method, the relation existing between the

interests of A and B in the business is 2:1, which
accords with the partnership agreement.
Itapparent in this problem that there has merely

is
been a sale by A of a share in his business, resulting

in a division of his interest, the assets remaining the
same.
In the above problem, if the agreement had been
that B was to invest $10,000, thus acquiring a one-third
interest in the business, the treatment of the case would
be as follows
Cash $10,000.00
B . $10,000.00
To bring on the books the cash invested by B.
Aninvestment of $10,000 by which a one-third in-

terest is acquired means again a valuation of $30,000
on the business as a whole. Therefore, good-will of
$2,000 would be brought on the books and credited to
A, giving the following balance sheet

Sundry Assets $18,000.00 A, Capital $20,000.00
Cash 10,000.00 B, Capital 10,000,00
Good- Will 2,000.00
$30,000.00 $30,000.00
Or again, ignoring good-will, after bringing on the

cash invested by B, thus raising the assets to $28,000,
an adjusting entry would be made debiting B and
crediting A
with $666.67, thereby establishing a ratio
of 2 1 between the capital accounts of the two partners.
:
If in this case, the agreement was that the invest-

ment of $10,000 entitled B to one-third of the "profits
instead of a one-third interest in the business, the only
entry necessary would be an entry bringing on the cash
and crediting it to B's capital account.
The capital accounts would then show the contri-
bution of each partner and consequently their present
interests in the assets, which need have no relation to
the basis on which profits are shared.
(a) Good- Will. The nature of good- will and the circumstances
under which it may properly be set up on the books are
discussed in Volume IV, Chapter XIX, §§ 2 and 7.
(b) Capital Accounts. This problem illustrates the function of
the capital account for a partner. (Refer to Volume I,
Chapter XXXI, § 2.)

(c) Admission of Partner. For the bookkeeping procedure re-
quired upon the admission of a partner, see Volume I,
Chapter XXXI, § 3.
(d) Profit and Loss Distribution. As explained in Volume I,
Chapter XXXI, § 6, partners may agree upon any basis
for the distribution of profits or losses. In that chapter
there are suggested several methods which are in common
use.
Problem 61
A composed of X and Y whose capital ac-

firm is
counts show $10,000 and $14,000 respectively, profits

being shared equally. Show entries for the admission
of Z as a partner under each of the following conditions
(a) Z offers to buy a one-third interest in the busi-

ness from X and Y for $15,000.
(b) Z offers to contribute such a sum as will give
him a one-third interest in the partnership.
In each case, the interests of the three partners are

to be adjusted in such a way as to make that of all
three partners equal.
(a) If Z is willing to pay $15,000 for a one-third

interest in the business, he estimates the business as a
whole to be worth $45,000. As the present net assets
amount to $24,000, good-will would be brought on the
books for an amount equal to the excess of $45,000 over
$24,000, by the following entry:
Good- Will $21,000.00
X $10,500.00
Y 10,500.00
The good-will would be divided between X and Y

in the proportion in which they share profits.
This would be followed by an entry:
X $5,500.00
Y 9,500.00
Z $15,000.00
not taken into account, the following

If good-will is
entry will show the admission of Z:
X $2,000.00
Y 6,000.00
Z $8,000.00
(b) If Z is to contribute such a sum as will give him

a one-third interest in the business, the present capital
of $24,000 would represent the other two-thirds; on
this basis, the total capital would be $3^000, making
Z's contribution $12,000.
(si) Good- Will. For a discussion of good- will and all the nec-
essary accounting treatment of it, see Volume IV, Chapter
XIX.
(b) Admission of Partner. The bookkeeping necessary when a
new partner is admitted to a firm is explained in Volume
I, Chapter XXXI, § 3.
Problem 62
A and B carried on business in partnership and

divided profits and losses in proportion to their capital,
three-fifths and two-fifths respectively. On January 1,

1920, A's capital was $52,500, and B's $35,000, as
shown by a balance sheet of that date. They agreed
to admit C as a partner from the same date on the
following terms:
1. Assets and liabilities and capital to be taken as

shown in the balance sheet.
2. $12,500 to be added to the assets for good-will.
3. The amount of good-will to be added to A's
and B's capital in the proportion in which
they divide profits.
4. C to pay to the partnership such a sum as will
give him a one-fifth share in the business.
(a) State what amount of capital C has to bring in.

(b) Set out the capital accounts of each partner in
the new partnership.
(c) State in what proportions the profits will be
—
divided in the future Â and B, as between themselves,
sharing in the same proportions as before.
Assets (originally) $ 87,500.00

Add— Good- Will 12,500.00
Total Assets prior to entrance of C $100,000.00
The problem states specifically that what C pays

will be "to the partnership," not to the individuals.
Therefore, C is to pay such a sum as will increase the
assets to a figure that will give him Vs of the total.
Thus, $100,000 must represent Vs of the assets of A, B, and C.
.-. $100,000 -T- .80 = $125,000, the new assets
$125,000 - $100,000 - $25,000 the amount C must bring in.
(A, $60,000
Assets, $125,000 B, 40,000
Ic, 25,000
A, Capital
Jan. 1, 1920. Balance.. $52,500.00

VBGood-Will 7,500.00
$60,000.00
B, Capital
Jan. 1, 1920. Balance.. $35,000.00

Ve Good- Will 5,000.00
$40,000.00
C, Capital
I
Cash $25,000.00
Distribution of profit:
A — 48%
B — 32%
C - 20%
As C is to receive }/^ of the profits, he gets 20%.
A and B are to split the remaining 80%, Ys to A
and ~/s to B, as previously.
80% X Yo = 48% to A
80% X % = 32% to B
(a) Good-Will. See Volume IV, Chapter XIX, §§ 2-7, for a

discussion of the nature of good-will and the accounting
procedures in connection therewith.
(b) Profit and Loss Distribution. In Volume I, Chapter XXXI,
§ 7, the mostcommon methods by which profits and losses
are distributed are outlined.
(c) Admission of Partner. The bookkeeping required upon the
admission of a partner to the firm is explained in Volume
I, Chapter XXXI, § 3.
Problem 63
C, D, and E are partners with equal capital and

share equally in the profits. After trading for three
years E wishes to retire and D
elects to remain and
purchase the share of the former. The partnership
agreement provides that the retiring partner shall
receive a share of the good-will, the value of the latter
to be equal to two-thirds of the average of the profits
of the last three years preceding his retirement.
The following are the figures and we are requested
to prepare a balance sheet and a profit and loss account
as of June 30, 1916, and an account showing the amount
due to E from the remaining partners:
Capital Account, C $ 8,000.00
D 8,000.00
E 8,000.00
Plant and Equipment 14,840.00
Trade-Marks 4,500.00
Inventory, June 30, 1916 7,600.00
July 1, 1915 4,800.00
Merchandise Creditors 13,402.00
Sales 55,188.00
Purchases 27,804.00
Wages and Salaries 4,600.00
Partners' Drawing Accounts:
C, debit balance 5,500.00
" "
D, 5,500.00
" "
E, 5,500.00
Cash in Bank and on Hand 3,974.00
The following adjustments are to be made for the

year closed: 10 % depreciation on the plant and
equipment; 15 %
on the trade-marks; 10 reserve for %
bad and doubtful debts.
There is on the books a special reserve account to
cover depreciation of the stock on hand which is of a
very perishable nature. The reserve amounts to $5,388,
and must be equitably dealt with in the dissolution
of the partnership.
The previous two years' profits were $17,816 and
$22,020, respectively.
(Minnesota C. P. A. Examination.)
C, D, AND E PARTNERSHIP
ADJUSTING ENTRIES
June 30, 1916
Depreciation on Plant and Equipment $1,484.00

Reserve for Depreciation on Plant Equipment . $1,484.00
To establish a reserve for an estimated depreciation
of 10% on plant and equipment. ^ „
Depreciation of Trade- Marks 675.00

Reserve for Depreciation of Trade- Marks 675.0u
To establish a reserve for an estimated deprecia-
tion of 15% on book value of trade-marks. ^
Anticipated Loss on Doubtful Accounts 1,940.00
Reserve for Doubtful Accounts 1,940.00
To set up a reserve estimated at 16% of the open
accounts receivable on the books in anticipation
of loss through worthless debts.
For the Year Ended June 30, 1916
Deduct — Cost of Sales:

Inventory, July 1, 1915 $ 4,800.00
Add— Net Purchases 27,804.00 $32,604.00
Less— Inventory, June 30, 1916 7,600.00 25,004.00
Deduct — Expenses :
Wages and Salaries $ 4,600.00

Depreciation on Plant and Equipment 1,484.00
Depreciation on Trade- Mark 675.00
Anticipated Loss on Doubtful Accounts 1,940.00 10,259.00
Distribution of Profits:
C— Va $ 6,641.67
D— Vs 6,641.67
E— Vs 6,641.66 $19,925.00
BALANCE SHEET
June 30, 1916
Assets
Plant and Equipment $14,840.00
Less— Reserve for Depreciation 1,484.00 $13,356.00
Trade- Marks $ 4,500.00

—
Less Reserve for Depreciation .... 675.00 3,825.00
Cash 3,974.00

Less —
Reserve for Loss on Doubtful
Accounts 1,940.00 17,460.00
Inventory $ 7,600.00
Less— Reserve for Depreciation .... 5,388.00 2,212.00
Liabilities
Accounts Payable $13,402.00
Capital:
C— Investment $ 8,000.00
Less — Drawings 5,500.00
$ 2,500.00
Plus Profit for period 6,641.67 $ 9,141.67
D— Investment $ 8,000.00
$ 2,500.00
Plus Profit for period 6,641.67 9,141.67
E— Investment $ 8,000.00
$ 2,500.00
Plus Profit for period 6,641.66 9,141.66 27,425.00
The determination and distribution of good-will are

as follows:
Profits for three years ended June 30, 1916, equals
$17,816 + $22,020 + $19,925, or $59,761.
The average profits per year equals one-third of

$59,761, or $19,920.33.
The good-will equals two-thirds of the average
profits, or $13,280.22.
This good-will is distributed equally among the
three partners, each receiving a net credit of $4,426.74.
Statement showing amount due E:
Balance of Capital Account, per Balance Sheet $ 9,141.67

Add— Share of Good- Will 4,426.74
Amount Due $13,568.41
(a) Good- Will. The nature of good-will and the circumstances

under which it may properly be recorded upon books of
account are discussed in Volume IV, Chapter XIX,
§§ 2-7.
(b) Dissolution of Firm. The bookkeeping necessary upon the
dissolution of the partnership is described in Volume I,
Chapter XXXII, § 5.
Problem 64
The stock and plant of the Rockview Manufactur-

ing Company were badly damaged by fire on June 30,
1920. An appraisal of the loss made as a basis for
settlement with the insurance companies showed that
machinery which cost $5,000 was destroyed, against
which a reserve for depreciation had been built up of
$1,000; that the building was damaged to the extent
of $10,000; that raw material was destroyed which
cost $14,000; that finished goodswere also destroyed

which cost $20,000 to manufacture.
Make the necessary entries to estabHsh the loss on
the books, and to show a cash settlement with the
insurance companies for $35,000.
June 30, 1920
Fire Loss $ 4,000.00

Reserve for Depreciation of Machinery 1,000.00
Machinery $ 5,000.00
(Explanation.)
Fire Loss 44,000.00

Buildings 10,000.00
Raw Materials 14,000.00
(Explanation.)
Cash 35,000.00
Fire Loss 35,000.00
(Explanation.)
Surplus 13,000.00
Fire Loss 13,000.00
To record fire loss not compensated for by insurance.
Points Illustrated in Problem Slt-
(a) Fire Loss. The method

of keeping a Fire Loss account and
some be observed in the practical use of it
of the points to
are suggested in Volume IV, Chapter XX, § 8.
(b) Surplus Adjustment. Attention is invited to the fact that
the balance of the Fire Loss account is debited to Surplus
This procedure was adopted because the loss was an un-
usual transaction and should not affect the current Profit
and Loss account. (For other examples of surplus adjust-
ments, see Volume IV, Chapter VII, § 4.)
Problem 65
The G. W. Brown Company suffered a fire on May
25, 1920, resulting in the loss of its building, furniture,
and equipment, costing $207.90, and of the greater por-
The damaged stock was sold for $1,500.
tion of its stock.
A cash settlement was made with the insurance com-
panies for $8,000: $3,000 on stock and $5,000 on building.
You are called in to prepare the financial statements
and you find that the bookkeeper had been keeping a
Merchandise account; an analysis of the account
showed the following summarized charges and credits:
Merchandise Debits
Inventory, January 1, 1920 $ 3,372.55

Purchases 14,152.39
Merchandise Credits
Sales— Regular $10,059.46

Sales of Damaged Stock 1,500.00
Insurance Settlement 3,000.00
Cost of Goods Shipped to Commission Merchants 2,745.50
The cost of goods damaged and destroyed by fire
had been estimated at $8,920.38.

The Real Estate account showed a debit of $12,125,
representing original cost, and a credit of $5,000 repre-
senting the insurance settlement. The building lot is
appraised at $6,000.
Make all entries necessary to adjust matters, includ-
ing the separation of the single Merchandise account
into separate accounts; prepare a statement showing
details of the loss, a statement showing gross profit on
sales to time of fire, and entries to close all accounts given.
The following entry is made to close out the old

Merchandise account and to open instead thereof ac-
counts showing the various trading activities as well as
the conditions arising from the fire.
Purchases 14,152.39
Sales $10,059.46
Fire Loss 1,500.00
Fire Loss 3,000.00
Purchases 2,745.50
Merchandise 597.30
Fire Loss 8,920.38

Purchases 8,920.38
To remove from the Purchases account the cost
of goods destroyed by fire.
THE G. W. BROWN COMPANY

STATEMENT SHOWING FIRE LOSS
May 25, 1920
Merchandise:
Cost of Goods Destroyed and Damaged $8,920.38
—
Less Returns:
Sale of Damaged Goods $ 1,500.00
Insurance Settlement 3,000.00 4,500.00
Loss on Merchandise $4,420.38
Real Estate:
Cost $12,125.00
Less:
Insurance $5,000.00
Value of Land 6,000.00 11,000.00
Loss on Building 1,125.00
Furniture and Fixtures:

Total Loss 207.90
Net Fire Loss $5,753.28

THE G. W. BROWN COMPANY
TRADING STATEMENT
January 1, 1920, to May 25, 1920
Sales $10,059.46
Cost of Sales:
Inventory, January 1 $3,372.55
—
Purchases Gross $14,152.39
Freight and Cartage 377.32 $14,529.71
Less:
Cost of Goods Destroyed $ 8,920.38
Cost of Consigned Goods 2,745.50 "
11.665.88 2,863.83 6,236.38
ENTRIES TO CLOSE THE TRADING AND FIRE LOSS

ACCOUNTS
Sales $10,059.46
Trading $10,059.46
To close the sales for the period into Trading.
Trading 3,372.55
Inventory 3,372.55
To close the inventory as of January 1 into
Trading.
Trading 377.32
Freight and Cartage 377.32
To close freight and cartage into Trading.
Trading 2,863.83
Purchases 2,863.83
To close the net cost of goods sold during the
period into Trading.
Trading 3,823.08
To close the gross profit on sales into the Profit
and Loss account.
Fire Loss 1,332.90

To close the loss on real estate and furniture
and fixtures into the Fire Loss account.
Surplus 5,753.28
Fire Loss 5,753.28
To close the net fire loss into Surplus.
(a) Fire Loss. See Volume IV, Chapter XX, § 8, for a general
description of the bookkeeping necessary to record fire
losses.
(b) Merchandise Account. In Volume I, Chapter VIII, § 3,
the Merchandise account which formerly was in common
use is described. The inconvenience of such an account
and the necessity for analyzing it can be noted in this
problem.
(c) Consignments. When goods are shipped on consignment,
no sale has taken place and accordingly the credit should
not be to a Sales account but may properly be to the
Purchases or Inventory account as shown in this problem.
The reason for this is that profit must not be anticipated
and the credit for the sale must be deferred. (See Volume
IV, Chapter III.)
(d) Freight Inward. For a discussion of the adding of freight
inward to the cost of purchases, see Volume I, Chapter
IX. § 8.
Problem 66
On October 31, 1913, a fire occurred at the plant of

a furniture manufacturing company which destroyed
part of the equipment, a large portion of the stock, and
one of the accounts receivable ledgers. A claim under

the company's policies of insurance of $250,000 was
which was ultimately settled by the adjusters on
filed,
December 1, 1913, for $200,000 which was paid in cash,

thecompany to retain all salvage. The following is a
summary of the book value of the assets destroyed or
lost:
Equipment $ 75,000.00
$255,000.00
At December 31, 1913, when closing the books for

the fiscal year, it was estimated that the salvage and
book debts would realize $90,000, as follows
Equipment $ 15,000.00
Book Debts 50,000.00
(a) Draw up a adjustment account and

fire loss
show the from the conflagration,
profit or loss resulting
stating how you would treat it in the annual accounts
at December 31, 1913. State also what steps you would
take to verify the salvage values placed on the various
items for the purposes of the balance sheet at that date.
(b) During the year succeeding that of the fire, i.e.,
in 1914, it turned out that the estimated salvage value
of the stock had been excessive and that only $20,000
was realized thereon, while the book debts proved to
have been undervalued and actually produced $70,000.
How would you deal with these differences in the 1914
accounts.?
ILLUSTRATIVE PROBLEMS 2}ll
Solution to Problem 66'

^ J
FURNITURE MANUFACTURING COMPANY
Fire Loss Adjustment Account
Book Value of Assets Destroyed: Cash Settlement with Company. , $200,000.00

Equipment % 75,000.00 Estimated Value of Salvage:
Merchandise 100,000.00 Equipment $15,000.00
Accounts Receiv- Merchandise 25,000.00
able 80,000.00 $255,000.00 Book Debts 50,000.00 90,000.00
Excess of Estimated Realization

over Booit Value —carried to
Reserve for Realization of Sal-
vage
^
35,(^.00
$290,000.00 $290,000.00
Deficiency on Realization of Mer- Reserve for Realization of Salvage $ 35,000.00

chandise $ 5,000.00 Excess on Realization of Book •fc^"-
To Surplus 50,000.00 DebU 20,000.00
_•
$ 55,000.00 $ 55,000.00
(a) As auditor it would be necessary to inquire into

the basis for valuing the salvage. Equipment should be
valued at its cost less the estimated depreciation in-
curred through the fire. Merchandise should be valued
at its cost, purchase, or market price, whichever is the
lowest, less the estimated reduction on its cost value
due to fire damage. It is decidedly wrong to value
^t at its realizable value when sold in the ordinary
course of trade, as this is taking credit for the profit on
the goods before they are sold and depriving the sub-
sequent periods of the profit on these goods when sold.
Accounts receivable can be valued at their realizable
value, which, if an adequate reserve for loss on bad
debts has been provided, will be their book value.
When some of the records cannot be read with certainty.
* Solution by D. Himmelblau, C. P. A
«02 ILLUSTRATIVE PROBLEMS
allowance must be made for the estimated loss on those

records that are obscure.
(b) Where the Fire Loss Adjustment account results
in a credit balance, it is advisable to carry such balance
to a reserve account until the salvage has been realized
upon. This is especially necessary when the salvage
is large in amount and uncertain in value. When the
salvage has been realized upon, the balance of this
reserve account can be carried to Surplus if the board
of directors so decides.
(a) Fire Loss. The most practicable way of recording the facts
involved in fire losses is discussed in Volume IV, Chapter
XX, § 8.
(b) Surplus. The balance of the Fire Loss account is closed
into Surplus because of the unusual nature of the transac-
tions involved. For other adjustments of surplus of a
similar nature, see Volume IV, Chapter VII, § 4.
(c) Unrealized Profit. As suggested in the solution of this prob-
lem, when any doubt exists as to the ultimate collection
and realization of asset values, the credit for such values
should be deferred until the realization actually occurs.
Accordingly, in this problem the balance of the Fire Loss
Adjustment account was carried as a reserve until the
salvage had been realized upon. This method of deferring
credits is explained in Volume IV, Chapters III and VIII.
Problem 67
Corporation C is organized in New York with an

authorized capital stock of $500,000, divided equally
between preferred and common, the shares being of the

par value of $100 each. Sufficient shares of common
stock are subscribed and paid in cash to effect the in-
corporation, and a contract is entered into for the taking
over of the business of Corporation A and of Corpora-
tion B, the balance sheets of which, at the time of the
transfer, displayed financial condition as follows:
CORPORATION A
Assets Liabilities
Plant and Machinery . $ 35,000.00 Common Stock $ 50,000.00
Raw Materia! 6,500.00 Preferred Stock 42,500.00
Work in Process 9,200.00 Preferred Stock Scrip . 7,500.00
Finished Product . . . 16,700.00 Surplus 5,400 00
Accounts Receivable . 33,500.00 Accounts Payable .... 14,200.00
Bills Receivable 14,500.00
Deferred Charges 1,200.00
Cash 3,000.00
$119,600.00 $119,600.00
CORPORATION B
Assets Liabilities
Plant and Machinery . $ 51,000.00 Capital Stock $100,000.00
Inventories 32,000.00 .\ccounts Payable .... 31,610.00
Accounts Receivable . 47,500.00 Reserve for Bad Debts 1,940.00
Cash 1,000.00
Deficit 2,050.00
$133,550.00 $133,550.00
Thecontract provides, in settlement for the prop-

erties and businesses acquired, that preferred stock be
issued in each case to the extent of the excess of the
asset values, as stated, over the liabilities, and that an
equal amount of common stock be issued in payment

for the good-will.
Draft opening entries of Corporation C, and prepare
balance sheet.
Cash $ 500.00
Common Stock $ 500.00
Issue of 5 shares of common stock for cash.
Cash 3,000.00
Plant and Sundry Assets 222,000.00
Corporation A, Vendor 210,800.00
Purchase of plant and assets of Corporation A
in accordance with contract approved by
board of directors.
Corporation A, Vendor 210,800.00

Payment of balance due.
Cash 1,000.00
Reserve for Bad Debts 1,940.00
Corporation B, Vendor 195,900.00
Purchase of plant and assets of Corporation B
in accordance with contract approved by
board of directors.
Corporation B, Vendor 195,900.00

Preferred Stock 97.950.00
Payment of balance due.

Work in Process 9,200.00
Finished Product 16,700.00
Inventories (B) 32,000.00
Accounts Receivable (per schedule) 81,000.00
BillsReceivable 14,500.00
Good- Will 203,350.00
To set up valuation of assets made by board
of directors.
CORPORATION C
BALANCE SHEET
Assets
Capital Assets:
Good- Will $203,350.00
Total $289,350.00
Current Assets:
Inventories $ 64,400.00
Less— Reserve for Bad Debts . . 1,940.00 79,060.00

Cash 4,500.00
Total 162,460.00
Total $453,010.00

Capital Stock:
Total $407,200.00
Total $453,010.00
(a) Consolidation by Purchase. As explained in Volume IV,

Chapter XXVIII, § 2, one method of consolidating corpo-
rations is through the purchase of one or more companies
by a newly organized corporation. The economic, legal,
and accounting principles inv'olved in this method of
consolidation are discussed in Volume IV, Chapter
XXVIII.
(b) Opening Entry for Corporation. This problem illustrates a
set ofopening entries for a corporation which are made in
accordance with the procedure described in Volume I,
Chapter XXXill, § 8.
(c) Plant and Sundry Assets. The use of a Plant and Sundry
Assets account where a corporation acquires various assets,
tangible and intangible, is described in Volume I, Chapter
XXXIII, § 8. The object of using such an account is to
place the responsibility for the valuation of specific assets
upon the board of directors.
(d) Valuation of Good- Will. The method employed in this
problem for valuing the good-will of the two companies
is only one of the methods outlined in Volume IV, Chapter
XIX, § 4.
(e) Reserve for Bad Debts. The reserve for bad debts is de-
ducted on the balance sheet from the gross amount of
accounts receivable. This is in accordance with the prac-
tice which is recommended in Volume I, Chapter XXIX,
§11.
(f) Purchase of Deferred Charges. In this example the new cor-
poration acquired, among the assets purchased, deferred
charges previously carried by Corporation A. Unless the
deferred charges represented an organization expense of
Corporation A, they may be presumed, from the state-
ment of the problem, to be a current item such as pre-
paid insurance or the like. In that event, it is properly
chargeable as an asset in the accounts of the new corpora-
tion.
Problem 68
In January 15, 1901, Howard Robinson and four
others acquired a tract of 600 acres at a cost of $20,000.
On March 1, 1901, they incorporate the Nob Hill
Realty Company for the purpose of acquiring, sudivid-
ing, and selling this tract for residence purposes.
The par value of the stock is $100 per share, the
capital $300,000, ofwhich $120,000 is issued for the
land purchased, and the balance $180,000 is paid for
in cash. The directors engage a landscape architect to
lay out the tract, a special feature of which is to be a
beautiful park, together with tree-lined boulevards and
driveways. In accord with the architects' advice the
directors defer marketing any portion of the property
until the year 1911.
Owing to errors in early development work the com-
pany is compelled to borrow $50,000 at 6% on March
1, 1910. The loan is secured by a mortgage on the en-
tire property, with the customary release clause for
individual lots upon payment of $25,000 of the loan,
and $1,000 on each lot for which release is demanded.
Sales of lots are made beginning March 1, 1911.
The sale contract provides that the company will
maintain the park and driveways in perpetuity and to
insure this a fund will be created for the permanent
maintenance and care of the park and driveways, the
estimated annual expense of which is $6,000. It is
agreed with purchasers of lots that one-third of all
cash received from sales shall be invested in sound
bonds yielding 4% net, until $150,000 has been so in-
vested. It is further agreed that upon the sale of all
the the bonds will be turned over to a board of

lots,
trustees to be elected by lot-owners and designated
trustees of Nob Hill Park, who shall take over the
management of the park and driveways.
In November, 1916, Robinson dies and as a result
of the inquiries made by the accountant for the execu-
tor,the following facts appear with respect to the finan-
cial affairs and accounts of the Nob Hill Realty
Company
been the practice of the directors to buy
It has
bonds after the close of each fiscal year. The books
are in balance, but the total cost of the investment is
not recorded and no entries appear with respect to the
park fund for permanent maintenance from which the
bonds were to be purchased.
The tract consists of 400 lots of different sizes, but
all of the same selling price. On February 28, 1917,
40 lots are left unsold, sales of which will probably be
consummated during the spring and summer of 1917.
Cash dividends have been declared and paid, but
nobody appears to know what portion of dividends
were earned, and what portion represents liquidating
dividends, if any. The accountant draws off two trial
balances, as follows:
TRIAL BALANCES
Mar. 1, 1911 Feb. 28, 1917
Debits:
Cash on Hand $ 16.000.00 $ 252,000.00
Bonds 100,000.00
Real Estate 120,000.00 120,000.00
Improvements 160,000.00 160,000.00
Improvements Replaced 60,000.00 60.000.00
General Expense 24,000.00 84,000.00
Mar. 1, 1911 Feb. 28, 1917

Park and Driveway Maintenance 36,000.00
Dividends Paid 430,000.00
$380,000.00 $1,242,000.00
Credits
Capital Stock $300,000.00 $ 300,000.00
Sale of Lots 900,000.00
Interest (on call loans) 30,000.00 30,000.00
Mortgage 50,000.00
$380,000.00 $1,242,000.00
Fromthe foregoing data prepare journal entries,

profit and loss account for the period, and balance sheet
as of February 28, 1917.
(California C. P. A. Examination.)
March 1, 1901
The Nob Hill Realty Company has been incorporated

this day with an authorized capital stock of $300,000,
divided into 3,000 shares of the par value of $100 each.
Real Estate $120,000.00

Cash 180,000.00
To record the acquirement of real estate and
the receipt of cash in exchange for 3,000
shares of capital stock March 1, 1910.
Cash 50,000.00
Mortgage 50,000.00
A loan of $50,000 is secured by a mortgage on
the entire property. Interest on mortgage,
6%.
14
Improvements 160,000.00
Improvements Replaced 60,000.00
Cash 220,000.00
To show expenditure of cash for improvement
of real estate.
Cash 30,000.00
Interest 000.00
$30,000 interest received on call loans.

Cash 24,000.00
To record expenses incurred and paid up to
March 1, 1911.
The foregoing entries are set up to show such trans-

actions as occurred from the time of incorporation to
March 1, 1911.
In order to show the total cost of the investment,
the accounts with Improvements and Improvements
Replaced should be closed into the Real Estate account.
Also, inasmuch as the property had not been a
source of income up to March 1, 1911, any expenses
incurred prior to such date may rightly be capitalized
and any incidental income might be considered a re-
duction of the cost of the property.
Hence the three following entries

Improvements $160,000.00
Improvements Replaced 60,000.00
To add to the cost of real estate such items as
represent permanent improvements on the
property.
Real Estate 24.000.00

To capitalize expenses incurred on property
prior to March 1, 1911.
Interest (on call loans) 30,000.00

Real Estate 30.000.00
To close Interest account into the investment,
showing a reduction of cost of property.
Entries to show transactions from March 1, 1911,

to February 28, 1917:
Cash $900,000.00
Sales of Lots $900,000.00
To record the sale of .SCO lots at $2,500 each.

Cash 96,000.00
Expenses incurred from March 1, 1911, to
February 28, 1917.
Bonds 100,000.00
Cash 100,000.00
To record purchase of bonds for permanent
maintenance of park.
Cash 12,000.00
To show income from bonds purchased for
investment.
Mortgage 50,000.00
Cash 50,000.00
To show the taking up of the mortgage placed
on the property.

Cash 430,000.00
To record payment of dividends to stock-
holders.
Since no distinct accounts have been kept for the

park fund for permanent maintenance, the following
entries seem necessary:
Park Fund— Bonds $100,000.00
Bonds $100,000.00
To close the Bond account now on books and
setup in place thereof a park fund invest-
ment account.
Park Fund— Cash 50,000.00

Cash 50,000.00
To bring the park fund investment up to the
amount called for in the agreement with land
owners.
—
Park Fund Expense and Income 36,000.00
To close park and driveway maintenance ex-
penses into the Expense and Income account.

—
Park Fund Expense and Income 12,000.00
To close income from bonds into Expense and
Income account.
Sales of Lots 24,000.00

Park Fund — Expense and Income 24,000.00
To transfer debit balance of Expense and In-
come account to Sales account.
Note: The excess of expenses over income with respect to the mainte-
nance of the property must be considered a reduction of the income from sales
until such time as the permanent fund is suflSciently large to carry the burden
of maintaining the property.
The following entries are to close the books as of

February 28, 1917.

Total value of real estate per
balance of account $334,000.00
40 lots at $835 unsold 33,400.00
Cost of lots sold $300,600.00

Sales of Lots 575,400.00

To close Sales account showing gross profit
into Profit and Loss account.
Surplus 150,000.00
Reserve for Park Maintenance 150,000.00
To establish a reserve account against the
amount of $150,000 which is to be turned
over to the Nob Hill trustees. (Note:
This amount must be taken out of Surplus
in order to prevent its use for dividend dis-
tribution.)
Surplus 365,400.00
Dividends in Liquidation 64,600.00
To close Dividends Paid into Surplus and into
Dividends in Liquidation.
The Surplus account having a balance of only

$365,400, it is clear that the remaining $64,600 paid to
stockholders represents a liquidation of the capital
stock.
The source of income from this property since its
incorporation, March 1, 1901, namely, the sale of lots,

is not permanent. Hence when all the lots are sold, no
further dividends will accrue to the stockholders. As
dividends paid to date by the Nob Hill Realty Com-
pany have exceeded the available
to its stockholders
surplus, it must be considered that such dividends
are a liquidation of the shares in the hands of stock-
holders.
Mining properties and timber tracts are similar in
nature to real estate subdivisions in that the working
of the property represents a continuous diminution of
the property valuation.
NOB HILL REALTY COMPANY
PROFIT AND LOSS ACCOUNT
March 1, 1911, to February 28, 1917
Less — Balance of Maintenance Expense Account 24,000.00
Net Sales $876,000.00

Deduct— Cost of Lots Sold (360 lots at $835) 300,600.00

—
Deduct General Expenses 60,000.00
Net Profit for Period $515,400.00
NOB HILL REALTY COMPANY

BALANCE SHEET
February 28, 1917
Assets
Real Estate (40 salable lots at $835) $ 33,400.00
Cash 202,000.00
Park Fund:
Bonds $100,000.00
Cash 50,000.00 150,000.00
Capital
Less — Dividends in Liquidation 64,600.00 $235,400.00
Reserve for Park Maintenance 150,000.00
Total Capital $385,400.00
(a) Wasting Assets. For a discussion of the nature of wasting

Volume IV, Chapter XVII, § 8.
assets, see
(b) Liquidating Dividends. The conditions under which cor-
porate dividends may be in part liquidating dividends are

described in Volume IV, Chapter XVII, § 8. This prob-
lem illustrates a partial liquidation and the method of
stating the stockholdings indented on the balance sheet.
(c) Funds. For a discussion of the nature of funds, see Volume
IV, Chapter VIII, § 3.
(d) Reserves. A discussion of reserves and the uses to which
they may be put will be found in Volume IV, Chapter VIII.
(e) Organization Expense. All legitimate expenses incurred dur-
ing the organization period of a business may properly be
capitalized, that is to say, they may be charged either to the
cost ofany fixed asset in connection with which they may
have been incurred, or they may be carried as an intangible
asset under some caption such as organization expense.
There can properly be no operating expenses until the
organization has been completed. (See Volume IV,
Chapter II, § 5.)
Problem 69
Prepare a statement of the operations of a railroad
company (using your own figures) and show the profit
and loss account after providing for an amortization of
5% of the gross earnings; also state the assets and lia-
bilities of the company.
(Pennsylvania C. P. A. Examination.)

In presenting the statement of the operations of a
railroad company, it is desirable that the account
by the Interstate Commerce
classification as prescribed
Commission be followed closely. With that in mind,
the following is submitted:
•Solution by E. P. Moxey, C. P. A.
THE NORTH AND SOUTH RAILROAD COMPANY
INCOME ACCOUNT
For the Year Ended June 30, 1914
Railway Operating Income:

Rail Operations— Revenues $59,682,777.77
Rail Operations —
Expenses 44,782,708.27
Net Revenue— Rail Operations $14,900,069.50

Outside Operations— Revenues $ 402,523.22
—
Outside Operations Expenses 377,404.61
Net Revenue —Outside Operations 25,118.61
Net Railway Operating Revenue $14,925,188.11

Railway Tax Accruals 2,600,288.42
Railway Operating Income $12,324,899.69
Other Income:
Income from Lease of Road $ 218,545.90
Hire of Equipment— Credit Balance 393,218.19
Joint Facility — Rent
Income 259,555.56
Miscellaneous Rent Income 28,450.79
Net Profit from Miscellaneous Physical
Property 81,962.58
Dividend Income 915,313.89
Income from Funded Securities 224,780.40
Income from Unfunded Securities and Ac-
counts 691,149.82
Total Other Income 2,812,5»77.13
Gross Income ! $15,137,876.82
Deductions from Gross Income:

Deductions for Lease of Other Roads .... $ 163,376.27
Joint Facility— Rent Deductions 588,267.00
Miscellaneous Rent Deductions 47,510.26
—
Separately Operated Properties Loss .... 25,291.00
Interest Deductions for Funded Debt 7,123,932.90
Interest Deductions for Unfunded Debt . . 13,605.88
Miscellaneous Deductions 91,731.76
Total Deductions 8,053,715.07
Net Income $ 7,084,161.75

Disposition of Net Income:

Appropriations of Income to Sinking Funds $ 201,023.17
Reserve for Doubtful Accounts 204,252.08 405,275.25
Income Balance transferred to Credit of Profit and

Loss $ 6,678,886.50

Credits
Balance, July 1, 1913 $40,743,870.09
Credit Balance transferred from Income
Account 6,678,886.50
Delayed Income Credits 95,219.25
Miscellaneous Credits 2,656,266.96 $50,174,242.80
Debits
Dividend Appropriations of Surplus:
Cash Dividend, 33^%, payable February
10, 1914 $ 2,520,000.00
Cash Dividend, 3j^%, payable August
10, 1914 2,520,000.00
$ 5,040,000.00
Debt Discount Extinguished
through Surplus $273,687.50
Less — Premium Realized on
Bonds sold during year . . 175,000.00 98,687.50
Miscellaneous Debits:
Amount appropriated to Reserve for
Additions to Property — being 5% of
Gross Earnings from Rail Operations,
viz., 5% of $59,682,777.77 2,984,138.89
Balance Credit, June 30, 1914 42,051,416.41 $50,174,242.80
GENERAL BALANCE SHEET

Assets
Phopebtt Investments:
Road and Equipment:
Investment to June 30, 1907:
Road $139,471,342.11
Equipment 36,072,004.83 $175,543,346.94
Investment since June 30, 1907:
Road $ 49,943,854.36
Equipment 16,331,026.60 66,274,881.05
$241,818,427.99
Reserve for Accrued Depreciation — Credit:
Way and s>tiu< lures, etc $ 9,974,264.55
Equipment 17,439,335.40 27,413,599.95 $214,404,628.04
Seccrities:
Proprietary, Affiliated, and Controlled Companies:
Pledged:
Stocks $ 250,728.48
Funded Debt 1,200,000.00 $ 1,450,728.48
Issued or Assumed — Pledged— Funded Debt 3,929,000.00

Unpledged:
Stocks $ 3,030,592.65
Funded Debt $1,900,282.83
Miscellaneous 172.276.00 2.072,558.83 5,103,151.48 10,482,879.96
Otheb Investments:
Advances and Controlled Companies
to Proprietary, Affiliated
for Construction, Equipment and Betterments $ 18,012,919.^8
Miscellaneous Investments:
Physical Property $ 3,220,078.08
Securities— Pledged 14.662,472.37
Securities — Unpledged:
Stocks $4,288,753.08
Miscellaneous 16,442.44 4,305,195.52 22,187.745.97 41,100,665.25
Working Assets:
Cash ... $ 13,815.564.10
Securities Issued or Assumed — Held in Treasury — Funded Debt. 10,644,339.94
Marketable 55ecurities 6,786,768.75
Loans and Bills Receivable 214.234.85
Traffic and Car Service Balances Due from Other Companies. . . 496,297.44
Net Balance Due from .\gents and Conductors '
988.523.58
Miscellaneous Accounts Receivable 3,174.412.88
Materials and Supplies 7,086,383.22 43,208,524.76
Accrued Income Not Dde:

Unmatured Interest. Dividends, and Rents Receivable 50,872.90
Deterred Debit Items:

Advances:
Temporary Advances to Proprietary, Affiliated and Controlled
Companies $ 927,206.49
Working Funds 191,417.27 $ 1,118,628.78
Taxes Paid in .\d vance 28,258.27

Special DeiJcsils 500.005.00
Cash and Securities in Sinking and Redemption Funds:

Company Bonds $ 1,027,000.00
Cash, etc 79,629.86 1,106,629.86
Other Deferred Debit Items 1,301,191.65 4,054,708.54
$313,300,279.45
Liabilities
Stock:
Capital Stock:
Common Stock:
Full Shares Outstanding $ 71,917,200.00
Fractional Shares Outstanding 720.00
Original Stock and Subsequent Stock Dividends Unissued . 82,080.00
$ 72,000,000.00
Premium Realized on Capital Stock 12,116.76 9 72,012,116.76
Mortgage, Bonded, and Seccbed Debt:

Funded Debt:
Mortgage and Collateral Trust Bonds:
Owned by Company $ 16,100,339.94
OutsUnding in Hands of Public 168,341,000.00 $184,441,339.94
Plain Bonds, Debentures, and Notes 21,857.00 184.463,196.94
Working Liabilities:
Trafficand Car Service Balances Due to Other Companies. 238,551.54
Audited Vouchers and Wages Unpaid 2,782,527.38
Miscellaneous .\ccounts Payable 541,189.92
Matured Interest, Dividends, and Rents Unpaid 1,257,811.17
Matured Mortgage, Bonded, and Secured Debt Unpaid. . . 95,000.00
Other Working liabilities 472,310.28 5.437,390.29
Accrued Liabilities Not Due:

Unmatured Interest, Dividends, and Rents Payable $ 3.496,321.88
Taxes Accrued 1,191,425.77 4.687,747.65
Deferred Credit Items:

Operating Reserves $ 439,254.65
Other Deferred Credit Items 934,563.78 1,373.818.43
Appropriated Scbplus:
Additions to Property since June 30. 1907, through Income or
Surplus 9 2,984,138.89
Reserves from Income or Surplus:
For Doubtful Accounts 290,454.08 3.274.692.97
Profit and Loss:

Balance 42,051.416.41
$313,300,279.45
(a) Special Statement Forms. This problem illustrates the use

of specialized forms in compliance with legal requirements.
Whatever theories an accountant may hold in regard to
the form, when he prepares a statement for a railroad
company or for any other similarly regulated industry, he
must follow the prescribed forms. The usual form of
profit and loss statements and balance sheets is described
in Volume I, Chapters IX and XI, and in Volume IV,
Part IV.
(b) Extraneous Operations. The profit and loss resulting from
operations outside of the conduct of the main business of
shown separately on the statement. This
railroading are
is accordance with the general principle of statement
in
preparation explained in Volume I, Chapter IX, § 12.
(c) Sinking Fund and Sinking Fund Reserves. The principles
underlying sinking funds and their offsetting reserves are
discussed in Volume IV, Chapters VIII and XL
(d) Analyzed Surplus. In this case the surplus is analyzed so
as to show the portion of it which has been appropriated
by means of reserve accounts. For a discussion of the
creation of such reserves, see Volume IV, Chapter VIII.
(e) Dividends. This problem illustrates the charging of divi-
dends against surplus, which in this case is called Profit and
Loss account. The real nature of dividends as distribu-
tions of surplus appears in this solution. (See Volume IV,
Chapter V.)
(f) Discount on Bonds. In this solution there is illustrated the
absorption or gradual writing off of discounts on bonds.
For a discussion of this point see Volume IV, Chapter X,
§10.
(g) Reserve for Depreciation. The desirability of deducting
reserves for depreciation from the book value of the assets
to which they apply has been discussed in Volume I,
Chapter XXIX, § 4.
(h) Working Capital. As explained in Volume I, Chapter XI,
ILLUSTRATIVE PROBLEMS «21
§ 14, working capital is the excess of current assets over

current liabilities. In this problem the current assets and
liabilities are called "working" assets and liabilities. The
excess of the former over the latter is clearly indicated
by the form of balance sheet shown.
(i) Accrued Liability. This problem illustrates the necessity for
recording accrued liabilities, as explained in Volume IV,
Chapter III, § 1.
(j) Deferred Debits and Credits. The deferring of debits and
credits which affect subsequent periods is explained in
Volume IV, Chapters II and III.
Problem 70
From the trial balance of the Wonder Machine
Shoe Company prepare a balance sheet and statement
with sections showing manufacturing costs, trading
results, and profit and loss.
Reserve for the depreciation of machinery, 10%; of
tools, 10%; of lasts and patterns, 20%. Reserve for
loss from bad debts an amount that, when added to the
reserve for that purpose already in force, will make the
sum 1% of the book accounts.
TRIAL BALANCE
December 31, 1919
Real Estate $ 81,035.00

Machinery and Equipment 57,750.00
Tools 5.259.00
Lasts and Patterns 35,260.00
OflBce Equipment 3,396.00
Raw Materials Inventory, January 1, 1919 14,378.40
Goods in Process, January 1, 1919 23,631.50
Finished Goods, January 1, 1919 $ 15,686.31
Cash 22,902.63
Reserve for Depreciation of Lasts and Patterns . i 15,411.75
Surplus 7,329.46
Mortgages Payable 20,000.00
Sales 419,752.35
Discount on Purchases 7,290.40
Factory Supplies 8,817.62
Raw Material Purchased 145,481.69
Labor 110,371.84
Freight Inward 1,845.25
Indirect Labor 5,193.00
SellingExpenses 25,792.65
Interest 110.60
Allowances to Customers 552.25
Discount on Sales 8,818.75
Collection and Exchange 340.81
Returned Sales 1,493.58
$695,225.88 $695,225.88
INVENTORIES
December 31, 1919
Raw Materials $ 5,397.24

Factory Supplies 820.20
Fuel 1,592.17
Goods in Process 18,493.12
Interest Accrued on Notes Held 37.00
Interest Accrued on Notes Outstanding 55.00
WONDER MACHINE SHOE COMPANY

ADJUSTING ENTRIES
December 31, 1919
Depreciation of Machinery $5,775.00

Reserve for Depreciation of Machinery $5,775.00
To record 10% reserve for the year ending Decem-
ber 31, 1919.
Depreciation of Tools 525.90

Reserve for Depreciation of Tools 525.90
To record 10% reserve for the year ending Decem-
ber 31, 1919.
Depreciation of Lasts and Patterns 7,052.00

Reserve for Depreciation of Lasts and Patterns . 7,052.00
To record 20% depreciation for year ending Decem-
ber 31, 1919.
Provision for Loss on Bad Debts 261.95

Reserve for Loss on Bad Debts 261.95
To record Reserve for Loss on Bad Debts amount-
ing to 1% of book value.
Factory Supplies on Hand 820.20

To deduct supplies on hand from the expense ac-
count.
Fuel on Hand 1,692.17

Manufacturing Expense 1,592.17
To deduct from Manufacturing Expense, the fuel
on hand, December 31, 1919.
Interest on Notes Receivable Accrued 37.00

on Notes Receivable
Interest 87.00
To record interest due us on notes held December
31, 1919.
Interest 65.00
Interest on Notes Payable Accrued 65.00
To record interest due on notes outstanding.

Exhibit A
BALANCE SHEET
December 31, 1919
Assets
Fixed Assets:
Machinery and Equipment $57,750.00
Less — Reserve for Depreciation . 5,775.00 51,975.00
Tools $ 5,259.00
Less — Reserve for Depreciation . 525.90 4,733.10
Lasts and Patterns $35,260.00

Less — Reserve for Depreciation . 22,463.75 12,796.25
Office Equipment 3,396.00 $153,935.35
Current Assets:
—
Less Reserve for Loss on Bad
Debts 623.17 $61,693.33

Cash 22,902.63 88,984.41
Inventories:
Raw Materials $ 5,397.24
Fuel 1,592.17 35,201.34
Accrued Items:
Interest on Notes Receivable Accrued 37.00


Fixed Liabilities:
Accounts Payable $18,580.70
Bills Payable 6,500.00 25,080.70
Accrued Items:
Interest on Notes Payable Accrued 55.00
Surplus
Balance of Surplus, December 31, 1919 $ 7,329.46
Add — Net Profit for period 55,692.94 63,022.40

Exhibit B
Net Sales of Manufactured Goods:

Sales $419,752.35
Less — Returned Sales 1,493.58 $418,258.77
—
Deduct Cost of Manufactured Goods Sold:
On Hand, January 1, 1919 $ 15,686.31
Cost of Goods Manufactured
during year (See Exhibit C) . . . 311,049.77 $326,736.08
Deduct— On Hand, December 31, 1919 8,898.61 317,837.47
Gross Profit on Sale of Manufactured Goods $100,421.30
Deduct:
Selling Expense $ 25,792.65
General Expense 16,123.75 41,916.40
Net Trading Profit $ 58,504.90

IS
Add —Other Income:
Interest on Notes Receivable $ 37.00
Discount on Purchases 7,290.40 7,327.40
Total Income $ 65,832.30
Deduct —Other Charges:

Interest $ 165.60
Allowances to Customers 552.25
Discount on Sales 8,818.75
Collection and Exchange 340.81
Provision for Loss on Bad Debts 261.95 10,139.36

Exhibit C
STATEMENT SHOWING COST OF GOODS
MANUFACTURED
Raw Materials Used:
On Hand, January 1, 1919 $ 14,378.40
Freight Inward 1,845.25 $161,705.34
Deduct— On Hand, December 31, 1919 5,397.24 $156,308.10
Labor 110,371.84
Manufacturing Expenses $ 12,688.13
Indirect Labor 5,193.00
Factory Supplies 7,997.42
Depreciation of Machinery 5,775.00
Depreciation of Tools 525.90
Depreciation of Lasts and Patterns 7,052.00 39,231.45
Total Manufacturing Charges $305,911.39

Add— Goods in Process, January 1, 1919 23,631.50
$329,542.89
Deduct— Goods in Process, December 31, 1919 18,493.12
Net Cost of Goods Manufactured $311,049.77

(a) Manufacturing Statements. This problem illustrates the

form of reports for manufacturing businesses. (See Volume
IV, Chapter XXIII.)
(b) Subsidiary Statements. As explained in Volume I, Chapter
XIV, the use of subsidiary statements is advisable when
thereis more information to be shown than can con-
veniently be displayed in one statement. In this problem

the use of subsidiary statements is illustrated.
(c) BillsReceivable and Payable. In Volume I, Chapter XXVII,
§ 3, the use of this terminology is criticized and the reason
for its use is explained.
(d) Reserve for Bad Debts. The reserve for bad debts in this
case is calculated upon the amount of accounts receivable
outstanding. It is generally preferable to relate this
reserve to the volume of sales rather than to the
accounts outstanding. (See Volume IV, Chapter XVI,
(e) Depreciation. The rates used for depreciation in this case

are generally reasonable. As explained in Volume I,
Chapter XXIX, § 6, the determination of the rate is more

of an engineering matter than one of accounting. Where
a fixed annual percentage is written off from the book
value of the account without any adjustment of that book
value for previous depreciation, the method is known as
the straight-line method. If the percentage is written off
from the balance of the account after adjustment for pre-
vious depreciation, the percentage of diminishing value
method is the one employed.
(f) Accrued Liabilities. This problem illustrates the setting up
of accrued liabilities. The necessity for this is explained
in Volume IV, Chapter III, § 1.
(g) Tie-Up of Statements. In this solution the balance sheet
and the statement of profit and loss are definitely related
so that one checks the other. The desirability of this is
explained in Volume IV, Chapter XXI, § 13.
ns ILLUSTRATIVE PROBLEMS
Problem 71
The fiscal year of a manufacturing company ends

June 30, 1908, and the bookkeeper presents a statement
to the directors made up in the following form:

Increase of Inventory 15,000.00 $300,000.00
Cost of Sales
Operating Expenses, Material and Supplies . . . $257,000.00
Plant Expense 12,000.00
Freight on Returned Goods 600.00
Sundry Purchases Finished Goods 10,400.00 280,000.00
Manufacturing Profit $ 20,000.00
Other Income:
Miscellaneous Earnings $ 1,500.00
Profiton Contracts 6,500.00
Discount on Purchases 500.00 8,500.00
$ 28,500.00
Less:
Discount on Sales $ 2,875.00
Rebates and Allowances 1,125.00 4,000.00
Net Plant Profit $ 24,500.00
Less:
General Expenses $ 5,500.00
Interest 1,500.00 7,000.00
You are required to make up a profit and loss state-

ment in regular form, showing purchases, etc., and using
such of the above figures as may be necessary, together
with these following: Inventory June 30, 1907: ma-
$115,000; supplies $35,000; finished goods $45,000.
terial
Inventory, June 30, 1908: material $140,000; supplies
$10,000; finished goods $60,000. Material used in
factory during the year, $75,000. Wages $122,500;
fuel $2,500; repairs and renewals $2,000. Other oper-

ating expenses $55,000, which includes $25,000 sup-
plies used.
THE MANUFACTURING COMPANY

STATEMENT SHOWING COST OF MANUFACTURED
GOODS SOLD
July 1, 1907, to June 30, 1908
Cost of Materials Used

Inventory, July 1,
1907 $115,000.00
Add— Purchases . 100,000.00
. . $215,000.00
Less— Inventory. June 30, 1908 . 140,000.00 $ 75,000.00
Wages 122,500.00
Total Prime Cost $197,500.00
Add — Manufacturing Expenses:

Fuel $ 2.500.00
Repairs and Renewals 2,000.00
Factory Supplies Used:
Inventory, July 1, 1907 $ 35,000.00
—
Less Inventory, June 30,
1908 10,000.00 25,000.00
Plant Expense 12,000.00

Factory Operating Expenses 30.000.00 71,500.00
Total Cost of Goods Manufactured $269,000.00
Add:
Finished Goods Inventory, July 1, 1907 $ 45,000.00
Sundry Purchases of Finished Goods 10,400.00 55,400.00
$324,400.00
Less — Inventory Finished Goods, June 30, 1908 60,000.00
Cost of Goods Sold $264,400.00

THE MANUFACTURING COMPANY
July 1, 1907, to June 30, 1908

Less — Returned Goods 1,125.00
Net Sales $283,875.00

Deduct— Cost of Goods Sold 264,400.00
Add:
Miscellaneous Earnings $ 1,500.00
Profit on Contracts 6.500.00 8,000.00
Total Operating Profit $ 27,475.00
Deduct:
General Expenses .'
$ 5,500.00
Freight on Returned Goods 600.00 6,100.00
Net Profit from Operations $ 21,375.00
Deduct — Net Balance of Interest and Discount Items:

Interest Charges $1,500.00
Discount on Sales 2,875.00 $ 4,375.00
Less — Discount on Purchases 500.00 3,875.00
(a) Manufacturing Statements. This problem illustrates the

preparation of statements for a manufacturing business.
Volume IV, Chapter XXIII.)
(See
(b) Subsidiary Schedules. The use of subsidiary schedules is
explained in Volume I, Chapter XIV.
(c) Form of Profit and Loss Statement. The form of statement
used in this solution differs somewhat from that in general
use. As explained in Volume I, Chapter IX, § 6, the se-
lection of a form should be made with the sole view of
practicability. That form should be adopted in each case
which will be most intelligible to the persons who are to
use it.
Problem 72
A company of typewriter manufacturers makes up

itsaccounts on December 31, 1907, for the year. The
following are the debits to the Profit and Loss account
Raw Material on Hand, January 1, 1907 $12,500.00
Finished Machines on Hand, January 1 (1,600 at $30) . . 48,000.00
Purchases of Material 62,500.00
Labor, Productive 82,500.00 .

Agents' Commissions 90,000.00
Branch House Expenses 40,000.00
Bad Debts 8,000.00
Depreciation on Machinery and Plant 5,500.00
The sales for the year were 6,000 machines, yield-

ing $540,000; the raw material on December 31, 1907,
at cost, was $4,000; and the finished machines in stock
ready for sales numbered 800.
Prepare an income and profit and loss statement.
{Michigan C. P. A. Examination.)
INCOME AND PROFIT AND LOSS STATEMENT

Sales $540,000.00

Finished Goods on Hand, Janu-
ary 1, 1907 $ 48.000.00
Add — Cost of Goods Manufac-
tured (per Manufacturing State-
ment) 182,000.00 $230,000.00
Deduct— Inventory, December 31, 1907, (800

machines at $35) 28,000.00 202,000.00

232 ILLUSTIUTIVE PROBLEMS
Deduct Expenses:
Branch House Expenses 40,000.00 160,000.00
Profit from Operation $178,000.00
—
Deduct Other Charges:
Bad Debts 8,000.00

MANUFACTURED
Raw Materials Used:

Inventory, January 1 $12,500.00
Add— Purchases 62,500.00 $75,000.00
Deduct —Inventory, December 31 4,000.00 $ 71,000.00
Prime Cost $153,500.00
Manufacturing Expenses $23,000.00

Depreciation of Machinery and Plant 5,500.00 28,500.00
Cost of Goods Manufactured $182,000.00
Cost per Machine

Machines on hand, December 31, 1907 800
Sold during the year 6,000 6,800
On hand, January 1, 1907 1,600
Manufactured during year 5,200
5,200 machines costing $182,000 to manufacture

represent a cost of $35 per machine.
There being no goods in process recorded, it may
be assumed that the amount $182,000 represents cost
of finished goods. Also, for the purposes of this prob-

lem it is correct to consider that all of the 1,600 ma-
chines on hand
at the beginning of the year, which
machines cost $30 each to make, have been sold and
that the 800 machines on hand December 31 are such
as were completed during the year at a cost of $35 each.
(a) Manufacturing Statements. As explained in Volume IV,

Chapter XXIII, the form of statements for manufacturing
businesses is somewhat different from those convenient
for mercantile businesses. In this problem the former
type of statements is illustrated.
(b) Subsidiary Schedules. The use of subsidiary schedules
where the information to be shown is too voluminous to
be incorporated in one statement is explained in Volume
I, Chapter XIV.
Problem 73
The following is a trial balance June 30, 1916, before

closing, of the ledger of a textile mill
Land $ 10,000.00
Buildings 75.000.00
Machinery 119,138.73
Tenements 1,670.66
Finished Goods Inventory, January 1, 1916 66,984.43
Stock in Process Inventory, January 1, 1916 .... 57,042.38
Yarn . 259,882.12
Cash ,".T7.T7rr.T. 12,769.19
Petty Cash 106.39
Mortgage Receivable 875.00
Labor 25,979.27
Supplies 2.974.31
2S4 ILLUSTRATIVE PROBLEMS
Repairs 956.63
Oils 50.84
Coal 1,443.20
Starch 1,390.00
Water 122.65
Finishing 15,381.54
Brokerage 660.50
Commission 4,580.67
Discounts Allowed 1,246.84
Insurance 679.92
Taxes 1,502.81
General Expense 389.39
Freight and Express 974.34
Telephone and Telegraph 68.72
Traveling Expense 274.85
Interest Paid 409.80
Discount on Notes Payable 1,408.00
Dividends 3,375.00
Capital Stock, Preferred 6% Cumulative $100,000.00
Capital Stock, Common 263,800.00
Cloth Sales 137,818.07
Waste Sales 922.94
Tenement Rents Received 339.50
Discounts Taken 2,873.59
$734,118.66 $734,118.66
Inventories and Items, June 30, 1916:

Finished Goods $104,190.24
Stock in Process 71,242.39
Yarn 135,661.63
Coal 1,000.00
Starch 900.00
Supplies 1,150.00
Prepaid Taxes 402.26
Prepaid Water Rates 100.00
Bad Debts 100.00
Estimated Discounts to be taken on Accounts Payable 817.29
Estimated Discounts to be allowed on Accounts Receivable . 460.86
Depreciation rates per annum are 5% on machinery;

3% on tenements; 2% on mill buildings.
Depreciation for the period of six months ending
December 31, 1915, was not put upon the books. No
additions have been made to the fixed assets within
a year.
Estimated discounts on the accounts receivable and
payable were not put upon the books January 1, 1916;
these were respectively $400 and $750.
The last two semiannual dividends on preferred
stock are unpaid.
Prepare proper statements for a report to the direc-
tors as of June 30, 1916.
TEXTILE MILL
ADJUSTING ENTRIES
June 30, 1916
Depreciation on Machinery $2,978.47

Depreciation on Tenements 25.06
Depreciation on Mill Buildings 750.00
Reserve for Depreciation on Machinery $2,978.47
Reserve for Depreciation on Tenements 25.06
Reserve for Depreciation on Mill Buildings . . . 750.00
One-half year's depreciation:
Machinery, 2}^% of $119,138.73
Tenements, l}4% of 1,670.66
Mill Buildings, 1% of 75,000.00
Profit and Loss .T. 8,753.53

Reserve for Depreciation on Machinery 2,978.47
Reserve for Depreciation on Tenements 25.06
Reserve for Depreciation on Mill Buildings ... 750.00
Depreciation for half-year ending January 1, 1916,
not set up.
Discounts Taken 750,00
Discounts Allowed 400.00
Estimated discounts on accounts payable ($750)
and accounts receivable ($400) not entered on
books January 1, 1916.
Dividends 6,000.00
Preferred Dividends Payable 6,000.00
Cumulative dividends on preferred stock unpaid
for the year ended June 30, 1916.

Interest accrued on notes payable to date.

Discount on Notes Payable 211.11
Interest prepaid on notes payable discounted.
Labor 2,051.05
Accrued wages to date.

Insurance 600.00
Insurance unexpired as of this date.

Taxes 402.26
Taxes prepaid as of this date.
Prepaid Water Rates 100.00

Water 100.00
Water rates prepaid as of this date.
Bad Debts 100.00

Estimated debts uncollectible.
Estimated Discounts to be taken on Accounts Payable . 817.29

Discounts Taken 817.29
Discounts Allowed 460.86

Estimated Discounts to be allowed on Ac-
counts Receivable 460.86
Estimated discounts to be allowed and taken.
TEXTILE MILL
MANUFACTURED
For the Six Months Ended June 30, 1916
Stock in Process, January 1. 1916 $ 57,042.38
Raw Materials Used:

Yarn $259,882.12
Add— Freight and Express 974.34 $260,856.46
Deduct— Inventory. June 30, 1916 135,661.63 126,194.83
Direct Labor 28,030.32
$210,267.53
Deduct— Stock in Process, June 30, 1916 71,242.39
Prime Cost $139,026.14
Finishing $ 15,381.54
Oils 50.84
Coal $ 1,443.20
Less— Inventory 1,000.00 443.20
Starch $ 1,390.00
Less— Inventory 900.00 490.00
Water $ 122.65
ft Less— Rates Prepaid 100.00 22.66
^ Supplies $ 2,974.31
^ Less— Inventory 1,150.00 1,824.31
Repairs 956.63
Insurance $ 679.92
Less— Unexpired 600.00 79.92
Taxes $ 1,502.81
Less— Prepaid 402.26 1,100.65
Depreciation
On Machinery $ 2,978.47
On Tenements 25.00
On Mill Buildings 750.00 3,753.53 24,103.17
Gross Manufacturing Cost $163,128.31
Deduct
Waste
Sales of $ 922.94
Tenement Rents Received 339.50 1,262.44
Net Cost of Goods Manufactured $161,865.87
TEXTILE MILL
For the Six Months Ended June 30, 1916
Cloth Sales $137,818.07
Deduct —
Cost of Goods Sold
—
Inventory Finished Goods, Jan-
uary 1, 1916 $ 66,984.43
Add — Cost of Goods Manufac-
tured 161,865.87 $228,850.30
Deduct— Inventory, June 30, 1916 104,190.24 124,660.06
Deduct Expenses:
Traveling Expenses $ 274.85
Commissions 4,580.67
Telephone and Telegraph 68.72
Brokerage 660.50
General Expense 389.39 5,974.13
Profit from Operating $ 7,183.88
Add —
Other Income:
Discounts Taken 2,940.88

Deduct Other Charges:

Loss on Bad Debts $ 100.00
Discounts Allowed 1,307.70
Discount on Notes Payable 1,196.89 3,403.80
Net Pro6t $ 6,720.90
TEXTILE MILL
BALANCE SHEET
June 30, 1916
Assets
Fixed Assets:
Land $ 10,000.00
Buildings $ 75,000.00
Less — Reserve for Depreciation 1,500.00 73,500.00
Machinery $119,138.73
Less — Reserve for Depreciation 5,956.94 113,181.79
Tenements $ 1,670.66
Less — Reserve for Depreciation 50.12 1,620.54
Total Fixed Assets $198,302.33
Current Assets:
Cash in Bank $ 12,769.19
Petty Cash 106.39 $ 12,875.58
Accounts Receivable $ 46,085.68

—
Less Reserve for Loss on Bad
Debts 100.00 45,985.68
Mortgage Receivable 875.00

Estimated Discounts to be taken 817.29
Total Current Assets . . .rTT-rr.^TrrTT 60,553.55
Inventories:
Finished Goods $104,190.24
Stock in Process 71,242.39
Yarn 135,661.63
Coal 1,000.00
Starch 900.00
Supplies 1,150.00
Total Inventories 314,144.ie6
Prepaid Items:
Interest Prepaid on Notes Payable ... $ 211.11
600.00
100.00
Total Prepaid Items 1,313.37
Estimated Discounts to be Allowed 460.86
Preferred Dividends Payable 6,000.00
Capital
Capital Stock, Preferred $100,000.00
Capital Stock, Common 263,800.00 $363,800.00
Profit and Loss

Debit balance $ 20,694.80
Adjustments for preceding pe-
riod 3,403.53
Dividends 9,375.00
$ 33,473.33
Deduct— Profits for the period . 6,720.96
Deduct— Debit balance, June 30, 1916 26,752.37
Total Capital 337,047.63 j
Total Liabilities and Capital $574,313.51 i

(a) Operation of Tenements. In this solution the operation of

the tenement property is incorporated in the manufac-
turing statement on the theory that the housing of work-
men is a manufacturing expense. The decision of this
question in each case should turn on the facts involved.
If the housing of workmen is primarily necessary to reduce
the turnover of labor or to improve working conditions,
then the operation of the housing property is a manufac-
turing element. If, however, the tenement investment was
made as a collateral matter to produce additional income,
the operation of the tenements would not affect the manu-
facturing statement.
(b) Waste Sales. Waste problem are taken to be
sales in this
sales of waste which isused in caring for machinery, or
sales of scrap resulting from the operation of the machinery
on work in process. In either of these events any value
realized from the sale or other utilization of such waste
product is a reduction of the manufacturing exj>ense. If
waste were manufactured as a by-product and then sold,
the sales of such waste would be sales of the business and
should not be shown as a reduction of manufacturing
expense. In Volume IV, Chapter XXIII, the items gen-
erally entering into the cost of goods sold are shown.
(c) Unpaid Preferred Dividends. Where cumulative dividends
on preferred stock have not been declared, they should
not be shown in the accounts, although a memorandum of
them should be made on the balance sheet as explained
in Volume IV, Chapter VI, § 8. Some accountants rec-
ommend that the surplus of the corporation be so stated
as to show what portion of it must first be used to pay
dividends on preferred stock prior to those on common
stock. In this case, however, the unpaid preferred divi-
dends had evidently been declared. Once declared they
constitute liabilities and so should be shown on the
accounts.
i6
(d) Cash Discounts on Outstanding Accounts. While cash dis-
ccunts should be recorded only when taken, nevertheless
it is sometimes advisable to estimate the amount of dis-
count which it is expected will be taken, in order to pre-

pare a balance sheet indicating the approximate amount
collectible from customers and payable to creditors.
(See Volume I, Chapter XXV, §§ 8 and 16.)
Problem 74
GEORGE W. DUNN
TRIAL BALANCE
December 31, 1920
Cash $ 5,627.00
Inventory, December 31, 1919 (cost) 215,275.00
Real Estate (book value) 161,540.00
Store Fixtures (book value) 19,416.00
OflBce Furniture and Fixtures (book value) 2,760.00
Prepaid Interest on Discounted Notes 1,350.00
Catalogues and Advertising Matter on Hand . 956.00
Prepaid Insurance 175.00
Accrued Interest on Notes Payable 560.00
Accrued Interest on Mortgage Payable 700.00
George W. Dunn, Capital 370,000.00
George W. Dunn, Drawings 15,677.00
Sales 802,071.00
Sales Returns and Allowances 17,200.00
Freight and Hauling Inward 4,130.00
Advertising 19,607.00
Store Clerks' Salaries 20,460.00
Traveling Salesmen's Salaries 18,643.00
Store Supplies Used 1,416.00
Freight and Hauling Outward 2,160.00
OflSce Clerks' Salaries 7.482.00
Maintenance of Real Estate 14,682.00
Income from Rental of Upper Floors 11,627.00
Interest on Notes Receivable 1,287.00
Interest on Bank Balances 96.00
Cash Discounts on Purchases 4,893.00
Interest on Mortgage Payable 4,200.00
Cash Discounts on Sales 2,695.00
$1,409,170.00 $1,409,170.00
Inventory, December 31, 1920 (cost), $176,482.
Required
(a) Profit and loss statement
(b) Balance sheet
(c) Closing entries
Mr. Dunn conducts a wholesale jobbing business.

He owns a six-story building, using the basement and first
two floors for his business and renting the upper floors.
"Maintenance of Real Estate" includes taxes, in-
surance, repairs to building, depreciation, heat and
light, janitor and helpers, etc.
Freight and hauling inward on merchandise pur-
chases is considered a part of the cost of goods pur-
chased, and the proper portion thereof is included in
the cost of goods on hand, both at the beginning and
at the end of the year.
This trial balance was taken after all necessary
adjusting entries had been made and posted.
(a)
GEORGE W. DUNN
One Year Ending December 31, 1920

Less —
Returns and Allowances 17,200.00
Net Sales $784,871.00

Inventory, December 31, 1919 . . $215,275.00
Gross Purchases . . . $599,025.00
Less —
Returns
and Allowances 8,672.00

Freight and Hauling Inward 4,130.00 $809,758.00
Less— Inventory, December 31, 1920 176,482.00 633,276.00
Gross Profit on Sales • • $151,595.00
Deduct — Operating Expenses:

Selling Expenses:

Traveling Salesmen's Salaries . 18,643.00
Freight and Hauling Outward . 2,160.00 $ 76.007.00
Administrative Expenses:
Office Clerks' Salaries $ 7,482.00
OfficeExpenses 1.786.00
Maintenance of
Real Estate ... $ 14,682.00
Less — Income
from Rental
of Upper
Floors 11,627.00 3,055.00 12,323.00 88,330.00
et Trading Profit $ 63,265.00

Add —Other Income:

Interest on Notes Receivable $ 1,287.00
Interest on Bank Balances 96.00
Cash Discounts on Purchases 4,893.00 6,276.00
Deduct — Other Charges:

Interest on Xotes Payable $ 5,740.00
Interest onMortgage Payable 4,200.00
Cash Discounts on Sales 2,695.00 12,635.00
Net Profit for the'year $ 56,906.00
(b)
GEORGE W. DUNN
BALANCE SHEET
December 31, 1920
Assets
Current Assets:
Cash $ 5,627.00
Merchandise on Hand (cost) 176,482.00
Accrued Items:
Total Current Assets $434,659.00
Fixed Assets:
Real Estate (book value) $161,540.00
Store Fixtures (book value) 19,416.00
OflSce Furniture and Fixtures (book value) .... 2,760.00
Total Fixed Assets 183,716.00
Deferred Charges to Pro6t and Loss:

Catalogues and Advertising Matter on Hand . $ 956.00
Prepaid Interest on Discounted Notes 1,350.00
Prepaid Insurance 175.00
Total Deferred Charges 3,378.00
$621,753.00
Accrued Items:
Interest on Notes Payable $ 560.00
Interest on Mortgage Payable . . 700.00 1,260.00
Total Current Liabilities $140,524.00
Fixed Liabilities:
George W. Dunn's Capital:

Investment, December 31, 1919 $370,000.00
Add — Net Profit for the year per
Profit and Loss Statement . . . $56,906.00
Less — Drawings for the year 15,677.00 41,229.00
Total Capital 411,229.00
$621,753.00
(c)
GEORGE W. DUNN
CLOSING ENTRIES
December 31, 1920
Sales $ 17,200.00
Sales Returns and Allowances $ 17,200.00
To close the sales returns and allowances for
the year into the Sales account.

Purchases 8,672.00
To close the purchase returns and allowances
for the year into the Purchases account.
Purchases 4.130, 00
To close the cost of freight and hauling inward
on merchandise purchases for the year into
the Purchases account.
Cost of goods on hand December 31, 1919.
Cost of goods on hand December 31, 1920.
Sales 633,276.00
To close the cost of goods sold during the year
into the Sales account:
Inventory, December 31, 1919 .... $215,275.00
Gross Purchases $599,025.00
Less —
Returns and
Allowances 8,672.00

$809,758.00
Less— Inventory, December 31, 1920 176,482.00
$633,276.00
Sales 151,595.00
To close the gross profit on sales for the year
into Profit and Loss account.
Less — Returns and Allowances . 17,200.00
Net Sales $784,871.00

Deduct— Cost of Goods Sold 633,276.00
$151,595.00
Intereston Notes Receivable 1,287.00

Intereston Bank Balances 96.00
Cash Discounts on Purchases 4,893.00
To close the accounts representing items of
extraneous income for the year into Profit
and Loss account.
Income from Rental of Upper Floors 11,627.00
To transfer the income received from rental
of the upper floors to the Maintenance of
Real Estate account, in order that this ac-
count may show by its balance the cost to the
business of occupying the basement and
first two floors.

Advertising 19,607.00
Traveling Salesmen's Salaries 18,643.00
Freight and Hauling Outward 2,160.00
Office Clerks' Salaries 7,482.00
Expenses
Office 1,786.00
To close the accounts representing the operat-
ing expenses for the year into Profit and Loss
account.

Intereston Mortgage Payable 4,200.00
Cash Discount on Sales 2,695.00
To close the accounts representing items of
extraneous expense for the year into Profit
and Loss account.

George W. Dunn, Drawings 56,906.00
To transfer the net profit for the year to George
W. Dunn's drawing account.
George W. Dunn, Drawings 41.2£9.00

George W. Dunn, Capital 41,229.00
To transfer to George W. Dunn's capital ac-
count the credit balance of his drawings
account, being the net addition for the year
to his capital investment.
Points Illustrated in Problem 7-4
(a) Mercantile Statements. As explained in Volume IV, Chap-

ter XXIV, the form of statements for mercantile businesses
differsfrom that used by manufacturing concerns. In
thisproblem the former kind is illustrated.
(b) Drawing Account. In this problem the balance of Profit
and Loss is closed into the drawing account, in order to
show in the accounts the portion of profits not withdrawn
by the proprietor. This procedure is discussed in Volume
I, Chapter VIII, § 7. Another procedure which is as
often found is to close the balance of Profit and Loss and
the balance of the drawing account directly into the capital
account.
(c) Freight Inward. The addition of freight inward to the cost
of merchandise purchased, as illustrated in this problem,
is discussed in Volume I, Chapter IX, § 8.
Problem 75
From the following trial balance and other infor-

mation, prepare a trading and profit and loss state-
ment:
A AND COMPANY
TRIAL BALANCE
December 31, 1920
Cash $ 90.00
NotesPayable $ 3.600.00
Accounts Payable 10.000.00
^50 ILLUSTRATIVE PROBLEMS
Inventory, January 1, 1920:
Dept. A 12,500.00
Dept. B 8,000.00
Dept. C 9.000.00
Purchases
Dept. A 37,000.00
Dept. B 10,500.00
Dept. C 13,500.00
Bank Overdrafts 2,800.00
Sales:
Dept. A 43,500.00
Dept. B 13,750.00
Dept. C 16,500.00
Wages
Dept. A 1,750.00
Dept. B 750.00
Dept. C 950.00
Trade Expense 1,500.00
Office Salaries 2,250.00
Rent, Taxes, Insurance 1,300.00
Bad Debts 430.00
Discounts Allowed Customers 630.00
A, Drawings 2,500.00
B, Drawings 1,500.00
$135,150.00 $135,150.00
The inventory of goods on hand on December 31,

1920, is as follows:
Dept. A $15,000.00
Dept. B 9,000.00
Dept. C 8,000.00
During the year goods were transferred from De-

partment A to Department B at cost price amounting
to $1,000; also to Department C at cost price amount-
ing to $750; neither of these transfers being accounted
for through entries on the books. Discount on cus-

tomers' accounts at 2% on outstanding amount is to
be taken into consideration in the solution of this
problem.
$500 as a reserve is to be set aside for doubtful and
bad debts. Depreciation at the rate of 10% is to be
written off on furniture and fixtures. There is accrued
rent amounting to $100. Each partner secures 4%
interest on his capital, after which the profit is to be
divided in proportion to the capital as stated in the
trial balance.
A AND COMPANY
TRADING STATEMENT
Year Ended December 31, 1920
Total Dept. A Dept. B Dept. C
Sales $73,750.00 $43,500.00 $13,750.00 $16,500.00
Cost of Goods Sold

Inventory, January 1, 1920 . $29,500.00 $12,500.00 $ 8,000.00 $ 9,000.00
Purchases 61,000.00 37,000.00 10,500.00 13,500.00
Wages 3,450.00 1,750.00 750.00 950.00
Departmental Transfers . . . 1,750.00 1,000.00 750.00
Total $93,950.00 $49,500.00 $20,250.00 $24,200.00

Inventory, December 31,
1920 32,000.00 15,000.00 9,000.00 8,000.00
Net $61,950.00 $34,500.00 $11,250.00 $16,200.00
Gross Profit $11,800.00 $ 9,000.00 $ 2,500.00 $ 300.00

Trade Expenses $ 1,500.00 Gross Profits:

Office Salaries 2,250.00 Dept. A $9,000.00
Rent, Taxes, Insurance. . . $1,300.00 " B 2,500.00
Accrued Rent 100.00 1,400.00 " C 300.00 $11,800.00
Bad Debts 430.00

Depreciation of Furniture and Fix-
tures (10%) 225.00
Discounts Allowed Customers 630.00
Reserve for Discounts (2%) 550.00
Reserve for Bad Accounts 500.00
Profit Distribution:
A— Interest $1,000.00
A—Balance of ProfiU.. 1.397.22 2,397.22
B— Interest $ 800.00
B—Balance of Profits. . 1,117.78 1,917.78
$11,800.00 $11,800.00
(a) Mercantile Statements, This problem illustrates the form

of financial statements generally in use by mercantile or
trading businesses. (See Volume IV, Chapter XXIV,)
(b) Form of Statement. This statement is presented in what is
known as the account form, in which the expenses are
listed on the left side and the income items on the right.
The balance of profit or loss, as the case may require, is
inserted to make the totals of the two sides equal. This
form is not to be recommended for general use. It is
somewhat technical and less easily understood than the
running form in which the income items are placed first
and the expenses deducted from them. On such a form,
the net profit or loss appears at the bottom as the result
obtained by subtracting the amount of the expenses from
the income or vice versa. (See Volume I, Chapter IX,
§ 6.)
(c) Subsidiary Statements. The use of subsidiary or support-
ing schedules is fully explained in Volume I, Chapter

XIV.
(d) Interest on Capital. This problem illustrates the futility of
allowing interest on capital when the profit and loss ratio
is the same as the capital ratio. (See Volume I, Chapter
XXXI, § 10.) The net profits in this case are $4,315, of
which % or $2,397.22 belong to A, and Vq or $1,917.78 to
B. Interest to A and B amounts to $1,000 and $800
respectively, which reduces the net profits to $2,515, of
which A gets ^g or $1,397.22, and B Vg or $1,117.78.
Adding the credits for interest will give A and B the iden-
tical amounts that they would have received if no interest
had been allowed. This problem illustrates also the ad-
visability of specifying dates in connection with amounts
of capital on which interest is to be allowed. For a general
discussion of the method of distributing profits and losses
on the basis of capital invested, see Volume I, Chapter
XXXI, § 8.
Problem 76
John B. Green has a chain of five retail grocery

stores. Goods are sold to consumers for cash; and to
small dealers on credit. Additional working capital
is required. Three of Green's friends agree to furnish
funds providing the business is incorporated. Such
books as exist have been kept by single entry. The
business is duly incorporated for an authorized capital
of $100,000, par value of shares $100 each. It is agreed
that Green shall turn over his business to the company
as at July 1, 1914, on appraised values of physical
properties; and values of all book accounts (assets and

liabilities) as they shall be disclosed; and Green's net
worth is to apply on his stock subscription of $25,000.

In addition, Green is to be allowed 25% of the net
worth for "good-will." Other capital stock subscrip-
tions are, respectively, A $30,000, B $25,000, C $20,000;
and each is to pay immediately in cash a proportionate
amount on subscriptions which, altogether, shall ag-
gregate 50% more than the value of capital stock
issued to Green.
The appraisal company reports as follows:
Real Estate:
Store No. 1 $4,000.00
Store No. 2 5,000.00
Reproductive Sound
Values Values
Buildings:
Store No. 1 $ 3,000.00 $2,000.00
Store No. 2 7,500.00 5,000.00

Stores 10,000.00 7,500.00
General Office 1,000.00 500.00
Stock Room 1,000.00 500.00
Automobiles (2) 5,000.00 3,500.00
Inventories (Merchandise):
In Storeroom 14,000.00
In Storage (Butter and Eggs) 5.000.00
In Stores 11,000.00
No. 1 $ 2,300.00
No. 2 1,950.00
No. 3 3,135.00
No. 4 2,365.00
No. 6 1,250.00
The book accounts disclosed are as follows:
Cash at Bank $ 1,500.00

Cash— General Office Petty Cash 100.00
ILLUSTRATIVE PROBLEMS ^55
Cash —Stores 500.00

No. 1 $ 140.00
No. 2 75.00
No. 3 160.00
No. 4 60.00
No. 5 65.00
Accounts ReceivabIe-7-DeaIers 2,600.00
Trade Creditors' Accounts 22,280.00
Accrued Wages and Salaries 795.00
Accrued Taxes 100.00
—
Mortgage on Real Estate and Buildings dated July 1, 1913;
principal payable in 5 years; interest at 6% per annum, pay-
able semiannually 7,500.00
Notes Payable (Bank)
Due 3 months from May 1, 1914 (6%) 10,000.00
Due 3 months from June 1, 1914 (6%) 5,000.00
Interest falling due on mortgage loan has not been

paid. Interest on the $10,000 note is payable at ma-
turity. The $5,000 note was discounted.
The following additional facts are shown on the
books and records of the John B. Green Company at
first month's business:
the close of the
Merchandise Purchases (of which $750 was returned) $35,000.00

Stores' Sales, per Cash Register Totals:
Store No. 1 $6,000.00
Store No. 2 3,500.00
Store No. 3 8,000.00
Store No. 4 5,000.00
Store No. 5 2,500.00
Sales to Dealers 5,000.00
Issuesfrom General Stock (at cost):

Store No. 1 $5,585.00
Store No. 2 2,850.00
Store No. 3 6,470.00
Store No. 4 4,210.00
Store No. 5 2,475.00
Cost of Goods Shipped to Dealers 4,545.00

Heat, Light.
Clerks' Cleaning,
Wages Rents Ice, etc. Total
Expenses of Stores : .
Store No. 1 $200.00 $ 65.00 $25.00 $290.00

Store No. 2 135.00 25.00 20.00 180.00
Store No. 3 235.00 75.00 35.00 345.00
Store No. 4 200.00 150.00 35.00 385.00
Store No. 5 135.00 100.00 35.00 270.00
Management and OflSce Salaries $385.00

Storeroom and Delivery Wages 265.00
Rent of Office and Storeroom 35.00
Stationery and Office Supplies 40.00
Postage 10.00
Advertising 75.00
In-Freight 50.00
Heat, Light, and Janitor (Office) 15.00
Appraisal and Audit Fees 350.00
Law and Organization Expenses 250.00
Auto Up- Keep 90.00
Telephone 40.00
Debts of John B. Green not disclosed at date of turnover:
On Creditors' Accounts $675.00
On Storage Charges (of which $5 is for current month) 20.00 695.0U
The stores' merchandise inventories at the end of

the month amount to:
Store No. 1 $2,650.00
Store No. 2 1,875.00
Store No. 3 2,920.00
Store No. 4 2,115.00
Store No. 5 940.00
The stores' cash funds are reduced to:
Store No. 1 $ 100.00

Store No. 2 50.00
Store No. 3 100.00
Store No. 4 50.00
Store No. 5 50.00
Differences are found in the stores' cash funds at

the close of the first month's business:
Store No. 1 short $ 3.00

Store No. 2 over 1.00
Store No. 5 over 17.00
The merchandise stock shows: spoiled

general
goods $60; shortage in inventory at the end of the
month $35.
The stores receive credit for spoiled goods:
Store No. 1 $ 15.00

Store No. 2 10.00
Store No. 3 20.00
Store No. 4 15.00
Store No. 5 30.00
The upper floor of store No. 1 building is tenanted,

and rentals at $25 monthly, payable in advance, are
found to be three months in arrears of which $50 is —
paid during July.
Insurance expires September 30, 1914.
All salaries and wages are payable one-half each on
the 1st and 15th of the month.
Dealers have paid on their accounts $4,200.
Trade creditors have been paid (of which $340 is
discount) $40,000.
Depreciation charges (annual rates)
On buildings, 5%.
On furniture and fixtures, 10%.
On automobiles, 25%.
Part of store No. 2 building is used for the general
oflBce and storeroom.
I?
You are asked to submit:
(a) Opening on the books of the corpora-

entries
tion (journalform with brief explanations),
taking over the business of John B. Green
and including payments on account of capi-
tal stock subscriptions.
(b) General cash account for the month.
(c) Profit and loss account for the month; show-
ing also, in a clear and simple manner, the
stores' operations with percentages of gross
profit on cost. It is not necessary to pro-
rate any of the general business expenses
to the stores.
(d) Comparative balance sheet as at July 1 and
July 31, 1914.
(e) A brief statement giving the grounds of your
conclusions in explanation of the loss on

goods sold in store No. 5.
{Wisconsin C.P.A. Examination.)
(a)
OPENING JOURNAL ENTRIES

Unissued Capital Stock $100,000.00
For authorized capital stock issue of the John
B. Green Company, per articles of incor-
poration.
Capital Stock Subscriptions 100,000.00

Unissued Capital Stock 100,000.00
For subscriptions, viz.
John B. Green $25,000.00

A 30,000.00
B 25,000.00
C 20,000.00
Sundry Assets (as below) 62,800.00

Vendor 62,800.00
For assets acquired from John B. Green:
Buildings 7,000.00
Automobiles (2) 3,500.00
Merchandise Inventories:
Storeroom 14,000.00
In Storage 5,000.00
Stores 11,000.00
Cash at Bank 1,500.00
Cash— Office Fund 100.00
Cash— Stores 500.00
Accounts Receivable — Dealers . . 2,600.00
Interest Paid in Advance 50.00
Vendor 46,000.00
For sundry liabilities taken over from John B.
Green and assumed by the company:
Trade Creditors $22,280.00
Wages 795.00
Interest on Mortgage 225.00
Interest on Note 100.00
Accrued Taxes (estimated) 100.00
Good- Will 4,200.00

Vendor 4,200.00
For 25% of vendor's net equity in business
turned over, as disclosed at date, being:
Assets $62,800.00
Liabilities 46,000.00
Net Equity $16,800.00

Good- Will equals 25%, or 4,200.00
Vendor 21,000.00
Capital Stock Subscriptions —John B.
Green Account 21,000.00
To transfer former account balance and apply
same to subscription account in accordance
with terms of agreement.
Cash 31,500.00
Capital Stock Subscriptions 31.500.00
John B. Green Account $21,000.00
50% additional 10,500.00
Required total payment $31,500.00
Distributed as follows:
A, 42% of $30,000 $12,600.00
B, 42% of 25,000 10,500.00
C, 42% of 20,000 8,400.00
$31,500.00
Note:
Total subscriptions A, B, and C . $75,000.00
Required total payment 31,500.00
Which is 42% of total subscriptions.
(b)
CASH ACCOUNT
Balance, July 1 $ 1,500.00 Creditors $39,660.00
Stock Subscriptions 31,500.00 Pay-Roll 1,572.50
Cash Sales 25,000.00 Interest on Mortgage . . 225.00
Received from Dealers . 4,200.00 Postage 10.00
From Stores 150.00 Balance 20,947.50
Over-Cash 15.00
Rental 50.00
$62,415.00 $62,415.00
Balance, August 1 $20,947.50

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Profit and Loss Account — Continued
Dr. Cr.
Operating Profit (brought down) ,985.00

Discounts on Purchases 340.00
Cash Overage Stores — 15.00
Waste— Stores $ 90.00
Waste— General Stock 60.00
—
Inventory Shortage General Stock 35.00 $ 185.00
Salaries — Management $385.00

Salaries —Storeroom 265.00 650.00
Rent— Office and Storeroom $ 35.00

Heat, Light, and Janitor 15.00
Stationery 40.00
Postage 10.00
Advertising 75.00
In-Freight 50.00
Law and Organization 250.00*
Appraisal and Audit 350.00*
Auto Up-Keep 90.00
Telephone 40.00 955.00
Interest Charges —Loans 112.50

Insurance 16.67
Depreciation of Furniture and Fixtures .... $ 70.83
Depreciation of Auto 72.91 143.74
Balance — Net Profit on Operations 277.09
$2,340.00 $2,340.00
Net Operating Profit (brought down) $ 277.09

Rentals from Buildings 150.00
Depreciation of Buildings $ 29.16
Taxes (estimated) 16.66
—
Balance Net Profit to Balance Sheet 381.27
$ 427.09 $ 427.09
• This may be written off over a period of, say, six months, $100 monthly.
Stores' expenses comprise:
Total Salaries Rents Sundries

No. 1 $ 290.00 $200.00 $ 65.00 $ 25.00
No. 2 180.00 135.00 25.00 20.00
No. 3 345.00 235.00 75.00 35.00
No. 4 385.00 200.00 150.00 35.00
No. 5 270.00 135.00 100.00 35.00
$1,470.00 $905.00 $415.00 $150.00
Journal entry:
Stores' Expenses $1,470.00

Wages Accrued $905.00
Rent of Buildings 90.00
Accounts Payable $150.00
325.00 475.00
(d)
Before the balance sheet for July 31 can be set up,

the following adjustment entries must be made:
John B. Green $ 690.00

Storage (Butter and Eggs) 5.00
Accounts Payable $ 695.00
To record undisclosed liabilities.
Cash 50.00
John B. Green 50.00
To record receipt of rent in arrears.
John B. Green 160.00

Good- Will ....'. 160.00
To reduce good-will to 25% of John B. Green's
net worth at time of incorporation.
To record purchase of merchandise.
Accounts Payable 750.00
Merchandise 750.00
To record return of merchandise.
JOHN B. GREEN COMPANY

COMPARATIVE BALANCE SHEET
Assets
July 1, 1914 July 31, 1914

Real Estate:
$ 4,000.00 Store No. 1 $ 4,000.00
$^ 9,000.00 5,000.00 Store No. 2 5,000.00 $ 9,000.00
Buildings:
$ 2,000.00 Store No. 1 $ 2,000.00
7,000.00 5,000.00 Store No. 2 5,000.00 7,000.00
4,200.00 Good- Will 4,040.00

Unpaid Capital Stock Subscriptions:
$ 4,000.00 John B. Green $ 4,800.00
17,400.00 A 17,400.00
14,500.00 B 14,500.00
47,500.00 11,600.00 C 11,600.00 48,300.00

$ 7,500.00 Stores $ 7,500.00
500.00 General Office 500.00
8,500.00 500.00 Storeroom 500.00 8,500.00
3,500.00 Automobiles (2) 3,500.00

Merchandise Stocks:
$14,000.00 General Storeroom ... $ 22,020.00
5,000.00 Storage (Butter and
Eggs) 5,005.00
30,000.00 11.000.00 Stores 10,500.00 37,525.00
2,600.00 Accounts Receivable— Dealers 3,400.00

Cash at Banks and in Hand:
$33,000.00 At Banks $ 20,947.50
100.00 General Office Fund . 100.00
33,600.00 500.00 Stores' Funds '
350.00 21,397.50
July 1, 1914 July 31, 1914

Deferred Charges:
$ 50.00 Interest Prepaid—
100.00 50.00 Unexpired Insurance 33.33 58.33
Accounts Receivable — Rents 25.00

$146,000.00 $142,745.83
Liabilities
July 1, 1914 July 31, 1914
$100,000.00 Capital Stock— Authorized Issue . . $100,000.00 $100,000.00
Unpaid Subscribed (per contra) . . . 48,300.00
Issued and Outstanding $ 51,700.00
7,500.00 Mortgage Payable (on Real Estate and Building) 7,500.00

Sundry Creditors:
$15,000.00 Notes Payable $ 15,000.00
22,280.00 Creditors' Accounts
Payable 18.610.00
38,075.00 795.00 Wages and Salaries .. 777.50 34,387.50
Accruals:
$ 100.00 Interest on Notes Pay-
able $ 150.00
225.00 Interest on Mortgage . 37.50
4«5.00 100.00 Taxes (estimated) ... 116.66 304.16
Depreciation Reserves 172.90

Profit for month of July, 1914 381.27
$146,000.00 $142,745.83
(e)
The loss at store No. 5 may be accounted for:
1. By selling goods on credit instead of for cash.

2. By selling goods at less than cost.
3. By clerks' personal takings; or giving to rela-
tives or friends without charge.
4. By giving "overweight."
5. By carelessness in general.
Adjustments to John B. Green's account:
Charge him with undisclosed liabilities $690.00

Credit him with rent due 50.00 $640.00
Charge him with reduction of Good- Will account, 25%

of $640 160.00
Netincrease $800.00
The difference found in the store's cash funds at

the close of the first month might be held in a sus-
pense or adjustment account until the end of the year.
As between sound and reproductive values, the for-
mer should be used. If reproductive values are used,
they should be offset by a reserve for depreciation
to bring the value of the assets down to sound value.

(a) Statement of Mercantile Business. This problem illustrates
the form of statements usually required for mercantile or
trading businesses. (See Volume IV, Chapter XXIV.)
Problem 77
The Brown Manufacturing Corporation, finding its
credit impaired, prepares the following statement as of
January 1, 1908:
Assets Liabilities
Plant $248,607.00 Capital Stock $200,000.00
Merchandise 345,156.00 Accounts Payable .... 488,361.00
Accounts Receivable . 174,216.00 Profit and Loss 80,685.00
Cash 1,067.00
$769,046.00 $769,046.00
By agreement of all concerned, the corporation ap-

plied for receivers, who were appointed and granted
permission to operate.
The receivers tookno inventory, but revalued cer-
tain assets in above statement as follows:
Merchandise $241,610.00
On October 1, 1909, having paid dividends to credi-

tors and receivers' expenses aggregating $362,845, the
receivers reported to the court the following condition
plant merchandise $77,564; accounts re-
$241,747;
ceivable $63,132; cash $47,637; accounts payable
$186,883; and were authorized to turn over the property
to the stockholders.
Draw up entries covering the following:
(a) Corporation books, transfer of property to

receivers.
(b) Corporation books, recovery of property.
(c) Balance sheet, after above entries are made.
(d) Receivers' books, opening.
(e) Receivers' books, closing.
(a)
January 1, 1908
Receivers $630,657.00
Plant $248,607.00
Merchandise .^ 241,610.00
Cash 1,067.00
The above entry is made to clear the books of
the above assets and to charge the receivers
with them at the value at which taken over.
Receivers 488,361.00
To credit the receivers with the liabilities placed
in their hands.
Profitand Loss 138,389.00

To charge and Loss with the difference
Profit
between the book value of the above assets
and the value at which they were taken over
by the receivers.
The books would then show the following balances
Balance Sheet
Assets Liabilities
Receivers $142,296.00 Capital Stock $200,000.00
Deficit 57,704.00
$200,000.00 $200,000.00
(b)
October 1, 1909
Plant $241,747.00
Cash 47,637.00
Receivers $430,080.00
To bring on the books the assets turned over
to the company by the receivers at the close
of the receivership.
To bring on the books the amount due creditors
as reported by the receivers.
Surplus 100.901.00
To close the balance of the Receivers account
into Surplus,as this balance represents the net
addition to net worth due to the receivership.
(c)
BALANCE SHEET
October 1, 1909
Assets Liabilities
Cash $ 47,637.00 Capital Stock $200,000.00
Accounts Receivable . 63,132.00 Accounts Payable .... 186,883.00
Merchandise 77,564.00 Surplus 43,197.00
Plant 241,747.00
$430,080.00 $430,080.00
(d)
January 1, 1908
Plant $248,607.00
Cash 1,067.00
Brown Manufacturing Corporation $630,657.00
To bring on the receivers' books the assets
taken over from the Brown Manufacturing
Corporation.
Brown Manufacturing Corporation 488,361.00

Accounts Payable 488.361.00
To show the liabilities assumed by the receivers.
(e)
October 1, 1909
Brown Manufacturing Corporation $430,080.00

Plant $241,747.00
Merchandise j_. . 77,564.00
Cash 47,637.00
To show the return to the Brown Manufactur-
ing Corporation of the assets held by the re-
ceivers at the close of the receivership.
To account to the Brown Manufacturing Cor-
poration for the liabilities outstanding at the
close of the receivership.

Cash 46,570.00
Plant 6,860.00
Realization and Liquidation 100,901.00
To close into a Realization and Liquidation
account the net change in assets and liabili-
ties which took place during the receivership,
this balance representing the net profit due to
the receivership.
Realization and Liquidation 100,901.00

To transfer the net profit to the Brown Manu-
facturing Corporation, thus closing all ac-
counts on the receivers' books.
It will be observed that no use is made of the

amount representing dividends to creditors and re-
ceivership expenses, $362,845. These being interim
transactions, no account would be taken of them in
closing the books.
(a) Statement of Affairs. In a case such as the one in this prob-

lem, it is customary to prepare a statement of affairs and
a deficiency account as described in Volume I, Chapter
XII. None is required by this problem.
(b) Realization and Liquidation Statement. A statement of
realization and liquidation is usually prepared at the end
of a receivership such as the one covered in this problem.
The form of such a statement is outlined in Volume I,
Chapter XIII. None is required in this problem.
(c) Profit and Loss Account. In the balance sheet shown in

this problem the account entitled "Profit and Loss" is
the "Surplus" account. Reference should be made to the

discussion of the use of the term "Profit and Loss" when
other accounts or statements are meant. (See Volume I,
Chapter IX, § 6.)
(d) Surplus Adjustments. The surplus adjustments in this
problem are made in accordance with the principles out-
(e) Interim Transactions. In this case the interim transactions
cannot be fully recorded because they are not known. In
this respect the solution of the problem resembles the
preparation of single-entry statements as described in
Volume I, Chapter XXXV.
Problem 78
A corporation with a balance sheet as at December

31, I9I2, given below, is placed in charge of a receiver.
Assets Liabilities
Accounts Receivable . . 71,227.00 Notes Payable 60,000.00
Investments 13,950.00 Capital Stock 50,000.00
Inventory 83,312.00 Surplus 55,497.00
Fixtures 46,880.00
$227,557.00 $227,557.00
An examination of the books discloses the following

The cash consists of deposit in bank $10,550; cur-
rency $595; advanced on traveling expenses $250;
sundry expense vouchers $793.
Accounts receivable:
Contracted in 1912 $51,822.00 estimated to shrink $500
" 1911 5,715.00 " " " 25%
" 1910 3,180.00 75%
prior to 1910 10,510.00 all bad
The investments were considered to be of no value.

The inventories were found to contain unsalable stock
to the amount of $7,525.
The fixtures were bought as follows
In 1905 $ 5,115.00
1906 3,002.00
1907 2,150.00
1908 17,810.00
1909 1,005.00
1910 4,505.00
1911 6,115.00
1912 7,178.00
$46,880.00
Fixtures are estimated to last ten years, and no

depreciation has been entered in the accounts. Bills for
goods received amounting to $3,512 were not included
in the accounts payable of $62,060. The receiver de-
cides to reorganize the business with a capital stock
of $150,000, divided as follows: $75,000 common, and
$75,000 6% preferred. He offers the creditors 75% of
their claims in preferred and 25% in common stock,
with a bonus of 25% common. This is accepted by
creditors holding $60,000 worth of notes, and $40,000
of claims on open accounts. He offers the stockholders
in the old corporationone share of common stock in
the new corporation for every two shares in the old
corporation. This is accepted by all of them. He
estimates that the new corporation can do a business

of $700,000 a year with the goods costing 70%; that
his expenses will be $175,000; that he will allow a
quarter of 1% for bad bills, and a depreciation charge
of 10% on the cost of fixtures.
Submit an adjusted balance sheet of the new cor-
poration, and an estimated operating account for the
first year, showing the estimated percentage earned on
common stock, after paying dividends on preferred

stock.
ADJUSTMENTS IN BALANCE SHEET

Of December 31, 1912
Advances to Salesmen $ 250.00

Cash $ 250.00
To remove from the Cash account an item of cash
advanced on account of traveling expenses.
Surplus 793.00
Cash 793.00
To remove from the Cash account items of ex-
pense vouchers which have been carried as cash.
Surplus 14,823.75
Reserve for Bad Debts 4,313.75
To write off estimated shrinkage in accounts re-
ceivable.
Surplus 13,950.00
To write off the investments which are considered
of no value.
i8
Surplus 7,525.00
Inventory 7,525.00
To remove from the Inventory account the un-
salable stock of no value.
Surplus 20,082.70
The above entry is to create a reserve for depre-
ciation of fixtures based upon a life of ten years.
Purchases of fixtures and corresponding deprecia-
tion are as follows:
Year Purchased Cost Depreciation

1905 $ 5,115.00 $ 4,092.00
1906 3,002.00 2,101.40
1907 2,150.00 1,290.00
1908 17,810.00 8,905.00
1909 1,005.00 402.00
1910 4,505.00 1,351.50
1911 6,115.00 1,223.00
1912 7,178.00 717.80
$46,880.00 $20,082.70
Surplus 3,512.00
To bring on the books the corresponding liability
for goods bought and included in the inventory.
ADJUSTED BALANCE SHEET

December 31, 1912
Assets Liabilities
Accounts Receivable . 71,227.00 Notes Payable 60,000.00
Advances to Salesmen. 250.00 Reserve for Bad Debts 14,823.75
Inventory 75,787.00 Reserve for Deprecia-
Fixtures 46,880.00 tion 20,082.70
Deficit 5,189.45 Capital Stock 50,000.00
$210,478.45 $210,478.45
ENTRIES TO EFFECT REORGANIZATION

Notes Payable $60,000.00
Reorganization Expense 25,000.00
Capital Stock, Preferred $75,000.00
Capital Stock,Common 50,000.00
Creditors are offered 75% of their claims in pre-
ferred stock and 25% in common stock with a
bonus of 25% in common stock. This offer is
accepted by the holders of the notes payable
and by $40,000 of the book creditors.
Capital Stock (Old Company) 50,000.00

Surplus 25,000.00
Stockholders in the old company are offered one
share of common stock in the new company for
every two shares which they now hold. This
offer is accepted by all stockholders.
BALANCE SHEET, NEW CORPORATION

Assets Liabilities
Cash 8 11,145.00 Accounts Payable .... $ 25,572.00
Accounts Receivable . . 60,717.00 Reserve for Bad Debts 4,313.75
Advances to Salesmen . 250.00 Reserve for Deprecia-
Inventory 75,787.00 tion 20,082.70
Fixtures (cost) 46,880.00 Capital Stock, Preferred 75,000.00
Reorganization Expense 25,000.00 Capital Stock, Common 75,000.00
Surplus 19,810.55
$219,779.00 $219,779.00
By including reorganization expense $25,000 in the

balance sheet, it is understood that it is to be written
off over a certain number of years, thus becoming a
deferred charge to Profit and Loss. It may be immedi-
ately charged to Surplus, thus resulting in the balance

sheet showing a deficit of $5,189.45.
In the following estimated operating statement, one-
fifth of the reorganization expense is charged against
operating profit, thus being written off over a period
of five years.
ESTIMATED OPERATING STATEMENT

Year Following Reorganization
Sales $700,000.00
Less— Cost of Sales 490.000.00
Gross Operating Profits $210,000.00
Deduct:
Operating Expenses $175,000.00
Bad Debts 1,750.00
Depreciation of Fixtures 4,688.00
Extinguishment of Reorganization Expenses . . 5,000.00 186,438.00
Estimated Net Profit $ 23,562.00
Dividend Charges:
Preferred Stock, 6% of $75,000 $ 4,500.00
This leaves net profits belonging to common *
stock of $19,062, showing an earning of

25.42%.
(a) Surplus Adjustments. The surplus adjustments in this

problem are required as explained in Volume IV, Chapter
VII.
(b) Depreciation and Reserves. The theory of depreciation and
the methods of recording it are described in Volume I,
Chapter XXIX. In the solution the reserves for depre-
ciationand for bad debts are shown on the liability side
of the balance sheet. This is not considered the best
practice.
(c) Corporation Deficit. In the adjusted balance sheet in this

solution the deficit shown on the asset side of the balance
is
sheet. Another way of showing it is by a deduction from

the capital stock outstanding. (See Volume IV, Chapter
XXI, §7.)
(d) Prophecies. As a rule, the accountant is not expected to
make prophecies of what future business may produce or
cost, but in this case estimates are required. Where such
estimates are necessary, a careful analysis of the factors
entering into the preceding year's business must be made
and the use of predetermined percentages will be helpful.
(See Volume IV, Chapter XXX, § 3.)
Problem 79
Several manufacturers consolidate their interests
and organize the Consolidated Manufacturing Com-
pany with an authorized capital stock of $1,000,000,
divided into 5,000 shares of common stock and 5,000
of preferred stock at $100 each par value.
The manufacturers sell to the company all of their
assets subject to floating debts of $115,000, divided

into notes payable $65,000 and accounts payable
$50,000, for thesum of $1,000,000, payable $1,000 in
cash, $499,000 incommon stock, and $500,000 in pre-
ferred stock. The company agrees to pay the debts of
$115,000. The active assets acquired are inventoried
by the Consolidated Manufacturing Company as fol-
lows: real estate $175,000, machinery $200,000, and
merchandise $155,000.
The patents and good-will are inventoried at a sum
equal to the difference between the net cost to the
company of the assets acquired and the above valua-

tions of the active assets.
The company receives $1,000 cash for 10 shares of
common stock, and for the purpose of providing funds
for working capital authorizes an issue of bonds amount-
ing to $300,000, of which $200,000 are immediately
sold as follows : $100,000 for cash at 80%, and $100,000
for cash at par with a bonus of common stock amounting
to $100,000.
For the purpose of providing common stock to be
given as a bonus, the manufacturers donate $200,000
of common stock to the treasury of the company.
Prepare the journal and the cash entries for the
company, covering all of the above transactions, and
prepare a balance sheet of the company.
CONSOLIDATED MANUFACTURING COMPANY

Consolidated Manufacturing Company, a corporation
organized under the laws of , with an author-
ized capital stock of $1,000,000, divided into 5,000 shares of

common stock and 5,000 shares of preferred stock, of the par
value of $100 each.
Cash $ 1,000.00
Common Stock $ 1,000.00
10 shares common stock issued for cash.
Plant and Sundry Assets 1,115,000.00

Vendors 1,000,000.00
For purchase in accordance with contract
approved by board of directors.
Vendors 1,000,000.00
Cash 1,000.00
Payment of balance due on purchase con-
tract.
Good- Will and Patents 585,000.00

Machinery 200,000.00
To record valuation of assets by board of
directors.
Treasury Common Stock 200,000.00

Stock Donation 200,000.00
Donation of 2,000 shares.
Cash 180,000.00
Discount on Bonds 20,000.00
Stock Bonus 100,000.00
Treasury Common Stock 100,000.00
Bonds 200,000.00
Sale of bonds with treasury stock bonus.
Stock Donation 100,000.00

Stock Bonus 100,000.00
To close latter account.
(See balance sheet on page 280.)
(a) Opening Entry for Corporation. The opening entry for the
corporation is described in Volume I, Chapter XXXIII,
§8.
(b) Plant and Sundry Assets Account. The use of such an ac-
count is described in Volume I, Chapter XXXIII, § 8.
It is also commented upon in Problem 67.
(c) Valuation of Good-Will. The various methods of valuing
good-will are described in Volume IV, Chapter XIX, § 4.
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(d) Treasury Stock Account. The method of recording treasury

stock on the books of account is described in Volume I,
Chapter XXXIII, § 9, and in Volume IV, Chapter XV,
§ 4. There is some difference of opinion among account-
ants on this matter and it is suggested that the reader
review the sections to which reference has been made.
(e) Treasury Stock on Balance Sheet. The treasury stock at
its par value is deducted from the par value of stock out-
standing as shown by the balance sheet in the above solu-

tion. This is in accordance with the procedure suggested
in Volume IV, Chapter XV, § 8.
(f) Surplus from Stock Donation. The use of such an account
and the theory underlying it are discussed in Volume IV,
Chapter XV, § 4.
(g) Issue of Bonds at Discount. The discount on the bonds is
listed as a deferred charge on the balance sheet in the
above solution. This is done in order that this discount
may be prorated over the life of the bonds as advocated
in Volume IV, Chapter X, § 10.
(h) Consolidation by Purchase. The procedure by which the
consolidationwas effected in this case is described in
Volume IV, Chapter XXVIII, § 2.
Problem 80
The Gordon Manufacturing Company is organized

with authorized capital stock of $2,000,000, divided
into 20,000 shares of the par value of $100, of which
15,000 shares, or $1,500,000, shall be preferred stock
and 5,000 shares, or $500,000, common stock. The
corporation purposes to issue $500,000 in consolidated
mortgage bonds to be used towards the purchase of
sundry properties. The amount of capital with which
the corporation begins business is $50,000, being the

proceeds of subscriptions for 500 shares preferred stock.
To carry out the purposes of said corporation, the
real estate, water power, machinery, good-will, etc., of
certain existing corporations have been purchased at
an appraised valuation of $2,000,000, viz.. Diamond
Manufacturing Company $200,000, Eureka Manufac-
turing Company $300,000, Champion Manufacturing
Company $500,000, American Manufacturing Com-
pany $600,000, Aetna Manufacturing Company $400,-
000, and in payment full-paid stock and bonds have
been issued at par on a basis of 60% in preferred stock,
20% in common stock, and 20% in bonds.
Materials and supplies are to be paid for in cash
when their value is determined.
Formulate the entries necessary to open the books
of the new corporation.
The Gordon Manufacturing Company, a corporation

incorporated under the laws of the State of with ,
an authorized capital stock of $2,000,000, divided into

15,000 shares preferred and 5,000 shares common stock, all
of the par value of $100 per share.
Subscribers to Preferred Capital Stock $ 50,000.00

Preferred Capital Stock Subscriptions $ 50,000.00
To record subscriptions to 500 shares of
preferred stock.
Cash 50,000.00
Subscribers to Preferred Capital Stock. 50,000.00
To record payment of subscriptions.
Preferred Capital Stock Subscriptions 50,000.00

Preferred Capital Stock 50,000.00
To record issue of preferred capital stock.

Diamond Manufacturing Company . . . 200,000.00
Eureka Manufacturing Company 300,000.00
Champion Manufacturing Company . . 500,000.00
American Manufacturing Company . . . 600,000.00
Aetna Manufacturing Company 400,000.00
To record purchase of certain assets, per
contract of sale on file.
Diamond Manufacturing Company 200,000.00

Eureka Manufacturing Company 300,000.00
Champion Manufacturing Company 500,000.00
American Manufacturing Company 600,000.00
Aetna Manufacturing Company 400,000.00
Preferred Capital Stock 1,200,000.00
Common Capital Stock 400,000.00
Consolidated Mortgage Bonds 400,000.00
For settlement of purchase price as follows:
Preferred Stock, 60% $1,200,000.00
Common Stock, 20% .... 400,000.00
Bonds, 20% .... 400,000.00
100% .... $2,000,000.00
Comment on Problem 80
No entry can be made for materials and supplies
since no price has yet been determined upon.
The account with Plant and Sundry Assets will
remain upon the books until it is determined what
values shall be assigned to each property item taken
over. At that time an entry will be made debiting
each of the asset units taken over and crediting the
Plant and Sundry Asset account. The posting of this
entry will open the asset accounts upon the books.
(a) Method of Consolidation. In Volume IV, Chapter XXVI,

the methods of effecting consolidations are described.
(b) Opening Entry The opening entry for the
for Corporation.
corporation made in accordance with the procedure out-
is
lined in Volume I, Chapter XXXIII.

(c) Plant and Sundry Assets Account. The use of this account
is described in Volume I, Chapter XXXIII, § 8.
Problem 81
Smith Company and Jones Company being pressed

by their bankers and obliged to pay off their loans,
agree to consolidate. Their liabilities, capital, and
earnings are as follows:
Smith Co. Jones Co.

Common Stock $200,000.00 $100,000.00
Five Per Cent Bonds 100,000.00 Nil
Six Per Cent Loans 25,000.00 50,000.00
Surplus 30.000.00 Nil
$355,000.00 $150,000.00
Together $505,000.00
Earnings available for Interest and Dividends ... $ 22,500.00 $ 10,000.00
Together $ 32,500.00
Smith Company issue $100,000 additional common

stock and $100,000 additional bonds and buy up Jones
Company which will be liquidated. The total expenses
of liquidation and issue of new stock and bonds amount
to $10,000, and the cash balance will be increased by
$15,000. No increased profits are anticipated from
the consolidation but it is considered that the earnings
of $32,500 can be maintained. Owing to the condition
of Jones Company decided that its stockholders

it is
should receive $1,000 less income per annum.

(a) How much of the $100,000 of additional capital
stock of Smith Company should be issued to the stock-
holders of Jones Company, and how much is available
for stock dividend to Smith Company stockholders?
(b) Show the entries to record all the transactions
on the books of Smith Company.
The following interpretation has been placed upon

certain points in this problem:
First. The new bonds of the Smith Com-
issue of
pany is sold to bankers or to other parties, and the
proceeds used in paying off the loan accounts of both
companies, consuming $75,000 of the bond issue.
The expenses of liquidation and issue of new stock
and bonds amounting to $10,000 were also paid from
the proceeds of the issue, leaving a cash balance of
$15,000, to which the problem refers.
Second. It is assumed that the entire earnings re-
maining after payment of interest are to be distributed
in the form of dividends.
The interest charges under the old arrangement
amount to $6,500 for Smith Company and $3,000 for
Jones Company, or a total of $9,500.
As the old loans of both companies will be paid off,
there will be a cancellation of the interest charges on
the same, leaving a funded debt of $200,000 of 5%
bonds, carrying interest charge of $10,000. As it is
expected that the earnings of $32,500 will be main-

tained, this amount, less the $10,000 interest charge,
leaves $22,500 of earnings available for dividends,
which is equivalent to 73^% on a total capitalization
of $300,000.
Under the old arrangement, Jones Company with
earnings of $10,000, less an interest charge of $3,000,
had left available for dividends $7,000.
The problem states that Jones Company stock-
holders are to receive under the new arrangement
$1,000 less income per annum. This, we assume to
mean that there will be $1,000 less distributed to them
in the form of annual dividends than in prior years.
This would give them $6,000 in dividends instead of
$7,000 as under the old plan.
The $300,000 capitalization of the consolidated
company will all be in common stock, on which a
uniform rate of dividend will be declared. The only
way, therefore, by which a smaller share of the income
could be distributed to the old stockholders of Jones
Company would be to give them such an amount of
stock as would carry with it a dividend distribution
of $6,000.
As stated above, the earnings available for divi-
dends are equivalent to 7J^% on capitalization. If
the old Jones Company stockholders are to receive
$6,000 in dividends on a l}/2% basis, they would have
to be the holders of $80,000 worth of stock.
(a)
Therefore, $80,000 of the new stock should be issued

to Jones Company stockholders, leaving $20,000 to be
distributed to Smith Company stockholders in the form

of a stock dividend.
(b)
Sundry Assets $150,000.00

Jones Company, Vendors $150,000.00
To show the total assets acquired from the
Jones Company.
Jones Company, Vendors 50,000.00

Six Per Cent Loans 50,000.00
To show the liabilities of the Jones Company
assumed.

To show the issue of stock to Jones Company
to pay for the net assets of their business.

Surplus 20,000.00
To close into Surplus the profit accruing to Smith
Company.
Surplus 20,000.00
To show the distribution of a stock dividend to
stockholders of Smith Company to an
amount equal to the difference between
. $100,000 new issue and that issued to Jones
Company stockholders.
Cash 100,000.00
Five Per Cent Bonds 100,000.00
To show sale of $100,000 bonds for cash.
Six Per CentLoans 75,000.00

Cash 75,000.00
To show the liquidation of 6% loans.
Expenses 10,000.00
Cash 10,000.00
(a; Methods of Consolidation. In Volume IV, Chapter XXVI,

various methods of effecting consolidation of corporations,
including the method adopted in this problem, are described,
(b) Surplus Adjustments. The adjustments of surplus in this
solution are made in accordance with the principles out-
Problem 82
The X
Corporation is formed with a capital stock
of $500,000 (of which $200,000 is preferred and $300,000
is common stock) and consolidate three
to acquire
existing corporations designated as A, B, and C and
having the following status respectively:
Book
Liabilities Surplus Deficit Capital
Accounts
A $171,000.00 $ 56,000.00 $15,000.00 $100,000.00

B 165,000.00 80,000.00 $5,000.00 90 000 00
C 108,000.00 47,000.00 6,000.00 55,000.00
$444,000.00 $183,000.00 $21,000.00 $5,000.00 $245,000.00
The several vendor companies which are to be con-

solidated into one corporation contract with the pro-
moter to sell their assets as above stated and including
good-will, at the following prices respectively, viz.:
A $125,000, B $100,000, C $75,000, payable one-half
in cash and one-half in preferred stock to be issued

therefor by the new company, which is also to assume
all outstanding obligations.
The promoter or vendor contracts with the newly
organized corporation, or vendee company, to acquire
the several properties now belonging to A, B, and C
companies, respectively, subject to the liabilities as
stated, and to provide an additional working capital
of $100,000 cash, and payment therefor the
to take in
entire authorized capital stock of the new company,
out of which the subscribing incorporators and direc-
tors will acquire their individual stock by purchase
from the underwriters.
The common stock is underwritten by bankers at
80% with bonus of one share of preferred to each ten
shares of common stock. The bankers are also to take
an additional $10,000 of preferred stock at par, as part
of their agreement made with the promoter for the
financing of the corporation.
(a) Frame the opening entries and balance sheet of
the vendee company, showing the costs respectively of
assets, good- will, and organization expense on the as-
sumption that the terms of the several contracts are
known to all the parties concerned and form the basis
of the initial values established before entering into
the consolidation.
(b) Frame closing entries of A Company, showing
cancellation of stock and distribution of proceeds of
sale among stockholders.
(c) Show promoter's compensation or profit for
effecting the consolidation.
19
(a)
The X
Corporation incorporated under the laws of the
State of , with an authorized capital stock of
$500,000, divided into 2,000 shares preferred and 3,000

shares common stock, all of the par value of $100 each.
Cash $100,000.00
Organization Expense 100,000.00
Sundry Liabilities $183,000.00
Capital Stock, Preferred 200,000.00
The opening entry of this company, explained
as follows
—
Cash Working Capital supplied by
Promoter $100,000
Plant and Sundry Assets:

A Company $171,000
B Company 165,000
C Company 108,000 $444,000
Organization Expenses al-

lowed Promoter:
Underwriting —
20% of
$300,000 $ 60,000
300 shares Preferred Stock
at par 30,000
100 shares Preferred Stock
at par (compensation) . 10,000 $100,000
Good- Will — Excess Payments:

A Company $ 10,000
B Company 15,000
C Company 14,000 $ 39,000
Liabilities
A Company $ 56,000
B Company 80,000
C Company 47,000 $183,000
ILLUSTRATIVE PROBLEMS £91
THE X CORPORATION
OPENING BALANCE SHEET
As at
Cash $100,000.00 Sundry Liabilities .... $183,000.00

Plant and Sundry Assets 444,000.00 Capital Stock:
Good- Will 39,000.00 Preferred $200,000
Organization Expenses 100,000.00 Common 300,000 500,000.00
$683,000.00 $683,000.00
(b)
A COMPANY
CLOSING ENTRIES
Good- Will $ 10,000.00
Surplus $ 10,000.00
Excess over book value to be paid.

Promoter 125.000.00
Assets (including Good- Will) 181,000.00
To close book accounts and charge promoter
with their value.
Vendee Company Preferred Stock 62,500.00

Cash 62,500.00
Promoter 125,000.00
To record settlement made by promoter in ac-
cordance with agreement, one-half payment
to be in cash and one-half in preferred stock.
Surplus 25,000.00
Vendee Company Preferred Stock 62,500.00
Cash 62.500.00
To close all accounts and distribute Vendee
Company shares and surplus cash among
stockholders.
(c)
PROMOTER'S TRANSACTIONS
Plant and Sundry Assets (including Good- Will) . . . $483,000.00
Sundry Assumed Liabilities $183,000.00
A Company, Vendor 125,000.00
B Company, Vendor 100,000.00
C Company, Vendor 75,000.00
To record net assets bargained for and trans-
ferred to the promoter.
X Corporation, Vendee 300,000.00

Sundry Assumed Liabilities 183,000.00
Plant and Sundry Assets (including Good-
Will) 483,000.00
To record transfer by promoter to new com-
pany of net assets of A, B, and C Companies.
Capital Stock, Preferred — Vendee Company .... 200,000.00

Capital Stock, Common — Vendee Company .... 300,000.00
Promotion Profit and Loss 100,000.00
To record securing entire capital stock issue of
$500,000 from vendee corporation.
Cash 240,000.00
Promotion Profit and Loss 90,000.00
— Vendee Company
Capital Stock, Preferred 30,000.00
Capital Stock, Common — Vendee Company 300,000.00
To record sale to bankers of full common stock
issue at 80%, difference being cost of under-
writing; with additional bonus of one share
of preferred stock to each ten shares of com-
mon stock.
Cash 10,000.00
Capital Stock, Preferred — Vendee Company 10,000.00
To record shares taken by partners at par, per
agreement.

Cash 100,000.00
To record payment to vendee corporation of
$100,000 for cash working capital, per agree-
ment. Contract now fulfilled completely.
ILLUSTRATIVE PROBLEMS ^93
A Company, Vendor 125,000.00

B Company, Vendor 100,000.00
C Company, Vendor 75,000.00
Cash 150,000.00
Capital Stock, Preferred — Vendee Company 150,000.00
Torecord net purchase price paid to individual
vendor companies, half in cash and half in
preferred stock, in accordance with agreement.
PROMOTION PROFIT AND LOSS ACCOUNT

Bankers' Charges and Vendee Corporation's
Costs for Under- Allowance for Prelim-
writing Common inary Consolidation
Stock Issue $ 90,000.00 Costs $100,000.00
Balance 10,000.00
$100,000.00 $100,000.00
Balance $ 10,000.00
Comment on Problem 82
The balance of the Promotion Profit and Loss
($10,000) represented by 100 shares preferred capital
is
stock of the vendee corporation par value $100. —

(a) Method of Consolidation. The method of effecting the solu-

tion in this problem is one of those described in Volume
IV, Chapter XXVI.
(b) Good- Will. The theory underlying good- will and its valua-
tion is discussed in Volume IV, Chapter XIX.
Problem 83
The balance sheet of the ABC Company is as

follows
Assets
Current
Cash $ 25,000.00
Notes Receivable 1,000.00 $ 376,000.00
Work in Progress, at cost . . $ 500,000.00

Less — Advanced Payments 400,000.00
$ 100,000.00
Merchandise, Materials, and
Supplies 250,000.00 350,000.00
Investments:
Acme Company Bond $ 1,000.00
Stock in Other Companies. . 200,000.00 201,000.00 $ 927,000.00
Plant:
Real Estate, Main Plant . . . $1,000,000.00
—
Less Reserve for Depre-
ciation 50,000.00 $ 950,000.00
Real Estate, Branch $ 400,000.00

Less— Mortgage 50,000.00 350,000.00
Machinery and Equipment $1,000,000.00

Less —Reserve for Depre-
ciation 75,000.00 925,000.00 2,225,000.00
$3,152,000.00
Good- Will:
Good- Will Account $1,000,000.00
Patent Rights 600.000.00
Organization Expense 100,000.00 $1,700,000.00
Deferred Charges:
Unexpired Insurance $ 20,000.00
Prepaid Interest 5,000.00
Personal Advances 2,000.00 27,000.00
Accounts Receivable in Suspense 300,000.00 2.027,000.00
Deficit 3,016,000.00
$8,195,000.00
Liabilities
Current:
Accrued Wages 10,000.00
" Taxes 5,000.00
Commissions 10,000.00 $ 325,000.00
$1,125,000.00
Capital Stock:
Preferred $2,000,000.00
Common 5,000,000.00 7,000,000.00
Reserves
For Completion of Contracts 70,000.00
$8,195,000.00
A reorganization by a new company, the

is effected
XY Z Compan3% taking over the business. The new
company starts with the following bonded debt and
capitalization
First Mortgage 6% 20-year Bonds $1,000,000.00

7% Preferred Stock 2,000,000.00
Common Stock 1,250,000.00
$4,250,000.00
The stockholders of the old company agree to par-

ticipate in the reorganizationupon the following terms :
Ninety per cent of the preferred stockholders pay

$15 per share on their holdings, $100 par value, and
surrender their stock, and receive in exchange $15 first
mortgage 6% bonds, and equal shares preferred stock
of the new company, $100 par value, and also receive
$7 per share in lieu of accrued dividends.
Ten per cent of the preferred stockholders do not
pay the $15 per share, but surrender their stock in
exchange for preferred stock of the new company to an

amount equal to 80% of their holdings and $7 per share
in lieu of accrued dividends, computed upon 80% of
their holdings.
Common stockholders surrender their stock and pay
$5 per share on the whole outstanding common stock
of the old company, par value $100, and receive in
exchange $20 in first mortgage bonds of the new com-
pany and 1 share common stock of the new company,
par value $100, for each 4 shares so surrendered.

The balance of the bonds were used at par to pay
debts of the old company, one-half each on notes
payable and accounts payable, and $300,000 of notes
payable are paid in cash. Accrued profit on work in
progress is estimated at $100,000.
Draft balance sheet of the Y Z Company after X
conclusion of reorganization.
X Y Z COMPANY
BALANCE SHEET
Assets
Current
Cash $ 107,800.00
Notes Receivable 1,000.00 $ 458,800.00
Work in Progress, at cost . . $ 500,000.00

Estimated Profit Accrued . . 100,000.00
$ 600,000.00
'
Solution by Hazen P. Philbrick, C. P. A.
Less — Advanced Payments

on Account 400,000.00
Estimated Equity in Un-

finished Contracts $ 200,000.00
Merchandise, Materials, and
Supplies 250,000.00 450.000.00
Investments:
Acme Company Bonds .... $ 1,000.00
Stock in Other Companies . 200,000.00 201,000.00 $1,109,800.00
Plant:
Real Estate, Main Plant . . . $1,000,000.00
Less —
Reserve for Depre-
ciation 50,000.00 $ 950,000.00
Real Estate Branch $ 400,000.00

Less— Mortgage 50,000.00 350,000.00
Machinery and Equipment $1,000,000.00

Less — Reserve for Depre-
ciation 75,000.00 925,000.00 2,225,000.00
$3,334,800.00
Good- Will:
Good- Will Account '
$1,000,000.00
Patent Rights 600,000.00
Organization Expense 137,200.00 $1,737,200.00
Deferred Charges:
Unexpired Insurance $ 20,000.00
Prepaid Interest 5,000.00
Personal Advances 2,000.00 27,000.00
Accounts Receivable in Suspense 300,000.00 2,064,200.00
$5,399,000.00

Current:
Accrued Wages 10,000.00
Accrued Taxes 5,000.00
Accrued Commissions 10,000.00 $ 85,000.00
Notes Payable 260,000.00 $ 345,000.00

Funded:
First Mortgage Bonds 1.000,000.00
Total Liabilities $1,345,000.00
Capital Stock:
Preferred Authorized $2,000,000.00
Less— Unissued 40,000.00 $1,960,000.00
Common, Authorized and Issued 1,250,000.00
Total Capital Stock Issued $3,210,000.00

Reserve for Completion of Contracts 70,000.00
Reserve for Working Capital 774,000.00 4,054,000.00
$5,399,000.00
A new formed; therefore, the books

corporation is
of the old corporation would be closed, and books

opened for the new corporation. The requirement of
the problem is to secure a balance sheet of the new
corporation. Since this may be secured by making a
few adjustments of the old balance sheet, it seems
unnecessary to do more than this, even though theo-
retically the individual steps should be carried out.
The passage from the balance sheet of the old company
to that of the new one may be carried out by setting
up their auxiliary accounts as follows:
REORGANIZATION ADJUSTMENT
Deficit Account (old company) $3,016,000.00
Reorganization Expense (old company) 100,000.00
Reduction in Common Stock $3,750,000.00
Preferred Stock Surrendered, not reissued,
(20% of 10% of $2,000,000) 40,000.00
Estimated Profit Accrued on Work in
Progress 100,000.00
Balance considered a Reserve for Working
Capital 774,000.00
$3,890,000.00 $3,890,000.00
REORGANIZATION CASH
Received from Preferred Stockholders ($15 per
share on 18,000 shares) $ 270,000.00
Received from Common Stockholders ($5 per
share on 50,000 shares) 250,000.00
Paid on Notes Payable $ 300,000.00
Reorganization Expense (new company) 137,200.00
$7 per share on 18,000 shares $126,000.00
. .
$7 per share on 80% of 2,000

shares 11,200.00
Balance, added to cash balance of old company 82,800.00
$ 520,000.00 $ 520,000.00
MORTGAGE BONDS
Sold for cash to Preferred Stockholders $ 270,000.00
Sold for cash to Common Stockholders 250,000.00
Applied at par on Notes Payable 240,000.00
Applied at par on Accounts Payable 240,000.00
Total Bonds Issued $1,000,000.00
Good-Will account is not closed out. Though its
value may be problematical, it may as well be taken
over with the rest of the assets at book value. On the
other hand, it would not be proper for the new company
to carry as an asset the expense of organization of a
defunct company hence, the account is charged off.
;
The estimated profit accrued on contracts in prog-

ress is an earning of the old company; profit on new
work on such contracts is an earning of the new company.
The cash paid to the preferred stockholders "in
lieu of accrued dividends" must not be called dividends;
it is a bonus to induce the stockholders to assent to
—
the reorganization an organization expense.
In actual cases the balance of such a reorganization
adjustment has often been called surplus of the new

company; but it has not been earned, nor contributed,
and is not properly available for dividends. Under
these circumstances, it is preferable to set aside this
balance as a reserve for working capital, that it may
not be confused with actual earnings in the future.

(a) Method of Consolidation. In Volume IV, Chapter XXVI,
are described various methods of consolidation including
the one utilized in this problem.
(b) Good- Will. For a discussion of the theory of good-will, see
Volume IV, Chapter XIX, § 2.
(c) Deferred Credits. The deferring of the profit on the con-
tracts in this problem is in accordance with the principles
laid down in Volume IV, Chapter IV, § 4.
(d) Reserve for Working Capital. The nature of working capital
IS described in Volume I, Chapter XI, § 14. The use of
reserve accounts is discussed in Volume IV, Chapter VIII.
(e) Profits of Subsidiary Prior to Consolidation. See Volume
IV, Chapter XXVIII, § 4, for a discussion of the usual
disposition of profits earned by subsidiary companies
prior to consolidation.
Problem 84
A is an operating company and B is a holding com-
pany. The following statements are taken from the
books of the respective companies, viz.:
A COMPANY
Assets
Cash on Hand $35,000.00
Book Accounts Receivable . 25,000.00
Stock Inventory 21,000.00 $ 81,000.00
Prepaid Accounts 7,000.00

SinkingFund Trustee 15,000.00
Premiums on Sinking Fund Bonds 700.00
B Company Advances 45,000.00
Investments, B Company Stock 25,000.00
Other Investments 5,000.00
Plant, Franchises, etc 1,400,000.00
$1,578,700.00
Liabilities
Book Accounts Payable $ 12,000.00

Wages 8,000.00
BillsPayable 50,000.00
Accrued Accounts 12,000.00 $ 82,000.00
Reserve Accounts 65,000.00

Bonds 750,000.00
Surplus 181,700.00
$1,578,700.00
B COMPANY
Assets
Cash on Hand .'

$ 14,000.00
Accounts Receivable 6,000.00 $ 20,000.00
Investments:
A Company's Stock $500,000.00
Other Investments 500,000.00 1,000,000.00

Deficit 22,000.00
$2,292,000.00
Liabilities
Book Accounts Payable $ 7,000.00

BillsPayable 130,000.00
Accrued Accounts 10,000.00 $ 147,000.00
Due A Company 45,000.00
Bonds Issued 1,100,000.00
Capital Stock Issued 1,000,000.00
$2,292,000.00
Prepare a consolidated balance sheet.

(Pennsylvania C. P. A. Examination.)
WORKING SHEET
Eliminations Consolidated
A B and Balance
Company Company Additions Sheet
Assets
Cash $ 35,000.00 $ 14,000.00 $ 49,000 00
25,000.00 6,000.00 31,000 00
21,000.00 21.000 00
7,000.00 7.000 00
15,000.00 15,000.00
Premium on Sinking Fund Bonds. 700.00 700.00
45,000.00 $ 45,000.00
25.000.00 25,000.00
500,000.00 500,000.00
5,000.00 600,000.00 505,000.00
1,400,000.00 1,250,000.00 2,650.000.00
$3,278,700.00
Liabilities
$ 12.000.00 $ 7,000.00 $ 19,000.00
Bills Payable 50,000.00 130.000.00 180,000.00
8,000.00 8,000.00
12,000.00 10,000.00 22,000.00
65,000.00 65.000.00
Bonds 750.000.00 1.100,000.00 1.850,000.00
45,000.«0 $ 45,000.00
Capital Stock 500.000.00 1.000,000.00 525.000.00 975,000.00
181.700.00
Deficit 22,000.00 159.700.00
$3,278,700.00
Comments on Problem 84-
The stock of each company held by the other is

ehminated from the assets and from the combined
capital stock; the assets received by each company in
exchange for this stock appearing elsewhere in the bal-
ance sheet; and only the capital stock accomitability
to outside investors being taken into account because
the intercompany holdings of stock do not represent
such accountability of the consolidation.
The advances made by A Company to B Company
are, of course, offset by the amount due A Company
which appears among the liabilities of B Company.
A AND B COMPANIES
CONSOLIDATED BALANCE SHEET
Assets
Cash $ 49.000.00
Stock Inventory 21,000.00
Fund Trustee
Sinking 15,000.00
Premium on Sinking Fund Bonds 700.00
Prepaid Accounts 7,000.00
$3,278,700.00

Miscellaneous Accruals 22,000.00
Bonds 1,850,000.00
Reserves 65,000.00
Surplus 159,700.00
$3,278,700.00
Points Illustrated in Problem 81^,
(a) Consolidated Balance Sheet. The consolidated balance sheet

prepared as shown in Volume IV, Chapter XXVIII.
is
(b) Sinking Fund Reserve. In this problem there is a sinking

fund without a corresponding reserve. For a discussion of
funds and reserves, see Volume IV, Chapters VIII and XL
(c) Premium on Sinking Fund Bonds. This item illustrates the
deferring of debits where they are to be distributed or
prorated over a number of fiscal periods. (See Volume
IV, Chapter II.)
Problem 85
Fromthe following three trial balances prepare a
consolidated balance sheet as at December 31, 1912, in
the form you would draw it up for presentation to the
stockholders of the parent company (the Safety Razor
Company), showing as separate items therein, (a) the
total good-will of the combined companies; and (b) the
net profits accruing to the new corporation, viz.: to
the Safety Razor Company.
SAFETY RAZOR COMPANY

TRIAL BALANCE
At December 31, 1912
Preferred Stock $1,500,000.00
Common Stock 1,500,000.00
Investments in Subsidiary Companies:
4,000 shares of Stock of L W Company and
4,000 shares of Stock of Steel Blade Com-
pany, both of $100 each at cost $2,500,000.00
Dividends from Subsidiary Companies 100,000.00
Administration Expenses 25,000.00
L W Company Current Account 100.000.00
Steel Blade Company Advances 150,000.00

Cash 270.000.00
Organization Expenses 75,000.00
$3,120,000.00 $3,120,000.00
L W COMPANY
TRIAL BALANCE
Properties and Plant $ 325,000.00

Good- Will 250,000.00
Investment in Steel Blade Company: 2,000
shares of par value of $100 each, cost $300,000 400,000.00
Receivables 195,000.00
Cash 90,000.00
Capital Stock (4,000 shares) $ 400,000.00
Steel Blade Company 175,000.00
Surplus (includes $100,000 added to Book Value
of Investment in Steel Blade Company) .... 710,000.00
Safety Razor Company 100,000.00
$1,510,000.00 $1,510,000.00
STEEL BLADE COMPANY

TRIAL BALANCE
Good- Will $ 50,000.00

Property and Plant 325,000.00
Receivables, General 105,000.00
L W Company 195,000.00
Cash 10,000.00
Capital Stock (6,000 shares) $600,000.00
Accounts Payable : . . . 90,000.00
Surplus or Deficit 35,000.00
$875,000.00 $875,000.00
30
In the preparation of your consolidated balance

sheet be guided by the following assumed facts:
That the Safety Razor Company was formed on
1.
March 28, 1912, and acquired its stock ownership in

the two subsidiary companies, as shown in its trial
balance, on April 1, 1912.
2. That at January 1, 1912, the L W
Company had
a surplus of $605,000 and the Steel Blade Company a
deficit of $50,000.
3. That no inventory was taken of either the L W

Company or the Steel Blade Company between January
1 and December 31, 1912, the business of the companies
being continued without interruption notwithstanding
the change in ownership of the capital stock as indicated
above.
4. That prior to December 31, 1912, the L W Com-
pany declared a dividend of $100,000 payable to the
parent company, which was duly taken up on the books
of both companies, being passed through the current
accounts and charged against the surplus of the L W
Company prior to December 31, 1912.
5. That the difference in the current accounts be-
tween the Steel Blade Company and L W
Company
represents, as to $10,000, merchandise in transit, and
as to the remaining $10,000, a charge for rental of ware-
house for the last six months of 1912, which has been
credited to the Rent account on the books of the Steel
Blade Company.
6. That estimated on reliable authority which
it is
may be accepted as final, that from January 1 to March

31, 1912, the net profits of the L W
Company amounted
to $30,000, while during the same period the Steel

Blade Company lost $15,000.
Attach your consolidating working papers to the
consolidated balance sheet you prepare.
(Illinois C. P. A. Examination.)
KEY TO DIVISION OF TRIAL BALANCE

As Shown on Working Sheet
L W Company — Surplus:
Surplus at January 1, 1912 $ 605,000.00
Profits for three months from January 1 to March 31, 1912 30,000.00
Surplus from writing up of Steel Blade Company Stock
between March 31 and December 31, 1912 100,000.00
Profits for nine months from March 31 to December 31, 1912 75,000.00
$ 810,000.00
Less — Dividend declared 100,000.00
Credit per Trial Balance $ 710,000.00
Intercompany Stock Held by L Company: W

Steel Blade Company Stock at par $ 200,000.00
—
Premium Paid at time of purchase $100,000.00
—
Premium Written up on books between
March 31 and December 31 100,000.00 200,000.00
Per Trial Balance $ 400,000.00
Steel Blade Company — Surplus:

Deficit at January 1, 1912 $ 50,000.00
Deficit for three months from January 1 to March 31, 1912 15,000.00
$ 65,000.00
Profits for nine months from March 31 to December 31, 1912 100,000.00
Credit per Trial Balance $ 35,000.00
Intercompany Stock Held by Safety Razor Company:

L W Company Stock at par $400,000.00
Steel Blade Company Stock at par ..-. 400,000.00 $ 800,000.00
Premium 1,700.000.00
Per Trial Balance $2,500,000.00
Solution by A. E. Andersen, C. P. A.
SAFETY RAZ
CONSOLIDATED
L W Company
(After Posting Adjustment
No. 1)
Assets Liabilities
Intercompany Balances:
L W Company
$ 175,000.00
Steel Blade Company.
(1) 20.000.00
Intercompany Stockholdings, par value:
L W Company 400,000.00
Steel Blade Company $200,000.00
Intercompany Holdings, premium over par:
L W
Company and Steel Blade Company
Steel Blade Company Cost — 100,000.00
Steel Blade Company Written up — 100,000.00
Good-Will 250,000.00
Surplus:
Balance at January 1, 1912 605,000.00
ProfitJanuary 1 to March 31, 1912 30,000.00
Surplus — Writing up Steel Blade Stock 100,000.00
Profits April 1 to December 31, 1912 (1) 10.000.00 75,000.00
Dividends declared April 1 to December 31, 1912. 100,000.00
Dividends received April 1 to December 31, 1912.
(1) 10,000.00
Inventories
250,000.00
Cash 90,000.00
Accounts Receivable. . . 195,000.00
Property Equipment. . . 325,000.00
Organization Expense. .
Administration Expense.
Capital Stock, Preferred.
Capital Stock, Common.
$1,630,000.00 $1,630,000.00
Note: To save space the adjustments Nos. 1 and 2 have been included in the same columns as the
OR COMPANY
WORKING PAPERS
S.\FETY Razor Company
Consolidated Balance
Steel Bl.u)e Comp.vxy (After Posting Adjustment
Sheet
1
No. 2)
Assets Liabilities Assets Liabilities Assets Liabilities
1 $195,000.00 $ 100,000.00
/ 150,000.00
it
1 : ....}
<t $150,000.00
4 400,000.00 \
K 600.000.00 400,000.00 /
A 1,700.000.00
7
8
9 50,000.00
$1,530,000.00
10 50,000.00
11 15,000.00
^9
IS 100.000.00 (2) 40,000.00 $ 125,000.00
"1
14
15 $ 100.000.00/
r
16
\ 190,000.00 450,000.00
17 10,000.00 270.000.00 370,000 00
18 105,000.00 300,000.00
''9 325,000.00 650,000.00
W 90.000.00 20,000.00 235,000.00
f1 75,000.00 (2) 15,000.00 60,000.00
99 25,000.00 (2) 25,000.00
r^ 1,500,000.00 1,500,000.00
94 1,500,000.00 1,500,000.00
$940,000.00 $940,000.00 $3,160,000.00 $3,160,000.00 $3,360,000.00 $3,360,000.00
trial balance figures, but the items have been kept separate and marked with the numberof theadjustment.
ADJUSTMENTS
Profit and Loss, Mar. 31 to Dec. 31, 1912 (Rent) $ 10,000.00
Inventory (Merchandise in transit) 10,000.00
Steel Blade Company $ 20,000.00
To adjust Steel Blade Co. current account.
and Loss, March 31 to December 31, 1912
Profit 40,000.00
Organization Expense 15,000.00
Administration Expense 25,000.00
To write off administration and a portion of
organization expenses, balance of latter car-
ried forward as deferred charge.
SAFETY RAZOR COMPANY, L W COMPANY, AND STEEL

BLADE COMPANY
December 31, 1912
Assets and Deferred Charges

Capital Assets:
Good- Will $1,530,000.00
Properties and Plant 650,000.00 $2,180,000.00
Current Assets:
Inventories $ 450,000.00
Receivables 300,000.00
Cash 370,000.00 1,120,000.00
Deferred Charges to Income:
Organization Expenses $ 75,000.00
Deduct— Amount (K) written off 15,000.00 60,000.00
$3,360,000.00
Liabilities
Capital Stock Issued and Outstanding:
Preferred Stock $1,500,000.00
Common Stock 1,500,000.00 $3,000,000.00
Surplus:
Net Income from March 28 to December 31, 1912 125,000.00
$3,360,000.00
The chief points in the problem are as follows

1. The accumulated surplus and deficit at March
31, 1912, in the case of the LW and Steel Blade Com-

panies have been applied, as the case may be, in reduc-
tion of or in addition to the good-will item in the con-
solidated balance sheet. This treatment is generally
accepted as correct. Many accountants, however, hold
that any surplus or deficit appearing on the books of
the subsidiaries at the date of purchase of the capital
stock by the holding or parent company, should be car-
ried forward as such in the consolidated balance sheet.
2. The surplus of $100,000 arising from the revalua-
tion of the investment of the L W Company in the

capital stock of the Steel Blade Company could have
been properly carried to a Capital Surplus account in
the consolidated balance sheet or shown separately
under Surplus. It is more conservative to treat the
item as a reduction of the value of good-will.
3. One-fifth of the organization expenses of $75,000
was written off in submitting the solution to this prob-

lem. However, one-third might have been charged off
or the entire amount might have been carried forward.
4. The entire amount of $25,000 incurred as admin-
istration expenses was written off. Scarcely any good

reason can be advanced for carrying this item forward.
5. The "merchandise in transit" item of $10,000 was
added to the value of the inventories. It is assumed

that it had not been included in the inventory of the L
W Company, otherwise the debit adjustment would be
against that company's Profit and Loss.
(a) Consolidated Balance Sheet. The theory of the consolidated

balance sheet and the methods of preparing one are
described in Volume IV, Chapter XXVIII.
(b) Good-Will. See Volume IV, Chapter XIX, for a discussion
of good- will.
(c) Deferred Charge. This problem illustrates the writing off of
deferred charges such as organization expenses. (See
Volume IV, Chapter II, § 5.)
Problem 86
On January 1, 1913, the A B Company owned 90%
of the stock of the X Y Company and 80% of that of
the P Q Company, two subsidiary companies which it
thus controlled, and in fact, actually directed the policy

and general administration, the minority holdings in
each case being in the hands of the officers and em-
ployees of the subsidiary company or of other interests
friendly to the A B Company. On June 30, 1913, the
holdings in the X Y Company were reduced to 80% by
the sale of 100 shares at $200 per share, to certain em-
ployees not theretofore stockholders, while in the case
of the P Q Company, owing to the resignation of an
officer, his holdings, consisting of 100 shares, were pur-
chased at par, the holdings by the A B Company being
thus increased to 90%, so that on December 31, 1913,
the proportion of holdings in the two companies was
just reversed.
The following are the trial balances of all three
companies (after closing) at December 31, 1913:
TRIAL BALANCES
Particulars A B Company XY Company P Q Company
$ 85.000.00 $ 75,000.00
Good-Wll $100,000.00
Stockholdings:
In X y Company :
800 shares (book

ni5.ooo.oo
In P Q Company:
82,000.00
132,000.00 135,000.00 90,000.00
Capital Stock:
A B Company,
3,000 shares .... $300,000.00
X Y Company,
1 ,000 shares . . . $100,000.00
P Q Company,
1,000 shares .... $100,000.00
125,000.00 30,000.00 10,000.00
Surplus at January 1 50,000.00 60,000.00 10,000.00
1913 Profits t44,000.00 45,000.00 35.000.00
Dividends Paid in
December, 1913 30,000.00 40,000.00 25.000.00

60,000.00 25,000.00 35,000.00
$519,000.00 8519,000.00 $260,000.00 $260,000.00 $190,000.00 $190,000.00
•After crediting the proceeds of the 100 shares sold, prior to which the investment had been valued
at cost.
fDividends received from subsidiary companies, less expenses of parent company.
Prepare consolidated balance sheet, showing:

1. The liability to the minority stockholders in
respect to their equity.
2. The proportion of surplus and profits apper-
taining to the stockholders of the A B
Company.
3. The good-will of the combined companies.
Assume that the profits earned by the X Y Company
and P Q Company, respectively, to June 30, 1913,
were exactly 50% of the profits for the complete year.
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O
A B COMPANY AND SUBSIDIARIES
December 31, 1913
Assets
Capital Assets:
Properties $160,000.00
Current Assets 357,000.00
$590,250.00
Liabilities
Capital Stock of A B Company:

3,000 shares (par value $100) $300,000.00
Minority Stockholders' Interest in Subsidiary Companies:

Capital Stock (par value) $ 30,000.00
Surplus 15,000.00 45,000.00
Surplus:
Balance at January 1, 1913 $ 50,000.00
Add — Net Profits for year ending December 31,
1913 60,250.00
$110,250.00
Deduct— Dividends Paid 30,000.00 80,250.00
$590,250.00
r Comments on Problem 86
1. been assumed that the dividends paid by

It has
the A B Company in December, 1913, were declared
after June 30, 1913.
2. The cost of the holding company's 900 shares in
the P Q Company is made up as follows

Shares Per Share Amount

Balance at January 1, 1913 800 $ 90.00 $72,000.00
Purchase at June 30, 191, 'i 100 100.00 10,000.00
Bahince at December 31. l!)i;! 900 $82,000.00
3. The net profits of the P Q Company pertaining

to the holding company (assuming the profits earned
to June 30, 1913, were exactly 50% of the profits for
the year) are made up as follows:
80% of $17,500 (profits, January 1 to June 30) $14,000.00

90% of $17,500 (profits, July 1 to December 31) 15,750.00
Total for year $29,750.00
4. The cost of the holding company's 800 shares in

the XY Company is made up as follows:
Shares Per Share Amount

Balance, December 1913 (per books)
31, 800 $115,000.00
Addback— Sale of 100 shares June 30, 1913 .. . 100 $200.00 20,000.00
Cost at January 1, 1913 (per books) 900 $150.00 $135,000.00

—
Add Accrued profits on 900 shares from
January 1. 1913, to June 30, 1913 22.50 20,250.00
900 $172.50 $155,250.00

Deduct— 100 shares sold at June 30, 1913, at
cost (per books) 100 172.50 17,250.00
Adjusted book balance at June 30, 1913 800 $172.50 $138,000.00
Amount received for 100 shares $ 20,000.00

Cost thereof (per books) 17,250.00
Profit realized on sales $ 2,750.00

5. The net profits of the X Y Company pertaining

to the holding company (assuming the profits earned
to June 30, 1913, were exactly 50% of the profits for
the year) are made up as follows:
90% of $22,500 (profits, January 1 to June 30) $20,250.00

80% of $22,500 (profits, July 1 to December 31) 18,000.00
Total for year $38,250.00
6. The "good-will" of the subsidiary companies in

the consolidation was determined in the following
manner
Cost of holdings in X Y Company (800 shares at $150) $120,000.00
Deduct:
Par value of 800 shares at date of purchase,
January 1, 1913 $80,000.00
Surplus of X Y Company at date of purchase,
January 1, 1913 48,000.00 128,000.00
Intangible value termed Good- Will $ 8,000.00
Cost of original holdings in P Q Company (800 shares at $90) . $ 72,000.00

Deduct:
Par value of shares at date of purchase, January
1, 1913 $80,000.00
Surplus of P Q Company at date of purchase, Jan-
uary 1, 1913 8,000.00 88,000.00
Intangible value termed Good- Will $ 16,000.00
Cost of additional holdings in P Q Company (100 shares at $100) $ 10,000.00

Deduct:
Par value of shares at date of purchase, June 30,
1913 $10,000.00
Surplus of P Q Company at date of purchase,
June 30, 1913 (see note below) 2,750.00 12,750.00
Intangible value termed Good-WiU $ 2,750.00

Note: The surplus of the P Q Company at June 30, 1913, is made up as

follows
Surplus at January 1, 1913 ($10,000) $ 1,000.00
Profits from January 1, 1913, to June 30, 1913 ($17,500) 1,750.00
Surplus at June 30, 1913 ($27,500) $ 2,750.00
(a) Consolidated Balance Sheet. The consolidated balance

sheet in this case is prepared in accordance with Volume
IV, Chapter XXVIII.
(b) Dividends as Liabilities. The time when a dividend becomes
a liability and the proper method of recording dividends
are described in Volume IV, Chapters V and VI.
(c) Good-Will. See Volume IV, Chapter XIX, for a discussion
of good-will.
(d) Surplus. The nature of surplus and the methods of adjusting
that account are described in Volume IV, Chapter VII.
Problem 87
A
"blank" firm is engaged in the lumber business
owning timber lands in fee and licensed, saw mills, and
other equipment, and 90% of the stock in another lum-
ber corporation. They instruct an accountant to ex-
amine their accounts for the purpose of ascertaining the
true financial position. The following is a trial balance
from the firm's books December 31, 1914, after closing:
Dr. Cr.
Cash $ 20,000.00
Logs and Manufactured Lumber 200,000.00
Advances on Account of Season's Logging Dr. Cr.
Operations 100,000.00
Investments in Controlled Company, 900
shares (cost) 99,000.00
Timber Lands (cost) 500,000.00
Mill Plants and Equipment (cost) 250,000.00
Loans Payable $ 150,000 dC
Deposits on Orders 50,000.00
Mortgage on Plants 150,000.00
Controlled Company Current Account 20,000.00
Partners' Capital 739,000.00
$1,339,000.00 $1,339,000.00
The controlled company's trial balance December

31, 1914, was:
Cash $ 5,000.00
Timber Lands 50,000.00
Mills 100,000.00
BillsPayable $100,000.00
Blank Firm 30,000.00
Capital 100,000.00
Surplus 15,000.00
$265,000.00 $265,000.00
The following matters disclosed by the accountant's

examination were not included in the accounts prior to
closing December 31, 1914. The appraised value of
the timber lands of the firm, consisting of 200 square
miles, is $3,000 per square mile, and those of the con-
trolled company, 20 square miles, at the same price per
square mile, and the owners wish these taken up in
the accounts. There are unpaid license fees on the
timber lands of the firm due in 1920, of $8 per square
mile, which must be paid to retain the privilege of

cutting the timber under the stumpage agreement.
$50,000 of the bills payable of the controlled company
were indorsed by the firm, and the latter also discounted
customers' notes amounting to $25,000. The difference
in the intercompany accounts consisted of a charge by
the firm to advances on logging operations instead of
to the controlled company.
There were prepaid taxes
in the controlled company of $2,000. The stock on
hand of logs and lumber was pledged as security for
loans of $100,000.
Prepare
(a) Adjusting entries for above.

(b) Corrected trial balances.
(c) Consolidated balance sheet.
(d) Write a brief report covering the examination
and balance sheet.
(a) Adjusting entries:

On books of the firm:
Timber Lands $100,000.00

Partners' Capital $100,000.00
To bring the book value of the timber lands
owned by the firm into agreement with the
appraised value of $3,000 per square mile.

Accrued License Fees 1,600.00
21
The amount of based on the assumption

this entry is
that the given figure of $8 per square mile represents
the accruals to date of a uniformly increasing liability,
and that it applies to all the timber land belonging to
this firm, amounting to 200 square miles. We are not
told how long the agreement has been running, nor the
annual rate, nor just when it is to be paid; nor is any
explanation given as to why the payment of the license
fees of $8 per square mile under the stumpage agreement
should be deferred until 1920. Because of these omis-
sions it is impossible to compute the amount of the pay-
ment to be made in 1920. On the other hand, if we
interpret the question to mean that the amount due in
1920 will be $8 per square mile, we are with- left entirely
out means of computing the accruals to date. In an

actual case, the accountant would carefully examine the
agreement, and all uncertainties would disappear.
Controlled Company, Current Account $ 10,000.00

Advances on Logging Operations $ 10,000.00
Amount charged the latter account in
error.
On the books of the controlled company:
Timber Lands $ 10.000.00

Surplus $ 10,000.00
To bring the book value of the timber lands
owned by the company into agreement
with the appraised value of $3,000 per
square mile.
Prepaid Taxes 2,000.00

Surplus 2,000.00
To correct error in not taking account of
the prepaid taxes at the closing of the
books.
(b) Adjusted trial balances as of December 31,

1914:
Books of the firm:
Cash $ 20,000.00
Advances on Logging Operations 90,000.00
Investment in Controlled Company (900
shares), at cost 99,000.00
Timber Lands, appraised value 600,000.00
Mill Plants and Equipment, at cost 250,000.00
Controlled Company, Current Account 30,000.00
Loans Payable $ 150,000.00
Deposits on Orders 50,000.00
Reserve for License Fees 1,600.00
$1,439,000.00 $1,439,000.00
Books of the controlled company:

Cash $ 5,000.00
Timber Lands 60,000.00
Mills 100,000.00
Bills Payable $100,000.00
Blank Firm 30,000.00
Capital Stock (1,000 shares) 100,000.00
Surplus 27,000.00
$277,000.00 $277,000.00
After these trial balances have been adjusted as

shown above, the next step is the preparation of the
shown below:
consolidated balance sheet
(c) Consolidated balance sheet December 31, 1914:

BLANK FIRM AND CONTROLLED COMPANY
Assets
Cash , $ 25,000.00
Advances on Logging Operations 90,000.00
Timber Lands, at appraised value ($3,000 per
square mile) 660,000.00 $1,235,000.00
Mill Plants and Equipment, at cost, disregarding depreciation 350,000.00

Total Assets $1,587,000.00

Loans Payable $250,000.00
Deposits on Orders 50,000.00 $ 570,000.00

Accrued License Fees 1,600.00
Total Liabilities $ 721,600.00
Nine-tenths of Capital and Surplus of Con-

trolled Company, being actual value of part-
ners' investment therein $114,300.00
Less — Book Value Partners' Investment therein 99,000.00
Adjustment to be added to Book Value of

Partners' Capital $ 15,300.00
Book Value of Partners' Capital 837,400.00
Net Investment of Partners $852,700.00

One-tenth of Capital and Surplus of Controlled
Company, being actual value of the invest-
ment of minority stockholders therein 12,700.00
Total Net Worth 865,400.00
$1,587,000.00
Notes: Contingent liability under customers' notes discounted, $25,000.

Loans payable of $100,000 secured by pledge of the stock of logs and lumber.
(d) Report:
October 15, 1915
Blank Firm,
Dear Sirs :
At your request, I have made an examination of the accounts of your firm

and of the Controlled Company, for the purpose of ascertaining the true finan-
cial condition thereof as of December 31, 1914, and I present herewith a con-
solidated balance sheet showing such financial condition (Exhibit C).
All the liabilities shown in this balance sheet have been verified by me,
and I have been unable to discover any further liabilities. The cash and
accounts receivable have also been verified by me, and in my opinion sufficient
provision has been made for doubtful accounts.
The inventories of logs and lumber were taken and figured by the employees
of the respective concerns, and I am informed that these inventories are valued
at cost.
The book value of timber lands has been brought into agreement with the
value shown by the appraisal of Messrs. Doe and Roe as of said date of Decem-
ber 31, 1914.
The plant and equipment is shown at actual cost, no improper charges
having been made to the accounts, and depreciation having been disregarded.
In preparing this balance sheet I have taken into account accrued license
fees and prepaid taxes which did not appear on the books.
Certain contingent liabilities and secured claims will be found noted below
the balance sheet.
Very truly yours,
(Signed) John Bbown, C.P.A.
There are several matters in the course of this solu-
tion upon which differences of opinion may arise
The adjustment to bring book value of timber lands
up to the appraised value might have been credited to
a special account of some sort, in each set of books, but
in the author's opinion nothing is thereby gained. If
the lands of the firm are really worth $600,000, the real
present net worth of the firm (which is all that partners'
capital stands for) is $839,000, and no useful purpose
is served by having this figure divided between two
accounts. Similarly in the corporation, if the value of

the land is understated, the net worth is also under-
stated, which means that surplus is understated, since

net worth is merely capital stock plus surplus, and capi-
tal stock is fixed. If it be argued that a dividend could
not be paid out of a surplus so created, the reply is
that a dividend is never 'paid out of surplus, but is
declared out of surplus, and may be declared out of any
surplus that is actual and not fictitious, however it
may have been created, such course being legal although
sometimes not good policy.
The lack of definiteness in the data regarding the
license fee is, of course, to be deplored in an examination
question. If this were a fee applying to some particular
tract of timber land, which had to be paid before any
timber could be cut from that tract, the full amount
would be a deduction from the value of the tract. But
it appears to be due at a specified date, and to apply
to all the land of the firm. Under these circumstances,

the most natural assumption is that this is a steadily
accruing charge for the period of the agreement; thus,
the accrual to date is shown as a deferred liability.
Mention might perhaps be made of the indorsement
by the firm of $50,000 of the company's paper. But
this amount is already included in the liabilities on
the consolidated balance sheet, and to mention it again
might be misleading, since the indorsement of course
does not double the liability of the consolidation.
The error of $10,000 might be mentioned in the re-
port, but nobody is benefited by advertising a simple
technical error.
It is, of course, unusual for land to appear among
the current assets. But timber land is the raw material

account of these concerns; its value is changing almost
daily as the timber is cut and transferred to logs ac-
count; and it could be sold, as standing timber, at any-
time, without interfering with the current operations;
it has all the characteristics of a current asset.
The computation of the actual investment of the

partners is clearly set forth on the balance sheet itself.
It might be simpler to make an entry on the books of
the firm to reduce the investment in the company to
the yar value of the stock owned, and then credit the
partners, in the consolidated balance sheet, with nine-
tenths of the company's surplus. It is true that the
result would be the same, in the consolidation; but
there is no reason for the entry on the firm's books. The
only logical entry on those books would be an increase
in the book investment from cost $99,000, to actual
present value $114,300.
(a) Consolidated Balance Sheet. See Volume IV, Chapter

XXVIII, for a description of consolidated balance sheets
and the methods of preparing them.
(b) Secret Reserves. The arguments for and against secret
reserves and the ways in which they are usually created
are discussed in Volume IV, Chapter VIII, § 5.
(c) Current Assets. See Volume I, Chapter VI, § 10, for a
description of the items which are usually classified as
current assets.
(d) Notes Receivable Discounted. The procedure which should
be followed upon the discounting of notes receivable in
order to record the contingent liability thereon, is outlined
in Volume I, Chapter XXVII, § 9.
Problem 88
The Peerless Storage Warehouse Company has its
treasurer's oflSce in Boston, and warehouse in a nearby-
town. The treasurer's books at June 30, 1914, show
the following:
Warehouse Property $50,000.00

Cash 98.05
Prepaid Interest 81.99
Accrued Interest on Investments 1,584.00
Due from Warehouse 643.80
Mortgage Bonds 42,500.00
Accrued Interest on Bonds 850.00
Reserve for Depreciation 497.24
Surplus 2,364.24
A separate set of books at the warehouse show the

following accounts and balances at June 30, 1914:
Cash $311.05
Accounts Payable 10.52
Due to Treasurer 843.80
The had received $200 in payment of ac-

treasurer
counts receivable at June 30, 1914, which was credited
on the treasurer's books to the account with the ware-
house but was not taken up on the warehouse books
until June 30.
The Y Company is incorporated on March 31, 1914,
with $100,000 capital stock, and acquires control of the
Peerless Storage Warehouse Company by capital stock
ownership. It issues on May 15, 1914, $50,000 par
value, first mortgage 5% bonds; purchases 500 shares
of the Peerless Storage Warehouse Company stock
(par $100) at 101 owns land costing $65,000; purchases

;
$20,000 (par value) first mortgage 4% bonds, due 1920,

at 983^; has cash on hand $24,000, and a credit balance
in the Profit and Loss account of $9,150. The taxes
assessed on the land as of May 1, 1914, for the following
year were $1,200, and there was interest accrued on
the bonds issued from May 15, 1914, to June 30, 1914.
Adjust the warehouse company books, bringing
(a)
the inter-office account wîth the treasurer in agreement.
(b) Prepare a consolidated balance sheet of the
three sets of books at June 30, 1914, and show therein
the net amount of capital stock of each company in
the hands of the public.
(a) Entry on books at warehouse:
Due Account
to Treasurer $200.00
Accounts Receivable $200.00
Cash collected by treasurer from on June 30.
(b) The desired consolidated balance sheet appears

in the last column of the following working sheet. The
surplus of the Y Company
obtained by deductingis
from the profit and loss balance of $9,150, two months'

accrued taxes and one and one-half months' accrued
bond interest. In fact, Massachusetts taxes are assessed
as of April 1, so that we should have three months'
accrued taxes on June 30 and we ought also to take into
;
account accrued taxes on the warehouse property and

accrued interest receivable on the $20,000 of first mort-

gage 4% bonds owned by the Y Company. However,
we are not expected to read into the statement of the
problem, errors or additions, unless such a course is
absolutely unavoidable.
WORKING SHEET
Peerless Storage
Warehouse Co. Elimina-
Y tions of
Total
Company Inter-
Treasurer's Warehouse Relations
Books Books
Assets
Cash $ 98.05 $311.05 $ 24,000.00 $ 24.409.10
Accounts Receivable 343.27 343 27
Investments 48,803.64 19,650.00 68,453.64
Warehouse Property 50,000.00 50,000.00
Land 65,000.00 65 000 00
Prepaid Interest 81.99 81 99
Accrued Interest Receivable 1,584.00 1,584.00
Due from Warehouse 643.80 $ 643.80
Peerless Storage Warehouse Com-
pany Stock, at par 50,000.00 50,000.00
Premium paid for Peerless Storage
Warehouse Company Stock 500.00 500.00
$101,211.48 $654.32 $159,150.00 $50,643.80 $210,372.00
Liabilities
Accounts Payable $ 10.52 $ 10 52
Accrued Bond Interest $ 850.00 $ 312.50 1 162 50
Accrued Taxes 200.00 200 00
Mortgage Bonds 42,500.00 50,000.00 92,500.00
Capital Stock 55,000.00 100,000.00 $50,000.00 105,000.00
Reserve for Depreciation 497.24 497.24
Surplus 2,364.24 8,637.50 11,001.74
Due to Treasurer 643.80 643.80
$101,211.48 $654.32 $159,150.00 $50,643.80 $210,372.00
The $500 premium paid by the Y Company on

purchase of the other company's stock might be either
deducted from the consolidated surplus or shown by
itself among the assets as a good-will item. The latter

treatment would appear preferable, however, in a case
where not all the stock of the subsidiary company is
owned by the holding company.
(a) Consolidated Balance Sheet. See Volume IV, Chapter
XXVIII, for a discussion of consolidated balance sheets
and the methods of preparing them.
(b) Accrued Liabilities. The accrued
liabilities in this case are
recorded in accordance with the principles outlined in
(c) Good- Will. See Volume IV, Chapter XIX, for a discussion
of good-will.
Problem 89
A cloak manufacturing concern, turning out but one
grade of cloaks, claims to have been robbed on the
night of April 16 and forthwith files a claim under a
burglary insurance policy it was carrying.
The proof of the loss filed by the assured contained
two items, viz.: 300 cloaks valued at $12,000 and 1,000
yards of silk stated to be worth $1,500.
The insurance company being notified of the loss,
immediately ordered an inventory to be taken, which
was done on the morning of the 17th, and disclosed the
following
1,250 cloaks
6,250 yards of cloth —
_^
2,500 yards of silk

On the same day you were called in by the insurance
company to examine the books for the purpose of prov-
ing or disproving the claim, when the following infor-

mation was obtained:
1. That a complete inventory had been taken on
January 1, 1913, of the cloaks, cloth, and silk
on hand at that date, the inventory sheets of
which had subsequently been lost or de-
stroyed. However, the books showed that the
total valuation was $32,675 and the firm's
representatives assured you that this was
correct and that the inventory had been
properly valued at cost prices which had not
fluctuated since.
2. That the cloth and silk purchases subsequent
to January, 1913, had amounted to 18,750

yards of cloth and 5,000 yards of silk at av-
erage prices of 50 cents and $1 per yard of
each fabric respectively.
3. That 3,000 cloaks had been manufactured dur-
ing the same period, which had consumed
20,000 yards of cloth and 5,000 yards of silk,
while 4,500 cloaks had been sold.
You were further informed that the manufacturing
cost was as follows:
Material $5.00 per garment
Labor and other expenses 3.50 " "
Total $8.50 "
Give the gist of your report to your client; and state

what, if any, different case you could have made out
for the firm had you been employed by it instead of by
the insurance company.
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CLOAK MANUFACTURING COMPANY
STATEMENT OF BURGLARY LOSS
Night of April 16, 1913
Inventory (per books), January 1, 1913 $32,675.00
Purchases since:
Cloth, 18,750 yards at $.50 $ 9,375.00
Silk, 5,000 yards at $1 5,000.00
Labor and Other Expenses:

3,000 cloaks at $3.50 10,500.00 24,875.00
$57,550.00
4,500 cloaks at $8.50 38,250.00
Inventory at April 16, 1913 $19,300.00
Inventory on Hand, April 17, 1913:

1,250 cloaks at $8.50 $10,625.00
6,250 yards cloth at $.50 3,125.00
2,500 yards silk at $1 2,500.00 16,250.00
Difference —representing loss by burglary $ 3,050.00
Loss as reported by insured

300 cloaks at cost ($8.50) $ 2,550.09
1,000 yards of silk at cost ($1) 1,000.00 3,550.00
Discrepancy $ 500.00
The insured is entitled to recover the cost value of

the goods stolen, not their estimated market value,
unless some other
basis of recovery is stipulated in the
policy. used as a basis, the first adjustment
If cost is
to be made is in the value of the goods reported to have
been stolen. The excessive claim in this respect is
$9,950, which is made up as follows:
Cloaks:
As per proof of loss (300 at $40) $12,000.00
At cost (300 at $8.50) 2,550.00
Claim not allowable $ 9,450.00
Silk:
1,000 yards at $1.50 $ 1,500.00

1,000 yards at $1.00 1,000.00
Claim not allowable $ 500.00
In addition to the foregoing $9,950, there is a dis-

crepancy in the inventories of $500. If the books of
account are correct, this discrepancy may be in the
inventory on hand January 1, 1913, or in the goods
stolen. As the former quantities were not preserved,
and as the latter quantities are the subject in dispute,
it is impossible to state definitely wherein the discrep-
ancy lies.
If the report is being made on behalf of the manu-

facturing concern, it would be advisable to ascertain
the probable cost of replacing the stocks. If this re-
placement cost be larger than the original cost of the
stolen goods, a claim for the higher values should be
filed by the company.
(a) Estimate of Inventory. The only point in this problem

which requires comment is the estimating of the inventory.
For an explanation of the method usually employed in
estimating inventories between times of stock-taking, see
Volume I, Chapter XVIII, § 8, and Volume IV, Chapter
XX, § 7.
SS6 ILLUSTRATIVE PROBLEMS
Problem 90
The treasurer of the United Manufacturing Com-

pany submitted the following figures, taken from the
ledger of the company, as representing the condition of
the business, December 31, 1915:
Cash $ 7,500.00
Inventory:
Raw Materials $20,000.00
Labor 30,000.00
Manufactured Goods 16,250.00 66,250.00

Surplus, December 31, 1915 14,750.00
$120,625.00 $120,625.00
A comparison of the above statement with a former

one showed a net loss, for the period, of $6,250. The
directors had expected a basing their expecta-
profit,
tions on the result obtained by applying their cost cal-
culations to the volume of sales for the period, and they
employed an accountant to investigate the matter. All
the nominal accounts had been closed into either the
Merchandise account or the Profit and Loss account,
and an analysis of these accounts disclosed the
following
Inventory at beginning of period

Raw Material $ 22,500.00
Labor 32,500.00
Manufactured Goods 55,000.00
Purchases during period 50,000.00
Labor 87,500.00
Wages 10,000.00
Traveling Expenses, Commission, etc 26,250.00
Salaries 19,000.00
Rent 3,750.00
Bad debts 6,375.00
Depreciation 1,500.00
Interest 625.00
Sales 250,000.00
Return Sales 7,500.00
The consumption of material and labor shown by

the cost records was:
Material $45,000.00
Labor 80,000.00
Prepare a statement showing any discrepancy that

may exist in the above figures; also a statement of in-
come and profit and loss, and a statement of assets and
liabilities December 31, 1915.
UNITED MANUFACTURING COMPANY

TRIAL BALANCE (BEFORE CLOSING)
December 31, 1915
Cash $ 7,500.00
Inventory, beginning:
Labor 32,500.00
Manufactured Goods 55,000.00
Labor 87,500.00
Wages 10,000.00
Traveling Expense, Commission, etc 26,250.00
32
Salaries 19,000.00
Rent 3,750.00
Bad Debts 6,375.00
Depreciation 1,500.00
Interest 625.00
Sales $250,000.00
Return Sales 7,500.00
Surplus, January 1, 1915 21,000.00
$376,875.00 $376,875.00
STATEMENT SHOWING DIFFERENCE IN INVENTORY

December 31, 1915
Raw Manufactured
Total Material Labor Goods
Inventory at beginning . . $110,000.00 $22,500.00 $ 32,500.00 $55,000.00
—
Add Purchases and
Labor 137,500.00 50,000.00 87,500.00
$247,500.00 $72,500.00 $120,000.00 $55,000.00
Deduct — C onsumption
per Cost Records 163,750.00 45,000.00 80,000.00 (38,750.00)
Inventory, December 31,

1915 $ 83,750.00 $27,500.00 $ 40,000.00 $16,250.00
Inventory, per Treasurer's
Statement 66,250.00 20,000.00 30,000.00 16,250.00
Difference in Inventory,
December 31, 1915 ... $ 17,500.00 $ 7,500.00 $ 10,000.00
Net Loss for period, per Treasurer's Statement $ 6,250.00

Adjustment, for Increase in Inventory, as shown above 17,500.00
Net Profit for period, per Statement of Income and Profit and
Loss $11,250.00

STATEMENT OF INCOME AND PROFIT AND LOSS
For Period Ended December 31, 1915
Sales $250,000.00
Less Return Sales 7,500.00
Net Sales $242,500.00
Cost of Sales:
Material
Inventory, beginning $ 22,500.00
$ 72,500.00
Less — Inventory, end, per state-
ment 27,500.00 $ 45,000.00
Labor:
Labor during period 87,500.00
$120,000.00
Less — Inventory, end, per state-
ment 40,000.00 80,000.00
Manufactured Goods:
Inventory, end 16,250.00
Add — Decrease in Inventory 38,750.00
Cost of Sales 163,750.00
Expenses:
Wages $ 10,000.00
Traveling Expense, Commissions, etc 26,250.00
Salaries 19.000.00
Rent 3,750.00 .
Interest 625.00
Bad Debts 6,375.00
Depreciation 1,500.00 67,500.00
Net Profit for period $ 11,250.00

Surplus, January 1, 1915 21,000.00
Surplus, December 31, 1915 $ 32,250.00

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1915
Assets
Cash $ 7,500.00
Inventory (per Statement)
Raw Material $27,500.00
Labor 40,000.00
Manufactured Goods 16,250.00 83,750.00
$138,125.00

Notes Payable 20.000.00
Capital Stock 80.000.00
Surplus, December 31. 1915, (per Statement of Income and
Profit and Loss) 32,250.00
$138,125.00
(a) Detection of Errors by Executives. This problem illustrates

the preparation of statements for the guidance of execu-
tives in their approval of financial statements. A dis-
crepancy evidently exists in the figures submitted and a
statement accounting for it is required. See Volume IV,
Chapter XXX, for a general discussion of the ways in
which an executive can test the correctness of a statement.
(b) Tie-up Between Statements. This case illustrates the relat-
ing of the balance sheet and the profit and loss statement
in order that they may be tied up or definitely connected.
(See Volume IV, Chapter XXI, § 13.)
(c) Testing Inventory. This problem illustrates one method of
testing the amount of the inventory. (See Volume I,
Chapter XVIII, § 8.)

(d) Profit and Loss Statement. The statement of income and

profit and loss in this problem illustrates the form described
in Volume I, Chapter IX.
Problem 91
The books and accounts of the Brown Mercantile

Company for the year ending December 31, 1920, dis-
close the following facts which may be assumed to have
been verified and to be correct:
Net Sales 800,000.00
Inventory, December 31, 1920 300,000.00
General Administrative Expenses 70,000.00
Invested Capital 500,000.00
The following items are to be computed in the

solution of this problem:
(a) Rate of gross profit on cost of sales.

(b) Rate of gross profit on sales.
(c) Per cent of sales represented by selling
expenses.
(d) Per cent of sales represented by general admin-
istrative expenses.
(e) Per cent of sales represented by net profit.
(f) Rate of net profit on invested capital.
(g) Number of times stock has been turned.

Year Ending December 31, 1920
Sales $800,000.00
Cost of Goods Sold:

Net Purchases 700,000.00 $900,000.00
Inventory, December 31, 1920 300,000.00 600,000.00
Operating Expenses:
General Administrative Expenses 70,000.00 120,000.00
Net Profit $ 80.000.00
(a) $200,000 -h $600,000 = 33.33%, rate of gross profit on cost

of sales.
(b) $200,000 -H $800,000 = 25%, rate of gross profit on sales.
(c) $ 50,000 H- $800,000 = 6.25%, rate which selling expenses
bear to sales.
(d) $ 70,000 -^ $800,000 = 8.75%, rate which general admin-
istrative expenses bear to sales.
(e) $ 80,000 4- $800,000 = 10%, rate which net profit bears
to sales.
(f) $ 80,000 -h $500,000 = 16%, rate of net profit on invested
capital.
(g) Cost of goods sold during year, $600,000. Average stock

carried during year (found by averaging the inventories
at beginning and end of year), $250,000.
$600,000 -^ $250,000 = 2.4, the number of times the stock
was turned during the year.
(a) Detection of Errors by Executive. This problem illustrates

the preparation of percentages which can be used by execu-
lives to test the correctness of figures submitted by the

bookkeeping or accounting department. (See Volume IV,
Chapter XXX.)
(b) Percentage of Gross Profit. In this problem the gross profit
is related to cost of goods sold and to sales. For a dis-
cussion of which method is commonly used and for a
statement of the reasons for and against each method,
see Volume IV, Chapter XXX, § 5.
(c) General Percentages. As mentioned in Volume IV, Chapter
XXX, § 9, percentages of various kinds are useful for
executive supervision. The ones most frequently calcu-
lated are illustrated in this problem.
(d) Turnover. The nature and the method of calcu-
of turnover
lating it are described in Volume IV, Chapter XXX, § 8.
Problem 92
In taking off a trial balance a bookkeeper finds that

his debit footing exceeds the credit by $131.56, and as
he is unable to locate the error he carries it to a Sus-
pense account. Later he discovers that a debit item
of $679 had been posted to the Machinery account as
$697; that an error of $100 had been made in footing
the sales column in the sales journal, giving a total of
$100 too small posted to the Sales account; that an
item of $12 discount allowed to a customer had been
posted to the wrong side of the Merchandise Discount
account; that $100 withdrawn by the proprietor had
been posted to the Wages account; that a credit item of
$1.50 had not been posted from the journal.
Make adjusting entries to correct the above errors
and state whether the books are now in balance.
Suspense $ 18.00
Machinery $ 18.00
Suspense 100.00
Sales 100.00
Merchandise Discount 24.00

Suspense 24.00
Proprietor 100.00
Wages 100.00
Suspense 1.50
Credit Account 1.50
Suspense Account
$ 18.00 To balance $131.56

100.00 24.00
1.50
To balance 36.06
$155.56 $155.56
There are therefore mistakes not yet discovered

amounting to $36.06.
(a) Detection of Errors by Bookkeeping Department. This

problem illustrates the complexities which result from trial
For a discussion of the work to be
balance differences.
done under such conditions, see Volume IV, Chapter
XXXI.
(b) Correction of Errors. A complete and orderly procedure
for the correction of errors is described in Volume IV,
Chapter XXXIII.
Problem 93
The a firm of traders, doing business in
office of
San Francisco, was destroyed by an earthquake. The
books of account, which had been fully posted and
which may be presumed to be correct, were badly dam-
aged. The following ledger accounts were found to be
legible: purchases, net, $69,000; discounts lost $640;
discounts gained $3,450; sales $54,000; bills receivable
$33,000.
Inquiry at the bank disclosed a balance on deposit
of $129,000. Bills receivable amounting to $45,000
had been discounted at the bank. An audit of the
checks paid by the bank showed that $99,000 had
been paid to creditors of the firm (including $60,000
notes payable).
A balance sheet prepared at the last closing of the
books was produced, containing the following items:
cash $60,000; accounts receivable $126,000; loans re-
ceivable $24,000; real estate $90,000; notes receivable
$78,000; capital $318,000; notes payable $60,000.
Prepare a trial balance supplying the missing
accounts and giving full particulars for each of
them.
Cash
Balance $ 60,000.00 Notes Payable . . . ... $ 60,000.00
Notes R e c e i V a ble Creditors 39,000.00
Discounted .... 45,000.00 Balance 129,000.00
Customers 123,000.00
$228,000.00
$228,000.00
Balance $129,000.00
Customers
Balance $126,000.00 Discounts Lost $ 640.00
Sales . . 54,000.00 Cash 123,000.00
Balance 56,360.00
$180,000.00 $180,000.00
Balance $ 56,360.00
Creditors
Discounts Gained . . . . . $ 3,450.00 Purchases $69,000.00

Cash 39,000.00
Balance 26,550.00
$69,000.00 $69,000.00
Balance $26,550.00
Notes Receivable
Balance $78,000.00 Cash, Notes Receivable
Discounted $45,000.00
Balance 33,000.00
$78,000.00 $78,000.00
Balance $33,000.00
Notes Payable
Cash $60,000.00 Balance $60,000.00
Trial Balance
Cash 129,000.00
Notes Receivable . . 33,000.00
Loans Receivable . . . 24,000.00
Accounts Payable . . $ 26,550.00
Capital 318,000.00
Sales 54,000.00
Purchases 69,000.00
ILLUSTRATIVE PROBLEMS S47
Discounts Gained 3,450.00

Discounts Lost 640.00
$402,000.00 $402,000.00
(a) Correction of Errors. See Volume IV, Chapter XXXIII,

for a discussion of the method by which errors can most
be corrected.
satisfactorily
(b) Notes Receivable Discounted. The method of recording the
contingent liability in such cases is described in Volume
I, Chapter XXVII, § 9.
(c) Cash Discounts. See Volume I, Chapter XXV, for a dis-

cussion of the nature of cash discounts and the methods
of recording them.
Problem 94
From the data contained in the following schedules,

make a calculation of the cost of a woolen fabric:
Schedule 1
COST OF YARN USED

The fabric has 50 yards to a piece, or cut as it is
called. There are 1,640 threads of yarn running length-

wise in the warp; that is, the fabric has 1,640 ends.
The filling, or threads running crossways of the fabric,
has 22 threads, or picks, to the inch.
The warp yarn in one piece weighs 66 lbs. and the
filling yarn 59 lbs. The size of yarn used is known as
234-run and it is made from a mixture of wool, No. 441.
The cost of this yarn is $.41 per lb. Of a wool mix

100 lbs. will produce only 76.46 lbs. of warp. It is
therefore necessary to divide the price of the 100 lbs.,

or $41, by the yield, 76.46, in order to obtain the price
per lb. including the yield. This new price multiplied
by the pounds of warp gives the cost of warp yarn
used. The cost of filling yarn is arrived at in a similar
manner.
During the process of weaving there is yarn waste
estimated at 5%. This is an expense which must be
added to the cost of warp and filling yarn as above
determined in order to arrive at the total cost of yarn.
Schedule 2
LABOR AND EXPENSE

The warp yarn must be wound on spools
Spooling.
before the warp can be prepared. Spooling is paid for
at piece-work rates. The rate is $.2223 per 1,000 yards
of 40 ends. The warp has 50 yards of 1,640 ends.
1,640 X 50
=
X .2223 $.46
40 X 1,000
When the fabric comes off from the loom, it measures

45 yards instead of 50, due to **take up" in weaving.
The spooling department expense per woven yard is
$.00271.
45 X .00271 = $.12
Dressing. After the warp yarn has been spooled,

it has to be wound from the spools onto the loom beam,
which process is called dressing. It costs $.27 per piece
to do this.
Drawing-In. The warp ends next have to be drawn

in through the eyes in the loom harnesses which actuate
the warp so that the shuttle carrying the filling can
pass over and under the proper threads, thereby weav-
ing the fabric. Drawing-in is paid for at piece-work
rates, the rate being $.605 per 1,000 ends. The expense
labor of the drawing-in operation for inspectors, etc.,
is $.00141 per woven yard.
Weaving. The principal operation is that of weav-
ing. This paid for at piece-work rates. The rate
is
for a 22-pick fabric is $.1021 per woven yard. Day-

workers, such as loom fixers, have to be provided for
in the cost calculation by adding $.03375 per woven
yard.
Burling. Next the woven fabrics have to be in-
spected and any knots made by the weavers pulled
through. This costs $.00973 per woven yard.
Sewing. Wrong threads have to be sewed in, the
sewing operation costing $.01301 per woven yard.
In the weaving department, there are power, floor
space, fixed charges, and supervision still to be con-
sidered. These are estimated to cost 73% of the piece-
work weaving department labor.
Wet and Dry Finishing. The last operation is that
of finishing the woolen goods. During the process the
fabric shrinks, due to the fulling qualities of wool.
The average length of a piece, finished, is 38.7 yards.
The average cost per yard for finishing process is
$.1680.
The total cost of the piece is $89.25, and the total
cost per yard is $2.30 based on 38.7 yards to the
piece.
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(a) Textile Costs. For a discussion of textile costs, see Volume

III,Chapters XXVII, XXVIII, and XXIX. A compre-
hensive discussion of the method of accounting in a large
textile mill is presented.
(b) Cost of a Woven Fabric. In Volume III, Chapter XXVIII,
§ 1, the elements entering into a cost calculation are
clearly shown in the Cloth in Process —Weaving account.
(c) Cost of a Job. See Volume III, Chapters III-V, for a dis-
cussion of the method of arriving at the cost of a single
job. Often in textile mills where fabrics are woven from
yarn, it is the practice to control production by means of
orders issued by the superintendent of weaving. In this
case the cost of each job is calculated.
Problem 95*
From the data contained in the following schedules,

make a distribution of operating expense to the various
kinds of silk shipped during the period, and calculate
the amount of operating expense per pound of silk
produced in a silk-throwing mill.
The superintendent of the mill states that the time
required to throw a bale of raw silk into 28/30 Japan
single tram, canton tram on cops, organzine, crepe on
bobbins, and crepe on cops, is in the proportion of 1,
6, 8, 18, and 20 respectively. These numbers are there-
fore to be used for weighing the shipments when dis-
tributing operating expense.
'There will be found slight discrepancies in the figures given in this problem, doe to the rounding
decimab.
off of
Schedule 1
POUNDS OF SILK SHIPPED DURING PERIOD

Tram, Canton on Cops 1,114 lbs.
Tram, 28/30 Japan 546 " 1,660 lbs.
Organzine 1,472 "
Crepe on Bobbins 3,508 "

Crepe on Cops 6,591 " 10,099 "
13,231 "
Schedule 2
OPERATING EXPENSE FOR PERIOD
Wages
Superintendent $ 325.00
Assistant Superintendent 200.62
Foremen 564.12
General Help 1,865.44
Depreciation on Buildings 405.67
Depreciation on Machinery and Equipment 2,502.75
Depreciation on Auto 38.84
Repairs 912.29
Material and Supplies 300.32 $7,115.05
Power, Light, and Heat:

—
Wages Engineer and Fireman $ 93.50
Electricity 1,186.92
Water 41.85
Fuel 260.49 1,582.76
Total $8,697.81
All that is required in the solution of this problem

is the preparation of a tabulated statement showing
the operating expense per pound for each kind of silk.
The sources of the figures in the following statement
can readily be identified in the schedules given in the
problem.
SILK-THROWING MILL
OPERATING EXPENSE PER POUND OF SILK SHIPPED
Operating
Multi- Operating
Ship- Weights Product Expense
plier Expense
ments per Pound
(1) (2) (1X2) (3) (4) (4-^1)
Tram, 28 /30 Japan Single 546 lbs. 1 546 lbs. $.04064967 $ 22.19 $.040650
Tram, Canton on Cops. . . 1,114 " 6 6,684 •'
271.70 .243896
1,472 " 8 11,776 " 478.69 .325197
Crepe on Bobbins 3,508 " 18 63,144 " 2,566.78 .731693
Crepe on Cops 6,591 " 20 131,820 " 5,358.45 .812994
" "
Total 13,231 213,970 $8,697.81
(•?8,697.81 -7- 213,970 = $.04064967)
(a) Textile Costs. For a discussion of textile costs, see Volume

III, Chapters XXVII-XXIX.
(b) Apportionment of Expense. For basis of apportioning ex-
pense as between products, see Volume III, Chapter XXII.
(c) Job Order vs. Process Costs. See Volume III, Chapter VII,
§ 14, for a comparison of job order and process methods.
Problem 96*
From
the data contained in the following schedules,
prepare a statement showing the cost per pound for
winding tram, organzine, and crepe in the winding
department of a silk-throwing mill.
•There will be found slight discrepancies in the figures given in this problem, due to the rounding off
of dedmals.
Schedule 1
INVENTORY OF WORK IN PROCESS

At Beginning of Period
Tram $ 40.73 127 lbs.

Organzine 107.61 200 "
Crepe 320.94 3,293 "
Total $409.28 3,620 "
Schedule 2
DETAILED ANALYSIS OF LABOR AND EXPENSE
FOR PERIOD
Labor
Tram:
Japan $ 118.89
Canton 182.88
28/30 Japan Single 15.74
Organzine 41.07
Crepe •.
. 712.06
General
Rubbing 11.97
Handing Out Silk 47.61
Soft Silk 48.75
Expense:
Repairs 184.29
Total $1,363.26
Schedule 3
PRODUCTION FOR PERIOD
Tram 1,660 lbs.
Organzine 1,272 "
Crepe 10,099 "
Total 13,031 "

SILK-THROWING MILL
UNIT COSTS— WINDING DEPARTMENT
Organ- Sub- Grand

Tram Crepe General
zine Total Total
f $118.89 $ 41.07 $ 712.06 $ 184.29

J 182.88 107.61 320.94 11.97
Labor and Expense
1 16.74 47.61
[ 40.73 48.75
Total Cost $ 358.24 $ 148.68 $1,033.00 $1,539.92 $ 292.62 $1,832.54
23.27% 9.65% 67.08% 100.00%

$ 68.09 $ 28.24 $ 196.29
Total, including Pro Rata of Gen-
$ 426.33 $ 176.92 $1,229.29 $1,832.64
1,787 1,472 13,392
Cost per Pound for Winding $ .238573 $ .120190 $ .091793
(Production plus work in process at beginning of period.)
(a) Expense in Process Plants. For a discussion of the method

of handling expense in a process department, see Volume
III, Chapter XXI, § 8.
(b) Process Costs. See Volume III', Chapter IV, for a discussion
of the general method of process cost-finding.
(c) Cost of a Unit of the Product. See Volume III, Chapter
IV, § 4, for method of finding cost of a unit of the product.
Problem 97*
From
the data contained in the following schedules,
prepare a statement showing the cost per pound for
•There will be found slight discrepancies in the figures given in this problem, due to the rounding
off of decimals.
spinning tram, organzine, and crepe in the spinning

department of a silk- thro wing mill.
Schedule 1
INVENTORY OF WORK IN PROCESS

At Beginning of Period
Tram $ 10.83 127 lbs.

Organzine 130.76 200 "
Crepe 671.11 1,558 "
Total $812.70 1,885 "
Schedule 2
DETAILED ANALYSIS OF LABOR AND EXPENSE

FOR PERIOD
Labor:
Tram:
Japan $ 214.10
Canton 323.41
Organzine 211.75
Crepe 2,454.13
General
Bobbin Boy 319.50
End Counter 57.23
Expense:
Repairs 1,818.28
Total $5,398.40
Schedule 3
PRODUCTION FOR PERIOD
Tram 1,660 lbs.
Organzine 1,272 "
Crepe 10,099 "
Total 13,031 "

SILK-THROWING MILL
UNIT COSTS— SPINNING DEPARTMENT
Organ- Sub- Grand
Tram Crepe General
zine Total Total
[$214.10 $ 211 75 $2,454.13 $1,818.28

Labor and Expense ] 323.41 130.76 671.11 319.50
[ 10.83 57.23
Total Cost $ 548.34 $ 342.51 $3,125.24 $4,016.09 $2,195.01 $6,211.10
Percentage of Distribution 13.65% 8 53% 77.82% 100.00%

General Expense Distribution $ 299.62 $ 187.23 $1,708.16 $2,195.01
Total including Pro Rata of General
$ 847.96 $ 529.74 $4,833.40 $6,211.10
1,787 1,472 11,657
Cost per Pound for Spinning $ .474516 $ .359878 $ .414634
(Production plus work in process at beginning of period)
Problem 98*
From the data contained in the following schedule
and the cost accounts taken from the books in a silk-
throwing mill, prepare a statement showing the cost of
each product for the period and also an analysis of sales.
Schedule 1
SALES FOR PERIOD

28/30 Japan Single Tram 546 lbs. $ 87.36
Canton Tram on Cops 1,114 " 830.15
Organzine 1,472 " 1,525.31
Crepe on Bobbins 3,508 " 8,602.60
Crepe on Cops 6,591 " 17,357.11
Total 13,231 " $28,402.53
•There will be found slight discrepancies in the figures given in this problem, due to the rounding
off of decimals.
'358 ILLUSTRATIVE PROBLEMS
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SILK-THROWING MILL
DETAILED ANALYSIS OF COSTS FOR PERIOD
28/30 JAPAN SINGLE TRAM
Operation Pounds Cost Amount
Soaking . . 546 .083234 $ 45.45

Winding. . . .238572 130.26
Spinning . . .474515 259.09
Reeling . . . .058999 32.22
Shipping . . .052148 28.47
Operating . .040645 22.19
Office .001410 .77
General . . .005183 2.83
Total 546 $.954706 $521.28
CANTON TRAM ON COPS
Soaking. . . . 1,114 $.083234 92.72

Winding . . . .238572 265.77
Spinning . . .474515 528.61
Copping . . . .137127 152.76
Shipping . . .052148 58.09
Operating . . .243895 271.70
Office .008449 9.41
General . . .031108 34.66
Total 1,114 $1.269048 $1,413.72

ORGANZINE
Soaking . . . 1,472 083234 $ 122.52

Winding . . , 120190 176.92
Spinning . . 359877 529.74
Reeling .... 058999 86.84
Shipping . . 052148 76.76
Operating . 325196 478.69
Office 011263 16.58
General . . . 041479 61.06
Total 1,472 $1.052386 ,549.11
CREPE ON BOBBINS
Soaking . . . 3,508 $ .083234 $ 291.99

Winding . . . .091793 322.01
Doubling . . .098168 344.38
Spinning . . .414635 1,454.54
Shipping . . .052148 182.94
Operating . .731693 2.566.78
Office .025348 88.91
General . . .093327 327.39
Total 3,508 $1.590346 $5,578.94
(See analysis of crepe on cops costs, page 367.)
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Soaking . . . 6.591 .083234 548.60

Winding . . .091793 605.01
Doubling . .098168 647.02
Spinning . . .414635 2.732.85
Copping . . , .137127 903.81
Shipping . . .052148 343.71
Operating . .812994 5.358.45
Office .028164 185.63
General . . .103698 683.47
Total 6.591 $1.821961 $12,008.55
(Grand Total Cost of Sales, $21,071.60)
(a) Process Costs. For a discussion of the entries in a depart-

ment process account, see Volume III, Chapter VII, § § 9
and 10.
Problem 99
The Department of Street-Cleaning operates a
stable where the horses are cared for, a mechanical
department where the mechanics are located who make
the necessary repairs to the buildings and equipment,
and a storehouse from which articles used in the va-
rious divisions of the department are issued. The city
is divided into street-cleaning districts in charge of
superintendents, and the districts are subdivided into
sections in charge of foremen. After the streets have
S68 ILLUSTRATIVE PROBLEMS
been cleaned in each district and section, it is necessary

for the Department to cart the rubbish away and
dispose of it.
From the data given in the following schedules,

prepare a statement showing: (1) the total cost of
operating the Street-Cleaning Department; (2) the
cost of sweeping and cleaning per square yard; (3)
carting and stable per cubic yard; (4) the cost of
final disposition per cubic yard; and (5) cost of snow
removal per cubic yard.
Schedule 1
OPENING INVENTORY
Initial Cost
Land $500,000.00
Buildings 750,000.00
Equipment 600,000.00
Stores 100,000.00
Repair Jobs in Process 25,000.00
It is estimated that the land, buildings, and equip-

ment belonging to the Department of Street-Cleaning
are used in the following proportions for the different
activities
Land Buildings Equipment

General Administration 5% 5% 5%
Repair Division 10 10 10
Sweeping and Cleaning 15 10 30
Carting and Stable 45 55 40
Final Disposition 20 15 10
Snow Removal 5 5 5
100% 100% 100%

Schedule 2
FIXED CHARGES
It is estimated that the depreciation
on buildings amounts to
3% and on equipment to 10% a year. The loss to the city by
reason of exemption of land and buildings from taxation amounts
to $1.84 per $100. Interest amounts to 4% on the initial cost.
Schedule 3
PURCHASES
The purchases for the year were as follows:
General Administration $ 25,000.00
Repair Division 10,000.00
Sweeping and Cleaning 50,000.00
Carting and Stable 40,000.00
Final Disposition 200,000.00
Snow Removal 10,000.00
Schedule 4
STORES ISSUED
The stores issued for the year were as follows:
General Administration $ 10,000.00

Schedule 5
PAY-ROLL DISTRIBUTION
The pay-roll for the year was as follows:
General Administration $100,000.00

34
Schedule 6
GENERAL ADMINISTRATION
The general administration expense of the Street-Cleaning
Department for the year is to be distributed on the following
bases
Repair Division 10%

Sweeping and Cleaning 50
Carting and Stable 15
Final Disposition 10
Snow Removal 15
100%
Schedule 7
REPAIR DIVISION
The repair division reports work done as follows:
Sweeping and Cleaning 30%

Carting and Stable 40
Final Disposition 15
Snow Removal 15
100%
Schedule 8
WORK UNITS
The number of yards estimated to be covered by each unit
is as follows:
Sweeping and Cleaning 2,000,000 sq. yds.

Carting and Stable 4,500,000 cu. yds.
Final Disposition 4,500,000 " "
Snow Removal 6,000,000 " "
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Problem 100
On January 1, 1914, the Arlington Company's rec-

ords show the following conditions of its accounts:
Inventory of raw materials $46,864.26; accrued fac-
tory pay-roll, applied and distributed, $2,495.34; goods
in process at prime cost $191,665.32; the further value
of $24,111.51 for the factory overhead, also $36,224.76
to cover superintendence; finished goods in stock show
a total cost of $64,968.03.
During the period from January 1 to December 31,
1914, purchases of raw materials amounted to $241,-
249.35; factory pay-rolls $377,381.70; superintend-
ence $114,300; factory expenses, including wages not
applied to cost accounts, $74,538; interest paid on notes
$3,600; dividends received $15,012.
During the period mentioned, the operations in the
factory comprised: raw materials requisitioned for
consumption $239,461.02; wages applied and distributed
to manufacturing cost $360,751.20; and to factory
expenses $17,878.17, included in the sum stated in the
paragraph above.
There were also forwarded from the factory to the
warehouse, finished goods at prime cost, covering ma-
terials $235,627.74, and labor $355,001.25. The cost of
goods sold during the year was $755,849.70, and the

proceeds from goods sold $907,019.64.
On December 31, 1914, the goods in process in-
cluded, in addition to prime cost, factory overhead
amounting to $25,317.06, and superintendence $38,-
035.98, and accrued factory pay-roll, applied and
distributed, amounting to $3,743.01.
Show the cost controlling accounts as they would
appear in the general ledger, their operation, and the
resulting net profit.
(New York C. P. A. Examination.)
The following journal entries show in proper se-

quence the transactions of the Arlington Company for
the period from January 1, 1914, to December 31,
1914, as they affected the cost accounts:
Goods in Process $239,461.02

Raw Material $239,461.02
Raw materials requisitioned.

Pay-Roll 360,751.20
Wages applied and distributed to manufactur-
ing costs.

To charge Finished Goods with the prime cost
of goods transferred from factory to ware-
house during year as follows:
Raw Materials $235,627.74
Labor 355,001.25
Factory Overhead Expense 73,332.45
To close into Manufacturing Expenses the
factory expenses applicable to the year ended
December 31.

Superintendence 112,488.78
To close into Alanufacturing Expenses the cost
of superintendence applicable to the year
ended December 31.

To close the Manufacturing Expenses into the
cost of finished goods.
Sales 755,849.70
To charge Sales account with the cost of fin-
ished goods sold.
Sales 151,169.94
and Loss
Profit 151,169.94
Gross profit on sales.
Income from Securities 15,012.00

To close all nominal accounts into Profit and
Loss.
Raw Material
1914 1914
Jan. 1 Balance . . $ 46,864.26 Dec. 31 Requisitioned $239,461.02
Dec. 31 Purchases 241,249.35 Balance .... 48,652.59
$288,113.61 $288,113.61
1915
Jan. 1 Balance $ 48.652.59
Factory Pay-Roll
1914 1914
Dec. 31 Year's Pay- Jan. 1 Accrued .... I 2,495.34
Roll $377,381.70 Dec. 31 Mfg. Cost . . 360,751.20
Balance .... 3,743.01 Factory Wages 17,878.17
,124.71 ,124.71
1915
Jan. 1 Balance J,743.01
Goods in Process — Prime Cost

1914 1914
Jan. 1 Prime Cost $191,665.32 Dec. 31 Finished Gds. $590,628.99
Dec. 31 Raw Material 239,461.02 Balance .... 201,248.55
Wages 360,751.20
$791,877.54 $791,877.54
1915
Jan. 1 Balance $201,248.55
Finished Goods
1914 1914
Jan. 1 Balance . . . $ 64,968.03 Dec. 31 Cost of Sales $755,849.70
Dec. 31 Prime Cost . 590,628.99 Balance .... 85,568.55
Mfg. Exp. . . 185,821.23
$841,418.25 $841,418.25
1915
Jan. 1 Balance . . . . $ 85,568.55
Sales
1914 1914
Dec. 31 Cost of Sales $755,849.70 Dec. 31 $907,019.64
Gross Profit 151,169.94
$907,019.64 $907,019.64
Superintendence
1914 1914
Jan. 1 Undistributed $ 36,224.76 Dec. 31 Mfg. Exp. . . $112,488.78
Dec. 31 114,300.00 Balance . . . 38.035.98
$150,524.76 $150,524.76
1915
Jan. 1 Balance .... $ 38,035.98
Factory Overhead Expense

1914 1914
Jan. 1 Undistributed $ 24,111.51 Dec. 31 Mfg. Exp. . . $ 73,332.45
Dec. 31 Factory Ex- Balance . . . 25,317.06
pense 74,538.00
$ 98,649.51 $ 98,649.51
1915
Jan. 1 Balance $ 25,317.06
Interest on Notes Payable

1914 1914
Dec. 31 $ 3,600.00 Dec. 31 Profit & Loss $ 3,600.00
Income from Securities

1914 1914
Dec. 31 Profit & Loss $ 15,012.00 Dec. 31 Dividends
Received . . $ 15,012.00
1914 1914
Dec. 31 Overhead ... $ 73,332.45 Dec. 31 Finished
Superintendence 112,488.78 Goods .... $185.821.23
$185,821.23 $185,821.23
Profit and Loss

1914 1914
Dec. 31 Interest . . $ 3,600.00 Dec. 31 Gross Profits $151,169.94
Balance . . 162,581.94 Securities . . . 15,012.00
$166,181.94 $166,181.94
1915
Jan. 1 Balance . . . . $162,581.94

(a) Elements of Cost. See Volume III, Chapter II, § 1.
(b) Controlling Cost Accounts. See Volume III, Chapter VII,
for a description of the ledger accounts usually required.
(c) Profit and Loss. See Volume III, Chapter IX, § 3.
Problem 101
A lumber company issues the following statement,

and one of the stockholders submits it to you as he
cannot understand how 135,000 ft. sold at average of
$8.15 per 1,000 can produce a profit of $370, with a
cost of $6.50 per 1,000. Make your report with reasons
why the statement is in error, and illustrate with a new
statement of operation, applying the inventories where
they correctly belong at proper value and showing the
cost of each operation and the cost of the material as
it works through from operation to operation.
PINE TOP LUMBER COMPANY

STATEMENT OF OPERATION
June 1, 1913
Income Average
Sales Cost
100,000 ft. Rough Lumber $ 750.00 $ 7.50
35,000 ft. Dressed Lumber 350.00 10.00
$1,100.00 $ 8.15
Expenses
Logging. 400.000 ft $1,200.00 $ 3.00

Hauling to Mill. 300,000 ft 300.00 1.00
Sawing at Mill, 200,000 ft 300.00 1.50
Planing, 50,000 ft 50.00 1.00
$1,850.00 $ 6.50
S78 ILLUSTRATIVE PROBLEMS
Less — Inventory (estimated value)
100.000 ft. Logs in Woods at $2.50 . . $250.00
100,000 " Logs at Mill " 4.00 . . . 400.00
50,000 " Rough Lumber " 7.00 . . . 350.00
15,000 " Dressed Lumber " 8.00 . . . 120.00 1,120.00
Cost $ 730.00
Profit 370.00 $1,100.00
{Virginia C. P. A. Examination.)
PINE TOP LUMBER COMPANY

STATEMENT OF OPERATION
From to June 1, 1913
Average per
Sales: M Ft.
100,000 Rough Lumber
ft. $ 750.00 $ 7.50
35,000 " Dressed Lumber 350.00 10.00
Total $1,100.00 $8.15
Cost of Lumber Sold:

Logging: Total 400,000 ft. at $3.00
. . . $1,200.00
Less— Inventory 100,000 " " 3.00 300.00
Hauling to Mill:
" "
Cost of Logs . . . 300,000 3.00 $ 900.00
Hauling " 1.00 300.00
Total $1,200.00
Less —Inventory 100.000 " " 4.00 400.00
Sawing:
" "
Cost of Logs . . . 200,000 4.00 $ 800.00
Sawing " 1.50 300.00
Total $1,100.00
Less — Inventory 50,000 " " 5.50 275.00
Net 150,000 " " 5.50 $ 825.00

Sales 100,000 " " 5.50 550.00 $ 550.00 $ 5.50
Planing:
Cost Rough
Lumber 50,000 " " 5.50 $ 275.00
Planing ft. at 1.00 50.00
Total $ 325.00
Less— Inventory 15,000 " " 6.50 97.50
Sales 35,000 " " 6.50 227.50 6.50
Total $ 777.50 $ 5.76
Gross Profit $ 322.50 $ 2.39

The statement submitted by the company showed
a profit of $370. The excess of $47.50 is due to the
following errors in the inventories:
Company Correct Over-
Valuation Valuation Valuation
100,000 ft. of Logs in Woods $2.50 $3.00 %50.00
50,000 " " Rough Lumber 7.00 5.50 75.00
15,000 " " Dressed Lumber 8.00 6.50 22.50
Net Over- Valuation $47.50
The company's statement that the average cosi

was $6.50 is wrong because in that figure the inven
tories are not taken into account and because it makev
no distinction between rough lumber and dressed
lumber which cost, respectively, $5.50 and $6.50.
No provision for depletion has been made unless
it is included in the reported operating costs.
This problem illustrates the fact that the average
of a group total is not the average of the individual
averages within the group when there is substantial
variation in quantities and prices of detail items.

(a) Procedure in Keeping Cost Accounts. See Volume III,
Chapter VI, for the operation of cost accounts.
(b) Profit and Loss Account. See Volume III, Chapter IX,
for a description of a Profit and Loss account.
Problem 102
A company of bicycle manufacturers makes up its
accounts December 31, 1907, for the year. The follow-

ing are the debits to the Profit and Loss account:
Raw Material on Hand January 1, 1907 $12,500.00

Finished Machines on Hand January 1, 1907, 1,600 wheels at $30 . 48,000.00
Purchases of Material 62,500.00
Labor, Productive 82,500.00
Manufacturing Expenses: Coal, repairs, paint, varnish, superin-
tendents' salaries, unproductive labor and sundry other expenses 23,000.00
Branch Expense: Rents, and miscellaneous
salaries 40,000.00
Selling Expense: Travelers' expenses and salaries, discounts, re-
bates and miscellaneous 30,000.00
Bad Debts 8,000.00
Depreciation on Machinery and Plant 5,500.00
The sales for the year 1907 were 6,000 wheels,

yielding $540,000; the raw materials on December 31,
1907, taken at cost, were $4,000, and the finished wheels
in stock ready for sale numbered 800. Prepare an ac-
count from the above showing:
(a) Number of wheels manufactured.
(b) The cost per wheel.
(c) The gross manufacturing profit.
(d) The final net result, including in the Profit and
Loss account the stock of finished wheels on
hand December 31, 1907, at their cost as
shown by the accounts.
(Michigan C. P. A. Examination.)
(a)
NUMBER OF WHEELS MANUFACTURED

Number of wheels sold during the year 1907 6,000
Deduct — Wheels on hand January 1, 1907 1,600
Balance represents new wheels sold 4,400

Add— Wheels on hand December 31, 1907 800
Total represents new wheels manufactured 5,200
(b)
COST PER WHEEL

Raw Materials Used:
Purchases for the year 62,500.00 $ 75,000.00
Deduct— Inventory, December 31, 1907 4,000.00 $ 71,000.00
Manufacturing Overhead Expenses:

Manufacturing Expenses $ 23,000.00
Depreciation on Machinery and Plant 5,500.00 28,500.00
Total Manufacturing Cost $182,000.00
5,200 wheels at a total cost of $182,000 show a unit cost of $35.
(c) and (d)
GROSS MANUFACTURING PROFIT

NET PROFIT
Sales $540,000.00
Deduct —
Cost of Goods Sold: —
Inventory of Finished Goods on
hand January 1, 1907 (1,600
wheels at $30) $ 48,000.00
Cost of Wheels Manufactured . . 182,000.00 $230,000.00
Less—Inventory at December 31, 1907 (800
wheels at $35) 28,000.00 202,000.00
Gross Manufacturing Profit (c) $338,000.00
—
Less Expenses
Agents' Commissions '.
$ 90,000.00
Expense
Selling 30,000.00
Branch Expense 40,000.00 160,000.00
Net Profit from Operations $178,000.00
Deduct —
Other Charges:
Loss on Bad Debts 8,000.00
Net Profit (d) $170,000.00
(a) Definition of Elements of Cost, See Volume III, Chapter

II, §§ 1 and 8, for a discussion of the items entering into
cost.
(b) Cost Accounting Routine. See Volume III, Chapter VI,
for a description of the operation of cost accounts.
Problem 103
Draw up a brief but effective classification of general

ledger accounts suitable for a company with a total
capital investment of, say, $750,000, doing an annual
business of about $1,000,000, employing about 300 men
and with 500 customers' accounts. Assume the com-
pany manufactures and sells to dealers bicycles of ten
different patterns and styles and does a small business
in the sale of duplicate parts. The accounts are so
framed as to permit the preparation monthly of an
approximate balance sheet and approximate profit and
lossaccount without the taking of a physical inventory

except at the annual closing on September 30 of each
year.
State the classification in the order in which, in your
opinion, the accounts should appear in the ledger,
giving briefly your reasons therefor, and indicate which
accounts, if any, should be supplemented with subsidi-
ary ledgers or other subsidiary account records, bear-

ing in mind that the object is to facilitate the prepara-
tion of the monthly statements required.
BICYCLE MANUFACTURING COMPANY

CLASSIFICATION OF ACCOUNTS
100-700 Assets and Deferred Charges
100 Land, Buildings, and Equipment (Details carried in sub-
sidiary ledger, subsidiary accounts being numbered from
101 to 199.)
200 Materials and Supplies —
Inventory
300 Customers' Accounts (Details carried in subsidiary ledger.)
400 Sundry Debtors (Details carried in subsidiarj'^ ledger.)
500 Notes Receivable (Details carried in subsidiary note register
or ledger.)
600 Cash Items:

601 Bank Balance
602 Petty Cash Fund
700 Deferred Charges: _

701 Prepaid Interest
702 Prepaid Insurance
703 Prepaid Taxes
704 Organization Expenses
800-1100 Capital Stock, Liabilities, Reserves, and Surplus
800 Capital Liabilities:

801 Preferred Stock (Details carried in stock ledger.)
802 Common Stock (Details carried in stock ledger.)
803 First Mortgage 6% Bonds
900 Current Liabilities:

901 Notes Payable
902 Unpaid Audited Vouchers
903 Sundry Creditors Ledger
904 Accrued Interest on Bonds
905 Accrued Taxes
(Details of accounts Nos. 901, 902, and 903 carried in
subsidiary ledgers or records.)
1000 Reserves:
1001 Reserve for Depreciation — Buildings
1002 Reserve for Depreciation —Machinery and Equip-
ment
1003 Reserve for Depreciation —Office Furniture and
Fixtures
1004 Reserve for Bad Debts
1005 Reserve for Freight and Discounts
1100 Surplus Account
1500-2500 Profit and Loss Accounts
1500 Raw Material Purchases:

1501-1511 (Subsidiary accounts to be kept only in the
event distribution between styles or types of bicycles
is obtainable.)
1600 Productive Labor:

1601-1611 (Subsidiary accounts to be kept only in the
event distribution between styles or types of bicycles
is obtainable.)
1700 Factory Expenses:

1701 Foremen's Salaries .
1702 Noii-Productive Labor

1703 Heat and Light
1704 Supplies
1705 Repairs and Renewals
1705 A Machinery and Equipment
1705B Buildings
1706 Taxes
1707 Insurance
1708 Depreciation
1708 A Machinery and Equipment
1708B Buildings
1709 Miscellaneous Factory Expenses
1800 Selling Expenses:

1801 Salesmen's Salaries
1802 Salesmen's Traveling Expenses
1803 Advertising
1804 Miscellaneous Selling Expenses
1900 General and Administrative Expenses:

1901 Officers' Salaries
1902 Office Salaries
1903 Stationery and Printing
1904 Telephone and Telegraph
1905 Traveling Expenses
1906 General Office Expenses
2000 Sales:
2001-2011 (Subsidiary accounts to be kept for sales of
various styles or types of bicycles and finished parts.)
2100 Miscellaneous Income Accounts:

2101 Interest on Daily Bank Balances
2102 Discount on Purchases
2103 Interest on Notes Receivable
2200 Miscellaneous Expense Accounts:

2201 Interest on Borrowed Money
2202 Discount on Sales
In arriving at the approximate inventory at the end

of each month, it is assumed that:
1. Estimated or test costs of the various styles of

bicycles are available.
2. That the approximate cost of duplicate parts is
known.
In this case the method of arriving at an approxi-
mate inventory each month would be as follows:
Total charges contained in the controlling accounts:
Account No. 200 $
Account No. 1500
Account No. 1600
Account No. 1700
Total $
Deduct — Estimated cost of bicycles and duplicate parts upon

basis referred to in (1) and (2) above
Balance — Approximate Inventory $
(a) For a description of cost ac-

Controlling Cost Accounts.
counts see Volume III, Chapter VII.
(b) Routine for Handling Cost Accounts. See Volume III,
Chapter VI, for a description of the operation of cost
accounts.
Problem 104*
From the data contained in the following schedules
"
make a calculation of the cost per chargeable or "sold
*There will be found slight discrepancies in the figures given in this problem, doe to the rounding
off of decimals.
hour, as it is often called, for labor and expense

combined, in a job printing establishment. The
period covered, for the purposes of this calculation,
is one month of average production in a plant of
this capacity.
Schedule 1
DISTRIBUTION OF RENT
The annual rent paid is $36,060, and is to be prorated on the
basis of productive floor area which isfound to be as follows by
measurement
Departments and Factory Divisions Square Feet
Proof-Reading 740
Hand Composition 6,817
Keyboard Monotype 288
Casters 634
Plate Finishing and Repairing 346
Job Press Department:
Kelly Presses 834
Victoria and Caxton Presses 417
Universal Presses 1,424
Gordon Press 208
Cylinder Press Department:
Pony Press 1,005
00, 1-Color Presses 3,519
000, 2 " " 4,019
0000, 1 " " 7,168
00000, 1 " " 2,010
00000, 2 " " 2,010
Webb Press Department:

64-page, 2-Color Presses 5,213
32 " 2 " " 1,299
32 " 1 " " 3,896
64 " 1 " " 1,303
Cutting 1,000
Total 44,150
Schedule 2
DISTRIBUTION OF POWER
The power bill for the month amounted to $1,940.58, and is
to be prorated on the basis of the horse-power hours which are as

follows:
Horse-Power
Departments and Factory Divisions Hours

Casters 623
Kelly Presses 646
Universal Presses 375
Gordon Press 48
Pony Press 81
00, 1-Color Presses 1,806
000, 2 " " 6,160
0000, 1 " " 6,096
00000, 1 " " 1,463
00000, 2 " " 3,880
32 " 2 " " 4,973
32 " 1 " " 11,020
64 " 1 " " 8,036
Cutting 974
Total 81,351
Schedule 3
DISTRIBUTION OF DEPRECIATION
Depreciation is taken at 15% per year on the plant invest-
ment which is as follows:
Plant
Departments and Factory Divisions Investment
General and Office $ 79,467.92

Hand Composition 46,063.04
Keyboard Monotype 3,548.00

Casters 23,343.81
Plate Finishing and Repairing 1,836.94
Kelly Presses 10,125.94
Victoria and Caxton Presses 2,541.89
Universal Presses 5,748.07
Gordon Press 462.86
Pony Press 1,286.92
00, 1-Color Presses 17,538.60
000, 2 " " 44,770.30
0000, 1 " " 43,128.96
00000, 1 " " 11,703.37
00000, 2 " " 24,890.25
64-page, 2-Color Presses 122,941.58
32 " 2 " " 32,819.03
32 " 1 " " 60,757.62
64 " 1 " " 29,534.41
Cutting 2,923.42
Total $565,432.93
Schedule 4
PAY-ROLL ANALYSIS
The analysis of the factory pay-roll for the month appears
as follows:
Departments and Factobv Divisions Pay-Roll
General and Office $ 1,408.02

Shipping 3,136.06
Proof-Reading 1,223.06
Hand Composition 7,378.29
Keyboard Monotype 411.42
Casters 427.79
Plate Finishing and Repairing ..—-.-.- 385.02

Kelly Presses 798.59
Victoria and Caxton Presses 286.67
Universal Presses 880.50
Gordon Press 81.91
Pony Press 187.34
00, 1-Color Presses 1,217.69
000, 2 " " 2,248.05
0000, 1 " " 3,746.76
00000, 1 " " 749.35
00000, 2 " " 1,217.70
32 " 2 " " 2,832.17
32 " 1 " " 6,034.05
64 " 1 " " 2,113.97
Cutting 371.48
Slip Sheeting —Job Department 34.15
Slip Sheeting — Cylinder Press Department 78.96
Wrapping —Job Department 116.72
Total $46,909.45
In addition to the foregoing, there are office salaries of

$2,752.75 and executive salaries of $4,766.66 for the month.
Schedule 5
ANALYSIS OF DEPARTMENTAL PURCHASES
The analysis of purchases chargeable to departmental ac-
counts is as follows for the month
Departments and Factory Divisions Purchases
General and Office $1,735.81

Shipping •
237.29
Hand Composition 332.43
Keyboard Monotype 47.65
Casters 70.98
Plate Finishing and Repairing 8.53

Kelly Presses S0.03
Victoria and Caxton Presses 16.36
Universal Presses 59.96
Gordon Press 5.19

Pony Press 23.98
00, l-Color Presses 160.82
000, 2-Color Presses 295.99

0000, 1 " " 493.59
00000, 1 " " 112.64
00000, 2 " " 151.19
32 " 2 " " 287.27
32 " 1 " " 1,299.16
64 " 1 " " 304.00
Cutting 21.45
Total $6,943.35
Schedule 6
CHARGEABLE HOURS
The chargeable hours for the period are reported to be as
follows
Chargeable
Departments and Factory Divisions Hours
Hand Composition 6,113

Casters 570
Kelly Presses 555
Universal Presses 784
Gordon Press 81
Pony Press 82
00, 1-CoIor Presses 552
000, 2 " " 977
0000. 1 " " 1,672
00000, 1 " " 376
00000, 2 " " ^. 519
32 " 2 " " 605
32 " 1 " " 1.289
64 " 1 " " 454
Solution to
DETAILED ANALYSIS OF
STATIsf
Hand KevWtl
Plate JOB PRESS DEPT. J
Proof Finish-
General Shipping Compo- Casters
ing and Victoria Univer-
Reading Kelly Gordon
sition type Rtpainnj Caxton sal
i. <)4 Vo % %
Floor Space in Sq.ft. 740 l.?7 ^15.43 288 .6634 144346 .78 834 1.89 4n .M I4Z4 Vh 208 .ft
Horse-power Z 437 i55 5 4 5 1
Horse-power Hours 4B .51 623 .76 456 .56 646 .79306 .38 375 .46 48 .05
Plant Investment 79146752 4{i0610i 5548.00 2134181 1,836.94 10,125.94 2,541.89 5748.07 462^6
Chargeable Hours 6113 413 570 358 555 254 784 81
DEPARTMENTAL COSTSJ
1 Pay-roll - Factory 1,408.02 3U 36.06 172306 737a29 411.42 427.79 385i02 79859 286.67 88QS0 81.91
2 Office Salaries 2752.75
3 Fxecutives' Salaries 4766.66
4 Purchases 173581 237.29 332.43 4765 7098 853 eo.o3 I6i36 59.96 &19
5 Rent 15.64 5020 46384 19.54 39.38 22.47 56.81 2876 96l79 14.12
6 Power 9.85 14.85 10.88 15.39 729 8.94 1.14
7 Depreciation e 15% v. 99335 57578 44.35 291.78 2296 I26i57 31.77 71.85 5.79
8 Total 11.672.23 2i373.35 1,27^26 ai75a34 532.81 844.78 449.86 1,05739 37035 1,118.04 108.15
9 Oistr. of Proof Reading
10 onBasisofHnieil9«< 1,096.89 74.10 102.27
11 Total U672.23 a3B35 6184723 606.91 94705 44986 1.05739 370.35 1.1 18.04 108.15
CDistrof GenlandShip'g 16.88% -104% 1.62% .77'/. 1.81 •/. j64% 1.92 % .19 %
13 on a Rercentage Basis 2,53969 156l47 243.74 115.85 27^32 96.29 288.87 2859
Lt Total 11 and 13 1^^386.92 76338 U90.79 56571 1.329.71 466i64 1,406.91 136.74
Total Labor and Ex-

pense per Charg. Hn *2.03 *L85 2.09 |.58 *Z40 *l.84 1.79 »l.69
Problem 104
LABOR AND EXPENSE FOR MAY 19
TICS
CYLINDER PRESS DEPT. WEBB PRESS DEPT. SLIP SHEETING
Wrapping
Pony
oo oooo ooooo ooooo 64P.P 32 PR 32PP 64PP Cutting
Job Total
l-Col. 2 -Col. 1-Col. l-Col 2-Col. 2-CoL 2 -Col. l-Col. l-Col.
Job Cylinder
V. V. V.
ID05?.27 ^19 797 4019 aio 7168 16.3 3)10 455 g)l0 455 5213 11.80 I?99 2.94 3896 &82 ^3 2X IPOO 226 44,150 100
2 20 as 48 10 20 8a5 10.25 30.Z5 20 5.5
81 .10 1806 122 ^0 757 61)96 7.49 I{t63 180 i8M4.77 33,995*8Z 4.973 6.11 1L0ZO-Q55 5035 9.87 974 1.19 81,351 l2o
1286.92 17338.60 44,770.30 43,178.96 IL703.37 24.890.25 I72.94I.58 ZHQSa 6Q75762 20534.41 292342 565432.93
82 552 977 U572 376 519 2P34 605 1289 454 354 104 124 354 18,624
PER CHARGEABLE HOUR

187.34 1.217.69 2,248.05 3^746.76 74435 1.217.70 954373 2,832.17 6034.05 ^113. 97 371.48 34.15 78.% 116.72 46.909145
2,752.75
4.766i6
2198 16a82 295.99 49359 112.64 151.19 1.219.03 28727 1,299.16 304.00 2145 6.94335
68.23 239.58 273.55 489.98 136.77 l36iTr 354.81 88.28 265.13 88.65 5620 3OOS.OO
1.93 4108 14^94 I4&4I 34.89 92.55 810.79 118.63 262.87 191.69 23.46 I.94Q58
16.09 219.23 55a63 539.11 146.29 311.13 1.536.77 410.24 759.47 369.18 36.54 7.06788
297.57 1,880.40 3524.16 5i4l4.85 1,179.94 1.909.34 13,465.3 3,736.59 8.62068 3,06749 509.13 34.15 7&96 116.72 7^38567
297.57 l,88a40 i524.16 ^414.85 1,179.94 1,90934 13465.13 3173659 &62068 3067.49 509.13 34.15 78.96 116.72 73.385.67
31% 3.22% 6.04% a28% Z02% 3.27 V. 3.08% 6.40% 1477% &2S% .87% .06% .14% .22% 100%
76.73 484.47 908.75 1,39&?3 30392 491.99 3.472.52 96291 ^22223 789.89 130.90 9.03 21.06 3313
374.30 Z364.87 4,43Z9I 6^81108 I.483l86 Z40U3 I6i93765 4,69150 K1842.9I 3857.38 640.03 43.18 100.02 14985 73,38567
»4.56 *4.28 *4.54 *4.07 *a95 *4.62 *8.33 7.77 *3.4! *8.50 l.6f *.42 *.8I *.42
Cutting 354
Slip Sheeting —Job Department 104
Slip Sheeting — Cylinder Department 124
Wrapping —Job Department 354
Total 18,624
Schedule 7
DISTRIBUTION OF PROOF-READING DEPART-
MENT LABOR AND EXPENSE
The charges to the proof-reading department will be found
to amount to $1,273.26 (pay-roll $1,223.06, and rent $50.20),
which amount is to be distributed to the hand composition,
keyboard monotype, and casters departments on the basis of
the chargeable hours in each.
Schedule 8
DISTRIBUTION OF GENERAL AND SHIPPING

DEPARTMENT LABOR AND EXPENSE
The total labor and expense will be found to be $73,385.67,
ofwhich amount $15,045.58 belongs to the general and shipping
departments, and $58,340.09 to productive or operating depart-
ments. The $15,045.58 is to be prorated on the basis of the
$58,340.09 chargeable directly to departments. Thus it will be
found that the hand composition department will be assessed
for 16.88 %
of the general and shipping departmental labor and
expense.
Schedule 9
HOURLY RATES FOR LABOR AND EXPENSE

After the work has been completed up to this stage, it will
be found that the $73,385.67 is all segregated according to pro-
ductive departments. The last stage of the work consists in
dividing the chargeable hours given in Schedule 6 into the
departmental totals. The result will be the rate per hour for
labor and expense for the printer to use in calculating the cost
of manufacture.
(a) Sold-Hour or Service-Hour Method. See Volume III,

Chapter XXII, §§ 2, 9, and 10 for a complete description
of the method of combining overhead expense with labor
and of apportioning both over the product.
Problems 105 and 106
The following two problems show statements pre-

pared by public accountants covering the operations
of two unrelated companies. Each is supplemented
by a list of questions which, however, are not answered.
It is suggested that these questions be answered by
the reader as a means of testing his analytical power
and his knowledge of the principles covered by Volumes
I to IV.
Problem 105
THE AMERICAN REFINING COMPANY AND
ITS CONSTITUENT COMPANIES
CONDENSED GENERAL BALANCE SHEET

December 31, 1920
Assets
Real Estate and Plants, including refineries, warehouses,

cooperage, railroads, tank cars, wharves and stables, with
their machinery and equipment, and timber and other
lands owned in fee or through ownership of the entire
capital stock of constituent companies, at cost less
depreciation $ 45,931,123.93
Investments— General 24,782,540.68
Investments — Insurance Fund 9,500,000.00
Investments— Pension Fund 1.750,000.00
Merchandise and Supplies, including raw and refined sugar,
syrup, material in process of manufacturing boneblack,
cooperage, and other stock and supplies on hand 9,142,074.71
Prepaid Accounts, Insurance, Taxes, etc 309,051.18
Loans 1,121,266.10
Accounts Receivable 3,322,489.23
Accrued Income, Interest Earned, and Dividends Declared
but Not Yet Collected 1,047,043.91
Cash on Hand, with Trust Companies, Banks, and Short-
Term Loans 40,493,252.19
$137,398,841.93
Liabilities
Capital Stock:
Preferred $45,000,000.00
Common 45,000,000.00 $ 90,000,000.00
Sundry Reserves:
For Insurance $ 9,500,000.00
For Pension Fund 1,750,000.00
For Improvement of Plants 3,367,514.84
For Trade- Mark Advertising 2,000,000.00
For Contingencies 823,647.99 17,441,162.83
Accounts, Taxes, and Loans Payable 8,097,115.45

Dividends Declared, payable January 2, 1921, and Former
Dividends Unclaimed 1,599.036.75
Surplus, balance, December 31, 1919 $18,348,711.69

Add — Amount transferred in 1920 as stated
in Income and Profit and Loss Statement 1,912,815.21 20,261,526.90
$137,398,841.93
COMPARATIVE PROFIT AND LOSS STATEMENT

For Years 1918, 1919, and 1920
1918 1919 1920
Credits
$2,991,465.39 $ 9,756,379.42 $10,055,291 41
880,609.09 792,990.70 1,006,002.25
2.312,646.21 2,905,737.10 3,129,948.70
Net Profit from Investments 248,336.34 21,544.85
$6,184,720.69 $13,703,443.56 $14,212,787.21
Amount of Appropriations for Improvement of

Plants expended in new and
construction,
offset in Depreciation on Plant and Equip-
ment below $ 685,470.76
Amount deducted from Surplus of former years. 701,992.24
$7,572,183.69 $13,703,443.56 $14,212,787.21
Debits
Depreciation, Renewal, and Replacement $ 790,304.71 $ 2,000,000.00 $ 2,000,000.00
481,906.98 3,383,562.09 4,000,000.00
6,299,972.00 6,299,972.00 6,299,972.00
$7,572,183.69 $11,683,534.09 $12,299,972.00
Amount added to Surplus of former years $ 2,019,909.47 $ 1,912,815.21

$7,572,183.69 $13,703,443.56 $14,212,787.21
BALANCE SHEET
For Years 1918, 1919 and 1920
1918 1919 1920
Assets
$ 48,763,560.47 $ 47,246,442.89 $ 45,931,123.93
Investments — General 22,577,772.00 23,972,036.34 24,782,540.68
8,000,000.00 9,000.000.00 9,500,000.00
1,000,000.00 1,250,000.00 1,750,000.00
16,963,384.52 18,654,839.97 9,142,074.71
252,834.04 1,527,643.32 309,051.18
3,803,274 90 1,222,193.00 1,121,266.10
Accounts Receivable 4,607,398.09 3,833,259.72 3,322,489.23
Accrued Income 468,844.67 555,907.03 1,047,043.91
Cash 15,624,806.32 22,717,453.53 40,493,252.19
$122,061,875.01 $129,979,775.80 $137,398,841.93

1918 1919 1920
Liabilities
Capital Stock $ 90.000,000.00 $ 90.000,000.00 $ 90,000,000.00
10,137,705.62 13,475,267.87 17,441,162.83
Acfounts and Lo.ins Payable 3,999,462.92 6,555,963.24 8,097,115.45
Dividends Declared and Outstanding 1,595,904.25 1,599,833.00 1,599,036.75
16,328,802.22 18,348,711.69 20,261,526.90
$122,061,875.01 $129,979,775.80 $137,398,841.93
Questions
1. What amount of current assets does the balance sheet show?

What is the ratio between current assets and liabilities?
2. (a) Ascertain what dividends were declared by this company
payable on January 2, 1921, and after doing so deter-
mine the amount of unclaimed dividends,
(b) How do you explain the item among the assets, "Ac-
crued Income, Interest Earned, and Dividends De-
clared but Not Yet Collected''?
3. After allowing for the dividend paid on the preferred stock
during the year, what were the earnings per share on the
common stock?
4. What evidences of strength do you observe in the statements
company?
of this
5. Determine the book value of the common stock.
6. Explain the nature of the reserve for trade-mark advertising.
Give the probable function of the account.
7. The reserve for pension fund and the corresponding pension
fund have been increased $500,000 during the year. By
what entries was this brought about?
8. The report of the company states that the number of stock-
holders has increased during the year from 18,949 to
19,758 and that the average holdings have decreased from
473/^ shares to 45)^ shares. Is this change to be regarded
in a favorable or an unfavorable light?
9. Explain this quotation from the detailed report: "Better-
ments have been capitalized to the extent of $866,323.56."
Problem 106
THE B F COMPANY
CONDENSED BALANCE SHEET
December 31, 1919
Assets
Capital Assets:
Real Estate, Buildings, Plant, Machinery, and Sundry
Equipment less Reserve for Depreciation $12,679,151.72
Patents 583,650.00
Good- Will 57,798,000.00
$71,060,801.72
Investments in other Companies, etc 1,197,058.00
Soci6t6 Franâise B F —representing the net investment at
December 31, 1919 570,987.32
20,587 shares of 7% Cumulative Preferred Stock in Treasury
at par 2,058,700.00
Current Assets:
Inventory of Raw Materials, Partly Manu-
factured and Finished Stock $12,614,926.67
Trade Accounts Receivable after deduct-
ing- Reserve to cover Doubtful Ac-
counts, Discounts, and Allowances .... 4,699,938.10
Other Accounts Receivable 777,266.85
Cash in Banks and on Hand 723,053.50 19,401,459.82
Deferred Charges to Future Operations:

Prepaid Insurance, Interest, Taxes, etc 222,950.01
$94,511,956.87
Liabilities
Capital Stock:
600,000 shares Common Stock, $100 each $60,000,000.00
300,000 shares of 7% Cumulative Pre-
ferred Stock of $100 each 30,000,000.00 $90,000,000.00
(Redeemable in case of dissolution, liq-

uidation, merger, or consolidation at
$125 per share)
4e0 ILLUSTRATIVE PROBLEMS
Bills Payable $ 2,799,736.24
Sundry Accrued Liabilities 217,206.47 3,505,974.24
Reserve for Contingencies '.
300,000.00
Surplus:
Balance at December 31, 1918 $ 806,235.24
—
Add Net Profit for the year ending
December 31, 1919, as per annexed
statement 2,599,747.39
$ 3,405,982.63
Deduct — Dividends Paid, 7% on Cumula-

tive Preferred Stock for year ending
December 31, 1919 . . . $2,100,000.00
1% on Common Stock . . 600,000.00 2,700,000.00 705,982.63
Contingent Liability (Societe Frangaise B F) $ 573,000.00
Bankers' loans securedby assets of the

French company and by the guarantee of
the B F Company (a New York corpora-
tion)
$94,511,956.87
THE B F COMPANY
Net Sales $39,509,346,52

—
Deduct Manufacturing, Selling, and General Administrative
Expenses 36,451,233.98
Profit from Operations $ 3,058,112.54
Add — Miscellaneous Income 491,316.72
$ 3,549,429.26
Deduct:
Reduction of Treasury Preferred Stock from
Cost to Par Value $168,417.03
Provision for Depreciation 541,358.09
Interest on Bills Payable 239,906.75 949,681.87
Net Profit carried to Balance Sheet $ 2,599,747.39

REPORT OF ACCOUNTANTS
February 17, 1920.
To THE President and Board of Directors of

The B F Company
Dear Sirs:
We have examined the books and accounts of the B F Com-

pany New York corporation) and its Subsidiary Companies
(a
for the fiscal year ending December 31, 1919, and certify that
the annexed Balance Sheet and relative Profit and Loss account
for the period have been correctly prepared therefrom.
We verified the additions to the Plant accounts and satisfied
ourselves that they represent legitimate capital charges, that
ample provision has been made for depreciation, and that the
investments in other companies, etc., are conservatively stated
in the Balance Sheet.
We are satisfied that the valuations of the inventories of the
raw, part manufactured, and finished goods do not exceed cost,
that the crude rubber on hand was valued at cost which was
lower than market on December 31, 1919, that full provision
has been made for doubtful accounts and bills receivable, that
the deferred charges represent expenditures properly chargeable
to future operations and that due care has been exercised to
include all known liabilities.
And we certify that in our opinion the annexed Balance

Sheet is properly drawn up so as to show the true financial
position of the Company on December 31, 1919, and that the
relative Profitand Loss account for the year ending that date
shows the correct results from operations.
X, Y, AND Z,
Public Accountants and Auditors
Questions
1. How was the treasury stock preferred acquired? What entry

pertaining to this stock was made during the year?
2. What is the ratio between current assets and current lia-

bilities?
S. What, in your opinion, is included under "Other Accounts

Receivable" and "Sundry Accrued Liabilities"?
4. Would there appear to be any relation between the amount
of good- will and the issue of common stock? What pro-
portion of the total assets is represented by good- will?
5. What is the book value of the common stock?
6. Do you approve of the amount of reserves for depreciation
and for doubtful accounts not being shown?
7. Was the dividend paid on the common stock earned during
the current year?
INDEX
(All references are to pages)
liabilities (See "Liabilities, ac-

crued")
Account, Adjustments (See also "Entries, ad-
capital, adjustments in partnership justing")
changes, 116, 183, 187 accrued expenses, 125, 132
controlling, branch, 106, 119 accrued liabilities, 180
deficiency, 61, 70 (See also "State- balance sheet, 271
ment of afiFairs") deferred debits, 125, 180
fire lossadjustment, 199 errors, 343
merchandise inventory, 23 affecting surplus, 180
plant and sundry assets, corpora- on trial balance, 343
tion accounting, use of in, 170, fire loss (See "Fire loss adjust-
202, 277, 281 ments")
profit and loss (See " Profit and inventory, 70
loss") partnership (See "Partnership")
railroad income, 215 surplus (See "Surplus")
surplus, adjustments covering prior Amortization of bonds, table show-
years, 137 (See also "Surplus") ing value, 146, 148 (See also
suspense, trial balance errors car- "Bonds")
ried in, 137 Annuity,
Accounts, calculation of, 146, 165, 166
classification of, 100 present worth of, 146
Interstate Commerce Commis- \ssets,
sion, railroad accounts, 215 appreciation of, statement of affairs,
manufacturing concern, 382 how treated in, 66, 70
receivable, current, classification of, on con-
collection of, previously written solidated balance sheet, 319
off, 19, 21 replacement of, journal entries
reserve for, 19, 21, 231 covering, 15, 16, 18
uncollectible, charging off as, 19 single-entry statement of, 88, 97
valuation of, statement of affairs, wasting, accounting for and liqui-
70 dation of, 207
Accrued, Assets and statement of,
liabilities,
expenses, 125, 132 336 (See also " Balance sheet")
403
404 INDEX
B general, of railroad, 215
initial statement on organization of
Bad debts (See "Debts, bad") corporation, 170
Balance, preparation of, from single entry
bank, reconciliation of, with cash, records, 112
3, 4 reconcilement with trial balance
cash, verification of, 4 and profit and loss statement,
Balance sheet, 132, 336
adjustment of, report or statement form, example
on reorganization, 271 of. 45
partnership, 45 stock issues shown on, 176
close of trusteeship, realization and tie-up with profit and loss state-
liquidation statement, 78, 83 ment, 132, 221, 336
comparative, of branch store busi- treasury stock on, 152, 277
ness, 253 Bank balance, reconcilement with
condensed general, 395 cash book, 3, 4
consolidated, 277, 304, 312, 319, 328 Bankruptcy procedure (See "State-
accrued liabilities, treatment on, ment of affairs")
328 Bonds,
adjusting entries for, 319, 328 accounting for issue of, 140, 146,
assets, classification of, 319 148, 152, 160
bad debts, treatment of, 202 amortization of, table showing
bond discount, 277 value, 146, 148
corrected trial balances, 319 cancellation of, 152, 166
deferred charges, treatment of, discount, 152, ICO, 215
202 as deferred charge on consoli-
deficit, treatment of, 271, 304 dated balance sheet, 277
dividends as liability on, 312 effective interest on, 146, 148
good-will, treatment of, 202, 277, in sinking fund, 152, 160
328 investments in, journal entries, 148
notes receivable, 319 premium on, as deferred debit on
premium on sinking fund bonds, consolidation, 148, 300
300 underwriters' profit on, 160
profit on contracts as deferred Bookkeeping,
credit, 293 single-entry, 88, 90, 93, 97
report covering, and profits assets and liabilities, 88
acquired, 319 capital contributions, 90
secret reserves on, 319 capital, decrease in, 97
stock premium paid by parent entry to open double-entry books,
company, 328 90
surplus adjustments, 284, 312 furniture and fixtures, treatment
surplus of subsidiary, 304 of, 90
working sheet for, 328 interest on capital, 93, 242
depreciation and reserve, on liabil- net sales and purchases, calcula-
ity side, 271 tion of, 93
INDEX 405
Bookkeeping Continued Chain store accounting (See "Branch

single-entry Continued stores")
openingentries for partnership, 88 Charges, deferred (See " Deferred
preparation of statements, 112 debits")
proprietor's drawings, 93 Claims, preferred, statement of affairs,
proprietor's salary, 97 61
showing net profit, 88, 97 Classification of accounts, 100
Branch stores, Interstate Commerce Commission,
accounts kept at head office, 119 railroad accounts, 215
incorporation of proprietorship manufacturing concern, 382
business, 253 Closing entries (See "Entries,
interbranch profits, 108 closing")
inventory, valuation of, 108 Combinations and consolidations,
opening entries on incorporation, 277-328
140, 253 acquirement by stock ownership,
profit and loss analyses, 119, 253 328
treatment of contingent profits as by purchase, 202, 277, 281, 288
deferred credit, 106, 108, 119 cash entries for, 277
trial balance, general, 119 opening entries for, 202, 277
plant and sundry assets account,
use of, 277, 281
vendee company, opening en-
Cancellation of bonds, 152, 166 tries, 288
Capital, vendor company, closing entries,

account, adjustments in partner- 288
ship changes, 116, 183, 187 consolidated,
contributions, single-entry state- working papers, 304
ments, 90 working sheet, 312
decrease in, single-entry state- good-will, 202, 277, 288, 293, 304,
ments, 97 312, 328
expenditures, compared with reve- holding company's statements, 300
nue expenditures, 132 operating company's statements,
stock (See "Stock") 300
Cash, organization expenses, 304
discounts (See "Discounts, cash") promoter's transactions, 288
omission of, from assets, realiza- stock dividend paid to vendor, 284
tion and liquidation statement, surplus adjustments, 284
78, 83 Composite life method of calculating
petty, journal entries for decrease depreciation, 168
of fund, 7 Consignments, accounting for, after
trustees account, 78, 83 (See also fire loss, 196
" Realization and liquidation Consolidated balance sheet (See
statement") "Balance sheet, consolidated")
Cash book, reconcilement with bank Contracts, profit on as deferred debit,
pass book, 3, 4 on consolidated balance sheet, 293
406 INDEX
Controlling accounts, Cost accounting,
branch, 106, 119 bicycle costs, 380
cost accounting, 372 controlling accounts, 372
customers ledger, opening entry, 10 cost of a job, 347
reconcilement of, with subsidiary job printing,
ledger, 11 cost per sold hour, 386
voucher register, use with, 9 schedule of expense distribution,
Corporation, 386
accounting, journal entries covering transac-
branch stores, opening entries, tions for period, 372
325 process costs, per unit of product,
deficit, treatment of, 271, 304 353, 367
distribution of loss, 61 textile costs, 347, 351, 353, 355.
dividends (See " Dividends") 357
entries to effect reorganization, distribution of expense to prod-
271, 281 uct, 351, 353, 355
initial statement on organization labor and expense schedule, 347
170 unit costs of service, 367
liquidation of wasting assets,
207
opening entries on consolidation,
202, 277 Debts, bad,
opening entry, involving good- charging off as uncollectible, 19
will, 56, 140, 170, 202 consolidated balance sheet, treat-
parent and subsidiaries, trial ment on, 202
balances, 304 reserve for, 19,21,228
plant and sundry assets account, Deferred,
use of, 170, 202, 277, 281 credits, 152, 215
promoter's transactions, 288 illustration of, in branch account-
receiver, transfer of property to, ing, 106, 108, 119
266 profit on contracts, 293
trial balance (before closing), 336 debits, 152, 215
holding company statements, 300 adjusting entries, 125, 132, 137,
stock (See "Stock") 180
subsidiary, as assetson consolidation, 202
profits issued by, prior to con- bond discount, 277
solidation, 293 organization expenses, 304
statements, 221, 228, 231, 249 Deficiency statement, 61, 66, 70 (See
surplus of, 304 also " Statement of affairs ")
Cost, Deficit, corporation treatment of, on
accounting (See" Cost accounting," consolidated balance sheet, 871,
below) 304
analysis, silk throwing mill, 357 Depreciation,
goods sold, 127, 130 accounting, applicable to prior
summary, woven fabric, 347 periods, 180
INDEX 407
Depreciation Continued accrued liabilities, 180

adjusting entries, 15, 16, 18, 19, 21, affecting partners' profits, 190
215 consolidated balance sheet, 319,
calculation of, 328
composite method, 168
life deferred debits, 125, 180
fixed proportion method, 16, 18, depreciation, 15, 16, 18, 19,21, 215
168 profit and loss account, 132
percentage of diminishing value surplus (See "Surplus")
method, 168 closing,
straight-line method, 16, 18, 168 into trading accounts, 23, 83
sum of year digit method, 168 invoices not received, how
on profits, 132
effect handled, 90
shown on liability side of balance on consolidation, 288
sheet, 271 partnership accounting, on incor-
Discounts, poration, 56, 140
bonds (See " Bonds") receiver's books, 266
cash, opening,
journal entries for, 23 branch stores, 253
outstanding accounts, estimation involving good-will, 57, 140, 170,
of, 233 202
provision for future loss, 13 on consolidation, 202, 277
settlement by mutual accounts, 1 partnership, single-entry state-
time of taking, 13 ments, 88
lost, method of recording, 345 receiver's books, 266
notes receivable (See "Notes re- stock issues, recording, 170, 173,
ceivable") 176
Dissolution of partnership (See subscriptions to capital stock, 59
"Partnership, dissolution") Errors,
Dividends, adjustment of, 343
accounting for, 137, 215 affecting surplus, 180
liquidation, 207 on trial balance, 343
as liabilityon consolidation, 312 detection and correction of, 336,
cumulative preferred, accounting 341, 345
for, 233 by bookkeeper, 343
stock, paid to vendor, 284 by executives, 336
Double-entry books, preparation of percentages as aid
entry to open from single-entry to, 341
statements, 90 trial balance carried in suspense
Drawings, proprietor's, 93, 242 account, 137
Expenditures, capital, compared with
revenue, 132
Expense,
Entries, accrued, adjusting entries for, 125
adjusting, administrative, as per cent of
accrued expenses, 125 sales, 341
408 INDEX
Expense Continued valuation of,
distribution, on consolidation, 202, 277, 288,

over product (textile costs), 351, 312, 328
353, 355 partnership, 183, 186, 187, 190
printing establishment, 386 Gross profit (See " Profits, gross ")
organization,
capitalization of, 207
H
consol dations, how treated in,
304 Holding company statements, 300
prepaid, adjusting entries, 180
selling, per cent of sales to, 341
Imprest fund, decrease of, journal

entries for, 7
Income and profit and loss statement
Fire loss adjustments,
(See " Profit and loss statement")
closing trading and fire loss ac-
Incorporation of partnership, 56
counts, 196
(See also generally " Corpora-
recording loss, 194, 196, 199
tion accounting")
surplus adjustments, 194
Insolvency (See "Realization and
Fixed percentage of diminishing
liquidation statement," "State-
value method of calculating
ment of affairs")
depreciation, 168
Instalment sales,
Fixed proportion method of calcula-
entry recording profit, 109
tion of depreciation, 16, 18, 168
ledger accounts covering sales and
Freight and cartage,
payments, 109
inward,
Insurance policy,
as addition to cost of purchases,
asset value, on death, 116
242
entries to record payment, 116
treatment in merchandise ac-
Insurance, unexpired, statement of
count, 23
affairs, 66, 70
outward, treatment in merchandise
Interest,
account, 23
accounting for, 249
Fund, sinking (See "Sinking fund")
bond, effective, 146, 148
Furniture and fixtures, treatment of,
mortgage, statement of affairs, 66,
on single-entry statements, 90
70
partnership,
adjustment of capital, 27, 28, 31
partners' drawings 31
Good-will, single-entry statements, 93
accounting for, on partnership Interstate Commerce Commission,
dissolution, 56, 140 railroad accounts, 215
opening entries involving, corpora- Inventory,
tion accounting, 56, 140, 170, 202 adjustments, 70
sale of, in partnership, 56 affecting surplus account, 180
INDEX 409
Inventory Continued M
analysis of, 23
estimating, after loss, 127, 130, Manufacturing concern,
331 classification of accounts, 382
gross profit on, 127 statements, 221, 228, 231, 233
invoices not received, how handled, Mercantile business, statements of,
90 242, 249, 253
proof of loss, after burglary, 331 Merchandise,
statement showing differences, 336 account,
testing, method of, 336 adjustment after fire loss, 196
valuation, branch stores, 108 analysis of, 23
closing, 23
inadequacy of, 23
gross profit on, ascertaining, 127
Job order cost system, 386 inventory (See "Inventory")
Job order vs. process costs illustrated, Mortgage, interest on, how secured,
347. 351 statement of affairs, 66, 70
N
Ledger, subsidiary, reconcilement of, Net profit, calculation of,
with controlling account, 11 invested capital, 341
Liabilities, single-entry statements, 88, 97
accrued, Net worth, showing of, on statement
adjusting entries, 180 of affairs, 61
consolidated balance sheet, treat- Notes receivable,
ment on, 328 discounted, 61, 70
effect on surplus, 180 consolidated balance sheet, treat-
necessity for recording, 215 ment on, 319
realization and liquidation state- contingent liability, 345
ment, treatment of, 83 journal entries, 13
salariesdue but not recorded,
132
contingent,
journal entries to record, 178 Opening entries, 10 (See also "Entries,
notes receivable as, 345 opening")
Liquidation and realization (See Organization expense,
" Realization and liquidation capitalization of, 207
statement," "Statement of consolidations, how treated in, 304
affairs")
receivership transactions, entries
covering, 266
surplus adjustments, 266 Partnership,
Loss, distribution of, deficiency ac- accounting, 27, 56, 140, 183, 186,
count, 61 187, 190
410 INDEX
Partnership Continued Preferred claims, statement of affairs,
acco unti ng Co ntinued 61
admission of partner, 183, 186, Premium,
187 bonds in sinking fund, 300
balance sheet adjustments, 45 stock (See "Stock")
capital account, adjustments Process cost,
affecting, 116, 183, 187 accounts showing, 357
closing entries, on incorporation, analysis of costs, 357
56, 140 compared with job order costs,
distribution of profit and loss, 347, 351
27, 31, 183, 187 per unit of product, 353, 357
intereston capital and drawings, Profit and loss account, 399
investments on consolidation, adjusting entries, 132
319 (See also "Consolidated as surplus account, 266
balance sheet") branch stores, 119, 253
post-closing trial balance, 45 railroad, 215
profit and loss statement, 45, showing cost of production, 377
190 Profit and loss statement,
profits, adjustments affecting, comparative, 395
190 partnership accounting, 45, 190
single-entry statements, opening preparation of, from single-entry
entries, 88 records, J12 (See also "Book-
statement of partnership ac- keeping, single-entry")
counts, 140 reconcilement with balance sheet,
dissolution, 34, 35, 37, 39, 42. 190 132, 337
deficit offset with loan, 34 Profit or loss, single-entry bookkeep-
distribution of assets and loss, ing (See "Bookkeeping, single-
34, 35, 42 entry")
good- will, accounting for, 56, 140 Profits,
life insurance policy, accounting accounting for, after fire loss, 199
for, on death of partner, 116 contingent, in branch accounting,
overpayment of partner, pre- treatment of, 106, 108, 119
venting, 35, 37 contracts not realized, treatment of,
payment by instalments, 35, 37 293
salary of partner, how treated, 42 division of partners', 27, 31, 183,
good-will, 187 (See also "Partnership ac-
sale of, 56 counting")
valuation 190
of, 183, 186, 187, effect of depreciation on, 132
incorporation, method 56
of, gross,
Percentage of diminishing value determination of, 23
method of calculating deprecia- merchandise, 127
tions, 168 sales, 341
Petty cash fund, 7 sales, cost of, 341
Plant and sundry assets account, 170, instalment sales, entry recording,
202, 277, 281 109
INDEX 411
Profits Continued Replacement of assets,

merchandise sales, statement of, 23 journal entries covering, 15, 16, 18
net, calculation of, Report of accountant to board of
invested capital, 341 directors, example of 399
single-entry statements, 88, 97 Reserves,
partners', bad debts, 19, 21, 228
adjusting entries affecting, 190 created from surplus, 207
division of, 27, 31 for working capital, on consolida-
subsidiary prior toconsolidation, 293 tion, 293
Proof of loss, inventory after burg- secret, on consolidated balance
lary, 331 sheet, 319
Proprietor, shown on liability side of balance
balance sheet, 242 sheet, 271
closing entries, 242
drawings, single-entry statements,
93. 242
profit and loss statement, 242 Salaries, accounting for,
salary, single-entry statements, 97 partners', 42
Purchases, proprietor's, 97
calculation of net sales and, single- Sales,
entry statements, 93 instalment,
entry recording profit, 109
ledger accounts covering sale and
payments, 109
Real estate and buildings, need for merchandise, statement of profit
separate accounts, 132 on, 23
Realization and liquidation state- net, calculation of, single-entry
ment, 78, 83 statements, 93
accrued liabilities, treatment of, 83 ratio to
balance sheet, at close of trustee- administrative expense, 341
ship, 78, 83 selling expense, 341
cash account, trustees, 78, 83 waste, 233
interim transactions, how recorded, Schedules (See "Statements")
266 Scrap, accounting for, 233
liquidating dividends, 207 Secret reserves, 319
omission of cash from assets, 78, 83 Single-entry bookkeeping (See ** Book-
supplementary charges on, 83 keeping, single-entry")
tie-up between statements and Sinking fund,
balance sheet, 78 bonds in,
trading account, trustees, 78, 83 accounting for, 152, 160
Receivership, accounting for, 266, 271 premium on, 300
Reconcilement, creation of, 207
balance sheet figures with trial reserve account, 300
balanco, 132 Sold-hour cost in printing establish-
carh book with bank balance, 3, 4 ment, 386
412 INDEX
Statement of affairs, tie-up of, 132, 221, 836
adjustment of balance sheet differ- trading, before fire loss, 196
ences, 61 Stock,
appreciation of assets, how treated, authorized, accounting for, 176
66,70 common, calculation of value, 60
condensed form, 66 dividend, on consolidation, 284
deficiency statement, donated,
account form, 61 entries on incorporation, 173
distribution of loss, 61 in surplus account, 173, 176
interest on mortgage, how secured, "surplus from stock donated"
66,70 account, 277
net worth, showing of, 61 issues,
preferred claims, 61 opening entries to record, 170,
unexpired insurance, how treated, 173, 176
66, 70 shown on balance sheet, 176
valuation of accounts receivable, 70 premium, surplus of subsidiary, 312
Statements, subscriptions,
assets and liabilities, 336 (See also accounting for, 59, 152, 17 )
" Balance sheet") journal entries for, 59, 170

balance sheet, tie-up with profit treasury,
and loss, 132, 221, 336 account, 277
bookkeeping to facilitate prepa- balance sheet treatment, 152, 277
ration of, 23 donated, 173
burglary loss, 331 entries on incorporation, 173
deficiency (See "Statement of in surplus account, 173, 176
affairs") Straight-line method of calculating
estimated, operating, 271 depreciation rates, 16, 18, 168
fire loss,196 (See also "Fire loss Subscriptions,
adjustments") capital stock,
manufacturing, 221, 228, 231, 233 accounting for, 59, 152, 173
mercantile, 242, 249, 253 opening entries for, 59, 170
partners' accounts (See "Partner- Subsidiaries (See "Corporation")
ship ") Subsidiary ledger, reconcilement of,
profit and loss (See " Profit and loss with controlling account, 11
statement") Sum of year digit method of calcu-
profit on merchandise sales, 23 lating depreciation, 168
realization and liquidation (See Surplus,
"Realization and liquidation account,
statement") adjustments covering prior
showing differences in inventory, years, 137
336 donated stock, 173, 277
single-entry, 112 (See also "Book- profit and loss account as, 266
keeping, single-entry") treasury stock, 173, 176
subsidiary corporation, 221, 228, accumulated, how treated on con-
231, 249 solidated balance sheet, 304
INDEX 413
—
Surp lus Continued errors,
adjustments, carried in suspense account, 137
accrued liabilities, 180 correction of, 319
applicable to prior periods, 125, location of, 343
132 parent and subsidiaries, 304
combinations and consolidations) post-closing, in partnership ac-
284, 312 counting, 45
depreciation entries, 15 16, 18. Trustee, trading account, 78, 83
21 Trusteeship (See " Realization and
errors affecting, 180 liquidation statement")
fire loss, 194 Turnover, computation of rate of,
in reorganization, 271 341

inventory, 180
liquidation and realization state-
ment, 266
U
premium on bonds, to set up, 148 Unexpired insurance, 66, 70
liabilities accrued, effect on, 180
Unit cost of product or service, 353,
subsidiary, 304 367 (See also "Cost account-
Suspense account, trial balance errors ing")
carried in, 137
Tenements, recording operation Valuation,

of,
233 accounts receivable, 70
Textile costs (See" Cost accounting") common stock, 60
good-will,
Tie-up,
balance sheet with profit and loss on consolidation, 202, 277, 288,
statement, 132, 221, 336 312, 328
between partnership, 183, 186, 187, 190

statements, realization
and liquidation statement, 78 inventory (See "Inventory")
Verification of cash balance, 4
Trading,
account, closing entries into, 23, 83
Voucher register, opening entry for
controlling account, 9
statement, gross profit on sales
before fire loss, 196
Treasury stock (See "Stock, trea-
sury")
w
Trial balance, Waste sales, accounting for, 233
branch accounting, 119 Withdrawals, accounting for proprie-
consolidated balance sheet, differ- tor's, 93, 242
ences in, how corrected, 319 Working sheet,
corporation accounting, before consolidated balance sheet, 328
closing, 336 partnership accounting, 45
SCUTHE,-N B.^^ KCH
iiNIVEfiSITY OF CAKFORNIA,
LID/RARY,
ii-OS ANGELES, CALIF.
UNIVERSITY OF CALIFORNIA LIBRARY
Los Angeles
This book is DUE on the last date stamped below.

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THE LIBRARY

Volume I —Theory of Accounts

III — Cost Accounting

IV —Advanced and Analytical Accounting

V— Illustrative Accounting Problems

HAROLD DUDLEY GREELEY, LL.M,

The Ronald Press Compant

All Rights Reserved

ature ofaccountancy would have been welcomed.

The volumes of "Business Accounting" are intended

stitute an encyclopaedia of unconnected and isolated

have been applied to factory or cost accounting. Hav-

whether bookkeepers and other persons who keep ac-

it is to keep accounts and to prepare statements. They

like accounting problems and studying the method of

point involved in the solution will become clear by

the kind which develops analytical accounting ability

The cash book of a firm at a given date showed a

Balance, per cash book $10,000.00

Points Illustrated in Problem 1

(a) Bank Reconcilement. This solution follows the lines pro-

The cash book of a general trading concern shows for

Total receipts, per cash book $13,925.48

Jan. Overdraft on bank $ 10.32

Cash on hand undeposited amounted to $56.23.

Credit deposits 13,854.37

Credit balance pass-book $ 5,011.62

Company's bank balance $ 4,958.35

Company's actual cash $^5,014.58

Receipts that should have been deposited $13,969.25

.\ctual shortage in deposits, January 31 $114.88

Cash Book Disbursements:

Disbursements that should appear on cash book 8,885.70

Disbursements in excess of cash book (Exhibit C) $ 10.36

Add — To correct, per checks drawn (Ex-

SI Cash book balance •.

Net amount of shortage (Exhibit B) $ 114.88

Points Illustrated in Problem, 2

(a) Reconcilement of Bank Balance. The necessity for and

The Universal Company handles its currency dis-

the amount required to replenish the fund. The

General Administrative Expense $212.60

It is decided as of this date to reduce the fund by

On the credit side of the cash book a check for

General Administrative Expense $212.60

This check should be cashed and the money placed in

Points Illustrated in Problem S

(a) Imprest Petty Cash Fund. This problem illustrates the

A manufacturing concern buys its raw product from

the accounts with individual creditors. This change

Thomas Groom and Son $ 496.85

Make such entries and accompanying comments as

In order to install the voucher system, a voucher

Thomas Groom and Son $ 496.85

These vouchers should be numbered and entered in

distributed to purchase or expense accounts. They

Points Illustrated in Problem 4-

(a) Controlling Account. The purpose and use of controlling

A mercantile concern which began in a small way