Journal of Accountancy July 1913 Vol. 15 Issue 1 (Whole Issue)

Journal of Accountancy
Volume 15 Issue 6 Article 13
6-1913
Journal of accountancy, July 1913, Vol. 15 issue 1 [whole issue]

American Association of Public Accountants
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V ol. 15
theJOURNAL of
ACCOUNTANCY
T H E JO U R N A L O F A C C O U N T A N C Y JU N E ,
JUNE, 1913
VOLUME 15
Number 6
CONTENTS
The National Budget on its Expenditure Side Harvey
Foreign Exchange Christian Döru p
Treatment of Interest on Manufacturing Investment
Interest on Manufacturing Investment - H. C. Miller
Interest on Owned Capital - John R. Wildman
Treatment of Interest - Herbert M. Temple
Lumber Company Accounting - John A. McDonald
Spread and Effect of Accountancy Legislation
New York Reciprocity Clause
Department of Practical Accounting
New York C. P. A. Examinations of January, 1913
Paul-Joseph Esquerré
Correspondence
1913
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THE JOURNAL OF ACCOUNTANCY III
The Journal of Accountancy
CONTENTS FOR JUNE, 1913

PAGE
The National Budget on its Expenditure Side
By Harvey S. Chase ........ . 397
Foreign Exchange
By Christian Djörup ....... • 412
Treatment of Interest on Manufacturing Investment:

Interest on Manufacturing Investment
By H. C. Miller ........ . 427
Interest on Owned Capital

By John R. Wildman .... ... . 428
Treatment of Interest
By Herbert M. Temple . . 431
Lumber Company Accounting

By John A. McDonald ...... . 433
Editorial
Spread and Effect of Accountancy Legislation . 444
New York Reciprocity Clause ... . 448

Conducted by John R. Wildman ...... . 449
New York C. P. A. Examinations of January, 1913 (continued)

By Paul-Joseph Esquerré ....... . 459
Income Tax Problem ........ , 467
Oregon C. P. A. Law ........ . 468
New York C. P. A. Law Amended ..... . 471
Correspondence ......... . 472
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Official Organ of the American
Association of Public Accountants
Vol. 15 JUNE, 1913 No. 6

By Harvey S. Chase, C.P.A.
I have prepared no formal address for consideration at this

meeting but I have had printed summaries of the United States
budget (see pages 398 and 399), and they will give you an idea of
a portion of the work which the President’s commission on
economy and efficiency has been doing in the line of preparing
a governmental budget for the next fiscal year. These summaries
exhibit the expenditure side of the budget solely, and cover the
financial year beginning July 1st, 1913.
Of course, no man can estimate what congress is going to
do with the tariff or what it is going to do with the income
tax. At the present time nobody knows—neither congress, nor
the president, nor any one else—and therefore it would be
futile for me to attempt to estimate what the revenue side of
this budget will be. Under the requirements of law the secre
tary of the treasury last fall did compute, somewhat roughly
and crudely, as is ordinarily done, what the revenue might be,
and his estimate was forwarded to congress at the same time that
the printed estimates of expenditures were sent in by him from
the various departments.
Originally, back in the time of Alexander Hamilton and at
the beginning of our financial development as a government,
there was marked antagonism between the executive and the
legislative branches of the colonial government. Usually the
executive was a royal governor, while the legislative body rep
resented the citizens, the colonists. For this reason the legis-
* An address before the Massachusetts Society of Certified Public Accountants
at Boston, Mass., April 9, 1913.
397
THE BUDGET OF THE

Expenditures of the Government (as Estimated)
Classified in four different ways: A, by Purposes of Expenditure; B, by Character
A. Classified by Purposes. B. Classified by Character of Expenditures.

(Functions, or Classes of Work.) (Expenses, Outlays, etc.)
I. General Functions. I. Current Expense, etc.
Legislation $8,660,365.47 Overhead and operating expenses $565,798,628 25
Executive direction and control 2,836,125.00 Upkeep of property 22,764,889.48
Departmental administration, etc. 20,813,891.40 Fixed charges, interest 24,849,263.12
General business activities (a) 124,187,727.51 Court and treaty awards 40,491.48
Legal advice, etc., 3,858,890.00 Pensions, retirements, etc. 195,152,431.10
Adjudication 5,741,313.33 Subsidies, grants, etc. 12,426,278.80
Indemnities 100,000.00
Total general functions 166,098,312.71
821,131,982.23
II. Public-service Functions.
Military: II. Acquisition of Property.
Defense by land 102,556,164.95 Land 2,531,825.00
Defense by sea 146,615,091.43 Buildings 20,958,272.61
Pensions, etc 203,394,808.24 Improvements to land and waterways 74,974,139.91
Equipment 73,542,149.55
452,566,064.62 Stores (increase) 7,268,549.44
Work-in-progress (increase) 115,522.47
Unclassified 10,805,946.77
Civil:
Providing facilities for transportation 116,844,538.02 190,196,405.75
Agriculture, forestry, etc. 37,372,039.63
Indians, etc. 14,018,907.41
Public health 7,817,342.48 III. Other Expenditures (Unclassified).
Education, recreation, etc. 5,736,545.21 In large part “acquisition of property" 38,610,984.29
Medium of exchange 4,584,554.59 Total 1,049,939,372.27
Laboring classes 4,372,805.23
Friendly relations, etc. 4,341,688.20 IV. Sinking Fund.
Commerce and banking 3,023,658.53 To be reserved for payment of the
Defective, dependent, etc. 2,622,486.84 public debt 60,685,000.00
Patents and copyrights 2,242,690.89
Meteorological 1,712,490.00 Total 1,110,624,372.27
Trading, mining, etc. 930,438.60
Census, etc. 765,060.00
Standards, weights, and measures 612,395.00
Total, other than Postal Service 206,997,640.63
Postal service, etc. 276,983,944.16
483,981,584.79
III. Contributions to Local Government,

District of Columbia and Territories 7,978,410.15
Totalallfunctions 1,110,624,372.27
TV. Deduct amount payable by V. Deduct Amount payable by

District of Columbia 583,795.00 District of Columbia 583,795.00
Total expenditures by United Total expenditures by United
States Government $1,110,040,577.27 States Government $1,110,040,577.27
(a) Includes “sinking fund" $60,685,000. ♦Distributed by Departments, etc.

Summarized from tabulations prepared by the
By HARVEY
398
UNITED STATES OF AMERICA.

for the Fiscal Year Beginning July 1, 1913.
of Expenditure; C, by Organization Units; D, by Appropriation Acts.
C. Classified by Organization Units. D. Classified by Acts of Appropriation.

(Departments and Subdivisions.) (As Estimated in November , 1912.)
I. The Congress. I. Current Appropriations.
Senate $1,769,716.50 Legislative, executive, and judicial $36,289,615.50
House of Representatives 4,895,420.25 Sundry civil 119,668,577.65
Committees and commissions 1,912,773.72 Agricultural 18,287,230.00
Capitol buildings and grounds 178,900.00 Diplomatic and consular 4,072,752.61
Capitol police 78,450.00 Army 96,497,987.08
Government Printing Office* Fortifications 6,945,086.80
Superintendent of documents 251,424.00 Military Academy 1,666,735.69
Library of Congress 849,885.00 Naval 151,463,758.53
National Botanic Garden 30,893.75 Indian 11,303,316.53
Pension 185,220,000.00
9,967,463.22 Rivers and harbors 69,678,054.73
Post-office (from general treasury) 155,000.00
Post-office (from postal revenues) 281,641,508.00
II. The President. District of Columbia 6,624,668.80
The Executive Office 199,040.00 Deficiencies 277,137.10
The Commission on Economy and Miscellaneous 313,398.27
Efficiency‡ 250,000.00 Unclassified 2,420,423.00
449,040.00 II. Recurrent Appropriations.
Definite 11,916,182.72
III. The Judiciary. 5,408,101.00 Indefinite 3,174,449.75
Determinate (a) 85,801,695.12
Revenue 17,206,794.39
IV. The Executive Departments.
State 4,653,372.61 Total 1,110,624,372 27
Treasury (a) 136,306,557.92
War 199,195,018.28
Justice 5,768,097.84
Post-office 284,141,018.00
Navy 152,626,008.53
Interior 230,216,066.50
Agriculture 24,706,012.72
Commerce and Labor† 17,163,404.62
1,054,775,557.02
V. Other Government Establishments.

Isthmian Canal Commission 30,174,432.11
Interstate Commerce Commission 1,790,000.00
Civil Service Commission 440,075.00
Smithsonian Institute 988,895.12
Lincoln Memorial Commission 300,000.00
Others 206,300.00
33,899,702.23
VI. Districts and Territories 6,124,508.80
Total 1,110,624,372.27
VII. Deduct amount payable by III. Deduct amount payable by

District of Columbia 583,795.00 District of Columbia 583,795.00
Total expenditures by United Total expenditures by United
States Government $1,110,040,577.27 States Government $1,110,040,577.27
†Separate Departments hereafter. ‡Amount recommended by President Taft

President’s Commission on Economy and Efficiency. No appropriation made by Congress,
8. CHASE.
399
lative body was frequently jealous of the gubernatorial power,

and in the preparation of our present constitution great care
was taken that the executive should not become too powerful.
For this reason the secretary of the treasury was required to be,
in this particular, the servant of the legislative body instead of
the servant of the executive as he is in all other respects. Al
though a cabinet officer, and although appointed by the president
and subordinate to the latter, he is in this matter of the esti
mates only a “messenger boy” for congress.
The First Step Toward a Budget
By law the heads of departments and officers of the govern

ment are required to send, in ample time, to the secretary of
the treasury their estimates of expenditures proposed for the
ensuing fiscal year. These estimates are presented in the fall
of each year in preparation for appropriations which will not
be available until July 1st of the next year. Prior to the open
ing of congress in December the secretary of the treasury pre
pares and has printed each year all the estimates of the de
partments and offices of the government, arranged under the
present law in exactly the same form in which they have been
arranged in years before. Congress has been particularly em
phatic about this—that no change should be made in the forms
of these estimates—and for good reasons, namely, the com
mittees of congress which have to do with appropriations can
judge of the new estimates only by comparison with the old, and,
if changes—marked changes—were permitted in the form in
which these estimates are submitted, the committees of con
gress would be wholly at sea; they would not know how to
make comparisons. For this reason congress has-been exceed
ingly antagonistic to any suggestions made by the president
or by our commission on economy and efficiency concerning
modifications of the general estimates scheme, and it is therefore
evident that to bring about results congress should be given the
information in the same form that it has had for many years;
and at the same time there should also be submitted each year
a budget on new lines, comprising the same amounts as in the
old form, but arranged in a new form. This double submission
should be continued for a series of years until there has been
400
established sufficient precedent upon the new form so that the

old may be abandoned with safety. This is the way, I imagine,
in which this most important change will be brought about; in
fact, this seems to be the only practicable way to accomplish it.
The president’s commission has, therefore, devoted much
time to devising a scheme that would give information which
the old form of estimates has never given, and the statement
exhibited herewith is a summary of the work which the commis
sion has done on these lines during the six months from August,
1912, to February, 1913.
Four Classifications
It seemed to the commission exceedingly important that in
a budget statement on the expenditure side there should be set
up, first, a classification of the total expenditure by “functions”
or “classes of work,” which the government proposed to un
dertake—that is, by purposes. This has never been done by
this government, nor by any government completely, so far as
we know—and we investigated more than twenty foreign nations
before we undertook to lay out this budget.
In the second place it seemed advisable to make the very
important distinction, which all accountants recognize, between
“current expenses” and “capital outlays,” which had not been
made before in the United States government as a whole, and
which is not completely differentiated in the accounts of any
government with which we are acquainted. It is true that
many other governments do very much better in this regard
than the United States government has done heretofore. The
two summaries labeled A and B on the statement before us
are, therefore, the product of the commission’s work primarily,
while the two classifications labeled C and D (C being a
classification by organization units, that is, by the depart
ments and subdivisions which are to spend the money, and
D a classification by acts of appropriation, which is a state
ment of the way in which congress has authorized the expendi
ture) are the forms ordinarily used heretofore. The last classifi
cation, D, is the one with which congress is most familiar, and
the only form in which anything at all approaching a “budget”
statement has been set up in the United States government prior
to this year.
401
To build up the totals which are set forth on these sum

maries required some 25,000 sheets about 30 by 24 inches, which
came in from all departments and offices of the government; and
upon these sheets all details were set forth. Then it fell to
the commission to classify and summarize and foot up the amounts
which finally appear in these tabulations now before you, each
of which, you will note, totals to the same sum, namely, a
billion, one hundred and ten millions of dollars.
If we make comparisons between the usual classification rep
resented by D—acts of appropriation—and by C—organization
units (which is the form in which the annual reports of the sec
retary of the treasury have been set forth heretofore)—and
the summaries prepared by the commission, A and B, a num
ber of exceedingly striking and important points will imme
diately be evident. Referring to A, classified by purposes, it
will be noted that there are three primary divisions: I, general
functions; II, public service functions; III, local government
functions. General functions, consisting of what an accountant
would ordinarily label “overhead,” relate to legislation, executive
direction and control, departmental administration, general busi
ness activities, legal advice and adjudication. The total of these
general functions amounts to over one hundred and sixty-six
million dollars.
The next section, public service functions, is divided into
(1) military and (2) civil; the total of military amounting to
$452,000,000, of which $203,000,000 is for pensions, while $102,-
000,000 is required for defense by land and $146,000,000 for
defense by sea. In comparison with military the expenditures
for civil purposes, whose items are set forth here on the sche
dule, amount to about $484,000,000. If we examine the details
of these several functions, we find that “postal service” is the
largest, amounting to $277,000,000, and of course the question
arises immediately in your minds, as accountants, what is there
on the revenue side to offset this expenditure of $277,000,000 ?
There is, in fact, a very large amount, not quite sufficient to equal
this expenditure, but very nearly to equal it, arising from the
revenues of the postal service.
The next important item is “transportation interests,” amount
ing to $117,000,000, which includes expenditure for rivers and
harbors, and for the Panama canal. “Agriculture, forestry,”
402
etc., amount to $3 7,000,000, but when we come down to ques

tions of “public health,” with less than $8,000,000, and to “edu
cation and recreation,” with less than $6,000,000, or to “com
merce and banking,” with a little over $3,000,000, while “trad
ing, mining, etc.,” have less than one million, we have a striking
contrast with expenditures for military purposes, as above, $452,-
000,000.
Never before in the history of the United States government
has it been possible to make such comparisons as these, for the
reason that appropriations, shown in D, have never been classified
by purposes. In each of the appropriation bills which congress
sets up, there are elements which should properly be set forth
under other titles. For instance, the pension bill sets forth here,
in D, $185,220,000, whereas the total expenditures for pensions,
retirement allowances, etc., amount, in A, to over $203,000,000;
the difference between the 185 and the 203 millions being in
cluded in various other appropriation bills. In the same way the
Indian appropriation carries $11,303,000, while the actual expense
on account of Indians and other dependent wards of the na
tion, amounts to over $14,000,000. The army bill carries ninety-
six and a half millions, while the costs of “defense by land”
are over $102,000,000. So we could go on for some time making
these striking comparisons. Sufficient has been stated to show
the non-relation between the acts of appropriation as now pre
pared and passed by congress, and the actual purposes for which
money is intended to be spent.
Current Expenses in Contrast With Capital Outlays
Another very notable feature which is brought out in these

classifications is in B, where the distinction is made between
the total expenditures of the government for “current expenses,”
that is, for operating and maintaining the government, which
amount to $821,000,000, and the amount spent for “capital
outlays,” that is, for acquisition of lands, buildings, improve
ments, equipments, stores, etc., which amount to $190,000,000.
I call your attention to the third term, “Other expenditures
(unclassified),” amounting to $38,611,000. That means that
out of the total expenditure of a billion, one hundred and ten
millions, it was impossible to classify nearly thirty-nine millions
403
as between “current expenses” and “capital outlays.” Now, no

further criticism of the condition of bookkeeping of the United
States government as a whole is needed than this fact: that the
commission with all the power it had, with the president behind
it and with earnest efforts by the departments cooperating, could
not determine in the time available where nearly $39,000,000 of
the government expenditures should fall, i. e., whether they were
current expenses or capital outlays.
Sinking Fund
It will be noted in IV of summary B that $60,685,000 is

reserved as a sinking fund for the payment of the public debt.
An accountant would naturally think that that really meant
something; but it means nothing. The requirements of the
law for a long period have been that one per cent of the total
outstanding public debt on June 30th should be laid aside for
a sinking fund to retire that debt. Each year there is an entry
made upon the books, whereby the treasury apparently trans
fers one per cent, setting up a reserve or sinking fund accord
ing to the law, but there is nothing whatever on the asset side
to provide funds for this bookkeeping credit. There is no
actual “sinking fund”; there is nothing in fact but a memoran
dum account on the books of the treasury, which now stands at a
very large number of millions of dollars, but which actually means
nothing whatever. The secretaries of the treasury in their re
ports, year after year, have pointed out this fact and have re
quested congress to change the law so that it could be com
plied with in fact as well as in letter. Nothing has been done
about it, however, and nothing will be done about it, or can be
done about it, until we have a proper banking and currency act
which will relieve the situation in relation to United States
bonds. These bonds cannot be paid off in the present circum
stances, as they are required for the basis of national bank cir
culation, and therefore the false position of the sinking fund
must necessarily be continued. Now, for the first time in the his
tory of the United States government, this requirement of law
has been set up as if it were a fact, and has been brought to the
attention of congress and of the executive in such a way that
the long delayed action must be taken.
404
If we were to figure, as our commission has done, what the

requirements of the sinking fund would actually be, in order to
retire all outstanding bonds in twenty years, we should find that
the amount would be about $45,000,000 per annum instead of
$60,000,000, as now required by the one per cent clause of the
present law. In schedule A this $60,000,000 appears in “general
business activities,” $124,000,000. In schedule B it appears by
itself. In schedule C it appears in “treasury” $136,000,000.
Other Comparisons
Turning now to C—classified by organization units—we

have the usual form of summarized expenditures of the United
States government as they have been reported heretofore, namely,
by departments and subdivisions of the government. Here again
distinctions between the amounts expended by such organiza
tion units as set forth in the law, and the amounts expended
for purposes or functions of the government, as they have been
classified in schedule A, are very noticeable. These differences,
however, cannot be avoided for the present. It is probable
that gradually, having these classifications before it, congress will
modify the laws which establish the departments and subdivi
sions of the government until the latter will more clearly represent
functions or purposes of expenditure than they do at present.
Whether this is done or not, it is perfectly feasible in the opinion
of the commission so to change the “acts of appropriation” that
they will fit into the new classifications by purposes, and then the
organization units must spend the money in accordance with the
appropriations as made.
It is evident, if we take the item of “adjudication” in divi
sion I of schedule A, which amounts to $5,741,000, and compare
it with C, “the judiciary,” $5,408,000, that we get a close ap
proximation. The moneys for the judiciary are set up in sched
ule D under the “legislative, executive and judicial” bill, and
are included in the $36,000,000 which that bill carries.
The appropriation for legislative, executive and judicial is
divided in very great detail in the bill itself, and we have sub
sidiary schedules of each of these items, running down to the
expenditure of the smallest amount. In fact this summary was
built up of items from the smallest offices, which were accumu-
405
lated in the 25,000 sheets. Every unit of organization of the

government sent in to the commission, by executive order, a
statement of its estimate of the expenditures necessary for it for
the ensuing fiscal year, under each of these four classifica
tions.
Estimates and Appropriations
Before this new classification was made those three large

items were put together in appropriations, in very great detail.
The “book of estimates” of the United States government is a
volume two inches thick and twelve inches square, and in it
are all the estimates upon which the acts of appropriation are
based. This is merely a summary of the acts of appropriation.
What is called the “digest of appropriations” is a book equal in
size to the estimates. The way in which the appropriation com
mittees actually determine whether or not a department is ask
ing for more than it should is by calling the heads of depart
ments and their subordinates before them, and putting these
executives “on the grill.” The committees go into these matters
very exhaustively, asking why and for what purpose and for
what reasons the increases, if there are such, are required. This
is the basis on which the appropriations of congress are now made
—a personal basis. It is very thoroughly done, and it is the fear
of loss of this control that congress is naturally somewhat jealous
about. The members do not wish to have their control inter
fered with, and they ought not to have it interfered with, until
they can be given a better method. The new plan proposes that
there shall be in the executive and in the legislative branch of
the government provisions for a central authority which shall
pass upon the appropriations as a whole; that, in the first place,
the executive shall formulate a general plan, and, having deter
mined what can be raised as revenue, shall then subdivide the
amount among the different purposes for which the money, in
the view of the executive, should be spent.
Central Administrative Division
The commission advises that there be established a new “cen

tral administrative division,” which shall be directly under the
406
president and be a part of the executive office, which shall take

from the treasury the accounting, auditing and investigating fea
tures, which are now elements of that department, and establish
them in this new central executive board. One reason, among
others, for this is that now the department of the treasury, in
theory, has authority over other departments, which it ought
not to have, and which it cannot exercise as such control ought
to be exercised, without awakening jealousy and interfering
greatly with the harmonious progress of all departments. No
head of a department desires the head of another department
to come in and investigate his office, but no secretary would make
serious objection to an investigation by the president or by his im
mediate representatives.
The commission has not suggested that this executive officer
should have the privilege of the floor in support of the budget.
That would be more a political matter than an economic mat
ter. It appears to be the view, however, of some of the leaders
of the Democratic party at the present time that it would be ad
visable for cabinet officers to have the right to be heard in the
senate.
Under the present system, the secretary of the treasury audits
the bills as well as pays them. The auditing force of the gov
ernment is a subdivision of the treasury. There is an auditor
for war and an auditor for the navy and auditors for the state
and for other departments, but these are all officers of the
treasury. They audit the accounts of the disbursing officers, of
whom there are about 4,500 in the government. This new board
would take that auditing out of the treasury department and
bring it into this new centralized auditing and accounting divi
sion.
This means that we would have promptly prepared and proper
statistics of the government’s receipts and expenditures. The
form of report of the United States government would be com
pletely reorganized. The reports are promptly available now.
We have a statement issued by the secretary of the treasury
every day. Some features of it are right up to date—yesterday’s
business—some of it is nine months old. There are very good
reasons for this.
The commission thinks it has discovered ways in which to get
around many of these reasons and within a comparatively short
407
time the secretary of the treasury—the present secretary of the

treasury—will take action on these lines, and we shall have much
better reports than we have had in the past.
Terminology
“Recurrent” appropriations in section II are the titles

that the commission—together with the committees of the var
ious departments that met with the commission in determining
many matters—decided to be proper. In section D the dis
tinctions are “current” appropriations and “recurrent” appro
priations. The title “current appropriations” explains itself. It
means appropriations made every year for current purposes.
“Recurrent appropriations” are of four kinds. They are ap
propriations that made once do not have to be made again each
year. They are either “definite,” as stated, which means a
specific amount, or “indefinite,” like interest payments, concern
ing which general authority is given for paying all requirements in
relation thereto. And in the same way “determinate” is a tech
nical title. “Revenue” appropriations are those appertaining
to the cost of collecting revenues, which have to go on from
year to year.
There is a distinction between “determinate” and “definite.”
One is a question of time and the other is a question of amount.
The question of terminology has been one of the features that
the commission naturally had in mind, and these titles which
have been finally determined have been thoroughly threshed over.
The Commission on Economy and Efficiency
The organization of the commission on economy and efficiency

was this:—Six members were appointed by the president, that
is, five commissioners and a secretary, whose power was co
ordinate with the commissioners. An appropriation was provided,
which formed a part of the White House appropriations, and
was under the jurisdiction of the president. A force of ac
countants and clerks was established, subject to the approval of
the president. Associated with the commission in each of the
departments were various committees, consisting of the men in
each department best fitted to act in their several capacities.
408
There was a committee on accounting in each department, a com

mittee on office methods in each department, etc. Such com
mittees were paid from their own appropriations. They consisted
of men in those departments already on salaries. They were de
tailed from their ordinary duties and devoted themselves for the
time being to these new questions. In this way cooperation was
had with all the departments, and results were worked out that
could not have been obtained in any other way. When a con
clusion was reached in regard to a matter, it was only after
a meeting of the commission either with the chairman or with
the members of these various committees, when the whole pro
position was threshed out, usually after many meetings of this
sort. It has been an exceedingly laborious proposition, this whole
business, because the magnitude of it is tremendous and the field
of it is almost appalling. There are 110 different subjects that
the commission has attacked.
Dr. Frederick A. Cleveland—formerly head of the bureau of
municipal research in New York, prior to that a member of the
staff of Haskins & Sells and previously professor of economics
at the University of Pennsylvania—was the chairman of the com
mission. Dr. Cleveland has had practical training both as an
accountant and as an investigator in the exceedingly large opera
tions of the city of New York, and was probably the best man
that could have been obtained in the United States for this
purpose, both on account of his broad theoretical training and
of his varied practical experiences. The second member of
the commission was William F. Willoughby, who had been as
sistant director of the census, and prior to that treasurer of the
island of Porto Rico. He had been in the service of the gov
ernment for some time. He also was a university trained man
and when he left the commission he took the chair of govern
ment at Princeton which was vacated by President Wilson. The
third member of the commission was Judge W. W. Warwick,
who was formerly assistant solicitor in the treasury, then auditor
of the canal zone with Goethals, and finally a judge of the canal
zone court. From there he came to the commission. He is a man
exceedingly well-informed in regard to all the details of work in
the treasury and in the government in general. The fourth mem
ber of the commission was Dr. Frank J. Goodnow of Columbia
University, who has had the chair of government and constitu-
409
tional history there for many years. He is a successful and ex

tremely able gentleman, who has recently been appointed “con
stitutional advisor” to China and he has just sailed for China to
lay out, or to assist in laying out, a new constitution for the
400,000,000 of people in that country. The secretary of the
commission was Mr. Merritt O. Chance, formerly auditor of the
post-office department. The final member was myself. Owing to
the fact that the last congress made no appropriation for the
commission, inasmuch as the latter was a presidential proposi
tion, while the Democratic congress was not particularly inclined
to favor President Taft, who was going out of office, it became
necessary to mark time until it should be determined what view
President Wilson would take of these affairs. Meanwhile, as
the appropriation was about exhausted, the force could not be
kept together and it has been mostly dissipated. Professor Good
now, Professor Willoughby and myself stepped out from the
commission, and recently Mr. Chance has gone back to the post
office department, while Judge Warwick will soon be appointed
deputy comptroller of the treasury.
This will leave Dr. Cleveland giving but half of his time to
the commission, while most of the assistants have been allowed
to go. Of course it is unfortunate that congressional action could
not have been taken earlier and the force kept together. How
ever, the main investigation work of the commission has been
done, and it remains now for the constructive work to be con
tinued.
At a recent meeting at the White House, President Wilson
stated that he was strongly in favor of the work of the com
mission. While the details of the manner in which further
work shall be carried on have not yet been discussed, there is
no doubt that the original plans will be continued forcefully
and that in due time appropriations will be granted to carry
on the work. Unsolicited commendations of the work of the
commission have come into our offices and into the offices of
senators and representatives as well as to the president, par
ticularly in relation to this “budget” proposition. The whole
country seems to have awakened to it; and when we consider
what a part these new budgetary measures are to play in our
states’ accounting and finance, as well as in our municipal ac
counting and finance, we can see that the field for such work
410
is almost endless. Probably nothing has ever been done in the

United States which will stimulate efficiency and economy in
the transactions of the government, as well as in the operations
of the various civil divisions of the country, as will this matter
of correct budgetary control of the national finances.
411
Foreign Exchange
By Christian Djörup, B.C.S.
The Encyclopaedia Britannica says: “Foreign exchange is

the system by which commercial nations discharge their debts to
each other.” On this side of the Atlantic foreign exchange means
both the medium by which balances between foreign nations are
settled and in a broader sense the price at which this medium
is quoted. Thus it will be found that newspapers state at differ
ent times: “Exchange on London is going up,” i. e., the rate of
bills drawn in pounds sterling on London is advancing; or, “For
eign exchange is against us,” meaning that the rates of foreign
bills of exchange are above par; or, “Foreign exchange rates
have a favorable tendency,” which is to say that foreign exchange
is moving downward, going toward or below par.
The par, par value, or parity of exchange represents the value
of the gold unit of the currency of one country expressed in the
currency of another nation. Most of the commercial nations
have adopted the gold standard, and naturally one can arrive
at the parity only as to countries that have established the same
standard, while it is impossible to arrive at the par between silver
standard and gold standard countries. For instance, gold is
quoted in Honduras as a commodity, subject to fluctuations; and
silver is in our country like any other commodity, subject to
fluctuations and of changing value. It would therefore be im
possible to express the fixed value of a silver peso of Honduras
in United States dollars, or vice versa.
To arrive at the parity between countries of the same stand
ard, we have to know the mint laws of the countries, or how
the gold pieces are coined. Taking the United States, England,
France, and Germany as examples, we must know that:
United States coins $10 out of 258 grains of gold, 9/10 fine.
England coins £1 out of 123,274 grains of gold, 11/12 fine.
France coins 155 20-franc pieces out of kg. 1 gold, 9/10 fine.
Germany coins 69¾ 20-mark pieces out of 500 grammes of fine gold
(9/10 fine).
To arrive at the parities between the United States and the

other three countries, we get the following results by using the
chain rule:
412
Foreign Exchange
? $ 1£
I 123.274 grs. standard gold
12 11 grs. fine gold
9 10 grs. U. S. standard gold
258 10 $
£1 = $4.86654
? fr. 1$
IO 258 grs. U. S. standard gold
5760 373.242 grammes French standard gold
1.000 3100 francs
$1 = francs 5.18262
? cents 4 marks
1395 500 grammes fine gold
900 1000 German standard gold
373.242 5760 grains U. S. standard gold
258 10 $
100 cents
Marks 4 = 95.2852 cents
To arrive at the parities for England we have:

The same chain rule for the United States dollars, as in Eng
land the purchasing power of the pound sterling is expressed in
the exchange quotation:
£1 = $4.86654
? francs 1£
1 123.274 grs. st. g.
12 11 grs. fine
5760 373.242 grammes fine
9 10 standard
1000 3100 francs
£1 = francs 25.2215
Knowing the parity of United States dollars and pounds

sterling, and United States dollars and francs, we arrive more
quickly at the result by using the following chain:
413
? francs 1£ 5.18262x486654
1 4.86654 $ 45 6684
1 5.18262 francs ----------------- -
------------- '------------------------ 2 07305
£1 = 25.2214 francs 41461
====== 3109
25.2214
? marks if 1946.616:95.2852 = 204294

1 4.86654 $ = 40 912
95.2852 400 marks 2798
892
£ = M 20.43 35
To arrive at the parity of francs in marks:

? marks 100 francs 2042.94:25.2214 — 81.000
25.2214 20.4294 marks = 25.23
----------------------- = 1
francs 100 = marks 81
The result is obtained more quickly by using the coinage:

? marks 100 francs 2511:31 = 81
3100 1 kg standard = 31
10 9 fine gold
1 2790
francs 100 = M 81
However, the basis for the exchange quotations is not the

parity but the cheque rate, from which discount and bill stamp
are deducted to arrive at the rate for long bills, and to which
interest is added to arrive at the cable rate. The quotations
are regulated by the laws of demand and supply, and the theo
retical limits of fluctuation are the gold points.
Demand and supply depend on the balances between com
mercial nations. If, for instance, foreign nations owe us more
than we owe them, i. e., if the trade balances are in our favor,
we shall draw heavily on foreign business centers. The supply
of foreign bills of exchange will be plentiful, and the exchange
rates will go down until they reach a point where some banker
finds it profitable to import gold. He will buy bills or cable
transfers on London, with which he will purchase gold there.
414
Foreign Exchange
The gold will be shipped by the next fast steamer to New York,
and at the mint he will receive $10 for every 232.2 grains of fine
gold contained in the shipment. This transaction will be profit
able if the rate of exchange, plus the cost of insurance, packing,
cartage, freight, loss of interest, and the loss caused by abrasion,
not to speak of the small fee paid at the mint, amounts to less
than $4.8665. On the other hand, when the quotations rise to
such an extent that the parity, plus shipping expenses, interest,
loss, and so forth, amounts to less than the cheque rate, we say
that the gold export point has been reached. Some banker will
then sell bills on London and purchase gold, which will be sent
abroad with the next fast steamer. It may be bar gold, or eagles
or double eagles. For every $4.8665 invested in gold, his corre
spondents will receive £1 within two or three days from the day
of arrival of the gold shipment; and, as the gold and drafts
drawn by the New York banker go with the same steamer,
there will naturally be a loss of interest of only a few days
occasioned by the temporary overdraft on the account with the
London banker.
The cheque rates will fluctuate more or less between these gold
points. When the outflow of gold commences, the interest rates
go up in this country and the exchange rates go down; and,
when gold is imported in larger quantities, the foreign countries
put the interest rates up and up go the exchange rates in our
market. Thus will gold shipments check an excessive rise or
fall of exchange rates.
The aforementioned balances between commercial nations
are created by imports and exports of merchandise, and also
by indirect imports and exports. In connection with merchan
dise shipments we have freight, insurance, commissions, and, as
most of the shipments are made in foreign bottoms, the freight
bills reach tremendous figures in the course of a year. The
indirect imports and exports are made up of purchase and sale
abroad of securities for Americans, or on our stock exchanges
for foreigners; the placing of entire bond issues, or parts of
them, in either country on account of the other; the interest,
being coupons or dividends on American capital invested in
foreign securities, and on foreign capital invested in American
enterprises; speculative purchase and sale in foreign markets or
bourses of commodities like copper, tin, coffee, cotton, grain,
415
sugar, and so forth, which involve no actual shipments until set

tlement day, but primarily the payment or collection of differences
gained or lost; the placing of loans with, or for account of, for
eign bankers and the resulting settlements; expenses of American
tourists abroad, or of foreign travelers in our country: doweries
given to American girls marrying foreigners. These and many
other indirect imports and exports create balances between nations
not shown in the government statistics, but they sometimes out
weigh the imports or exports of merchandise. So it may occur
that, although our exports of cotton, grain, and flour are largely in
excess of the imports for the same period, the foreign exchange
rates are very high because of securities sold on our exchanges
on account of foreign houses, or American securities sold freely
on the foreign bourses and bought by American investors.
The medium most commonly used to settle balances or to
effect payments between foreign nations is the bill of exchange.
The foreign bills of exchange are divided into clean bills and
secured bills, and into short bills and long bills.
Clean bills are drawn by an American institution on a foreign
house, and are not accompanied by negotiable shipping docu
ments or securities. They are based on funds deposited abroad,
and on credit balances obtained by previous shipments of mer
chandise, or through loan arrangements. The value of these
clean bills depends on the standing of the drawer, the drawee,
and the endorsers, if any, and on the drawer’s probable authority
to issue these drafts.
Secured bills are accompanied by stocks or bonds, which are
attached to and mentioned by the bills, and are delivered against
payment of these security bills. Then there is the larger class
of documentary acceptance or payment bills. The former are
bills to which are attached shipping documents evidencing the
shipment of merchandise, which documents are to be delivered
against the acceptance of the bills. The latter are accompanied
by shipping documents to be delivered only against payment of
the bills. The shipping documents (mentioned above) must be in
a negotiable form, and consist of a full set or sets of bills of
lading, the insurance certificates, and documents erroneously con
sidered of minor importance, such as certificates of weight,
origin, inspection, hypothecation slips, plain or consular invoices,
and so forth, according to the requirements of the trade or law
416
Foreign Exchange
in the country of destination. If the bankers in this country

would organize a company for the purpose of inspecting and
appraising the merchandise used as collateral for documentary
bills, and would refuse to accept these bills without inspection
certificates signed by reputable examiners, frauds like those per
petrated recently through documentary bills could not occur.
A smaller class of bills called masters’ bills should also be
mentioned with the clean bills. The master’s bill is drawn by
the captain of a vessel on the steamship company or its agent at
the port of destination, and is generally payable on arrival of
the vessel. The purpose of these bills is to supply the captain
with funds to meet his expenses.
Bills are further classified as short bills and long bills. The
former are drawn for a period of less than thirty days after
sight; the latter are payable thirty days after sight, or after a
longer period.
In pricing foreign exchange there is also a distinction made
as to the character of the maker or drawer and of the drawee,
and the bills are divided into bankers’ and commercial bills.
The bankers’ bills may be prime bankers’ or plain bankers’ bills,
according to the character and standing of the principals whose
names appear on them. Double name paper drawn by an
American banker on a foreign institution will generally be val
ued higher than single name bills drawn by an American insti
tution on a foreign branch office, or on a foreign institution
controlled by the American house.
The commercial bills are also subdivided into prime com
mercial and commercial bills. The prime bills are those drawn by a
commercial house of the highest standing on a foreign banker or a
commercial house also of very high standing. The plain com
mercial bills show as makers or drawees the names of firms not
rated so highly.
A foreign bill of exchange can be a short bill, and simultane
ously a bankers’ or commercial bill and a clean or a secured
bill, and the documents attached in the case of a secured bill can
be delivered against acceptance or against payment.
A banker pricing exchange takes into consideration in the
first place the names appearing on the bills; secondly, the
security going with the bills. For example, a banker buying
bankers’ long bills will take into consideration the standing of
417
the firm drawing the bills and of the bank on which the bills are
drawn. These drafts are generally issued under some loan
arrangement, and the quantity of these bills, called finance bills,
offered in the market has to be considered. A great factor in
arriving at the price to be paid for the finance bills is the readi
ness with which foreign banks discount these bills. Finance bills
drawn by a very large American concern on its foreign branch
office may be discounted abroad at a higher rate than similar
bills of a much smaller institution drawn on an independent
foreign bank, and consequently the latter class of bills may
command a higher rate in our market.
When pricing commercial bills, the banker will consider the
name of the drawer or of the merchant from whom he buys
the bills, and in the case of clean bills he will not purchase an
amount in excess of the credit he would grant to the customer
on his notes or bills receivable. A conservative banker will buy
documentary bills only to the extent that he would grant loans
against merchandise. Naturally, the name of the drawee, the
nature of the merchandise, whether perishable or non-perishable,
the delivery of the documents, whether against acceptance or
against payment, and the foreign market for these bills, will
have to be considered. Acceptance bills can be discounted abroad,
while documentary payment bills are not discounted by the for
eign banks. However, the former are like clean bills after the
documents have been delivered against acceptance, and the ad
ditional security in the shape of merchandise expires with the
acceptance of the bills. The latter retain this security until
the bills are paid, and certain classes of documentary payment
bills are retired, i. e., taken up before maturity by the drawees
or acceptors. Some of the payment bills are held for collection
at maturity, and, the money invested in the bills being tied up
for a certain length of time, the purchaser of these bills would
have to consider the interest rates in New York. The prices
quoted for the different bills of exchange will ordinarily vary with
the risk, which the foreign exchange man attaches to the specific
bills, and with the facilities that he has for handling them
abroad.
Other means of transferring funds to foreign countries are
cable or telegraphic transfer, which is an order sent by cable
for the payment of money, and the mail transfer or delegation,
418
Foreign Exchange
which is an order transmitted by letter for the payment of money,

or the transfer of a certain amount to a specified payee. Postal
money orders are the means adopted by many foreigners for
remitting funds abroad, and usually these remittances are made
through an institution having branches abroad, or other facili
ties for the remitting of money through continental postal au
thorities. Travelers’ cheques issued by the American Bankers’
Association, by express companies or by bankers have taken
the place of international money. They can be cashed in every
part of the world, and are taken by many tourists in preference
to letters of credit. Travelers’ letters of credit authorize the
holder to draw up to a certain amount on one foreign bank, or
on several banks, or on all the correspondents of the bank issuing
the credit. These drafts, which have to be drawn in accordance
with the requirements of the letter of credit, are cashed by almost
every bank, occasionally even in hotel offices. The letters of
credit are paid for either at the time of issue, cash L/C, or
the holder furnishes the issuing banker with a guarantee signed
by himself or a third party, arranging the payment of the drafts
drawn under the credit as they reach the banker.
Having considered the sources that create balances between
foreign nations, and the means by which these are settled, the
following balance sheet of a foreign department will illustrate
some of the transactions that are classified as foreign exchange
business.
419
Balance Sheet of the Foreign Department as at March 31, 1913.

Due to Due from Due to For. Due from
Long Bills Banks Banks Name of Bank Banks Banks Long Drafts
Overdrafts Overdrafts
$10,000 00 $ $100,000 00 Bank of Great Britain $20,000 00 $10,000 00 $175,000 00
60.000 00 Bank of Germany 15.000 00 25.000 00
12.000 00 75.000 00 Bank of France 18.000 00 50.000 00
20.000 00 Bank of Belgium 5.000 00
30.000 00 Bank of Switzerland 10.000 00
3,000 00 60.000 00 Bank of Italy 20.000 00
50.000 00 Bank of Holland 12.000 00
20.000 00 Bank of Scandinavia 5.000 00
40.000 00 Bank of Austria
45.000 00 Etc., Etc. 45.000 00
$25,000 00 $ $500,000 00 Total $150,000 00 $10,000 00 $250,000 00
Resources Dr. Cr. Liabilities
Foreign money $5,000 00 $ Deposits:

Due from banks: 150.000 00 Due to foreign banks
Due to banks, overdrafts 10.000 00 Due from banks, overdrafts
Correspondent banks 500.000 00 100.000 00 Rebated acceptances
Collection banks 20.000 00
Ex. sold payable steamer day 150.000 00 260.000 00 Total due to banks
Loans, advances, etc: 200.000 00 30.000 00 Margins
Time loans 5.000 00 Cash letters of credit
Sterling loans 100.000 00
Long bills 25.000 00 295.000 00 Total Deposits
Advances 50.000 00 Bills payable:
Commercial L/C acceptances 200.000 00 150.000 00 Foreign long drafts
100.000 00 Customer’s long drafts
200.000 00 Commercial L/C acceptances
50.000 00 Ex. bought, payable steamer day
15.000 00 Undivided profits
440.000 00 Balance
Total $1,250,000 00 $1,250,000 00 Total
Contingent assets and liabilities:

Unused commercial L/C balances $300.000.00
" travelers’ L/C 50.000.00
Travelers’ cheques 20.000.00
$370,000.00
Endorsers' liability $1.000.000.00
420
Foreign Exchange
The amounts shown in the above balance sheet, or daily state

ment of a foreign department, are taken from the general ledger
and the bank ledger, of which the latter will support the balances
shown on the controlling accounts. Control accounts and lia
bility records will supply the detail of the contingent assets and
liabilities.
It would be too cumbersome to go fully into all the trans
actions represented by the items shown in the above statement,
and it will be best to elucidate only the treatment of profits and
show how some of them are ascertained.
The most logical method of recording and analyzing profits
is the calculation of interest earned on the capital invested in the
department, and the comparison of the average balances of
the individual accounts with the profits made in these accounts.
For this purpose an earnings account should be subdivided into
the following columns: correspondent banks, commissions, com
mercial L/C commissions, travelers’ L/C commissions and
cheques, interest, collections, postage-cables, etc., sundries. As
suming that a statement of March 31, 1913, has been received
from a London bank and checked to the account shown on the
books of the foreign department, the reconciliation demonstrated
below may be the result.
421
Reconciliation of English Bank, London, as at Close of Business March 31, 1913.
D a te of Foreign D ate D ate of Foreign D ate
E n try A m ount D ollars since E n try D ollars since
A d ju st ’d A m ount A d ju st ’d
1913 1913
M arch 31 O ur balance to th eir d eb it £10.000 — 47.500 00 O ur balance to th eir credit
T heir balance to our debit M arch 31 T heir balance to our credit £3.900 19.020 30
W e credit, th ey do n o t d eb it W e debit, th ey do n o t cred it
M arch 20 R ebat. D ft. C om m .L/C 741 due4/20 2.000 — 9.737 74 Jan. 10 #90,117 90 d /s Ldn. due 4/21 5.000 63.195 55
24 D raft #8317 1.000 — 4.871 75 A pril 1 Feb. 17 #60,311 60 d /s “ “ 4/29 8.000
26 “ 8511 5.000 — 24.357 50 “ 3 M arch 24 #18,320 ck. Ldn. 1.200 5.845 20 April 1
30 “ 8932 3.000 — — 14.616 00 “ 7 26 #18,560 “ “ 4.700 22.894 87 “ 3
27 M ail tran s. G erm an B ank, London 10.000 — 48.745 62 “ 4 30 #18,912 “ “ 3.100 15.101 65 “ 7
31 C able tran sfer payable A pril 4 5.000 24.372 81 “ 4
T hey credit, we do n o t d eb it T h ey debit, we do n o t credit

M arch 25 Collection #20,011 1.000 — 4.879 03 A pril 4 M arch 31 T rav elers ’ L /C 117 D ft. 1.000 4.877 00 April 12
31 In terest 2 ½ -4 ½ % “ 12 Commissions 25
154.707 D iscounts and Stam ps 120
1
422
C ables, noting and sundries 5
Profit to M arch 31 |
599 69
1 £32.050 1155.307 38 £32.050 155.307 38
N ew Y ork quotes London cable 4.8770, dem and 4.8720.
D iscount ra te in London 4 ½%. B ank ra te 3 ½%.
Foreign Exchange
Our balance to their debit is the balance shown on the books

in foreign and United States currency, and their balance to our
credit is the balance shown on the statement and converted at
cable rate. Then the items of the account which do not appear
in the statement and the items of the statement which are not
shown in the account are entered in the reconciliation form in
foreign currency only. The dollar values for these foreign
amounts must next be ascertained.
The rebated commercial letter of credit draft could be retired
at about ½% below the bank rate:
£2000.—.— due April 20
3. 6.8 20 days at 3%
£1.996.13.4 at 48770 = $9737.74
The drafts sold on the 24th, 26th, and 30th of March approxi
mately correspond with the cheques bought on the same dates,
and both are entered with the dollar equivalents as shown on
the ledger account.
The mail transfer, being payable on April 4, is valued:
£10,000.—.— due April 4
5-— — 4 days at 4½%
£ 9,995.—.— at 4877 = $48,745.62
The collection bill is taken at cable rate and the interest

added at the rate allowed in the account, namely 1% above
and below the bank rate.
£1,000.—.— at 4.8770 = $4,877.00
plus 6 days at 2½% 2.03
$4,879.03
The interest, £50, credited by the foreign bank, being a profit

item, is not converted.
The remittances sent abroad on January 10 and February 17,
are held for discount, when the account requires it.
423
£5,000 due 4/21 21 daysat4½% £13. 2. 6

8,000 due 4/29 29 days at 4½% 29.—.—
£13,000 £42. 2. 6
42. 2. 6
£12,957.17. 6 at 4.8770 = $63,195.55
The cable transfer, being payable on April 4, is worth one-

half of the mail transfer payable on the same day.
The travelers’ letters of credit draft is converted at cable
rate, as interest will be collected from the guarantor in New
York.
Commissions and so forth are not converted, as they are
profit and loss items reflected in the percentage earned on the
capital invested in the account.
The difference between the total debits and credits will
show the profit. In this case the $599.69, compared with the
average balance of 50,000 for the three months’ period, shows
a yield of 4.79752%.
599.69 X 100 239,876
% =------------------ =------------- = 4.79752%
50,000 X ¼ 50,000
To illustrate the profit calculation on a time loan, let us

assume that a German bank borrowed marks 1,500,000 on Novem
ber 1, at 6%, payable in ninety days. The account would
appear as follows, cable rate being November 1, 95 5/16, January
30, 95 3/16.
GERMAN BANK, TIME LOAN ACCOUNT

1912 1913
Nov. 1 Cable transfer Jan. 30 Interest 90 days 6% 22,500.00 5,354.29
at 95 5/16. .M 1,500,000.00 357,421.88 30 Trf. to Deutsche
1913 Bk. at 95 3/16. 1,500,000.00 356,953 13
Jan. 30 Earnings and ex
pense a/c ... 4,885.54
352,307.42 352,307.42
424
Foreign Exchange
Disregarding the cable charges of a few dollars, $4,885.54

was the yield of an investment of $357,421 for ninety days.
Using the formula:
Interest X 36,000
%=------ ---------------
Capital X days
We arrive at:
100
4885.54x36000
488554 :89355.47 = 5.468%
357421.88 x 90 4177
89355.47 603
67
Which is the interest returned on the capital invested in

this account.
Assume, further, that the department has made an arrange
ment with a London banker whereby it can draw long drafts
against the payment of a commission of 1/16% for every thirty
days running time of the draft. A customer in need of about
$500,000 for ninety days may obtain £100,000 in drafts on the
London banker. He can dispose of these drafts and obtain
the funds; whereas the department is supplying its credit only.
The loan account will be debited at the ninety days’ sight rate
agreed upon. At maturity it will be credited with the same
amount, plus interest and commission collected from the custo
mer, and debited with the cable transfer and commission paid
to the foreign banker. The difference will show the profit realized
by the department, and not an interest yield, as there is no
capital invested.
Should the department, however, draw its long drafts to
obtain funds for its own use in the loan market, the long draft,
or acceptance account, would be credited with the equivalent
obtained for these drafts. At maturity it would be debited for
the equivalent at cable rate in dollars, also for the commission
paid to the banker abroad, and the difference compared with the
original amount obtained for the drafts will show what per
centage had been paid for the use of the money.
In conclusion, a few remarks about commercial letters of
credit. They are the means by which the foreign exporter
obtains immediate cash payment and the American importer the
425
sixty or ninety days’ credit which he needs to transact business.

The American merchant desirous of buying goods abroad ob
tains a letter of credit in favor of the foreign exporter. The
latter will draw a draft for his invoice, or part of it according to
the arrangement, on the banker on whom the credit is issued, at
sixty days’ sight or some other time. The draft, with the ship
ping and other necessary documents attached, will be presented
to the drawee for acceptance. In accepting the draft he will
detach the documents and forward them to the foreign depart
ment. The latter will immediately notify the importer of the
arrival of the documents and deliver them to him against a
trust receipt. By virtue of the trust receipt, title in the mer
chandise remains with the foreign department until payment of
the draft has been effected by the importer. This payment is
made in time to remit to the accepting bank, and no capital of the
foreign department should be needed for the transactions.
Being a credit and a trust, or rather a trusting business, very
accurate accounting and a continuous follow-up system as to
the credit and standing of the customers is imperative. All the
letters of credit issued, the acceptances made abroad and the
payments received have to be properly recorded, and control
accounts should be kept for the available credits and for the
unmatured acceptances, the former showing the contingent, the
latter the actual liability of the customers, with a corresponding
liability of the department to the foreign acceptors.
426
Treatment of Interest on Manufacturing Investment*
(Third Series)
Interest on Manufacturing Investment
By H. C. Miller
Bureau of Accounts, New York Edison Co.

Assuming that it will not be denied that generally cost of
production, C, and sale price, S, vary according to the law of sup
ply and demand, it must follow that net income, I, also varies.
Where it is possible owing to monopoly conditions to fix rates,
income will still vary as cost of production remains a variable.
Ignoring selling costs:
S —C = I
But I is a loss and an impairment of capital. I cannot

by any criterion be called interest. Interest implies an obliga
tion to pay at a fixed rate a percentum on a certain date. The
principal sum, the amount borrowed, is a liability. On the other
hand, the proprietor’s investment represents a business risk, the
return or profit being determined by economic conditions. Pro
prietor’s capital is not a liability. I, then, is either an addition
or subtraction from capital. Interest on mortgage liability is a
cost factor.
It is regrettable that the decimal measuring stick is confused
with the interest rate. While both are percentages, one measures
merely a return previously earned, the other determines the return
in advance; one depends on miscellaneous investment and fluctu
ating markets, the other on a guaranteed agreement to make a
definite return. (The interest rate is, of course, determined by
supply and demand, time and the nature of the investment and
security offered, but in any specific case the rate for the term
of the liability is fixed in the bond.)
I conclude, therefore, that “interest” on manufacturing in
vestment is not a factor of the cost of production. Within the
bounds of economic conditions, efficient management is meas
ured by approximation to those bounds.
• A further discussion of this subject will be found on page 473 under “Cor
respondence.”
427
Interest on Owned Capital
By John R. Wildman
As to the propriety of including interest on borrowed cap

ital as a part of selling cost there appears to be no argument.
The discussion which follows concerns only interest on owned
capital or that which is contributed by the proprietor. The word
proprietor is used in its broadest sense without regard to the
legal type of organization involved.
Economists seem generally to agree that there are four fac
tors which produce income, namely, land, labor, capital, and
business organization. The income produced is, respectively,
rent, wages, interest and profits. If these facts are agreed to,
the object of business organization is profit. Analyze, if you
will, this profit and show how much is attributed to land as
rent; how much to labor (proprietor), for the wages of manage
ment; how much to capital, as interest; and, how much to the
organizer (proprietor) for his shrewdness in seeing the oppor
tunity, skill in effecting the organization, and courage in carrying
the risk which he assumes.
Base your accounting on economic principals and it will
be truly scientific, but you will not have helped the business
man to decide the question whether it is more profitable for him
to continue in active business or retire and entrust his capital
to others, taking his income as interest rather than profits. If
the income on his investment in the business is, in the form of
profits, 7%, whereas gilt-edge securities of other concerns will
yield him but 4% it will not be a difficult matter for him to see
that if he elects to take the latter he must forego income to the
extent of 3% in exchange for freedom from business activity,
care, worry and risk.
If you charge the business with interest for the use of money
and credit the proprietor, why not continue the practice with
regard to land, giving him credit for the rent, and with labor,
giving him credit for wages?
No difficulty is encountered until, in continuing through legal
types of organization, you reach corporations. Here you would
be obliged to apportion the credit for rent among the various
stockholders—likewise the interest on capital. Trouble arises
428
with wages since the stockholders are not necessarily adminis

trative officers. Stockholders derive their income from dividends
which are distributions of profits, therefore the argument against
the apportionment of these items. This practice, if resorted to,
has had the effect of increasing the selling cost in each instance,
thereby automatically decreasing the profit. Since it is not prac
ticable to apportion the credits corresponding to the charges for
rent, interest and wages of management (provided officers and
stockholders are the same) the credits are now applied to the
reduction of the selling costs and the profits restored.
This it must be admitted resembles traveling in a circle and
shows a certain amount of inefficiency so far as the accounting is
concerned. What is true of the business as a whole must be
true of its parts, so that the argument may with equal force be
worked down to any machine or center of production.
In the case of copartnership interest on capital contributed
is frequently charged to selling cost and credited to the partners.
The matter of interest here seems to be one affecting the equaliza
tion of profits among partners on account of variations in the
contribution of capital rather than one affecting the selling
cost.
In the tabulations which follow, two organizations, whose
operations are the same except in the matter of interest, have
been compared. The first proposition shows the results in the
case of a corporation or other organization where the credit
offsetting the charge for interest on owned capital has been taken
in as income. In the second proposition, the interest earned on
owned capital has been credited to the proprietor or to surplus.
Proprietor Proprietor
Capital “A” Interest “B” Interest
Borrowed—5% ............ $ 50,000 Paid $2,500 $ 50,000 Paid $2,500
Owned —5%............... 50,000 .......... 50,000 Chgd. 2,500
Total .............. $100,000 $2,500 $100,000 $5,000
429
FIRST PROPOSITION
Proprie Selling Proprie Selling

tor “A” Cost tor “B” Cost
Sales ................................................ $75,000 $75,000
Cost of goods sold ...................... 40,000 $40,000 40,000 $40,000
Gross profit on sales .................. $35,000 $35,ooo

Selling and adm. expenses........ 20,000 20,000 20,000 20,000
Net profit on sales:

Income from operations.... $15,000 $15,000
Other income:
Interest earned on owned
capital ................................. 2,500 *2,500
Gross income ............................... $15,000 $17,500

Deductions from income:
Interest on capital charged... 2,500 2,500 5,000 5,000
(Total selling cost) .............. $62,500 $62,500
Net income—profit and loss... $12,500 $12,500
* Red figure indicating a credit among debits.
SECOND PROPOSITION
Proprie Selling Proprie Selling

tor “A” Cost tor “B” Cost
Sales ........................ $75,000 $75,ooo
Cost of goods sold 40,000 $40,000 40,000 $40,000
Gross profit on sales ........ $35,000 $35,ooo

Selling and adm. expenses 20,000 20,000 20,000 20,000
Net profit on sales:

Income from operations.... $15,000 $15,000
Deductions from income:
Interest on capital charged... 2,500 2,500 5,000 5,000
(Total selling cost) $62,500 $65,000
Net income—profit and loss... $12,500 $10,000

Profit and loss—credit:
Interest earned on capital... 2,500
Profit and loss—surplus $12,500 $12,500
In the first proposition, the net income is the same in each

case. Assuming the selling cost to represent 100,000 units the
cost per unit will in each case be 62½ cents. The net income
is in each case equal to 12½% on the investment of $100,000.
In the second proposition, the net income of “A” is $12,500,
or 12½% on the investment; “B,” $10,000, or 10%. The selling
430
costs are respectively 62½ cents and 65 cents per unit. Would
you ask “A” to put his selling cost up to 65 cents? Would it
be difficult for “A” to decide whether to continue business or
retire and put his $100,000 into 4% bonds?
Assuming it to be generally agreed that the three principal
objects in ascertaining costs are to—
(a) Determine accurate profits,
(b) Serve as a basis for fixing selling prices,
(c) Provide proprietors or administrative officers with in
formation upon which to decide financial policies and
guide the operations,
it would not seem difficult to decide as to which is the better of
the two theories.
I should like to see in The Journal a discussion on the pro
priety of including rent, taxes, interest, insurance, etc., in manu
facturing costs.
Treatment of Interest
By Herbert M. Temple
The discussion in The Journal relative to the treatment of

interest in its relation to cost of production is of more than
passing benefit to every student who is concerned in proper and
correct methods of determining and treating of record the
elements of the cost of production, and to those who have not
had the pleasure of reading it, there is commended to their atten
tion an article on this subject by Mr. A. Lowes Dickinson, which
appeared in the December, 1911, issue of The Journal. This
article treats the subject very graphically.
There can be but one conclusion in regard to capitalizing
interest, depreciation, obsolescence, etc., in the partly or com
pletely ready-for-market product, and in this connection it is
generally accepted that interest is not a factor to be inventoried
as an element of the cost of production, but is a factor to be
considered in establishing the sales or selling price of the units
or elements produced. In recording and demonstrating sales
realization on this basis, the units sold reveal an income in excess
431
of the direct or inventoried cost sufficient to make provision for

depreciation, obsolescence and returns to capital in all of its
phases.
On the other hand, those industries which capitalize interest,
etc., in the manufactured product, carrying the same in the in
ventory at such capitalized prices, not only make a most peculiar
and unique disclosure in their income account, but also render
themselves subject to a severe criticism when they enter the
market as borrowers on credit.
432
By John A. McDonald, C.P.A.
It will be generally admitted that the lumber business is one

of the greatest of all the manufacturing interests of the country.
The magnitude of any particular enterprise may vary from a
mill with one circular saw and equipment, buzzing away in some
obscure corner, to a gigantic plant comprising in its entire
equipment several large mills with every variety of lumber
making machinery, railroads, logging outfits, tugboats, ships,
wharves, dry docks, machine shops and acres and acres of tim
ber land. It would, therefore, be practically impossible even to
outline here such accounting requirements as would be adaptable
to the industry as a whole. The writer, for this reason, confines
himself to a plant of a type and capacity of output frequently
encountered in different parts of the country, and does so in the
hope that students of accountancy, preparing for their degree,
may derive some benefit.
It may be necessary to state that the exhibits and schedules
given, with some changes, result from an audit actually made,
but that the names and locations are fictitious and are used only
for convenience.
The company is composed of three brothers incorporated
under the name of the Simpson Lumber Company. The plant
consists of a sawmill, planing mill, hardwood finishing mill, box
factory, and dry kilns. These are located immediately adjacent
to a well-known line of railroad. For this reason there are
no expenses in the way of railroad maintenance and operation,
chargeable in the trading account. The dry kilns are attended
to by different men from the different mills, but no distribution
of pay roll or other expenses in this connection has been kept
during the year, and it is impossible to make it with any degree
of accuracy at the year’s end. These expenses have been ab
sorbed in those of other departments. The supplies in the way
of oils, files, small repair parts, etc., are kept in a building
contiguous to the mill commissary and supplied to each mill on
requisition.
The standing timber is located some miles from the plant.
433
The logs are transported from the woods over the company’s
railroad and by its own equipment. It is, therefore, necessary
to record with some degree of detail the expense of maintenance
and operation. It will be noticed that the cost of the cut logs
“in the woods” is shown as distinct from their cost “delivered
at the mill.” The former may be considered the prime cost of
the logs and the latter the final cost.
The accounts shown on the balance sheet as standing timber
might better be termed standing timber rights or standing timber
leases. The company has not purchased, outright, the timber
and the land on which it stands, but has purchased the privilege
of cutting and using it for a term of years. These rights expire
at different times and it is necessary to charge off the annual
proportion of each lease as the stumpage expense. If the com
pany owned the timber and land, however, it would be advisable
if not necessary to have an expert “timber cruiser” make as
accurate an estimate as possible of the standing timber, and to
have a “scaler” in the woods, reporting to the office the board
feet in logs cut, and use this as a measure of the stumpage
consumed during the year. It would be necessary, too, to have
a “scaler” at the mill entrances measuring the logs as they come
into the mill to be sawed. Their reports would be used as a
basis for calculating the feet, in logs, actually consumed in
output. The inventory of uncut logs would be taken by the
“scalers” at the end of the year and the difference adjusted.
The inventory of the unsold lumber at the end of the pre
ceding year, as shown in the trading account, cannot be consid
ered as accurately taken, but was accurately taken at the end of
the year under review. It has been properly classified and
separately valued at as close to manufacturing cost as could
be ascertained under the conditions. It will be noticed that the
lumber purchased from others to fill rush orders is shown sepa
rately. This makes it an easy matter for the officials to discover
the extent of the sales of their own output. Attention is directed
to the classification of the products sold, showing the feet of
each class sold, price per thousand and value. This is a matter
usually of very great interest to the proprietors and when kept
year after year enables them to get an intelligent insight of
comparative conditions. The system installed enables this to
be done month by month.
434
It will be noticed that the depreciation in the different de

partments has been charged to the operating expenses of each,
but that insurance has not been so charged, as it should have
been had conditions permitted such distribution with any degree
of accuracy.
The object in view in operating the commissaries is to re
lieve the mill and logging hands of the necessity of going into
town to make their sundry purchases and using this as an excuse
for a few days’ stay. They may make reasonable purchases in
advance of their earnings and have them deducted from the
pay rolls. The commissaries are not operated primarily for
profit, and any profit made is shown as miscellaneous income.
The schedules leading up to the surplus account show in
proper order, and in what is regarded as sufficient detail, the
results of operation for the period under review. This and
the balance sheet show that a fair profit has been made, because
the lumber industry has been in unusually flourishing condition
and the standing timber cut was purchased on the basis of
low prices of manufactured lumber in former years.
435
EXHIBIT A
BALANCE
SIMPSON
Year
Dec. 31,
ASSETS
Fixed Assets:
Real estate .......................... $ 6,000.00
Buildings ................................ $16,363.81
Machinery ........................ ..... 39,564.11
Tram road .............................. 26,514.34
Fire equipment ...................... 1,709.25
Tools and teams .................... 2,804.13
Cottages .................................. 1,200.00
Office furniture and fixtures 427.85
Total.......... $88,583.49
Less: Depreciation reserve 16,230.25 72,353.24
Standing timber .................. $45,986.21
Less: Depreciation reserve 10,418.93 35,567.28
Current Assets:
First Nat. Bank-Simpson, S. C......... $ 309.63
Merchants & Planters Bank-Simpson 1,428.97
First Nat. Bank-Richmond, Va.......... 502.18 2,240.78
Railroad claims .......................... 104.26

Accounts Receivable—Traders:
Foreign accounts .................. $10,768.57
Local accounts ........................ 1,697.25
Total.......... ................ $12,465.82

Less: Unpaid freight reserve $1,200.00
Bad debt reserve........ 404.73 1,604.73 10,861.09
Accounts receivable—Other:
H. O. Simpson .............. $ 5,268.92
S. H. Simpson................ 7,153.43
J. H. Simpson .............. 1,595.85 14,018.20
Inventories:
Camp store merchandise $ 505.25
Mill store merchandise . 2,272.33
Uncut logs ...................... 295.00
Unsold lumber .............. . 15,621.09 18,693.67
Deferred Charges to Operation:

Inventory—sundry supplies ... $ 267.79
Unearned insurance ............ 1,607.02
Advances on pay rolls ...... 108.91 1,983.72
Total $161,822.24
436
EXHIBIT A
SHEET
LBR. CO.
Ended
1912
liabilities
Current Liabilities:
Accounts payable $ 6,451.18
Notes payable .. . 87,309.66 $ 93,706.84
Unclaimed pay rolls ......................................................... 312.00

Items Accrued but not due:
Accrued taxes ................................................................. $ 511.45
Accrued interest ................................................................. 1,406.78
Pay rolls payable ............................................................... 1,580.91 3,499.14
Capital Stock and Surplus:

Capital stock issued and outstanding .....................$30,000.00
Surplus—12/31/11, as adjusted ................. $13,753.25
Profit for year 1912 .................................... 20,497.01 34,250.26 64,250.26
Total ....................................................... $161,822.24
437
Mr. H. O. Simpson, President,

Simpson Lumber Co.,
Simpson, S. C.
Dear Sir:
As requested, we have audited the accounts of the Simpson
Lumber Company for the year ended December 31, 1912, and
submit the result in the way of the following exhibits and
schedules:
Exhibit A—Balance sheet, December 31, 1912.
Exhibit B—Surplus account, December 31, 1912.
Schedule 1—Profit and loss account.
Schedule 2—Trading account.
Schedule 3—Statement showing cost of logs.
Schedule 4—Statement showing cost of milling.
Schedule 5—Details of other expenses.
The fixed assets shown on the balance sheet are shown at
cost. Depreciation has been provided for by a credit to depre
ciation reserve account on an established rate of 10% because
of the fact that it is estimated you will have only ten years’ cut.
This depreciation is deducted, as you will notice, from the total
of the fixed assets on the debit side. A depreciation has also
been provided on standing timber by a credit to a special de
preciation reserve account. As against the book value of stand
ing timber this depreciation is shown on the balance sheet in
the manner above mentioned.
We have proved the accuracy of the cash in bank and on
hand. We have, too, verified the accounts receivable, both local
and foreign. The inventories of merchandise, etc., on hand
have been accepted, as to quantities, as certified to us by your
general manager. It was necessary for us, however, to establish
as closely as possible the inventory values of the lumber unsold.
In the schedules in connection with exhibit B, we have at
tempted to show, in a clear and orderly manner, such details as
are necessary to a thorough understanding of the operations of
the company for the past year.
We wish to say that according to the information given us,
the explanations furnished, and the examination we have made
of the books and vouchers of the Simpson Lumber Company, the
attached balance sheet does, in our opinion, exhibit a true and
438
correct view of the state of the company’s affairs at the close

of the year 1912.
Respectfully submitted,
Certified Public Accountants.
EXHIBIT B
Surplus Account
Simpson Lumber Co., Year Ended December 31, 1912
Credits
1911
Dec. 31 Surplus balance this date ..................................................... $ 14,350.74
1912
Feb. 29 Acct. of Merchants Gro. Co., charged off.......................... 432.79
Total............................................................................. $ 14,783.53
Debits
1912
Jan. 1 Pay rolls previous year not charged................... $ 456.50
Dec. 31 Accounts previous years charged off:
J. C. Lent & Co........................................ $267.59
U. S. Lumber Co.................................... 125.92
M. H. Rickford Co................................ 180.27 573.78 1,030.28
Surplus balance as adjusted.................................................. $13,753.25

1912
Dec. 31 Add: Profit for this year....................................................... 20,497.01
Surplus balance—December 31, 1912................................... $34,250.26
EXHIBIT B
Schedule 1
Profit and Loss Account

1912
Dec. 31 Gross profits on sales from Trading Acct........................... $40,503.26
Deduct:
Administration expense ..................................... $6,564.22
Office expenses ...................................................... 2,484.03
General expenses .................................................. 4,591.53 13,639.78
Net Operating Profit.................................. ............................ $26,863.48
439
Add—Miscellaneous Income:
Profit—Camp store........................................... $608.57
Sundry rents for year .......................................... 147.10
Total................................................................. $755.67
Less: Loss—Mill commissary................................ 313.37 442.30
Gross profits for year............................................................... $27,305.78
Deduct—Charges against Profits:

Reserve for bad accounts ............................ $ 404.73
Taxes for year ..................................................... 587.90
Interest—Notes and accounts ........................ 5,816.14 6,808.77
Net profit for year (see Exhibit A)..................................... $20,497.01
EXHIBIT B
Schedule 2
Trading Account
1911
Dec. 31 Inventory of lumber on hand.............................................. $ 9,848.84
1912
Dec. 31 Add: Cost of products manufactured in 1912.............. 96,162.69
Total cost ................................................................... $106,011.53

Deduct Inventories as below:
Oak ...................................... 25,070 feet $ 601.68
Sweet gum ............................ 57,730 “ 2,318.60
Black gum ................................ 115,000 “ 1,340.00
Heading .................................... 335,270 “ 3,352.70
Cypress ..................................... 186,260 “ 3,113.96
Pine .......................................... 302,983 “ 4,894.1515,621.09
Cost of Company’s products sold ....................................... $ 90,390.44
Add—Lumber purchased from others:
Pine ....................................... 114,476 feet $1,408.40
Heading ..................................... 20,925 “ 334.80
Poplar ....................................... 28,569 “ 571.30 2,314.50
Total cost of products sold during year........................... $ 92,704.94
Credits
Sales during the year:

Pine .............................. 4,284,726'@ 24.64 $105,575.83
Heading ...................... 1,692,837'@ 16.62 28,140.67
Sweetgum .................. 85,077'@ 14.79 1,258.45
Blackgum .................. 215,179'@ 22.38 4,816.84
Poplar .......................... 713,747'@21.61 15,425.76
Cypress ........................ 283,137'@ 25.94 7,343.93
Other ............................ 53,689'@ 27.90 1,499.92
Wood ............................ 1,576.09
Total ...................... 7,328,392'@ 22.38 165,637.49
440
Deduct—Allowances and Selling Expense:

Allowances ..................................... $ 1,593.21
Commissions ................................ 6,369.18
Freight .......................................... 24,466.90 32,429.29
Net proceeds from sales......................................................... $133,208.20

Gross profit on sales for the year ................................... $ 40,503.26
EXHIBIT B
Schedule 3
Statement
Showing cost of logs in woods, also cost of logs delivered at mill

Year Ended December 31, 1912
Stumpage for year....................................................................................... $ 5,748.27
Logging Expenses:
Wages ................................................................................. $22,137.58
Supplies ................................................................................. 3,214.71
Sundry expenses ................................................................. 44-59 25,396.88
Depreciation—Teams and tools ......................................................... 280.41
Cost of logs in woods............................................................................. $31,425.56
Railroad Maintenance:
Wages ................................................................................. $ 3,448.24
Supplies .............................................................................. 107.45
Timber for trestle .......................................................... 26.67
Spikes .................................................................................... 170.03
Ties ......................................................................................... 30.20 3,782.59
Railroad Operation:
Wages ................................................................................. $ 3,200.05
Coal—536½ tons ............................................ .$ 714.41
Freight .................................................... 1,233.48 1,947.89
Engines—repairs .......................... 1,301.77

Cars—repairs ........................... 188.40
Car grease ............................................................................. 97.67
Sundry supplies ................................... 573.24
Sundry expenses.................................................. 80.34 7,389.36
Dep’n—road and equipment................................................................. 2,65143
Cost of logs delivered at the mill $45,248.94
441
EXHIBIT B
Schedule 4
Statement
Cost of milling during year 1912
Cost of logs delivered at mill—from previous statement................ $45,248.94
Sawmill Operating Expenses:

Wages ..................................................................................... $21,157.50
General supplies ................................................................... 3,156.01
Band saws ............................................................................. 342.00
Steam feed............................................................................. 383.74
Hog repairs ........................................................................... 164.35
Engine repairs....................................................................... 167.05
Saw repairs ........................................................................... 71.22
Belting ..................................................................................... 67.55
Flue hammer ......................................................................... 80.00
Chains ........................................................ 167.65
Emery wheels ....................................................................... 20.74
Sundry repairs ..................................................................... 196.41
Sundry expenses ................................................................ 70.96 26,045.18
S/M depreciation ................................................................................... 3457.67
Planing Mill Operation Expenses:

Wages .................................................................................... $11,825.66
Sundry supplies ................................................................. 1,790.00
Sundry expenses ................................................................ 76.28 13,691.94
P/M depreciation ................................................................................... 1,876.37
Hardwood Mill Operation Expenses:

Wages ................................................................................. $ 4,321.80
Supplies ................................................................................. 575.11 4,896.91
H/M depreciation ................................................................................. 531.81
Box Factory Operation Expenses:

Wages ................................................................................. $ 334.25
Supplies ................................................................................. 44.17 378.42
B/F depreciation ................................................................................... 35.45
Cost of Manufactured products ......................................................... $96,162.69
442
EXHIBIT B
Schedule 5
Expense Details
Administrative Expenses:
Officers’ salaries ....................................................................................... $ 5,587.86
Telegrams ................................................................................................... 102.19
Telephone ................................................................................................... 70.55
Legal expenses ......................................................................................... 125.00
Livery expense ......................................................................................... 40.72
Traveling expense ................................................................................... 162.85
Auto repairs and supplies....................................................................... 475.05
Total administrative expenses................................................... $ 6,564.22
Office Expenses:
Office salaries ........................................................................................... $ 1,554.52
Exchange—foreign drafts ..................................................................... 3.60
Adding machine repairs ......................................................................... 25.00
Postage ....................................................................................................... 78.04
Printing and stationery ......................................................................... 81.26
Advertising ............................................................................................... 137.37
Depreciation—office fixtures ................................................................. 43-21
Auditors’ fees and expenses................................................................. 561.03
Total office expenses...................................................................$ 2,484.03
General Expenses:
Association dues................................................................................... $ 96.00
Accidents .. ................................................................................................ 64.20
Survey of mill lands, etc........................................................................ 502.28
Timber estimating ................................................................................... 605.33
Trade journals ......................................................................................... 11.75
Excise tax ................................................................................................. 15.00
Recording fees ......................................................................................... 16.15
Charity—donations ................................................................................. 55-97
Sundry expenses ..................................................................................... 104.75
Insurance ................................................................................................... 3,120.10
Total general expenses ............................................................. $ 4,591.53
443
Published monthly for The American Association of
Public Accountants by The Ronald Press Company,
20 Vesey Street, New York. Thomas Conyngton, President;
J. M. Nelson, Secretary; Hugh R. Conyngton, Treasurer.
Office of Publication: Cooperstown, New York.
A. P. Richardson, Editor Jos. French Johnson, Consulting Editor

H. R. Conyngton, Managing Editor
ASSOCIATE EDITORS
W. M. Cole, Harvard University Isaac Loos, University of Iowa
John B. Geijsbeek, Edward Sherwood Meade,
University of Denver University of Pennsylvania
Stephen W. Gilman, Harlow S. Person,
University of Wisconsin Tuck School, Dartmouth College
John H. Gray, University of Minnesota M. H. Robinson, University of Illinois
Henry R. Hatfield, H. Parker Willis,
University of California George Washington University
Frederick C. Hicks,
University of Cincinnati
EDITORIAL
Spread and Effect of Accountancy Legislation
The current year is likely to go down to posterity with a
record of many things accomplished—some desirable, others not
quite all that might be desired—and in particular the 1913 rec
ord of legislation is notable although the year is only at its half
way stage. Leaving out of consideration the crucial enactments
affecting the fiscal policy of the nation and the equally vital leg
islative acts of some of the states it may be pardonable for this
magazine of accountancy to pause and discuss briefly the enact
ment of legislation in the several states bearing on the account
ancy profession and its status in the community.
So far this year six states have written certified public ac
countant laws on their statute books and even with that number
of enactments to its credit, 1913 has exceeded the accomplish
ments of all its predecessors. The closest second in the race
is 1909 when five states joined the ranks of progressive (we use
the word without political prejudice) communities. This year
Oregon, Tennessee, North Carolina, Delaware, Wisconsin and
North Dakota have accepted the theory that there should be an
official recognition of qualified accountants exactly as there should
444
Editorial
be and long has been governmental regulation of the practice of

medicine and law. Legislation of a similar character is pending
in three or four states and the probability is that by the time
this year’s legislative sessions are ended the number of states
having C. P. A. laws will have been considerably increased. At
the present time thirty states have certified public accountant
laws on their books. And yet it is only seventeen years since
the first law of this kind was passed by the legislature of New
York—truly a remarkable development in so short a time, but
not cause for astonishment when it is borne in mind how rapid
has been the advance of the accounting profession in the same
time.
But there are some aspects of the spread of C. P. A. legisla
tion which are not agreeable and call for the careful attention
of every accountant in the country.
It is almost inevitable that in the haste to enact laws pro
viding for the certification of accountants there should be writ
ten many a serious error which would lead to injury to the pro
fession which it was the ostensible purpose to assist. Legislators
have long been recognized as fallible and most fallible when it
comes to matters of which they can know little or nothing.
Accountancy is such a matter; and accordingly it is not aston
ishing that the legislation for accountancy should contain some
foolish and some pernicious clauses. Moreover, there have been
many instances in which private ambitions have guided the course
of accountancy bills—instances in which some accountant, rec
ognizing the increasing value of the right to affix the initials
C. P. A. to his signature, has pushed through the legislature of
his state a bill lax in its provisions and dangerous in its intent
by means of which he, the promoter, would become eligible for
official recognition without prior qualification or examination.
On account of these two causes—ignorance and self interest—
several wretched laws have been enacted in the states. Their
waiver clauses have been ridiculously broad and all embracing,
and by means of these waivers has come into the company of
accountants a regrettably numerous band of inefficients. But
it is pleasant to relate that the day of the bad law is passing.
Stout opposition to the unsatisfactory sort of legislation is made
by the American Association of Public Accountants, and although
now and then an undesirable law may slip through in some out
445
of the way corner of the country, the general tendency of the

latest laws is toward more rigid provisions and less elastic
waivers.
The effect of this is seen in the fact that of the six laws
enacted this year at least five are such as will bear the approval
of the national organization. The sixth was passed without any
word of warning and inasmuch as the American Association
was not consulted, the result is not what is desired. Yet these
unfortunate laws will be amended sooner or later, as legislators
are brought to see the necessity of effectual control of the ac
countancy profession and when the public comprehends that
upon the accountant rests so important a share of the burden of
commercial responsibility that no law not adequately preventive
of inefficiency will be tolerable. Revision and amendment are
slow processes but it may not be erring on the side of optimism
to predict that the evil features of most of the state laws dealing
with accountancy will have been altered before the next five
years have passed. It is gratifying to state further that while
a large number of unqualified men came into the possession of
certificates under one or another of the almost universal waiver
clauses, the vast majority of these have given up such practice as
they previously had, and therefore will work no more injury to
the profession. As the standards of accountancy are raised and
the demand of the public becomes confined to the best it is cer
tain that the worst will find itself without a foothold.
Now, assuming, for the sake of argument, that the laws will
be well revised and that no other states will fall into errors such
as have gone before, is it safe to consider that the protection
of the certified public accountant is complete? Assuredly it is
not. The laws may be never so faultless; their provisions may
apply only to the qualified; and to all appearance the public may
rest secure in the thought that no one can obtain the degree
without thorough investigation and demonstration of his integ
rity and ability—and yet despite all seeming perfection the whole
law may be maleficent in its effect if there be not an honest and
consistent application of its provisions.
Every accountancy law in the country provides for the ex
amination of candidates and almost all specify the subjects in
which examinations must be made—yet what of that if the
examiners be wilfully or ignorantly ready to set absurd questions
446
Editorial
and to accept as correct equally absurd answers? It is easy to

conceive an examination that would be no great obstacle to anyone
outside the nursery. True it is that the laws as a rule call for
examiners of fairly high attainments, but the power of appoint
ment is with the governors or with state institutions of learning
unadvised by the profession most concerned, and while that con
dition prevails it is not marvelous that some of the examiners
are ill-fitted to their positions.
This brings us to the heart of the whole matter. It is with
the appointing power that the fault or the merit lies and it is
upon the shoulders of some of our governors that we find the
burden of responsibility for grave mistakes in selection.
The remedy? Well, there’s the difficulty. It is a simple
matter to criticise destructively and constructive criticism is ever
the harder task; but it seems to us that the first care should
be to ameliorate the present ills and afterward to eradicate them.
The prime object, therefore, should be to impress upon the ap
pointing authority—whether it be governor or college—the para
mount need for cautious selection and to urge the observance of
those safeguards which the law intends. This may be done
if it be gone about in the right manner.
To eradicate the fault, however, will be more arduous and will
call for a wide-spreading campaign. The way lies in the rec
ognition of accountancy bodies, such as state societies, affiliated
with the national body and in provision for nomination of board
members by those bodies. The state society—it being under
stood that the right obtain only with the society recognized by
the national association—should be required by law to name,
let us say, three candidates for every vacancy as it occurs in the
state board. Let the choice of the man rest, if you will, with
the governor or the university, but that choice should be limited
to one of the candidates approved by the state society. By this
means unless the whole society were dominated by professional
obliquity, the public would be protected from the appointment of
unqualified examiners and the standards and meaning of certified
public accountancy laws would be strengthened and made clear.
Already there is an inclination in many states to appoint members
of the national association to fill vacancies in state boards and
it is not a counsel of the unattainable to urge full cooperation
between the governmental and accounting authorities.
447
In states where there is no state society the matter would

be adjusted differently, but it has ever been the contention of
the more prominent men in the profession that the society should
precede the law, partly for the very reason that such order of
progression makes for better protection against weak laws and
ill-advised appointments with all the host of evils that may
follow upon such conditions.
The New York Reciprocity Clause

Accountants in many parts of the country, as well as in New
York, will learn with a deal of gratification that the long sought
enactment of a reciprocal clause in the accountancy law of this
state at length is realized. We may not regard the wording of
the law as wholly satisfactory, but it is certainly a step in the
right direction and as such it should be welcome.
An anomalous condition of affairs has prevailed for many
years in this state in that a large percentage of the practising
accountants here have been certified public accountants of other
states; and while there was no reciprocity clause in the New York
law it was impossible for these accountants to obtain the New
York degree, which many of them felt they should hold while
practising in this state, unless they elected to take the examination
prescribed by the New York board—an alternative not seriously
to be considered by men who had already fulfilled the require
ments of other boards.
Under the new law the question of what shall be considered
the equivalent of the New York standard rests with the regents
of the university, and we have no doubt that the decision of that
body will be uninfluenced by any political or partisan feeling.
We are confident that the accountants of New York will
accord a hearty greeting to those members of the profession
practising here who desire to take advantage of the recently
granted opportunities.
448
Conducted by John R. Wildman, M.C.S., C.P.A.
Problem No. 18 (Demonstration)
The Central Furniture Company was incorporated under the
laws of the state of New York on July 1, 1912, with an author
ized capital stock of $2,000,000, divided into 10,000 shares of
preferred of the par value of $100 each, and 20,000 shares
of common of the par value of $50 each, for the purpose of
effecting a consolidation of three companies engaged in the
manufacture of furniture and furniture parts. There was also
authorized an issue of 5% collateral trust bonds, to be dated
July 1, 1912, to the extent of $1,000,000.
The consolidation was promoted and managed by the Syndi
cate Trust Company, which prior to July 1st caused an investi
gation to be made of the accounts of the various companies;
the properties to be appraised; secured options upon the stock
and made contracts with the holders thereof. It was stipulated
in the contract between the trust company and the newly organ
ized furniture company that the former should receive for its
services 10% of the par value of the preferred stock issue, in
stock, and should advance the cash necessary to pay the bonus
to the stockholders of the consolidating companies, recovering
the advances out of the proceeds of bond sales when same were
issued.
The balance sheets of the consolidating companies on May
31, 1912, were as follows:
The
The Riverton The Chat- Irvington
Furniture terton Chair Cane Seat
Assets Company Company Company
Land and buildings ........................ $ 643,789.42 $432,548.52 $875,419.17
Equipment ........................................ 85,321.88 47,997.22 90,405.74
Motor trucks.................................... 8,500.00 5,000.00 7,800.00
Furniture and fixtures .................. 15,132.69 10,547.86 12,532.52
Securities owned ............................. (a)52,987.50 (b)72,827.25 (c)40,000.00
Patents, trade-marks and goodwill 25,000.00 25,000.00 45,250.00
Materials and supplies.................. 18,943.26 20,617.32 19,437.62
Goods in process ............................ 7,562.89 12,881.23 15,258.45
Finished goods .............................. 22,713.48 14,683.04 11,138.12
Cash ................................................... 30,343.75 23,387.92 27,287.47
Accounts receivable ...................... (d) 125,486.29 (e)112,783.48 (f) 102,651.43
Notes receivable ............................ (g) 15,237.80 11,624.49 12,132.19
Accrued interest on securities... 125.00 500.00 250.00
449
Sinking fund .................................. 43,274.13

Organization expense .................... 4,750.00 5,125.00 2,525.00
Moving expense ............................ 1,275.00
Insurance unexpired .................... 32500 273.14 526.19
Total assets ........................ $1,099,493.09 $797,071.47 $1,262,613.90
Liabilities and Capital

First mortgage bonds .................. $ 300,000.00
Debentures ...................................... $500,000.00
Bond and mortgage payable .... $2 5 0,000.00
Taxes accrued ................................ 3,275.00 2,500.00 4,385.00
Salaries and wages accrued........ 1,327.50 847.25 3,127.23
Accounts payable .......................... (h)103,843.87 (j)97,981.14 (k)98,41745
Notes payable and interest.......... 61,328.43 (l)45,621.29 76,818.54
Interest accrued on bonds.......... 6,000.00
Interest accrued on debentures.. 5,000.00
Interest accrued on bond and
mortgage ...................................... 3,000.00
Reserve for depreciation, build
ings and equipment .............. 148,718.29 200,000.00 225,237.15
Preferred capital stock—par $100. 2 5 0,000.00 200,000.00
Common capital stock—par $100. 175,000.00 100,000.00 100,000.00
Profit and loss surplus ................ 50,000.00 97,121.79 49,628.53
Total liabilities and capital $1,099,493.09 $797,071.47 $1,262,613.90
(a) Includes 50 shares of the Chatterton Chair Company acquired at 102%.
(b) Includes 40M Ann Arbor, 1st g. 4’s at 80. (c) Includes 25M Riverton 1st
mortgage bonds at par. (d) Includes $613.95 due from the Chatterton Chair
Company, (e) Includes $2,647.92 due from the Irvington Cane Seat Company.
(/) Includes $1,532.17 due from the Riverton Furniture Company. (g) Includes
$5,125.75 notes and interest of the Chatterton Chair Company. (h) Includes
$1,532.17 due to the Irvington Cane Seat Company, (j) Includes $613.95 due to
the Riverton Furniture Company. (k) Includes $2,647.92 due to the Chatterton
Chair Company. (1) Includes $5,125.75 notes payable and interest in favor of
the Riverton Furniture Company.
On July 1st, the stock of the Central Furniture Company

was issued to the Syndicate Trust Company in blank, the latter
taking up the stocks of the consolidating companies in accordance
with the contracts. Preferred stockholders of the Riverton
Furniture Company received one share of preferred, two shares
of common and 25% in cash; common stockholders, two shares
of common and 15% in cash. Stockholders of the Chatterton
Chair Company received four shares of common and 40% in
cash. Preferred stockholders of the Irvington Cane Seat Com
pany received one share of preferred, two shares of common and
25% in cash; common stockholders, three shares of common
and 10% in cash.
Upon receipt of the stocks of the subsidiary companies, they
were deposited with a trustee and $500,000 collateral trust 5%
bearer bonds were issued to the Syndicate Trust Company. The
bonds were sold at an average price of 97. The balance of the
preferred stock was sold at an average price of 90, after which
450
the trust company made its accounting, returning the balance of

common stock unsold. The trust company sold the stock re
ceived as a commission at 90.
Prepare:
(a) Consolidated balance sheet of the three companies, May
31, 1912.
(b) General balance sheet the Central Furniture Company,
July 31, 1912.
Solution to Problem No. 18

The requirements of this problem are that there shall be a
consolidated balance sheet of the three companies at May 31,
1912, and a balance sheet of the Central Furniture Company
after the opening entries have been made. At first glance these
might seem to be the same thing. If the situation is analyzed
they will be found quite different. The consolidated balance
sheet was presumably prepared prior to the actual organization
of the Central Furniture Company as a basis for determining
principally what the capitalization would need to be. It will
also have been observed in reading the problem that the Central
Furniture Company was to be a holding company, maintaining
control of the three underlying companies through stock owner
ship and deriving its income from dividends on stocks and
interest on bonds. Consequently the detailed assets and lia
bilities of the three companies will not appear on the books of
the holding company, their place being taken by the investments
in securities.
As a matter of law, “any two or more corporations organ
ized for the purpose of carrying on any kind of business of
the same similar nature which a corporation organized under the
business corporations law might carry on, may consolidate into
a single corporation.” No previous cross-ownership is necessary
here as in the case of a merger. It is probably true that the
holders of the stock of the companies about to be consolidated
might pool their interests and select representatives without
giving up or in any way changing the status of their stock.
It makes a much cleaner matter of it, however, to organize a
new corporation, the capital stock of which is used to exchange
for and take up the capital stock of the consolidating companies.
The exchange of stock is not always par for par. The
451
consolidation may have originated with stockholders of the con

stituent companies who have seen an opportunity for mutual
advancement and profit, or it may have originated with some
promoter who has seen an opportunity for himself in bringing
about the consolidation. In the first instance various classes of
stock may give to the respective holders varying degrees of
power. Holders of preferred stock may be loath to give up
such stock unless they receive stock of equal strength in the new
company. In the second case certain stockholders will not,
perhaps, give up their old stock without additional incentive in
the form of cash. Further, it may be necessary to give a stock
or cash bonus in order to equalize the settlements among stock
holders of the various companies on account of goodwill, sur
plus, franchises carried at a nominal figure or not shown, patents
and trade-marks carried in the same way, and various other
attachments which a par for par exchange would ignore. It
therefore happens that all sorts of plans are contrived, all having
as their prime purpose a distribution which will be equitable and
satisfactory to all concerned.
In the problem under discussion the first requirement is a
consolidated balance sheet of the three companies May 31, 1912.
Before this can be prepared a consolidated trial balance or
working sheet is necessary. Incident to its preparation, there
must be taken into consideration the accounts between com
panies. What might be a perfectly good asset as long as someone
else owns a certain business becomes valueless if perchance you,
happening to be the debtor which the asset represents, should
purchase the business in question. So in the case of a consolida
tion, what was formerly a debt owing by one company to
another loses its value when the accounts of the two companies
are put together.
Examples of such accounts are, capital stock, bonds, ac
counts receivable and payable, notes and interest receivable and
payable, loans and advances, inter-company sales, rent, etc. The
danger of duplicating these inter-company transactions is avoided
in consolidated working sheets or trial balances by the introduc
tion of an elimination column. The operation of this as well
as the illustration of the above mentioned peculiarities common
to consolidation will be seen from the consolidated trial balance
appearing below:
452
CONSOLIDATED TRIAL BALANCE OF THE RIVERTON FURNITURE COMPANY,

THE CHATTERTON CHAIR COMPANY AND THE IRVINGTON
CANE SEAT COMPANY
May 31, 1912, AFTER CLOSING
The The The

Riverton Chatter Irvington
Elimi Furniture ton Chair Cane Seat
Debits Total nations Company Company Company
Land and buildings .............. $1,951,757.11 $ 643,789.42 $432,548.52 $ 875,419.17
Equipment .............................. 223,724.84 85,321.88 47,997.22 90,405.74
Motor trucks ........................ 21,300.00 8,500.00 5,000.00 7,800.00
Furniture and fixtures ........ 38,213.07 15,132.69 10,547.86 12,532.52
Securities owned .................. 135,689.75 (ac) $30,125.00 (a) 52,987.50 (b) 72,827.25 (c)40,000.00
Patents, trade-marks and
goodwill .......................... 95,250.00 25,000.00 25,000.00 45,250.00
Materials and supplies.......... 58,998.20 18,943.26 20,617.32 19,437.62
Goods in process .................. 35,702.57 7,562.89 12,881.23 15,258.45
Finished goods ...................... 48,534.64 22,713.48 14,683.04 11,138.12
Cash .......................................... 81,019.14 30,343.75 23,387.92 27,287.47
Accounts receivable ............ 336,127.16 (def)4,794.04 (d) 125,486.29 (e)112,783.48 (f) 102,651.43
Notes receivable.................... 33,868.73 (g)5,125.75 (7)15,237.80 11,624.49 12,132.19
Accrued interest on securities 875.00 125.00 500.00 250.00
Sinking fund .......................... 43,274.13 43,274.13
Organization expense .......... 12,400.00 4,750.00 5,125.00 2,525.00
Moving expense .................... 1,275.00 1,275.00
Insurance unexpired .......... 1,124.33 325.00 273.14 526.19
Total debits............ $3,119,133.67 $40,044.79 $1,099,493.09 $797,071.47 $1,262,613.90
Credits
First mortgage bonds ......... $ 275,000.00 (n)$25,000.00 $ 300,000.00
Debentures ............................ 500,000.00 $ 500,000.00
Bond and mortgage payable 250,000.00 250,000.00
Taxes accrued ...................... 10,160.00 3,275.00 2,500.00 4,385.00
Salaries and wages accrued. 5,301.98 1,327.50 847.25 3,127.23
Accounts payable .................. 295,448.42 (hjk)4,794.04 (h) 103,843.87(j)97,981.14 (k)98,417.45
Notes payable and interest.. 178,642.51 (l) 5,125.75 61,328.43 (l) 45,621.29 76,818.54
Interest accrued on bonds.. 6,000.00 6,000.00
Interest accrued on deben
tures ................................... 5,000.00 5,000.00
Interest accrued on bond
and mortgage ................ 3,000.00 3,000.00
Res. depn. bldgs. and equip.. 573,955.44 148,718.29 200,000.00 225,237.15
Preferred capital stock........ 450,000.00 250,000.00 200,000.00
Common capital stock ........ 370,000.00 (m)5,000.00 175,000.00 100,000.00 100,000.00
Profit and loss surplus .... 196,625.32 (m) 125.00 50,000.00 97,121.79 49,628.53
Total credits.......... $3,119,133.67 $40,044.79 $1,099,493.09 $797,071.47 $1,262,613.90
(a) Includes 50 shares Chatterton Chair Co. at 102%. (c) Includes 25M Riverton first mortgage
bonds at par. (d) Includes $613.95 due from the Chatterton Chair Co. (e) Includes $2,647.92 due
from the Irvington Cane Seat Company. (f) Includes $1,532.17 due from the Riverton Furniture
Company. (g) Includes $5,125.75 notes and interest of the Chatterton Chair Company. (ft) Includes
$1,532.17 due to the Irvington Cane Seat Company. (j) Includes $613.95 due to the Riverton Furni
ture Company, (k) Includes $2,647.92 due to the Chatterton Chair Co. (k) Includes $5,125.75 notes
payable and interest in favor of the Riverton Furniture Co. (m) 50 shares of Chatterton stock at
102% held by the Riverton Chair Co. (n) 25M bonds of the Riverton Chair Co. held by the Irvington.
Cane Seat Co.
453
The elimination will, after reference to the respective foot

notes, presumably be clear with the possible exception of the
adjustment of the surplus in the amount of $125. This occurs
by reason of the fact that in the securities owned by the Riverton
Furniture Company there appear 50 shares of the Chatterton
Chair Company carried at 102½ or $5,125, while the par value
of the stock as shown by the Chatterton Chair Company is
$5,000. While the stock in question may have cost the Riverton
Furniture Company $5,125 and the stock as evidenced by the
surplus of the Chatterton Chair Company may be worth said
amount, it is apparent that the premium increases the surplus
of the Riverton Furniture Company, and that in putting the two
companies together and eliminating the stock the premium must
be offset against the combined surplus.
Owing to the fact that the books of the companies about to
be merged have been closed before taking off the trial balance
and consequently no nominal accounts appear, to present a con
solidated balance sheet may smack of duplication, since the items
in the balance sheet will be the same as the combined items in
the trial balance after eliminating the offsets. The consolidated
balance sheet is presented nevertheless in order that the differ
ence between it and the subsequent balance sheet of the Central
Furniture Company may be strongly apparent. The consolidated
balance sheet is as follows:
454
THE RIVERTON FURNITURE COMPANY, THE CHATTERTON

CHAIR COMPANY AND THE IRVINGTON CANE
SEAT COMPANY
Consolidated Balance Sheet, May 31, 1912
Assets Liabilities and Capital
Land and buildings .. .$1,951,757.11 Capital stock:

Preferred ............... $ 4 5 0,000.00
Equipment .................... 223,724.84 Common .................... 3 70,000.00
Motor trucks ................ 21,300.00 Total capital stock.$ 820,000.00
Furniture and fixtures. 38,213.07 First mtge. bonds... 2 7 5,000.00

Securities owned ........ 135,689.75 Bonds and mtge. pay
able ...................... 250,000.00
Patents, trade-marks
and goodwill ........ 95,250.00 Debentures ................ 500,000.00
Working and trading Current liabilities:
assets: Taxes accrued ....... $ 10,160.00
Materials and sup Salary and wages
plies ..................... $ 58,998.20 accrued .............. 5,301.98
Goods in process.... 35,702.57 Accounts payable ... 295,448.42
Finished goods ........ 48,534.64 Notes payable and
interest ................. 178,642.51
Total working and Int. accrued on bonds 6,000.00
trading assets ..$ 143,235.41 Int. accrued on b/m. 3,000.00
Int. accrued on de
Current assets: bentures ...................... 5,000.00
Cash ............................. $ 81,019.14
Accounts receivable.. 336,127.16 Total current lia
Notes receivable .... 33,868.73 bilities .............$ 503,552.91
Acct. int. on securities 875.00
Reserve for deprecia
Total current assets.$451,890.03 tion :
Buildings and equip
Sinking fund ................ 43,274.13 ment ........................ 573,955.44
Deferred charges to ex
pense : Profit and loss surplus. 196,625.32
Organization expense $ 12,400.00
Moving expense .... 1,275.00
Insurance unexpired. 1,124.33
Total deferred chgs.

to expense...... $ 14,799.33
Total liabilities and
Total assets ... .$3,119,133.67 capital ............. $3,119,133.67
The consolidated balance sheet affords the promoters a basis

for planning the capitalization of the holding companies and
the consolidated trial balance shows the standing of the respec-
455
live companies. The latter serves as a basis for settlement with

the stockholders. While the entries covering the exchange of
stock will appear in their historical order among the others, it
may be of interest to glance at the following tabulation for the
purpose of seeing how much stock and cash the stockholders of
the respective companies will receive under the proposed plan
as well as how much preferred and common stock and cash will
be needed to meet the combined requirements:
Total | Pfd. | Common | Cash
Riverton
Preferred stockholders:
2500 sh. X 1 pfd. ($100 par)........ .. .$250,000 $250,000
2500 sh. X 2 com. ($50 par) ........ ... 250,000 $250,000
$250,000 X 25% cash .................... ... 62,500 $ 62,500
Total preferred stockholders... .. .$562,500
Common stockholders:
1750 sh. X 2 com. ($50 par) .... ...$175,000 175,000
26,250
$175,000 X 15% cash .................... ... 26,250
Total common stockholders ... .. .$201,250
Chatterton
1000 sh. X 4 com. ($50 par) .... .. .$200,000 200,000
$100,000 X 40% cash .................... ... 40,000 40,000
Total common stockholders .. .. .$240,000
Irvington
Preferred stockholders:
2000 sh. X 1 pfd. ($100 par) .... .. .$200,000 200,000
2000 sh. X 2 com. ($50 par) .... .... 200,000 200,000
$200,000 X 2 5% cash .................... .... 50,000 50,000
Total preferred stockholders.. .. .$450,000
1000 sh. X 3 com. ($50 par)........ ... .$150,000 150,000
$100,000 X 10% cash .................. ... 10,000 10,000
Total common stockholders... .. .$150,000
Grand total .......................... . .$1,613,750 $450,000 $975.ooo $188,750
In the journal entries, covering the opening of the books of

the Central Furniture Company which follow, the explanations
appear to be sufficient in most cases to make the entries clear.
In the case of organization expense, however, a word or two
may be necessary. The amount of $145,000 is made up of two
456
items, namely $100,000 as commission to the trust company for

services and $45,000 representing the discount allowed by the
trust company on the preferred stock. To show this latter item
on the books as such would appear to be an admission on the
part of the company, in the circumstances, that the stock in
question was not full-paid when issued and the corresponding
legal liability would therefore attach to the holders of the stock.
Since it is not the intention to place any such liability upon
stockholders but rather to increase the compensation to the trust
company to allow for such contingencies the organization expense
representing commissions allowed to the trust company is cor
respondingly increased.
Preferred capital stock unissued ....................................... $1,000,000

Common capital stock unissued .......................................... 1,000,000
To preferred capital stock authorized.............. $1,000,000
Common capital stock authorized.............. 1,000,000
To record the organization of the Central

Furniture Company, incorporated under the
laws of the state of New York on July 1,
1912, with an authorized capital stock of
$2,000,000 divided into 10,000 shares of pre
ferred of the par value of $100 each and
20,000 shares of common of the par value of
$50 each.
The Syndicate-Trust Company .......................................... 2,000,000

To preferred capital stock unissued.................. 1,000,000
Common capital stock unissued ................ 1,000,000
For capital stock issued in blank to the Syn

dicate-Trust Company.
Five per cent collateral trust bonds unissued................ 1,000,000

To five per cent collateral trust bonds au
thorized ............................................................. 1,000,000
Provision for issue of five per cent collateral
trust bonds authorized as of July 1, 1912.
The Syndicate-Trust Company ........................................ 500,000

To five per cent collateral trust bonds unissued 500,000
For bonds issued to the Syndicate-Trust

Company for sale.
Common capital stock unissued ......................................... 25,000

Organization expense ............................................................. 145,000
Discount on bonds ...................................................................... 15,000
Riverton Furniture Co.—pfd. stock, 2500 sh.................... 562,500
Riverton Furniture Co.—com. stock 1750 sh.................... 201,250
Chatterton Chair Co. —com. stock 1000 sh.................... 240,000
457
Irvington Cane Seat Co.—pfd. stock 2 000 sh.................... 4 5 0,000

Irvington Cane Seat Co.—com. stock 1000 sh.................... 160,000
Cash............................................................................................... 701,250
To the Syndicate-Trust Co.................................... 2,500,000
To account for preferred and common stock

and bonds turned over to the Syndicate
Trust Company.
THE CENTRAL FURNITURE COMPANY
General Balance Sheet, July 31, 1912
Assets Liabilities and Capital
Securities owned ...............$1,613,750 Capital stock:

Cash ...................................... 701,250 Preferred—issued and
Organization expense .... 145,000 outstanding ................. $1,000,000
Discount on bonds... 15,000 Common:
Auth........... $1,000,000
Less unissued 25,000 975,000
Total capital stock.$1,975,000
Collateral trust 5% bonds:

Auth............... $1,000,000
Less unissued 500,000
Issued and outstanding. 500,000
Total assets .............$2,475,000 Total liabilities and

--------------- capital ................... $2,475,000
It will be noted that in the balance sheet the stocks have been
grouped under the title of securities owned rather than shown in
detail, since a general balance sheet is asked for. As a matter
of further interest, the stocks of the underlying companies will
be seen to have lost their identity, in so far as the par is con
cerned, having been taken up at their cost in par of the stock
and cash of the parent company. The latter will in the future
take its earnings from subsidiaries through dividends.
Problem No. 18-A (Practice)
From the text and demonstration of problem No. 18, prepare:

(a) Journal entries relating to the consolidation, as they ap
peared on the books of the Syndicate Trust Company.
(b) Skeleton ledger accounts of the Syndicate Trust Com
pany.
458
New York C. P. A. Examinations of
January, 1913
Answers by Paul-Joseph Esquerré, C.P.A.
PRACTICAL ACCOUNTING—PART II
Question 4
James Stetson is appointed trustee of the manufacturing business of

John Brightlawn, for the purpose of rehabilitation. On taking charge
he finds that the available assets are: cash in bank, $356; accounts re
ceivable, (a) good, $3,712; (b) probably uncollectible, $350. The working
and trading assets consist of: raw materials, $17,258; sundry manufac
turing supplies, $700; finished goods, $8,000; goods in process, $30,945.70.
Other assets comprise: machinery and machine tools, $41,000; shop and
hand tools, $1,300; deferred debits to manufacturing, $530. The liabilities
are: creditors’ account, $39,700; wages accrued, productive $500, unskilled
$230.
The transactions under the trusteeship are as follows: Loaned by
creditors for immediate needs, $7,000. Purchased on book accounts: raw
materials, $8,300; sundry manufacturing supplies, $9,500. Factory ex
pense: paid in cash, $1,300; incurred as a liability to creditors and subse
quently liquidated, $2,100. The doubtful accounts receivable proved
worthless. Cash paid for: productive labor, $16,000; unskilled labor,
$2,500; general expense, $8,000; additional shop tools, $609; freight in
ward, on raw materials manufactured and sold, $60. Interest allowed
to creditors on their accounts amounted to $143.10. The trustee ad
vanced $4,300 to John Brightlawn on account of expected profits; the
sales of finished wares amounted to $91,000.
At the close of the trusteeship, the trustee’s books show the working
and trading assets to be: finished goods, $11,000; goods in process,
$10,450; raw materials, $1,945.70; manufacturing supplies, $395.25. There
is besides an amount of $750.10 representing factory expenses unapplied.
The creditors’ accounts show a balance of $1,650.30, while the uncollected
accounts receivable amount to $2,975.36. The shop and hand tools
amount to $1,609.
Prepare an account which, while respecting the fiduciary character
of the relations of the trustee and of the proprietor of the business, will
reflect logically and clearly the result of J. Stetson’s administration.
459
Answer to Question 4
SUMMARY OF THE ADMINISTRATION
or the Business of John Brightlawn, by John Stetson, Trustee
Assets taken over: Liabilities to be liquidated:

Cash ..................................................... $ 356.00 Creditors’ accounts ......................... $ 39,700.00
Accounts receivable ......................... 4,062.00 Wages accrued ................................. 730.00
Raw materials ................................... 17,258.00
Manufacturing supplies.................. 700.00
Finished goods.................................. 8,000.00
Goods in process ............................. 30,945.70
Machinery and machinetools.... 41,000.00
- Shop and hand tools ...................... 1,300.00
Deferred debits to manufacturing:
Factory overhead expense.......... 530.00
Total................................... $104,151.70 $ 40430.00
New assets obtained during trustee New liabilities incurred during trus
ship and increases of assets in teeship, and increases of liabilities
cluded in original inventory: included in original inventory:
Raw materials and freight thereon $ 8,360.00 Creditors’ accounts:
Manufacturing materials and sup For loans ......... .....$ 7,000.00
plies ................................................... 9,500.00 For raw material.... 8,300.00
Labor on goods manufactured.... 17,770.00 For manufacturing
Factory overhead on goods manu supplies .................. 9,500.00
factured ....................................... 3,400.00 For factory overhead 2,100.00
Finished goods ................................. 75,222.65 For interest .............. 143.10 27,043.10
Proceeds of loan by creditors—
cash ............................................. 7,000.00 To employes:
Accounts receivable: For productive labor.$15,500.00
Collected ................ $88,024.64 For unskilled labor.. 2,270.00 17,770.00
Uncollected ................ 2,975.36 91,000.00
Shop and hand tools ...................... 609.00
Total ................................. $212,861.65 Total .................................$ 44,813.10
Total assets ............................... $317,013.35 Total liabilities........................... $ 85,243.10
Gross profit on sales: Disposition of assets:

Increase from sales ...$91,000.00 a. Consumed by manufacturing
Cost of goods sold.... 75,222.65 18,777.35 operations:
--------------- Decrease of goods in
process ....................... $20,495.70
Raw materials and
freight thereon.... 23,672.30
Manufacturing sup
plies ...... .. 9,804.75
Factory overhead ex
pense ...................... 3,179.90
Tools ............................... 300.00
460
Labor:
Productive ............ 15,500.00
Unproductive .......... 2,270.00 $ 75,222.65
b. Sold by trustee :
Finished goods (at sale
price) ......................................... 91,000.00
c. Lost in collection ............................ 350.00
d. Disbursed:
1. To acquire assets:
Tools ......................... $ 609.00
Freight on materials 60.00
Factory overhead .. 1,300.00
$ 1,969.00
2. To liquidate liabili
ties:
Creditors’ accounts .$65,092.80
Wages accrued .... 18,500.00
$83,592.80
3. For expenses of
trustee ..................... $ 8,000.00
4. For advances to
proprietor ................$ 4,300.00 97,861.80
e. Returned to J. Bright
lawn :
Cash ............................... $ 1,230.84
Accounts receivable... 2,975.36
Raw materials.............. 1,945.70
Manufacturing supplies 395.25
Finished goods ............ 11,000.00
Goods in process........ 10,450.00
Machinery and ma
chine tools ............ 41,000.00
Shop and hand tools... 1,609.00
Factory expense unap
plied ........................ 750.10 71,356.25
$335,790.70 $335,790.70
Disposition of liabilities:
a. Liquidated:
Creditors’ accounts. .$65,092.80
Wages accrued .... 18,500.00 83,592.80
b. Returned to J. Brightlawn:
Creditors’ accounts ............... 1,650.30
$85,243.10
$421,033.80 $421,033.80
461
GENERAL LEDGER ACCOUNTS
Appearing on the Books of the Trustee
CASH
J. Brightlawn .................... $ 356.00
Creditors’ (loan) .............. 7,000.00 Factory expense ................. $ 1,300.00
Accounts receivable ........ 91,736 64 Productive wages................. 16,000.00
Unskilled labor.................. 2,500.00
General expense................ 8,000.00
Tools ..................................... 609.00
Goods in process, freight
in..................................... 60.00
J. Brightlawn, drawings.. 4,300.00
Creditors.............................. 65,092.80
Balance ................................. 1,230.84
$99,092.64 $99,092.64
Balance ................................. $ 1,230.84 J. Brightlawn ............ ....$ 1,230.84
ACCOUNTS RECEIVABLE
J. Brightlawn .................... $ 4,062.00 J. Brightlawn (loss) ......... $ 350.00

Finished goods ..................... 91,000.00 Cash ..................................... 91,736.64
--------------- Balance ................................. 2,975.36
--------------- $95,062.00
Balance ................................... $2,975.36 ---------------
== J. Brightlawn .................... $ 2,975.36
RAW MATERIALS
J. Brightlawn .................... $17,258.00 Goods in process.................$23,612.36

Creditors ............................ 8,300.00 Balance ................................ 1,945.70
$25,558.00 $25,558.00
Balance ................................. $ 1,945.70 J. Brightlawn ..................... $ 2,945.70
462
SUNDRY MFG. SUPPLIES
J. Brightlawn .................... $ 700.00 Goods in process ............... $ 9,804.75

Creditors ............................ 9,500.00 Balance ................................. 395.25
$10,200.00 $10,200.00
Balance ................................. $ 395.25 J. Brightlawn .................... $ 395.25
FINISHED GOODS
J. Brightlawn ................... $ 8,000.00 Sales .................................. $ 91,000.00

Goods in process ............ 75,222.65 Balance ............................... 11,000.00
J. Brightlawn .................. 18,777.35
$102,000.00 $102,000.00
Balance ............................... $ 11,000.00 J. Brightlawn.................... $ 11,000.00
GOODS IN PROCESS
J. Brightlawn .................... $30,945.70 Finished goods .................... $75,222.65

Raw materials.................... 23,612.30 Balance ................................. 10,450.00
Mfg. supplies .................... 9,804.75
Productive wages ............ 15,500.00
Factory overhead.............. 5,749.90
Freight inward.................. 60.00
$85,672.65 $85,672.65
Balance ................................. $10,450.00 J. Brightlawn ..................... $10,450.00
MACHINERY AND MACHINE TOOLS
J. Brightlawn....................... $41,000.00 J. Brightlawn....................... $41,000.00
SHOP AND HAND TOOLS
J. Brightlawn .................... $ 1,300.00 Factory expense................. $ 300.00

Cash ...................................... 609.00 Balance ................................. $ 1,609.00
$ 1,909.00 $ 1,909.00
Balance ................................ $ 1,609.00 J. Brightlawn ..................... $ 1,609.00
463
FACTORY OVERHEAD EXPENSES
J Brightlawn ...................... $ 530.00 Goods in process ................ $ 5,749.90

Cash, factory expense.... 1,300.00 Balance ............................... 750.10
Creditors ............................ 2,100.00
Unproductive labor........ 2,270.00
Shop tools .......................... 300.00
$ 6,500.00 $ 6,500.00
Balance ................................ $ 750.10 J. Brightlawn ................... $ 750.10
CREDITORS’ ACCOUNTS
Cash ...................................... $65,092.80 J. Brightlawn ..................... $39,700.00

Balance ................................ 1,650.30 Cash ...................................... 7,000.00
Raw materials.................... 8,300.00
Supplies .............................. 9,500.00
Factory expense ................ 2,100.00
Interest .......................... ... 143.xo
$66,743.10 $66,743.10
J. Brightlawn ..................... $ 1,650.30 Balance ................................. $ 1,650.30
WAGES ACCRUED—PRODUCTIVE
Cash ...................................... $16,000.00 J. Brightlawn ......................$ 500.00

Goods in process .............. 15,500.00
$16,000.00 $16,000.00
WAGES ACCRUED—UNSKILLED
Cash ...................................... $ 2,500.00 J. Brightlawn ......................$ 230.00

Factory overhead ............ 2,270.00
$ 2,500.00 $ 2,500.00
GENERAL EXPENSE
Cash ....................................... $ 8,000.00 J. Brightlawn ..................... $ 8,000.00
INTEREST ACCOUNT PAYABLE
Creditors ............................. $ 143.10 J. Brightlawn ..................... $ 143.10
464
JOHN BRIGHTLAWN (Proprietor)
Sundry liabilities taken Sundry assets taken over $104,151.70

over ........ $ $40,430.00 Gross profit on sales .... 18,777.35
Accounts receivable (lost) 350.00
Interest on accounts pay
able .............................. 143.10
General expenses of trus
tee 8,000.00
................................
Advances by trustee........ 4,300.00
$53,223.10
Balance 69,705.95
$122,929.05 $122,929.05
Balance ............................... $ 69,705.95

Sundry liabilities returned 1,650,30
Sundry assets returned..$ 71,356.25 $71,356.25
TRIAL BALANCES OF THE BOOKS OF THE TRUSTEE
INITIAL TRIAL BALANCE
Cash ..................................... $ 356.00 Creditors’ accounts ......... $ 39,700.00

Accounts receivable $3,712 Wages accrued ................ 730.00
350 4,062.00 J. Brightlawn ................ 63,721.70
Raw materials ................ 17,258.00
Manufacturing supplies.. 700.00
Finished goods ................ 8,000.00
Goods in process ............ 30,945.70
Machinery and machine
tools ................................ 41,000.00
Shop and hand tools.... 1,300.00
Deferred debits to mfg.. 530.00
$104,151.70 $104,151.70
CLOSING TRIAL BALANCE
Cash ..................................... $ 1,230.84 Creditors’ accounts .......... $ 1,650.30

Accounts receivable ......... 2,975.36 J. Brightlawn ....................... 69,705.95
Raw materials .................. 1,945.70
Mfg. supplies .................... 395.25
Finished goods .................. 11,000.00
Goods in process .............. 10,450.00
Machinery and Machine
tools .............................. 41,000.00
Shop and hand tools........ 1,609.00
Deferred debits to mfg... 750.10
$71,356.25 $71,356.25
465
COMMENTS
John Stetson, Trustee
To the accountant who has been sufficiently interested to follow the

evolution of the New York C. P. A. examinations, this problem gives
the impression of being a rearrangement, revised and enlarged, of the
“Peter Post” problem of the New York C. P. A. examination of October
1, 1907. It is interesting to note that while the older problem boldly asks for
a Realization and Liquidation account, the younger one is so carefully
worded that it avoids the mention of the title which the account is to
bear.
Indeed, it would be odd to apply the term “Realization” to the opera
tions of the trustee. The only asset on which the trustee realizes is the
Accounts Receivable; but in this he acts precisely as the proprietor should
have done. As to the other assets, he uses them as required by the
conduct of the business: he operates the machinery and tools; in the
course of his operations, he consumes certain working assets and trans
forms them into trading assets which he exchanges for claims against
customers; in the course of his administration, he consumes part of the
cash to defray expenses according to the needs of the business, or in
pursuance of one of his duties which consists of marshalling the re
sources which are entrusted to him, in order to apply them to the satis
faction of the claims of the creditors. Having rehabilitated John Bright
lawn’s enterprise, he naturally accounts for what he took over originally,
for the fluctuations of the assets and liabilities, for the causes which
have brought them about, and, lastly for the disposition of the properties
and moneys which he has held in trust during his trusteeship.
The expression of the above facts resolves itself into the expression
of the results shown by the ledger accounts reflecting the transactions
of the period, whether the trustee opened new books, or retained the
books kept by the proprietor.
466
An Income Tax Problem
[An esteemed correspondent has submitted a problem in the applica
tion of the income tax which, because of the probability of an early
enactment of such a law in this country, is of peculiar interest at present.
Our correspondent has offered to analyze replies which are received to
this problem. Replies should be addressed to “X,” care Journal of
Accountancy, and should be received before June 30.—Editor, The Jour
nal of Accountancy.]
The following statement represents the profit and loss of an English

manufacturing concern for three fiscal years, one showing a profit and
the other two a loss. The accountant is to prepare an adjustment ac
count of the three years and arrive at the amount upon which the
tax is levied. The profit is to be determined by consideration of
the items relevant to the business establishment. This problem illus
trates the equity of assessing upon an average of three years’ results,
which is considered fair to the government and to the taxpayer, and
preferable to a calculation made upon the result of one year, which
might be abnormal in its profits or losses.
Problem
McNeill & Lauff, manufacturers, are equal partners. From their

profit and loss accounts for the fiscal years ended June 30, 1910-11-12,
prepare the income tax assessment for 1913-14. The plant at the end
of the fiscal year 1912 stood at $42,500.00, and five per cent is the agreed
rate of depreciation.
Dr. 1910 1911 1912

1. Inventory ........................................ .$ 13,750.00 $ 13,000.00 $ 13,600.00
2. Purchases ........................................ . 41,200.00 37,840.00 37,400.00
3. General expense ............................ . 21,600.00 20,800.00 20,400.00
4. Loss on live stock sold ................ . . 300.00 600.00
5. Removal expense .......................... 1,250.00
6. Charity ............................................ 525.00 525.00 525.00
7. Loss on sale of real estate ........ 500.00
8. Wages ................................................ 12,100.00 11,400.00 11,500.00
9. Salaries ............................................ . 3,400.00 3,225.00 3,200.00
10. Salaries, McNeill & Lauff .......... 2,000.00 2,000.00 2,000.00
11. Depreciation of plant, 5% .......... 2,000.00 1,900.00 1,805.00
12. Interest on capital—McNeill .... 1,050.00 1,085.00 1,050.00
13. Interest on capital—Lauff .......... 625.00 600.00 575.00
14. Depreciation of buildings, 2½%. 1,125.00 1,095.00 1,065.00
15. Schedule A—tax on premises—
$1,800.00 @ 5 5/6% . 105.00 105.00 105.00
16. Profit .................................................. 1,375.00
$101,655.00 $ 94,825.00 $ 93,825.00
467
17. Sales ................................................... $ 87,605.00 $ 78,100.00 $ 73,425.00

18. Profit on sale of real estate.......... 700.00
19. Dividends on stocks ......................... 625.00 800.00 650.00
20. Rents received ................................... 425.00 600.00 550.00
21. Inventory ............................................. 13,000.00 13,600.00 14,500.00
22. Loss .................................................... 1,725.00 4,000.00
$101,655.00 $ 94,825.00 $ 93,825.00
Oregon C. P. A. Law
Following is the text of the bill introduced at the last session of the
Oregon legislature, passed and approved, creating a state board of ac
countancy of Oregon:
An Act to create a State Board of Accountancy and to prescribe its
powers and duties, to provide for the examinations of and issuance and
revocation of certificates to qualified applicants, and to provide a penalty
for the violation of this act.
Be it enacted by the People of the State of Oregon:
Section 1. That any person residing or having an office for the regular
transaction of the business of accountancy in the state of Oregon, being
over the age of twenty-one years and of good moral character, being also
a citizen of the United States, or having in good faith duly declared his
intention of becoming such, and who shall have received from the state
board of accountancy a certificate of his qualifications to practise as a
public expert accountant, as hereinafter provided, shall be styled and
known as a “Certified Public Accountant” and no other person and no
partnership all of the members of which have not received such certifi
cate and no corporation shall assume such title or the title of “Certified
Accountant” or use the abbreviation of “C.P.A.” or any other words,
letters or abbreviations tending to indicate that the person, firm or cor
poration so using the same is a certified public accountant.
Section 2. The governor shall, within thirty days after the passage
and approval of this act, appoint five persons residing in this state, who
shall be skilled in the practice of accounting, and who shall have been
actively engaged therein on their own account within the state of Oregon
for a period of at least two years next preceding the passage of this act,
to constitute and serve as a state board of accountancy. The members
of such board shall hold office for four years and until their successors
are appointed and have qualified; save and except that one of the
members of the board first to be appointed under this act shall hold
office for one year; one for two years; one for three years; and two
for four years. Any vacancies that may occur from any cause shall
be filled by the governor for the unexpired term; provided, that all
468
Oregon C. P. A. Law
appointments made after the first board must be made from the roll
of certificates issued and on file in the office of the governor.
Section 3. The state board of accountancy shall make all needful
rules and regulations regarding the qualifications and experience of
persons applying for certificates under this act, the conduct of the
examinations herein provided for or their character or scope, the method
and time of filing applications for examinations and their form and
contents and all the rules and regulations necessary to carry into effect
the purpose of this act. Examinations shall be held by the board at least
once in each year at such time and place as may be determined by it.
The time and place of holding examinations shall be duly advertised for
not less than three consecutive days, not less than thirty days prior
to the date of each examination, in at least two representative daily
papers published in the state. The examinations shall be “Theory of
Accounts,” “Practical Accounting,” “Auditing,” and “Commercial Law.”
Section 4. The state board of accountancy shall charge each applicant
for the examination and certificate provided for in this act, a fee of
twenty-five dollars to meet the expenses of such examination. The fee
shall be payable by the applicant at the time of filing his application.
In case of failure on the part of any applicant to attend the examination
or to pass a satisfactory examination, said applicant may appear at
the next examination of said board for re-examination without charge.
The state board of accountancy shall report annually to the governor
the names of all persons receiving certificates, or whose certificates are
registered or revoked; and the receipts and expenses under this act. Out
of the funds collected under this act shall be paid the actual expenses of
the state board of accountancy. No member of the board shall receive
remuneration for his services. Provided, that no expense incurred under
this act shall be a charge upon the funds of the state.
Section 5. Said state board of accountancy may, in its discretion,
waive the examination of, and may issue a certificate for the certified
public accountant to any person possessing the qualifications mentioned in
section 1 of this act, who
(1) Is the holder of a certified public accountant certificate issued
under the laws of another state which extends similar privilege to
certified public accountants of this state, provided the requirements
for said degree in the state which granted it to the applicant are, in the
opinion of the state board of accountancy, equivalent to those herein
provided; or who
(2) Either shall have for at least two years next prior to the passage
of this act been practising in this state as a public accountant on his
own account or who shall have for at least one year next prior to the
passage of this act been practising in this state as a public account
ant on his own account and shall have had at least two years prior
experience in the practice of accountancy on his own account or with
a reputable public accountant or accountants in this or other states, and
469
who shall apply in writing to said board for such certificate within sixty
days after the passage of this act.
All applicants mentioned in this section shall pay a fee of ten dollars
($10.00) for such certificate.
Section 6. The state board of accountancy may revoke any certificate
issued under this act for unprofessional conduct or other sufficient cause,
provided that written notice shall have been served on the holder of such
certificate at least twenty days before any hearing thereon, stating the
cause for such contemplated action and appointing a day for a full hear
ing thereon by the state board of accountancy. Provided further, that
such revocation must receive the affirmative vote of at least four members
of the board.
Section 7. All certificates granted by the state board of accountancy
shall be subject to an annual fee of one dollar ($1.00).
Section 8. If any person shall represent themselves to the public as
having received a certificate provided for in this act, or shall assume
to practise as a certified public accountant or use the abbreviation
“C.P.A.” or any similar words or letters to indicate that the person
using the same is a certified public accountant, without holding a valid
certificate issued under the provisions of this act, or if any person having
received such a certificate provided for in this act shall thereafter lose
the same by revocation and shall refuse or delay to return such certificate
to the board and shall continue to practise as a certified public accountant
or use such title or any other title or abbreviation mentioned in section
1 of this act, he shall be deemed guilty of a misdemeanor, and on con
viction thereof shall be fined a sum not exceeding two hundred dollars
for each conviction, or shall be imprisoned in the county jail for a term
not exceeding six months.
The Wisdom of Chicago

The prominent part played by accountants in the Chicago Association
of Commerce is again demonstrated by the fact that in the committee
of that association appointed to entertain the members of the International
Conference on the one hundredth anniversary of peace among English
speaking peoples the following certified public accountants were in
cluded : Edward E. Gore, St. John Powers, Francis R. Roberts, W.
Ernest Seatree, Walter A. Staub and Arthur Young.
470
New York C. P. A. Law Amended
The sections of the general business law of New York which relate
to certified public accountants have been amended by the addition of a
reciprocal clause. The law as amended follows (new matter in italics) :
AN ACT to amend the general business law, in relation to certified

public accountants.
The People of the State of New York, represented in Senate and

Assembly, do enact as follows:
Section 1. Section eighty of chapter twenty-five of the laws of nine
teen hundred and nine, entitled “An act relating to general business,
constituting chapter twenty of the consolidated laws,” is hereby amended
to read as follows:
§ 80. Certified public accountants. Any citizen of the United
States, or person who has duly declared his intention of becoming such
citizen, residing or having a place for the regular transaction of business
in the state, being over the age of twenty-one years and of good moral
character, and who shall have received from the regents of the university
a certificate of his qualifications to practise as a public expert accountant
as hereinafter provided, shall be styled and known as a certified public
accountant; and no other person shall assume such title, or use the
abbreviation C. P. A. or any other words, letters, or figures, to indicate
that the person using the same is such certified public accountant. Any
citizen of the United States who has practised three years as a certified
public accountant in another state, under a license or a certificate of his
qualifications to so practise, issued by the proper authorities of such state,
may, upon payment of the regular fee, in the discretion of the regents of
the university, receive a certificate to practise as a certified public account
ant without an examination. But he must possess the qualifications re
quired by the rules of the regents of the university and must furnish
satisfactory evidence of character and qualifications.
§ 2. This act shall take effect immediately.
New York State Society of Certified Public Accountants
At a meeting of the New York State Society of Certified Public Ac

countants on May 12th the following officers and directors were elected
for the ensuing year:
President, Edward L. Suffern; first vice-president, Ferdinand W.
Lafrentz; second vice-president, Parley Morse; secretary, Samuel D.
Patterson; treasurer, David E. Boyce.
Directors: Francis R. Clair, Henry R. M. Cook, Adolf S. Fedde,
Charles Hecht, Charles E. W. Hellerson, Duncan MacInnes, J. Lee Nichol
son, Elijah W. Sells, Richard P. Tinsley, William F. Weiss, William H.
West, and Arthur Wolff.
471
Correspondence
“For the Good of the Profession
Editor, The Journal of Accountancy:
Sir: In connection with your editorial in the last number of The
Journal, the enclosed clipping may be of interest.* You see human
nature is pretty much the same in other professions than accountancy!
But after all, is it so much professional jealousy as dislike to appear
in the role of “Professor Know-it-all” that deters so many from pub
lishing professional data and experiences? I have noticed at conventions
and local association meetings that after the discussions get everybody
warmed up, there is no lack of interesting statements of experiences and
opinions. But every chairman who has conducted one of these discus
sions knows how hard it is to get them started.
As a case in point I note quite a lively controversy is fairly under
way in The Journal on the subject of interest as part of manufacturing
or production costs. Doesn’t that seem to point the way to induce freer
expressions of opinions and experiences? In short, let The Journal
assume the role of chairman of a general debate, propound the problems
and invite general discussion.
As an example: What is the proper place for depreciation in an in
come statement?
Yours truly,
W. H. Lawton.
May 11, 1913.
* Suppression of Technical News
(From The Engineering Record)
Dear Sir: I have read with a great deal of interest the editorial in the
Engineering Record of March 15 entitled “Suppression of Technical
News.” You have expressed my sentiments, and especially in the para
graph reading as follows: “The suppression of so much good engineering
information until it becomes too old to be of much interest is due to a
very common misapprehension as to what constitutes technical news.”
Most engineers have adopted this policy largely, I think, because of
what might be termed “professional jealousy”; but it has been my idea
for several years that the principle is wrong and that we do one another
an injustice by not publishing for the benefit of our fellow engineers such
data as would be of service to us.
P. H. Norcross.
Atlanta, Ga.
472
Correspondence
Interest a Factor of Costs?

Editor, The Journal of Accountancy:
Sir: I have read with much interest the articles published in The
Journal on the question proposed in its April issue, i. e., “In a manu
facturing business shall interest on investment be considered as a factor
of cost; or shall it be treated as a deferred charge against profits?” and
believing as I do your statement that “the matter is one of considerable
importance” and one which demands “a practical settlement,” I venture
to accept your invitation for further comment on the arguments so far
advanced.
The principal reasons for the inclusion of interest as a cost element
are given in your articles as follows:
Professor Cole gives two arguments: first, because the enterprise to
be self-supporting must yield sufficient income to give a proper amount
of interest on the investment; second, because the inclusion of interest
is needed as a guide in determining the comparative costs of production
as between processes requiring the use of expensive machinery with
heavy investment of capital and processes in which there is a larger use
of labor requiring less investment of capital.
A. Hamilton Church makes a distinction between interest on bor
rowed capital and interest on that part of the invested capital of a
manufacturing business which is “represented by land, buildings, plant
machinery, stores and work in progress,” but states that interest on
capital so invested for use in manufacturing should be charged as part
of the cost of manufacturing in order to know the comparative economical
value of the different processes used in manufacturing, and should be
added to the cost of the output.
Edward L. Suffern agrees with the main contention of the advocates
of interest as one of the elements of production, stating that so far as
the manufacturer who borrows all his capital is concerned, his costs
do not terminate nor do his profits begin until this interest is earned and
it is certainly part of his cost of doing business.
Mr. Suffern also states that interest should be included in the cost
of manufacturing in order to know the relative advantages of special
as against regular classes of output.
J. Lee Nicholson gives a further reason for including interest as
part of the cost of doing business, in the greater risk of capital invested
in manufacturing enterprises as against its investment in stocks, bonds
or real estate. Mr. Nicholson states his agreement with the reasons
advanced by Professor Cole and A. Hamilton Church.
The first reason given for the inclusion of interest on investment as
part of the cost of production by Professor Cole is that the enterprise
to be self-supporting must yield sufficient income to give a proper amount
of interest on the investment.
I submit that this argument does not apply to the question proposed,
as it would make no difference to the income of an enterprise whether
473
the interest were treated as a factor of cost or as a deferred charge

against profits; the net result or income would be the same.
The second argument by Professor Cole is that in order to know the
comparative economical cost of two processes of manufacture the interest
on machinery used must be taken into consideration.
The illustration given by Professor Cole is a simple problem in the
relative economical value of two processes of manufacture, one using
expensive machinery, the other using hand labor, and his argument is
that a proper comparison of the cost of these two processes must include
the interest on the expensive machinery. Certainly any business man
before undertaking to invest new capital or his surplus working capital
in expensive machinery, would make a careful calculation before he
purchased such machinery to ascertain whether the actual profits de
rived from its use would pay the cost of procuring such new capital
and still show a surplus over the profit derived from the hand process.
This is quite a different matter from the theory advanced of charging
the interest on the purchase price of such machinery as part of the manu
facturing cost of the articles it produces, as it simply is not part of the
manufacturing cost of same; but to make this statement does not mean
that the manufacturer cannot reimburse himself for the cost of the new
capital necessary. He certainly should and actually does, but he should
do so by making his selling price include the manufacturing costs, com
mercial costs, financial costs, and also an adequate profit to compensate
him for the risk he assumes in making the investment.
It will be noticed that none of the reasons given for the inclusion
of interest as a factor of cost is based on fundamental principles of
accountancy. Mr. Church states that “the general principle we must
apply in discussing this question is that of utility,” and calls the kind of
interest he advocates “an assessment for the use of capital values in the
actual process of manufacturing.” Now if, under the methods of cost
accounting which do not include interest as a cost factor, there is no
provision made to provide compensation for the use of capital values
represented by land, buildings, plant machinery and other needed facilities
for manufacturing, in this case Mr. Church would have pointed out an
omission which should be corrected. But such is not the case. Modern
cost accounting does provide an adequate Charge to each article manu
factured or job performed for the use of the manufacturing facilities
needed by arranging for a proper charge to output for the depreciation
caused by the manufacturing process. This assessment for depreciation
when properly made provides for the repairs needed and replacement of
old buildings, machinery and machines by new buildings, machinery and
machines, and places the entire burden of this repair and replacement
cost on the articles manufactured and jobs performed in exact ratio
to their use of these facilities, so that the entire capital investment in
plant is preserved without impairment at its full original asset value, by
an “assessment for the use of capital values in the actual process of
474
Correspondence
manufacturing”; but this “assessment” is called depreciation by most

cost accountants.
In the operation of a manufacturing business the following processes
are fundamental:
The production of some article or substance.
The selling of its product.
The shipment of its goods.
The clerical work necessary to transact its business.
The administration of its business and financial affairs.
To undertake the work, capital is invested in a manufacturing plant
to make its product, and also in a place and facilities for and expenses
connected with the sale of its product, i. e., a selling force, a shipping
force, office force, and working capital to run the business. So it is
assumed that your question—“In a manufacturing business shall interest
on investment be considered as a factor of cost?”—does not contemplate
the division of capital made by Mr. Church, who ignores all investment
of capital necessary to perform commercial functions and makes the
interest he advocates apply simply to that part of the capital values
used in manufacturing processes and the facilities of manufacture, while
it is claimed by those who differ from his view that for the use of these
facilities proper depreciation charges make ample provision up to the
point where it is not a question: “What has the use of this machine or
shop cost us in the production of this output?” but “How much interest
are we entitled to charge on the cost of this plant investment to add to
the cost of operating its facilities? For instead of investing our money
in this business, we might have purchased government bonds at 3%,
or other bonds at from 4% to 6%, or possibly some speculative industrial
which might have yielded 8%, so we do not know just how much interest
we should charge to cost of manufacturing output.”
The question at this point becomes not a question of cost accounting;
all the actual costs have been provided for. It is not a question of com
parative economy in the use of certain processes; that has been provided
for on the basis of actual cost of process plus actual cost of machinery
impairment and wear and tear in each process. It is now simply a ques
tion, from the point of view that would include interest on investment
as a manufacturing cost: How much interest on my money do I con
sider an adequate return for my investment in this plant? Then in
accordance with the personal decision of such a manufacturer all his
manufactured goods and goods in process are charged with whatever
rate of interest the manufacturer elects to charge for his money, and
the interest department of his profit and loss account is credited with
this absolutely artificial and fictitious amount, which then appears on his
balance sheet as part of the asset value of his manufactured stock.
Now, if it be granted that the manufacturer has a perfect right to
make whatever rate of profit he can secure from the sale of his goods,
at least let common business honesty prevail at this point; and let him
in his calculations of price keep his cost figures intact and accurate, so
475
that his manufacturing cost values will in his financial statements reflect
the universal meanings attached to these words by investors who buy
bonds and by bankers who depend upon the honesty of the balance sheet
to furnish an accurate view of the assets and liabilities of those with
whom they transact business.
To do this will not in any way limit the profit any manufacturer
desires to make, for having ascertained the exact cost of his production,
the exact cost of selling and shipping his goods, and cost of his office,
administration and financial requirements, he is in a position to add to
these several factors of cost and commercial expense the factor of
desired profit to his selling price—all without recourse to any devious
or doubtful presentation of asset values. Furthermore, the profits shown
by this process will not include anticipations made before the goods are
sold, but will be actual earned profits based on actual sales.
It might be well to point out the further drift of those advocating
the addition of interest to manufacturing cost. Mr. Suffern states that,
in the case of a man who borrows all his capital, as there can be no
profits to him until his interest has been earned, such interest is part of
his cost of doing business. Mr. Nicholson states that interest on cap
ital should be charged to proper expense account before ascertaining
the actual profit from manufacturing or trading, and quotes from Mr.
Webner’s Factory Costs to the effect that rental of buildings for manu
facturing purposes and interest on investment are similar charges, and
that hence such interest is a manufacturing expense. He also quotes
from Stanley Gerry’s Multiple Costs, “We may even carry this a stage
further, and also charge to the factory interest on stocks of raw ma
terial.”
It is quite clear that here is the climax of the absurdities involved in
applying the erroneous proposition that interest is a cost charge. Con
sider the condition of a manufacturing business in which through a
mistake of judgment in the purchasing department, 300,000 pounds of
rubber was purchased, enough for two years’ operation, at what was
thought to be a very low price. In the meanwhile the price drops still
lower, and at closing period the cost accountant of the new school takes
this stock of raw material at cost, and then adds to this cost interest for
one year on the investment price of the raw rubber on hand at (?)
per cent, making a nice profit.
It may be urged that he should drop to market price, but he cannot
consistently do this, because he must secure for the firm at least the
interest charges on their capital investment in raw rubber. It is signifi
cant that the balance sheet, with its message to the manufacturer, to
outside investors and the financial community, is not even once men
tioned by advocates of the new interest cost theory.
Men do not invest money in manufacturing businesses to get interest
for their money but for the profit they expect to make. Let us keep
the distinction clear between the manufacturing costs of production and
the commercial costs of selling and financing a business, not only for
476
Correspondence
the sake of clear analysis, but to secure a sound basis for the fixing of
prices to give adequate profit, and for the further reason of meriting
the confidence of both manufacturers and bankers in the asset values
shown on the balance sheets we prepare, which should not be inflated by
fictitious additions to actual cost values.
Yours truly,
Edward C. Gough, C.P.A.
Michigan C. P. A Law Amended
A bill, which has passed the house of representatives and senate of

Michigan and awaits the governor’s signature, modifies in some degree
the C. P. A. law of that state. It involves the following changes:
Members of the state board shall hold office until their successors are
appointed.
The two-year requirement heretofore a part of the rules of the board,
requiring two years’ continuous practical experience in public accounting
immediately preceding the date of application, is now a part of the
law.
A bond of $5,000, which was required to be filed under the old law,
if allowed to lapse acts as an automatic revocation of certificate, but
certificate is renewed on renewal of the bond.
All audit reports signed as C. P. A. must bear the date of the
holder’s certificate and the date of the expiration of the surety bond, and
shall be signed only by actual holders of certificates; and any corporation
or partnership signatures will be considered a violation. The signature
of the C. P. A. so affixed shall be permitted only to certified public ac
countants who shall have performed the examination in person, and
any literature or reports issued indicating C. P. A. service shall be con
sidered a violation of this act, unless the signature be that of a holder
of a certificate issued as provided by law.
The bill if signed will become a law August 15th. Thereupon a new
board will be appointed by the governor.
Michigan C. P. A. Board
The governor of Michigan has appointed the members of the state

board of accountancy as follows:
Frederic A. Tilton, C.P.A., Detroit.
Archibald Broomfield, attorney, Big Rapids.
Durand W. Springer, C.P.A., Ann Arbor.
Terms expire January 1, 1914, 1915 and 1916 respectively.
The new board held its first meeting and organized May 3, 1913, and
set June 12 and 13 for examinations.
477
Pennsylvania Institute of Certified Public Accountants
At the annual meeting of the Pennsylvania Institute of Certified

Public Accountants the following officers were elected:
President, Edward P. Moxey; vice-president, William W. Rorer;
treasurer, Charles Weissinger; secretary, William J. Wilson.
Dominion Association of Chartered Accountants
The annual convention of the Dominion Association of Chartered Ac

countants will be held in Winnipeg, Manitoba, on September 2nd, 3rd
and 4th. The selection of these dates for the convention has been
largely influenced by the hope that members of the American Association
of Public Accountants would be able to attend as visitors.
The Dominion Association expects to have a large gathering of
members and guests, and extends a cordial invitation to all the members
of the American Association who may be able to attend.
The Rhode Island Society of Certified Public Accountants
The eighth annual meeting of the Rhode Island Society of Certified

Public Accountants was held in Providence on April 25th, 1913. The
secretary of the American Association was the guest of the society and
addressed the members on the work of the association.
The following officers were elected:
President, Charles S. Jenckes.
Vice-President, F. W. Barney.
Secretary-Treasurer, Hamilton L. Carpenter.
Member of executive committee, Adin S. Hubbard.
Delegate to convention of American Association, F. W. Barney.
H. J. Freeman
H. J. Freeman, C.P.A., treasurer of the Minnesota Society of Public

Accountants, died at his residence in St. Paul on May 19th.
Mr. Freeman was one of the most prominent foundation members of
the Minnesota society and was an enthusiastic worker in the cause of
accountancy as a whole. His absence will be seriously felt by account
ants in his state and elsewhere.
478
Announcements
Rodway and Kessler, certified public accountants, of St. Louis, Mis
souri, announce that they have taken into partnership Jeff K. Stone,
C.P.A., and that in future the style of the firm will be Rodway, Kessler
and Stone, certified public accountants. The offices of the firm are in
the Third National Bank Building, St. Louis, Mo.
Rollins-Stewart-Phinney and Company announce that they have

opened offices at 508-509 First National Bank Building, Fort Worth,
Texas, for the practice of public accounting.
Alexander H. Watt, certified public accountant, announces that he

has opened an office at 402 North American Building, Philadelphia, Pa.
Phillips & Glendinning, chartered accountants, announce that their

office address has been changed to 1201 Union Trust Building, Winnipeg,
Manitoba.
Vollum, Fernley, Vollum and Rorer announce that they have trans
ferred their New York offices from Trinity Building to suite 1380-84
Woolworth Building, New York City.
Books Received for Review
Club Accounts. By H. Tansley Witt. 19x3. 95 pages. 8vo, cloth. Price,

$1.75. Gee & Co.
Elements of Accounting. By Joseph J. Klein. 1913. 422 pages. 8vo,
cloth. Price, $1.50. D. Appleton & Co.
Handbook of Municipal Accounting. By U. L. Leonhauser. 1913. 318
pages. 8vo, cloth. Price, $2. D. Appleton & Co.
How to Read the Balance Sheet of a Commercial Concern. By F. W.
Pixley, London. 19x3. 64 pages. 8vo, cloth. Price, $1. Gee & Co.
Principles of Double Entry Bookkeeping. By Charles Van Cleve. 1913.
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THE JOURNAL OF ACCOUNTANCY V
The American Association of Public Accountants

List of Officers, Trustees and Committees
1912-1913
OFFICERS
President ................................................ Robert H. Montgomery, 55 Liberty Street, New York.

Treasurer ...................................... James Whitaker Fernley, 907 Betz Building, Philadelphia.
Secretary ............................................................... A. P. Richardson, 55 Liberty Street, New York.
Vice-Presidents:
Alabama State Association of Public Accountants.. .G. L. Lemon, Birmingham
California State Society of Certified Public Account
ants ................................ ..................... .................................. Norman McLaren, San Francisco
Colorado Society of Certified Public Accountants....Fredk. W. Deidesheimer, Denver
Connecticut Society of Certified Public Accountants..Fredk. W. Child, Greenwich
Georgia Society of Certified Public Accountants........ Joel Hunter, Atlanta
Illinois Society of Certified Public Accountants.......... Arthur Young, Chicago
Kentucky Society of Public Accountants....................... Thomas E. Turner, Louisville
Louisiana Certified Public Accountants, The Society
of ............................................ Henry Daspit, New Orleans
Maryland Association of Certified Public Accountants. Frank Blacklock, Baltimore
Massachusetts, Certified Public Accountants of, Inc..Waldron H. Rand, Boston
Michigan Association of Certified Public Accountants.Fred T. Gies, Detroit
Minnesota Society of Public Accountants..................... Herbert M. Temple, St. Paul
Missouri Society of Certified Public Accountants... .David L. Grey, St. Louis
Montana State Society of Public Accountants............ J. C. Phillips, Butte
New Jersey, Society of Certified Public Accountants
of the State of .......................... ........................................Clarkson E. Lord, New York City
New York State Society of Certified Public Account
ants .............................................. William F. Weiss, New York City
Ohio Society of Certified Public Accountants, The...Frank Brewster, Cleveland
Oregon State Society of Public Accountants.............. John Y. Richardson, Portland
Pennsylvania Institute of Certified Public Account
ants .................. ..................... . .............................................. T. Edward Ross, Philadelphia
Rhode Island Society of Certified Public Accountants.Charles S. Jenckes, Providence
Tennessee Society of Public Accountants ..................... William A. Smith, Memphis
Texas State Society of Public Accountants ................ H. E. Gordon, Dallas
Virginia Society of Public Accountants, Inc...................George Mahon, Lynchburg
Washington Society of Certified Public Accountants. E. G. Shorrock, Seattle
Wisconsin Association of Public Accountants .......... John H. Brown, Milwaukee
TRUSTEES
J. S. M. Goodloe ....................................................................................... Ohio

John B. Geijsbeek .....................................................................................Colorado For One
J. E. Sterrett ............................................................................................. Pennsylvania Year
Hamilton S. Corwin .............................................................. ................ New York

W. Ernest Seatree ...................................................................................Illinois For Two
E. W. Sells ................................................................................................. New York Years
John A. Cooper ......................................................................................... Illinois
W. Sanders Davies .................................................................................. New Jersey For Three
E. L. Suffern ................................ ............................................................ New York Years
AUDITORS
George L. Bishop ..................... Massachusetts Wm. Franklin Hall ................ Massachusetts
STANDING COMMITTEES
EXECUTIVE
The President, Chairman ................ New York J. E. Sterrett .... Pennsylvania

The Treasurer ................................. Pennsylvania Edward L. Suffern ... New York
W. Sanders Davies ........................... New Jersey W. F. Weiss.......... ...New York
E. W. Sells............................................. New York
VI THE JOURNAL OF ACCOUNTANCY
STANDING COMMITTEES--Continued
COMMITTED ON ANNUAL MEETING COMMITTEE ON ACCOUNTING TERMINOLOGY
Harvey S. Chase, Chairman... .Massachusetts J. Lee Nicholson, Chairman.............. New York

Amos D. Albee ............................. Massachusetts H. T. Westermann................................... Missouri
Gerald Wyman ............................. Massachusetts Frank G. DuBois.............................. New Jersey
COMMITTEE ON ARBITRATION COMMITTEE ON BUDGET
George Wilkinson, Chairman.......... New York John R. Loomis, Chairman................. New York
Hamilton S. Corwin ........................... New York Amos D. Albee ............................. Massachusetts
Joel Hunter ................................................. Georgia Charles Hecht ...................................... New York
committee on constitution and by-laws committee ON EDUCATION
John A. Cooper, Chairman .................... Illinois John B. Geijsbeek, Chairman................ Colorado

R. O. Berger ............................................... Illinois Waldron H. Rand .......................... Massachusetts
Carl H. Nau ..................................................... Ohio H. J. Freeman ........................................ Minnesota
Bertram D. Kribben ............................... Missouri
COMMITTEE ON FEDERAL LEGISLATION COMMITTEE ON JOURNAL

Arthur Young, Chairman ......................... Illinois J. E. Sterrett, Chairman................Pennsylvania
Herbert M. Temple ............................ Minnesota William M. Lybrand ..................... Pennsylvania
Edward E. Gore ......................................... Illinois J. B. Niven ............................................ New York
COMMITTEE ON MEMBERSHIP committee on state legislation
W. Sanders Davies, Chairman... .New Jersey J. S. M. Goodloe, Chairman......................... Ohio

Frederick C. Manvel........................... New York Charles F. McWhorter....................... New York
Charles E. W. Hellerson ................... New York John F. Forbes ..................................... California
SPECIAL COMMITTEES
COMMITTEE ON PROFESSIONAL ETHICS COMMITTEE ON STANDARD SCHEDULES FOR UNI
FORM REPORTS OF MUNICIPAL INDUSTRIES AND
J. Porter Joplin, Chairman ..................... Illinois PUBLIC SERVICE CORPORATIONS
J. J. McKnight................................................. Ohio
Harvey S. Chase, Chairman... .Massachusetts
W. R. Mackenzie ....................................... Oregon L. H. Conant ....................................... New York
SPECIAL COMMITTEE ON PUBLICITY Willis B. Richards................................. New York
J. H. Kauffman ............................................... Ohio
J. E. Sterrett, Chairman .............. Pennsylvania Ernest Reckitt .................. Illinois
Charles S. Ludlam ............................. New York F. F. White ...........................................New York
W. B. Richards ................................... New York Thomas L. Berry ................................... Maryland
Clinton H. Scovell ....................... Massachusetts Henry Daspit ......................................... Louisiana
Edward L. Suffern ............................. New York Charles S. Ludlam ............................... New York
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Journal of Accountancy July 1913 Vol. 15 Issue 1 (Whole Issue)

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Journal of Accountancy

Volume 15 Issue 6 Article 13

Journal of accountancy, July 1913, Vol. 15 issue 1 [whole issue]

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Part of the Accounting Commons

THE RONALD PRESS COMPANY

Copyright, 1913, by The Ronald Press Company

Entered as Second Class Matter at Cooperstown, N. Y., Post Office

RONALD ACCOUNTING SERIES

Cost Accounting for Institutions

THE RONALD PRESS CO., 20 Vesey St., NEW YORK

The Progress of Accountancy

New York University School of

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When writing to advertisers kindly mention The Journal of Accountancy.

National Business Institute Checking Pen

C. P. A. Courses of High Professional Value

The Journal of Accountancy

CONTENTS FOR JUNE, 1913

Treatment of Interest on Manufacturing Investment:

Interest on Owned Capital

Lumber Company Accounting

New York Reciprocity Clause ... . 448

Department of Practical Accounting

New York C. P. A. Examinations of January, 1913 (continued)

Income Tax Problem ........ , 467

Oregon C. P. A. Law ........ . 468

New York C. P. A. Law Amended ..... . 471

Correspondence ......... . 472

THE RONALD PRESS COMPANY

When writing to advertisers kindly mention The Journal of Accountancy

Position Wanted Executive account­

CORPORATION AUDIT COMPANY

Why Not Record Your Auditing Work

Cooley’s Audit Records

Vol. 15 JUNE, 1913 No. 6

The National Budget on its Expenditure Side

I have prepared no formal address for consideration at this

THE BUDGET OF THE

A. Classified by Purposes. B. Classified by Character of Expenditures.

III. Contributions to Local Government,

TV. Deduct amount payable by V. Deduct Amount payable by

(a) Includes “sinking fund" $60,685,000. ♦Distributed by Departments, etc.

UNITED STATES OF AMERICA.

C. Classified by Organization Units. D. Classified by Acts of Appropriation.

V. Other Government Establishments.

VII. Deduct amount payable by III. Deduct amount payable by

†Separate Departments hereafter. ‡Amount recommended by President Taft

lative body was frequently jealous of the gubernatorial power,

The First Step Toward a Budget

By law the heads of departments and officers of the govern­

established sufficient precedent upon the new form so that the

To build up the totals which are set forth on these sum­

etc., amount to $3 7,000,000, but when we come down to ques­

Current Expenses in Contrast With Capital Outlays

Another very notable feature which is brought out in these

as between “current expenses” and “capital outlays.” Now, no

It will be noted in IV of summary B that $60,685,000 is

If we were to figure, as our commission has done, what the

Position Wanted Executive account

By law the heads of departments and officers of the govern

To build up the totals which are set forth on these sum

etc., amount to $3 7,000,000, but when we come down to ques

The commission advises that there be established a new “cen

There was a committee on accounting in each department, a com

tional history there for many years. He is a successful and ex

sugar, and so forth, which involve no actual shipments until set

The amounts shown in the above balance sheet, or daily state

As to the propriety of including interest on borrowed cap

with wages since the stockholders are not necessarily adminis

Proprie Selling Proprie Selling

Proprie Selling Proprie Selling

It will be noticed that the depreciation in the different de