Chapter Xliii, Pages 386-391, for Explanation and Illustration.

As to the method of attacking problems, the student is perhaps already aware that before attempting solution it is best to read and study the problem carefully to determine exactly what is called for and then to decide as to the treatment of all doubtful points and items—what they mean and how they must be handled to arrive at what is called for. With these preliminary points cleared up, the solution itself is mostly a matter of accuracy and form. In all problems calling for financial statements, the trial balance should first be tested as to the equality of debits and credits. As stated above, the method of the work sheet is usually the best method for summarizing results, although sometimes skeleton ledger accounts will be found helpful in order to visualize the effect of entries and to trace their course through the accounts. Only painstaking work and the solution of many problems will produce facility and confidence in work of this kind.

The instructor should direct the student to take Problem XXVIII under consideration throughout the whole semester, in order adequately to get his material together and into shape. It may well be treated as a thesis for the semester.

At the close of the fiscal year ended June 30, 1913, Thomas J. Howe called you in to determine his financial condition. From the books, which were kept on the single-entry plan, and from other sources, you gathered the following information:

The ledger contained the following accounts: Thomas J. Howe, Capital, $4,000; Thomas J. Howe, Drawing (debit) $472; Expense (debit) $184; Sales $18,945; Purchases $17,450; customers’ accounts considered good: H. E. Brewer $110; D. Cohen $85; Will Benton $190; Linn Bros. $77; customers’ accounts which have proved uncollectible and are considered bad: Peter Metz $43; L. C. Fish $101; creditors’ accounts: Stone Bros. $942; Little & Co. $1,082; H. Hudson $1,220; also accounts with Salaries $375; Advertising $112.

Other sources yielded this information: stock of goods on hand inventoried at $5,641; horses and wagons estimated as worth $730; store fixtures $1,114; rent of store building unpaid $300; clerks’ salaries unpaid $84; notes receivable $2,300; notes payable outstanding (non-interest bearing) $2,400. Bill of goods received from Stone Bros., which has been included in the inventory but which has not been entered in Stone Bros.’ account, $193; interest accrued on notes receivable $16; cash in the bank and safe $1,724.

It was found that the following information was available for determining his financial condition as at the close of the preceding fiscal year, June 30, 1912: cash $1,478; notes receivable $500; notes payable $800; Howe’s capital $4,000; store fixtures $900; inventory of goods in stock $2,800; horses and wagons at an estimated value of $800; customers’ accounts total $2,314; creditors’ accounts total $3,609.

From the foregoing prepare:

(a) Statement of financial condition of Thomas J. Howe as of June 30, 1913. (b) Statement showing the amount of profit made or loss sustained for the fiscal year ended June 30, 1913. (c) Statement setting forth in numerical order the advantages of double-entry over single-entry accounting systems. (d) As a result of your convincing argument Mr. Howe has decided to change his system of accounting from single- to double-entry. Prepare the necessary entries to change the accounting system to double-entry, continuing the use of the old ledger and providing for controlling accounts for customers and creditors.

Instructions

See Volume I, Chapters LV and LVI.

The following trial balance was taken from the books of Thomas J. Howe at the close of the next fiscal year.

THOMAS J. HOWE TRIAL BALANCE, JUNE 30, 1914

Cash $894.00 Notes Receivable 5,000.00 Accounts Receivable 18,000.00 Thomas J. Howe, Capital 6,000.00 Thomas J. Howe, Drawing 560.00 Notes Payable 3,000.00 Accounts Payable 15,640.00 Purchases 77,100.00 Sales 93,620.00 Merchandise Inventory, June 30, 1913 5,641.00 Purchase Discounts 743.00 Sales Discounts 1,420.00 Freight Inward 2,884.00 Insurance 300.00 Interest Earned 146.00 Returned Sales 930.00 Returned Purchases 760.00 Furniture and Fixtures 2,000.00 Horses, Wagons, and Harness 1,200.00 Rent 1,500.00 Advertising 300.00 Expense 180.00 Salaries 1,600.00 Commissions Paid on Sales 400.00 ----------- ----------- $119,909.00 $119,909.00 =========== ==========

At this date, you will find that the following items must be considered to determine the financial condition of Mr. Howe: Merchandise inventory $2,470; insurance unexpired $100; interest accrued on notes receivable $66; interest accrued on notes payable $30; he owes for two months’ rent $300.

1% of net sales is to be set aside as a reserve for uncollectible accounts. Furniture and fixtures are to be written off in the amount of 10%. Provide for a reserve of 10% for depreciation of horses, wagons, and harness.

Advertising carried forward to the next period $75; unused stationery and other expense items $42; commissions on sales due but unpaid $90.

(a) Prepare the working sheet. (b) Construct the balance sheet as of June 30, 1914. (c) Prepare profit and loss statement—percentages based on net sales. (d) Write the adjusting and closing journal entries.

III

Joseph Mason was Howe’s greatest competitor. After getting better acquainted with each other, Howe conceived the plan of uniting their capital and services in the form of a partnership. After some discussion it was decided to operate as Howe & Mason, the capital to consist of $12,000, of which Howe is to contribute $8,000 in the form of his existing business. The excess of Howe’s net worth, as shown by the balance sheet of June 30, 1914, over $8,000, his investment in the partnership, is to be considered as a loan to the firm. Mason is to transfer his entire business—assets and liabilities—and sufficient cash to make his net investment $4,000, or one-third of the total capitalization.

As of July 1, 1914, the date of the formation of the partnership, Mason’s assets and liabilities were as follows: cash $1,340; accounts receivable $2,460; notes receivable $1,120; stock of goods inventoried at $4,590; furniture and fixtures appraised at $1,316; accounts payable $5,280; notes payable $1,770; rent unpaid $320.

Prepare journal entries to give effect to the foregoing on Howe’s books, which are to be continued for the partnership.

During the year Charles Palmer purchased one-third interest in the capital and profits of the firm by contributing $9,000 in cash. The total capital of the new firm is set at $18,000. Business is to be conducted under the old firm name, the old partners retaining their respective capital investments. Howe’s loan account is to be continued at its original amount.

Write the necessary journal entries to record on the books of the firm the admission of the new partner and the adjustments between Howe and Mason.

Before determining the profits for the year Palmer assigns his interest in the capital and profits of the firm to John H. Bartlett, who settles directly with Palmer for $10,000. Howe and Mason agree to admit Bartlett as a partner in place of Palmer and new articles of partnership are signed by the members.

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

Instructions

Note carefully the terms under which Palmer is admitted. His capital will appear on the books as $6,000. Make the adjustment through a good-will account. Howe and Mason withdraw cash to effect their respective adjustments.

The business has been in operation as a partnership one year. At the conclusion of this period the trial balance given below shows the condition of the accounts on the books of the firm.

HOWE & MASON TRIAL BALANCE, JUNE 30, 1915

Cash $ 1,872.00 Accounts Receivable 22,945.00 Reserve for Bad Debts $384.00 Horses, Wagons, and Harness 3,100.00 Reserve for Depreciation, Horses, Wagons, and Harness 120.00 Furniture and Fixtures 5,390.00 Merchandise Inventory June 30, 1914 7,060.00 Notes Receivable 12,456.00 Notes Receivable Discounted 4,780.00 Accounts Payable 24,220.00 Notes Payable 8,500.00 Thomas J. Howe, Loan 1,540.10 Thomas J. Howe, Capital 8,000.00 Thomas J. Howe, Drawing 2,440.00 Joseph Mason, Capital 4,000.00 Joseph Mason, Drawing 1,710.00 John H. Bartlett, Capital 6,000.00 Sales 158,335.00 Returned Sales and Allowances 3,890.00 Purchases 144,244.60 Freight Inward 3,518.50 Warehouse Labor and Supplies 1,002.00 Returned Purchases and Allowances 2,714.00 Salesmen’s Salaries 2,215.00 Advertising 872.00 Freight and Cartage Outward 316.00 Office Salaries 2,619.00 Postage 82.00 Stationery and Printing 116.00 Legal Expenses 85.00 Office Heat and Light 212.00 Interest Earned 117.00 Interest on Bank Balances 14.00 Cash Discount on Sales 2,306.00 Cash Discount on Purchases 3,041.00 Interest Paid 143.00 Telephone and Telegrams 17.00 Insurance 500.00 Rent 2,200.00 Miscellaneous Expense 74.00 Commissions on Sales 380.00 ----------- ----------- $221,765.10 $221,765.10 =========== ===========

Additional information is as follows:

Merchandise inventory, June 30, 1915, $13,260; stationery and printed matter on hand $35; unused postage stamps $17.00. One-fourth of advertising is to be applied to the next year. Warehouse labor of $130, due but unpaid, has not been recorded on the books. Interest accrued but not recorded: on notes receivable $71, on notes payable $47, on bank balances $8. Rent prepaid $200.

You find that no record has been made on the books for $750 worth of merchandise received from Marsh & Co., but that these goods have been included in the current inventory. Four-fifths of the insurance has expired. Interest is to be accrued on Howe’s Loan account at 6%. Through error $100 of commissions on sales has been charged to Salesmen’s Salaries account.

It has been decided to provide for depreciation and reserves as follows: 10% reserve on reducing balances for horses, wagons, and harness; a reserve of ½% on sales for uncollectible accounts; by writing off 10% of the book value of furniture and fixtures.

Profits and losses are to be shared according to the original investments of the partners.

Give due consideration to the foregoing and construct:

(a) The working sheet as of June 30, 1915. (b) Balance sheet. (c) Profit and loss statement containing percentages on sales. (d) Adjusting and closing journal entries.

Instructions

Note the bases for the various depreciation reserves and that depreciation on furniture and fixtures is to be written off the books, i.e., no reserve is to be set up.

July 1, 1915, the capital of the firm of Howe & Mason is increased to $30,000 and Wm. R. Gray is admitted as a partner.

Among other things, the articles of copartnership provide that:

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

The representation of the partners in the capital of the firm shall be Howe, 8/20; Mason, 5/20; Bartlett, 3/20; Gray, 4/20.

Profits and losses shall be shared according to the capital representation of the partners as at the time of formation of this partnership. In the event of the death of a partner an accounting shall be made at the close of the fiscal year in which the death occurs and the value of the deceased partner’s estate determined as of the date of his death by prorating profits on a monthly basis.

Gray is to pay for one-fifth interest in the capital of the firm by giving the firm his note for $2,000 and $4,000 in cash. The difference in capital is to be supplied by good-will, which is to be distributed among the three partners constituting the firm of Howe & Mason on the basis of their original capital representations in that firm, i.e., in the ratio of $8,000, $4,000, $6,000 respectively.

After adjustments have been made, the respective partners’ drawing accounts shall be settled in cash.

(a) Write the necessary journal entries to admit Gray as a partner and to adjust the several partners’ capital and drawing accounts. (b) Set up the capital and drawing accounts of all the partners.

Instructions

The partnership agreement is to be interpreted to mean that, after distribution of the good-will, Howe, Mason, and Bartlett are to contribute or withdraw cash necessary to give them the respective capital shares agreed upon for the new firm.

Wm. R. Gray died November 30, 1917, two years and five months after he became a partner in the firm of Howe, Mason & Co. As provided in the articles of partnership, the business continued until the end of the fiscal year, June 30, 1918, at which date an accounting was made on the basis of the following trial balance and subjoined data.

HOWE, MASON & CO. TRIAL BALANCE, JUNE 30, 1918

Land $10,000.00 Buildings 40,000.00 Reserve for Depreciation, Buildings $2,000.00 Delivery Equipment 6,000.00 Reserve for Depreciation, Equipment 1,200.00 Furniture and Fixtures 5,990.00 Good-Will 6,000.00 Cash 2,010.00 Accounts Receivable 36,000.00 Reserve for Bad Debts 1,460.00 Notes Receivable 7,500.00 Notes Receivable Discounted 4,500.00 Merchandise Inventory—Bags, June 30, 1917 6,770.00 Merchandise Inventory—Trunks, June 30, 1917 12,410.00 Mortgage Payable 25,000.00 Accounts Payable 26,000.00 Notes Payable 14,400.00 Thomas J. Howe, Loan 2,000.00 Thomas J. Howe, Capital 12,000.00 Thomas J. Howe, Drawing 1,210.00 Joseph Mason, Capital 7,500.00 John H. Bartlett, Capital 4,500.00 Wm. R. Gray, Capital 6,000.00 Wm. R. Gray, Drawing 1,100.00 Sales—Bags 71,432.00 Returned Sales and Allowances—Bags 3,690.00 Sales—Trunks 222,386.00 Returned Sales and Allowances—Trunks 1,508.00 Purchases—Bags 59,315.00 Returned Purchases and Allowances—Bags 4,230.00 Purchases—Trunks 184,824.00 Returned Purchases and Allowances—Trunks 2,716.00 Freight Inward 7,020.00 Warehouse Labor and Supplies 1,875.00 Salesmen’s Salaries 4,303.00 Salesmen’s Traveling Expenses 2,809.00 Advertising 2,146.00 Freight and Cartage Outward 1,154.00 Commissions on Sales 981.00 Office Salaries 2,274.00 Miscellaneous Office Supplies 170.00 Legal Expense 200.00 Postage 127.00 Telephones and Telegrams 93.00 Interest Earned on Notes Receivable 385.00 Cash Discounts on Purchases 3,547.00 Rent Collected 1,500.00 Taxes 1,312.00 Insurance 680.00 Interest Paid 472.00 Cash Discounts on Sales 2,789.00 Collection and Exchange 24.00 ----------- ----------- $412,756.00 $412,756.00 =========== ===========

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

Merchandise inventories, June 30, 1918, bags $2,431, trunks $4,380. A reserve of ½% of the sales is to be provided for bad debts. The furniture and fixtures are to be written down 10% of their book value.

The old account of Horses, Wagons, and Harness was closed and Delivery Equipment opened when the horses were sold and an automobile service installed. It is deemed advisable to increase the reserve by 10% of the declining value.

An additional 5% of the original cost of the buildings will be set aside as a reserve for depreciation.

Accruals are as follows: taxes $370; interest on mortgage 9 months at 5%; interest on notes receivable $80; interest on notes payable $520; interest on bank balances $61.20; office salaries $150; interest on Howe loan 6% for one year.

Advances made to salesmen on salaries $400; tenants paid $300 in advance rent; unused postage $32; miscellaneous office supplies on hand $30; one-fourth of the insurance remains in force; advertising deferred $600. Distribute in-freight and warehouse labor on the basis of gross purchases.

Profits and losses are to be shared according to the original investments, as stated in the articles of partnership.

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

“In the event of dissolution, good-will is to be increased at the rate of 24% per year of the original value.” Take this into account now as effective for 2 years and 5 months.

As of June 30, 1918:

(a) Prepare working sheet. (b) Construct balance sheet. (c) Construct income statement. (d) Write the closing journal entries. (e) The three remaining partners, as a firm, take over the interest of Gray’s estate, paying therefore cash $1,000 and three equal notes with interest at 6%, maturing in one, two, and three years, for the balance. (f) Write entries which will adjust the partnership interest represented by Gray’s estate and show settlement of that interest.

VII

The Ironclad Trunk Corporation was organized and incorporated November 1, 1912, for the purpose of manufacturing trunks, bags, and brushes of all kinds and dealing in traveling requisites of every description.

The authorized capital of $100,000 consists of 750 shares of common stock having a par value of $100 per share, and 250 shares of preferred stock of the same par value.

The incorporators subscribed for at par and paid for the common stock as indicated below:

Arthur Butler, 250 shares in cash.

A. J. Lindsey, 150 shares by transferring the following assets and liabilities: cash $3,000; accounts receivable $7,000; notes payable $3,000; notes receivable $2,000; stock of raw material $9,000; accounts payable $5,000; furniture and fixtures $2,000.

Edward Harrison, 100 shares by giving bill of sale of machinery appraised at $6,000; the balance to be paid in one year.

Charles E. Wells, 50 shares by his personal note for $5,000 with interest at 6%, due in one year.

In connection with the organization of the corporation the following items were paid in cash: corporation tax $50; filing fees $20; recording fees $12; legal expenses $500.

(a) Write journal entries to record this information on the books of the corporation.

(b) Prepare a balance sheet showing the condition of the corporation at this date.

Instructions

Refer to trial balance of VIII to see the method pursued in making the opening entries for the corporation.

VIII

The following trial balance was taken from the books of the Ironclad Trunk Corporation at the close of its first year. From it and the additional notations appended thereto you are asked to furnish:

(a) Working sheet. (b) Balance sheet. (c) Income statement. (d) Closing journal entries.

IRONCLAD TRUNK CORPORATION TRIAL BALANCE, OCTOBER 31, 1913

Fifth National Bank $7,940.00 Imprest Cash 200.00 Land 10,000.00 Buildings 30,000.00 Machinery and Tools 25,000.00 Materials and Supplies, October 31, 1912 9,000.00 Accounts Receivable 12,000.00 Notes Receivable 10,000.00 Notes Receivable Discounted $4,000.00 Advertising Unexpired 1,000.00 Insurance Prepaid 200.00 Purchases—Material 108,000.00 Notes Payable 18,000.00 Taxes Accrued 200.00 Wages Accrued 3,400.00 Returned Sales 2,200.00 Returned Purchases 2,800.00 Factory Supplies 2,600.00 Labor—Direct 70,000.00 Superintendence 4,000.00 Heat, Light, and Power 12,000.00 Miscellaneous Wages—Factory 3,620.00 Factory Expense 400.00 Accounts Payable 26,000.00 Reserve for Depreciation, Buildings 3,000.00 Interest Accrued on Notes Payable 700.00 Sales 214,706.00 Interest on Bank Balances 46.00 Freight Inward 2,770.00 General Expense 1,920.00 Taxes 350.00 Rent of Building 1,000.00 Reserve for Depreciation, Machinery 2,500.00 Salesmen’s Salaries 4,200.00 Repairs to Machinery 630.00 Reserve for Bad Debts 1,000.00 Cash Discount on Purchases 3,110.00 Interest Earned 418.00 Commissions—Salesmen 3,600.00 Office Salaries 2,800.00 Insurance 150.00 Freight Outward 1,100.00 Bad Debts 1,000.00 Furniture and Fixtures 3,700.00 Authorized Capital Stock—Preferred 25,000.00 Authorized Capital Stock—Common 75,000.00 Unissued Stock—Preferred 12,000.00 Unissued Stock—Common 20,000.00 Subscriptions 4,000.00 Notes Received—Stock Subscription 6,000.00 Bonding Employees—Office 100.00 Cash Discount on Sales 2,300.00 Depreciation 5,500.00 Advertising 600.00 ----------- ----------- $380,880.00 $380,880.00 =========== ===========

You are presented with properly certified statements showing the present inventory of materials and supplies to be $16,300; goods in process $1,400; finished goods $9,800, and factory supplies in storeroom $700. It has been estimated that $200 of the freight inward is applicable to the present inventory of materials and supplies. Salesmen have been overpaid $600 on their salary accounts. Items aggregating $400 which have been charged to Expense are found to be on hand. In the customers ledger you find accounts having credit balances amounting to $1,500, and uncollectible accounts to the amount of $710. You decide to write down furniture and fixtures 10%.

Instructions

It will be noted that the trial balance presented indicates that the books have been partially adjusted. The uncollectible accounts of $710 were taken into consideration when the estimate for reserve for doubtful accounts was made. Charge them against the reserve.

After Edward S. White, the inventor of a process for constructing a superior fiber for trunk-making, demonstrated the practicability of his process, the Ironclad Trunk Corporation purchased all his rights in patents granted by United States, Canada, Mexico, and Great Britain. The sale went into effect January 1, 1914. The consideration of $100,000 was made payable $60,000 in cash, $20,000 in bonds at par, and $20,000 in two-year interest bearing notes of the company.

To provide for payment of the patent, the corporation, after duly complying with all legal requirements, issued $100,000 in 20-year 6% sinking fund bonds, under date of December 1, 1913, interest payable June 1 and December 1. During the month $70,000 of the bonds were sold for cash on a 7% basis, and the remainder at the same price during the following month.

The trust agreement provided that a sinking fund should be established by a charge against profits every interest period, of an amount sufficient on a 4% compound interest basis—interest compounded semiannually—to retire the bonds at maturity. The fund was placed in a trust company for accumulation.

(a) Give journal entries to effect the foregoing on the corporation’s books. (b) Prepare a statement setting forth the condition of the sinking fund at each interest date during the last five years previous to maturity of the bonds.

Instructions

It will be noted that the problem requires the calculation of the selling price of the bonds, i.e., their valuation on the given basis. This may be found from bond tables but preferably by the formula of