Chapter Xv. the Sinking Fund May Also Be Found From Tables or the

formula of Chapter XXV.

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

(a) Prepare an amortization schedule covering the first five years life of the bonds. (b) Write the journal entries for:

1. The first sinking fund instalment. 2. The first bond interest payment. 3. The liberation of the sinking fund at maturity. 4. The retirement of the bonds at maturity.

Instructions

Averaging the bonds sold at par with those sold on a 7% basis places the whole issue approximately on a 6.787% basis. Use that as the effective rate for the amortization schedule.

Several customers of the Ironclad Trunk Corporation protested vigorously against paying their accounts when we sent them statements requesting payment. They denied that they owed the amounts shown on our books and produced receipts and canceled checks to prove their contentions. In many cases we found that the receipts and checks were dated several weeks before the credits appeared on the books and in some cases no credits had been entered.

The manager immediately requested Leroy Swift, a certified public accountant, to make a thorough audit. Among other things, the accountant’s report disclosed the following:

The petty cash sales had been entered in the cash book at smaller amounts than the records showed. The discrepancy between cash book and sales records was: trunks $1,040, bags $360.

Freight bills had been raised $300. The Railroad Company had been overpaid this amount but refunded it on the request of our bookkeeper, S. O. Bright, who cashed the checks and retained the money.

The Customers column and Net Cash column in the cash book were short-footed $8,430. To make the balance in the Customers’ controlling account agree with the total of the individual accounts, the sales book was short-footed the same amount—bags $2,790, and trunks $5,640.

Credits to customers’ accounts in the amount of $4,740 were missing. Not a trace of a record for this amount or any part thereof could be found in any book.

Leather novelties amounting to $1,560 had been sold from the National Novelty Co.’s consignment but no remittance had been made. The only record of the transactions were duplicate bills of the sales made. The money received for these sales had not been deposited and was appropriated by the embezzler.

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

A $1,000 note receivable had been transferred by forged indorsement as $950 part payment on a $1,300 automobile bought by the embezzler for his personal use. The Self-Starter Auto Co. were the holders of the note.

Checks for $1,800 were drawn to the order of fictitious creditors. The indorsements were forged by Bright and the checks duly passed through the bank.

The relatives and friends of Bright agreed to repay the company the greater part or all of the losses due to his embezzlement. In order to provide funds for immediate needs the present stockholders donate 20% of their present holdings of stock, both common and preferred.

Prepare journal entries to give effect to the foregoing as of December 13, 1913.

XII

The City of Oswego donated to the Ironclad Trunk Corporation a building site having a market value of $40,000, on condition that the company build a factory worth at least $100,000 and operate at least five years, employing not less than 100 factory operators.

To take advantage of this offer the corporation obtained permission to issue $100,000 of 7% cumulative preferred stock having a par value of $100 per share, dividends payable semiannually. A condition of the issue made the stock redeemable by lot at the call of the company, the shareholder having the option of receiving 110 in cash or 120 in common stock. A redemption fund is to be created out of profits at the yearly rate of 10% of the issue.

The entire issue was sold for cash May 1, 1914 at 100½. On the same day 101 Blue Valley R. R. 4% bonds, par $1,000, were purchased at 98 with accumulated interest. The bonds are payable July 1, 1924; interest payable January 1 and July 1. The entire bond investment was set aside as a building fund.

Record as of July 31, 1914, the transactions that took place in connection with the erection of the building and the removal from the old to the new plant.

The corporation paid taxes of $400 on the building site and partially completed building. Of this amount $100 applied to the uncompleted building. During the period the manager devoted two-thirds of his time to superintending building operations and one-third to supervising installation of machinery and equipment. His salary amounted to $3,000.

The old land and building and part of the machinery were sold to the American Harness Company for $49,000, payable $11,000 in cash and the balance covered by mortgage for five years at 6%. The amount of the sale was distributed—land $12,000, building $29,000, machinery and tools $8,000. At the date of the sale the accounts appeared on the books as follows: land $10,000; buildings $31,000, with a reserve of $3,000 and nine months’ depreciation on a 5% basis still to be provided for; machinery and tools $25,000 with a reserve for depreciation of $2,500. The machinery and tools sold cost $12,000, on which depreciation has been booked for one year at 10% on original cost. Take into consideration an additional period of nine months.

The remaining machinery, having been designed especially for our use, could not be sold for more than one-half its cost; accordingly, the directors had the machines moved to the new plant. The old machines appear on the books at a cost of $13,000, with reserve recorded for one year at 10% and nine months’ depreciation still to be booked. Additional expenses of removing were as follows: dismantling $40; crating, drayage and freight $170; labor for setting up machines $60; superintendent’s time for moving and installation $150.

The manager, not being sure as to the amount at which to book the machinery, obtained an estimate to duplicate this particular machinery and put it in running order for $9,000.

(a) Write the journal entries to place the above data on the company’s books. (b) Explain briefly the theory underlying your treatment of the old machinery transferred to the new plant.

Instructions

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

XIII-XIV

The directors of the Ironclad Trunk Corporation, after receiving full authority from the stockholders, set December 31 as the close of the fiscal year, thereby making the present fiscal period fourteen months instead of one year.

From the following trial balance and supplementary data prepare:

(a) Condensed balance sheet, supported by schedules. (b) Condensed income statement, supported by schedules.

TRIAL BALANCE, DECEMBER 31, 1918

Land Donated $ 40,000.00 Buildings 129,000.00 Machinery 47,000.00 Tools 4,680.00 Delivery Equipment 5,900.00 Furniture and Fixtures 2,300.00 Patents 108,000.00 Loans to Employees 6,320.00 Dividend No. 6, Cumulative Preferred Stock (Payable January 10, 1919) $ 1,400.00 Dividend No. 7, Preferred Stock (Payable January 10, 1919) 1,500.00 Dividend No. 8, Common Stock (Payable January 10, 1919) 3,000.00 Interest Accrued on Bonds Receivable 3,200.00 Freight Inward 4,334.82 Freight and Express Outward 2,613.07 Royal Leather Preferred Stock (100 shares) 7,480.00 Fire Loss 6,000.00 Strike Loss 4,200.00 Credit Department Expenses 2,950.40 Pamphlets, Price Lists, and Posters 973.00 Advertising Space Prepaid 260.00 Advertising 731.40 Directors’ Fees 200.00 Entertainment of Customers’ Agents 174.50 Charity 60.00 Workmen’s Compensation Insurance Premiums 640.00 Rent from Houses for Employees 2,390.00 Maintenance of Houses for Employees 318.30 Watchmen’s Wages 700.00 Bonuses Paid to Employees (Direct Labor) 1,980.10 Experimental Expense 2,300.00 Contingent Royalties Fund 2,140.00 Mercantile Agency Reports 80.00 Accounting Expense 500.00 Legal Expenses 300.00 Claims Against Transportation Companies 3,792.00 Bright—Special 14,500.00 Suspense 370.00 Delivery Expense 1,194.50 Due to Consignors 4,387.20 Imprest Cash 200.00 Raw Materials Inventory, October 31, 1917 21,304.00 Trade Customers 108,946.63 Finished Goods Inventory, October 31, 1917 22,100.00 Notes Receivable 18,000.00 Notes Receivable Discounted 3,460.00 Insurance Prepaid 200.00 Insurance 480.00 Raw Materials Purchases 240,000.00 Accrued Office Salaries 760.40 Accrued Taxes 1,220.00 Accrued Advertising 190.00 Sales, Trunks 416,775.00 Sales, Bags 93,518.80 Returned Sales, Trunks 1,750.00 Returned Sales, Bags 619.00 Returned Purchases, Raw Material 2,320.00 Returned Purchases, Bags 974.00 Factory Supplies 2,436.00 Labor, Direct 78,751.20 Labor, Indirect 3,497.00 Factory Superintendence 3,200.00 Heat, Light, and Power Service 7,147.10 Miscellaneous Factory Expense 283.14 Trade Creditors 40,309.00 Reserve for Depreciation, Buildings 13,810.00 Reserve for Depreciation, Machinery 18,411.00 Reserve for Depreciation, Delivery Equipment 2,300.00 Reserve for Depreciation, Furniture and Fixtures 750.00 Reserve for Expiration of Patents 21,000.00 Reserve for Sinking Fund—Bonds of 1933 18,128.08 Reserve for Contingent Royalties 2,140.00 Reserve for Supersession of Patents 20,000.00 Interest Earned 7,810.00 Interest Paid 11,200.00 Office Expense 1,873.38 Warehouse Labor on Raw Materials 1,143.26 Salesmen’s Salaries 4,500.00 Salesmen’s Commissions 12,305.40 Repairs to Machinery 1,748.80 Repairs to Buildings 3,755.50 Reserve for Doubtful Accounts 3,330.70 Discount on Purchases 3,751.30 Discount on Sales 6,400.00 Office Salaries 7,974.00 Provision for Doubtful Accounts 2,379.12 Capital Stock, Cumulative Preferred 100,000.00 Capital Stock, Preferred 50,000.00 Capital Stock, Common 200,000.00 Unissued Stock, Common 10,000.00 Treasury Stock, Common 40,000.00 Assessment for Street Improvements (Donated Land) 2,000.00 Bonding Employees—Office 200.00 Surplus 41,394.49 Drawings and Patterns 4,606.00 Mortgage Receivable (due 1923) 38,000.00 Accrued Pay-Roll 957.75 Reserve for Land Donated 40,000.00 Bonds Payable 100,000.00 Employees’ Pension Fund 47,500.00 Reserve for Employees’ Pension Fund 47,500.00 Discount on Bonds Payable 7,332.33 Wrapping and Crating Supplies 1,418.90 Ralston National Bank 17,841.53 Bond Sinking Fund 18,128.08 Redemption Fund—Cumulative Preferred Stock 40,000.00 Reserve for Redemption of Cumulative Preferred Stock 40,000.00 Houses and Land for Employees 24,600.00 Purchases—Bags 91,360.00 Trunks in Process, October 31, 1917 4,984.20 Commissions Earned 564.80 Notes Payable 7,108.00 Taxes 1,520.00 Accrued Interest Receivable 250.00 ------------- ------------- $1,314,143.59 $1,314,143.59 ============= =============

A careful investigation disclosed the following:

Interim dividends had been paid May 15, 1918: No. 5, cumulative preferred stock, $1,400; No. 6, preferred stock, $1,500; No. 7, common stock, $3,000.

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

Items to be distributed:

Account Distribution

Buildings Expenses Selling ¼; Office ⅛; Factory ⅝. Furniture & Fixtures Expense Selling ¼; Office ⅛; Factory ⅝. Light, Heat, and Power. Selling $842.90; Office $392; Freight Inward Factory $5,912.20. Taxes Materials ¾; Bags ¼. Building and Equipment $1,300; Employees’ Houses $220.

The Suspense account was credited for $370 received from a former customer in payment of an old account which had been charged off as uncollectible some years ago.

In many cases notes payable have been issued with interest included in the face of the notes. Of this interest $290 is applicable to the succeeding period.

Provision for contingent royalties was begun two years ago in anticipation of an unfavorable decision in an action brought against us for infringement of patents. Recently the action was decided in our favor.

Legal expenses of $1,500 for prosecution of infringements of patents had been charged against profits at the close of the previous year. Of the present legal expenses, $100 was paid for services in protecting patents.

Inventories as at December 31, 1918:

Wrapping and Crating Supplies Unused $387.50 Factory Supplies on Hand 718.50 Pamphlets, Price Lists, and Posters on Hand 450.00 Workmen’s Compensation Insurance Prepaid 160.00 Bags in Stock 12,542.00 Trunks in Stock 28,050.00 Raw Materials 8,000.00 Trunks in Process as under: materials $6,497.10 direct labor $2,680.40 manufacturing expense $976.50

Fire Loss was debited for $6,000 which represents damage to buildings of $4,000 and loss of machinery of $2,000 after making due allowance for depreciation. Just after the trial balance was made a check for $5,400 was received from the insurance company in full settlement of our claims for fire damage.

The Repairs to Buildings account contains $3,500 of charges for replacing the parts destroyed by fire.

Provision for reserve for depreciation is to be made on a straight line basis, at the following yearly rate: buildings 5%; machinery 10%; delivery equipment 12%; furniture and fixtures 12%.

It was deemed advisable to write off 20% of the accounts of Tools, and Drawings and Patterns. Also, to reserve from profits $2,000 for supersession of patents in addition to providing for the reduction in the life of the patent.

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

Bright—Special account shows the balance due on Bright’s embezzlement. The company holds good collateral in the form of stock for the full amount.

Trunks in Process, October 31, 1917, comprised raw materials $3,115, direct labor $1,120, and factory burden $749.20.

The account, Freight and Express Outward, represented items charged to customers on account of outward freight charges assumed by us and still owing to the transportation companies.

It was ascertained that on Oct. 31, 1917, the patents had 164 months yet to run, and that the policy is to depreciate the value remaining at the end of each fiscal period over the remaining life of the patents.

Royal leather stock was being held because of trade advantages secured thereby.

Claims against transportation companies represented claims for damage acknowledged as good by the companies.

Instructions

In a footnote to the balance sheet call attention to the contingent value of donated land. Extreme conservatism might require the setting aside of a reserve of surplus covering any expenditures on the land, such as assessments for street improvements, inasmuch as the same contingency attaches to them as to the land. So long as a good balance of general surplus is maintained, a special reserve is not usually considered necessary.

Note that both the Contingent Royalty Fund and its reserve are free. Transfer the fund to general cash, and the reserve to surplus.

Note that the reserve for supersession of patents is a reserve created out of surplus and therefore to be treated as a part of net worth. This is, of course, contrary to best practice.

Fire Loss account, as it appears in the trial balance, has been properly charged with the values of the assets destroyed but has not yet been credited with the insurance. Consider carefully the proper booking of the repairs to buildings on account of the fire.

See Problem XXVI, Appendix A, for instructions as to content of condensed balance sheet. See also Problem XV, this Appendix.

From the information furnished in the preceding problem.

(a) Construct a surplus statement. (b) Write the adjusting and closing journal entries.

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

XVI

Some time ago the stockholders of the A. M. Strong Fiber Co. and the Randall Manufacturing Co. appointed committees on merger. At a joint meeting of the two committees a plan for merger of the two companies was adopted. The stockholders of the respective companies accepted the plan for the joint committee and instructed and authorized their boards of directors to carry out the terms of the merger. The agreement provided that a new corporation be formed to acquire the assets and assume the liabilities of the two companies as shown on their balance sheets of December 31, 1916, except as noted.

The subjoined balance sheets show the conditions of the two companies. The balance sheet of the Randall Co. has already been adjusted to meet the conditions of the merger. The agreement provided, however, that the machinery and tools of the Strong Co. should be taken over at a 10% reduction of their present book valuation; that the book value of the Special War Plant assets be written up $20,000 on account of their adaptability to the regular needs of the merger; and that the reserve for bad debts be increased to $5,000. The surplus, after these adjustments, was reduced to even multiples of $10,000.

A. M. STRONG FIBER CO. BALANCE SHEET, DECEMBER 31, 1916 ==================================+================================= Assets | Liabilities and Capital | Machinery $60,000.00 | Notes Payable $10,000.00 Tools 4,000.00 | Accounts Payable 75,000.00 Furniture and Fixtures 7,500.00 | Reserve for Bad Debts 3,000.00 Good-Will 150,000.00 | Depreciation Reserve Raw Materials 75,000.00 | for Machinery 7,000.00 Cash 25,000.00 | Depreciation Reserve Notes Receivable 47,500.00 | for Furn. and Fixt. 1,500.00 Accounts Receivable 112,500.00 | Depreciation Reserve Special War Plant 130,000.00 | for War Plant 50,000.00 | Bonds Payable (6%) 100,000.00 | War Munition Bonds | (7%) 60,000.00 | Reserve for Sinking | Fund 30,000.00 | Capital Stock, Common 150,000.00 | Capital Stock, | Preferred (6%) 100,000.00 | Surplus 25,000.00 ----------- | ----------- $611,500.00 | $611,500.00 =========== | ===========

RANDALL MANUFACTURING CO. BALANCE SHEET, DECEMBER 31, 1916 ==================================+================================= Assets | Liabilities | Land $90,000.00 | Accounts Payable $35,800.00 Machinery 70,000.00 | Notes Payable 20,000.00 Tools 10,000.00 | Wages Payable 2,000.00 Motor Trucks 12,000.00 | Interest Accrued 1,000.00 Furniture and Fixtures 3,000.00 | Reserve for Bad Debts 1,200.00 Patents 60,000.00 | Bonds Payable (5%) 100,000.00 Raw Material 14,000.00 | Capital Stock, Goods in Process 8,000.00 | Preferred 50,000.00 Finished Goods 19,000.00 | Capital Stock, Cash 8,000.00 | Common 100,000.00 Notes Receivable 16,000.00 | Surplus 40,000.00 Accounts Receivable 40,000.00 | ----------- | ----------- $350,000.00 | $350,000.00 =========== | ===========

To effect the reduction of the surplus of the Strong Co. to even multiples of $10,000, by consent of all the stockholders, a special dividend was declared to be shared by both common and preferred stockholders equally on the basis of their respective holdings; and it was further agreed that because the preferred stock carried a participation privilege and preference as to assets, in the distribution of the stock of the merger in payment of the respective interests of the present stockholders, the preferred holders should be considered as being entitled to a pro rata share of the adjusted surplus and good-will.

The net profits for the last period, after deduction therefrom of 8% interest on the respective capitals as adjusted by taking effect of the foregoing items, were capitalized in even thousands of dollars on a 20% basis, to determine the value of the good-will of the two companies; the good-will of the Strong Co. so determined to be in addition to its present good-will. It was ascertained that the net profits for the last period were: Strong Co. $41,750, Randall Co., $30,000.

To carry out the plan of the merger, the Sterling Trunk Corporation was organized with sufficient capital in 7% cumulative preferred stock and common stock to acquire the two other companies, and additional common—to remain unissued for the present—to bring the total capitalization to $750,000.

(a) Submit a statement showing the capitalization of the Sterling Trunk Corporation and the distribution of the capital stock to the other companies.

(b) Prepare the balance sheet of the Sterling Trunk Corporation as of December 31, 1916.

(c) Write the journal entries necessary to adjust the books of the A. M. Strong Fiber Co. and to show its sale and the transfer of its properties to the Sterling Trunk Corporation.

XVII

1. A fire partially destroyed the power plant and equipment of the Zehner Manufacturing Co. on the night of June 30, 1918, entailing a loss of $25,000 on the building, and a ⅔ loss on the equipment. Insurance for one year, with the 80% coinsurance clause, had been purchased January 1, 1918, for $1,775, covering the above property. The policies carried $40,000 on the power house and $100,000 on the power house equipment. On that date—January 1, 1918—the values of the power house and equipment as shown on the balance sheet were:

Power House $75,000.00 Less Depreciation Reserve 12,000.00 $ 63,000.00 ----------

Power House Equipment $200,000.00 Less Depreciation Reserve 80,000.00 120,000.00 -----------

Depreciation was estimated at the rate of 4% per annum on the power house, and 10% on the equipment.

The insurance company settled on the above basis.

Show the journal entries necessary to make all the adjustments in the accounts.

For the purpose of the problem assume that the rate on the power house was the same as on the equipment.

2. The Colorado Rock Drill Co. authorized the issue of $100,000 of 6% cumulative preferred stock callable by lot in amounts as follows:

$10,000 at the end of 5 years at 107 in cash. $10,000 at the end of 7 years at 106 in cash. $15,000 at the end of 10 years at 105 in cash. $15,000 at the end of 12 years at 104 in cash. $50,000 at the end of 20 years at par in cash or convertible into the company’s common stock at the option of the company.

The entire issue was sold for cash at 103.

Set up the accounts showing the handling of all redemption transactions at the five periods above referred to, with these additional facts: It is the expectation of the company to provide for a permanent increase in capital of $100,000, the amount of the preferred stock issue, during the life of the issue; and at the end of the 20 years, the company exercises its option by converting $30,000 of the preferred into common stock out of unissued common to that amount held in the treasury.

Instructions

Problem 1. Refer to Chapter XXXII.

Problem 2. Refer to Chapters I and XXI.

XVIII

The Sterling Trunk Corporation, hoping to recoup excessive trade losses, engaged more extensively in the manufacture of war supplies. Instead of realizing the enormous anticipated profits, they sustained a severe loss through an explosion followed by a disastrous fire on August 1, 1918. The assets destroyed were only partially protected by insurance because of difficulty in getting a reasonable rate. Also some policies which had expired had not been renewed.

The following information was accepted by the insurance companies as a basis for settlement. Date of policies January 1, 1918.

LEGEND: (A) = Name of Property Insured (B) = Original Value of the Property (C) = Reserve for Depreciation, Jan 1, 1918 (D) = Yearly Rate of Depreciation (E) = Face of Ppolicy (F) = Amount of Property Destroyed on Aug 1, 1918 (G) = Unexpired Premium on Policy Aug 1, 1918 (H) = Coinsurance Clause in the Policy ===========+=========+=========+=====+=======+========+======+===== (A) | (B) | (C) | (D) | (E) | (F) | (G) | (H) -----------+---------+---------+-----+-------+--------+------+----- Buildings | $110,000| $10,500 | 5% |$30,000| $80,000| $200| 80% Machinery | 76,000| 14,000 | 10% | 20,000| ¾ | 150| 100% Furniture &| | | | | | | Fixtures | 4,700| 1,200 | 12% | 4,000| 70% | 10| 80% Patterns & | | | | | | | Drawings | 3,500| | 20% | 1,500| All | None | 60% Finished | | | | | | | Goods| 16,400| | | 80% of| 90% of| 120| 80% | | | |selling|selling | | | | | |price |price | | -----------+---------+---------+-----+-------+--------+------+-----

(a) What is the effect of the coinsurance clause?

(b) Determine the amount of insurance received for each asset.

(c) Indicate, by means of journal entries, the effect on the various accounts involved in the settlement of the losses.

The finished goods were listed at the factory cost but the policy covered the selling price which was based on a profit of 60% on the factory cost, with 10% on sales added for selling expenses.

XIX

The European War caused a reduction in the income of the Trunk Company by an abrupt falling off of sales; also as a result of the rapid increase in materials several contracts were completed at a loss. These losses together with the unexpected loss by fire placed the company in an embarrassing financial condition. There was great pressure from bondholders because the interest for the last year had not been paid, and dissatisfaction among stockholders because dividends had been passed. Current debts could not be met and it was clearly evident that the business could not continue long in its present condition. To remedy this a meeting of the stockholders was called and a committee on reorganization appointed. The recommendations of the committee, which are given below, were put into effect on December 31, 1918.

The holders of the 6% bonds were given one share of new cumulative 7% preferred stock in payment of defaulted interest on each bond. The holders of the $100,000 of 5% bonds assumed for Randall Manufacturing Co. contributed in cash 5% of the amount of their bonds and received for each $1,000 bond a new $500 bond bearing 5% interest and $700 in non-cumulative 6% preferred stock. The holders of $60,000 7% war munitions bonds received for each $1,000 bond $600 in 6% preferred stock and $500 in common stock. The old cumulative preferred stockholders were given new non-cumulative preferred stock, share for share. The old common stockholders were given new common stock and were assessed $20 per share for which they were given new cumulative preferred stock.

(a) Determine the amount of cash, bonds and various classes of stock to carry into effect the reorganization. (b) Present the journal entries necessary to record these data.

See Problem XVI for other necessary data. Assume all common stock outstanding. Par value of old issue bonds, $1,000; stock, $100.

The Hillsdale Co. operates a factory and general sales organization from its main plant and conducts two branches, A and B, as distribution centers at conveniently located points. The branches maintain independent records which are subject to periodic audit by the head office. At the close of the fiscal period the branch trial balances are sent to, and incorporated with, the head office trial balance to determine the results of combined operation. Below are given the trial balances of the head office and branches with the data necessary to close the books and determine results. You are asked to present closing journal entries for Branch A and the entries necessary to incorporate the branch results with the head office and to close the head office books. Also present a consolidated balance sheet after closing.

TRIAL BALANCES, JUNE 30, 1918

Branch A Branch B --------------------- ----------------------- Cash $3,000.00 $1,000.00 Notes and Accounts Receivable 70,000.00 50,000.00 Salaries 15,000.00 5,000.00 Rent 2,700.00 1,500.00 Other Expenses 10,000.00 7,000.00 Sales $ 75,000.00 $48,500.00 Sundry Accounts Payable 5,000.00 7,200.00 Purchases from Head Office 70,000.00 50,000.00 Head Office Merchandise 70,000.00 50,000.00 Head Office General 20,700.00 8,800.00 ----------- ----------- ----------- ----------- $170,700.00 $170,700.00 $114,500.00 $114,500.00 =========== =========== =========== ===========

Inventories, at billed price: Branch A $10,000, Branch B $5,000.

Create on the branch books reserves for doubtful accounts of 1% of the sales at each branch.

HEAD OFFICE

Plant and Equipment $250,000.00 Depreciation Reserve Plant and Equipment $50,000.00 Cash 25,000.00 Notes and Accounts Receivable 100,000.00 Reserve for Doubtful Accounts 5,000.00 Merchandise Inventory, June 30, 1917 27,500.00 Notes and Accounts Payable 45,000.00 Purchases 170,000.00 Sundry Expenses 35,250.00 Depreciation 12,500.00 Bad Debts 1,125.00 Sales 225,000.00 Sales to Branches 120,000.00 Branch A, Merchandise 70,000.00 Branch B, Merchandise 50,000.00 Branch A, General 20,700.00 Branch B, General 8,800.00 Capital Stock 250,000.00 Surplus 75,875.00 ----------- ----------- $770,875.00 $770,875.00 =========== ===========

Head office inventory, $30,000.

Goods were billed to the branches at 150% of cost.

XXI

A New York company doing business in London, received the following trial balance from its London office at the end of a fiscal year:

TRIAL BALANCE—LONDON OFFICE

Plant £100,000 Accounts Receivable 75,000 Accounts Payable £35,000 Expenses 10,000 Income 100,000 Merchandise 20,000 New York Office Account 135,000 Remittance Account 60,000 Cash 5,000 -------- -------- £270,000 £270,000 ======== ========

The New York books showed as follows:

TRIAL BALANCE—NEW YORK BOOKS

Capital Stock $1,000,000.00 Patents $600,000.00 London Office Account 656,100.00 Remittance Account 291,712.50 Expenses 10,000.00 Cash 25,612.50 ------------- ------------- $1,291,712.50 $1,291,712.50 ============= =============

The remittance account consisted of four 60-day drafts on London for £15,000 each, which were sold in New York at 4.85½, 4.86, 4.86½, and 4.86¾ respectively.

Make such journal entries as are necessary to incorporate with the New York accounts the results of the year’s business in London (conversion to be made at the average rate of exchange of the four remittances), and establish the new balance of the London office account so that it will agree with the London books when converted into sterling at 4.87¼, the rate of exchange ruling on the last day of the year. Show also trial balance of the New York books after closing.

XXII

Company A owns the entire capital stock of Companies B and C. The assets and liabilities of the respective companies are as follows:

Company A: cash $10,000; deferred charges $150; inventories $1,000; due from allied companies $25,000; notes receivable $15,000; petty cash $100; trade creditors $1,000; capital stock $100,000; surplus $5,250; notes payable $50,000; other investments $55,000; investments in allied companies $50,000.

Company B: trade debtors $10,000; cash $4,000; deferred charges $200; notes receivable $1,000; petty cash $500; inventories $8,000; land $10,000; buildings $25,000; equipment $20,000; surplus $1,000; dividends payable $500; due allied companies $30,000; notes payable $10,000; accrued liabilities $200; capital stock $25,000; trade creditors $12,000.

Company C: capital stock $30,000; notes payable $15,000; cash $2,000; trade creditors $4,000; notes receivable $1,000; petty cash $200; accrued expenses $100; trade debtors $3,500; allied companies $5,100; surplus $2,300; inventories $5,000; land $7,500; deferred charges $100; equipment $15,000; buildings $12,000.

Prepare consolidated balance sheet. Submit with your solution your working papers.

Criticize briefly (not to exceed 500 words) the condition of each company and state whether, in your opinion, the investments in allied companies are valued correctly.

XXIII

Jones & Robinson, merchants, are unable to meet their obligations. From their books and the testimony of the insolvent debtors, the following statement of their condition is ascertained:

Cash on Hand $ 5,500.00 Debtors ($1,000 good; $600 doubtful but estimated to produce $200, $1,000 bad) 2,600.00 Property (estimated to produce $9,000) 14,000.00 Notes Receivable, Good 4,250.00 Other Securities ($3,000 pledged with partially secured creditors; the remainder held by the fully secured creditors) 28,000.00 Jones, Drawings 9,000.00 Jones, Capital 10,000.00 Robinson, Drawings 8,400.00 Robinson, Capital 16,050.00 Sundry Losses 13,500.00 Preferential Claims—Wages, Salaries, and Taxes 700.00 Trade Expenses 7,400.00 Creditors Unsecured 25,000.00 Creditors Partially Secured 23,900.00 Creditors Fully Secured 17,000.00

Prepare a statement of affairs and deficiency account.

XXIV

Parker & Riley, being unable to meet their obligations, have made an assignment. You are asked to prepare a statement of affairs for presentation at a meeting of their creditors. Some of the creditors are entirely or partially secured, the security being a part of the assets. The following is a trial balance of their ledger at the date of the assignment:

Cash $ 1,200.00 Stock and Material (old inventory) 12,000.00 Reliance Trust Co. Stock (20 shares at cost) 2,200.00 Accounts Receivable 10,550.00 Notes Receivable 2,000.00 Mortgage Receivable (second mortgage) 1,000.00 Real Estate (store building and lot) 14,000.00 Fixtures 1,700.00 Horses, Trucks, and Harness (asset account) 1,400.00 Accounts Payable $ 28,000.00 Loans Payable 7,000.00 Mortgage on Real Estate 5,000.00 Purchases 30,000.00 Sales 36,000.00 Rents 1,200.00 Salaries 3,500.00 Interest and Discount 960.00 Taxes Accrued 740.00 Insurance Unexpired 500.00 General Expenses 4,130.00 Parker, Capital 8,000.00 Riley, Capital 4,000.00 Parker, Drawings 3,000.00 Riley, Drawings 1,800.00 ---------- ---------- $89,940.00 $89,940.00 ========== ==========

The accounts receivable are classed as: good $8,000; doubtful $1,500 (estimated to produce $1,000); worthless, $1,050. Notes receivable will realize $1,800; the second mortgage is estimated to produce $800; the trust company shares $1,800; delivery equipment $900; fixtures $1,000; and real estate $12,500.

Of the accounts payable $20,000 is unsecured and $8,000 is secured by the second mortgage and trust company stock. The loans payable are secured by the equity in the real estate. The inventory of merchandise on hand which foots $5,000 is expected to realize $3,000. Other liabilities not booked are employees’ wages $550, and interest on mortgage $125. The unexpired insurance is expected to yield $150 upon redemption.

Draw up a statement of affairs and deficiency account.

XXV

The Metropolitan Book Co., a corporation, goes into voluntary liquidation and a trustee is appointed. The following is the trial balance of the company on July 1, 1918, the date when its affairs are turned over to the trustee.

Capital Stock $20,000.00 Cash $553.69 Office Furniture 1,666.92 Meter Deposit 60.00 Accounts Receivable 26,153.95 Rogers & Co. (moneys collected for their account) 14,738.00 Notes Payable 27,573.50 Accounts Payable 4,197.22 Purchases 27,404.74 Sales 8,045.35 Expense 10,751.97 Surplus 7,962.80 ---------- ---------- $74,554.07 $74,554.07 ========== ==========

Value of merchandise on hand is $20,183.86, and the other assets are appraised at book value. The trustee’s cash receipts and disbursements are:

Dr. CASH Cr. =======================================+============================ Balance taken over $553.69 | Notes Paid $27,573.50 Meter Deposit 60.00 | Accounts Paid 4,197.22 Office Furniture 487.90 | Merchandise Bought 562.55 Accounts Receivable 22,872.75 | Expenses 5,697.01 Additional Collections for | Rogers & Co. Rogers & Co. (in full) 1,965.24 | (in full) 16,703.24 Sales of Merchandise 22,090.70 | Commission from Rogers & Co. 6,703.24 | ---------- | ---------- $54,733.52 | $54,733.52 ========== | ==========

Accounts receivable not collected are worthless.

Prepare a realization and liquidation account in technical form.

XXVI

Messrs. Sharp and Green having given the firm’s notes to a friendly company as an accommodation, became embarrassed through failure of the payee and appointed a trustee to realize and liquidate. The following is a statement of their condition January 1, 1916:

================================+=================================== Assets | Liabilities and Capital | Cash $ 500.00 | Mortgage on Real Estate $5,000.00 Merchandise 20,000.00 | Mortgage Interest Accrued 250.00 Real Estate 25,000.00 | Taxes Accrued 375.00 Notes Receivable 5,000.00 | Accounts Payable (including Accounts Receivable | accommodation paper (including | as contra) 61,550.00 accommodated | Notes Payable 1,000.00 party $58,000) 62,000.00 | Henry Maxwell, | Special Partner 10,000.00 | Samuel Green, Capital 20,325.00 | James Sharp, Capital 14,000.00 ----------- | ----------- $112,500.00 | $112,500.00 =========== | ===========

The following is a memorandum of the trustee’s transactions for the year: purchases to complete contract orders $70,000; sales for the year for cash $108,000; uncollected accounts $2,000; stock of goods on hand December 31, 1916, $10,000; notes receivable collected at a loss of $600; accounts receivable collected $3,600, balance lost; received 75% in full settlement of accommodation notes and paid cash on account of same $48,000 giving renewal notes for $10,000. The legal fees and petty expenses paid on account of accommodation paper amounted to $2,400. The following payments were also made: mortgage, with interest, and one year’s accrued interest to December 31, 1916; all taxes, notes payable, and accounts payable; and clerk hire, wages, and other expense, including an allowance of $100 per month to each of the active partners, one year’s interest at 6% to Maxwell, interest on Green’s excess capital ($6,325) for one year at 6%, and trustee’s fee of $5,000—in all $10,000.

The special partner had a ¹/₁₀ interest and the general partners shared alike in the residue of the net profits.

On January 1, 1917, the estate was returned to the owners.

Prepare the trustee’s realization and liquidation account in technical form, supported by trustee’s cash account. Show a balance sheet of the estate as turned back to the partners, and set up the partners’ accounts.

XXVII

Three partners contribute capital as follows: X $90,000, Y $45,000, Z $15,000. They share profits in the proportion of X 50%, Y 30%, Z 20%. X’s salary is $5,000, Y’s salary is $3,000, Z’s salary is $2,000. At the end of their fiscal period X dies. The books are closed and the net assets ascertained to be $152,500. Z and Y liquidate the firm’s affairs and distribute the surplus assets quarterly as follows:

First quarter $42,410.20 Second quarter 74,622.30 Third quarter 31,967.50 $149,000.00 ---------

Prepare a statement of the partners’ accounts, showing how the distribution of assets should be made, together with the apportionment of the loss. Give your authorities.

XXVIII

Use the following instructions as a guide in preparing a special report on a business with which you are familiar, either by experience or through investigation.

(a) Write a short history of the business, giving:

1. Title. 2. Character of business in which engaged. 3. Date of beginning and amount of capital invested. 4. Successive changes affecting: The ownership (individual, partnership, or corporate). The amount of capital. The character of the business in which engaged.

(b) Submit:

1. A trial balance at the close of a fiscal period. 2. A balance sheet for the same period. 3. A profit and loss statement for the same period. 4. Adjusting and closing journal entries for the same period. Note: If possible, give 1, 2, 3, for two successive periods and prepare a comparative balance sheet and profit and loss statement.

(c) Prepare:

1. A list of the different books and blanks used to record the financial transactions. 2. A sample page or blank or a copy of each item listed under 1. Note: If the copy should require a great deal of space, simply give the form of ruling, headings, and size of page.

(d) Write one or two typical entries in each book and show the form of closing in actual use.

(e) As a separate problem:

1. Outline the course of an article from the time the order is placed until the goods reach you. This would be a purchase department record.

2. Outline the course of an article from the time you receive the order until the goods reach your customer. This would be a sales department record.

Note: For both 1 and 2 attach actual forms used or copy of same, if possible.

(f) Information in regard to:

1. Terms of sale. 2. Treatment of C. O. D. or approval sales on the books. 3. Treatment of freight inward on the books. 4. Treatment of freight outward on the books. 5. Treatment of accounts for containers or boxes to be returned by your firm; by your customers. 6. Treatment of petty cash. If this has not been furnished under (c) 2, give sample page of petty cash. 7. Treatment of consigned goods on the books. 8. Closing journal entries. If this has been furnished under (b) 4, omit. 9. Treatment of instalment sales. 10. Pay-roll system. 11. Your method of entering payment from customers. 12. Provision for bad debts. 13. Method of providing for depreciation. Give an example. 14. Provision for redemption of bonds payable. 15. Interest on daily or other balances. 16. Proportional discount. 17. Assignment of accounts receivable. 18. Use of check figures. 19. Number of customers. 20. Amount of gross sales. 21. Amount of gross purchases. 22. Methods of obtaining inventories and basis for valuation. 23. Usual gross profit. 24. Usual gross expense. 25. Figuring profits. On selling price or cost price. 26. Figuring expenses. On selling price or cost price. 27. Use of selling or expense charts or charts of any other kind. 28. Insurance carried and manner in which it is written off. 29. System of branch or agency accounts. 30. Nature of items found in allowances. 31. Use of mechanical appliances in offices. 32. Filing systems, other than for correspondence. 33. Frequency of audits by firm’s staff. By outside parties. 34. Cost system in use. 35. Date of installation of present system. 36. Rate of turnover. 37. Treatment of cash sales.

(g) Give:

1. Adverse criticism of any department or part of same which you know from actual experience does not work out as it should. 2. Your opinion as to the cause.

(h) Constructive criticism of any department or part of same which you think would make it more effective or less expensive if conducted according to your plan.

(i) Anything peculiar to your business which has not been included in any of the previous divisions.