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THE LIBRARY

THE UNIVERSITY

OF CALIFORNIA

LOS ANGELES

UNlVERSin'orcALlFORNiA,

LIBRARY,

lUDS ANGELES. CALlF.

Graduate Schol of Business Administration

University of California

Los Angeles 24, Calif oniia

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in 2007 with funding from

IVIicrosoft Corporation

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C. p. A. ACCOUNTING

THEORY, QUESTIONS, AND PROBLEMS

GEORGE HILLIS NEWLOVE, Ph.D., C.P.A. o.. .c)

RESIDENT AUDITOR, INCOME TAX UNIT, BUREAU OP INTERNAL REVENUE;
DEAN, WASHINGTON SCHOOL OF ACCOUNTANCY; MEMBER, NATIONAL
Y. M. C. A. ACCOUNTANCY STANDARDIZATION COMMITTEE;
MEMBER, AMERICAN ASSOCIATION OP UNIVERSITY
INSTRUCTORS OP ACCOUNTING; LIEU-
TENANT (j. G.), PAY CORPS, U. S"
N. R. P. (inactive).

VOLUME I

V/ACA

ASSOCIATION PRESS

New York: 347 Madison Avenue
1921

40064

The Ikternationai. Committee of

YouNo Men's Christian- Associations

(Printed in the United States of America)

All Rights Resened

Bq8. Admii^
Library

56>C> I

H^6

FOREWORD

^ The pasi school year— 1920-1921— closed the first decade of the study
*y of Accountancy in Y. M. C. A. Schools, with an enrolment of approxi-
•sSraately 10,000 students. It is, therefore, quite in line with the progressive
•policy of the I'nited Y. M. C. A. Schools to begin the second decade
^ of Association Accountancy instruction by furnishing, for advanced stu-
^ dents, these two volumes on "C. P. A. Accounting — Theory, Questions,
^ AND Problems," by George llillis Newlove, Ph. D., C. P. A.

For two years tlie standaid Accountancy Commission of the United

•Y. M. C. A. Schools has been carefully studying the Accountancy courses

'offered by the local Association schools, with a view to planning a

(*^ standard four- year curriculum that would be of maximum service to

the student, not only in giving him sound instruction, but in equipping

^lim to i^ass his state examination.

( These books by Dr. Newlove aie admirably planned to furnish the
^instruction and equipment referred to, for they are the outgrowth of
^his own experiences a.s instructor and Dean of the Washington, D. C,

School of Accountancy.
^ It will ])e obsei-ved that there are moi-e problems in the books than
©can be solved within class periods. In order to relieve the instructor
/!and to aid the student, model solutions for all })i'o])lems have been pro-
vided, in mimeogi'aph form. These may be secui-ed, at slight cost, from
• the Educational Director of the local Association, by resident students,

Jfter they have solved the problems required by the instructor. Those
rho are using these books, but are not in Association classes, may secure
he model problem solutioTis from Association Press, 347 Madison Avenue,
y^ew York City.

The Accounfancy Commission, to which full ci'edit is due for its
eai-nest and jii-actical woi-k in formulating curricula, consists of D. S.
Sylvestei-, B. C. S., LL. B., Dean, School of Commerce and Finance,
Northeastern College, Boston, Mass. ; H. C. Daines, A. B., B. C. S., P^du-
cational Director, Chicago; Ralph B. Mayo, President of R. B. Mayo.
& Co., Denver; Gr. H. Newlove, Ph. D., C. P. A., Dean, Washington School
of Accountancy, Washington, D. C. ; F. L. Roth, Dean, School of Business
Administration, Cleveland; and C. A. Wesp, Dean, School of Commerce,
Philadelphia.

PREFACE

This volume together with Volume II classifies all the general accounting
theory and auditing questions given in 335 C.P.A. examinations. When
more than one examination has used identical questions all references are
given, and where questions are practically identical an asterisk has been
used after the reference which used the question in a slightly different
form.

The lectures, which attempt to answer the questions, presuppose at least
two years' study of accounting or its equivalent, in a resident school. The
elimination of the elementary subject matter enables the lectures to con-
tain in a comparatively brief compass, a digest of the advanced theory
and auditing points.

As the attempted use of at least three references for each accounting
point rendered the giving of proper credit for direct quotations impossible,
direct quotations have been avoided. The references practically amount
lo indirect quotations, however, and no special changes in phraseology
have been made to conceal this fact. It is not claimed that the bibli-
ography is complete, three references on undisputed points and as many
references as possible on disputed points being the desired goal.

The purposes of this work are (a) to show the C.P.A. candidates what
will be expected of them and to offer them an opportunity for further
study on the particular points on which they are weak, and (b) to incite
the universities to offer post-graduate courses in accounting literature so
that there will not be as much diversity of thought in the accounting books
of tomorrow as is shown by the references to exist in the accounting books
of today. This volume and Volume IT have been arranged so that the
theory and auditing questions and the practical problems on each subject
will l)e studied concurrently with the lecture on each subject.

The undersigned wishes to express his appreciation to Mr. Thos. W.
Walton and Mr. Arthur L. Ward, the former and present educational sec-
retaries. Young Men's Christian Association, Washington D. C, for assist-
ance in developing the C.P.A. preparatory coui-ses given by the Wash-
ington School of Accountancy, from 16 two-hour class sessions with 8
students in November, 1918, to 64 two-hour class sessions with 142 stu-
dents in June, 1921. This teaching experience and the opportunity for
two years to spend practically my entire time on the material is responsible
for whatever merit there may be in this work. The undersigned is further
indebted to Professor R. B. Kester, C.P.A., Columbia University, for his
valual)le suggestions; to Mr. John Berg, C.P.A., Wasliington, D. C, for
his help on the detailed references, and to Miss Margaret E. Batson, Sec-
retary, Washington Scliool of Accountancy, for her help in editing the
material.

G. H. Newlove.

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CONTENTS

PAGE

CHAPTER I— Field of Accountancy 1

Bookkeeping; Accounting; Installing Systems; Auditing; Objects of
Auditing ; Errors of Principle ; Mechanical Errors ; Detection of Fraud ;
Qualifications of Auditors; Responsibility of Auditor; Attitude of
Auditor; Auditor as Witness; Internal Check.

CHAPTER II— Double Entry Bookkeeping 16

Double Entry Bookkeeping; Accounts; Classes of Accounts; Nominal
Accounts; Controlling Accounts; Suspense Accounts; Arrangements of
Accounts; Numbered Accounts; Journalizing; Verification of Footings
and Postings; Trial Balance; Books; Voucher System; Vouchers;
Articulation Statement.

CHAPTER III— Balance Sheet 42

Balance Account; Balance Sheet; Form of Balance Sheet; Model Balance
Sheet; Valuation in Balance Sheet; Condensed Balance Sheets; Com-
parative Balance Sheets ; A ssets ; Kinds of Assets ; Kinds of Liabilities ;
Accrued Items ; Deferred Items ; Contingent Items ; Capital ; Proprietor-
ship Accounts; Relation of Proprietor to Business.

CHAPTER IV— Profit and Loss Statement 67

Income; Revenue; Earnings; Profits; Revenue and Capital Receipts;
Revenue and Capital Expenses; Revenue and Capital Expenditures;
Fixed Charges aiul Opei-ating Expenses; Summaries of Nominal Ac-
counts; Account Foim of Profit and Loss Statement; Report Form of
Profit and Loss; Statements of Non-Trading Concerns; Comparative
Profit and Loss Statements ; Use of Schedules in Profit and Loss State-
ments; Working Sheet.

X CONTENTS

CHAPTER V— Partnership at Organization 86

Partnei-ship Defined; Kinds of Partnerships; Advantages and Disadvan-
tages of Partnership; Liability of Partners; Authority of Partners;
Articles of Copartnership; General Partnership Rules; Partners' Pro-
prietorship Accounts; Loans of Partners; Opening Entry for Partner-
ship Books; Guaranteed Assets; Buying Interest in Business; Buying
Share in Profits; Audit of Partnerships; Joint Stock Companies.

CHAPTER VI— Partnership During Operation 101

Division of Profits ; Interest on Capital ; Interest on Excess or Deficit of
Capital; Interest on Drawings; Partners' Salaries; Tabular Form of
Partners' Accounts.

CHAPTER VII— Partnership at Liquidation 113

Causes of Dissolution; Adjustment upon Partner's Death; Liquidating
Partners; Value of Assets at Dissolution; Liquidation of Uncompleted
Contracts; Reserves at Dissolution; Application of Assets at Dissolu-
tion; Losses and Expenses of Liquidation; Purchasing Partner's In-
terest; Personal Insolvency of One Partner; Illustrative Problem;
Capital Deficit; Goodwill in Liquidation; Closing Partnership Books
after Sale; Liquidation by Installments.

CHAPTER VIII— Corporation Stock 126

Corporation Defined; Classes of Corporations; Advantages and Disad-
vantages of Incorpoiation; Proeeduie of Incorporation; Charter; By-
Laws; Stockholders; Directors; Minute Books; Corporate Officers;
Capital Stock ; No Par Stock ; Kinds of Stock with Par Value ; Capital
Stock on Balance Sheet; Stock Certificate Book; Stockholders' Ledger;
Opening Entries for Corporation; Subscriptions; Subscription Ledger;
Transfer Journal ; Installments ; Installment Ledger ; Installment Scrip
Book; Forfeited Stock; Payment for Stock; Premium and Discount on
Stock; Donated Stock; Bonus Stock; Redemption of Stock; Audit of
Capital Stock; Organization Expense; Investments in Stocks.

ClIAl'TER IX— Interest 102

Interest and Discount; Prepaid Interest; Accrued Interest; Intere.st Ex-
pense and Income; Calculation of Interest; Interest on Partial Pay-

CONTENTS xi

merits; Audit of Interest; Interest as a Cost of Manuf actiii'e ; Compound
Interest Processes ; Processes Involving Interest ; Processes Involving
Discount; Valuation of Serial Bonds; Valuation of Short Terminal
Bonds; Amortization of Bond Premium and Discount; Interest Bearing
Debt Paid by Equal Annual Installments; Bond Purchased at Inter-
mediate Dates ; Optional Bond Redemption ; Computing an Unknown
Rate ; Computing Elfective Bond Rates ; Computing an Unknown Time ;
Amount of Annuities with Interim Interest Dates; Present Worth of
Annuities Avith Interim Interest Dates; Present Worth of Deferred
Annuities; Amount of Annuities Due; Present Worth of Annuities Due.

CHAPTER X— Reserves and Funds 180

Classes of Reserves; Asset Valuation Reserves; Operating Reserves;
Appreciation Reserves; Contingency Reserves; Secret Reserves; Open
Proprietorship Reserves; Funds; Reserve Funds; Sinking Fund; En-
tries for Sinking Fund ; Reserve for Sinking Fund.

CHAPTER XI— Bonds 202

Classes of Bonds ; Unissued Bonds ; Treasury Bonds ; Bonds as Collateral ;
Issue of Bonds; Bond Interest; Bond Register; Coupon Register; Audit
of Bonds Payable; Investments in Bonds.

CHAPTER XII— Dividends and Surplus 219

Classes of Dividends; Dividends out of Capital; Dividends out of Profits;
Declaration of Dividends; Payment of Dividends; Cumulative Divi-
dends; Dividend Book; Audit of Dividends; Profit Sharing; Undivided
Profits Account; Surplus Defined; Kinds of Surplus; Statement of
Surplus; Audit of Surplus; Deficit.

CHAPTER XIII— Trading Accounts 238

Old Merchandise Account ; Pui'chase Records ; Unrecorded Purchase
Orders; Sales Records; Cash Sales; (LO.D. Sales; Installment Sales;
Sales for Future Delivei-y; Sales to Branches; Consignment Sales;
Sales of Sci-ap or By-Products; Sales to Proprietor; Sales on Approval ;
Sales of Fixed Assets: The Turnover; Merchandise Expense; Returns
on Sales and Purchases; Rebates and Allowances; Guaranteed Sales;
Sales in Transit; Book and Physical Inventories; Verifying Inventories;
Trade Discount; Cash Discount on Purchases; Cash Discount on Sales;
Neglected Discounts; Reserve for Cash Discounts.

xii CONTENTS

CHAPTER XIV — Insurance and General Expense 26G

Unexpired Insurance; Fire Insurance Register; Reserve for Insurance;
Audit of Fire Insurance; Coinsurance Clause; Fire Loss; Marine In-
surance; Life Insurance; Employers' Liability Insurance; Burglary In-
surance; Accrued and Prepaid Wages; Payroll Book; Audit of Pay-
roll; Insurance, Rent, and Taxes as Costs; Rent as Income; Postage;
Donations; Adjustment Entries.

CHAPTER XV— Depreciation 287

Nature of Depreciation; Causes of Depreciation; Inadequacy; Obso-
lescence; Depletion; Actual and Theoretical Depreciation; Appreciation
and Depreciation; Booking of Depreciation; Depreciation Fund; De-
preciation Rates; Plant Ledger; Calculation of Depreciation; Straight
Line Method; Working Hours Method; Composite Life Method; Service
Output Method; Fixed Percentage on Diminishing Value Method; Sum
of Year Digits Method ; Sinking Fund Method ; Annuity Method ; Main-
tenance Method; Replacement Method; The Fifty Per Cent Method;
Appraisal Method; Insurance Method; Gross Earnings Method.

CHAPTER XVI— Manufacturing Accounts 309

Nature and Function of Cost Accounting; Components of Cost Data;
Relation of Co^t to General Accounting; Comparison of Cost and Non-
Cost Systems ; Kinds of Cost Systems ; Control of Material ; Control of
Labor Costs ; Wage Systems ; Control of Manufacturing Expenses ; By-
products; Inventories,

CONTENTS xiii

APPENDIX

KEY TO REFERENCES

PAGK

A to Q 339

R to Z 340

AA to MM 340

NN to ZZ 341

AAA to GGG 341

HHH to ZZZ 342

AAAA to WW 343

WWWW to ZZZZ 344

AAAAA to HHHHH 344

REFERENCES FOR CHAPTERS

Reperencks For Cfiapter I 345

References For Chapter II 346

References For Chapter III 347

References For Chapter IV 349

References For Chapter \ 350

References For Chapter VI 351

References For Chapter VII 351

References For Chapter VIII 352

References For Chapter IX 355

References For Chapter X 357

References For Chapter XI 358

References For Chapter XII , 359

References For Chapter XIII 360

References For Cjiapter XIV 363

References For Chapter XV 364

References For Chapter XVI 366

C. p. A. ACCOUNTING

CHAPTER I

FIELD OF ACCOUNTANCY

Bookkeeping — Bookkeeping may be defined as the art of keeping a
systematic record of business transactions/

There are two systems of bookkeeping, namely: (1) Single entiy (some-
times called simple entry), the system wherein entries of transactions do
not require e(iual charges and credits for every exchange,'' and where in its
simplest form, transactions are shown only in the relation they bear to
persons;' and (2) double entry, the system wherein two equal records are
made for each transaction, one a charge and the other a credit to the re-
spective accounts affected/

Accounting — Accounting may be defined as the science which treats of
the systematic record, compilation, and presentation in a comprehensive
manner for administrative purposes of the financial opeiations of a busi-
ness organization.'' While accounting includes bookkeeping, it does not
stop with the mechanical recording of any given set of facts, but embraces
the designing of bookkeeping forms and methods and the presentation of
the data gathered by the bookkeeper in the form of statements for the
infoi'mation of the management."

Installing Systems — The work of installing a system for an industry
requires first, a knowledge of mechanics of the industry; second, a knowl-
edge of the financial and legal status of the industry, and third, a
knowledge of the men who will operate the system.' The first is needed to
have the data classified according to the operations of the business, the
second so that the interests of the firm may be safeguarded and all legal
requirements met, and the third in order that the system may be operated
by the men available. This third point is so important that accountants
specializing in system work usually arrange to have the clients' staff in-
structed in the operation of the system.

Auditing — Auditing is the art of verifying the work incident to the
record, compilation, and presentation of the facts concerning business
transactions.*

Large firms have "inside" auditors who regularly audit their books and
documents. This excellent practice has the effect of discouraging fraudu-
lent practices and of increasing the care with which the records are kept.
However, even if "inside" auditors are employed, the affairs should be
regularly investigated by a professional auditor, who, removed from local
influences, can be relied upon to treat matters in a disinterested manner,
and whose wider experience makes him capable of advising his client as

'For explanation of superior figures see page 337.

■2 C. P. A. ACCOUNTING

to the probable effect of practices which lie condemns and those which he
recomnu nds.* Piofessional auditors f i-equently are able from their experi-
ence to develop a percentage table based upon net sales which shows the
normal ratio of the various items in the profit and loss statement. A
(•umi')arison of the actual with the theoretical percentages frequently leads
to discovery of leaks and over-expenditures.

Objects of Auditing — The three objects of an audit usually given are the
discovery of errors of principle, the elimination of mechanical errors, and
the detection of fraud.'" To these a fourth and fifth object may be added,
namely, the ascertaining of ways of improving the accounting system and
office organization methods," and the preparation of analytical and un-
biased statements showing the business conditions." The last object is
the most important, as the correct statements aid (a) in the securing of
short time credit, (b) in floating bond.s, (c) in sale of the business, (d) in
adjustments between partners, and (e) in the settlement of fire loss claims."

Errors of Principle — As mistakes in principle are usually more im-
portant than mechanical errors or even fraud, the auditor must be con-
stantly guarding against them." As errors of principle, such as capitaliz-
ing revenue expenditures,'"'' omitting a proper allowance for depreciation,"
etc., are usually caused by ignorance and because the errors usually make
out the profits to be higher than they reallj' are, it is frequently difficult to
convince the management that they are wrong.''

Mechanical Errors — It must not be assumed that mechanical eiTors are
due to fraud,'" frequently they are caused by the ignorance or cai'elessne.ss
of the bookkeeper.

It is important to remember that incorrect books frequently balance as
the errors otfset one another."' This fact shows the danger of the practice
of writing off a small error in the trial balance."" However, an auditor
lays him.self open to just criticism if he devotes a considerable part of his
time searching for clerical erroi's.^'

Methods for locating errors in a ti-ial balance are too numerous to
mention, especially tis they ai-e largely guesswork. Auditors usually try
to avoid auditing the books when they are mechanically incorrect, as they
realize that their clients cannot afford to pay professional fees for such
mechanical services." However, frequently auditors are compelled to
audit books which are out of balance, in which ca.><es they usually depend
upon either blocking or analvzing the ledger, procedures discussed in
Chapter XIII, Volume II.

Detection of Fraud — The business world still holds the discovery of
fraud as the chief aim of an audit."' Although this idea is incorrect, it
forces the auditor to pay special attention to this feature, for even though
an auditor has left no stone unturned in his search for fraud, his practice
will be hurt if fraud is later discovered, even though he is not legallv
liable."

There is one feature about fraud, however, that aids the auditor, namely,
Ihc fact that each case of fraud is usually concealed in the same way, due.

FIELD OF ACCOUNTANCY 3

no doubt, to the desire of the culprit to simplify the continuation of the
defalcation and the fear of trying a new method of concealment when one
has already ])roved so far successful."'' For this reason the auditor is
always suspicious of any unusual vai'iations in the accounts.

Qualifications of Auditors — The C. P. A. boards by their requirements
show the legal qualiiications to be a thorough knowledge in accounting
and auditing theory and practical accounting and a fair knowledge of
commercial law coupled with a high school education and several years
of experience as a junior accountant. There are two additional qualiiica-
tions which the legal requirements cannot reach— namely, thorougimess
and imagination.'"' Notliing short of exact correctness can be accepted by
a good auditor. The faculty for imagination comes into operation when
the auditor visualizes tlie accounting system in search for possible oppor-
tunities for fraud, or when the auditor tries to work out in his imagina-
tion the operation of the accounting system he is creating.

Responsibility of Auditor — Legally, an auditor does not insure the
accuracy of the books he audits or the statements he compiles, but is
merely liable for reasonable care in his investigation." For instance, an
auditor is not liable for accepting as a valid voucher a document not
representing value actually expemled, if the true situation could not be
ascertained by reasonable carefulness. Where there is nothing to arouse
suspicion, a fcAv cases at haphazard would be a reasonable check, but, when
there are grounds for suspicion, a much more careful scrutiny must be
given." Legally, "reasonable" care and skill require more than an audit
of the books, the auditor being held for "reasonable" care to ascertain
that tlie books show the true status of the firm.'*

The moral responsibility of auditors greatly exceeds their legal liability.'*
Sentiment has been growing that investigations should be so thorough that
the statements will show the entii-e truth about the business, and it is a
matter of pride to the profession that American accountants have not
accepted the limited, though legal, views of their responsibility."

The delegation of the detailed work to junior accountants does not re-
lieve the auditor from his personal responsibility.^' This is I'eeognized
by the courts, who will pei'mit a senior accountant to testify in regard to
facts discovered by the junior accountants working under his personal
supervision."' As he cannot excuse himself by throwing the blame on his
suboi'dinates, a careful auditoi' keeps in close touch with the detailed work
by requiring frequent reports showing the progress made in conducting
the audit according to the auditing program which he has carefully de-
vised.'* j .\

The auditor is responsible foi- the reporting of all illegal acts of officers
and directors, but questions of the wisdom of the action of these officials,
imless they constitute a violation of accounting principles, are outside the
scope of the auditor's responsibility.""

Attitude of Auditor — In preserving his complete independence the
auditor must be cai-eful not to offend his client by too much assertiveness.**
As he cannot compel the adoption of his improvements, the auditor should

4 C. P. A. ACCOUNTING

use tact, and, l)y avoiding arguments on trivial points not involving prin-
ciple, strengthen his ])osition for the important points which may come
under consideration/'

Cooperation with the client's statT may be gained by avoiding parades of
authority and by showing a desire lo lessen or improve the quality of the
work.'* The auditor and his assistants should treat the clerks with due
courtesy,™ but no intercourse beyond strictly business arrangements should
be allowed/" Tact in the use of books when they are idle is advisable.*'

Auditor as Witness — The auditoj*, as a witness, must tell the truth and
nothing but the truth, bvit only in answer to direct questions.*' He should
not volunteer information either favorable or unfavorable to his client.*'
His impartiality on the witness stand sliould not deter him from assisting
his client's lawyer to determine what questions should be a.sked and what
subjects should be avoided.** It is therefore necessary that auditors have
sufficient knowledge of the laws of evidence to know what answ'ers are
admissible.*''

Before an auditor can testify as an expert accountant it is necessary to
have his qualifications established by answers to his client's attorney. The
auditor, by concise, modast answers, should relate his experience and
reputation as a public accountant.*" Before entei-ing the court room, it
is important that all the statements and schedules not prepai'ed by the
auditor himself should be ex.amined with the assistant who did the work
and verified by reference to the books of original entry and supporting
vouchers.*' If memoranda and references in his own handwriting are made,
the auditor will qualifj' as a witness.**

In testifying, the auditor should prevent his being placed in the position
of advocate for his client.** On the stand, the auditor is in much the
position of a teacher, for he must biing his points within the reach of the
juj'y who are untrained in accounting principles.'"" He must, on the other
hand, avoid in his effort for simplicity covering up his point in a mass
of verbiage." An accountant with legal knowledge can serve his client
by acting as an interpi-eter between his client's lawyer and the jury of
business men, for lawyers, from their legal viewpoint, frequently ask
questions so phrased that the ordinary jui'or cannot grasp the accounting
point involved.

An auditor must recognize the law of expert testimony which requires
that the testimony must be the best available for each item." He can, if
given access to the records, give an opinion as to the value of goodwill
based upon earning power." He, however, could not as an accountant say
that the plant should be valued at cost less depreciation, as the valuation
of fixed assets is the work of an appraiser."

Internal Check — Internal check is the method by which employees
check the records of one another, and the entire control does not rest in
any one clerk." Such a system eliminates the probability of fraud'* and
accordingly gi-eatly lessens the amount of detailed checking which must
be done."' As most fraud consists either in the misappropriation of cash

FIELD OF ACCOUNTANCY 5

or mercliandise, these two points are especially guarded by the system of
internal check.

The receipt of cash should be safeguarded by having all incoming mail
opened and listed by an official other than the cashier or bookkeeper."^
This practice, if cash sales are made and recorded by parties wdthout
access to the cashier's depai'tment, will prevent the manipulation of cash
receipts. Cash payments should be made by check'" and supported by
a duly authorized voucher.™ Small payments should be made out of a
petty cash fund set aside for the purpose."^ The cashier should not have
access to the personal accounts,'" nor to bills submitted to customers."''
Payrolls should be changed only upon written authority"* and each step
in their preparation should be checked by some one not directly in charge
of the work." Payments should be made in the presence of a witness, who,
together with the paymaster, should sign the payroll.""

The purchase of materials should be safeguarded by careful records of
receipts"' and by filing of filled orders to prevent passing of duplicate
invoices."* Invoices should be checked as to number and quality of
received goods, and as to extensions,"" and when check is drawn therefor,
notation should be made on invoice to prevent duplicate payment.'" Sales
invoices should be cheeked like purchase invoices" and also against the
customer's order.'^ Systematic records should be kept of all orders re-
ceived and shipments made.'^ Records of returned sales'* and returned
purchases'' should be kept. x\llowances should be granted only upon
written approval of proper authoi'ity.'" Perpetual inventories should be
maintained" which should be verified by physical inventories from time
to time."

C. p. A. ACCOUNTING

QUESTIONS

field of accountancy

Bookkeeping

1. Define: Bookkeeping. (N. Y., Jan., 1900; Wash., May, 1003;
N. J., 1904-1909*; Mich., July, 190G; N. Y., Oct., 1907; R. I., Dec.,
1907.*)

2. Define: Double-entry bookkeejjing:. (Pa., Nov., 1S99* ; N. Y., Jan.,
1900*; Pa., May, 1905; Md., Jan., 1909; Ohio, Nov., 1913*; S. C, Sept.,
1919.*)

3. State various kinds of bookkeeping with explanations. (Mich.,
July, 1906.)

4. State the essential piineiples of double-entry bookkeeping. (N. Y.,
Dec, 1896; N. Y., Jan., 1897; Wash., May, 1903; N. Y., June, 1909; Va.,
Nov., 1910; Wash., June, 1912*; W. Va., May, 1917.)

5. Under what conditions does double-entry bookkeeping become an
exact science? (N. Y., June, 1917.)

6. Name three objects of bookkeeping. (N. Y., Oct., 1907* ; R. I.,
Dec, 1907*; Mich., June, 1912.)

Accounting

7. Define: Accounting. (N. Y., Jan., 1900; Wash., May. 1903; N. J.,
1904-1909*; Ohio, Nov., 1913; Ohio, Nov., 1915; Ind., June, 1916*;
N. C, Aug., 1917.*)

8. What is a certified public accountant? (Wash., May, 1911; Iowa,
Dec, 1918.)

9. What is the relation of the accountant to the bookkeeper? (N. Y.,
Jan., 1900*; Wash., May, 1903*; Ind., June, 1916.)

10. State the fundamental objects of accounting. (Ohio, Nov., 1913*;
Ohio, Nov., 1915*; N. C, Aug., 1917*; Iowa, Dec, 1918.)

11. As a certified public accountant and auditor, what would be your
relation with your client? (N. J., 1904-1909.)

12. Ai*e the theory of accounting and the theory of common law
based in any respect on the same principle? Which is the more reliable
as to facts? (N. Y., June, 1917.)

13. (a) Why should we favor the stand jnlization of accounting
terminology and forms? (6) What means would you suggest as best

FIELD OF ACCOUNTANCY 7

adapted to obtain such uniformity? (c) Give two examples of ac-
counting terms that are ambiguous. Suggest remedies. (N. Y., June,
1915.)

14. If you were employed by a firm or corporation to install a system
of accounting, what would be your procedure? (Pa., Nov., 1899*; Ind.,
June, 1916; N. Y., Jan., 1917.*)

15. Enumerate the fundamental principles to be followed in devising
an accounting system for a large mercantile company. (N. Y., Jan.,
1904*; Ohio, March, 1910*; La.', May, 1913*; Mo., Dec, 1913; S. C,
Sept., 1919.*)

16. In devising a system of accounts for a business, what are the
main subjects for consideration, and in what order should they have
attention? (N. Y., Dec, 1896.)

Auditing

17. Define: Auditing. (N. Y., Dec, 1898*; N. Y., June, 1899*; Pa.,
Nov., 1899*; N. Y., Jan., 1900; Pa., Nov., 1900*; Pa., Nov., 1901*;
Wash., May, 1903; Pa., May, 1903*; Md., Oct., 1903; N. J., 1904-1909*;
Mich., Nov., 1907*; Mass., June, 1910*; N. Y., June, 1911.)

18. What are the objects to be attained by an audit? (N. Y., June,
1897; N. Y., Dec, 1898*; Wash., May, 1903;* Mass., June, 1910*; Mich.,
June, 1910*; N. Y., Jan., 1911*; Cal., May. 1916*: Cal., Nov., 1916*;
N. D., July, 1916*; W. Va., May, 1917*; W. Va., May, 1919*; S. C,
Sept., 1919.*)

19. What are the advantages of an audit? (Cal., May, 1916; Cal.,
Nov., 1916; Cal., June, 1917.*)

20. Explain the value of an outside audit for a business having a
regularly emi>loyed auditor. (Mich., June, 1913.)

21. State what are the advantages of the certified public accountant
(C. P. A.) degree to: (a) the accountant, (h) the client. (Wash., Aug.,
1908*; Wash.,' May, 1911.)

22. In large businesses internal auditors, members of the staff of the
concern, are frequently the only ones employed. Where this is the case,
do you think it desirable that professional certified public accountants
should be engaged? If so, give reasons. (TIL, Nov.. 1908; Ind., June,
1916.*)

23. What meaning attaches to the term "auditing" other than the re-
view and verification of accounts of past transactions / (M. Y., Jan., 1907.)

24. State generally your idea of your duties as an auditor and the
points to be covered by an audit. (Pa., Nov., 1906.)

25. Is criticism the chief duty of *an auditor? What additional points
should be covered in his report? (Minn., Oct., 1916.)

26. Wherein do the functions of accountants and auditors differ?
(Cal., June, 1904*; W. Va., May, 1917; W.'Va., May; 1919.)

8 C. P. A. ACCOUNTING

27. Outline the duties of an auditor. (N. Y., Dee., 1896; N. Y., June,
1898*; N. Y., Dec. 1898*; Pa., Nov., 1900*; N. Y., June, 1901*; Pa.,
Nov., 1901*; Pa., May, 1902*; Cal, June, 1904*; N. Y., Jan., 1907;
N. Y., June, 1909*; Mass., June, 1910*; N. Y., June, 1910*; Va., Nov.,
1910*; Mich., June, 1912*; La., May, 1913*; Ga., May, 1919*; N. D.,
July, 1919.*)

28. What qualifications must an auditor possess? (N. Y., Dec., 1898
Pa., Nov., 1899 ; N. Y., June, 1900* ; Pa., Nov., 1900 ; N. Y., June, 1901
Pa., Nov., 1901; Pa., May, 1903; Wash., May, 1903; Md., Oct., 1903
Cal., June, 1904; Mich., Nov., 1907; Wash., Aug., 1908; Md., Jan., 1909-
Mich., June, 1912*; La., May, 1913*; N. D., July, 1919.*)

29. State the training necessary to fit an auditor for the discharge of
his duties. (N. Y., June, 1900; Mich., June, 1912.*)

30. To what extent and for what purposes should an auditor be
familiar with : (a) law; (b) algebra; (r) economics; {d) financial history?
(Cal., Nov., 1916.)

31. Is it an auditor's duty to concern himself to any extent with the
validity of the transactions that come under his notice? Explain. (N. Y.,
June, 1900; Wash., May, 1903; 111., Nov., 1903.*)

32. To whom is an auditor responsible? (S. C, Sept., 1919.)

33. What are the responsibilities of an auditor? (N. Y., Dee., 1896*;
N. Y., June, 1901*; Pa., May, 1902; Pa., May, 1903; N. J., 1904-1909*;
N. Y., Jan., 1907*; Wash., Aug., 1908; Md., Jan., 1909; N. Y., June,
1909*; Mass.. June, 1910; Va., Nov., 1910*; Mich., June, 1912*; La.,
May, 1913*; Ga., May, 1919*; N. D., July, 1919.*)

34. To what extent is an auditor morally responsible for his certifi-
cate? (N. Y., Dec., 1898; Wash., May, 1903.)

35. To what extent is an auditor legallv responsible for his certifi-
cate? (N. Y., Dec, 1898; Wash., May, 1903; Wash., March, 1909.)

36. What are the duties and responsibilities of an auditor in the
following circumstances :

(a) Where the system of internal check is defective?

(&) Where the transactions for the year under review are correctly
recorded but the auditor has reason to believe that the property accounts,
Goodwill account, and Surplus account of prior years (not audited) have
been manipulated or improperly handled?

(111., Dec, 1918.)

37. To what extent should an auditor be governed by instructions?
(Pa., May., 1902.)

38. Give at length your views on the ethics of accountancy. (N. Y.,
June, 1912.)

39. Name the character of in-egularities, the evidence of which your
audit would disclose. (N. C, June, 1920.)

FIELD OF ACCOUNTANCY 9

40. Define and illustrate: (a) Technical error; (b) error of principle;
(c) compensating error. (Kan., May, 1916.)

41. What is the principal effect of errors of principle? In what part
of the accounts are they most apt to be found? (Minn., Oct., 1916.)

42. The A 1 Manufacturing Company employs a staff of bookkeepers.
The head bookkeeper has not studied the theoiy of accounting, neither has
his experience been extensive. He understands double-entry bookkeeping,
but he cannot be described as a well trained accountant.

Previously the A 1 Manufacturing Company has been satisfied with
annual accounts prepared by competent auditors. They decide to have
monthly statements of accounts in future, and wilh this end in view instruct
the head bookkeeper to prepare statements on the same lines as the last
annual accounts were prepared.

State the imaginary errors of principle that might not unreasonably be
found upon an expeii examination of his works.

(111., May, 1916.)

43. In auditing a client's boolcs you are requested to note any defects
in the system of accounting and submit suggestions for its improvement.
Make a brief report to your client acsordingly. For this purpose suggest
the remedying of some of the defects which you have most frequently
observed in your own experience. (Wash., March, 1909; Wash., May,
1911.)

44. What is your idea of the proper and a just charge or compensation
(a) to the employer and the employee, for your services as a certified
public accountant; (b) to the services of a first assistant; (c) to other
assistants. (N. J., 1904-1909.)

Internal Check

45. Define: Internal check. (Fla., April, 1908*; Colo., Dec, 1913;
Mich., Dec., 1914; Ohio, Nov., 1918; 111., Dec., 1918; Ohio, Nov., 1919.)

46. State what you consider the best system of bookkeeping to guard
against speculations and what regulations you would reconunend for the
conduct of the financial affaire of the concern. (La., May, 1913.)

47. What plan would you suggest to minimize the risk of fraud in the
following: (1) Payrolls; (2) accounting of cash receipts; (3) invoices of
purchases. (Colo.,"^Dec., 1913; 111., Dec, 1918.*)

48. How is the position of an auditor affected if the system of the
concern under audit is defective, (a) as to internal check; (&) as to cost
methods? (A. I. of A., May, 1918.)

49. Trace the various operations in a well regulated wholesale mer-
cantile office from the time an order is given for the purchase of material
until such material is paid for, to protect the company from any possible
loss in the transaction. (Colo., Dec, 1913.)

50. Name the ten matters of special importance in devising any system
of internal cheek in the handling of office records. (Mich., June, 1910.)

10 C. p. A. ACCOUNTING

51. Outline a system of internal cheek for a v>'holesale grocery concern
doing a business of $3,000,000 a year, with about 2,000 customers. The
system should coordinate with an annual audit by professional account-
ants. (A. I. of A., Nov., 1919.)

52. A clothing manufacturer has in an adjacent city a separate retail
establishment for the sale of his goods. The whole of the clerical work
and cash transactions are in the hands of one clerk. Suggest the method of
bookkeeping which, in your opinion, will afford the best check from the
auditor's point of view and at the same time be thoroughly practical. (Pa.,
Nov., 1906.)

53. You are asked to offer suggestions regarding a system of internal
check for a company whose business is that of wholesale merchants. De-
scribe the office methods you would introduce to safeguard the funds and
merchandise of the company. (111., Dec, 1910*; ^yash., Nov., 1913.)

54. The accounting department of a jobbing house, consisting of 5
men, keeps the books, does the billing, makes city collections, handles the
general and petty cash and pays the invoices of the eompanj\ On what
general lines would you distribute the work of the department to secure
the best internal check? (Md., Jan., 1909*; Mass., Oct., 1915; Ind., Nov.,
1917.)

55. What condition of office organization, above all others, leads to
fraud and defalcation by bookkeeper and cashiers? Support your
opinion. (N. Y., June, 1912.)

56. Where would irregularities be most likely to be discovered in a
detailed audit of a men's furnishing store which employs 10 salesmen?
In your answer assume that the books are kept according to a good system
of accounting and that the bookkeeper has complete charge of the office
with only the occasional supervision of the owner. (111., May, 1917.)

57. Outline a .system for handling the accounts of a large retail store,
explaining specially how you would ari'ange to guard against possible
dishonestv of such emplovees as have access to valuable jewels and plate.
(111., May, 1907.)

58. Under what circumstances can a bookkeeper cover up forced foot-
ings and postings during the course of an audit, so that oidinarily you
would not detect the same unless certain precautions are taken? State
what these precautions should be. (Colo., Dec., 1913.)

59. Give six typical examples of fraud, of which only four involve the
abstraction of actual money, and explain shortly what means you would
suggest to reduce the risk of loss under each of these headings to a mini-
mum. (111., May, 1909.)

60. The General Ledger of a trading concern contains, in addition to
the usual Balance Sheet and Profit and Loss accounts, pei-sonal accounts
of officers whose salaries are credited and drawings charged thereto. In
addition to currency, drawings on signed and numbered vouchei-s, they are
all privileged to pay private bills with company checks, and also to pur-
chase company merchandise for personal use.

FIELD OF ACCOUNTANCY 11

The General Ledger and General Journal are kei>t by and in full charge
of one of the officers. This officer handles no funds of the company. The
Ledger is in balance; there are no errois in the footings of the Ledger
accounts ; the cash at banks and in hand is correct ; and this officer's
account shows a small credit balance.

You find that periodical statements prepared by this officer are accepted
without question; and that the several amounts stated thereon are in
agreement with balances of the respective accounts in the General Ledger.

(a) State three ways by which this officer, without collusion, might
defraud the company.

(b) State, brittly, the way you would adjust any differences that
might be disclosed; and

(c) What preparation you, as a })ublic accountant, would make to
clearly state the facts and prove the defalcation in event you are re-
quired to give expert testimony in court proceedings.

(Wis., April, 1915.)

61. Name five common methods of defalcation and explain the steps
which you would suggest to detect each of them. (M'ch., June, 1919.)

62. What system would you recommend to a factory for the proper
checking of all labor emi)loyed :

(a) To obtain complete record of each emj^loyee from date of applica-
tion for employment to date of discharge?

(h) To prove that all labor paid for was actually accounted for?

(d) That the payroll had not been padded in any manner?

Mention the forms, mechanical appliances, etc., required for such system
and the independent internal checks necessary to prevent collusion between
clerks and employees.

(Mich., July, 1909.)

63. Discuss fully an effective method of controlling raw material for a
mill or factory. Select any types of mill or factory you desire. Illustrate
by sketches any forms not clearly described by their titles. (Pa,, Nov.,
1919.)

64. Where embezzlement of cash by usual means is impossible, how
can fraud be perpetuated by manipulation of accounts and records result-
ing ultimately in a large loss? (N. Y., Jan., 1916.)

C. P. A. ACCOUNTING

PROBLEMS

FIELD OP ACCOUNTANCY

1. From the following accounts appearing on the trial balance prepare,
without using figures, statements which you consider best calculated to set
forth the operations of the year and the financial position at December
31, 1916, assuming that you are preparing these statements on behalf of
a bank which desired paper available for rediscount with the Federal
Reserve Bank:

Accounts payable.

Accounts receivable.

Advertising.

Buildings.

Capital stock.

Capital stock unsubscribed.

Cash on deposit.

Commissions paid salesmen.

Depreciation, buildings, 1916.

Depreciation, machinery, 1916.

Discount allowed on sales.

Discount received on purchases.

Doubtful accounts receivable.

Factory expense.

Finished goods, inventory, December
:U, 1915.

Freight and cartage inward.

Freight and cartage outward.

Material purchased.

Mortgage on plant.

Notes payable.

Notes receivable.

Office expenses.

Office furniture and fixtures.

Offi.ce payroll.

Organization expenses (to be distrib-
uted over three years from Jan. 1,
1916).

Payroll factory, accrued.

Petty cash.

Prepaid taxes, real estate.

Profit and loss, 1915 surplus.

Eepairs, buildings.

Fuel.

Goodwill.

Insurance, buildings and machinery.

Insurance, finished goods.

Insurance, unexpired, buildings and
machinery.

Insurance, unexpired, finished goods.

Interest accrued on investments.

Interest accrued on mortgage payable.

Interest paid.

Interest received.

Investments.

Labor factory payroll.

Land.

Machinery

Material inventory, December 31, 1915.

Repairs machinery.

Reserve for bad and doubtful ac-
counts.

Reserve for depreciation, mnchinery.

Reserve for depreciation, buildings.

Returns and allowance on sales.

Salaries of general officers.

Sales.

Salesmen 's accounts, advanced on sal-
aries.

Subscriptions and donations.

Taxes, income, U. S.

Taxes, real estate.

Work in progress inventory, Decem-
ber 31, 1915.

The inventories December 31. 1916, not on the books were: Finished
goods, ; mateiial, work in progress, .

(It is assumed that the la.st inventory is intended to mean both the
inventory of material and that of work in process.) (A. I. of A , Nov
1917.)

2. Following is a list of the accounts appearing on the trial balance
cf a manufacturing company which deals in finished merchandise pur-

FIELD OF ACCOUNTANCY

chased, as well as in its own products. From the list, and without using
figures, draw up plans of financial statements (balance sheet, manufac-
turing account, profit and loss account, etc.) in the form which you think
most suitable:

Accounts payable.

Salaries, management.

Capital stock.

Notes receivable.

Cash.

Notes payable, partly secured by deed

of trust.
Salaries, office and store.
Real estate.
Fuel.

Insurance plant.
Light.

Freight on merchandise purchased.
Machinery and tools.
Freight on raw materials.
Printing and stationery.
Accounts receivable.
Horse, wagon, and harness.
Stable expense.
Advertising.

Purchases, raw material.
Productive labor, factory.
Machinery repairs.
Office furniture.
Reserve uncollectable accounts.
Reserve for depreciation.
Insurance merchandise.
Uncollectable accounts.

Buildings.

Sales, own products.

Inventory, own products.

Inventory, raw materials.

Inventory, partly manufactured goods.

Inventory, merchandise purchased.

Inventory, repair supplies.

Undivided profits, end of last year.

Purchases, merchandise.

Sales, merchandise purchased.

Rent, factory.

Rent, store and office.

Discount on sales, own product.

Interest payable.

Depreciation, building, machinery,
wagons and harness.

Sundry factory expenses.

Sundry office expenses.

Postage.

Subscriptions and donations.

Discount on purchases, merchandise.

Rents, income.

Insurance paid in advance, plant.

Labor, warehouse.

Insurance paid in advance, merchan-
dise.

Management, salary, factory.

Management, salary, office.

Salesmen's expenses and salaries.

(Mich., Dec., 1906*; Mo., Dec., 1913; Ohio, Nov., 1915.)

3. You are given a trial balance of a wholesale jobbing corporation
embodying the following accounts, and ai*e requested to prepare a Balance
Sheet and Profit and Loss statement. Prepare such statement, without the
use of figures, showing the form in which you would present them.

Real Estate, Capital Stock, Traveling Expense, Sinking Fund, Reserve
for Depreciation, Taxes (State and City), Accounts Receivable (Cus-
tomers'), Sales, 10-years debenture Insurance Policy, Insurance (all ex-
pired), Purchuoes, Depieciation, Accrued Interest on Bonds, Notes Re-
ceivable (Customers'), United States Income and Excess Profits Taxes
Paid, Furniture and Fixtures, Surplus, Liberty Bonds, Overdrafts on
Salary Accounts of Officers, Reserve for Bad Debts, Trade Acceptances
Receivable, Bond Interest, Petty Cash Fund, Auto Trucks, General Ex-
pense, Collections on Bad Debts Previously Charged Off, Notes Receivable
Discounted, Merchandise Inventory (at beginning of period — the amount
of inventory at the date of trial balance is also given you), Returns and
Allowances on Sales, Interest Received on Liberty Bonds, Discounts Re-
ceived on Purchases, Dividends Paid, Trade Acceptances Payable, Dis-
counts Allowed on Sales, Notes Payable Officers, and Treasury Stock.

(Va., Nov., 1918.)

C. p. A. ACCOUNTING

4. The Spark Plug and Auto Supply, Inc., is the manufacturer of a
patented spark plug and is also dealer in automobile supplies. From
the following trial balance (as of October 31, 1919) and information
prepare Balance Sheet and Profit and Loss statements showing cost of
manufacture of spark plugs and gross and net profit on sales :

Advertising

Accounts Receivable

Accounts Payable

Bills Receivable

Bills Payable Trade Creditors

Bills Payable First National Bank

Bonds 5% First mortgage

Building Factory

Bad Debts written off

Capital Stock, common (authorized $250,000) Fully

paid

Capital Stock, 6% preferred, authorized and issued —

Dividend preferred stock

DeUvery Expenses

DeUvery Equipment and Trucks

Directors' Fees

Discount on Sales

Freight, Raw Materials

Freight, Automobile SuppUea

Finished Goods

First National Bank Current Account

General Expenses

Goods in Process

Heat, Light and Power

Interest on Bonds

Insurance and Taxes, Factory

Labor, Productive

Labor, Nonproductive

Liberty Bonds

Loose Tools

Machinery and Plant

Office Furniture and Fixtures

PajToll

Patent Rights

Purchases, Raw Materials

Purchases, Automobile Supphes

Repairs

Rent, Warehouse

Reserve for Depreciation, Buildings

Reserve for Depreciation, Machinery

Reserve for Bad Debts

Real Estate, Factory Site

Shop Supplies and Expenses

Surplus

Sales, Spark Plugs

Sales, Automobile Supplies

Salaries, Office and General

Salaries, Salesmen

Travehng Expenses

$ 26,450
180,105

35,000

225,000
7,850

18,000

7,140

9,250

2,500

12,200

12,050

2,345

34,320

51,850

14,770

13,250

22,200

9,375

17,400

233,846

99,444

195,000

15,270

165,090

1,200

30,000
450,960
141,690

14,050
3,875

150,000
15,560

14,£00
34.600
22,300

52,288,440

$2,288,440

FIELD OF ACCOUNTANCY 15

Inventories, November 1, 1918: Raw materials, $14,500; automobile
supplies, $22,450.

Inventories, October 31, 1919: Raw materials, $27,300; automobile
supplies, $19,200; finished goods, $50,400; goods in process, $17,205;
loose tools, $10,500.

Reserve for bad debts to be adjusted to 5 per cent of open accounts.

Depreciation for the 12 months ended October 31, to be allowed as
follows : Factory buildings, 2 per cent ; machinery, 5 per cent ; delivery
equipment, 10 per cent ; furniture and fixtures, $200. Disregard fractional
parts of a dollar. Patent rights expire October 31, 1925; advertising,
$950, applies to next season; taxes on factory buildings accrued, $1,400.
First mortgage 5 per cent gold bonds are a first charge on all the assets
of the company. Interest payable quarterly on the first of February,
May, August and November. [Calculate depreciation on diminishing
values.]

(A. I. of A., Nov., 1919.)

Note: Model solutions of the problems presented in this book may
he secui-ed by students in Y. M. C. A. classes, on application to the
instructor. Those who are not students in Association classes may secure
the Model Solutions from Association Press, 347 Madison Avenue, New
York.

CHAPTER II
DOUBLE-ENTRY BOOKKEEPING

Double Entry Bookkeeping — As the name implies, double entry book-
keeping is based on the principle of two entries for each business trans-
action, a debit and a credit/ It presupposes an initial equation at the
inception of the bu.siness between the money or property furnished by the
proprietor and the proprietor's interest in the business/ Starting with
this initial equilibrium or balance of both sides of the accounts, each
subsequent transaction affects the two sides of the equation alike necessi-
tating for each debit enti-y a credit entrj' of equal amount, thus evidenc-
ing that no matter what transactions occur, if they are recorded by a
double entry, the oi'iginal equilibrium will not be destroyed/

Accounts — An account is a record under a specific heading of a single or
group of either similar or dissimilar items relating to the same person or
thing/ For convenience the account is divided into two parts or sides in
which the similar items are giouped/ As each of the sides of the account
is opposed to the other, the rule for joui-nalizing, or entering trans-
actions into accounts, is to debit or enter on the left side of the account
all increases of assets or decreases of liabilities and proprietorship, and
to credit or enter on the right side of the account all decreases in assets
or increases in liabilities and pi-oprietorship/ If the balance of an
account, the difference between the sum of the debits and the sum of the
credits, is a debit, then the account is an asset, expense, or deficit, while
accounts with credit balances represent liabilities, income, or proprietor-
ship/

Classes of Accounts — Classification of accounts usually divides the
accounts into the following classes :

1. Personal or accounts showing the effect of the transactions on the
vaiious people or corporations with whom the fii'm deals/

2. Impersonal or accounts recording profits, losses, receipts, disburse-
ments, and non-personal assets and liabilities/ The limiting of the term
"impersonal accounts" to real accounts'" seems fallacious.

3. Real or accounts recording assets, liabilities, and vested proprietor-
ship/'

4. Nominal (sometimes called representative)" or accounts recording
income and expenses/'

5. Mixed or accounts containing both real and nominal elements/*

6. Major (sometimes called primary)" or accounts recording all of the
transactions of a particular class/"

'For explanation of superior figures see page 337.

DOUBLE-ENTRY BOOKKEEPING 17

7. Subsidiary ov aoeounts auxiliary to, though not necessarily rlepenfl-
ent upon, a major account."

8. Summary or accounts summing up the data contained in a number
of other accounts of different classes to display some fact."

9. Specific or accounts containing items of only an exact, particular
nature."

10. Controlling (sometimes called collective)'"' or accounts containing
the totals of the debits and credits of a number of accounts in order to
show at any time the balance of the aggregate of these accounts.^* Con-
trolling accounts are sometimes called summary accounts,"^ but summary
accounts combine dissimilar accounts, and controlling accounts do not.

The purpose of classification of accounts is to clarify the financial state-
ments by grouping similar accounts together. Another use is to place all
the subsidiary accounts in schedules and place only the major accounts in
the statements.

Nominal Accounts — If nominal accounts were not used an entry to
vested capital would be necessary with every income or expense trans-
action.'^'' This is impractical, for the exact profit on each sale is seldom
known, at the time of the sale, and it is further inadvisable, for the
administration requires statistics showing the detailed effect of the various
transactions upon the business and not just the net result." Accordingly
items of income and expense are classified as minutely as the administra-
tion desires and then these nominal accounts are closed through the sum-
mary accounts into the vested proprietorship accounts.^"

Controlling Accounts — Controlling accounts are used because they
enable daily or monthly financial statements to be prepared without waiting
for the balancing of all the subsidiary accounts and greatly reduce the
work of locating errors in posting.^" The subsidiary ledger can be made
self-balancing by an "adjustment" account, which is an exact copy of the
controlling account in the general ledger except it is reversed."

Special columns for the controlling accounts are made in the books of
original entry from which posting is done to the subsidiary accounts."*
The posting to the subsidiary accounts is done as usual and then the totals
of such debits and credits are posted to the controlling account." As the
controlling accounts and not the subsidiary accounts are entered in the
trial balance of the general ledger, the books will balance.'"

All posting to controlling accoiints should be checked by the auditor.'*
Then the subsidiary ledger balance should be compared with the balance
of the controlling account.'^ If these balances agree only a test check of
the cases at random is necessary for the satisfactory audit of the sub-
sidiary accounts.''

Suspense Accounts — An account used as a place for temporary records
of items pending determination of their final allocation is a suspense
account.'* The usual examples of suspense accounts are unlocated errors
in trial balance, cash received without name of sender, and discrepancies
between the bank's records and the firm's cash book.'" It is important that

18 C. P. A. ACCOUNTING

each suspense item be placed in an aeeonnt under a suitable title instead
of general suspense accoimt.'"

When it becomes apparent that the cause of the suspended items cannot
be discovered, such item should be closed into pi-oflt and loss.'' However,
in a C. P. A. problem where the books are out of balance, the necessary
adjustment cannot be investigated and the suspense account should be
carried on the balance sheet instead of being closed into profit and loss.
This is especially true if the balance is a credit.

Some bu.siness men carry their doubtful accounts and notes receivable
in a suspense ledger.'* This provides a convenient way of keeping track
of these items, especially if the accounts ai-e kept in loose-leaf binders.*
However, as such a transfer does not affect the lx>ok valuation of the
items, it must not be used as an argument for omitting the reserve for
doubtful accounts.*'

Arrangements of Accounts — The accounts should be arranged in such a
manner so as to facilitate the preparation of the financial statements."
Such an arrangement would list the assets in the order of their liquidity,
each valuation account following its related asset; and would list the
liabilities likewise followed in order by the vested proprietorship accounts,
the profit and loss account, and the expense and income accounts in the
order in which they appear in the profit and loss statement.^ If eon-
trolling accounts are not maintained, the customers' and creditors' accounts
would be placed in the back of the ledger." A trial balance from a ledger
whose accounts are arranged as mentioned above is called a classified trial
balance." Sometimes, for reference purposes, the accounts are arranged
alphabetically."

Numbered Accounts — In some large businesses the accounts are so
numerous that they are given numbers as well as names. This is especially
important where the accounts are used for detailed statistical purposes by
having the numbers of the accounts punched on the cards, together with
the data.

There are several good systems of numbering accounts. A good general
idea of these plans can be had from the study of one of the simplest which
arranges the accounts into nine fundamental gi-oups, as follows :*^

1. Asset Accounts. 6. Valuation Reserves.

2. Investments and Treasury Securities. 7. Capital Surplus.

3. Prepaid Items. 8. Income Accounts.

4. Liability Accounts. 9. Expense Accounts.

5. Accrued Items.

These general groups may be subdivided into more special groups if
desired. An example of this subdivision would be :
9. Expense Accounts.
91 ^Manufacturing.
911 Prime.

9111 Wages.

9112 Freight.

DOUBLE-ENTRY BOOKKEEPING 19

912 Overhead.

92 Selling Expenses.

93 Administrative Expense.
931 Salaries.

9311 Clerks.

9312 Stenographers.

94 Non-opei-ating Expenses.

The above system is especially good as it emphasizes the major divisions
of accounts. A bookkeeper Avonld hardly post a debit to an asset to an
account beginning with 9. Another advantage is that the general correct-
ness of the system could be checked by an official with only a general
knowledge of the business, for a cursory survey of the books would detect
the capitalization of an expense.

A system very similar to the above is one that has only three grand
divisions, viz., property, proprietorship, and revenue accounts, the initial
numbers being respectively 1, 2, and 3, and the liabilities being differenti-
ated from the assets by having the second number 2 instead of 1, as in the
ease of assets.^'

In some systems key letters are also used with the numbers to aid in
rapid identification and to facilitate the operation of the system.** In
others each class of accounts is given the numbers starting with a certain,
hundred, viz., 100 to 290 for plant and equipment, 700 to 800 for de-
ferred charges, and 1700 to 1800 for factory overhead, etc.*

Journalizing — Journalizing is the systematic classification of the debits
and credits of a business transaction." In double entry bookkeeping
there are two axioms for journalizing, namely, that the sum of the debits
equals the sum of the credits, and that all entries are journal entries."
Formerly the words "to" and "by" were almost universally used." A
few accountants still use the word "to" although they do not use the word
"by."" However, the majoiity no longer advocate the use of either of
the words."

Another recent change in journalizing is the dropping of the practice
of making the entries closing the nominal accounts at the end of the fiscal
period with red ink posting directly from one account to another, the
practice generally followed now being to have the entries entered in the
journal and posted in black ink.'*'

The verification of journal entries is very important as the journal is
sometimes used fraudulently by making fictitious or irregular entries to
personal accounts to conceal misappropriation of cash." All journal
entries to personal accounts should be substantiated by vouchers approved
by authorized offteials." If they have not been so approved, the auditor
should have them initialed."

Verification of Footings and Postings — As experience has shown that
the percentage of frauds which have been concealed in false posting and
incorrect footings is small, auditors should not vei'ify every posting and
every footing, biit should depend on tests to locate such frauds."

20 C. P. A. ACCOUNTING

Posting to the ledgers should be verified by working back from the ledger
to the book of original entry and not rice versa, as this procedure pre-
vents anyone fi-om tampering with the auditor's check marks, and because
it will enable the aiulitor to detect entries made in the accounts, which
were not made on the books of original entry."^

If there are controlling accounts, it will not be necessary to verify the
detailed posting to the subsidiary accounts." If there are no controlling
accounts, the auditor should create them."'' Even if it is deemed wise
to verify the postings to the subsidiary accounts, all of the accounts
should not be checked.'' In periodical audits a certain number of the
subsidiary accounts should be verified each audit so that all of the accounts
would be verified in a reasonable time.*^

As to the footings, checking, in addition to the last page of each month,
about every tenth page in the purchase reeords*^' and every eighth page
in the sales records would be satisfactory if the firm is large.'" In an
audit of a small concern, the footing of every sixth page of the purchase
journals"' and every fourth page of the sales journals'^ should be verified.
If all receipts are deposited in the bank and all disbursements made by
check, no footing need be done in the general cash book, provided the
disbursements have been vouched and the bank account reconciled.'* If
the cash book footings can not be verified by the bank account, the net
cash and discount columns on both sides are usually added for the entire
period. Some auditors only add every third or fourth page of the cash
disbursements, if checks are always used,"* but add all receipt columns, if
the cashier has access to the receipts." In verifying additions special care
should be taken of the amounts carried forward."

Trial Balance — A trial balance is a table of the balances shown on a
ledger." Its purpose is to prove the mathematical accuracy of the ledger,
but mathematical equilibrium is not in itself sufficient proof of correct-
ness, as frequently errors offset each other.'* While a trial balance does
not prove the correctness of the ledger, the failure to balance does prove
incorrectness." This, together with the fact that the trial balance places
the accounts in a convenient form for the making of the financial state-
ments, is the value of taking a trial balance.'" Before closing, the trial
balance of the general ledger contains both nominal and real accounts,
but after closing, it really constitutes a non-classified balance sheet."

Books — The desire to keep some of the facts of the business unknown
to the clerks has cau.sed the particulars relative to the capital of the
business, the profit and loss accounts and other matters to be kept in a
separate ledger called "private ledger," which is made self-balancing by
using an "adjustment" account called general ledger account." The other
data is recorded in the ledger accessible to the clerks, called the "general
ledger," which is also self-balancing, the "adjustment" account, which is
called the private ledger account, being the reverse of general ledger ac-
count in the "private ledger."™

While bookkeeping can be done with only the standard "T" ledger
accounts, many variations have been devised whose chief point of interest

DOUBLE-ENTRY BOOKKEEPING 21

is the insertion of a "balance" column. Sometimes the money columns
are placed in the middle of the page, the order being debit, balance, and
credit.^" Another variation is for the money columns to be all at the
extreme right of the page in the order debit, credit, and balance." Still
another variation, called the Boston or tabulated ledger, has very wide
sheets containing space for the names of the accounts (written one to
a line under each other) and a group of three money columns in the
order debit, ci-edit, and balance for each day or month, as the case may
be.'^ Used in a bank, the total of balance columns gives the aggregate
depositors' balance, and the totals of the debit and credit columns give
the aggregate of the deposits received and checks cashed, respectively.*'

Voucher System — The voucher system is the treatment of creditors' ac-
counts in such a way as to obviate the necessity of keeping the individual
accounts in the ledger.** All invoices, which are held up until the goods
are received and accepted, are attached to voucher jackets, which, num-
bered consecutively, show the creditor's name and address, the material
received and the account to be charged.'" The voucher is sent for signature,
along with the check, but, as many vouchers are not returned, the system
relies largely on duplicate copies.'* To avoid this, voucher checks have
been devised which show upon the check itself what is being paid for."

As soon as the voucher jacket is made, it is entered on a voucher register
or record which lists these voucher jackets by date, number and firm.™
Columns are provided to take the credit to the vouchers payable account
(another name for accounts paj^able), for the allocation of the charges
to the usual expense accounts, and for the names of unusual accounts
with a money column for such items.™ When a voucher is paid, it is
entered in the cash book as would be done in any system.'* However, this
payment is recorded in the voucher register which shows which vouchers
are still unpaid, the aggregate of which agrees with the balance of the
vouchers 'payable account in the general ledger."

The use of voucher-checks combines the advantage of having evidence
that the creditor was paid with that of having the creditor's signature
as to the payment for a certain invoice.*' Vouchers are numbered con-
secutively as entered in the voucher register." The voucher-checks may
have only one number, in which case the number of the voucher-check
would agree with the number of the voucher. As vouchers are seldom
paid in the order in which they are recorded in the voucher register, the
voucher-checks having only one number would not be entered in con-
secutive order in the cash book. Sometimes voucher-checks are given two
numbers, the first being the number of the voiicher and the second the
treasurer's number.** This method of numbering enables the voucher-
checks to be entered consecutively in the cash book."* By the use of the
first number the entry in the voucher register can be traced and by the
use of the second number the cash book entry can be located.

The advantages claimed for the voucher system are :*" First, gives de-
tailed analysis of all purchases; .second, saves labor by eliminating the
purchase ledger; third, secures an up-to-date entry of all liabilities; fourth,

22 C. P. A. ACCOUNTING

localizes responsibility by showing authority for auditing, payment, and
entry of the items; fifth, secures a receipted bill for all payments of
cash; and sixth, increases the effectiveness and decreases the cost of an
audit. The chief disadvantages claimed are:*' First, clumsy provision
for returns and allowances, partial jiayment of bills, and notes payable;
second, inadequate showing of volume of business with each creditor;
third, the giving out of information about the business which should be
kept private; fourth, the expense of filing and recording the vouchers
and the labor of having them vised by the various officials; and fifth, no
ledger accounts available for future reference.

The first of these objections is by far the most important for the volume
of business with each creditor can, if desired, be readily computed on an
adding machine, and, if only the date and number of the creditor's invoice
appear on the voucher check, little secret information will be disclosed.
Purchase returns and allowances should be recorded in red ink in both
the votichers payable column and the distributive columns affected.'' Then
the red ink entries may be deducted from the regular entries or both red
and black totals may be used, in which case both totals should be posted,
the red as offsets to the corresponding black postings.'* "Where partial
payments are to be made, the original voucher may be canceled in full
and two new voucliers issued in place of it.^*" This adjustment may be
made directly on the face of the voucher register by cross-references be-
tween the old and new vouchers, usually shown in the "manner of payment"
column; or by reversing the voucher register entry for the old voucher
in the general journal and recording the new vouchers as usual in the
voucher register.""

Vouchers — A voucher is a document verifying the correctness of charges
for values paid out or of credits for values received.^*" The fact that one
source of information may be missing does not prevent the verification
of entries. For instance, sales items may l)e vouched by customers' orders,
shipping clerk's records, carbons of invoices, bills of lading, customers'
accounts and cash collections.*"* Vouchers for returned sales consist of
correspondence carbons of credit memos and invoices showing the original
charge, customers' settlement statements, and cash refund vouchers.*"*
Copies of deposit slips, stubs of receipt books, and bank pass book are
the cash receipt vouchers.*"* The vouchers for cash payments and pur-
chases comprise copies of orders, receiving clerk's records, checked invoices,
receipts for payments, canceled checks, petty cash vouchers, pay rolls,
wages and salary records, and the minute book.*"^ Returned purchases
may be verified from stock records, shipment records, credit memos, and
specification of requirements.*"' As journal entries are generally of an
unusual nature they are frequently supported by formal vouchers approved
by proper authority.*"* Correspondence, and the minute book also, are
used to vouch the journal entries.

Articulation Statement — The articulation statement consists of a sheet
ruled so that the accounts ai-e listed under each other, one account to a
line, and debit and credit money columns are provided for each class

DOUBLE-ENTRY BOOKKEEPING

of transactions^"* or for each ledger account.'^" If a man started a period
with cash $2,000 and merchandise $3,000 and then purchased $5,000 and
sold $7,500 worth of goods and incurred expense amounting to $1,000,
the articulation statement would be as follows :

Articulation Statement

Accounts

Starting
Balances

Merchandise

Expense

Final
Balances

Cash

$2,000
3,000

$1,000

$1,000
500

Merchandise. . .

$5,000

$7,500

Capital ....

$5 , 000

Creditors.

5,000

Debtors.

7,500

7,500
1,000

Expense

$1,000

$5,000

$12,500

$1,000

$10,000

It is possible to subdivide the headings into basic elements, e. g., the
merchandise could be divided into sales and purchases. Sometimes two
columns are allotted to cash, on account of the large number of such
transactions."'

The articulation statement is of little or no practical value"' but the
same idea is given a practical application when the interim entries are
classified according to the books of original entry.""

24 C. P. A. ACCOUNTING

QUESTIONS

DOUBLE-ENlTiY BOOKKEEPING

Accounts

I. What do you understand by the term "an account"? (N. J., 1904—
1909; Mo., Dec, 1914; Iowa, Dec., 1918.)

2.- Define: Account stated. (Mich., Dec, 1914; Mo., Dec, 1914.)

3. What various meanings may an entry in a Ledger account have, on
(a) the debit side, (b) the credit side? (N. Y., Jan., 1897.)

4. State fully the value of accounts under the following conditions :
(a) When correctly kept; (&) when incorrectly kept; (c) as a basis of
liquidation; (d) as a going concern; (e) for the purpose of .sale of busi-
ness. (Pa., Nov., 1906.)

5. Define the principal or main accounts of a corporation of your own
selection. (Pa., May, 1905.)

6. State the two piimary results to be sought in keeping accounts. In
what financial statements are these results shown? Point out the relation
between these statements. (Mo., Dec, 1913.)

7. What is the basis of accounts, (a) in a corporation, (b) in a part-
nership? (Pa., May, 1906.)

8. What do you consider the most important account in a set of account
books? Explain fully. (Pa., Nov., 1899.)

9. Define: Suspense account. (N. Y., Dec, 1896; N. Y., Dec, 1897;
N. Y., June, 1898*; N. Y., Dec, 1899; Pa., Nov., 1900; N. Y., Jan., 1902;
Mich., June, 1908; Wash., Aug., 1908; Ohio, March, 1910; Wash., Nov.,
1913; W. Va., May, 1917.)

10. Give three instances of items carried to a Suspense account, and
state how they may be removed from that account. (N. Y., Jan., 1902.)

II. State where and how the Suspense account is employed. (N. Y.,
Jan., 1902.)

12. Explain the meaning of an item in suspense. (N. Y., June, 1900.)

13. Show proper classification of the Suspense account on the debit and
credit sides of a Balance Sheet. Give examples. (Mich., June, 1908.*)

14. Describe the use and purpose of a Suspense account. (N. Y., June,
1898*; Va., Oct., 1912.)

DOUBLE-ENTRY BOOKKEEPING 2o

15. What do you understand to be the difference between personal
accounts, impersonal accounts, real accounts, and nominal accounts'? (111.
May, 1913.)

16. Define: Nominal accounts. (N. Y., June, 1899; N. Y., June,
1900; Pa., Nov., 1900; N. Y., Jan., 1906; Cal., May, 1908; N. Y., Jan.,
1911; Mich., June, 1912; La., May, 1913; N. Y., Jan., 1914; Mich., June,
1914; N. D., June, 1914; Kan., May, 1916; Ind., June, 1916; N. D.,
July, 1916*; Minn., Oct., 1916; Ohio, Nov., 1916; N. D., Aug., 1917*;
A. I. of A., May, 1919.)

17. What purpose does the use of nominal accounts subserve? (Ohio,
Nov., 1913.)

18. When and how are nominal accounts disposed of? (Ohio, Nov.,
1913; Ohio, Nov., 1915.)

19. Defi.i3. Real accounts. (N. J., 1904-1909; N, Y., Jan., 1906;
Cal., May, 1908; La., May, 1913; Mich., June, 1914; Ind., June, 1916;
N. D., July, 1916*; Ohio, Nov., 1916; N. D., Aug., 1917.*)

20. What is the relation of nominal accounts to real accounts'? How
do these accounts fulfill the purpose for which they are created? (N. Y,,
June, 1912; Okla., Nov., 1919.)

21. Classify the following accounts as real and nominal : Salary, Notes
Payable, Fixtures, Rent, Interest Earned, Discount on Sales. (N. D.,
July, 1916.)

22. Define: Personal accounts, (N. Y., June, 1899; Pa., Nov., 1900;
Md., Oct., 1903; N. Y., Jan., 1906; Cal., May, 1908; Mich., June, 1912;
Ind., June, 1916; Ohio, Nov., 1916; N, D. Aug., 1917.*)

23. Define: Impersonal accounts. (N. Y., Jan., 1906; Cal., May,
1908; Mich., June, 1912*; Ind., June, 1916; N. D., Aug., 1917.*)

24. Define: Mixed accounts. (Cal., May, 1916*; N. Y., Jan., 1918.)

25. What are the objections to a mixed account? (Cal., May, 1916.)

26. Illustrate mixed accounts. (Cal., May, 1916*; Mich., June, 1919,)

27. Define: Major accounts. (N. Y., Jan., 1918.)

28. What is a representative account? (N. J., 1904-1909.)

29. Define: Subsidiary accounts. (N. Y., Jan., 1918.)

30. Define: Current account. (N. Y., Jan., 1906; Mich., June, 1912;
La., May, 1913; Wash., July, 1917.)

31. Define: Collective accounts. (N. Y., Jan., 1918.)

32. Define: Summary accounts. (N. Y., Jan., 1906*; Mich., June,
1912; La., May, 1913; N. Y., Jan., 1918.)

33. What is meant by the term "primary accounts"? (111., May, 1913* ;
N. D., Aug., 1917.)

34. Define: Specific accounts. (N. Y., Jan., 1906; Mich., June, 1912*;
La., May, 1913; N. Y., Jan., 1918.)

26 C. P. A. ACCOUNTING

35. Define: Controlling accounts. (N. Y., Jan., 1900; N. Y., June,
1904* ; N. Y., Jan., 1906 ; N. Y., Feb., 1910 ; Va., Nov., 1910 ; Mich., June,
1912; La., May, 1913; Wash., Nov., 1913; Ohio, Nov., 1913*; Ohio, Nov.,
1915; Kan., Dec., 1915; Mo., Dec., 1915; N. D., July, 1916*; Ohio, Nov.,
1916; Cal., Nov., 1916; W. Va., May, 1917; 111., May, 1917; N. C, Aug.,
1917*; A. I. of A., Nov., 1917; Ind., Nov., 1918; Iowa, Dec, 1918.).

36. State the purposes of a controlling account. (N. Y., June, 1904;
N. J., 1904-1909; Va., Nov., 1910; Ohio, Nov., 1915; Mo., Dec., 1915;
Kan., Dec, 1915; N. D., July, 1916*; Okla. Nov., 1919.*)

37. Give an illustration of the use of a controlling account. (N. Y.,
Jan., 1900; N. Y., June, 1904*; Va., Nov., 1910*; Mich., June, 1913*;
Ohio, Nov., 1913*; W. Va., May, 1917.)

38. Give the names of several controlling accounts. (N. Y., June,
1904*; Cal., June, 1904*; N. Y., Feb., 1910; Wash., May, 1911*; Ohio,
Nov., 1915; Kan., Dec, 1915; Mo,, Dec, 1915; Ohio, Nov., 1916*; Okla.,
Nov., 1919.*)

39. Name the advantages of controlling accounts. (Mich., Jime,
1910*; Mich., June, 1913*; Ohio, Nov., 1913; N. D., July, 1916*; Ohio,
Nov., 1916.)

40. How do you reconcile a debit to a controlling account and another
debit for the same amount to an individual creditor with the fundamental
principle of double-entry bookkeeping? (Ohio, Nov., 1915.)

41. In making the audit of the Springfield Grocery' Company you find
that the controlling account in the general ledger exceeds the aggregate of
the balances in the Accounts Receivable Ledger by $25,210.66. What steps
would you take to bring this ledger into agreement with the controlling
account in the General Ledger? (111., May, 1916.)

42. In designing a set of accounts for a business, how might provision
be made for a constant showing of the aggi'egate sum owing by customers
and the aggregate sum owing to cretlitors, without the neees.sity of pre-
paring a schetlule of the accounts of such customers and creditors? (N. Y.,
Dec, 1896*; N. Y., June, 1901.)

43. Describe a method of keeping accounts so that an independent
balance of the ledger, containing only the real, nominal, special and con-
trolling accounts, exclusive of the individual accounts of customers and of
trade crcc^itors, may be taken. (N. Y., Dec, 1896.)

44. What is meant by "classification of accounts"? (Md., Oct., 1903;
Wis., April, 1917; Okla., Nov., 1919.)

45. Into what general classes should Ledger accounts be divided? State
the distinguishing feature of each class. Mention one account belonging to
each class. (N. Y., Dec, 1898*; N. Y., Jan., 1901; N. Y., Oct., 1907*;
R. L, Dec, 1907*; Wis., April, 1914.*)

46. State what verification you would make of the classification of
expenses. (N. C, Aug., 1917; N. C, Nov., 1918.*)

DOUBLE-ENTRY BOOKKEEPING 27

47. A wholesale house has on its books 200 individual accounts with
creditors, 500 with city customers, and 1500 with country customers, be-
sides about 75 impersonal, or representative accounts. Owing to the
methods of'^bookkeeping in force, it is necessary, in order to ascertain the
amount of Accounts Receivable or Payable, to take otf a complete list of
the accounts in question. You are called upon to advise as to how this
difficulty can be overcome, and also as to whether the bookkeeping work,
on the Accounts Payable cannot be reduced, having regard to the fact that
the firm discounts all its bills.

Embody your suggestions in a brief report. (Wash., April, 1906.)

48. Draw up a brief but effective classification of General Ledger ac-
counts suitable for a company with a total capital investment of say
$750,000, doing an annual business of about $1,000,000, employing about
300 men, and with 500 customers' accounts. Assume the company manufac-
tures and sells to dealers bicycles of 10 different patterns and styles, and
does a small business in the sale of duplicate parts, the accounts to be
framed to permit of the preparation monthly of an approximate Balance
Sheet and approximate Profit and Loss account without the taking of a
physical inventory except at the annual closing on September 30 of each
year.

State the classification in the order in which, in your opinion, the
accounts should appear in the Ledger, giving briefly your reasons there-
for, and indicate which accounts, if any, should be supplemented with
subsidiary ledgers of other sub-account records. (111., May, 1913.)

49. Classify and group the following accounts according to kind of
asset, liability, proprietary interest, income and expense:

Interest Collected in Advance. Bonds Payable.

Sinking Fund. Interest Earned on Liberty Bonds.

Notes Receivable Discounted. Interest Paid on Liberty Bond Install-
Treasury Stock. ments.

Work in Progress. Reserve for Depreciation, Buildings.

Dividends Unclaimed. Dividends Declared.

Capital Stock Subscription. Dividends Payable.

Suspense Accounts Receivable. Investments in and advances to corn-
Discount on Bonds Issued Written Off. panics for purposes of control.

Accrued Property Taxes. Advances to Company Officials.

Accrued Income and Excess Profits Insurance Premiums paid by company
Taxes. on life of its president (in which

Interest Accrued on Notes Receivable. the company is beneficiary).

Interest Accrued on Bonds Payable. Installment Payments by employees
Reserve for Sinking Funds. on Liberty Bonds bought for them

Reserve for Bad Debts. by company.

Merchandise Purchases. Liberty Bonds bought for employees.

Sales Returns and Allowances. Employees' Liberty Bond Subscrip-
Reserve for Building Extensions. tion.

(Wis., Nov., 1919.)

50. Classify and group the following accounts of a manufacturing com-
pany, according to kind of asset, liability, loss and gain :

1. Accounts Payable. 3. Accrued Salaries and Wages.

2. Accounts Receivable. 4. Advertising.

C. P. A. ACCOUNTING

5. Bad Debts Written Off,

6. Bills Payable.

7. Bills Receivable.

8. Bond Discount.

9. Bond Premium.

10. Bond Interest Accrued.

11. Capital Stock.

12. Cash.

13. Credit Department Expenses.

14. Depreciation of Buildings, Ma-

chinery and Plant.

15. Depreciation of Workmen's Cot-

tages.

16. Directors' Fees.

17. Discount on Purchases.

18. Discount on Sales.

19. Federal Corporation Tax.

20. First Mortgage Bonds.

21. Freight and Cartage Inward.

22. Freight and Cartage Outward.

23. General OflSce Expenses.

24. Goodwill.
2-5. Insurance.

26. Insurance Premiums Unexpired.

27. Interest on Bills Payable.

28. Interest on Bonds.

29. Income from Investments.

30. Inventory, Raw Materials.

31. Inventory, Goods in Process.

32. Inventory, Manufactured Goods.

33. Investments (Outside).

34. Maintenance of Buildings, Ma-

chinery, and Plant.

35. Maintenance of Workmen 's Cot-

tages.

36. Manufacturing Power, Heat, and

Light.

(Wis

37. Miscellaneous Factory Expenses.

38. Miscellaneous Selling Expenses.

39. Nonproductive Labor.

40. Office Equipment.

41. Office Salaries.

42. Officers' Salaries and Expenses.

43. Organization Expenses.

44. Patent Rights.

45. Patterns and Drawings.

46. Plant Site.

47. Plant Buildings.

48. Plant, Machinery, and Equipment.

49. Productive Labor.

50. Purchasing Department Expenses.

51. Raw Materials Purchased.

52. Rent of Workmen's Cottages.

53. Reserve for Depreciation of Build-

ings, Machinery, and Plant.

54. Reserve for Depreciation of Work-

men 's Cottages.

55. Reserve for Doubtful Accounts.

56. Reserve for Sinking Fund.

57. Returns and Allowances on Pur-

chases.

58. Returns and Allowances on Sales.

59. Sales of Manufactured Goods.

60. Sales of Waste Material.

61. Sales Agents' Commissions.

62. Salesmen 's Salaries.

63. Salesmen's Expenses.

64. Sinking Fund Investments.

65. Surplus.

66. Taxes on Plant and Equipment.

67. Taxes Accrued.

68. Workmen 's Cottages.

,, April, 1915; S. C, Sept., 1919.)

51. Assuming that these are the principal divisions of the expense
accounts of a manufacturing business selling the product through traveling
salesmen to the retail trade: (a) Manufacturing Expenses Division; (b)
Selling Expenses Division; (c) Administration and General Expenses
Division; (rf) Profit Deduction Expenses Division, designate in what
division you would classify each of the following accounts, by giving the
number of account and the letter indicating division opposite:

10.

Materials and Supplies Consumed.
Interest on Loans Paid.
Interest on Bonds Paid.
Postage for Correspondence.
Postage for Parcel Post.
Domestic Taxes.

Street Assessments for Street Im-
provements.
Federal Taxes.

Discounts Received on Purchases.
Discounts Given on Sales.

11. Discounts Allowed for Prompt Pay-

ment of Accounts Receivable.

12. Exchange on Checks.

13. Revenue Stamps.

14. Bonus to Traveling Salesmen.

15. Bonus to Office Force.

16. Bonus to Factory Operatives.

17. Bonus to Superintendent of Fac-

tory.

18. Fire Insurance Premiums on Fac-

tory.

DOUBLE-ENTRY BOOKKEEPING 29

19. Fire Insurance Premiums on Of- 31. Traveling Expenses of Buyer.

fice. 32. Expenses of Lawsuits for Colieet-

20. Fire Insurance Premiums on ing Accounts.

Warehouses. 33. Lawsuit Expenses Defending Suit

2L Liability Insurance Premiums. brought by Employee for Dam-

22. Life Insurance i'rcmiums on Fac- ages

tory Operatives' Lives. 34 Expense of Welfare Work.

23. Credit Insurance Premiums. 35 pj^^g Assessed for Violation of

24. Tornado Insurance Premiums Child Labor Laws.

25. Freight Prepaid on Shipments. o^ tt 1 • r, ^ ^ t-.

26. Claims Allowed on Sales Made. l^' Hedging Contract Expenses.

27. Rent of Factorv. ^^' Donations to Employees.

^8 Pent of Office ' ^^' Donations to Other Than Em-

29." (Omitted on Official Docu- ployees.

ment.) 3^- Freights on Purchases.

30. Traveling Expenses of Superin- 40. Claims allowed on Merchandise
tendent to Secure Operatives, Purchased.

(N. C, Nov., 1919.)

52. Show by chart or outline the various divisions and subdivisions of
all asset, liability, income and expenditure accounts. (Wis., April, 1914.)

53. Into what two general and what three special classes are accounts
divided in double-entry bookkeeping? (Mich., June, 1912.)

54. What are the purposes of elassifieations of accounts in a business,
and how should they be grouped to show the proper results? (Pa., Nov.,
1906; Okla., Nov.,'l919.*)

55. On the theory that accounts may fall into the following classifica-
tions, (a) accounts with individuals, {h) accounts with things, (c) ac-
counts with forces or ideas, give a number of illustrations or names of
accounts in a modern accounting system under each of these heads. (Ohio,
March, 1910.)

56. Which group of accounts, if eliminated from double-entry bookkeep-
ing, would reduce accounts to an economic history? (N. Y., Jan., 1917.)

57. Which class or classes of accounts close into Loss and Gain ac-
count? (N. Y., Dec., 1898.*)

58. What is the nature of the accounts on the debit or left-hand side
of the Ledger? (Ohio, March, 1910.)

59. What is the nature of the accounts on the credit or right-hand side
of the Ledger? (Ohio, March, 1910.)

60. What are the advantages obtained through numbering accounts?
Name and briefly describe two methods of numbering or lettering ac-
counts. (Wis., April, 1914; Mich., Dec, 1916.*)

61. In the opening of a Ledger, what principle should be followed as
to the order or arrangement of the accounts? Show the advantages of the
different plans. (N. Y., Jan., 1897*; V. Y., Dec, 1897; N.^Y., Jan.,
1907*; N. Y., June, 1911*; Cal., Nov., 19 V6*; N. Y., Jan., 1918.*)

62. What is the chief consideration in the arrangement of Ledger ac-
counts? (Ind., June, 1916.)

63. How may the accounts in a trial balance be best arranged to facili-

30 C. P. A. ACCOUNTING

tate the preparation of a business and financial statement? (S. C, Sept.,
1919.)

64. In what order should the accounts be aiTanged as they successively
appear in (a) a Ledjrer containing:: all the accounts of a business, (6) a
Ledger containing accounts of fixed assets and fixed liabilities, as well as
special, nominal, and summary accounts? (N. Y., Jan., 1906.)

65. What is meant by theory of accounts? (N, Y., June, 1917.)

Journal Entries

66. What is a Journal entry? When used? (Iowa, Dec, 1918.)

67. Define: Debit. (N. Y., Dec, 1898; N. J., 1904-1909.)

68. Define: Credit. (N. Y., Dec, 1898; N. J., 1904-1909.)

69. Define journalizing in its broadest sense. (N. Y., June, 1900;
Wash., May, 1903.)

70. State your opinion in regard to the technie of journalizing. Show
wherein your view is in accord with the evolution of the books of account.
(X. Y., June, 1912.)

71. Describe the theory of double-entry bookkeeping. (N. Y., June,
1901; N. Y., June, 1902*; Ohio, March, 1910; Mass., June, 1910; III., May,
1914; Ohio, Nov., 1915; Ind., June. 1916; Iowa, Dec, 1918; N. Y., Jan.,
1920.*)

72. In a recent work on double-entry bookkeeping it is contended that
each transaction involves two entries with the proprietor; do you ag'ree
with the author? If so, why? If not, why not ? (N. Y., June, 1914.)

73. State a comprehensive general nde for journalizing. (N. Y., June,
1899*; N. Y., June, 1900*; N. Y., Jan., 1901; N. Y., Jime, 1902*; Wash.,
May, 1903.*)

74. Why is the word "To" used in connection with debit entries, and is
its use necessary? (N. J., 1904-1909.)

75. Why is the word "By" used in connection with credit entries, and
is its use necessary-? (N. J., 1904-1909.)

76. State how you would verify Journal entries. (Va., Nov., 1910.)

77. Prepare a form of monthly summary Journal entries for the books
of original entry. (N. Y., Jan., 1907.)

78. State the general law growing out of the relationship of debtor and
creditor that governs double-entiy bookkeeping. (N. Y., Dec, 1898.)

79. In double-entry bookkeeping, why are the debits on the left and the
credits on the right? (N. Y., June, 1900.)

80. What is the result of a debit entry? of a credit entry? Illustrate
in the case of an account of each of the following classes: (a) Personal,
(&) real, (c) nominal. (N. Y., Dec, 1898; N. Y., June, 1900.)

81. (o) What may the placing of an item on the debit side of a Ledger
account represent? (b) What may the placing of an item on the credit
side of a Ledger account represent? (Va., Oct., 1911.)

DOUBLE-ENTRY BOOKKEEPING 31

82. Why is an account debited? Why is an account credited! (Iowa,
Dec, 1918.)

S3. Stale the advantaf,'-es of double-entry bookkeeping. (N. Y., June,
1901; N. J., 1904-1S09*; Mass., June, 1910.)

84. What is the best plan for distributing monthly bills among 500
or more expense and construction accounts? (Mass., Oct., 1914.)

85. In making detailed audits some auditors verify all postings and
footings of general and subsidiary ledgers, even though controlling ac-
counts are kept. State reasons for and against such procedure. (A. I. of
A., Nov., 1919.)

86. Describe the entries necessai-y to open a set of double-entry books
for a firm just starting in bushiess. (N. Y., Dec, 1898*; N. Y., June,
1900; Pa., Nov., 1900*; Wash., May, 1903.)

87. What is the proper course of procedure in taking charge of the
bookkeeping of a tirm that has either no books of account or very im-
perfect ones? (N. Y., June, 1898; Pa., May, 1902.*)

Trial Balance

88. What is a trial balance? (Pa., Nov., 1899*; Pa., Nov., 1901; Pa.,
May, 1902; Pa., May, 1905; N. Y., Jan., 1906; N. Y., Oct., 1907; 111., Dec,
1907; R. I., Dec, 1907; Md., Jan., 1909*; N. J., 1904-1909*; N. Y., Feb.,
1910; La., May, 1913*; Colo., Dec, 1913*; Wis., April, 1914; Kan.,
May, 1916; W. Va., May, 1917; Cal., June, 1917; N. C, Aug., 1917*; Va.,
Nov., 1918; N. C, Nov., 1918*; Iowa, Dec, 1918.)

89. What is the purpose of a trial balance? (N. Y., Jan., 1897* ; N. Y.,
Jiine, 1898; N. J., 1904-1909* ; N. Y., June, 1909* ; Ohio, Nov., 1913; Ohio,
Nov., 1915; Ohio, Nov., 1916; Ohio, Nov., 1918; Ind., Nov.. 1918; Md.,
Oct., 1919.)

90. If your trial balance shows an account having a debit excess what
does the cireum.stanee signify? Does the debit balance shown by the trial
balance indicate the true status of the account? Explain. (N. Y., June,
1904.)

91. What are the principal differences between a trial balance taken
before the books are closed, and one taken directly after they are closed?
(N. Y., Jan.. 1897; N. Y., Dec, 1897*; N. Y., June, 1908; Iowa, Dec,
1918.)

92. How may the accounts in a trial balance be best arranged to facili-
tate the preparation of a business and financial statement? (N. Y., Dec,
1896.)

93. What is the character of accounts contained in a trial balance?
(N. Y., Jan., 1897; N. Y., June, 1909.)

94. Describe the process of taking a trial balance. (N. Y., June,
1898.)

3ii C. P. A. ACCOUNTING

95. State the scope and value of the trial balance. (N. Y., Jan.,
1902.)

96. Submit trial balance taken from the books of a copartnei'ship and
also a similar trial balance, as it would apjiear by the books of a corpora-
tion (assuming that in each '!ase the books have been closed at the end of
the fiscal period), using your own figures. (Ohio, Dec, 1908.)

97. When accounts are in equilibrium what may be said as to their
correctness? (N. Y., Jan., 1917.)

98. Does a trial balance furnish conclusive evidence of the absence of
errors? Explain. (Pa., May, 1905* ; Ohio, Nov., 1913* ; Ohio, Nov., 1915;
N. Y., June, 1918*; Ind., Nov., 1918; Ohio, Nov., 1918; Md., Oct., 1919.)

99. How should one proceed to detect an error in a trial balance?
(N. Y., Jan., 1897; N. Y., Dec., 1897*; N. Y., June. 1901*; N. Y., Jan.,
1902.)

100. Give the order of procedure and describe tersely in enumerated
paragi'aphs the steps required when called upon to adjust an incorrect
trial balance which the bookkeeper cannot agree. (111., May, 1913.)

101. In balancing a set of books consisting of Cash Book, Purchase
Book, Sales Book, Journal and Ledger, the debit side of the trial balance
is found to be $87.19 in excess of the credit side; how should the error
be sought? (N. Y., Jan., 1900.)

102. In taking off a trial balance, a bookkeeper finds that his debit
footings exceed the credit by $131.56, which he carries to a Suspense
account. Later, he discovers that a purchase amounting to $417.50 has
been debited to a creditor as $192.94; that $312.50 for depreciation of
furniture has not been posted to depreciation account ; that $500 with-
drawn by the principal has been charged against wages account; that a
discount of $76.13 allowed to a customer has been credited to him as
$71.13; and that the total of sales returned was footed $5 short. Give
detailed entries showing how you would remedy these errors, and starting
with the original difference prepare a supplemental trial balance showing
whether the books balance or not. (111., Dec., 1910.)

103. When an auditor employed to adjust the accounts of a finn finds
that the current work is behind and that no trial balance has been made
for over a year, what course should he pursue, having regard for his own
interests as well as for those of the firm? (N. Y., Jan., 1900.)

104. What deductions may be safely drawn from a trial balance rep-
resenting intrinsic values and true economic history of the transactions
of a given period? (N. Y., June, 1917.)

Books

105. What books of account do you consider necessary for the con-
duet of a small business? Describe their form and use. (N. Y., Jan.,
1897; N. Y., Dec, 1898*; Pa., Nov., 1900*; Pa., May, 1905*; N. Y.,

DOUBLE-ENTRY BOOKKEEPING 33

June, 190G*; N. Y., Feb., 1908*; Mich., July, 1909; N. Y,, Feb., 1910;
Ohio, March, 1910.*)

106. Describe a system of bookkeeping by which the errors in a trial
balance may be localized. (N. Y., June, 1908.)

107. Suggest a plan for recording and posting, with the least possible
loss of time, the remittances received from customers by a concern whose
Ledger is in several divisions, with a bookkeeper to each division. (Wash.,
April, 1906.)

108. Describe a condition in which the use of a few books would not
result in simplicity of system, while the number of books currently oper-
ated could be increased with advantage. (N. Y., Jan., 1907.)

109. What is a Ledger? (N. Y., Oct., 1907; R. I., Dec, 1907.)

110. Do you approve of a business concern keeping more than one
Ledger? If so, why, and how would the different ledgers be character-
ized ? ( Mass., April, 191 1 . )

111. Name seven kinds of ledgers and briefly state the use of each
kind. (N. Y., Dec., 1897*; N. Y., June, 1908; N. Y., June, 1911.*)

112. Define: Boston ledger. (Ill, Dec, 1916.)

113. State arguments briefly for and against the use of Boston ledger.
(Cal., Nov., 1916.)

114. Define: Subsidiary ledger. (S. C, Sept., 1919.)

115. What are the advantages of a subsidiary ledger? (S. C, Sept.,
1919.)

116. Describe: Self -balancing ledger. (R, I., Dec, 1907; N. Y., June,
1912*; N. Y., June, 1919.)

117. How is a self-balancing ledger operated? (R. I., Dec, 1907*;
N. Y., June, 1912.)

118. In a large dry goods business it is considered necessary to divide
the bookkeeping in such a way that each ledger shall be balanced sepa-
rately. How should this be done? (N. Y., June, 1898.)

119. In making an audit would you consider it necessary to check in
detail the postings of subsidiary ledgers? Explain fully. (N. Y., Feb.,
1908; Mich., June, 1912.)

120. A Milwaukee corporation has twenty Sales Ledgers and desires
to adopt a system of sectional balancing so that each ledger can be
balanced separately each month. Outline and illustrate the use of the
system. (Wis., April, 1917.)

121. What do you consider the best subdivision of ledgers when
sales amount to $6,000,000 to $10,000,000 per annum in a manufacturing
business, say, steel? It is desired to ascertain losses and gains monthly.
Describe fully your plan or method of connecting up the ledgers em-
ployed, also the method of treating the purchases and sales. (Pa., Nov.,
1900.)

122. Define : General Ledger. (Wash., Nov., 1913.)

34 C. P. A. ACCOUNTING

123. State your opinion briefly as to the merits or the demerits of
General Ledger. (N. J., 1904-1909.)

124. Define: Private Ledger. (N. Y., June, 1899*; N. Y., Jan., 1900;
N. Y., June, 1901*; N. Y., Jan., 1902*; Wash., May, 1903; Pa., May,
1903; Cal., June, 1904*; N. J., 1904-1909*; N. Y., Jan., 1906*; Mich.,
July, 1906* ; 111., Mav, 1907* ; Wash., Aug., 1908* ; N. Y., Feb., 1910* ;
Mass., June, 1910*; Va., Oct., 1912*; Wash., Nov., 1913; N. Y., Jan.,
1914*; Mich., June, 1915*; Cal., Nov., 1916*; 111., Dee., 1916; Md.,
Oct., 1919.*)

125. What accounts should be embodied in a private ledger to make
it a complete synopsis of the business? How would you prove the cor-
rectness of these accounts? (N. Y., June, 1918.)

126. When would it be advisable to use a Distribution Ledger? (Md.,
Jan., 1909.)

127. Define: Loose-leaf system of bookkeeping. (Va., Nov., 1910;
A. L of A., May, 1918.)

128. Discuss the relative merits of bound books and loose-leaf or
card records for various accounting purposes. (N. Y., Jan., 1904* ; Cal.,
June, 1904*; N. J., 1904-1909*; R. L, Dec., 1907*; Fla., April, 1908*;
Wash., Mav, 1910*: Ya., Nov., 1910*; Mass., April, 1911*; Va., Oct.,
1912*; La., May, 1913*; Cal., Nov., 1916*; A. I. of A., Nov., 1917; A. L
of A., May, 1918* ; Ind., Nov., 1918* ; Ga., May, 1919.)

129. State your view of the possibility of removal, destruction or sub-
stitution of loose leaves or cards to the extent of effectually preventing evi-
dence in cases of litigation. (Wash., May, 1910.)

130. Give at least two methods for preventing improper abstracting
of leaves from loose-leaf books. (Fla., April, 1908.)

131. In what kind of business would loose-leaf ledgers be most use-
ful? Under what circumstances would you advise the use of card ledgers?
(Mass., April, 1911.)

132. Describe: Tabular books. (Pa., Nov., 1899; Md., Oct., 1903; Pa.,
Nov., 1906.)

133. What is the advantage or disadvantage in the use of columnar
books? (Pa., Nov., 1899; N. Y., Jan., 1900*; N. Y., Jan., 1902*; Wash.,
May, 1903*; Pa., May, 1903; N. J., 1904-1909; Pa., Nov., 1906; Md.,
Jan., 1909.*)

134. State the purposes for which series of perpendicular columns are
employed in books of original entry and how these purposes may be ac-
complished relative to the following conditions: (a) Several ledgers com-
prehended in one system of accounts; (ft) several departments com-
prehended in one business; (c) several accounts comprehended in income
and expenditure. (N. Y., Dec., 1896.)

135. Prepare form of book for small business combining General
Ledger, General Journal and General Cash Book in one binding to show
transactions involving all three on each double page. (III., Nov., 1904.)

DOUBLE-ENTRY BOOKKEEPING 35

136. Illustrate a Columnar Cash Book, a Columnar Journal, and a
Columnar Sales Book. What getieral requirements should be observed in
designing such books? (N. Y., Jan., 1900*; Wash., May, 1903.)

137. What is a Journal? (N. Y., Of^t., 1907; R. I., Dec, 1907.)

138. Explain what is meant by "books of original entry" and give
two illustrations of same. (Md., Oct., 1903*; Ohio, Nov., 1916.)

139. Describe various uses of the Journal. (N. Y., Jan., 1897; N. Y.,
June, 1902*; N. Y., June, 1906.)

140. Write a short article upon the Journal: (o) its form; (b) its
principle, and (c) how the principle works in all proper bookkeeping,
even in the absence of a Journal as a book, (Md., Oct., 1903.)

141. State your opinion briefly as to the merits or the demerits of the
Journal; do you consider its use necessary? (N. J., 1904-1909.)

142. In what does the Journal differ from the Cash Book? (N. Y.,
June, 1902.)

143. Describe the following books and explain the nature and the
objects of each : (a) Summary Journal ; (6) Con.sumption Journal. (N. Y.,
Jan., 1907.)

144. What do you consider a complete checking of the General Jour-
nal? (R. L, Dec, 1907* ; Ohio, Nov., 1915.)

145. What are auxiliary books as understood in accounting terminol-
ogy? Mention three books of this class and explain their use. (N. Y.,
June, 1904.)

146. Messrs. "C" and "D" desire that their Ledger shall show all the
transactions with their creditors, i.e., purchases and payments with each
creditor. Naturally the bookkeeper wishes so to arrange his books as to
accomplish the desired end with the minimum of labor.

(a) What would you recommend? (6) What would you name your
plan? (c) What general instruction would you give to the bookkeeper
to enable him properly to maintain your "plan" after its installation by
you? (N. J., 1904-1909.)

147. You wish so to keep your accounts that at any given time you
may readily ascertain the aggregate balances due from your customers
and the aggregate balances due to your creditors, without taking the time
to list the same (customers and creditors) and at the same time you
wish to maintain your Ledger in perfect balance.

(a) How would you arrange your Ledger or Ledgers? (&) How would
you name the Ledger or Ledgers? (c) How would you maintain the
balance of the Ledgers or make it possible to balance or prove one Ledger
independent of the other Ledgers? (N. J., 1904-1909.)

148. Define or describe what is meant by the words "a book of original
entry" and state what must be shown with respect to the entries therein
upon trial of any cause, before such entries become admissible in evi-
dence. (Mo., Dec, 1914.)

149. Does any advantage attach to the employment of more than one

36 C. P. A. ACCOUNTING

volume for the Ledger of a business requiring only one bookkeeper? Give
reasons. (N. Y., June, 1897; N. Y., Jan., 1907.)

Voucher System

150. Describe the voucher system. (N. Y., June, 1899*; Pa., May,
1903*; Pa., Nov., 1903*; 111., Nov., 1903*; Md., Jan., 1909*; Wash., May,
1910* ; Va., Nov., 1910* ; Wash., June, 1915* ; Mich., June, 1915* ; Mass.,
Oct., 1915*; Cal., May, 1916*; Cal., June, 1917*; A. I. of A., May, 1918*;
111., Dec, 1918; Mich., June., 1919.*)

151. State the arguments briefly for and against the use of voucher
system. (N. Y., June, 1899*; Pa., May, 1903; Pa., Nov., 1903; Cal.,
June, 1904*; Pa., Nov., 1906; 111., May, 1907*; Md., Jan., 1909; Fla.,
Julv, 1909*; Wash., May, 1910*; Va., Nov., 1910; Mass., April, 1911*;
111.,'^ May, 1912*; Mass., Oct., 1915; Cal., Nov., 1916; 111., Dec, 1916;
Cal., June, 1917; N. D., Aug., 1917*; A. I. of A., May, 1918; N. Y.,
Jan., 1920.*)

152. For what classes of undertaking is the voucher system peculiarly
desirable? For what classes of undertakiniis is it undesirable? Why?
(111., Nov., 1903*; Wash., May, 1910*; Cal., May, 1916.)

153. Describe the Voucher Record. (N. Y., June, 1898; N. Y., June,
1899; N. Y., June, 1912; Wash., June, 1915*; W. Va., May, 1917; Wash.,
July, 1917.)

154. What is the relation of the Voucher Record and Purchase Journal
to the General Ledger? (111., Dec, 1916.)

155. Define: Voucher cheek. (Wash., June, 1915.)

156. What Ls a voucher? (N. Y., Jan., 1906.)

157. Define: Journal voucher. (Wash., July, 1917.)

158. What is your understanding of the purpose of a voucher? (N. Y.,
Jan., 1906.)

159. Sketch forms of disbursement voucher and journal voucher. (111.,
May, 1907.)

160. State how you would satisfy yourself of the correctness or regu-
larity of absent vouchers. (N. C, Nov., 1918.)

161. A finn whose accounts have been audited annually for a number
of years, loses, through fire, all its receipted expense bills for the past
year, which have not been audited. All the other records were saved.
The accountant is requested to make the annual audit as usual. How
should he proceed to satisfy himself with respect to the expenses for
which the vouchers are missing? (N. D., July, 1919.)

162. Would you consider it necessary to place your initials or some
other distinctive marks on each voucher, and if so, why? (La., May,
1913.)

163. A corporation, in paying two bills, fastens the bills together, adds
to the first bill of the two the amount of the second bill and sends these

DOUBLE-ENTRY BOOKKEEPING 37

with a cheek for receipt. "When returned, only the top bill is receipted.
Do you consider this a valid voucher? If not, how could you satisfy
yourself at the office of the corporation? (Mass., June, 1913.)

164. How would an auditor protect himself from duplicate vouchers
or fraudulent bank books? (N. Y., Dec, 1896*; N. Y., June, 1898*; Pa.,
Nov., 1899; Pa., Nov., 1901*; Wash., May, 1903*; Pa., Nov., 1903;
Mich., Nov., 1907; Md., Jan., 1909*; Wash., May, 1911.*)

165. In an audit of the books of a corporation using the voucher
system, what means should be adopted to prevent the reproduction of
vouchers already passed, in cases where the auditor is not permitted to
deface the vouchers by stamps or writing? (N. Y., Jan., 1902.)

166. Give a broad definition of vouchers as a means of verifying items
entered in the books of account. (N. Y., Jan., 1907.)

167. In an audit stipulating for the examination of all vouchers of
every description, what would be proper vouchers for the following:
purchases, returned purchases, sales, returned sales, cash receipts, cash
payments, journal entries? (N. Y., Dec, 1896; 111., May, 1906; Ohio,
March, 1910; Mich., June, 1912; Wis., April, 1914*; Wis,, May, 1916*;
Va., Nov., 1918.)

168. State your method and procedure in an audit, in determining
that you have seen all vouchers, even though some of them have been
credited to personal accounts, and payments have been made to apply
on account. (Colo., Dec, 1913; N. D., Aug., 1917.)

169. How would you vouch the following items appearing in the books
of a company you are auditing; and state specifically the papers or docu-
ments you would call for in support of the disbursement :

1. The Rapid Typewriter Company —

Typewriter purchased in exchange for old one. .$ 30.00

2. Alex. Green —

Real estate for plant site 7,500.00

3. Automatic Sprinkler Company —

Installment paid on sprinkler system 1,000.00

4. John Mace —

Stumpage purchased for 625.00

5. Safety Trust Company —

Par value $3,000 bonds 2,970.00

6. Machinery constructed and erected by the com-

pany's staff 10,500.00

7. Thomas Jones, Salesman —

Traveling expenses for one week 73.20

8. A B Company —

Note payable discounted 987.50

(111., May, 1914.)

170. What is the purpose of examining vouchers? In a large concern
would you attempt to inspect them all? If not, what tests would you
make? (N. Y., Jan., 1916.)

C. P. A. ACCOUNTING

PROBLEMS

DOUBLE-ENTRY BOOKKEEPING

1, The following is the Balance Sheet of the A. B. Company, January
1915 :

Cash

Accounts Receivable

Inventories:

Raw Material

Finished Goods

Office Furniture and Fix

tures

Land

Buildings

Machinery

$52,864
197,425

84,268

31,597

7,500

180,000
150,000
250,000

8953,654

Accounts Payable

Dividends Payable Preferred

Stock Feb. 1, 1915

Dividends Payable Common

Stock Feb. 1, 1915

Mortgage Bonds 20 Year 6%

Dated Jan. 1, 1915

Premium on Bonds

Capital Stock Preferred

Capital Stock Common ....

Reserve for Bad Debts

Surplus

$35,482

7,500

10,000

100,000

5.000

250,000

500,000

4,718

40,954

$953,664

The transactions for the year ending January 1, 1916, Lave been as
follows: Cash received from customers, $793,501; rent received, $600.
There has been purchased 1,232,000 pounds raw material at 20 cents per
pound. Sales have been $823,334; discount and allowance on sales, $23,-
519; bad debts written off, $2,143.

Disbursements have been made for: Accounts Payable, $243,356; Fac-
tory Expense, $7,489; Factory Labor, $351,426; Factory Repairs, $23,843;
Office Expense, $1,927; Selling Expense, $52,914; Salaries, $58,471; Taxes,
$7,853.

Inventories January 1, 1916: Raw material, 412,595 pounds, having
market value of 20 cents per pound and finished goods, $30,842.

The land is estimated to be worth $200,000. Semiannual dividends of
3 per cent on preferred and 2 per cent on common, declared in June and
December, payable August 1 and February 1. Reserves for depreciation
of building, 3 per cent ; machinery, 5 per cent ; office fixtures^ 10 per cent.
Bad and doubtful debts reserve should be 2 per cent of Accounts Receiv-
able.

Prepare an Operating statement and Balance Sheet as on January 1,
1916.

(A. I. of A., Nov., 1917.)

2. The trial balance of the Interstate Manufacturing Company, on
June 30, 1918, after closing entries have been made, is given below :

DOUBLE-ENTRY BOOKKEEPING

Patents and Goodwill

Office Furniture

Inventory, June 30, 1918:

Raw Material

Supplies

Finished Goods

Petty Cash

Land

Buildings

Cash subject to check

Machinery'

Accounts Receivable

Common Capital Stock

Preferred Capital Stock

Bonds 6%, 50 year First Mortgage, issued June 30,

1918

Premium on Bonds

Preferred Stock Dividends, payable August, 1918 .
Common Stock Dividends, payable August, 1918 . .

Reserve for Bad and Doubtful Accounts

Undivided Surplus

Accounts Payable

$250,000

8,746

83,247

4,932

42,761

100

270,000

165,000

69,433

235,000

273,842

$1,403,061

$500,000
500,000

200,000
20,000
17,500
12,500
8,294
66,375
78,392

$1,403,061

During the year ending June 30, 1919, the Company purchased 29,047
tons of raw material at $22 per ton, which was delivered before the books
closed. Of the amount purchased, payment has been made for 26,647
tons.

They have also made payments for the following accounts: Accounts
Payable, $78,392; Salaries, $80,360; Selling Expense, $86,017; Labor,
$468,932; Shop Expense, $9,461; Repairs and Maintenance, $30,955;
Taxes, $7,842; Office Expense, $2,478; and Supplies, $37,637.

Customers have paid $1,502,927 in cash and have been given discounts
amounting to $18,395. Returns and allowances amount to $8,474. Bad
debts written off, $2,407; rents received, $500; and sales, $1,515,572.
$50,000 was borrowed on call on June 30, 1919, the market value of the
collateral security being $72,100.

The inventory on June 30, 1919, is made up of finished goods, $20,495 ;
supplies, $8,129; and 2,163 tons of raw material, the market price of
which is $24 per ton. The land is estimated to be worth $300,000.

Semiannual dividends of 3^4 per cent on the preferred stock and 21/^
per cent on the common stock have been paid from the earnings of the
half year ending December 31, 1918. Dividends at the same rate have
been declared on the preferred and common stock for the last half of the
fiscal year, payable in August, 1919.

You are asked to set up a Balance Sheet dated June 30, 1919, and ac-
company it with a statement which will show correctly the operation of
the Company.

The following annual rates of depreciation are to be assumed : Buildings,
3 per cent; machinery, ly^ per cent; office furniture, 10 per cent. It is

C. P. A. ACCOUNTING

also assumed that there should be a reserve for bad and doubtful accounts
equal to 3 per cent of the balance of accounts receivable. Calculate these
percentages to the nearest dollar.

(Mo., Dec, 1914; Md., Oct., 1916; Kan., May, 1918.*)

3. The books of Robert West, real estate agent, for the year 1900,
disclose the following opening and closing balances and intervening volume
of transactions:

Titles of Accounts

Balances Dec. 30, 1905

Transactions in 1906

Balances Dec. 31. 1906

Cash

$9,760.08
1,060.00

$137,797.62
34,656.00
34,788.00
34.610.00
100.934.00
4,841.40

$135,893.70

34,788.00

34,656.00

34,788.00

102,070.00

5.007.40

125.00

3.118.92

180.00

$11,664.00
928.00

$1,060.00

2,500,00

5,929.00

444.00

$928.00

2,678.00

Clients

260.00

104.00

6.909.00

610.00

Fees

125.00

3,118.92

180.00

1.000.00
2,000.00

1,000.00

2,000.00

500.00

Capital

1.647.08

1,647.08

$11,580.08

$350,627.02

$16,196.00

An analysis of the books afforded further information as follows:
Tenants were allowed $71 for repairs made by them, which sum was
applied on account of rent and charged to owners.

Owners were charged for commissions on collections, $869.70; trade
creditors' bills for repairs, $3,566; and insurance, $52.

Clients were charged, insurance, $668; coal, $906; fees, $125; commis-
sions on sales, $1,004.

Trade creditors presented bills for office supplies, $50; insurance writ-
ten, $576; coal, $815.40; they were allowed $180 for discount on settle-
ments made.

Commissions on sales, collections, insurance written, and coal orders
were closed into the General Commission account and Supplies account
was transferred to Expense.

The cash tran?actions were as follows:

Receipts, tenants, $34,717; clients, $102,070; commission on sales,
$1,010.62. Payments, owners, $30,051.30; clients, $98,231; trade credi-
tors, $4,661.40; personal drawings, $2,000; expense, $950.

Prepare an articulation statement showing in each account the several
elements of debit and credit and giving each element' the title of the articu-
lation account wherein the contra credit or charge appears.

(N. Y., Jan., 1907.)

4. The following statements comprise the trial balances of a business
at the beginning and the end of a fiscal period, together with the volume
of the transactions during said period :

DOUBLE-ENTRY BOOKKEEPING

Cash

Merchandise

Debtors

Fixtures

Creditors

Loan

Capital

Interest and discount

Rent

Insurance

Salaries

Advertising

Carting

Expense

Drawings, proprietor.

Trial Balance
January 1

$1,115
5,050
3,110
2,800

$12,075

$1,575

500

10,000

$12,075

Interim
Transactions

$16,583

17,665

25,135

505

18,922

693

900

1,820

900

1,705

1,333

2,000

$88,211

$16,338
26,874
24,229

19,410
1,000

360

$88,211

Trial Balance
December 31

$1,360

4.016
3,305

333

900

1,820

900

1,705

1,333

2.000

$17,722

$4,159

2,063

1,500

10,000

$17,722

(a) The Sale Book shows sales posted to debtors to the amount of
$25,135.

(6) The Journal shows allowances to debtors for returns of merchan-
dise sales, $1,015, and claims on creditors for returns of mer-
chandise purchases, $230; also application of debtors' balance
to settle creditors' account in the amount of $9,500, both ac-
counts being in the name of the same correspondent.

surance and Office Salaries contain only cash charges, while
the nominal accounts entitled Advertising, Cartage and Expense
show cash charges in the total amounts of $100, $200 and $773,
respectively, all other charges therein being by invoice duly
posted to creditors' accounts.

(d) The Merchandise account shows cash charges of $610 and cash

credits of $1,509 for cash purchases and cash sales, respectively.

(e) The Invoice Books show invoices posted to creditors' accounts to

the amount of $19,410.
Prepare an articulation statement showing in each account the several
elements of debit and credit and giving each element the title of the articu-
lation account wherein the contra credit or charge appears.

(N. Y., June, 1906.»)

CHAPTER III
BALANCE SHEET

Balance Account — The balance sheet is an outgrowth of the old practice,
now discarded, of closing all the accounts of the ledger at the end of the
fiscal 3'ear by closing the nominal accounts through the profit and loss
account into the vested capital accounts and the real accounts into a
balance account, which was itself closed when the real accounts were
reopened at the start of the new period/

Balance Sheet — The balance sheet may be defined as a statement showing
the financial position of a business, its assets and liabilities, the capital
employed therein, as well as any reserves, surplus, or deficiency there may
be at a specific date/ As to content, the balance sheet differs from the
prior-closing trial balance in not containing the nominal accounts,' but
is identical with a post-closing trial balance.* However, the purpose of
the post-closing trial balance is merely to prove that the ledger is in
balance,* while the balance sheet pui'ports showing the financial condition
of the business in a manner intelligible to the lay reader."

Form of Balance Sheet — There are two general classes of balance sheets,
namely: (a) The account form; and (b) the report form.' The account
form is frequently called the technical foi'm of balance sheet.*

The account form places the asset accounts on one side and the liability
and capital accoiuits on the other. If the assets are on the left the balance
sheet is in the American account form; if on the right, it is in the English
account form." The fact that deductions are not used in accounts does
not prevent the valuation resei*ves, etc., being deducted from the related
asset accounts in account form balance sheets.""

There are two general classes of report form balance sheets, namely:
(a) Same as the account form if the liability and capital accounts w^ere
placed under insfead of to the right of the assets;" and (b) a form in
which the assets are listed and their totals extended, and under them the
liabilities listed and their totals extended and deducted from the total of
the assets, the difference being the net worth of the business, which is then
itemized and total extended."

Classification of accounts is vitally important for balance sheet pur-
poses. However, it is seldom that two accountants will agi-ee as to the
degree of classification necessary. This results in some accountants
dividing the assets into (a) fixed assets, (b) permanent investments, (c)
investments of reserve, (d) working assets, (e) current assets, and (f)
deferred charges," while othfers merely classify them as to (a) current
assets, (b) defen-ed charges, and (c) fixed assets." More uniformity is

'For explanation of superior figures see page 337.

BALANCE SHEET 43

found on the liability and capital side of the balance sheet, as usually the
liabilities are classified as to (a) current liabilities, (b) deferred credits
to income, and (c) fixed liabilities, while the net worth accounts are
separated into (a) capital stock accounts and (b) surplus accounts."

There is little uniformity as to the order in which the classes of accounts
appear on the balance sheet. In general, hoAvever, there are two plans of
marshalling the balance sheet accounts. One lists the current assets and
liabilities first,'" and the other lists the fixed assets and lialiilities first."
A variation from the latter plan is to list the capital stock accounts,
followed in order by the fixed liabilities, current liabilities, and surplus."
As the reader is usually moi"e interested in the current than in the fixed
accounts, it seems preferable to list the current items first. It seems
decidedly objectionable to place the liabilities between the net worth
accounts, as so doing obscures both the amount of the liabilities and the
net worth of the business. There is a decided difference of opinion among
accountants as to the place to be assigned to deferred charges to opera-
tions and deferred credits to income. Some accountants place these items
after the current and fixed assets and liabilities, respectively," while others
place them between the current and fixed accounts." As the deferred
items have a much shorter life than the fixed items, the latter arrangement
seems to be preferable.

A special arrangement of the accounts in the account form of balance
sheet, called the "double account" form, divides the accounts into two
distinct tables.^* In the first table the fixed assets are placed against the
fixed liabilities and net worth accounts." The credit balance of the first
table representing the amount of free or available capital is brought down
into the second table in which the current assets and current liabilities
are listed."

Still another noteworthy point in the form of a balance sheet is the
number of columns used. Usually three columns are found to be suffi-
cient. What is gained in classification by the use of more than three
columns is more than offset by the increased complexity of the form, the
additional difficulty in having the statement typed, and what is important
for C. P. A. candidates, the increased time it takes to prepare the
statement.

Model Balance Sheet — For ordinary' purposes, it is comparatively un-
important which of the recognized forms of balance sheet is used. How-
ever, it is vitally important that all student,s limit themselves to the use
of only one form after they have become familiar with all the forms.
This specialization will gi'eatly enhance the speed and accuracy of the
student, the two requirements which the C. P. A. candidates find the most
difficult to acquire.

Valuation in Balance Sheet — The accounts shown in a balance sheet
are valued at book value, that is, the fixed assets are valued at cost less
depreciation,"^ the working assets at cost or market whichever is the lower"
and the other current assets at the estimated cash value. As there is no
asset, other than cash, whose actual value can be definitely ascertained, a
balance sheet is a statement of opinion and not a statement of fact."*

C. P. A. ACCOUNTING

A. B. COMPANY
BALANCE SHEET
Docomber 31, 1916

Assets
Current Assets:
Cash:

Petty Cash

Cash on Deposit .

Notes Receivable

Accounts Receivable

Less Reserve for Bad Accounts.

Interest Accrued on Investments .

Investments

Advances to Salesmen

Inventories :

Material

Work in Process

Finished Goods

Deferred Charges:
Unexpired Insurance:
Building and Machinery .
Finished Goods

Prepaid Taxes Real Estate .

Fixed Assets:

Land

Buildings

Less Reserve for Depreciation.

Machinery

Less Reserve for Depreciation.

Office Furniture.
Goodwill

Liabilities and Capital
Current LiabiUties:

Notes Payable

Accounts Payable

Interest on Mortgage . . .
Accrued Payrolls:

Factory

Office

Fixed LiabiUties:

Mortgage on Plant

Net Worth:

Capital Stock

Less Unissued Capital Stock.

Surplus :

Start of Period

Addition During Period .

BALANCE SHEET

Since the reserves for depreciation and doubtful accounts and the valua-
tions pLnced upon the inventories are merely matters of opinion, the profit
and loss statement and the resultant surplus are also matters of opinion
and not of actually ascertained facts."

The auditor's responsihility as to the balance sheet largely centers around
the valuation of the accounts. The sources of data as to values are (a)
books of account, (b) original purchase invoices, (c) catalogs, (d)
experience in the business, (e) appraisal concerns, and (f) capitalization
(goodwill) of earnings.^*

Condensed Balance Sheets — The purposes served by balance sheets are
(a) internal use by executives, (b) formal stockholders' report, (c) report
to supervising commissions, (d) annual report to state, (e) basis of appli-
cation for credit, and (f) basis for issuing new secui-ities."* When used
for some of these pui-poses, the amount of detailed information in the
balance sheet itself should be reduced to a minimum. This is accomplished
by grouping similar accounts under general headings with the detailed
information contained in the schedules, references to which are made on
the condensed or general balance sheet.'" Tlie use of only the controlling
accounts for the accounts and notes receivable and payable in the balance
sheet with lists of the subsidiary accounts appended is the most common
illustration of the supporting schedules." The same idea can be used for
the plant and property, investments, inventories, deferred charges, etc.''

Coynparative Balance Sheets — One of the most valuable statements an
auditor can prepare for his client is a balance sheet which will show the
increases and decreases Avhich occurred during the period in the various
accounts. Such a statement will detect any tendency to tie up the funds
in fixed assets or inventories of merchandise and will warn the client
against unusual increases in current liabilities.

Practically all of the comparative balance sheets prepared by accountants
do not classify the accounts'^ thereby partially obscuring the changes in
the classes of accounts. The model comparative balance sheet given below,
however, classifies the accounts'* and shows the increases and decreases
which occurred within the classes of accounts :

A. B. COMPANY
COMPARATIVE BALANCE SHEET

Assets

Jan. 1, 1907

Jan. 1, 1908

Increase

Decrease

Current Assets:

Cash

S800.00
5,400.00
4,200.00

$4,800.00
1,000.00
2,300.00

$4,000.00

Accounts Receivable ....

$4,400.00

Inventories

1,900.00

.1510,400.00

$8,100.00

$4,000.00

$6,300.00

Deferred Charges:

Insurance Prepaid

$400.00

$200.00

Fixed Assets:

Plant and Equipment.. . .

$17,000.00

$15,000.00

$2,000.00

$27,800.00

$23,300,00

$4,000.00

$8,500.00

C. P. A. ACCOUNTING

A. B. COMPANY
COMPARATIVE BALANCE SHEET

Liabilities and Capital

Jan. 1, 1907

Jan. 1, 1908

Increase

Decrease

Current Liabilities:

Notes Payable

Accounts Payable

$5,000.00
11,800.00

$5,000 00

$500.00

11,800.00

$16,800.00

$500.00

$16,300.00

Valuation Reserves:

Reserve for Bad Debts.. .

$300.00
700.00

Reserve for Depreciation.

$7,000.00
4,800.00

$1,000.00

Net Worth:

Capital Stock

$10,000.00

$17,000.00
4,800.00

Net Profits

$10,000.00

$21,800.00

$11,800.00

$27,800.00

$23,300.00

$11,800.00

$16,300.00

Summary

Current Liabilities:
Decrease

$16,300,00

Current Assets :
Decrease

$6,300.00
4,000.00

Increase

$2,300.00

200.00
2,000.00
7,000.00

Deferred Charges:
Decrease

Fixed Assets:

Decrease

Capital Stock :

Increase

11 500 00

Net Profits

$4 800 00

The above summary'" is not the only recognized method, for many ac-
countants would draw up the summary as follows :™

Funds Available:

Decrease in Current Assets $6 , 300. 00

Decrease in Deferred Charges 200. 00

Decrease in Fixed Assets 2,000. 00

Increase in Net Worth 11, 800 . 00

$20,300.00

BALANCE SHEET

A p plied as Follows:

Increase in Current Assets $4,000.00

Decrease in Current Liabilities 16,300.00

$20,300.00

Assets — The assets of a going eoncern are its property of all sorts ap-
plicable or subject to the payment of debts, and amounts expended for
the benefit of future periods." Assets of concerns about to liquidate in-
clude only such items as are applicable to the payment of the lialiilities'*
and do not include the items exempted by law or the amounts expended
for the benefit of future payments. The term "net assets" means the
j)roprietor's interest™ or the difference between the total assets and
liabilities of a business.

Kinds of Assets — The classes into which assets may be divided are :

(a) Current (sometimes called circulating, active, or floating) or assets
maturing within a short time or those convertible into cash by the ordinary
routine of business.^"

(b) Working or trading assets or a sub-group of curi-ent assets including
the inventories of raw material, goods in process of manufacture, and
finished goods."

(c) Quick (sometimes called liquid) or a sub-group of current assets
including only those assets very readily converted into cash. An advance
to a salesman is a current asset, but it is not a quick asset."

(d) Fixed (sometimes called permanent, passive, or capital) or assets
necessary for the conduct of the business, which are not intended for sale.*"

(e) Secret or assets representing the excess of the appraised value of
property over its book value."

(f) Wasting (sometimes called diminishing) or fixed assets which ai'e
consumed in direct ratio with operations, or merely through efflux of
time." The term "wasting assets" includes both the assets subject to
depreciation and those subject to depletion,*" but the term is most com-
monly used in reference to natural resources.

(g) Contingent or assets that are subject to pi'eceding events or situa-
tions which may or may not happen."

(h) Accrued or a sub-group of ciirrent assets which accumulate
gi'adually with the efHux of time.**

(i) Deferred charges to operations or those portions of expenses paid

in one period and allocated to future periods.*

Kinds of Liabilities — The liabilities, the debts or obligations due by a
firm to its ereditors,°* may be classified as follows :

(a) Current (sometimes called floating, active, circulating, or quick) or
liabilities maturing in a short time which will be liquidated in the normal
course of business."

(b) Accrued or eui-rent liabilities which accumulate gradually with the
efflux of time."

48 C. P. A. ACCOUNTING

(d) Contingent oi- liabilities subject to preceding events or situations
which may or may not happen."

(e) Fixed (sometimes called capital) or liabilities which will not mature
for a long time.*^ The assumption that fixed liabilities represent that part
of the capital income which has been invested in fixed assets'" is unwar-
ranted because a firm may have large fixed assets and no fixed liabilities
at all.

(f) Funded or liabilities for which definite provision for payment has
been made, usually secured by a mortgage or other lien."

(g) Unfunded or liabilities for which no definite provision has been
made.**

(h) Bonded or liabilities evidenced by an issue of bonds.^ Bonded debt
may be either secured or unsecured or either funded or unfunded.

Accrued Items — There are two bases of accounting. One, the cash basis,
is to record the expenses and incomes only when they affect the cash or
personal accoimts."* The other takes into records all of the expenses and
incomes including the accruals on the accounting principle that the primary
connection between the net assets and the resulting net income is the
matter of earnings and expense incurred, and not one of income received
in cash and expenses paid in cash.""

Accruals should be placed on the books at the end of the fiscal period.*^
The plea that they are practically the same at the beginning and end of
the period should be disregarded in the interest of accuracy. Some ac-
countants do not differentiate between accrued and deferred items, but it
is advisable to make the distinction."

Deferred Items — There are two kinds of deferred charges to operations,
namely, (a) items which will benefit the future periods such as the unex-
l)ired insurance,'" and (b) items which do not benefit future periods such
as the cost of equipment suddenlj'^ made obsolete through a new invention."
Deferred assets may be classified as to whether or not they have realizable
values, viz., prepaid insurance has a realizable value while organization
expenses have not. Prepaid insurance, rents, and interest and expense
inventories are the most usual illustrations of deferred charges.*'

The deferred credits to income include income or gains received but
applicable to su])sequent periods, such as discounts and premiums on
securities, unearned fees, and similar items."' Aggregates of credits meas-
uring the amount of cash receipts for the distribution of which informa-
tion is lacking, are also deferred liabilities."* The contention that deferred
credits to income represent liabilities not payable in cash but in goods or
services,"" is incorrect because items such as sales paid for in advance
include two elements, namely, cost and profit. Even the profit element can
not be taken, as prospective profits can not be capitalized."

Contingent Items — When a note receivable is endorsed and discounted
the note is changed from an ordinary to a contingent asset, and a contingent
liability is created." When the drawer pays the note, both the contingent

BALANCE SHEET 4f)

asset aiul liability are canceled.'^ Other illustrations of contingent assets
are pending lawsuits tor damages against another firm or individual, or
a conditional bequest in a will.'" Notes receivable discounted, pending law-
suits for damages against firm^ guarantees, long-term leases, purchases
for future delivery, surety bonds, and accommodation indorsements are
the most common contingent liabilities.'* Except for the notes receivable
discounted which shovdd be shown as assets among the other notes and
liabilities under the caption "notes receivable discounted,"" contingent
assets and liabilities are not ordinarily shown on the books.'"

Contingent items, other than notes receivable discounted, are usually
shown in foot notes on the balance sheet,'' although they may be shown in
the body of the balance sheet in the appropriate place, indented and not
carried out to the significant money column.'" If desired, the captions "con-
tingent assets" and "contingent liabilities" may appear on the balance
sheet.'* If the notes receivable account is credited when notes are dis-
counted, the contingent liability would merely be mentioned in a footnote
to the balance sheet."" However, when the notes receivable discounted ac-
count is credited when notes are discounted, the contingent liability is
shown on the balance sheet by deducting the notes receivable discounted
from the ordinary notes receivable.'^

It is imperative that the auditor inquii'e of the executives as to whether
any guarantees or indorsements exist and whether any security is available
to protect tlie business."^ If the officials are interested in other concerns,
the investigations should be very searching." The minute books should
be scrutinized."* Certificates as to the notes receivable discounted at the
bank should be obtained from the banker."" Certificates should also be
obtained from the beneficiaries under a guarantee, as some guarantees are
more of a real liability than a contingency."" The unfilled purchase orders
should also be examined to ascertain whether the financial condition of
the business has been jeopardized."'

Capital — Professor Charles J. Bullock, in "The Elements of Economies,"
defines capital as "all the intermediate products which man creates for the
pui'pose of employing them in the production of finished commodities."
This definition of capital from the economic viewpoint makes the capital
of the business include all the assets of a business. However, from an
accounting viewpoint the capital of a business is the excess of its assets
over its liabilities."*

Working capital is the excess of current assets over current liabilities"*
after the valuation reserves have been deducted from their related current
assets.*" The term is also used occasionally as a synonym for quick assets.*'
In courts, capital is classified into fixed and circulating capital, the terms
meaning respectively fixed and circulating assets.*^ Capital is sometimes
classified as owned and unowned, the former meaning that contributed
to the business by the proprietor or accumulated as profits and the latter
meaning that borrowed or obtained from creditors.*'

The term "deficiency" signifies the insufficiency of the assets of a firm
to discharge its liabilities; that is, deficiency is the exact opposite of

C. P. A. ACCOUNTING

capital." The terai "deficit" has two meanings, namely, (a) an excess
of expenses over income,"" and (b) the excess of liabilities over assets.'"

Proprietorship Accounts — In general, proprietorship accounts are of
two classes, namely, accounts with the original investments, and accounts
with subsequent changes in net worth. The following chart summarizes
the original investments accoiuits :*'

ORIGINAL CAPITAL ACCOUNTS

Proprietor's Investment Account

Partner's Individual Investment Ac-
count

Partner's Individual Investment Ac-
counts

Membership, Certificate of Indebted-
ness and Capital Accounts

Capital Stock

None

Capital Stock

TYPE OF ORGANIZATION
Sole Proprietors.
Copartnerships

Joint Ventures

Associations and Societies

Joint Stock Associations
Stock Corporations
Non-stock Corporations
Trusts and Holding Companies

A similar chart for the accounts recording changes in net worth subse-
quent to original investment is as follows:**

CAPITAL ACCOUNTS SHOWING
CHANGES IN NET WORTH SUB-
SEQUENT TO INVESTMENTS
Proprietor's Personal Accounts and Re-
serves
Partner's Individual Personal Accounts

and Reserves
Partner's Individual Personal Accounts
Surplus and Reserves
Undivided Profits, Surplus and Reserves
Undivided Profits, Surplus and Reserves
Surplus and Reserves
Undivided Profits, Surplus and Reserves

TYPE OF ORGANIZATION

Sole Proprietors

Copartnerships

Joint Ventures
Associations and Societies
Joint Stock Associations
Stock Corporations
Non-stock Corporations
Trusts and Holding Companies

Relation of Proprietor to Business — Viewing the business as an entity,
it has been claimed that the proprietor is a creditor of the business, whose
claim against the business is subject to the prior claims of the creditor.
The exponents of this opinion show the right side of the balance sheet
under the heading of "liabilities."** As the liabilities have contractual
rights in the assets, while the proprietorship has merely residual rights,
a distinction must be made between proprietorship and liabilities.^"* The
fact that losses and gains affect proprietoi'ship and do not affect the
liabilities also shows that there is a distinction between net worth and
liability accounts.'*' Holders of this opinion use the heading "liabilities
and capital" over the right side of the balance sheet.'"'

To avoid confusion by including proprietorship and contractual obliga-
tions under the caption "liabilities," and to lessen the danger of misunder-
standing, the use of the term "equities" has been suggested to represent

BALANCE SHEET 51

the right-hand membei- of the balance sheet equation, viz., assets equal
equities."" This term covers all elements of ownership — control, risk, and
income, the proprietorship equities having more of the control and risk
and residual rights to the income, and liabilities having a small amount
of the control and risk, and contractual rights to the income.'"*

C. p. A. ACCOUNTING

QUESTIONS

balance sheet

Statement

1. Define: Balance Sheet. (Pa., Nov., 1899*; Pa., Nov., 1901*; Pa.,
May, 1902*; N. Y., Jan., 1906; N. Y., Oct., 1907*; 111., Dec., 1907; R. I.,
Dec., 1907*; Md., Jan., 1909*; N. Y., Feb., 1910; Va., Oct., 1911*; Mich.,
June, 1912*; La., May, 1913; Colo., Dec, 1913; Wis., April, 1914; Kan.,
May, 1916; Wis., May, 1916*; W. Va., May, 1917; Cal., June, 1917; N. C,
Aug., 1917; N. C, Nov., 1918*; Va., Nov., 1918; Iowa, Dec, 1918*; N. C,
June, 1919*; N. C, Sept. 1919.*)

2. In a general way, what is the difference between a Financial State-
ment and a Balance Sheet? (Mich., June, 1910.)

3. Wherein does a Trial Balance differ from a Balance Sheet? (N. Y.,
Jan., 1897; N. Y., June, 1898*; Pa., Nov., 1899; Pa., May, 1903; Md.,
Oct., 1903; N. J., 1904-1909; Pa., May, 1905; Md., Jan., 1909; N. Y.,
June, 1909; Va., Nov., 1910; Ohio, Nov., 1913; Ohio, Nov., 1915; Cal.,
May, 1916; Cal., Nov., 1916; Mich., Dec, 1916*; N. C, Aug., 1917*;
Ohio, Oct., 1919.*)

4. State how the following differ: a trial balance after closing and a
Balance Sheet. (Md., Jan., 1909.)

5. Show the relations of a trial balance to the Balance Sheet. (N. Y.,
June, 1898.)

6. Is the trial balance essential to the making of the Balance Sheet,
and if so, why; and if not, why not? (N. J., 1904-1909.)

7. What is the purpose of a Balance Sheet? (Ohio, Nov., 1913; Ohio,
Nov., 1915*; Cal., May, 1916; Ohio, Nov., 1916; Ohio, Nov., 1917; Ohio,
Nov., 1918*; N. C, Nov., 1918*; Ohio, Oct., 1919.)

8. In submitting a Balance Sheet at the end of the fiscal year, are
you stating facts or opinions? Give reasons. (111., May, 1907*; Mich.,
June, 1912*; Ohio, Nov., 1915*; Mass, Oct., 1916; Ohio, Nov., 1918*;
N. Y., Jan., 1920.*)

9. On the Balance Sheet prepared by you from the books of a client,
state which items are matters of fact and which matter of opinion. (N. Y.,
Jan., 1920.)

10. State the general theory of the Balance Sheet. (N. Y., June,
1899.)

BALANCE SHEET

11. Is strict accuracy as to the facts possible in a Balance Sheet f
Why? (Ohio, Nov., 1913*; Ohio, Nov., 1917*; Ohio, Oct., 1919.)

12. Assuming that the amounts are correctly stated, point out several
ways in which a Balance Sheet may fail of its purpose. (Ohio, Nov.,
1917.)

13. What is meant by a Balance account? (N. Y., Oct., 1907; B. I.,
Dec, 1907; N. Y., Jan., 1914.)

14. How was the "Balance account" used originally? What has be-
come of it in modern bookkeeping practice? (N. Y., Jan., 1914.)

15. How would you determine the character of assets the surplus of
a business consists of, and what would be the advantage of such inforiiia-
ion? (N. C, June, 1916.)

16. Give method of preparing a Balance Sheet where ledgers have
not been closed. (111., May, 1905.)

17. Why must the revenue account be completed before a Balance
Sheet can be prepared? (N. Y., Oct., 1907; R. I., Dec, 1907.)

18. What is your interpretation of the difference between the total
debit balances and the total credit balances of the accounts belonging to
the capital division and to the current division of a Balance Sheet?
(N. C, June, 1916.)

19. Draw up a short report on the following Balance Sheet, criticizing
such items as you consider abnormal :

Buildings $^7;500

Machinery

Sundry Stock

Cash

Bills Receivable

Customers

Goodwill and Patents

12,500
90,000
3,200
6,800
20,000
30,000

$2.50.000

Capital and Surplus $155,000

Current Liabilities 87,500

Suspense Account 7,500

$250,000

(N. Y., Jan., 1901; Wash., Sept., 1917.)

20. What are the most important things an auditor has to certify as
regards a Balance Sheet? (N. Y., Jan., 1902*; Md., Oct., 1903; Mich.,
July, 1906.*)

21. In making up a general statement of assets and liabilities, what
groups of accoimts constitute assets and what constitute liabilities?
(N. Y., Dec, 1893.)

22. On what theory does the English form of Balance Sheet differ
from the continental and American form? Give an argument either for
or against the English fonii. (N. Y., June, 1899.)

23. The nigli Pressure Valve Manufacturing Coiiniaiiy submit the
following trial balance taken from their books in connection with the facts
enumerated; (he organization is highly skilled and dependent upon co-
operation. Give your reconunendations as to what should be done to
serve the interest of the business :

C. P. A. ACCOUXTING

Plant, $14,500; Accounts Receivable, $4,000; Cash, $1,510; Capital
Stock, $15,000; Loans Payable, $3,000; Accounts Payable, $4,000; Notes
Payable, $3,500; Sales, $16,000; Cost of Sales, $10,000; General Expense,
$2,000; Selling Expense, $3,500; Deductions from Income, $4,000. The
valves are in demand and in general use. (N. Y., June, 1919.)

24. Criticize the following Balance Sheet from both the auditor's
standpoint and that of the Company's financial condition :

"X." "Y." "Z." Co. Balance Sheet, December 31, 1915.

Assets

Real estate, building, plant, machinery, equipment

and goodwill

Investments in stocks and bonds at cost (market value

$100,000)

Current assets:
Inventories:

Raw materials (market value)

Finished stock at selling prices, less discount at 5%

Consignment (selling value)

Supplies (estimated)

Accounts and bills receivable including advances to

employees

Stock in treasury (unissued)

Preferred $150,000

Common 237,000

Investments in subsidiary companies .
Cash and miscellaneous items

Liabilities
Capital stock:

Preferred stock

Common stock

Bonds and bankers' loans

Reserves :

For depreciation

Less renewal expenditures written off .

Balance (debit) . . . .

P'or bad debts

Other contingencies .

Current liabilities:
Accounts payable . .
Other indebtedness .
Accrued items

Surplus .

$230,000

200,000

50,000

200,000

$680,000

225,000

387,000

425,000
50,000

$110,000
135,000

$25,000

5,000

50,000

$115,000

231,000

52,000

$2,000,000
150,000

1,767,000

$3,917,000

$1,000,000

1,800,000

625,000

30,000

398,000
64,000

$3,917,000

(Mass., Oct., 1916.)

BALANCf] SHEET 55

25. In the case of a company which publishes an annual Balance Sheet
but no Profit and Loss account, state whether or not you would recom-
mend to your client that the profits earned during the year, less dividends
paid, be shown on the face of the Balance Sheet. Give your reasons,
(A. L of A., May, 1920.)

26. How should you arrange the items on a Balance Sheet of a large
corporation? Of a partnership? (N. Y., Jan., 1897* ; N. Y., June, 1899* ;
N. Y., Jan., 1907*; 111., May, 1907*; Ohio, March, 1910*; Mich., June,
1912*;. Ohio, Nov., 1913*; Mich., Dec., 1913*; Mich., Dec, 1914*; 111.,
May, 1915; Mass., Oct.. 1915*; Cal., May, 1916*; N. C, June, 1916*;
Mass., Oct., 1916*; Ohio, Nov., 1917*; Ohio, Nov., 1918*; Iowa, Dec,
1918; N. Y., Jan., 1919*; N. Y., Jan., 1920.*)

27. Is the form of a Balance Sheet a matter of principle or conven-
tion? (Ohio, Nov., 1917*; Ohio, Oct., 1919.)

28. What is the mechanism of the double form Balance Sheet? Ex-
plain the connection between its sections, stating the theory of its organ-
ism. (N. Y., Jan., 1914; Cal., May, 1916*; Md., Oct., 1919.)

29. In drawing up a Balance Sheet, is it desirable to show the assets
and liabilities by groups, and if so, into what groups would you classify?
Give reasons for your classification. (N. Y., Jan., 1906; Va., Nov., 1918.*)

30. What is meant by marshaling the accounts of a Balance Sheet?
(Cal., May, 1916.)

31. State two different theories in relation to the presentation of a
Balance Sheet as far as classification is concerned. What is tlie reasoning
on which they are based? (N. Y., June, 1912; Cal., Nov., 1916.*)

32. Under what theory or theories would you classify the Balance
Sheet accounts into three cardinal divisions? (N. C, June, 1919; N. C,
Sept., 1919.)

33. Give a simple equation for the contents of a Balance Sheet. (Ohio,
Nov., 1913; Minn., Oct., 1916.)

34. In making up a business statement or a Balance Sheet, why are
the assets placed as debits and the liabilities as credits? Are there any
exceptions to this rule? (N. Y., June, 1900; N. J., 1904-1909.*)

35. What special points in the Balance Sheet of a company aside from
the correctness of the figures require careful consideration by the auditor?
(111., May, 1908.)

36. What is the extent of an auditor's responsibility in respect to the
classification of assets and liabilities in a balance sheet which he certifies?
(A. I. of A., May, 1918; Ga., May, 1919.)

37. What schedules should support the Balance Sheet in a thorough
audit of a manufacturing concern owning its entire plant? (Md., Dec,
1917.)

38. Outline the forms of the Profit and Loss statement and of the
Balance Sheet as submitted by the Federal Reserve Board in their pro-

56 C. P. A. ACCOUNTING

posal for a uniform system of accounting to be adopted by manufacturing
and merchandising concerns. (Wis., April^ 1918.)

39. Suppose you had certified the Balance Sheet of a manufacturing
concern, and were asked by a stockholder why you had certified it as
correct when some of the assets were not salable at the figures placed
against them, what reply would you make? (Fla., April, 1908.)

40. On what important points will the Balance Sheet of a trading and
non-trading company differ? (N. D., June, 1914.)

41. What should the financial statement of a trading company show?
(N. D., June, 1914.)

42. Explain the difference between cost and book value. (La., May,
1913.)

43. Explain the principles that underlie the mechanism of the state-
ment of resources and show their application. (N. Y., June, 1913.)

44. Prepare a chart of a Balance Sheet, showing the relationship of
all factors involved in its construction that will exhibit a view of Avhat,
in your opinion, is the meaning of a Balance Sheet. (N. C, June, 1920.)

Assets

45. Define: Assets. (N. Y., Dec, 1898; N. J., 1904-1909.)

46. Define: Current assets. (N. Y., June, 1901; N. Y., Jan., 1902;
N. Y., Jan., 1904; Mich., July, 1906; Ohio, March, 1910*; Va., Oct.,
1911*; La., May, 1913*; Colo.,"Dec., 1913; Mo., Dec, 1913*; Kan., Dec,
1915; Mo., Dec, 1915; Ohio, Nov., 1916; III., May, 1917; W. Va., 1917;
Wash., July, 1917; Va., Nov., 1918*; Iowa, Dec.,'l918.)

47. What are quick assets? (N. Y., Dec, 1898; N. Y., June, 1900*;
Mich., Dec, 1906; Md., Jan., 1909*; Va., Oct., 1911*; Mich., June, 1914*;
Iowa, Dec, 1918.)

48. Prepare an imaginary statement of the net quick assets. (Okla.,
Nov., 1919.)

49. What items would you designate as "quick assets"? (La., May,
1913.)

50. Define: Floating assets. (N. Y., June, 1899; Cal., July, 1904*;
111., May, 1908; Fla., July, 1909; N. D., July, 1916; 111., Dec, 1916.)

51. Define: Capital assets. (N. Y., June, 1902; N. Y., Jan., 1904;
La. May, 1913*; Wash., Nov., 1913; Mo., Dec, 1913*; Kan., Dec, 1915;
Mo., Dec, 1915; Va., Nov., 1918; Iowa, Dec, 1918.)

52. Define: Active assets. (Va., Nov., 1910.)

53. Define: Secret assets. (Colo., Dec, 1913.)

54. Define: Cash assets. (N. Y., Dec, J896; 111., Nov., 1903.)

55. Define: Fixed assets. (N. Y., Dec, 1896; N. Y., Dec, 1898
N. Y., June, 1899; Cal., June, 1904*; Mich., July, 1906; 111., May, 1908
Fla., July, 1909; Ohio, March, 1910*; Mich., June, 1910; Va., Nov., 1910

BALANCE SHEET 57

La., May, 1913*; Wash., Nov., 1913; Colo., Dec., 1913; Mich., June,
1914*; N. D., July, 1916; Ohio, Nov., 1916; 111., May, 1917; N. C, Aug.,
1917; Va., Nov., 1918.*)

56. Define: Net quick assets. (III., Dec., 1918.)

57. Define: Passive assets. (N. Y., June, 1900.)

58. State cases where the condition known as "diminishing assets" is
likely to arise. How should such cases be treated? (N. Y., June, 1902;
N. Y., June, 1914*; A. L of A., May, 1918*; N. Y., June, 1918.*)

59. Give instances of the manner in which fixed assets and floating
assets affect the stability and the credit of a business. (Fla., July, 1909.)

60. Give two examples of fixed assets in one business which become
floating assets in another business. (Mich., June, 1912; Mass., June,
1913.)

61. State three examples of fixed assets in some particular business,
which are generally floating assets. (Mass., June, 1913.)

62. In the Balance Sheet of a company, as prepared by the secretary,
you find the following items :

Under "Capital Assets":

(a) Factory real estate, buildings, plant and machinery.

(b) Real estate held for investment.

of control.

(d) Franchises having a fixed term.
Under "Current Assets" :

(e) Company's treasury stock (carried at $.50 on the dollar).

(/) Raw material, finished product, and inventory of oflBee sup-

plies and stationer3\
(g) Advances to officials of the company (unsecured).
(h) Insurance premiums paid by the company on a policy of the
life of the company's president, in which the company is
beneficiarj'.
(i) Due by customers,
(j) Sinking fund investments.
(A;) L^nexpired fire insurance premium.
(l) Cash in bank and on hand.
Discuss the correctness or otherwise of the above classification of items
under capital and current assets, giving reasons for your opinions, and
criticizing the items generally.

(Mo., Dec, 1914; Okla., Nov., 1919.)

63. Define: Resource. (N. Y., June, 1899.)

Liabilities

64. Define: Liabilities. (N. Y., Dec., 1898; N. Y., June, 1899; N. J.,
1904-1909.)

65. Define: Current liabilities. (N. Y., June, 1901; Mich., July, 1906;

58 C. P. A. ACCOUNTING

Va., Nov., 1910; Wash., Nov., 1913*; Mich., June, 1914*; Kan., Dec,
1915; Mo., Dec, 1915; Ohio, Nov., 1916; W. Va., May, 1917; Va., Nov.,
1918*; Iowa, Dec, 1918.)

66. Define: Floating liabilities. (N. Y., Dec, 1896; N. Y., Dec, 1897*;
N. Y., June, 1900; Wash., May, 1903*; N. Y., Jan., 1904; Mich., Dec,
1906*; Md., Jan., 1909*; Mass., June, 1910*; Colo.,- Dec, 1913*; N. D.,
July, 1916; Ohio, Nov., 1916.)

67. Define: Fixed liabilities. (N. Y., Dec, 1896; N. J., 1904-1909;
Mich., July, 1906; La., May, 1913*; Mich., June, 1914*; N. D., July,
1916; Ohio, Nov., 1916; N. C, Aug., 1917; Va., Nov., 1918.*)

68. Define: Funded debt. (N. Y., Dec, 1897; Wash., May, 1903;
N. Y., Jan., 1904; Md., Jan., 1909; Ohio, March, 1910*; Mass., June,
1910; Va., Nov., 1910; Colo., Dec, 1913; Kan., Dec, 1915; Mo., Dec,
1915.)

69. Define: Bonded indebtedness. (Wash., Nov., 1913.)

70. Define: Capital liabilities. (La., May, 1913*; Kan., Dec, 1915;
Mo., Dec, 1915; Iowa, Dec, 1918.)

71. Define the following accounting and business term : Passive lia-
bilities. (N. Y., June, 1900.)

72. Explain the difference between gross and net floating debts, and
what is generally meant by the term "floating debt" without the word
"gross" or "net" preceding it. (111., Nov., 1904.)

73. A distinction is made between funded debt and unfunded debt.
Please define and compare, discussing the advantages and disadvantages,
if any, attaching to each. (Mich., Dec, 1916*; A. I. of A., Nov., 1918.)

Accrued Items

74. Define: Accrued. (N. Y., Jan., 1911*; Mich., Dec, 1914*; Kan.,
May, 1916.)

75. State the difference between the accrual and the cash basis of ac-
counting. (Kan., Dec, 1915; Mo., Dec, 1915.)

76. Define: Accrued liability. (111., Dec, 1916.)

77. In the preparation of a Balance Sheet, explain the basis upon
which you would ascertain that accrued liabilities were properly valued.
(Wis., April, 1914.)

78. Name some accrued liabilities. (Md., Dec, 1917; Mich., June,
1919.»)

79. An auditor is called upon to verify a Balance Sheet and upon in-
vestigation he finds that unexpired insurance, interest paid in advance
on discounted notes, taxes accrued, interest accrued on demand notes,
bonded indebtedness, royalties, etc., are not included in the same. He
is informed that it has not been the custom of the corporation to include
in their Balance Sheet such items, as they offset one another, and that
the directors do not desire any change in the practice Ihey have adopted.

BALANCE SHEET 59

Discuss this proposition, stating reasons for your conclusions. (111., May,
1907.)

80. A corporation wishes to get figures of its earnings early each
month. Besides its regular income, it has bonds and stocks from which
the interest and dividends are received either quarterly or semi-annually.
It has trouble in getting some of its expense bills promptly, as some come
in quarterly, semi-annually, and even yearly. State the method of getting
out promptly with as little work as possible these monthly figures. (Mass.,
June, 1913.)

Deferred Items

81. What do you understand to be the meaning of the word "deferred"
when applied to accounts? (Ind., May, 1918.)

82. Define : Deferred charges. (N. Y., Jan., 1911; Wash., Nov., 1913;
Colo., Dec, 1913; N. Y., Jan., 1914; 111., May, 1914; Mich., June, 1914;
Wash., June, 1915; Minn., Oct., 1916; Ohio. Nov., 1916; Mich., Dec,
1916*; 111., May, 1917; Wash., July, 1917; Mass., Oct., 1917; 111., Dec,
1918; A. I. of A., May, 1919.)

83. Name some deferred charges to expense. (Mass., Oct., 1917; Md.,
Dec, 1917; Md., May, 1918*; Mich., June, 1919.*)

84. Mention two common kinds of deferred charges. (Ohio, Nov.,
1916.)

85. Define: Prepaid expenses and state how you would treat them in
a Balance Sheet. (Va., Nov., 1910.)

86. What is the theory applying to deferred debits shown in a Balance
Sheet? (N. Y., Jan., 19i7.)

87. Under what circumstances would you permit a client to defer items
of unquestionable expense? (Cal., May, 1916.)

88. What do you understand by deferred credits? Give illustration.
(Mich., June, 1914; 111., Dec, 1916.)

89. To what extent would you consider it necessary to verify expense
paid in advance, and what reference to such verification would you make
in your report? (Mass., June, 1913.)

90. State the nature of the items appearing in a Balance Sheet which
may properly be classified as "deferred credits" by a private concern.
(N. Y., Jan., 1920.)

91. What is the auditor's attitude with respect to organization ex-
penses, advertising, and other expenditures which the client claims to
have a value extending over more than one year? (N. Y., Jan., 1916.)

Contingent Items

92. Define: Contingent assets. (Md., Jan., 1909; La., May, 1913*;
Kan., May, 1916; N. C, Aug., 1917; A. I. of A., Nov., 1920.*)

60 C. P. A. ACCOUNTING

93. Give illustrations of contingent assets. (Md., Jan., 1909; Wis.,
April, 1914; Kan., May, 1916; A. I. of A., Nov., 1920.)

94. How would you treat contingent assets on the books? (Md., Jan.,
1909; Mo., Dec, 19i4; A. I. of A., Nov., 1920.)

95. How would you treat contingent assets on a Balance Sheet? (Md.,
Jan., 1909; Wis., April, 1914; Mo.,^Dee., 1914; A. I. of A., Nov., 1920.*)

96. Define: Contingent liabilities. (N. J., 1904-1909; Mich., Dec,
1906; Md., Jan., 1909; N. Y., Feb., 1910; Mass., June, 1910; Ya., Nov.,
1910; 111., May, 1913*; La., May, 1913*; Colo., Dec, 1913; Mich., June,
1914; Mass., Oct., 1914; Kan., Dec, 1915; Mo., Dec, 1915; Kan., May,
1916; Ind., June, 1916*; N. D., July, 1916*; Ohio, Nov., 1916; Mich.,
Dec, 1916*; 111., May, 1917; N. C, Aug., 1917; N. D., Aug., 1917;
A. I. of A., Nov., 19i7; Ind., Nov., 1918; 111., Dec, 1918; Iowa, Dec,
1918; A. I. of A., May, 1919; A. I. of A., Nov., 1920.*)

97. Give illustrations of contingent liabilities. (Fla., April, 1907;
Fla., April, 1908; Md., Jan., 1909; N. Y., Feb., 1910; Wash., June, 1912;
111., May, 1913; Wis., April, 1914; Mass., Oct., 1914; Mass., Oct., 1915;
Kan., Mav, 1916; Ind., June, 1916; N. D., July, 1916; Ohio, Nov., 1916;
N. D., Aug., 1917; 111., Dec, 1918*; A. I. of A., Nov., 1920.)

98. How should contingent liabilities be shown on the Balance Sheet?
(Fla., April, 1907; Fla., April, 1908; Md., Jan., 1909; N. Y., Feb., 1910
Mass., June, 1910*; Va., Nov., 1910; Wash., June, 1912; 111., May, 1913*
Wis., April, 1914; Mass., Oct., 1914*; Mo., Dec, 1914; Mass., Oct., 1915
Ind., June, 1916; Ohio, Nov., 1916; N. D., Aug., 1917.*)

99. State how contingent liabilities should be treated in the books.
(Fla., April, 1907; Fla., April, 1908; Md., Jan., 1909; Wash., June, 1912;
Mich., June, 1913*; Colo., Dec, 1913*; Mo., Dec, 1914; Mich., Dec,
1916; A. I. of A., Nov., 1920.*)

100. Explain how you would treat actions pending against your client
in your report on audit. (Iowa, Dec, 1918.)

101. How should a guarantee given that machinery sold will last five
years be treated on the Balance Sheet? (Ind., May, 1918.)

102. (o) Explain the treatment you would give the following in the
books of Account; (6) State the counterbalancing or offsetting accounts;
(c) Explain how they would appear in the Balance Sheet: (1) Notes re-
ceivable discounted; (2) actions pending against your client; (3) cumu-
lative preferred dividends payable; (4) liability as guarantor for third
parties; (5) liability as accommodation signer on note; (6) contingent
liabilities under contract; (7) unpaid balances on contracts not yet ful-
filled; (8) collateral in possession of your banker to secure paj'ment of a
note. (Wis., April, 1915.)

103. What contingent liabilities may be encountered and what steps
would you take to ascertain their existence in: (a) a wholesale hardware
corporation; (b) a manufacturing corporation; (c) a partnership? (Cal.,
May, 1916.)

BALANCE SHEET * 61

104. What is an auditor's responsibility and what steps should he take
in connection with contingent liabilities? (111., Dec., 1918.)

105. Under what conditions would you carry contingent liabilities
among other liabilities on a Balance Sheet and what occurs when the con-
tingency ceases to exist? (Cal., June, 1917.)

106. Give examples of such assets and liabilities not usually found on
books of account, as should be considered by the auditor when preparing
an Income and Profit and Loss account at the close of the fiscal period.
(N. Y., June, 1911.)

107. In the preparation of a Balance Sheet of a manufacturing com-
pany how would you handle large patent infringement suits which your
client would probably lose? (Cal., June, 1917.)

108. Define: Actual liability. (A. I. of A., May, 1919.)

Net Worth

109. State the object of the Capital account. (N. Y., Dec, 1898;
Ohio, Nov., 1913*; Ohio, Nov., 1915.)

110. Differentiate between the economic and the accounting use of
the term ''capital." (Ohio, Nov., 1913; Kan., Dec, 1915; Mo., Dec,
1915.)

111. Define: Capital. (N. Y., Dec, 1896; N. Y., Dec, 1897; 111., Nov.,
1903; Cal., June, 1904; N. J., 1904-1909; Wash., Sept., 1907; N. Y.,
Jan., 1911; N. D., June, 1914; N. C, Aug., 1917; Iowa, Dec, 1918.*)

112. Define briefly: Guarantee capital. (Cal., May, 1916.)

113. Define: Working capital. (N. Y., Dec, 1897; Wash., March,
1909; Wash., Nov., 1913; Mo., Dec, 1913*; Mich., Dec, 1914; Cal., Nov.,
1916; Ohio, Nov., 1916; A. I. of A., May, 1921.)

114. From what items or classes of items in a Balance Sheet would
you determine the amount of working capital in the business? (Wash.,
March, 1909.)

115. Define: Floating capital. (N. Y., June, 1900.)

116. Define: Fixed capital. (N. Y., June, 1900.)

117. How would you differentiate between circulating and fixed capital?
Illustrate the distinction that you would draw, giving examples. (N. Y.,
Jan., 1919.)

118. Define: Loan capital. (N. Y., Dec, 1896; III., Nov., 1903; Cal.,
May, 1916.)

119. Discuss from both standpoints the proposition that capital may
be properly regarded in any set of books as a liability. (Md., Oct., 1903*;
111., Nov., 1903; N. Y., June, 1909; Mich., June, 1915; Ohio, Nov., 1915*;
Kan., Dec, 1915; Mo., Dec, 1915; Iowa, Dec, 1918.)

120. Why is capital always shown on a Balance Sheet as a liability?
(N. Y., Dec, 1897.)

121. Define: Deficit. (Va., Nov., 1918.)

62 C. P. A. ACCOUNTING

122. Distinguish between capital and capital stock. (Ohio, Nov., 1915;
Cal., May, 1916*; Ohio, Oct., 1919.)

123. How do the accounts of a corporation and of a copartnership
differ in the statement of capital? (N. Y., Jan., 1904.)

12-4. What names are given to accounts that represent the excess of
assets over liabilities? Differentiate these names in their application to
various kinds of business. (N. Y., June, 1898.)

125. Define the statement of net worth, also describe its function.
(N. C, Nov., 1918.)

126. What is the net worth of a business and name the accounts be-
longing to the net worth division of a Balance Sheet? (N. C, June, 1916.)

127. How would you determine the net worth or net insolvency?
(N. D., July, 1916.)

128. State how you would verify the net worth of a business. (N. C,
June, 1916.)

P.AT.ANCK SHEET

PROBLEMS

BALANCE SHEET

1. From the following comparative Balance Sheet, make statement
showing disposition of income:

Assets

Plant and Equipment

Inventory, Material

Inventory, Supplies

Cash in Bank

Cash on Hand

Accounts Receivable

Interest on Accounts Receivable

Notes Receivable

Workmen's Compensation Commission

Deferred Insurance

Office Supplies

Taxes

Treasury Stock

Total

Liabilities

Capital Stock

Surplus . . . . :

Accounts Payable

Notes Payable

Reserve for Interest

Reserve for Taxes

Reserve for Freight and Allowances . . .

Reserve for Hospital Fund

Reserve for Depreciation

Total

Net profit for the year, $33,492.86.

Dividends paid during the year, $28,850.

Surplus adjustment, debit, $290.21.

(W. Va., May, 1919.)

2. In an investigation of the accounts of the American Products
Company you find that the Balance Sheets of the company for the past
four years are as follows :

1916

$37,277.11

$36,551.03

24,334.05

29,650.17

6,077.69

6,070.91

2,100.90

1.716.31

6.44

1.44

10,792.56

6,512.01

34.58

2.848.71

121.71

■ 287.98

650.28

90.00

95.00

41.67

400.00

$84,413.40

$81,247.15

$26,000.00

47,378.46

43,025.81

789.42

147.81

4,000.00

6.12

387.57

1,051.41

215.85

750.00

8,885.98

7,022.12

$84,413.40

$81,247.15

1915

C. P. A. ACCOUNTING

Year Ending December 31

1915

1916

1917

1918

$30,000
75,500
48,600
8,000
10,000
25,000
40,000
36,000

189,000

15,000

5,000

$30,000
80,500
53,800
8,500
10,000
25,000
58,000
48,000

196,000

12,500

6,000

$45,000

80,500

60,000

8,500

10,000

$45,000

95,000

83,500

9,000

5,000

66,000

202,000

20,000

7,000

125,000

229,500

9,500

8,000

$482,100

$528,300

$499,000

$609,500

$75,000

50,000

30,000

, 75,000

162,500
10,000
10,000
24,000
5,000
40,600

$75,000
50,000
20,000
85,000

177,200
16,500
12,500
32,000
8,000
52,100

$75,000
60,000
10,000
90,000
87,400
18,000
40,000
42,000
10,000
66,600

$75,000
100,00j

100,000
90,600
25,000
65,000
63,000
12,000
78,900

$482,100

$528,300

$499,000

$609,500

Assets

Land

Buildings

Machinery

Furniture and Fixtures

Bonds

Capital Stock in Subsidiarvr Co.. .
Advances to Subsidiary Company

Inventories

Accounts Receivable

Cash

Prepaid Expenses

Liabilities

Common Stock

Preferred Stock

Bonded Debt

Bills Payable

Accounts Payable

Accrued Wages

Accrued Taxes

Reserve for Depreciation

Reserve for Contingencies

Surplus

The net profits were double the amount of dividends paid each year.

Prepare a statement reflecting the disposition of the profits earned and
other funds provided each year and the change in working capital since
December 31, 1915. (Wis., May, 1919.)

3. From the following comparative Balance Sheets of the A. B. C.
Company at December 31, 1917, and December 31, 1918, prepare a short
statement showing the funds realized during the year and the disposition
made thereof:

Dec. 31, 1917

Dec. 31, 1918

Assets

Caoital Assets

$600,000

] ,000,000

850,000

200,000

20,000

$900,000

1,160,000
800 000

(Replacement values as shown by appraisal
were used at December 31, 1918)
Inventories

Accounts Receivable

Cash

550 000

Deferred Charges

10,000

$2,670,000

$3,420,000

BALANCE SHEET

Liabilities

Capital Stock

Bonds (issued at par)

Capital Surplus representing excess of sound
replacement value of appraisal at December
31 1918, over the book value of capital assets
at that date

Bank Loans

Accounts Payable

Reserve for Depreciation and Replacements . . .
(The reserve at December 31. 1918, represents
the difference between the replacement and
sound value of the appraisal at December 31,
1918)

Surplus

Dec. 31, 1917

$1,000,000

750,000
500,000
100,000

320,000

Dec. 31, 1918

$2,670,000

$1,000,000
500,000

150,000
400,000
600,000
200,000

570,000

$3,420,000

Note — The profits for the year were $450,000, and dividends were paid
during the year amounting to $200,000. The sum of $100,000 was charged
to operation for depreciation during the year and $50,000 was charged
against the Reserve for Replacements. (A. I. of A., Nov., 1919.)

4. (a) What is the amount of the net working capital in the following
Balance Sheet:

Balance Sheet, Jan. 1, 1915

Real Estate $10,000

Patents 8,000

Building.s 55.260

Cash 9,320

Inventories 32.600

Interest Prepaid 1,600

Accounts Receivable 40,200

$156,980

Capital Stock $50,000

Bonds 20,000

Notes Payable 10,000

Reserve for Bad Debts. . . . 5,350

Accounts Payable 32,502

Reserve for Depreciation,

Buildings 20,000

Surplus 19,128

$156,980

(&) What is the amount of the net working capital in the Balance
Sheet of the same company as of January 1, 1916, which here follows:

Balance Sheet, Jan. 1, 1916

Real Estate $17,000

Patents 7,000

Buildings 63,520

Cash 3,260

Inventories 38,710

Interest Prepaid 820

Accounts Receivable 42,200

$177,510

Capital Stock $50,000

Bonds 30,000

Notes Payable 20,000

Reserve for Bad Debts. . . . 6,240

Accounts Payable 25,620

Reserve for Depreciation,

Buildings 35,200

Surplus 10.450

$177,510

66 C. P. A. ACCOUNTING

Profits, as per Profit and Loss account for the year, amounted to $6,322,
and a 30 per cent dividend was declared and paid.

working: capital.

(Wis., May, 1916.)

5. The bookkeejer of a manufacturing concern could produce only
the following statement from its records on January 1, 1907 :

Manufacturing Fxpenses $4,622.89

Capital Stock 10,000.00

Plant and Equipment 17,500.00

Gross Sales 8,469.10

First Mortgage bond (due December 31, 1907) 15,000.00

Material and SuppUes (inventory) 4,289.34

Notes Payable 5,000.00

Accounts Receivable 5,423.23

Accounts Payable 2,436.28

Interest on Bonds ,(7 months) 393.75

Interest on Notes and Accounts Payable 282.40

Cash 832.14

On January 1, 1907. the management changes, and you are later re-
tained as a public accountant to conduct an examination and prepare a
Balance Sheet as of January 1, 1908,

You find that during the preceding year the directors have subscribed
in cash to $7,500 additional capital stock and have retired all the notes
and old accounts payable and that no interest was paid on these accounts
for the year. You also find that the plant and the equipment was re-
valued at $15,000 and 5 per cent of this amount was charged off to
provide for depreciation, while an additional 2^/2 per cent was ordered
placed in Reserve account to cover repairs and renewals, the entire 7V2
per cent being charged direct to Profit and Loss. The bond outstanding
fell due on December 31, 1907, and was paid, principal and interest, in
cash.

An inventory of materials and supplies placed their value at $2,328.19,
the practice being to charge all purchases direct to Manufacturing Ex-
penses and to credit back the amount of the inventory.

The accounts payable (all for material and non-interest bearing) amount
to $546.28.

Of the accounts receivable January 1, 1907, $4,968.18 was collected and
the balance charged off as uncollectible.

In addition to the material used from stock during the year and the
amount still due for material purchased, the manufacturing expenses were
$3,720.52, all paid in cash, the total manufacturing expenses being 31
per cent of the gross sales for the year ending January 1, 1908.

Of these 91.3 per cent were collected in cash and the balance, all of
which is considered good, remains on the books in Accounts Receivable.

Produce a comparative Balance Sheet of January 1, 1908-1907, and
state the amount of gross sales for the year.

(N. Y., Feb., 1908.) .

CHAPTER IV
PROFIT AND LOSS STATEMENT

Income — Income is the gain or remuneration which proceeds from
property, labor, or business/ It may be classified into (a) rent or income
from real estate, (b) wages or remuneration of labor, (c) interest or
income from liquid capital, and (d) profits or gain from investment in a
business organization/ Income may be also classified as primary or
operating revenue and secondary or non-operating revenue/

Revenue — The term "revenue" is frequently used interchangeably with
the term "income,"^ the terms "gross revenue" and "net revenue" being
used synonymously with "gross income" and "net income," respectively.'
There is a slight distinction, however, as the term "i-evenue" is used
especially by non-trading concerns/

Earnings — Earnings are that part of income derived as remuneration
for personal services, the terra being used in the statements of professional
men and public service coi'porations/

Profits — Pi'ofit to the economist means onlj!- the reward to the ability
and enterprise of the successful entrepreneur,* while to an accountant it
means the realized increment in value of the whole amount invested in a
business/ If a sole proprietor made a net income, the accountant would
call all of the net income profit,^" while the economist would classify it
as wages, rent, intei-est, and pi'ofits/'

Gross profits represent the excess of the selling price over the actual
cost of the article sold/'' Net profits represent the excess of earnings over
all costs, expenses, and reserves for accrued or probable losses/'

A broad distinction must be made between capital profits and operating
profits. A capital profit or loss is one that arises from a change in the
value of fixed assets, and should be shown on the books only if the fixed
assets are sold or destroyed." An operating profit or loss is one that
ai'iscs fi'om the ordinary operation of the business." Capital profits and
losses should not be included in the operating profit and loss statement,
but should be deferred until the operating profit or loss is ascertained and
then charged or credited directly to surplus."

Generally, profits and losses are made only on completed transactions,''
accruals being a recognized exception to this rule. This will prevent appre-
ciation on real estate from being treated as a profit until the real estate is
sold.'" Profit may not be taken on goods made for stock, for the profit
occui-s Avhcn the sale is made.'* No profit may be taken unless a cause
of legal action has arisen.'"

'For cxplniiiitioii of superior figure's see pnge .337.

68 C. P. A. ACCOUNTING

The estimated profit on goods made to order may be taken in the pro-
portion the share of work done during the period is to the total under-
taking.^' This necessitates a predetermination of profit on the whole
undertaking, an estimate of the portion of the contract completed, and
an adequate provision for unforeseen difficulties in completing the work."

Equitable treatment of stockholders requires that the profit on long
term contracts be taken as the work is completed." If liljeral allowances
for contingencies are made, the estimated profit may be prorated to periods
on the basis of the estimates of the portion of work completed made by
the supervising engineer to secure the periodic payments on the contract.^*
If the contract price is based upon a series of units in the contract, profit
should be taken on the number of units completed." Cost-plus contracts
may have the accrued profits taken without consideration of the unfinished
portion, as the profits are always a definite percentage of the cost.''"

As commercial practice allows buyers to cancel orders for standard
goods up to the date of a shipment, profits on luidelivered sales should
not be taken.^'

The excess of market price over production cost of goods sold by one
subsidiary companj' to another or transferred from one department to
another is not a profit, as no profit can be made unless the goods are
sold to an outside party .^

Revenue and Capital Receipts — Revenue receipts are the receipts of
cash and other assets on account of the regular operation of the business,
and include receipts from sales, interest on investments, etc." Capital
receipts consist of the cash and other assets received through the sales of
capital stock, the issue of capital liabilities,™ or the sale of a fixed asset."

Revenue and Capital Expenses — Revenue or operating expenses are in-
curred to conduct the business in an endeavor to make a profit.'' Capital
or non-operating expenses are the financial management expenses incurred
in providing the capital needs of a business.^'

Revenue and Capital Expenditures — The term "revenue expenditures"
is synonymous with "revenue expenses.'"* Revenue expenditures appear as
assets on the balance sheet only as defen-ed charges to income.^" Capital
expenditures are the expenditures made for additions or improvments to
the more or less permanent plant.^ The accounting for capital expendi-
tures is outlined in Chapter IV, Volume II.

Fixed Charges and Operating Expenses — Fixed charges are the expenses
of more or less fixed amount, which must be met periodically without ref-
erence to the volume of business.'' Interest on bonds is a fixed charge,"
but interest on notes payable is not." Operating expenses are those in-
curred directly in connection with operations and which roughly fluctuate
with the business done.^

Summaries of Nominal Accounts — The business executive's need for
statistics has caused many varied groupings of the nominal accounts, viz.,
the manufacturing, trading, administrative, and profit and loss accounts.
These summai-y accounts have largely been replaced by reports or state-

PROFIT AND LOSS STATEMENT

ments containing the same data in more available form. Examples of such
statements ai'e the statements of cost of manufacture, cost of sales, and
overhead. The need for all these data in one statement has led to the
modern profit and loss statement. Synonyms for the profit and loss state-
ment are statements of income and expenditures, revenues and expendi-
tures, trading and profit and loss, income and profit and loss, etc. "Revenue
and expenditui'es" is usually limited to profit and loss statements rendered
by non-profit-making concerns, "income and expenses" to institutions, and
"income statements" to large industrial concerns.**

Account Form of Profit and Loss Statement — The origin of the profit
and loss statement is shown in its account form, for each one of the original
summary accounts has a section in the account form of profit and loss
account.**

A. B. COMPANY
PROFIT AND LOSS STATEMENT
For Period Ending (Date)

Manufacturing Section

Raw Materials. . . .
Productive Labor . .
Factory Overhead:

Indirect Labor. .

Superintendence.

Supplies

....s

....$

Manufacturing Cost, carried

to Trading Section $

Power

... $

% '

Trading Section

Manufacturing Cost, brought
down from Manufacturing
Section %

Finished Goods (initial inven-
tory) %

Less Finished Goods (final in-
ventory) $ .

Cost of Sales

Selling Expense:
Salesmen's Sal-
aries

Traveling Ex-
penses

Advertising

Gross Profit on Trading car-
ried to Administration Sec-
tion '. %

Sales $ .

Less Returned Sales $ .

Net Sales $.

C. P. A. ACCOUNTING
Administration Section

Office Expense $ .

Directors' Fees $ .

Legal Expense . . $ .

Net Profit on Trading carried
to Profit and Loss Section. . $ .

Gross Profit on Trading
brought down from Trad-
ing Section

Profit and Loss Section

Bad Debts $ .

Interest Expense $ .

Net Profit for period carried
to Appropriation Section . . $ .

Net Profit on Trading brought
down from Administration
Section

Interest Earned

Appropriation Section

Dividends Declared.
Addition to Surplus.

Net Profit for Period brought
from Profit and Loss Sec-
tion

Report Form of Profit and Loss — As the account or non-technical form
of profit and lo^s statement is not adaptable to the use of the typewriter
and is rather too complicated for the lay reader, most accountants use
a report form of profit and loss statement/' although a few well known
authorities still advocate the account form."

As is the case with the balance sheet, thei-e are numerous forms of
I)rofit and loss statements. The chief advantages of the following model
form are, (a) the fact that only three money columns are used, thus
increasing the speed and accuracy of the student, (b) the subtraction from
the gross profit on sales of the total of the selling, administrative, and
general expenses," thereby eliminating the unimportant selling profit sub-
total, (c) the subtraction from or addition to tlie net profit on operations
of the net figure for the non-operating expenses and incomes,** thus
eliminating the insignificant total income figure, and (d) the introduction
of an appropriation of profit section," which is valuable in that it shows
a summary of the effect the profits had on the vested proprietorship
accounts.

PROFIT AND LOSS STATEMENT

A. B. COMPANY
PROFIT AND LOSS STATEMENT
For Period Ending December 31, 1916

Gross Sales

Less Returns and Allowances on Sales. . . .

Net Sales

Cost of Sales:
Material :

Inventory, Jan. 1, 1916

Freight and Cartage in

Purchases

Deduct Inventory, Dec. 31, 1916

Labor

Manufacturing Expense:

Depreciation, Buildings — 1916

Depreciation, Machinery — 1916

Factory Expense

Fuel

Insurance, Buildings and Machinery . . .

Repairs, Building

Repairs, Machinery

Taxes, Real Estate

Inventory Variation — Work in Process:

Jan. 1, 1916

Dec. 31, 1916

Inventory Variation — Finished Goods:

Jan. 1, 1916

Dec. 31, 1916

Gross Profit on Sales

$ ■.

Operating Expenses:
SeUing Expense:

Advertising

Commissions Paid Salesmen

Insurance, Finished Goods

Salaries, Salesmen

General Administrative Expense :

Office Expense

Office Payroll

Salaries, General Officers

Net Profit on Operations

Non-Operating Items:
Income:

Discount on Purchases

Interest Received

Expense:

Discount on Sales

Interest Paid

Doubtful Accounts Receivable

Net Income for Period

Appropriation :

Organization Expense Written Off

Subscriptions and Donations

Income Taxes

Surplus Additional

72 C. P. A. ACCOUNTIKG

Statements of Non-Trading Concerns — The profit and loss statements of
non-trading concerns such as railroads, telephones, banks, and hospitals
have the same general divisions as the statements of trading companies.'"
Fii-st, all the operating incomes are added, from which sum is subtracted
the total of the operating expenses. To the resulting net profit on opera-
tions is added the non-operating income. Then the non-operating ex-
penses are deducted, leaving the net profit for the period.*

Comparative Profit and Loss Statements — The Federal Reserve Board
has developed the form of comparative profit and loss statement given
below." The form is compact, yet clear, and may be followed to advan-
tage. Of course, some variation in the form may be made. For instance,
outward freight may be treated as a selling expense if the accountant so
desires. The increases or decreases between periods or percentage figures
may be shown in parallel columns to the right of the annual figures.

Use of Schedules in Profit and Loss Statements — To eliminate detail on
the profit and loss statement, schedules may be appended showing such
items as cost of goods sold, the gi'oup of selling expenses, the group of
general and administrative expenses, etc." A profit and loss statement
where the detail is relegated to schedules is called a condensed profit and
loss statement."

Working Sheet — As the working sheet is not an aim in itself but
mei'ely a means of increasing speed and accuracy in the jireparation of
financial statements, the twelve column working sheets should not be used.
Two columns each for the original trial balance, adjustments, balance
sheet, and profit and loss are adequate."

When the trial balance does not contain all the accrued and defeiTed
accounts, these accounts may be opened,'** or the adjustment may be kept
within the original nominal account by showing the debit and credit entries
in the adjustment columns under the original account with the letter "B"
after the item affecting the balance sheet." For instance, the new mer-
chandise inventory would appear in the adjustment columns as debit
"15,000 B" and credit "$15,000," the debit item later being extended to
debit balance sheet column and the credit item to the credit profit and loss
column. This second method is preferable, as it is quicker and leaves the
working sheet in a more compact form.

There are tAvo ways of treating inventories in the profit and loss columns
of the working sheet, namely, (a) extending into the profit and loss col-
umns only the difference between the old and the new inventories,"^ and
(b) extending the old inventory as a debit and the new inventory as a
credit." The latter method is the better, as both the old and new inventories
are used in the profit and loss statement while the difference between the
two inventories is not usually entered.

By arranging all the asset and expense accounts on one page and the
liability, capital, and income accounts on the other, the number of money
columns can be reduced to one for the trial balance, two for adjustments,
and one each for the balance sheet and profit and loss statement.**

PROFIT AND LOSS STATEMENT
COMPARATIVE STATEMENT OF PROFIT AND LOSS

Year

Ended

19—

Year

Ended

19—

Year

Ended

19—

Gross Sales

Less Outward Freight, Allowances, and
Returns

Net Sales . . ...

Inventory beginning of year

Purchases, Net

Less Inventory end of year .

Cost of Sales

Gross Profit on Sales

Selling Expenses (itemized to correspond
with ledger accounts kept)

Total Selling Expense

General Expenses (itemized to correspond
with ledger accounts kept)

Total General Expenses

Administrative Expenses (itemized to corre-
spond with ledger accounts kept)

Total Administrative Expenses

Net Profit on Sales

•f

Other Income:

Income from Investments

.•1

Interest on Notes Receivable, etc

Deductions from Income:

Interest on Bonded Debt

Interest on Notes Payable. . . . ,

Total Deductions

Net Income — Profit and Loss

Add special credits to Profit and Loss

Deduct special charges to Profit and Loss. . .

Profit and Loss for Period

Surplus beginning of period

Dividends Paid

Surplus ending of period

$ •• .

74 C. F. A. ACCOL'NTINMJ

QUESTIONS

profit axd loss statement

Definitions

1. Define: Trading- aceonnt. (N. Y., Dee., 1896; X. Y., June. 1890*:
Pa., Nov.. 1901; Pa., May. 1902*; Cal., June, 1904*; X. Y.. June, 1904*;
N. J., 1904-1909*; N. Y.. Oct., 1907*; R. I.. Dec, 1907*; Cal.. May,
1908; Wash., Aug., 1908*; Va., Nov., 1910; Wash., June, 1912; Va..
Oct., 1912*; Wash., Nov.. 1913; Colo., Dec, 1913; W. Va., May, 1917;
N. Y., Aug., 1917; S. C, Sept., 1919.*)

2. Define: Profit and Loss account. (N. Y.. Dec. 1896; N. Y., Dec,
1897*; Pa., Nov., 1899*; Pa.. May, 1902*; Pa., May. 1903*: Md.. Oct..
1903; Cal., June. 1904; N. Y., June, 1904*; Va., *Nov.. 1910; Wash.,
Nov., 1913*; Colo., Dec, 1913; W. Va., May, 1917; N. C, Aug., 1917;
S. C, Sept., 1919.*)

3. Define: Loss and Gain account. (N. J., 1904-1909*; Iowa, Dec,
1918.)

4. Define: Revenue account. (N. Y., Dec, 1896; Pa., Nov., 1901*;
Md., Oct., 1903; Cal., June, 1904*; N. J., 1904-1909; Cal., May, 1908;
Wash., June, 1912; W. Va., May, 1917; S. C, Sept., 1919.*)

5. Define: Income account. (111., Nov., 1903.)

6. Define: Net income. (Mich., June, 1910.)

7. Define: Income. (N. Y., Dec, 1897; Wash.. June, 1915*; Cal., Nov.,
1916*; N. C, Aug., 1917; Iowa, Dec, 1918.)

8. Define: Revenue. (N. Y., Dec, 1896; Pa., Nov., 1899; Pa., Mav,
1903*; N. Y., Jan., 1904; Va., Oct., 1911*; Mich., Dec, 1915; Iowa, Dec,
1918.»)

9. Define: Expense. (N. Y., Dec, 1896*; Pa.. Mav, 1903*; N. Y.,
Jan., 1904; Ohio, March, 1910*; W. Va., May, 1917*; n! C, Aug., 1917.)

10. Define: Cost of goods sold. (Wash., Nov., 1913*; N. C, Nov.,
1918.*)

11. Define: Operating expenses. (N. Y., Dec, 1896; N. J., 1904-
1909; Wis., April, 1914; Wash., June 1917.)

12. Define: Commercial expenses. (Mich., June, 1908.)

13. Define: Fixed charges. (N. Y., Dec, 1896; N. Y., Dec, 1897;
Wash., May, 1903*; N. J., 1904-1909; Mich., Dec, 1906; Md.. Jan., 1909;
Mass., June, 1910; Wis., April, 1914; Mich., June, 1914*; 111., Dec, 1916;
Wash., July, 1917.)

PROFIT AND LOSS STATEMENT 75

14. What expenses would you classify as fixed or overhead expenses?
(Va., Od., 1911.)

15. Define: Income and expenditures. (Pa., May, 1902*; Wash., June,
1912; N. D., Aug., 1917.)

16. Define: Statement of income and expenditure. (N. Y., Dec, 1896*;
Wis., April, 1914; Del., elune. 1915*; Wis., May, 1916; Mich., Dec., 1916;
111., May, 1917; W. Va., May, 1917.*)

17. Define: Statement of Revenue and Expenditures. (Kan., May,
1916.)

18. Define: Statement of Revenue and Expenses, and also describe
its function. (Ohio, Dee., 1908*; N. C, Nov., 1918.)

19. Define: Statement of Overhead or Administrative Expense; also
describe its function. (N. C, Nov., 1918.)

20. What is a Trading statement? (Iowa, Dec, 1918.)

21. Define: Cost statement. (N. C, June, 1920.)

22. What is a Manufacturing igtatement? (N. C, Nov., 1918*; Iowa,
Dec, 1918.)

23. What is a Profit and Loss statement? (Iowa, Dec, 1917; N. C,
Nov., 1918*; N. C, June, 1920.*)

24. What are revenue receipts? (N. Y., Dec, 1896; N. Y., Oct., 1907;
Mich., June, 1910; Mich., June, 1912; Wis., April, 1914; Wis., April,
1917.)

25. Define: Capital receipts. (N. Y., Dec, 1896; N. Y., Oct., 1907;
Mich., June, 1910; Va., Oct., 1911*; Wis., April, 1914; Wis., April,
1917.*)

26. Define: Capital revenue. (Cal., Nov., 1916.)

27. Define: Statement of the Cost of Sales; also describe its function.
(N. C, Nov., 1918.)

28. Define: Statement of Capital Receipts; also describe its function.
(N. C, Nov., 1918.)

29. Illustrate accounts that are considered as deductions from income.
(Mich., June, 1919.)

30. Define: Statement of Capital Expenses; also describe its func-
tion. (N. C, Nov., 1918.)

31. Define and distinguish between capital profit and capital loss.
(Wis., April, 1914.)

Operating Statements

32. Name and define five commonly used subdivisions of revenue ex-
penditure accounts. (N. Y., June, 1909* ; Mich., June, 1912; Wash., June,
1912*; Cal., Nov., 1916*; N. Y., June, 1909.*)

33. Submit a pro forma Balance Sheet and Profit and Loss account,
without figures, for a manufacturing company. (Wash., Aug., 1908*; Pa.,

70 C. P. A. ACCOUNTING

Nov., 1908*; Wash.. May, 1911*; Cal., May, 1916; Kan., May, 1916*;
Ind., June, 1916*; Mass., Oct., 1917.*)

34. How do the accounts of a corporation and of a copartnership
differ in the statement of Operation of Business and Determination of
Profits? (N. Y., Jan., 1904.)

35. A manufactunn«r corporation havinsr several plants decides to shut
down one plant because it cannot be run economically. Under what
classification in the Operatinir statement would you include the expenses
attending the care and upkeep of the idle plant? (N. Y., June, 1919.)

36. The books of a corporation show balances at the debit or credit
of the following: accounts: Rents from Tenements, Reserve for Accounts
Receivable, Depreciation on Machinery, Depreciation on Furniture and
Fixtures, Bond Redemption account, Bills Receivable, Dividend on Pre-
ferred Stock. State which should enter into Profit and Loss account and
which should appear in the Balance Sheet, and why. (N. Y., June, 1911.)

37. The following accounts are found in the books of a corporation.
State which of them would enter the Profit and Loss account and Balance
Sheet, and which would show debit and credit balances; Reserve Fund,
Depreciation on Furniture, Bad Debt Reserve, Bond Redemption account.
Bills Receivable, Rent on Properties Owned, Dividend on Preferred Stock.
(N. Y., Oct., 1907; R. I., Dec, 1907.)

38. Name the principal elements of a statement of the Cost of Sales
of a manufacturing business and prepare a fonn which vou would use.
(N. Y., Nov., 1919.)

39. Prepare a skeleton foi"m of a Manufacturing statement showing
classification of accounts. (Ind., June., 1916*; Iowa, Dec, 1918.)

40. Explain the functions of a Manufacturing account. (N. C, Aug.,
1917.)

41. Prepare a skeleton form of a Tr^'ding statement showing classifica-
tion of accounts. (Mich., Dec, 1913*; Iowa, Dec, 1918.)

42. What is the purpose of a Trading account, and what general
result should it show? In closing the Ledger what disposition should be
made of the balance of the Trading account? (N. Y., Jan., 1901.)

43. In making up a Profit and Loss statement at the end of a fiscal
year, are you stating a fact or an opinion? Give reasons. (111., Nov.,
1908; Colo., Dec, 1913; Del., June, 1915.)

44. State what is indicated by the Loss and Gain account (a) when
the account shows a debit balance; (b) when the account shows a credit
balance. Explain fully. (N. Y., Dec, 1897*; N. Y., Jan., 1900; N. Y.,
June, 1911.*)

45. What accounts on the Ledger are generally considered as "de-
duction from income"? Why? As "other income"? (Md., Dec, 1917;
N Y., June, 1919.)

46. From what accounts is a Profit and Loss account prepared? (N. Y.,
June, 1901; N. C, June, 1920.*)

PROFIT AND LOSS STATEMENT 77

47. How is the pi'ofit or loss anivefl at from a double-entry set of
books? (N. Y., Oct., 1907*; R. I., Dec, 1007*; Cal., May, 1008*; N. Y.,
June, 1909*; N. Y., Feb., 1010*; Va., Nov., 1010; \Ya.sh., June, 1912*;
Va., Nov., 1018.*)

48. Describe tbe different methods of determining the loss or gain of
a business. (N. Y., Dec, 1898.)

49. In a general way what distinguishes manufactm*ing expenses from
commercial expenses'? (Mich., June, 1910.)

50. May interest on floating debt be properly considered a fixed
charge? (N. Y., Dec, 1897; Wash., May, 1903; Md., Jan., 1909; N. Y.,
June, 1909; Mass., June, 1910.)

51. State explicitly and fully the function of the Profit and Loss
account. (N. Y., June, 1899.)

52. Show the relationship between trial balance, Trading statement.
Profit and Loss account, assets and liabilities. (Fla., July, 1908; Cal.,
Nov., 1916.*)

53. Differentiate as fully as possible a Manufacturing account, a
Trading account, and a Profit and Loss account, and state what the
balance in each indicates. (N. Y., June, 1898; N. Y., June, 1899; N. Y.,
June, 1906*; Md., Jan., 1909*; N. Y., Feb., 1910*; 111., May, 1913*;
Mich., June, 1915; N. D., Aug., 1917*; N. D., July, 1918*; Md., Oct.,
1919*; N. Y., Jan., 1920.*)

54. Give your mode of procedure in ascertaining the correctness of the
Profit and Loss account. (N. Y., June, 1898*; N. Y., June, 1901*; N. Y.,
Jan., 1902; Pa., May, 1903; Md., Oct., 1903*; Pa., Nov., 1904; Mich.,
June, 1913.*)

55. What particular accounts in a mercantile business would you in-
vestigate to see that all entries had been made before ascertaining the
correct profit or loss of the business? Answer very fully. (Pa., Nov.,
1901.)

56. A manufacturing concern on closing the books at the end of the
fiscal year finds that they show a loss, whereas there is good ground for
the belief that a profit was earned. With a view to settling the question,
what particular, etc., would you examine, and how? (Mass., Oct., 1915.)

57. In a test audit what verification should be made of the accuracy
of the Profit and Loss account? Assume that there is no reason to
suspect any intent to misstate the profits.

Would it make any difference if you were employed by the prospec-
tive purchaser of the business and he suspected that the profits had been
overstated so as to increase the selling price of the business?

(111., May, 1917.)

58. In preparing a Profit and Loss account and Balance Sheet, how
are gains, losses, assets, liabilities, capital, drawings, and expenditures
ascertained and dealt with? (111., Nov., 1908.)

78 C. P. A. ACCOUNTING

59. Give proper disposition of any bal moe appearing in a Profit and
Loss account at the end of the fiscal year. (111., May, 1907; 111., Maj-,
1909.*)

60. (a) What is the purpose of a Profit and Loss account and how is it
made up?

(&) What does the balance of a Profit and Loss account represent?

(111., May, 1909.)

61. An attorney-at-law joined an established firm in partnership with-
out having the books investigated, relying on the firm's .statement that
they were making certain profit. After several months have elapsed,
the new partner, not being satisfied, instructs you to audit the accounts
for the year prior to his joining the firm. You discover that no break
has been made in the books for years. What steps would you take to
ascertain the exact profit for the year? (111., May, 1910.)

62. Give examples of such assets and liabilities not usually found on
books of accounts, as should be considered by an auditor when preparing
an Income and Profit and Loss account at the close of a fiscal year.
(N. D., July, 1916.)

Profits

63. Define: Net profit. (N. Y., June, 1900; Pa., Nov., 1900; N. Y.,
Jan., 1901*; Wash., Aug., 1908; Mich., June, 1910; Va., Nov., 1910;
Colo., Dec., 1913; Kan., May, 1916; N. D., June, 1917.)

64. Define: Gross profit. (Pa., Nov., 1900; Wash., Aug., 1908*;
Mich., June, 1910; Va., Nov., 1910; Colo., Dec, 1913; Wash., June, 1915.*)

65. Define: Profits. (Wash., Sept., 1907.)

66. Define: Trading profit. (Cal., Nov., 1916.)

67. Define: Manufacturing profit. (N. Y., Jan., 1919.)

68. Explain the significance of the term "profits" as used: (1) in
ordinary parlance; (2) in commercial parlance; (3) in law; (4) in
economies. (Mo., Dec., 1913*; Mo., Dec, 1914.)

69. Legally, income is cash received in excess of expenses. What is
the theory of income of a partnership as expressed by their Profit and
Loss account, where values are not actually reduced to a cash basis?
(N. Y., June, 1917.)

70. How may the gross profit or loss on merchandise be ascertained?
(N. Y., Dec, 1897.)

71. State your understanding of the difference between gross profit
and net profit. (111., May, 1908; Mass., June, 1910.)

72. What, in your opinion, is the difference, if any, between net in-
come and net profit? Answer fully. (Kan., Dec, 1915; Mo., Dec, 1915.)

73. When is a profit made? (Iowa, Dec, 1918.)

74. State the general rule as to anticipation of profits. What excep-
tion, if any, is there to this rule? (Ohio, Oct., 1919.)

PROFIT AND LOSS STATEMENT 79

75. May any fliictiiation in the value of permanent assets be permitted
to affect the result of the Profit and Loss account? Give reasons. (Fla.,
April, 1907*; N. Y., Jan., 1918.)

76. What methods have your audits revealed by which uianufacturiui;'
concerns attempted to inflate profits? If you have not met any, ex2)Iain
how it could be done. (Mich., Dec, 1913.)

77. When the cost of making a product is known, also the overhead and
other expenses, and the amount of the sales, what other information
would you require to determine the profits or losses in the sales of the
product? (N. C, June, 1916*; N. C, Sept., 1919.)

78. In auditing a manufacturer's accounts would you incorporate as a
part of profits work in process of manufacture and finished stock on
hand? (Ind., June, 1916.)

79. The Profit and Loss account of a manufacturing company, for six
months ending June 30, 1897, contains on the debit side (a) stock on
hand Januaiy 1, 1896, (b) purchases of raw material, (c) manufacturing
expenses, (d) expenses of selling; on the credit side (a) sales, (6) stock
on hand June 30. Does the balance of these amounts constitute the net
profit for the six months, or should other charges be taken into account?
If so, state them. (N. Y., Dec, 1897; Ohio, March, 1910.)

80. A manufacturer has become convinced that he is not making the
profit he should, and you are asked to find out the condition of affairs.
Explain fully what should be done to analyze the situation and determine
the facts in the case. (Del., June, 1915.)

81. State the final disposition of net profit in the books of a partner-
ship. (N. Y., June, 1900.)

82. State briefly what the effect is, if any, on the current operating
profits of each of the following: (a) Failure to provide adequate reserve
for cash discounts; (b) return of goods sold in previous period; (c) cre-
ating a reserve for a bond sinking fund; (d) creating a reserve for con-
tingencies; (e) sale of machinery in excess of book value; (/) excess re-
serve for depreciation; (g) revaluing merchandise inventory at beginning
of period; (h) writing up the value of securities from cost to market; (i)
bonds issued at a discount; (j) allowing interest on partners' capital.
(Mass., Oct., 1917.)

83. State briefly the difference between income, profits, and gain.
(N. Y., June, 1917.)

Capital and Rfa'enue Expenditures

84. Name and define two classes of expenditures. (R. I., Dec, 1907.)

85. Define: Capital expenditures. (N. Y., Dec, 1896; N. Y., Jan.,
1901*; 111., Nov., 1903; N. Y., Oct., 1907; Cal., May, 1908*; Mich,, June,
1910 ; Va., Nov., 1910 ; Va., Oct., 1911* ; Mich., June, 1912 ; Wis., April,
1914; III, May, 1914; Del., June, 1915; Wash., June, 1915; Wis., May,
1916; Wis., April, 1917; Va., Nov., 1918; S. C, Sept., 1919.)

80 C. P. A. ACCOUNTING

86. Define: Revenue expenditures. (N. Y., Dec, 1S96; N. Y., June,
1899*; N. Y., Qct., 1907; Mich., June, 1910; Ya., Nov., 1910; Ya., Oct.,
1911*; Mich., June, 1912; Wis., April, 1914; Wis., May, 1916*; Wis.,
April, 1917.*)

87. (a) Define charges to capital; (6) charges to revenue. (Mass.,
Oct., 1917.)

88. Explain the general principles to be observed in differentiating
between capital and revenue expenditui-es. (N. Y., Jan., 1902*; Wash.,
May, 1903*; 111., May, 1904*; N. Y., Jan., 1907*; N. Y., June, 1908*;
Wash., Aug., 1908*; Md., Jan., 1909*; 111., May, 1909*; Mass., June,
1910*; Va., Nov., 1910*; Va., Oct., 1912; Ohio, Nov., 1913*; Wis., April,
1914; Ohio, Nov., 1915*; CaL, May, 1916*; Ohio, Nov., 1916*; Mass.,
Oct., 1917*; Ohio, Nov., 1917*; A. I. of A., May, 1918; Ohio, Nov.,
1918*; A. I. of A., May, 1919*; Ohio, Oct., 1919*; Md., Oct., 1919.*)

89. What class of expenditures should be treated as assets at the close
of a fiscal period? (N. Y., Jan., 1901; 111., May, 1910.*)

90. It has been stated that "revenue expenditures do not create assets."
What is^our opinion? (111., May, 1909.)

91. Under what condition would a revenue expenditure appear in the
Balance Sheet as an audit? (Mo., Dec., 1913.)

92. Explain the difference between capital expenditures and revenue
expenditures. What rule controls in determining whether certain pay-
ments belong to capital or to revenue? When in doubt, to which should
the payment be charged? (N. Y., June, 1901.)

93. Distinguish between capital expenditure and expense. (N. D.,
July, 1916.)

94. If in the course of an audit it should be found that capital ex-
penditures had been charged up against Profit and Loss account, what
would be the duty of the auditor in respect to such charges? (N. Y., Dec,
1897; A. I. of A., May, 1919.*)

95. Under what circumstances, if any, may capital expenditures be
charged against revenue? (Ohio, Nov., 1915*; Ohio, Nov., 1917*; Ohio,
Nov., 1918.)

96. What on the books of a company would be the proper method of
treating cash payments for capital expenditures? (Ohio, May, 1910.)

97. In the audit of the accounts of a corporation for a year in which
the business has made a loss and at the close of which no profits are avail-
able for dividends, would you consider it your duty to direct the same
attention as usual in distinguishing between expenditure on fixed assets
chargeable to capital and that chargeable against operations? Give your
reasons. (111., Dec, 1916.)

98. What is the auditor's general duty in regard to capital expendi-
tures? (A. I. of A., May, 1919.)

99. State which of the following should be charged or credited to
capital and which to revenue: (a) Repairs to machinery and plant; (h)

PROFIT AND LOSS STATEMENT 81

rejlacements of maeliinery and plant; (c) royalties on machines owned
and used by the company owning the patents, similar machines being
leased under royalty to competitors; (d) brokerage on a piece of property
purchased; (e) costs attending a mortgage given; (/) costs of patents,
including lawyers charges and govei'ument fees; (g) expenses of incor-
porating a company; (h) discount on bonds sold; (i) premium on bonds
sold. (Wis., April", 1915; Mass., Oct., 1917.*)

100. Expenditures are made by a corporation for items of each of the
following classes: (a) Taking dow-n a machine in one pai't of a factory,
moving it and putting it up in another part; (b) expenses of incorporat-
ing the company, including State charges and lawyer's services; (c) bi'ok-
erage on purchase of a piece of property; (d) commission on an issue of
debenture bonds; (e) costs attending a mortgage; (/) furniture and
fittings of a city office and salesroom; (g) cost of patents, including
solicitor's charges and government fees. Which items should be charged
to capital and which to revenue? State reason for your answer in each
case. (N. Y., June, 1900.)

101. Would an auditor be justified in certifying the accuracy of ac-
counts in which a capital expenditure appeared without making inquiry
into the real character of same? If not, why not? If he would, why?
(Cal., May, 1908.)

C. P. A. ACCOUNTING

PROBLEMS

PROFIT AND LOSS STATEMiaTT

1. Following is condensed trial balance of the Blank Manufacturing
Company on December 31, 1908, before closing the books for the year:

Debits

Credits

Inventories, raw materials and work in progress Januarj-

1, 1908

Purchases of raw materials and freight thereon

Productive labor

Factory expenses other than labor and materials

Inventories of manufacturing goods. Januarj' 1, 1908. . .

Administration and general expenses

Sales, gross

Freight outwards

Discounts allowed

Bad debts written off

Interest

Discounts received

Cash and accounts and bills receivable

Accounts and bills payable

Real estate and buildings

Machinery and tools

Furniture

Capital stock

Undivided profits

Profit from sale of real estate in 1908

$31,500

253,o00

56,o(X)

11.500

4,100

23,700

25,800

1,600

600

3,500

172.700

20.000

67.000

1,300

S673.300

$408,700

2,300
95 000

100,000

63,300

4.000

$673,300

The inventories of December 31, 1908, are: Raw materials and work
in progress, $65,648; manufactured goods, $1,991.

A reserve of $7,000 is to be set up for depreciation on machinery and
tools, and another reserve of $3,000 is to be provided for doubtful ac-
counts.

A commission of 5 per cent on the net profits for the year is to be
credited to the manager.

After taking the foregoing items into account, prepare the following:
Lists of ledger balances after closing books ; Manufacturing account ;
Trading account; Profit and Loss account; Balance Sheet. (Note: Use
technical form of statements.) (Wash., March, 1909.)

2. From the following trial balance of Maker and Sellers' books,

PROFIT AND LOSS STATEMENT

extracted on December 31, covering six months' operations, prepare a
Manufacturing, Trading and Profit and Lo«s account and Balance Sheet,
(Note: Use technical form.)

Cash at bank

Petty cash in hand

Bills receivable on hand

Sundry debtors

Buildings

Plant and machinery

Sundry creditors

Loan on mortgage

Material on hand July 1 (raw material) . . . .

Purchases

Wages

Discounts allowed on purchases

Discount allowed customers

Returns (customers' returns for half-year) . .

Sales

Patent rights (expenses)

Rent and taxes

Advertising

Traveler's salary

Carriage, outward

Bad debts written off

Repairs

Patent royalties received in advance

Royalties on patents attributed to half-year

General expense

Interest on loans

Reserve for bad and doubtful debts

Reserve for discounts on book debts

Maker capital account

Maker drawing account

Seller capital account

Seller drawing account

Debits

$3,000
15
1,000
36,825
20,000
15,000

13,705

42,000

7,020

4,690
1,650

250

500

2,300

2,150

1,950

500

420

2,510
600

6,000
3,600

$165,685

Credits

$9,850
22,500

1,950
80,000

2,500
200

2,700

985

30,000

15,000

$165,685

The goods on hand (raw material) on December 31, are valued at
$17,500.

Write off 5 per cent from plant and machinery for depreciation for
the half year. The profits are to be apportioned as follows : Maker, two-
thirds; Seller, one-third. (Minn., Oct., 1916.)

3. The American Manufacturing Company commenced business on
January 1, 1918, with a paid-up cash capital equal to the sales for the
year 1918.

The net profits for the year 1918 were $26,100,

Of the total charges to manufacturing during the year, 40 per cent was
for materials, 30 per cent for productive labor, and 30 per cent for manu-
facturing expenses (including 5 per cent depreciation on plant and machin-
ery, amounting to $3,000).

C. P. A. ACCOUNTING

The value of the materials used was 80 per cent of the amount pur-
chased, and 90 per cent of the amount purchased was paid during the
year.

The inventory value of finished goods on hand at December 31, 1918,
was 10 per cent of the cost of finished units delivered to the warehouse,
and the work in process at that date was equal to 50. per cent of the cost
of units delivered to the warehouse.

The selling and administrative expenses were equal to 20 per cent of
the sales; also to 40 per cent of the cost of goods sold. Ninety per cent
of th&se expenses were paid during the year 1918.

Plant and machinery purchased during the year were paid for in cash.

All labor and manufacturing expenses (exclusive of depreciation) were
paid in full up to and including December 31, 1918.

Of the total sales for the year, 80 per cent was collected and 1 per cent
charged off as worthless.

From the given data you are required to prepare a Balance Sheet, and
a Profit and Loss statement, showing cost of goods delivered to the ware-
house, cost of goods sold, and net profit for the year. (Ohio, Oct., 1919.)

4. The following figures are shown on a Balance Sheet for January
1, 1913:

Real Estate $100,000

Machinery

Merchandise

Accounts Receivable .
Cash

500,000

150,000

50,000

$850,000

Capital Stock $400,000

Pounded Debt 200,000

Bills Payable 50,000

Accounts Payable 75,000

Surplus 125,000

$850,000

The following is the Income Sheet of the year 1912 :

Sales

Goods in process, December 31, 1912 .
Stores on hand, December 31, 1912 . .
Merchandise, December 31, 1912 . . . .

Less:

Selling costs .

Goods in process, January 1, 1912

Stores on hand, January 1, 1912

Merchandise on hand, January 1, 1912

Supplies purchased

Wages paid

Wages due and unpaid

General manufacturing expenses

Cost of Product ,

Net profit

Dividends declared, but not yet paid ,

Surplus for the year

$1,000,000

30,000

20,000

100,000

1,150,000
250,000

$20,000
15,000
80,000

175,(K)0

320,000
30,000

200,000

$900,000

$840,000

$60,000
32,000

$28,000

PROFIT AND LOSS STATEMENT

Is the Balance Sheet consistent with the Income Sheet? If not, assume
the Ledger and the totals of both sides of the Balance Sheet to be correct,
and any error to have been caused by unwarranted combinations or can-
cellations of accounts, and then correct the Balance Sheet.

Show the Ledger with both sides of all manufacturing accounts when
closed for December 31, 1912.

The Balance Sheet on January 1, 1912, was as follows:

Real Estate S100,000

Machinery 500,000

Goods in Process 20,000

Finished Goods 80,000

Stores 15,000

Accounts Receivable 75,000

Cash 35,000

$825,000

Capital Stock $400,000

Funded Debt 200,000

Bills Payable 40,000

Accounts Payable 60,000

Surplus 97,000

Dividends 28,000

$825,0(X)

Is this consistent with the Income Sheet and with the 1913 Balance
Sheet as corrected?

(Cal., June, 1917.)

5. The Metal Products Company rents the ground on which its plant
stands for a long term of years ; it sells its own product only and maintains
a downtown office. Its books disclose the following data for its last fiscal
year; 25 per cent of the office expenses and wages and salaries of officers
are considered as entering into the cost of production ; 65 per cent of
these accounts are deemed to be selling expenses and 10 per cent are
unallocated.

Metal, Products Company, Balances of Operating Accounts

Advertising $54,600

Cartage on purchases 120

Cartage on sales 1,000

Depreciation :

Factory furniture 320

Office furniture 580

Machinery and buildings . 19,120

Discount on sales 10,150

Discount on purchases 12,500

Factory expenses 5,100

Office expenses and wages . . . 20,200

Interest paid 70

Insurance, machinery and

buildings 3,880

Inventory beginning of period 100,000

Labor 37,900

Light, fuel, and power $8,350

Purchases 381,500

Royalty on output 30,000

Repairs to equipment 7,600

Rent of factory 4,300

Salesmen's salary and expense 2 1 ,000
Superintendent and factory

clerks 9,050

Salaries of officers 24,000

Supplies at factory 19,000

Taxes on real estate 1,700

Plating expenditures 20,500

Reserve for doubtful accounts 1,000

Sales 660.000

Inventory at close of period . 160,000

Prepare from the figures (1) the cost of goods sold; (2) the manu-
facturing profit; (3) the gross and net realization from sales; (4) the
trading profit; (5) the other profits, losses and expenses, as the case may
be; and, lastly, the net profit for the period.

(Kan., Dec, 1915; Mo., Dec, 1915.)

CHAPTER V
PARTNERSHIP AT ORGANIZATION

Partnership Defined — A partnership may be defined as an association,
not incorporated, of two or more persons who have agreed to combine
their labor, propertj^, and skill, or some of them, for the purpose of engag-
ing in ?i\\y lawful trade or business and sharing profits and losses as well
l)etween them/ A partnership may also be defined as, (a) a contract of
mutual agency, each partner acting as a principal in his own behalf, and
as an agent for his copartners,* and (b) the contract relation existing
l)etween persons who have combined their property, labor, and skill in an
enterprise or business as principals, for the purpose of a joint profit/

It is extremely difficult to lay down any definite tests for determining
the existence of a partnership, as each case must be judged upon pertinent
facts, it being necessary to prove the intention of the parties to form a
partnership* in addition to proving the other necessary elements of an
ordinary contract.'

Kinds of Partnerships — There ai'e two broad classes of partnerships,
namely, (a) general, or partnerships in which all the partners are tenants
in common, each partner bearing with his associates the liabilities incuiTed
by individual partners acting as agents for their copartners,' and (b)
limited, or partnerships composed of general partners who are liable for
the debts of the firm as in the general partnei'ships, and special partners
who are liable only for the amount of their investments.'

The law also recognizes the following kinds of pai'tners :

(a) Silent (sometimes called dormant), or partners who take little if
any active part in the partnership's activities."

(b) Secret, or partners who are not known as partners, although they
may be actively engaged in the business.'

(e) Nominal, or those who are not partners by contract or agreement,
but may legally be so considered, due to having knowingly permitted them-
selves to be held out to the public as partners.'"

(d) Ostensible (sometimes called public), or those Avho hold themselves
out and are known as partners."

Advantages and Disadvantages of Partnership — The chief advantages of
the partnership form of organization are (a) larger capital and therefore
access to fields closed to sole proprietorships, (b) the combining of the
l)usiness wisdom, experience, and skill of several, and (c) the subdivision
of duties with the resulting increase in specialization." The chief disad-
vantages are (a) the possibility of friction between partners, (b) .slower

'For explanation of superior figures see page 337.

PAKTNEKSHIP AT ORGANIZATION 87

action than in sole piopiielorships, and (c) unlimited liability of partners
to extent of entire personal fortunes."

Liabiliti/ of Partners — Except for the limited partners who i-isk only
their investments/'' partners are considered as sureties for their copai-tners,
and so ai-e ultimately liable even to the amount of their private estates
for the full extent of the firm's debts." They are, however, entitled to
contributions from copartners for the proportionate share of the Arm's
debts which the copartners should have paid.'"

Retiring partners are liable as sureties for the due and undue obligations
at the time of retirement even though the vendees have agreed to liquidate
the liabilities and have given the vendors an indemnity bond against any
liability for the firm's debts.'' Continuing partners are jointly liable with
the retiring partners for the deljfs of the old firm.'' Incoming partners
are not liable for the debts of the old firm unless they agree to undertake
such liability, oi- unless they perfonn an act indicating such intent."
However, they may be considered to have accepted the liability if they fail
to state their freedom from such liability.^"

Authority of Partners — Every general partner is an agent of the partner-
ship in the transaction of business, and has authority to transact the ordi-
nary business of the concern." However, unless his partners have left the
administration of the busitiess entirely to him or are incapable of acting,
he cannot legally do such acts as (a) dispose of the goodwill of the busi-
ness, (b) as would render the continuation of the ordinary business im-
possible, (c) sell at one time all the partnership property, unless it con-
sists entirely of merchandise, (d) confess a judgment, (e) submit a part-
nership claim to ai-bitration, and (f ) assign any or all of the partnership
propej'ty to a creditor, or to a trustee for the benefit of one or more
crecUtors.^^

Articles of Copartnership — The leading features which should be pro-
vided for in the articles of copartnership are (a) date of commencement,
(b) parties, (c) nature of business, (d) location of biisiness, (e) firm name,
(f) duration of partnership, (g) individual investments (if other than
cash, the basis of valuation should be stated), (h) rights and duties of
partners, (i) di\dsion of profits and losses, (j) salaries, (k) personal draw-
ings, (1) books of account, (m) auditing of books, (n) interest on invest-
ments and drawings, and (o) settlement at dissolution including valuation
of goodwill and possession of firm name."

General Partnership Rules — Unless specific provisions to the contrary
are contained in the articles of copartnership, or unless it can be proved
that the partners intended otherwise, the following rules prevail :

(a) Partners are entitled to interest on their advances and on payments
personally made foi- the benefit of the firm.''^

(b) Interest is not allowed on investments.'"'

(d) Interest is not charged on money held by a pai-tner during liquida-
tion of partnership.'^

88 C. P. A. ACCOUNTING

(e) If no rate is mentioned, the legal rate of interest prevails in interest-
bearing transactions.™

(f) Profits and losses are shared equally.^

(g) Salaries are not allowed to partners.^

(h) All partners have an equal duty to keep books of account to which
each has free access.*^

Partners' Proprietorship Accounts — The capital accounts of a partner-
ship record the difference between the assets and liabilities of the business."
The components of the equity of partners are sometimes classified thus:"

Negative Positive

Deferred Debit Items Deferred Credit Items

Drawing Account (Debit Balance) Drawing Account (Credit Balance)

Undivided Profits

This classification, however, differs from the ordinary one in that de-
ferred charges and credits to income are considered to be capital items
instead of assets and liabilities, respectively.

The proprietorship accounts of partnerships may be divided into three
classes :

(a) Capital, or accounts which show the original investment plus the
profits left in the business minus withdrawals of capital, if the articles of
copartnership permit this to be done.** Where a partner has agreed to
invest a specific sum, his capital account should show this sum,^ and any
deficiency due to insufficient actual investment should be shown on the
books as a charge against the partner's personal account.^*

(b) Personal, or accounts which show the charges for losses, with-
drawals, or interest on same, and credits for additional investments, interest
on investment, salary, and profits." The personal account may be sub-
divided into a salary account and a di'awings account.^ Where charges
to a partner's personal account represent payments made in currency,
the auditor should have the partner approve the account as it appears in
the ledger,"

(c) Undivided profits accounts, or those representing the balance of the
profit and loss account which has not yet been allocated to the partners.*"

The proprietorship accounts of copartnerships appear in the appropria-
tion section of the profit and loss statements, as follows :"

Net Profit for Period remainder of statement

omitted) xxxxxxx

Appropriation:

Jones, Personal Account (3/5) xxxxxxx

Smith, Personal Account (2/5) xxxxxxx xxxxxxx

The partners' net worth accounts may be shown on the balance sheet
without detail, thus:"

Net Worth:

Jones, Capital xxxxxxx

Smith, Capital xxxxxxx xxxxxxx

PARTNERSHIP AT ORGANIZATION 89

If it is desired to show all elements of the proprietorship accounts of
the partners on the balance sheet, they would appear as follows:"

Net Worth:

Jones, Capital, Jan. 1, 1920 xxxxxxx

Share of net profits for 1920 xxxxxxx

Salary for 1920 xxxxxxx

xxxxxxx
Drawings for 1920 xxxxxxx xxxxxxx

Smith, Capital, Jan. 1920 xxxxxxx

Share of net profits for 1920 xxxxxxx

Salary for 1920 xxxxxxx

xxxxxxx
Drawings for 1920 xxxxxxx xxxxxxx xxxxxxx

Some accountants classify a partner's undrawn salary as a current
liability, and the debit and credit balances to a partner's drawing account
as a current asset and current liability, respectively.'" As a partner cannot
bring suit on these items and as the individual creditors of the partner
cannot consider such items as part of the partner's private estate until the
firm's debts have been paid, it seems preferable to list these items separately
under the net worth accounts.

Loans of Partners — A partner may loan money to his firm either by con-
tributing capital in excess of the amount agreed upon or by leaving his
profits in the business." These loans which may or may not be covered by
notes, are sometimes included in the ordinary capital accounts, but it is
preferable to show the amounts in special-loan accounts.*' Partners' loans
rank with equal status" after the claims of outside creditors and before
the ordinary proprietorship accounts in case of insolvency and dissolution
of the partnership.** Partners' loan accounts, like partners' undrawn
salary accounts, should be considered as net worth items rather than
liabilities. Unless specifically stated otherwise in the articles of copartner-
ship, partners' loans bear interest, and, if no rate of interest is specified,
the court will allow the legal rate.* If profits or losses are distributed on
the basis of capital invested, partners' loans are not counted as capital.*"

Opening Entry for Partnership Books — When a partnership agreement
is made and it is decided how much capital each partner should furnish,
the opening entry would be framed as follows :"

A, Personal Account xxxxxxx

B, Personal Account xxxxxxx

A, Capital Account xxxxxxx

B, Capital Account xxxxxxx

Then when each partner contributes the capital agreed upon, the follow-
ing entries would be made :"

90 C. P. A. ACCOUNTING

Sundry Assets (itemized) xxxxxxx

A, Personal Account xxxx xx

Sundry Assets (itemized) xxxxxxx

Sundry Liabilities (itemized) xxxxxxx

B, Personal Account xxxxxxx

Guaranteed Assets — Sometimes a partner turns into the new fii-m assets
which he guarantees to be worth the value assigned to them. Upon subse-
quent default the loss must be borne by the partner. The entry to be
made in case a guaranteed account receivable proved wortliless would be."

(Partner), Personal Account xxxxxxx

Accounts Receivable (Customer) xxxxxxx

Losses on assets accepted by the firm as of a certain value, without the
guarantee of the contributing partner, cannot be charged to that partner,
but must be charged to the firm's profit and loss account."

Buying Interest in Business — The purchase of an interest in the profits
must be distinguished from the purchase of a share in the business."
Assimiing that B wishes to purchase a half interest in the business of A,
whose net worth is $5,000, there are ten possible entries, viz. :

(a) If B pays into the business exactly book value of interest in busi-
ness purchased, the entry would be :"

Cash $5,000

B, Capital Account $5,000

(b) If B pays to A personally exactly book value of interest in business
purchased, the entry would be:"

A, Capital Account $2,500

B, Capital Account $2,500

(c) If B pays into the business less than book value of interest in busi-
ness purchased, without bringing in goodwill, the entry would be :**

Cash. $4,000

A, Capital Account 500

B, Capital Account $1,500

(d) If B pays into the business less than book value of interest in busi-
ness purchased but brings in goodwill, the entry would be :'"

Cash $4,000

Goodwill 1 . 000

B, Capital Account $5 , 000

(e) If B pays A personally less than book value of interest in business
l)urchased without bringing goodwill into the business, the entry would be."

A, Capital Accoimt $2 . 500

B, Capital Account $2 , 500

(f ) If B pays to A personally less (ban book value of interest in busi-
ness purchased but brings goodwill into the business, the entry would he :

Goodwill $1 ,000

A, Capital .\ccount 2 , 000

B, Capital Account $3 ,000

PARTNERSHIP AT ORGANIZATION 91

(j?) If B pays into the Jjiisiness more than book value of interest in
business purchased, the entry, if goodwill is eliminated, would be:"*

Ca»sh $6,000

A, Capital Account $500

B, Capital Account 5,500

(h) If B pays into the business more than ))ook value of interest in
business purchased, the entry, if goodwill is shown, would be :"'

Goodwill $1,000

A, Capital Account $1 , 000

Cash 6,000

B, Capital Account 6,000

( i ) If B pays to A personally more than book value of interest in busi-
ness purchased, the entry, if goodwill is eliminated, Avould be :""

A, Capital Account $2,500

B, Capital Account $2, 500

(j) If B pays to A personally more than book value of interest in
business purchased, the entry, if goodwill is shown, would be :"*

Goodwill $1 ,000

A, Capital Account $1 , 000

A, Capital Account 3 , 000

B, Capital Account 3,000

Buying Share in Profits — As profits are not necessaiily distributed
according to capital investments, all that is necessary to do, when a share
in the profits is purchased by the incoming partner, is to make the following
entry /'

Assets (itemized) xxxxxxx

(New Partner) Capital Account xxxxxxx

Audit of Partnerships — Having partnership books adjusted by profes-
sional accountants is especially important, because they will act impartially
and comply fully with the articles of copartnership, thus eliminating fric-
tion between partners.''" In the case of the limited partnerships, an inde-
jjendent audit is absolutely necessary for the protection of the limited
partners, who have no legal right to interfere with the active management
of the business."'

In an audit of a partnership, the partnership agreement should be called
for and very detailed notes taken of its contents."* An attempt should be
made to secui-e a certified copy for the auditor's permanent files.™

The auditor should conform to the spirit of the partnership agreement,
and where this is impossible, his first resort should be to interpret the
articles in the light of ordinary business practices, and this failing, to
seek assistance from the law of partnei'ships.'"

Joint Stock Companies — A joint stock company is a partnership whose
capital is divided, or agreed to be divided, into shares transferable without
tlie express consent of all the copartners."

Joint stock companies are created by contract." In some states a cer-
tificate of association containing the name of the joint .stock company.

92 C. P. A. ACCOUNTING

the date of its organization, the number of its stockhoklers, the names
and residences of its directors, and the principal place of business must
be tiled with the Secretary of State."

Joint stock companies are governed by directors, the members not being
agents as is the case in partnerships.'* The legal relation of the members
to the company, and the liability of members to creditors is practically
the same as in partnerships."

Joint stock companies are not terminated by transfer of shares, bank-
ruptcy or death of members, or war, but terminate on lapse of period
shown in articles of association, on bankruptcy of company, on dissolution
by court, or if all shares are owned by same member."

PAKTNKRSrilP AT ORGANIZATION 9:}

QUESTIONS

PARTNERSHIP AT ORGANIZATION

1. Explain fully a partnership. (Pa., Nov., 1903; Iowa, Dec, 1918.)

2. Explain fully a limited partnership. (Pa., Nov., 1903; Iowa,
Dec, 1918.)

3. What is a joint stock company'? (Iowa, Dec, 1918.)

4. Define: Partners' Capital account. (Wash., Nov., 1913*; Wash.,
July, 1917.)

5. Give an example of opening the books of a partnership, using
your own figures. (Pa., Nov., 1903; Iowa, Dec, 1918.*)

G. Give an example of opening the books of a limited partnership,
using your own figures. (Pa., Nov., 1903.)

7. Give the necessary books and papers in a partnership. (Pa.,
May, 1902; Mich., July, 1906.*)

8. Explain the ways in which the books and accounts kept by a firm
conducting any line of business would differ from those of an individual
conducting the same business. (Mich., June, 1913; Mich., Dec, 1914.*)

9. Wherein do the books of a copartnership differ from those of a
corporation in the same line of business? (Mich., Nov., 1907.)

10. What points should be covered in a partnership agreement?
(Mich., June, 1910*; 111., May, 1913; Del., June, 1915.)

11. What is the value of the partnership papers and what effect have
they in opening and closing of books? (Pa., Nov., 1901.)

12. What records and documents should an auditor have access to
in an audit of a partnership? Give reasons. (N, Y., Jan., 1901*; Pa.,
May, 1902*; Kan., May, 1916.)

13. In making an audit of a partnership, what information of im-
portance would an auditor get from the partnership agreement (a) in
determining the partners' profits; {b) in determining the partners' in-
terest in business? (Md., Oct., 1903*; N. Y., Jan., 1916*; Mass., Oct.,
1917.)

14. How would you organize a set of books for a partnership?
(Ohio, Dec, 1908.)

15. In arranging accounts for a partnership, how should original
capital be treated? (Fla., July, 1909.)

16. In auditing the accounts of a private firm where there are several

94 C. P. A. ACCOUNTING

partners, to what points should the auditor look in order to be assured
that the partnei''s accounts are correctly stated in the Balance Sheet?
(N. Y., June, 1899; N. Y., June, 1902*; Wash., March, 1909*; Ind., June,
1916.*)

17. Name some of the distinctive elements in an audit of partnerships.
(N. C, June, 1916.)

18. Analyze and discuss the following clause taken from a certain
partnership agreement :

"VIII. And it is further agreed that the said party of the second part
is to pay to the said party of the first part the sum of three thousand
dollars ($3,000) ; for which the said party of the second part shall receive
a one-third (1/3) interest in said business of the said party of the first
part."

(N. Y., Jan.. 1917.)

19. In making a general audit of a Minnesota corporation of which
C. D. Boyd is secretaiy and manager, you find among its papers what
appeal's to be a contract of partnership between it and George Owens,
signed respectively by Owens and by C. D. Boyd for the corporation,
but not witnessed as to either signer and without the seal of a corporation.
No other papers concerning this arrangement are on file, but the Ledger
shows a cash charge to the partnership for the amount of capital required
to be contributed, by the corporation, to the partnership.

In making your report how will you treat this transaction, both as to
the initial payment and any unstated accrued results of the partnership
from its commencement down to the date of your audit ?

(Minn., Oct., 1916.)

PARTNEHSTTIP AT OHfJAXTZATTOX 95

PROBLEMS

PARTNERSHIP AT ORGANIZATION

1. "A" has $5,000 invested in a business. He sells "B" a half interest
for $2,000 an^ places the money in the business. Make the entry. (N. Y.,
Dec, 1898*; Pa., Nov., 1903*"; Mich., Nov., 1907*; Wash., Aug., 1908*;
Mich., June, 1915.)

2. "A" has .$5,000 invested in a business. He sells "B" a half interest
for $3,000 and keeps the money. Make the entry. (N. Y., Dec, 1898*;
Pa., Nov., 1903*; Mich., Nov., 1907*; Mich., June, 1914.)

3. "X" and "Y" bought merchandise to the amount of $12,000. "X"
contributed $7,500; "Y" $4,500. They afterwards sold "Z" a one-third
interest for $6,000. How much of this amount should "X" and "Y"
receive respectively in order to make "X," "Y" and "Z" equal partners,
assuming (a) money paid into business with no goodwill; (b) money paid
into business with goodwill; (c) money not paid into business? (N. Y.,
June, 1914.*)

4. Two partners, Wilson and Peters, find at the end of the first year's
business that the Balance Sheet shows Wilson's interest to be worth $18,000
and Peters' $9,000. The goodwill of the firm is worth $3,000. Each
partner draws profits in proportion to his investment,

Thej' conclude to take in another partner and to give him a one-quarter
interest in the new firm. What sum must the new partner contribute?
How will the partnership accounts appear after the payment in of the
new capital? How will the profits be divided? (Cal., May, 1903.)

5. "A" and "B" enter into a partnership and will share profits in the
proportions indicated by their investments. "A" furnishes $25,000 and
"B" $15,000, which is invested in lands and buildings, $10,000, and
merchandise $30,000. However, before they have actually commenced
business, "C," realizing that "A" and "B" have a promising venture,
offers to buy a one-third interest in the business for $20,000. "A" agrees
to sell provided "B" will consent to pay him a bonus of $4,000 out of his
("B's") share. This "B" agrees to do and consents to the sale.

How should the $20,000 be divided between "A" and "B" so that the
interest of all three partners will be equal? (111., May, 1914.)

6. "A" and "B," each carrj'ing on a similar business, agree to form a
partnership under the name of "A and B" and that the new firm should
take over the assets of each partner in the business, and assume liabilities
of each.

The following trial balances were presented by each of the partnerships
on commencing business:

1)G

C. P. A. ACCOUNTING

Capital

Machin ry and Fixtures . .

Cash

Bills Receivable

Book Accounts Recei. able
Inventory Merchandise. . .

Wages

Unpaid wages

Expense Account

Bills Payable

Suspense Account

Merchandise Account ....
Book Accounts Payable . .

Repairs Account

Rentals

Rent

$20,000

$35,000

$25,0(X)

$45,500

4,000

8,000

3,000

3.000

20,000

25.000

10,000

15.000

2.000

4,000

500

3,000

15,000

18,000

20,000

26,000

1,000

3,000

26,000

35,000

15,000

25,000

2,000

3,000

1,000

1.000

500

$82,500

$125,000

Formulate the opening entries for new partnei-ship. (Pa., Nov., 1906.)

7. "A" and "B" carried on business in partnership and divided profits
and losses in proportion to their capital, three-fifths and two-fifths, re-
spectively. On January 1, 1915, "A's" capital was $52,500 and "B's",
$35,000, as shown by a Balance Sheet of that date. They agreed to admit
"C" as a partner from the same date on the following terms: (1) Assets
and liabilities and capital to be taken as shown in the Balance Sheet;
(2) $12,500 to be added to the assets for goodwill; (3) the amount of
goodwill to be added to "A's" and "B's" capital in the proportion in
which they divide profits; (4) "C" to pay to the partnership such a sum
as will give him a one-fifth share in the business.

(a) State what amoimt of capital "C" has to bring in. (b) Set out
the Capital accounts of each partner in the new partnership; and (c)
state in what proportions the profits will be divided in the future, "A"
and "B," as between themselves sharing in the same proportions as before.

(Wash., May, 1916.)

8. "A" and "B," who had hitherto been in business separately, decide
to enter into partnership on July 1, 1905. The Balance Sheets of "A" and
"B" were on that date as follows :

Liabilities

Accounts Payable

Capital Account

$1,000
5,000

$1,500
3,000

Assets

Furniture

Accounts Receivable
(face value)

$750

2,500

2,550

200

$600
1,500

Merchandise

2,000

Cash

400

$6,000

$4,500

$6,000

$4,500

PARTNERSHIP AT ORGANIZATION

It was agreed that "A" and "B" should take over their respective
Accounts Receivable at $200 and $150 less than the face values shown in
the Balance Sheets, these amounts to be charged against their Capital
accounts and carried on the partnei-ship books as a Reserve for Bad
and Doubtful accounts. Of "B's" furniture only $250 was to be taken
over by the partnership. With the above exceptions the assets and lia-
bilities of the 'parties were to be taken over by the partnership at the
Balance Sheet figures, except that "B" was to invest in the partnership
in cash, a sum which, after making the adjustments above referred to,
would make his Capital account the same as that of "A."

Draw the Balance Sheet of the "A" and "B" partnership on July 1,
1905, giving effect to the foregoing provisions.

(Wash., April, 1906.)

9. New, Knott and Moore are partners, sharing profits in the pro-
portion of their investments. On December 31, 1915, the Balance Sheet
of the partnership is as follows :

Cash $18,000

Other Current Assets 23,000

Fixed Assets 20,000

$61,000

Accounts Payable $1,000

Moore Capital 24,000

New Capital 24.000

Knott Capital 12,000

$61,000

Moore decides to retire from active business and agrees to sell his
interest to the other two partners for $26,400, taking $14,400 in cash
and the balance in three equal instalments payable July 2, 1916, January
2 and July 2, 1917, evidenced by notes payable.

The business is very prosperous, but it becomes increasingly evident that
more capital is required, especially in view of the approaching maturity
of the first note given to Moore. New and Knott decide to admit John
Less as partner as of date July 1, 1916, at which time the current assets
have increased by $16,000, accounts payable by $10,000 and the partners'
Capital accounts by $6,000. They value the goodwill at $12,000.

Less buys a one-third interest, but stii^ulates that all he pays must
remain in the business and that the goodwill shall not appear upon the
books.

How much must he pay for the one-third interest ? Present the Balance
Sheet of the firm of New, Knott and Less as of date July 1, 1916. (Ig-
nore accrued interest on Moore notes.)

(Cal., May, 1916.)

10. January 1, 1913, "A" and "B" signed articles of copartnership
to engage in a mercantile business, agreeing to invest $15,000 and $25,000
respectively. Profits were to be divided in proportion to capital eoo-
tributed, and interest at 5 per cent was to be allowed on investments in
excess of the agreed contributions and was to be charged on deficits under
the agreed contributions.

The trial balance of their books on December 31, 1913, was as follows:

C. p. A. ACCOUNTTNG

Purchases

Office Expense

Real Estate

Building

Accounts Receivable

Cash on Hand

Notes Receivable

Furniture and Furnishings

Discounts Earned

Accounts Payable

Salaries and Wages

Notes Payable

Sales

$60,000

1,000

5,000

10,000

12,000

1,000

.8,000

2,000

4,000

$1,000
7,000

4,000
55,000

9,000
27,000

The merchandise on hand is valued at $10,000.

After allowing for interest on invastments, divide the net profits ac-
cording to the agreement. Give the Capital accounts of each partner
and the Balance Sheet as of January 1, 1914.

On this date a third party, "C," desired to enter the partnership, and it
was agreed: (a) That "C" pay $9,000 in cash for a one-fourth (i/4) interest
in the new concern; {b) that goodwill of "A" and "B" be valued at $3,000;
(c) that "A" and "B" adjust their capitals so that they hold a one-fourth
(1/4) and one-half (Yz) interest, respectively, in the new firm; (d) that
profits and losses are to be divided according to capital eontnbutions.

In the adjustment, "A" received cash (out of the $9,000 paid in by
"C") for his excess investment, while "B" received the remainder of the
$9,000 paid in by "C" and the balance due him was considered a loan to
the partnership.

Give Journal entries necessary to record the above facts and the opening
Balance Sheet of the new firm.

April 1, 1914, "A," "B" and "C" agreed to sell the business. Ui> to
this time each partner had withdrawn $500. The assets were disposed of
for $24,500 cash, and the vendee assumed the liabilities of the partnersliip.
How should this sum of $24,500 be divided among the partners? Show
the exact relation of the partners to one another by accounts or statements.

(Wis., April, 1914.)

11. The firm of "A" and "B" have the following statement :

Store $15,000

Accounts Leceivable. 12,000

Cash 9,000

Furniture and Fixtures 2,800

Merchandise 37,000

Miscellaneous Equipment. . . . 4,200

$80,000

Accounts Payable $10,000

BillsJayable 5,000

A, Capital 30,000

B, Capital 35,(X)0

$80,000

"C" is admitted as a special partner with the following arrangement:
"C" to contribute $30,000 and to be entitled to one-third of the profit for

PARTNERSHIP AT ORGANIZATION 90

one year. Before making the contribution, the following changes to be
made in the books: Store to be marked down 5 per cent; allowance for
doubtful accounts to be created amounting to 2 jier cent; merchandise to
be revahied at $35,000; furniture and fixtures to be valued at $2,500. At
the end the amount of goodwill to be fixed at three times the net profits
for the year in excess of $20,000, this goodwill to be set up on the books,
the corresponding credit being to "A" and "B" equally — "A," "B" and
"C" each to draw $3,000 in cash, the remaining profits to be carried to
their Capital accounts.

During the year the following transactions took place: Merchandise
bought on credit, $240,000; cash purchases, $25,000; cash sales, $125,000;
sales on credit, $175,000; accounts payable paid (face, $245,000, discount
2 per cent), $240,100; accounts receivable collected (face, $170,000, all
net except $50,000, on which 2 per cent allowed), $169,000; buying ex-
penses, paid cash, $1,500; selling expenses, paid cash, $21,000; delivery
expenses, paid cash, $9,000; management expenses, paid cash, $4,500;
miscellaneous expenses, paid cash, $3,000; interest on notes payable, paid
cash, $250; partners each withdrew $3,000 cash as agreed.

In closing the books for determining profits and goodwill, the following
were agreed upon : Value of merchandise on hand, $60,000 ; depreciation
on store, $285; additional allowance for doubtful debts, $165; furniture
and fixtures written down, $200.

Goodwill having been estimated and duly entered, "C" then contributes
enough cash so that his Capital account equals just one-third of the total
capital.

Prepare statements showing how the accounts are to be adjusted and
the balance sheet after the final adjustment,

(A. I. of A., June, 1917.)

12. "Y" and "Z" are partners, drawing equal amounts for services and
sharing profits in accordance with capital investment, after allowing 5
per cent on capital. In order to acquire additional capital they agree
to admit "X" to the firm, who is to own a one-fourth interest in the
business. According to the balance sheet, "Y" has $8,000 and "Z," $4,000
invested. Goodwill is valued at $4,000. What sum must "X" contribute?
How will partners' accounts appear after payment into the firm of "X's"
capital, and how will future profits be divided? Show the accounts in
skeleton form. (Ind., Jan., 1916.)

13. John Jones, William Brown, and Alexander White are partners in
a business, their respective interests in the profits of the business being
five-tenths, four-tenths, and one-tenth. It is agreed between the partners
that Mr. Jones's son be taken into the business as at January 1, 1916, on
the understanding tliat White's interest in the business be increased to
12 per cent, which increased share is now considered to be applicable to
the four previous years, while the shares of Mr. Jones and Mr. Brown
are to be 40 per cent and 39 per cent, respectively, while Mr, Jones's son
is to be given 9 per cent interest in the profits of the business. It is
further ajrreed that the value of the goodwill of the business, amounting to

100 C. p. A. ACCOUNTING

$50,000, be set up on the books. This amount is to be divided between
Mr. Jones and Mr. Brown in proportion to their original interests in the
profits. Mr. Jones is to transfer the sum of $6,000 to his son's credit,
which wiir be in addition to the sum to be allowed him out of profits of
previous years. The profits divided during the four years to December
31, 1915, were as follows: 1912, $41,030; 1913, $49,000; 1914, $52,000;
1915, $48,000; total, $190,030.

The balances at credit of the Capital accounts at December 31, 1915,
were, John Jones, $230,310 ; William Brown, $185.112 ; Alexander White,
$21,809.

Prepare a detailed statement showing the balances at credit of the
various partners on January 1, 1916, after giving effect to the provisions
of the new partnership agreement as above indicated. Ignore any question
of interest.

(111., May, 1916.)

CHAPTER VI
PARTNERSHIP DURING OPERATION

Division of Profits — In the absence of a specific agreement to the con-
trary, all profits are shared, and all losses are borne, equally among part-
ners/ The partners, however, may agree that profits and losses be divided
according to (a) original investments,'' (b) net investments/ (c) average
investments,* and (d) arbitrary ratios/

For an ilhistration of these four methods of distributing profits, assume
that Jones and Smith, whose proprietorship accounts are given below,
made a net profit of $6,000 f<n' the year ending December 31st :

Jones, Capital Account

I January 1 $10,000. GO

Jones, Personal Account

May 1 $1,000.00 i Oct.! $1,000.00

June 1 1,000.00 |

Smith, Capital Account

I January 1 $5,000.00

Smith, Personal Account

Feb. 1 $1,000.00

Mar. 1 1,000.00

Aug. 1 2,000.00

Nov. 1 $2,000.00

Dec.l 3,000.00

If the profits are divided according to original investments, Jones would
receive two-thirds, and Smith one-third of the net profits, or $4,000 and
$2,000, respectively, as they contributed the original capital of $15,000
in the ratio of 2 to 1.

If the profits are divided according to net investments, Jones and Smith
would receive profits according to their net investment at the end of the
period, viz., capital accounts together with personal accounts. Jones
then would receive 9/15 of $6,000, or $3,600, while Smith would receive
6/15, or $2,400.

If the profits aie divided according to average investments, the basis
of profit-sharing would be the amount of capital furnished by each partner
and the duration of its use in the business. There are two methods of

'For explanation of superior figures see page 337.

101

102

C. P. A. ACCOUNTING

determining this basis, which may be calculated either on the day-dollar
or month-dollar basis.

The first method, illustrated below, in finding Jones' average invest-
ment, multiplies each investment and withdrawal by the number of months
elapsing between date of transaction and date of profit determination, the
difference between the month-dollars for the investments and the with-
drawals showing the average investment in terms of month-dollars."

The second method, illustrated below in finding Smith's avei-age invest-
ment, calculates the average investment in terms of month-dollars by
adding the products obtained by multiplying the net investments by the
number of months they remained unchanged.'

Both methods of calculating average investment necessarily are equally
accurate, but the second method is slightly preferable in that the "months"
column will always total the same as the length of the fiscal pei-iod, if each
partner had an investment at the start of the period,* and the last net
investment figure Avill always be the balance of the capital and personal
accounts of the partner,' thus giving two checks on the mathematical
accuracy of the calculation.

First Method (Jones) :

Amount

Months

Month
Dollars

Investments:

Jan.l

$10,000
1,000

1,000
1,000

8
7

120,000
3,000

Oct. 1

123.000

Withdrawals :
May 1

8,000
7,000

June 1

15,000

108,000

Second Method (Smith):

Investment

Months

Month
Dollars

$5,000
4,000
3,000
1,000
3,000
6,000

1
1
5
3

1
1

5,000
4,000
15,000
3,000
3,000
6,000

36,000

PARTNERSHIP DURING OPERATION 103

In distributing the profit of $6,000 on the basis of average investment,
Jones receives 108/144, or $4,500, while Smith receives 36/144, or $1,500.

Profits may be distributed without reference to investment." Indeed,
in some cases partners receive a share in the profits without having an
investment at all. This disparity between profit and capital I'atios is
usually due to one man having unusual skill or to the fact that one partner
devotes more time to the business than the others."

Interest on Capital — Allowing interest on partners' investments has no
effect when the capital and profit sharing ratios are identical, but, where
these ratios are dissimilar, it benefits the partner having the greater capital
at the expense of the partner having the smaller investment, and operates
to the detriment of the partner whose profit-sharing ratio is the greater
and benefits the partner with the smaller profit-sharing ratio."

The intei'est on investments is usually credited to the partners' personal
accounts," but there is little uniformity as to the debit entry, as sometimes
the profit and loss account'* is charged directly, while frequently either the
interest account" or the interest on partnership investments account" is
debited. The charge to the interest account is faulty, because the interest
account is commonly interpreted as the account reserved for interest pay-
ments between the firm and outsiders, while interest on capital affects
only the proprietors."

The adjustment between partners on account of interest on capital may
well be made by crediting each partner's personal account with the amount
due him, and then chai'ging the same account with its prorata share of
the total allowance made to all partnei's as interest on investments." For
instance, if A and B, whose profit and loss ratio is equal, are allowed $100
and $50, respectively, as interest on capital, the entry would be :

A, Personal Account $75. GO

B, Personal Account 75 . GO

A, Personal Account $100. 00

B, Personal Account 50. 00

or, showing only net results :

B, Personal Account $25. 00

A, Personal Account $25. 00

The interest on capital investment is sometimes treated as a financial
expense,'' and at other times as an allocation of profit." The latter treat-
ment seems preferable, unless the articles of copartnership require interest
on investment to be treated as an expense.

Interest on capital must be considered, if provided for in the articles
of copartnership, even though there are not enough net pi'ofits to satisfy
these requirements."^

There is no complexity in the calculation of the amount of interest to
be allowed on investment, when it is allowed on either original investment
or net investment. However, the calculation is quite complicated when
interest is allowed on the average investment. The two methods of eal-

104 C. P. A. ACCOUNTING

culating the interest to be allowed on average capital given below use the
Jones, Capital Account, and Jones, Personal Account, shown on page — .

First Method:

Interest on Investment:

$10,000.00 for 12 mo. @ 6%=
1,000.00 for 3 mo. @ 6%=

Interest on Withdrawals :

$1,000.00 for 8 mo. @ 6%=
1,000.00 for 7 mo. @ 6%=

Interest to be allowed

$600.00
15.00

$40.00
35.00

$615.00

75.00

$540.00

Second Method:

Investment

Months

Dollar
Months

$10,000
9,000
8,000
9,000

4
1
4
3

40,000

9,000

32,000

27,000

108,000

$108,000.00 @ 6% for one month =$540.00.

The second method is much simpler in the cases which occur in actual
practice, where an uneven number of days must be used in the calculation.

Interest on Excess or Deficit of Capital — Interest allowed to a partner
on excess capital is really interest on borrowed money, while the interest
charged a partner for a deficit of capital is an income offsetting the
interest the firm probably has to pay on money borrowed to operate the
business.^^ Therefore, interest on excess or deficit of capital is an item
to be entered into the profit and loss account through the interest account."

A, B, and C, partners sharing profits and losses equally, agreed to
furni.sh $20,000 each with interest on an excess or deficit of capital to be
figured at 6%. If they actually contributed $25,000, $20,000, and $10,000,
respectively, the entry for the adjustment between partners would be :

C, Personal Account (6% on $10,000) $600. 00

A, Personal Account (6% on $5,000) $300. 00

Interest Account 300 . 00

Interest Account 300. 00

A, Personal Account 100. 00

B, Personal Account 100. 00

C, Personal Account 100. 00

PARTNERSHIP DURING OPERATION

105

Some accountants diiTei* from the above method of treating interest on
excess or deficit of capital, considering it merely an adjustment between
proprietors."

Interest on Drawings — Interest can not be charged on drawings unless
the articles of copartnership so provide." The intention to charge such
interest can not be implied even if interest is allowed on investments, as
partners' drawings should be regarded as drafts on accruing profit rather
than on initial investment.™ Interest also can not be charged if the part-
ners allow one partner to draw more than the amount stipulated in the
agreement, unless interest was agreed upon at the time of the overdraft."
Partners' drawings are charged directly against their net worth accounts
and not against the profit and loss account.^*

Partners' Salaries — Adjustment for variation in the ability or activity
of partners may be made by compensating the more skilled or more active
partners by salaries.^' Salaries are not allowed to partners unless the
articles of copartnership so provide.^" Salaries of partners are some-
times treated as administrative expense,^ and sometimes as allocations of
profit,^^ the latter treatment seeming pi-eferable. Partners' salaries must
be considered, if provided for in the articles of copartnership, even though
there are not enough net profits to satisfy these requirements.^

Tabular Form of Partners' Accounts — While the capital accounts of
partners are in the regulation ''T" form in the ledger, it is customary to
present these accounts in tabular form when the detail of the accounts is
desired in a schedule or report." This tabular form gives one money
column for the combined capital and personal accounts of each partner.
The following is a simple example :

Total

Original Investment

$15,000.00
5,000.00
1,500.00

$10,000.00
3,000.00
1,000.00

$5,000.00

Salaries

2,000.00

Interest on Investment

500.00

Drawings

$21,500.00
7,500.00

$14,000.00
4,000.00

$7,500.00
3,500.00

Profits in Excess of Interest and
Salaries

$14,000.00
10,000.00

$10,000.00
5,000.00

$4,000.00
5.000.00

New Capital

$24,000.00

$15,000.00

$9,000.00

106 C. P. A. ACCOUNTING

QUESTIONS

PARTNERSHIP DURING OPERATION

1. Give a rule for ad.jusiing partners' accounts: (a) when the gains or
losses are to be divided in proportion to each partner's investment and the
time it remains in use; (6) when the proportion of gain or loss is fixetl,
and interest is calculated on excess or deficit of capital. (N. Y., Jan.,
1901; W. Va., May, 1917.)

2. Ex])lain a method for apportioning the profits or losses of a partner-
ship, where the partners may make additional investments or withdrawals
during the year. (N. D., June, 1914.)

3. In arranging accounts for a partnership, how should increases to
capital be treated? (Fla., July, 1909.)

4. In arranging accounts for a partnei*ship, how should accumulated
profits of each partner be treated? (Fla., July, 1909.)

5. In case of a partnership, how would you dispose of the balance of
the profit and loss account? (Mich., Dec, 1906*; N. Y., Oct., 1907; R. I.,
Dec., 1907.)

6. Where do a joint stock company and a copartnership differ in
method of profit distribution? (N. Y., June, 1909.)

7. How is the profit of a cooperative association divided? (Mich.,
Dec., 1906.)

8. Upon the audit of the partnership accounts of a manufacturing
business the following condition is revealed : A loan to the firm has
been credited by mutual consent to the capital account of one of the
partners. What would you deduce from this fact, and what would you
feel called upon to do? (Kan., May, 1916.)

9. How should the auditor deal with the ledger accounts of pai'tners
(a) in the division of profits, (h) in the assessment of losses, (c) in case
a partner's drawings exceed the amount specified in the partnership agree-
ment, (d) in case a partner's drawings are less than the amount to which
he is entitled? (N. Y., June, 1901.) •

10. What distinction, if any, would you make as to salaries and draw-
ings of the partners in a partnership firm, as affecting profit and loss?
(Ind., Nov., 1917.)

11. Explain fully in what way, if at all, partners' salaries should enter
into Trading and Profit and Loss statements, with reason for inclusion or
exclusion. (N. Y., June, 1898*; N. Y., Jan., 1911; Mass.,- June, 1913*;
Kan., Mar, 1916.)

PARTNERSHIP DURING OPERATION 107

12. John Smith owns a painting and decorating' business, employing
twenty men. He is in active charge and prepares estimates and supervises
all the work. He draws no salary. You are asked to advise him relative
to the propriety of this procedure, and as to whether he should charge
a salary for himself, and how much, and if it should be regarded as a part
of his overhead expense or as a general administrative expense. (111., May,
1917.)

13. Explain fully in what way, if at all, partners' drawings should
enter into Trading and Profit and Loss statement, with reason for inclusion
or exclusion. (N. Y., Jan., 1911; Mass., June, 1913*; Kan., May, 1916.)

14. Classify the Interest on Invested Capital account properly, accord-
ing to the subdivision of assets, liabilities, proprietary interest, income and
expenses, under which it should be grouped. (Wis., Maj', 1919.)

15. "A," "B," and "C" are equal partners, eadi having subscribed
$5,000 to the partnership. "A" pays in $3,000, leaving .$2,000 still due
the partnership on his capital account. It is agreed for the present that
this $2,000 can remain unpaid, provided "A" pays interest on the same,
which he does. Later a dispute arises as to how this interest shall be
credited. "A" claims that it should be included with the earnings of the
business, the profits of which are to be divided equally among the three
partners. "B" and "C^' claim that this interest should be divided between
them only, as they fully lived up to their obligations under the partnership
agreement, while "A" had only partially done so. To what account should
the interest on the deferred payment be credited? (N. Y., June, 1913.)

16. In examining the partnership accounts of Black and Brown you
ascertain that the capital of $20,000 has been provided equally, and the
articles of partnership provide that if any excess capital is supplied
either partner, interest at the rate of 5 per cent per annum shall be
allowed. Black pays $5,000 additional and is credited at the end of the
year 5 per cent on same which equals .$250, which is debited to Brown.
State whether you consider this correct and give reasons for your answer.
(N. Y., June, 1898*; 111., Nov., 1908; Mich. ,'^ Dec, 1913.*)

17. What method should be pursued in adjusting interest on capital
among partners whose investments differ in amount? Give reasons for
such book entries as you would recommend in the premises. (N. Y., Jan.,
1904.)

18. Under what conditions may interest on partners' capital invested
in a firm be charged and cretlited to the partners' accounts in the absence
of an agreement to that effect under the terms of a partnership? (Mo.,
Dec., 1914.)

108 C. P. A. ACCOUNTING

PROBLEMS

PARTNERSHIP DURIXG OPERATION

1. "A," "B," and "C" are partners. "A" is to receive a salary of
$2,000 per annum; "B" $2,500 and "C" $3,000. The balance of profits
after payment of salaries is to be divided as to the first $20,000, 2/3 to
"A," and 1/6 each to "B" and "C" ; and profits above $20,000 are to be
divided equally among the three. "A" retires from active business, and
gives up his right to salary for 1906. The profits for the year, before
charging salaries, amount to $35,000. To what extent are "A," "B," and
"C," respectively, affected by "A's" concession? (Fla., April, 1907.)

2. Jones and Johnson form a copartnership, January 1, 1909, each in-
vesting $10,000 ; April 1, Jones pays in an additional $2,500, and Johnson
draws out $1,500. August 1, Johnson pays in $3,000 and Jones withdraws
$1,000. The profits for the year ending December 31, 1909, are $5,000.

Prepare statements showing each partner's investment and portion of
profits, the profits being divided in proportion to capital invested and the
time it is employed.

(Ind., June, 1916.)

3. "A" and "B" form a partnership, "A" investing $30,000 and "B,"
$50,000. They agree to share expenses, profits and losses equally. They
further agree to and do leave their original investments intact. At the
end of the first year, the pi-ofits from the operations of the business amount
to $30,000, against which "A" has drawn in twelve equal monthly install-
ments on the last day of each month an aggregate amount of $9,000. "B"
has drawn against his profits on the last day of each quarter the sum of
$2,500.

Prepare Journal entries adjusting interest at 5 per cent per annum
between the partners in respect to both their investment and drawing ac-
counts and render statements showing the amount each partner has in the
business at the end of the year.

(Mass., June, 1912.)

4. The capital of three partners, "A," "B," and "C," in a manufactur-
ing business January 1, 1896, was $26,000, of which "A" owned 1/5, "B"
2/5, "C" 2/5. On December 31, 1896, one year thereafter, the condition
was found to be as follows: Real Estate, $15,000; Plant and Machinery,
$7,000; Stock on hand, $2,000; Book Debts Receivable, $6,000; Cash in
Bank, $2,500 ; Creditors' Notes Payable, $8,000 ; Partners' Withdrawals—
"A" (including interest), $1,500; Partners' Withdrawals— "B" (including
interest), $1,200; Partners' Withdrawals— "C" (including interest), $2,000.

PARTNERSHIP DURING OPERATION 109

After crediting up interest on Capital at the rate of 6 per cent, show
the net result for the year, and distribute the same, in proper proportions,
to the partners' accounts.

Prepare individual partners' accounts, showing the condition of each at
the end of the year.

(Mass., June, 1910.)

5. "A" and "B," partners, finding themselves in want of further capi-
tal in their business, and both being possessed of real property, "A" de-
posited deed with the bankers of the firm as security for a loan of $2,000
to the firm. "B" arranged on some of his own property a mortgage for
$1,500 with a private friend and paid the proceeds into the firm's bank
account. The bankers were eventually obliged to realize the security held
by them which produced, after payment of all expenses, the sum of
$2,850.

Prepare entries recording these transactions in the firm's books.

(Mass., Oct., 1916.)

6. "A," "B," and "C" agree to start in business with a capital of
$200,000, of which "A" is to^furnish $100,000 and "B" and "C," $50,000
each. "A" is to have one-half interest in the business and "B" and "C,"
each one-quarter. Interest at 5 per cent is to be credited on excess, or
charged on deficiency of capital. "A" contributes $100,000; "B," $45,000;
and "C," $40,000. How would the capital accounts stand on the books
after adjusting the interest at the end of the year? (N. Y., Dec, 1898.)

7. "A" offers to take "B" into partnership on equal terms, upon pay-
ment by "B" of a premium of $12,500 but as "B" is unable to pay the
money for three years, the following arrangement is agreed upon. The
profits are to be divided in the proportions of two-thirds to "A" and one-
third to "B." "B" will draw one-third of his share of the profits, leave
one-third in the business, and hand over the remainder to "A" in part
payment of the premium as above.

The profits for the first three years are as follows : First year, $8,000 ;
second year, $10,000; third year, $11,000.

Draw up the partnership accounts for these three years, and show the
amount due from "B" to "A" at the end of the period.

(Wash., May, 1910.)

8. "A" having a capital of $10,000, took "B" into partnership on
condition of his bringing in $5,000, In ascertaining profits each year,
"A" was to have $3,000 salary and "B" $1,500 and 5 per cent interest
upon capital was to be allowed to each partner, but no interest charge was
to be made on withdrawals. The profits thereafter were to be divided:
Up to $9,000, two thirds to "A" and one third to "B," any excess equally.

No limitations as to withdrawals in anticipation of profits were shown
in the deed of partnership and at the end of the first year "A" had drawn
$3,000, and "B" $750 in excess of their salaries. The profit for the year,
before making the above charges, amounted to $17,500.

Complete the Profit and Loss account and show the partners' accounts
as they should appear. (Wash., Sept., 1907.)

110 C. p. A. ACCOUNTING

9. "X" and "Y" enter into partnership. "X's" capital being $20,000
and "Y's" $15,000. Capital is to bear interest at 10 per cent per annum ;
profitB are to be divided equally between the parties. The profits for the
first two years (after chargins: interest on eapi(al) were: First year,
$6,000; second year, $7,500. The drawings of the partners (in excess
of salaries) were: First vear, "X." $1,500; "Y," $1,200; and second
year, "X," $1,750; "Y," $1,500.

At the end of the second year "Z" was admitted to partnership, and put
into the business the same amount of capital as "Y" had in the business
at that time, and on the same conditions as to interest and division of
profits. The profits of the business for the third year were $12,000, and
the partners' drawings in excef.s of salaries were: "X," $1,750; "Y,"
$1,600; "Z." $1,500.

Construct the Capital accounts of the partners for each of the three
years, showing the balance on each at the end of the third year.

(Wash., April, 1906.)

10. "A," "B," and "C" formed a partnership. "A" agreed to furnish
$10,000, "B" and "C" each $7,000. "A" was to manage the business and
receive one half of the profits; "B" and "C" were each to receive one
fourth. "A" supplied merchandise worth $8,500, but no additional cash.
"B" turned over to "A," as managing partner, $9,000 cash and "C" turned
over $5,500. The business was conducted by "A" for some time, but with-
out keeping exact books. While managing the business "A" purchased
additional merchandise amounting altogether to $75,000 and made sales of
$100,000. The cash received and paid out for the partnership was not
kept separate from "A's" personal cash. In order to straighten out mat-
ters, "B" took over the management. lie found receivables amounting to
$20,000 and of these he collected $4,500. The merchandise still on hand
he sold for $500. These receipts he deposited in a bank to the credit of
the firm. The remaining accounts proved worthless. The outstanding
accounts payable amounted to $2,000 of which $1,500 bad been incurred
in purchasing merchandise and $500 for expenses. These accounts he
paid. "A" presented vouchers showing that during his management he
had paid other expenses of $2,400. By mutual agi-eeraent "P."' was held to
be entitled to $100 on account of interest on excess capital contributed and
"A" and "C" were to be charged $75 each for shortage in contribution of
capital.

(a) Prepare Trading and Profit and Loss accounts and accounts of
each of the partners, indicating the final adjustment to be made in closing
up the partnership.

(b) ShoAv how the above final adjustment would be modified if "A"
proved to have no as.sets or liabilities outside the partnership.

(A. I. of A., June, 1917; Ind., Nov., 1917.*)

11. John Jones and Samuel Smith go into the hardware business
January 1, 1910, investing as follows: Jones, $23,874; Smith, $19,228.50;
total $43,102.50.

Within the year Jones draws out for private use over the additional in-

PARTNERsnrp DuruNa operation 111

vestment made by him $7,863; Smith draws out over investments
$10,057.30. A year later Jones makes additional investments from private
sources, and over and above the amount drawn out for private use,
$11,269.70. Smith also invests over amounts drawn out for his private
use $4,732.60. At the end of the year lOU they make the following state-
ment of assets and liabilities:

Assets

Merchandise

$27,860.00
10,246.00
12,354.30
16,452.00
10,000.00
5,324.70

Liabilities

Bills Payable

Personal Accounts

Firm owes John Jones .

$20,480.00

16,553.40

3,406.70

Cash on Hand

Personal Accounts Due .

Bills Receivable

Real Estate

Samuel Smith owes firm.

$82,237.00

$40,440.10

By agreement they are to divide the plains or losses pro rata according
to investment at the commencement of business, the partner of the small
investment not paying to the other partner any interest upon the differ-
ence of capital.

Show the Drawing account and Investment account of each and the net
investment or worth of each partner and also of the firm at December 31,
1911.

(Wash., June, 1912.)

12. H. Pratt, F. Jones and J. Todd entered into partnership on July 1,
1914. Pratt brought in as capital $15,000; Jones, $10,000; and Todd,
$5,000. They were to share profits in the proportion of one-half, one-
third, and one-sixth, but as Jones and Todd were the working partners,
they were to be credited at the close of each current year, by way of salary,
with the respective sums of $1,250 and $750. Pratt was to be allowed to
draw each year, as against profits, $2,500; Jones, $1,650; and Todd,
$1,250; interest at 6 per cent was to be charged on such drawings. The
partnership agreement also provided that Jones and Todd should have the
right to bring in extra capital not exceeding $8,000 each, and that upon
such capital they were to be credited with 6 per cent interest. Upon
closing the books on June 30, 1915, it was found that the partners had
drawn as follows:

Pratt

Jones

Todd

Sept. 1 .
Nov. 1 .
Dec. 1 .

.... $500.00
... 760.00
... 1,000.00

Aug. 1 $400.00

Sept. 1 350.00

Oct. 1 500.00

Dec. 1 400.00

Aug. I .
Sept. 1.
Nov. 1.
Jan. 1. .

$300.00
250.00
400.00
100.00

On October 1, Jones brought into the business as additional capital the
sum of $1,200 and Todd $2,000. On closing the books at June 30, 1915,

112 C. P. A. ACCOUNTING

and before the salary or interest to partners had been dealt with, the
balance to the credit of Profit and Loss stood at the sum of $13,000. Make
the closing entry and prepare Capital and Drawing accounts showing the
exact position of the partners on July 1, 1915.

(Wash., May, 1916.)

13. In making an audit of the books of the partnership of "A" and
"B" you find that the agreed division of profits was to be on the basis of
the capitals and of the time that they were left in the business.

The books show as follows: "A's" account paid in January 1, $6,000;
March 1, $2,000; June 1, $4,000; November 1, $1,000; withdrew April 1,
$3,000; October 1, $2,000.

"BV account, paid in January 1, $4,000; February 1, $1,000; August
1, $3,000; withdrew May 1, $2,000; December 1, $1,000. Prepare a state-
ment showing method of arriving at correct profit distribution.

(Ind., Nov., 1918.)

CHAPTER VII

PARTNERSHIP AT LIQUIDATION

Causes of Dissolution — Partnerships may be dissolved by (a) the with-
drawal of any partner, (b) sale of a partner's interest or admission of a
new partner, (c) lapsing of time limitations and completion of object
specified in partnership agreement, (d) mutual consent of the partners,
(e) misconduct, insanity, death, disability, assignment, or bankruptcy of
a partner, (f) illegality of object, (g) war between nations represented
by partners, (h) bankruptcy of the firm, and (i) sale and transfer of all
property of firm/ As a safeguard, it is important that all special reasons
which will dissolve the firm, be mentioned specifically in the articles of
copartnership."

Adjustment Upon Partner's Death — To avoid the necessity of taking
an inventory and an appraisal of all the firm's assets, the articles of
copartnership may provide for the continuation of the business and the
purchase of the interest of the deceased partner by the remaining partner/
In such cases, the deceased partner's share in the current period's profits
is usually the proration of the profits over the part of the period prior
to his death/ The deceased partner's estate is usually paid an allowance
for the deceased partner's share in the goodwill,^ and usually allowed
interest from the date of death until settlement is made/

Liquidating Partners — All partners have equal rights to share in the
work of liquidating the firm, but, as there is seldom sufficient work for
all, it is customary to appoint one partner (or an outside party) as
liquidator/ After the fact of the dissolution and name of liquidator have
been announced through the local newspapers, the liquidator proceeds to
sell the assets, fulfill the existing contracts and complete the partly manu-
factured goods/ If necessary, he may purchase such materials as are
needed to realize upon the assets/ The salary or commission of the
liquidating partner may be paid privately by the other partners" or by
the representatives of a deceased partner," but it is preferable, for record
purposes, to have the remuneration charged to the firm's liquidation ex-
penses/"

Value of Assets at Dissolution — The usual valuation rules used for going
concerns should not be followed when assets are appraised upon the
dissolution of a partnership/^ For instance, if a machine, whose estimated
life is ten years, cost $1,000 three years ago, it would be carried on the
books at $1,000 minus $300 (depreciation) or $700, in spite of the fact
that the selling price may have doubled. The machine would, however, be

'For explanation of superior figures see page 337.

113

114 C. P. A. ACCOUNTING

valued at its repi-oduetion value less aocnmulated depreciation on the date
of dissolution, say .$1,500, in calculating the retiiing partner's interest."

Liquidation of Uncompleted Contractu — The uncompleted contracts at
the dissolution of a jjartnership would be valued at market price, which
would approximate the cost of the work done plus that proportion of
the estimated profit on the completed contract that the cost of the work
done is to the estimated cost of the completed contract.

If the partners do not wish to estimate the profits on the contracts, the
books of the firm may be held open until the uncompleted contracts are
finished by one of the partners or by an outside fiim acting as the agent
of the partners. After the completion of the contracts, the assets would
be realized upon, the liabilities liquidated, and the profit on the contracts
distributed to the old partners."

Reserves at Dissolution — In eases where the interest of a retiring partner
is purchased by the continuing partners, the valuation reserves are closed
into the related assets which are then raised or lowered to their appraised
value. Contingency, sinking fund, and other surplus reserves are, how-
ever, part of the net worth of the business and directly affect the amount
to be allowed for the interest of the retiring partner.

Application of Assets at Dissolution — The proceeds from the assets are
applied in the following order: first, against outside liabilities; second,
against partners' loans and advances; third, against partners' capital ac-
counts; and fourth, in the distribution as profits of the residue to the
partners on the profit-and-loss ratio." If, however, there is a loss, this
must be distributed in the profit-and-loss ratio before the capital con-
tributions may be withdrawn." If losses have been so great as to wipe
out the capital account of a partner who has loaned money to the firm,
a sufficient amount should be transfei-red from his loan account to his
capital account to cancel the debit balance in the latter account, before
pajTnent is made on the loan account."

Losses and Expenses of Liquidation — There is considerable dispute
among accountants as to the distribution of liquidation losses and gains,
.some prorating them according to capital investments," others, on the
ordinary profit-and-loss ratio."" As the partnership is not dissolved until
the capital investments are returned, the latter view is the correct one.

Purchasing Partner's Interest — When a partner agrees to sell his interest
in the business, the liooks are closed and the profit or loss up to date
of sale is distributed to the partners' personal accounts. The retiring
partner's personal account is then closed into his capital account, which
is, in turn, closed by a debit offsetting the cash, notes, or other property
given the retiring partner for his interest.'* These entries take the fol-
lowing form :

Jones, Capital Account xxxxxxx

Jones, Personal Account xxxxxxx

Jones, Capital Account xxxxxxx

Cash xxxxxxx

Notes Pavable xxxxxxx

PARTNERSHIP AT LIQIIDATION 115

If the retiring partner sells his interest for less than the book value, the
ditference is credited to the continuing partner's personal account." The
transaction would be journalized thus :

Jones, Capital Account xxxxxxx

Cash xxxxxxx

Smith, Personal Account xxxxxxx

However, if the retiring partner receives more than the book value of
his interest, the difiference may be debited either to the continuing partner's
personal account or to the goodwill account." The fii-st method is jour-
nalized thus :

Jones, Capital Account xxxxxxx

Smith, Personal Account xxxxxxx

Cash xxxxxxx

The second method is recorded by the following entry :

Jones, Capital Account xxxxxxx

Goodwill xxxxxxx

Cash xxxxxxx

Personal Insolvency of One Partner — Any loss on a debt owed to the
firm by an insolvent partner, whether occasioned by withdrawings of
capital, operating losses, or liquidating losses, should be borne by the
other partners according to the ordinary profit-and-loss ratio.^*

Illustrative Problem — To illustrate the effect of dissolution of a part-
nership upon the accounts of the firm, assume that the following balance
sheet shows the condition after the realization of the assets. The profit-
and-loss ratio of Jones, Smith, and Johnson is 3:2:1, respectively; Jones
is bankrupt and wull not be able to pay anything on his debts. The
pi'oblem is to close the books.

BALANCE SHEET OF JONES, SMITH, AND JOHNSON

Cash . .

Liquidation Loss.

$8,500.00
12,000.00

$20,500.00

Accounts Payable

Jones, Loan Account . .
Smith, Loan Account. .
Jones, Capital Account.
Smith, Capital Account
Johnson, Capital Account

$3,000.00
2,000.00
1,500.00
1,000.00
5,000.00
8,000.00

$20,500.00

The order and character of the journal entries required to close the
partnership books are as follows :

(a) Prorating loss on liquidation:

Jones, Capital Account (3/6) $6,000.00

Smith, Capital Account (2/6) 4,000.00

Johnson, Capital Account (1/6) 2 , 000 . 00

Liquidation Loss $12,000.00

JKJ C. P. A. ACCUL.NTINU

(b) Transferring Jones' Loan to Capital:

Jones, Loan Account $2,000. 00

Jones, Capital Account $2,000. 00

Smith, Capital Account (2/3) $2,000.00

Johnson, Capital Account (1/3) 1,000.00

Jones, Capital Account $3 ,000. 00

(d) Transferring Part Smith's Loan to Capital:
Smith, Loan Account $1,000.00

Smith, Capital Account $1 ,000. 00

(e) Payment of Accounts Payable:

Accounts Payable $3,000. 00

Cash $3,000.00

(f) Payment of Smith's Loan:

Smith, Loan Account $500 . 00

Cash $500.00

(g) Payment of Johnson's Capital:

Johnson, Capital Account $5,000.00

Cash $5,000.00

Capital Deficit — As general partners are liable to the extent of their
personal fortunes for the debts of the fii'm, any deficits in the partners'
capital accounts created by the distribution of operating and liquidating
losses must be canceled by additional contributions." For instance, if
Jones and Srnith, who shared profits and losses equally and whose capital
contributions were $10,000 and $2,000, respectively, had only $3,000 in
cash after realizing on the assets and licjuidating the liabilities, then Jones
would receive all the casli the firm had, together with the $2,500 which
Smith would pay into tlie firm. The journal entries would be :

Jones, Capital Account $4,500.00

Smith, Capital Account 4,500.00

Profit and Loss $9,000.00

Cash 2,500.00

Smith, Capital Account 2,500.00

Jones, Capital Account 5,500.00

Cash 5.500.00

Goodwill in Liquidation — When a Inisiness is sold as a unit for more
than its book value, this excess is goodwill which may be recorded in the
books by debiting the goodwill account and dividing the credit among the
partnei's' capital accounts on the profit-and-loss ratio.''* Goodwill would
then be closed with the other assets when the sale is recorded." If the
sale is made at decease of one partner, his estate is entitled to its share
of the goodwill.'"'

PARTNERSHIP AT LIQUIDATION

117

When goodwill is allowed to a retiring partner, the value for the
goodwill for the firm must be calculated, but only the goodwill allowed to
the retiring partner may be placed on the books because the share of the
goodwill belonging to the continuing partners has not been purchased.^

Closing Partnership Books After Sale — If a partnership sells out, the
old books must be closed. This, of course, can be done by simply debiting
the liability and capital accounts and crediting the assets. However, it
is preferable to show the closing by steps as follows :"^°

Entry No. 1

Jones-Smith Company, Vendee xxxxxxx

Assets (itemized)

Entry No. 2

Liabilities xxxxxxx

Jones-Smith Company, Vendee

Entry No. 3

Cash xxxxxxx

Jones-Smith Company, Vendee

Entry No. 4

Jones, Capital Account xxxxxxx

Smith, Capital Account xxxxxxx

Cash

xxxxxxx

If stock is received instead of cash, the first and second entries would
be as above, but the third and fourth entries would be as follows :''

Jones-Smith Company Stock xxxxxxx

Jones-Smith Company, Vendee xxxxxxx

Jones, Capital Account xxxxxxx

Smith, Capital Account xxxxxxx

Jones-Smith Company Stock xxxxxxx

Liquidation by Installments — As the liquidator is personally responsible
if he overpays a partner,^^ it is important when partnerships are liquidated
by installments to have the capital investments reduced to the profit-and-
loss ratio as soon as possible."^ The rule for finding the amount that
should be given to each partner is to consider that all the property besides
the dividend is worthless, and that any partner, who may owe the partner-
ship when this loss is prorated, is bankrupt."* After these assumed losses
are prorated, the i-emaining capital represents the correct distribution of
the dividend."

As an example, a.ssume that the capital accounts of Jones, Smith, and
Johnson, after prorating the operating losses, are $20,000, $10,000, and
$5,000, res])ectively. If the partners shai'e profits and losses equally,
liquidating dividends of $14,000, $9,000, and $9,000 would be prorated
in the manner shown on page 118.

118

C. P. A. ACCOUNTING

Summary

Total

Jones

Smith

Johnson

1st Capital

$.35,000.00
14,000.00

$20,000.00

$10,000.00

$-5,000.00

1st Dividend

7,000.00

Assumed Loss

$21,000.00

7,000.00

1st Dividend — Unadjusted .
Adjustment

$14,000.00

$1.3,000.00
1,000.00

$3,000.00
1,000.00

$2,000.00
2,000.00

1st Dividend — Adjusted. . .

$14,000.00

$12,000.00

$2,000.00

nil

2nd Capital

$21,000.00
9,000.00

$8,000.00

$5,000.00

2nd Dividend

4,000.00

Assumed Loss

$12,000.00

4,000.00

2nd Dividend — Adjusted. . .

$9,000.00

$4,000.00

$1,000.00

3rd Capital

$12,000.00
9,000.00

$4,000.00

3rd Dividend

1,000.00

Assumed Loss

$3,000.00

1,000.00

3rd Dividend — Adjusted . . .

$9,000.00

$3,000.00

Dividend

Jones

Smith

Johnson

1st

$12,000.00
4,000.00
3,000.00

$2,000.00
4,000.00
3.000.00

nil

2nd

$1,000.00

3rd

3 000.00

As the capital accounts in the above problem are in the pvofit-aud-loss
ratio, after the second dividend, the actual loss of $3,000 could be directly
prorated on the profit-and-loss ratio, leaving the capital accounts totaling
the amount of the last dividend.

PARTNERSHIP AT LIQUIDATION 119

QUESTIONS

PAltTXERSHlP AT LIQUIDATION

1. As the bookkeeper of a firm that had no articles of copartnership,
what would be j'onr duty on learning: of the death of a partner? (N. Y.,
June, 1898.)

2. Describe two or more bases of valuation of a merchandising business,
in contemplation of purchase or sale thereof. Illusti'ate a basis of valua-
tion of a professional business in contemplation of admission of a third
l)artiier and sIioav how the capital accounts and profits would work out.
(III., Dec., 1910.)

3. In arranging- accounts for a partnership, how should Losses on
Dissolution of Partnership be treated? (Fla., July, 1909.)

4. How may a partnership terminate? Name the different ways.
(Iowa, Dec. 1918.)

5. A firm of three partners divided their profits as follows: "A,"
11/25; "B," 8/25; "C," 6/25. By the partnership agreement it was pro-
vided that in the event of the death of either, the survivors should take
the deceased's share in the proportion they already shared the profits,
"A" dies. What proportion of the profits would "B" and "C" respectively
take afterwards? (111., May, 1910.)

6. In dissolving a solvent partnership in what order should the pro-
ceeds of the assets be distributed? (N. D., July, 1916.)

7. What is the status of a partner's loan in the liquidation proceedings?
(N. D., July, 1916.)

120

C. P. A. ACCOUISTl^G

PROBLEMS

PARTNERSHIP AT LIQUIDATIOX

1. The capital of a partnership is contributed as follows: "A,"
$90,000; "B," $45,000; "C," $15,000.

The partnership agreement provides for profit-sharing as follows: "A,"
50 per cent; "B," 30 per cent; "C," 20 per cent.

The partnei-s' salaries are as follows: "A," $5,000; "B," $3,000; "C,"
$2,000.

At the close of the first year's business, "C" dies. The books are closed
and the net assets of the business are shown to be $152,500. "A" and
"B" liquidate the affairs of the partnership and distribute the surplus
assets as follows: First distribution, $42,410.20; second distribution,
$74,622.30; final distribution, $31,967.50.

Prepare a statement of the partners' accounts, showing how the distribu-
tion of the assets should be made and the apportionment.

(Md., Feb., 1915; N. Y., June, 1917; S. C, Sept., 1919.)

2. "A," "B," and "C" were in partnership, "A's" capital being $90,000,
"B's" $50,000 and "C's" $50,000. Their agreement is to share profits
in the following ratio : "A," 60 per cent ; "B," 15 per cent ; "C," 25 per
cent. During the year "C" withdrew $10,000. Net losses on the business
during the year were $15,000, and it is decided to close out the business.
It is uncertain how much the assets will ultimately yield, although none of
them is known to be bad. The partners therefore mutually agree that as
the assets are liquidated, distribution of cash on hand shall be made
monthly in such a manner as to avoid, so far as feasible, the possibility of
paying to one partner cash which he might later have to repay to another.
Collections are made as follows: May, $15,000; June, $13,000; July,
$52,000. After this no more can be collected. Show the partners' ac-
counts indicating how the cash is distributed in each installment, the
essential feature in the distribution being to observe the agreement
given above. (Ind., May, 1917; A. I. of A., June, 1917.)

3. "A," "B," and "C" were partners in a business on the following
basis :

Capital Contributed

Share of Profits

Salaries

"A" $45,000

"B" 22.500

••C" 7,500

.50 per cent
40 per cent
10 p>er cent

$6,000
4,000
2,400

PARTNERSHIP AT LIQUIDATION 121

At the end of the second year's business, "A" died. The partners' draw-
ing accounts before crediting their year's salaries appeared with the fol-
lowing debit balances: "A," $2,572; ''B," $1,218; "C," $1,710.

The net assets of the business after finally closing the books were found
to be $74,780. "B" and "C" liquidate the affairs of the partnership.
Three distributions of the proceeds of liquidation were made as follows:
$25,000, $35,000, $11,780.

You are asked to prepare a tabulation showing the share of each of the
distributions to each of the partners.

(Wis., Nov., 1919.)

4. "A" and "B," on winding up their partnership, found their assets
realized as follows: Factory premises standing in their books at $10,000
realized $4,000; machinery standing in their books at $7,500 realized
$2,500; merchandise standing in their books at $5,500 realized $4,500;
accounts receivable standing in their books at $9,500 realized $6,500,

Their unpaid liabilities were $10,500. "A's" capital stood at $15,000,
and "B's" capital at $7,000. In respect of profits and losses they were
equal partners.

Divide the proceeds of the realization between them after paying off
the liabilities, and debit them as having been paid the proportion to
which each was entitled, and show what amount would be payable (if any)
by either partner to the other to settle the accounts,

(111., May, 1910; N. D,, Aug., 1917.)

5. "A," "B," and "C" are in partnership. "A" invested $11,000; "B"
invested $5,000 ; and "C" invested $1,200. Their agreement provides that
profits or losses shall be divided as follows: ^"A," 4/9; "B," 3/9;
"C," 2/9.

The partnership has become insolvent and has therefore decided to dis-
solve. The cash value of assets is $10,000. The deficit is, therefore, $7,200.
How should the assets be divided and how much money will each partner
receive? (Wis., May, 1916.)

6. "A" and "B" are partners sharing losses and gains equally. "A"
invested $3,000, "B" invested $4,000. They are ready to wind up the
business. The firm owes $5,000 of which $1,000 is due "A," and $500 is
due "B." They have $7,000 in cash. Prepare the accounts showing the
closing. (Mich., June, 1914.)

7. Jones and Brown are partners, sharing profits equally. Their capi-
tal as it appears on the books of the partnership on June 20, 1908. the
date on which they dissolve partnership, is Jones $2,000 and Brown $500.
The total amount owing by the firm is $5,000 which includes $1,000 due to
Jones on a loan and $500 due to Brown on a loan. The whole of the
assets of the firm realize $6,000. Prepare accounts closing up the part-
nership and show the position in which the partners stand with each
other. (Mich., July, 1909.)

8. Two parties, "A" and "B," have been in business for the three years
ending December 31, 1904, on which date they agree to dissolve partner-

12-.

C. P. A. ACCOUNTING

ship. "A" takes over the business, paying *'B" $7,500 for his share of the
goodwill. "A" has drawn out each year $2,000 and ''B" $3,000. "A's"
capital at start was $10,000, and "B's" $12,500, and the profits of each
year have been $3,500, $4,200 and $4,600, respectively. There was no deed
of partnei-ship, nor any agi'eement as to interest on capital. Draft ac-
counts showing "A's" capital on taking over the business, and the amount
"B" will receive on retiring. (Wash., April, 1906.)

9. "A," "B," and "C" engage in business, "A" contributing $10,000
capital, "B" contributes $5,000, Avhile "C" in lieu of any capital contribu-
tion, agrees to undertake the active management, at a salary of $3,000 a
year, to be paid monthly.

After allowing 5 per cent interest on capital, they are to divide the net
result in the proportions of 5, 3 and 2, respectively.

At the end of eighteen months they ascei1:ain the position to be
unfavorable and decide to wind up. The assets realize $12,500; there are
no liabilities except for capital and interest thereon and one month's
salary, due to "C."

Make up the partners' accounts showing the amount to be received by
each.

(Mass., Oct., 1914.)

10. "A" and "B," partnei-s in a commercial enterprise, share profits
and losses equally. At the end of five years the partnership terminates
and the balance sheet shows as follows :

Assets

Cash on hand and in bank .... $5,600

Accounts Receivable 28,000

Merchandise Inventory 38,000

Plant and Machinery 15,400

$85,000

Liabilities

Accounts Payable $30,000

•Bills Payable 10,000

Capital :

"A" $30,000

"B" 15,000 45,000

$85,000

After studying the Balance Sheet an offer to buy at $30,000 (except
cash) is accepted. Make final adjustments and closing entries and show
amount each partner receives. (Ind., June, 1916.)

11. By partnership agreement existing between Brown and Gray,
Brown has 2/3 of the profits and Gray 1/3. Brown's capital account
stands credited $50,000. Gray's capital account stands credited $40,000.
The assets of the partnership consist of the following: Factory and Ma-
chinery, $75,000; Stock as per inventories, $30,000; Accounts Receivable,
$15,500. The liabilities are as follows : Accounts Payable, $15,000 ; Notes
Payable, $10,000; Overdraft Bank, $5,500.

Gray takes over the liabilities as above mentioned, and the assets at the
following agreed valuation: Factory and Machinery, $70,000; Stock as
per inventories, $26,000; Accounts Receivable, $14,000.

An arrangement is made whereby Gray received $500 from Brown for
accepting sole liability for the discounted bills receivable.

PARTNERSHIP AT LIQUIDATION 123

Make up a statement showing the amount that Brown should receive it
being understood that the losses on capital are borne by the partners in
the proportion in which the profits are divided. (W. Va., May, 1919.)

12. Brown, Black and Green were engaged in a merchandise business as
partners. On December 31, 1913, a Balance Sheet, to which all of the
partners agreed, showed the following financial position in the business:

Assets

Real Estate $10,000

Horses, Wagons, and Fixtures 5,000

Merchandise on hand 14,000 Brown

LiahilUies

Mortgage Payable $4,000

Accounts Payable 30,000

Accounts Receivable 38,000

Cash in bank and on hand. . . 14,000
Green 1,000

$82,000

Capital account $25,000
Drawing account 10,000 35,000

Black:

Capital account $15,000
Drawing account 2,000 13,000

$82,000

The profits are shared in the following proportions : Brown, i/^ ; Black,
1/3; and Green, 1/6. It was decided to dissolve the partnership as at
the date of the above Balance Sheet. The real estate was sold for $13,000.
Bad debts and discounts allowed amounted to $5,000. The merchandise
realized $12,000, and the horses, wagons and fixtures were sold for $3,000.
The mortgage on the property was paid off, interest thereon amounting to
$80. The accounts payable were paid, less discounts amounting to $1,000.
The expenses incurred during the period of realization amounted to $3,000.

After the assets had been realized and all the liabilities had been dis-
charged. Green became bankrupt, and a claim was made against his estate
for the amount due from him to the firm on the dissolution and a dividend
thereon at the rate of 20 cents on the dollar received.

By the end of the year 1914 all matters were disposed of. Write up
the Realization (Profit and Loss) account, Cash account (in summary
form), and the Capital and Drawing accounts of the partners, and close
the books of the firm. (Wash., June, 1915.)

13. "A" and "B" were partners trading under the name of "A," "B"
and Company. June 30, 1908, the following balances appear on their
ledger :

"A" Capital account $70,000

"B" Capital account 50,000

Real estate 22;000

Buildings 20,000

Machinery and tools 44,000

Furniture and fixtures 2,000

Accounts receivable 50 000

Cash 7,000

Materials and merchandise 53,000

Accounts payable ^^'^92

Bills payable f 'JSn

Bills receivable 5,000

124

C. P. A. ACCOUNTING

On June 30, 1908, the business is incorporated as the "X" Company, on
the following plan:

(1) Capital Stock, $150,000.

(2) "X" Company takes over entire assets and liabilities of "A," "B"
and Company, at the book figures as above, except (a) real estate of the
book value of $5,000, which is retained by "A," "B" and Company; (b)
the Accounts Receivable, which are taken over at $48,000, and (c) the
Capital accounts of the partners.

(3) "X" Company pays "A," "B" and Company $30,000 for the good-
will of the business.

(4) Payments to "A," "B" and Company are made as follows: viz.,
$50,000 in first mortgage bonds, and the Balance in capital stock of the
"X" Company.

(5) After paying off "A," "B" and Company the remainder of the
capital stock is sold for cash to sundry persons.

The real estate which is retained by "A," "B" and Company is bought
from "A," "B" and Company by "A" for $7,000 and is to be charged to
"A's" Capital account.

After the completion of the foregoi'ig described transactions "A" and
"B" dissolve partnership.

You are required :

(a) To prepare closing entries for the books of "A," "B" and
Company.

(6) A statement setting forth the partners' accounts down to their
final closing, beginning with the balances shown bv the books on June 30,
1908.

(Wash., Aug., 1908.)

14. "A" and "B" trading in partnership decide to admit "C" as from
January 1, 1919. They agree with "C" as follows:

"C" is unable to contribute any tangible assets as his capital investment,
but agrees to allow his share of the profits to be credited to his capital
account until he shall have one fifth interest. "C" is to share profits and
losses to the extent of one fifth.

"C" is to receive a salary of $3,000 per annum, payable monthly in
addition to his share of profits.

Balance Sheet of "A" and "B" at December 31, 1918, lis as follows:

Assets

Cash $1,.'>00

Accounts receivable 10.000

Merchandise 7..500

Furniture and fixtures 1 ,500

Goodwill 2,.500

$23,000

Liabilities

Accounts payable $8,000

Capital accounts

"A" $10,000

"B" 5,000 15,000

$23,000

During the six months endeil June 30, 1919, the business has sustained
unusual losses and it is decided to dissolve the partnership.

PARTNERSHIP AT LIQUIDATION
The Balance Sheet at that date is as follows:

125

Assets

Cash $.")0()

Accounts Receivable r2,.5(X)

Merchandise 5 000

Furniture and fixtures 1,500

Goodwill 2,500

Deficit

Being loss on trading for

six months 5,500

$27,500

Liabilities

Accounts Payable $12 500

Capital Accounts

"A" $10,000

"B" 5,000 15,000

$27,500

Accounts Receivable were sold for $9,000, the buyer assuming all re-
sponsibility for collection and loss, if any.

Merchandise realized $6,500, and furniture and fixtures, $500.

You are asked to make an examination of the accounts from January 1
and to prepare statements showing the realization of assets, the adjust-
ment of the partnership accounts, and the distribution of the funds.

In your examination you find that "C" has not drawn his salary for
four months and that "B" has advanced to the partnership $2,500 by way
of a temporary loan. These liabilities you find are included in the sum
of $12,500 shown as Accounts Payable.

"C" is ascertained to be worthless.

(A. I. of A., Nov., 1919.)

CHAPTER VIII

CORPORATION STOCK

Orrrporation Defined — Chief Justice Marshall has defined a corporation
as "an artificial being, invisible, intangible, and existing only in contem-
plation of law." A corporation is an artificial legal person, or entity,
having an existence distinct from that of the members composing it, and
having in addition to the powers granted by its charter, the implied powers
of a natural person/

Classes of Corporations — From the standpoint of purpose, corporations
may be divided into two classes, viz.: (a) those for profit, and (b) those
not for profit.* From the standpoint of ownership, corporations may be
classified into public or governmental organizations, and private corpora-
tions.* Quasi-public corporations are those privately owned companies,
which, although operated for profit, promote some public enterprise.*
Private corporations are of two types, (a) stock companies, or firais
operated for profit, and (b) non-stock companies, or non-profit-making
enterprises, such as libraries, churches, etc.°

Stock corporations are called sole corporations if all the stock, except
a few shares, is held by one person,* open corporations if the stock is freely
bought and sold,' and close corporations if the stock is not traded in and
the control is retained within a small compass of ownership.'

From the standpoint of the sovereignty to which allegiance is due, cor-
porations are either domestic or foreign, depending upon whether the
corporation is in the state or country within which it was organized.*
From the standpoint of the fact of incorporation, corporations may be
classed as (a) de jure, or those legally incorporated, and (b) de facto,
or those which have not fully met all legal requirements but are to all
intents and purposes corporations in fact."

Advantages and Disadvantages of Incorporation — The chief advantages
of incorporating are (a) limited liability of stockholders, (b) distinct legal
entity, (c) stability and permanency of organization, (d) transferability
of shares, (e) increased available capital, and (f ) centralized control."

The chief disadvantages of incorporating are (a) lack of motivation
on the part of officials, (b) onerous taxation, (c) required filing of many
reports, (d) limitations on business activities, (e) limitation of credit to
the amount of net assets, and (f ) illegality in some states of owning stock
of other corporations."

Procedure of Incorporation — The state laws governing incorporation
usually require that three or more persons prepare an application for

'For explanation of superior figures see page 337.

126

OORPORATTON STOCK 127

incorporation, wliidi, after proper publicity and when approved by the
proper oflkial after the payment of prescribed fees, becomes tJie charter
or certificate of incorporation of the company." The stockholders then
complete the organization by electing directors, adopting by-laws, and
making necessary arrangements for the conduct of the corporate business."

Charter — The chartei', or certificate of incorporation, recites (a) name
of corporation, (b) purpose of corporation, (c) amount and kinds of
capital stock, (d) number and par value of share of stock, (e) location
of principal office, (f) duration of corporation, (g) number of directors,
(h) names and addresses of fii'st directors, and (i) names and addresses
of subscribers to the eertiiicate with number of shares subscribed for by
each/'

By-Laws — By-laws are the rules of corporate action which are adopted
at stockholders' meetings." By-laws regulate the relations of the stock-
holders with the directors, of the directors with the stockholders and
officers, and of the corporation with outsiders who have knowledge of the
existence and import of the by-laws." If especially authorized by the
charter or by the state laws, directors can adopt by-laws.'* The auditor
should ascertain the duties and powers of each officer from the by-laws,"
which information is needed before the authenticity of the records can be
thoroughly verified.

Stockholders — Stockholders have the common law right to make or
change the by-laws of the corporation.""* They may insist on having cer-
tificates of stock issued to them showing the number of shares they
own." When this ownership of the certificates is recorded in the books
of the corporation, the owners are called stockholders of record." Stock-
holders of record alone may vote and receive dividends, and, although a
transferee has equitable title to any dividend declared after date of pur-
chase, he can not receive it except by recovery through the payee, the
stockholder of record."*' Stockholders have a common law right to inspect
the books of the corporation, but state statutes and corporate by-laws
usually require that good reason be shown for such inspection, which,
when arbitrarily enforced, reduces to nil the stockholders' right to inspect
the books of account." Stockholders may vote to elect directors, increase
or decrease the capital stock, amend the charter, and dissolve the cor-
poration." Stockholders may subscribe to their due proportion of all
increases in capital stock."' At stockholders' meetings each stockholder is
entitled to a vote for each share of stock standing in his name on the
books." In the election of directors, some states allow each share of
stock one vote for each director to be elected, which votes may be cumulated
upon one director or scattered at the option of the stockholders." When
a stockholder desires, he may delegate his voting powers to another stock-
holder who is said to be his proxy." Auditors are .sometimes called upon
lo make an audit of proxies, which is done by obtaining a list of the
>lockholders of record from the stockholders' ledger and then verifying
the transferal of the voting privileges.'*

128 C. P. A. ACCOUNTING

In the event of insolvency, stockholders are not liable for the firm's
debts, provided their stock is fully paid,'' but they are liable for the dif-
ference between that which they paid and that which thej' should have
paid to make their stock fully paid, even though the corporation agreed
to accept the payments made as full consideration.'' This liability is fi'e-
quently avoided by having the directors, whose valuation in the absence
of the proof of fraud is final," issue all or a large part of the stock for
property, the former ow-ners of which then donate part of this stock to the
corporation which can then sell this once-issued stock below^ par." Innocent
purchasers for value are not liable for the unpaid balances on their
holdings.''

Directors — The powers of directors vary largely because of the lack of
uniformity in state statutes and corporate by-laws. In general, directors
have the power to borrow money, to create new debts, to liquidate old
debts, to lease corporate property if such lease does not force the dis-
continuation of corporate business, to declare dividends out of surplus,
to conduct corporate litigation, to ratify a debt which has been barred
by the statute of limitations, to make and transfer negotiable paper, to
fix the salaries of corporate officers, to prepay wages, and to make con-
tracts with persons for ser%'ices for periods of one year and more."

Unless especially authorized by state statutes or corporate by-laws,
directors must secure the sanction of the stockholders before they can
make any change in the authorized capital stock of the company, issue
mortgages, cancel subscriptions for stock, or dissolve the company." They
can not issue more stock than is authorized,'* or execute leases divesting
the corporation of its physical assets.* Unless permitted by statutes,
directors can not issue stock below par." They can not vote by proxy
at meetings of the directors as the position of director is a fiduciary one
invohnng trust and confidence."

Since directors are trustees, both for the stockholders and creditors,
they can not secure for themselves any advantage which the stockholders
can not share, or which would cause the rights of the creditors to become
inferior to theirs."

As many states hold directors personally responsible for debts con-
tracted under certain circumstances and in excess of certain sums, it is
important, in examinations for credit purposes, for the auditor to ascer-
tain from the statutes whether or not the directors have automatically
made themselves liable for any part of the indebtedness." Directors are
held personally liable for declaring a dividend in excess of profits or
surplus."

Minute Books — There is no special form of minute book, but the most
modern and convenient form is a loose-leaf book.*' In large corporations,
separate books are kept for the stockholders' and directors' minutes, but
in small corporations the stockholders' and directors' minutes are recorded
in the front and back, respectively, of the same book.** The minute book
should contain, first, a copy of the charter;" second, a copy of the by-
laws;*' and lastly, a complete record of the kind of meeting, whether

CORPORATION STOCK 129

regular, special, or adjourned," and of the action taken at the stock-
holders' and directors' meetings.""

The minutes are examined by auditors with regard to the election of
officers, the compensation of officers, extra compensation, bond of the
treasurer, depositories, contracts with manager, contracts for the purchase
of a business, contracts for additions to plant, contracts for future de-
livery of materials in unusual quantities, valuation fixed on purchased
property, depreciation rates, possibility of litigation, settlement of pending
litigation for a sum in excess of liability carried therefor in the books,
and contingent liabilities." If the auditor is denied an inspection of the
minute book, he should mention that fact in his report and in a footnote
to his balance sheet."

Corporate Officers — The duties of the officers of a corporation are as-
signed by by-laws, custom, common consent, or action of the board of
directors." The number, titles, and powers of these officers vary accord-
ing to the size and internal organization of the corporation." A corpora-
tion usually has a president, one or more vice-presidents, a secretary, a
treasurer, and an auditor."^ These officers are chosen either by the directors
or stockholders," usually the former. No officer is personally liable for
the acts of another officer, and no officer can involve the corporation by
unauthorized acts."

Capital Stock — The capital stock of a corporation is the amount of
stock which it is authorized to issue." The amount of authorized capital
stock can be changed only by compliance with the requirements of the
state laws." It is sometimes claimed that capital stock represents the
total number of shares of stock outstanding,*^" but the term is more inclusive
than that, as unissued authorized stock is also capital stock." The capital
stock may be called the nominal or share capital of the corporation."* If
the actual capital stock of the corporation, the excess of assets over
liabilities,'^ is greater than its capital stock, the difference is called
surplus." This difference between the nominal and actual capital of a
corporation causes the capital stock to have two kinds of value, namely,
par value, or the nominal value printed on the certificate, and book value,
or the quotient of the net worth of the corporation divided by the number
of shares outstanding.

No Par Stock — Ten states permit the issue of capital stock with no
par value." The stock certificates must show the number of shares they
represent and the number of shares the corporation is authorized to
issue.*' The value of no par stock is its book value found by dividing
the net worth by the number of shares outstanding,'^ each share repre-
senting an aliquot interest."* When a company issues both par and no
par stock, care must be taken to show the portion of the profits belonging
to each, though this division may or may not be shown on the balance
sheet."

When all the stock is without par value, and there is but one class of
stock, there is no necessity for maintaining a surplus or undivided profits
account, for the result of current operations can be closed into the capital

130 C. P. A. ACCOUNTING

stock account.'" However, no par stock may be held on the books at its
book value just after the organization, and fluctuations in value may be
shown in a surplus or deticit account.'* The latter method, which is called
holding the no par stock at its stated value, seems preferable. In either
ease, specific projirietorship reserves should be stated separately." It is
sometimes contended that, if cui'rent profits are closed into the capital
stock account instead of into the surplus account, the profits would not
be available as dividends on the ground that combining the capital stock
and current profits has the same effect as a stock dividend in an ordinary
corporation." This contention overlooks the fact that stock dividends
involve the issue of new shares of stock.

The no par capital stock account should be credited for the value re-
ceived for the stock.^* The number of shares outstanding should be shown
either on the balance sheet'" or in a footnote thereto."' Unsubscribed no
par stock should not be shown at all on the balance sheet as it may be
subscribed for at prices othei- than the stated value." When unsubscribed
stock is sold after a company has accumulated a surplus, the amount
received in excess of the stated value of the then outstanding stock should
be credited to the surplus account, if that account is maintained." The
number of donated shares may be earned without value in the treasury
stock account,'* but, if a surplus account is maintained, it would seem
preferable to value the donated shares at their stated value and credit
the capital surplus account therefoi-. No par stock repurchased may
be debited to the treasury stock account at cost price,*" but, if a surplus
account is maintained, it would seem preferable to debit the treasury stock
account for the stated value, the difference between the stated value and
cost being charged or credited to the capital surplus account.

The advantages of issuing no par stock are (a) the checking of the
tendency to inflate value of assets in order to offset the nominal value of
certificates issued therefor,*' (b) the assurance given the investor that
.stock is fully paid and non-assessable,'" (c) the special facilities afforded
in ease of consolidation or i-eorganization,*'' and (d) the fact that the
investor is put on liis guard to find out the real value of the stock." The
objection that no par stock provides more oj)portunities for improper
manipulation does not seem to be justified, as there are many well known
legal methods of evading the statutory requirements as to a fixed par
value."'

Kinds of Stock with Par Value — The coi'porate stock having par value
may be divided into the following classes :

(a) Unsubscribed, or shares not only unissued but fo)- which no sul)-
scription has been received.*'

(b) Unissued (.sometimes called potential), or sliares for which cer-
tificates have not been issued."'

(e) Treasury, or shares of issued fully paid stock reacquired and held
by the corporation subject to disposal by directoi's.''*

(d) Authorized, or total number of shares the corporation has permi-<-
sion to issue.

CORPORATION STOCK 131

(e) Canceled, or the shares of authorized stock which have been de-
clared void, thus reducing the number of shares the corporation can issue.

(f ) Outstanding, or issued shares in the hands of the public."

(g) Non- voting, or shares not giving owners votes in stockholders'
meetings.'"

(h) Common, or shares with no financial preference over any other
stock of the company."'

(i) Preferred, or shares with financial preference, either as to divi-
dends or principal, or both, over other stock of the company.*''

(j) Non-participating, or shares of pi-ef erred stock which do not share
in the profits beyond their preferential dividends.*^

(k) Non-convertible, or shares which cannot be exchanged for some
other form of ownership or obligation."

(1) Cumulative, or shares whose dividends, if not paid in one year,
continue as a charge against the profits of succeeding years.'"

(m) Redeemable, or shares issued under contract to redeem them after
a certain length of time, at a named figure.""

(n) Founders, or shares of English origin (issued to promoters) which
are preferred as to their share of dividends; for instance, founders' stock
might receive one-half more dividends than the ordinary common stock."

(o) Guaranteed, or shares which, as to dividend or principal, or both,
have been actually guaranteed by some person, concern, or corporation
other than the issuing corporation."*

(p) Debenture, or shares issued under contract to pay absolutely there-
on, at specified intervals, a specified return."' In England debentures are
unsecured loans issued in irregular amounts.'*" Debenture stocks are to be
classified as liabilities.""

(q) Watered, or shares fictitiously designated as paid-up stock.'"

(r) Forfeited, or shares taken back because of failure to make the
agreed purchase payments."'

(s) Bonus, or shares given extra upon the purchase of other stocks or
bonds.'"

(t) Donated, or shares of issued paid-up stock which have been given
back to the corporation.'"" Donated stock should be entered on the books
as treasury stock.'*'

As each of these classes contains only shares having special characteris-
tics, stocks not having these characteristics must fall into classes whose
titles are generally the opposite of the above, viz., subscribed, participat-
ing, irredeemable, etc.

Capital Stock on Balance Sheet — While unsubscribed stock is not an
asset as far as the outside creditors are concerned, yet it is a matter of
which the stockholders should have knowledge.'"' The unsubscribed stock
should, therefore, be deducted from the authorized stock, as this would not
list the unsubsci'ibed stock as an asset."* As unissued stock is not an asset,
it should be deducted from the authorized capital stock."*

Some accountants believe that treasury stock is an asset, as it represents
an actual value received by a corporation, either through purchase or

132 C. P. A. ACCOUNTING

donation, "" and they so list it on the balance sheet/" Some aeeountants
classify treasury stock as an "accrued item,""" but this seems incorrect,
for, even if treasury stock were an asset, it does not accrue. Other
accountants see in treasui-y stock a decrease in stock proprietoi'ship, and
deduct it at par from the authorized capital stock."" It seems that the
last view is preferable, especially as treasury stock does not fulfill the
functions of an asset when the corporation is dissolved; it liquidates
neither the liabilities nor the outstanding capital stock.

Stock Certificate Book — Stock certificates are usually bound together
with a stub for each certificate.'" Both the certificate and the stub are
numbered consecutively,"' and contain spaces for the purchaser's name
and the number of shares issued."" The stub also lists for what the stock
was issued, name and address of former owner of shares, number of
original certificate, number of shares on original certificate, number of
shares transferred, and a receipt for the certificate."' The certificate is a
formal document under coi'porate seal, and with the signatures of the
authorized oflBcers."' On the back of the certificate there is usually a
blank for assignment of the stock.^" The certificates for the stock that
has been transferred or canceled should always be pasted back on the
stubs from which they were taken.'*" The stubs that have no certificates
attached would then represent the outstanding stock.'"

Stockholders' Ledger — Except in New York and a few other states where
the form of the stockholders' ledger is prescribed by law, there is little or
no uniformity in stockholders' ledgers."* The object of this ledger is to
keep with each stockholder an account which will show the date and num-
ber of the certificates and the number of shares on each certificate issued
to him, and if any certificates are transferred, the date, name of trans-
feree, number of surrendered certificates, number of reissued certificates,
and the number of shares transferred.'" Any form tabulating this data
conveniently is satisfactorj'.

A capital stock account is sometimes opened on the front page of the
stockholders' ledger, and debited with the aggi'egate amount of shares
credited to the stockholders' accounts, which practice makes the ledger
self-balancing and shows at any time the amount of outstanding stock.'"

Opening Entries for Corporation — There are so many satisfactory
methods of opening corporate books that most authors give more than one
way. The following procedure'" is recommended for three reasons, namely,
(a) unissued stock is shown on the books, (b) the practice of not issuing
stock until fully paid is recognized, and (c) the distinction between un-
issued and unsubscribed stock is drawn :

Entry No. 1

Unissued Capital Stock xxxxxxx

Capital Stock Authorized xxxxxxx

Entry No. 2

Subscribers xxxxxxx

Subscriptions xxxxxxx

CORPORATION STOCK 133

Entry No. 3

Cash xxxxxxx

Subscribers xxxxxxx

Entry No. 4

Subscriptions xxxxxxx

Unissued Capital Stock xxxxxxx

For a briefer procedure the following is recommended."^

Unsubscribed Capital Stock xxxxxxx

Subscribed Capital Stock xxxxxxx

Authorized Capital Stock xxxxxxx

Cash xxxxxxx

Subscribed Capital Stock xxxxxxx

Subscriptions — Unconditional accepted subscriptions for capital stock
bind the subscribers, as they can be enforced either by the company itself
or the creditors after insolvency.'" The uncalled subscriptions for capital
stock are accounts receivable, but they must be kept in a class by them-
selves."* Sometimes unpaid calls are deducted from the authorized capital
stock,'" but it seems preferable to treat them as assets. The practice of
classifying subscriptions as "accrued items'"^ seems incorrect, as they do
not accrue.

Subscription Ledger — There is no set form to the subscription books,
but it usually contains columns showing when the calls are to be made,
when actually made, when paid, and the balance due."* In general, the.se
columns are grouped so that the ledger follows roughly the "T" form,
the asset subscriptions being entered on the left and payments thereof, on
the right.'" The subscription account acts as the controlling account for
this ledger.""

Transfer Journal — The stock transfer journal or register contains the
original entries of stock transfers which are posted to the stock ledger."^
Sometimes the transfer journal is combined with the stock ledger, but the
laws of many states, including New York, require separate books and
prescribe the form of the transfer journal."" The New York form records
in separate columns the date, serial number of canceled certificate, number
of shares, by whom surrendered, to whom issued, serial number of new
certificate, number of shares, and number and value of revenue stamps.""
The transfer journals outside the state of New York approximate the same
form except for the data, on revenue stamps."' Sometimes, the transfer
book is merely a duplication of the assignment ordinarily appearing on
the back of each sfoclc certificate."" In such cases, the book used as a
posting medium for stock transfers is called the register of transfers.'"

Installments — If the subscribers do not settle for their stock in one pay-
ment, the first, second, and fourth entries in the proposed detailed pro-
cedure for opening corporate books would be used, but, instead of the
third entry, the following would be used:'*"

134 C. P. A. xiCCOUNTING

Entry No. 3 (a)

Installment (or Call) No. 1 xxxxxxx

Installment (or Call) No. 2 xxxxxxx

Subscribers xxxxxxx

Entry No. 3 (b)

Cash xxxxxxx

Installment (or Call) No. 1 xxxxxxx

Installment Ledger — The purpose of the installment lx)ok or ledger is
to give a classified record of original subscriptions, installments due and
paid, and balances still unpaid.'" Separate records should be kept for
each installment.'" There are two general forms of installment books.
One of these is based on the "T" form and contains on tlie left side columns
for date, shares, how acquired, percentage unpaid, certificate number of
scrip, and amount ; and on the right side, columns for date, shares trans-
ferred, how settled, percentage unpaid, certificate number of scrip, how
many shares paid, installment number, and amount.'" The other form is
based on the Boston ledger form, and contains a list of subscribers, num-
ber of shares subscribed by each, amount of installment, date of payment,
amount received, and remarks relating to the particular installment.*"
The installment account is the controlling account for the installment
ledger.'"

Installment Scrip Book — The installment scrip book contains blank re-
ceipts to be filled out and signed by the authorized corporate officers when
the installments are paid by the subscribers."' The details of each receipt
issued are recorded on its stub, from which the proper entries may be
obtained for the stockholders' ledger and for the other books.'" Upon the
payment of the last installment, the scrip is taken up and replaced by a
certificate of stock.'" Instead of giving individual receipts for the pay-
ment of each installment, sometimes a more elaborate receipt called a stock
scrip is given on the first payment, and subsequent installments are en-
dorsed on the back of the stock scrip.'* Both the installment scrip and
the stock scrip are transferable."*

Forfeited Stock — Unpaid subscriptions to capital stock can be declared
forfeited only if the statutes specifically grant the corporation that power.'"
In some states the entire amount paid in may be declared forfeited,'" while
in others only enough to cover the cost of placing the corporation in as
good condition as it would have been had the subscriber fulfilled his obli-
gation, may be retained by the corporation.'" When a corporation declares
a subscriber's stock forfeited for nonpayment of any balance, all liability
on the part of tlie subsci'iber ceases both to the creditors of the corpora-
tion and to the corporation on account of the subscription."* The profit
arising from the forfeiture of stock is sometimes credited to profit and
loss,'" but as the profit is not an operating item, it is preferable to credit
it directly to surplus."" Any discount or premium on the sale of forfeited
stock should be closed into the surplus arising from the foi'feiture.'"
Surplus from forfeited stock should not be declared as dividends, although

CORPORATION STOCK

135

such action is not illegal."^* The auditor should verify forfeited stock
with data from the minute book."'

By way of an illustration of the entries for forfeited stock under the
proposed detailed proeediii'e for opening corporate entries, assume an
authorized capitalization of $1,000,000, one-half subscribed and subscrip-
tions payable in four equal installments. The following entries"" would
be necessary if one hundred shares were declared forfeited for failure to
pay the second, third, and fourth installments and these shares were resold
at $90 a share. The entries have been divided into four parts to show
what entries take the place of the four usual entries in the proposed pro-
cedure for opening corporate books.

Parti

Unissued Capital Stock $1,000,000.00

Capital Stock Authorized $1 , 000 , 000 . 00

Part 2

Subscribers 500,000. 00

Subscriptions 500,000. 00

Parts

Installment No. 1 125,000.00

Installment No. 2 125,000.00

Installment No. 3 125,000.00

Installment No. 4 125,000.00

Subscribers 500,000. 00

Cash 492,500.00

Installment No. 1 125,000.00

Installment No. 2 122, 500. 00

Installment No. 3 122,500.00

Installment No. 4 122,500.00

Subscribers 7,500.00

Installment No. 2 2,500.00

Installment No. 3 2,500.00

Installment No. 4 2,500.00

Subscribers 2,500.00

Surplus from Forfeited Stock .... 2 , 500 . 00

Subscriptions 10,000.00

Subscribers 10,000.00

Subscribers 9,000.00

Surplus from Forfeited Stock 1 ,000. 00

Sub.scriptions 10,000.00

Cash 9,000.00

Subscribers - . . 9,000.00

Part 4

Subscriptions 500,000.00

Unis.sued Capital Stock 500 , 000. 00

136 C. P. A. ACCOUNTING

Payment for Stock — As is shown by the above illustration, the method
of paj'ment for stock affects only the third section in the proposed pro-
cedure for opening corporate books. This section may be further compli-
cated because stock may be paid for by cash, services, or property. In
all these cases, the credit is to subscribers. However, if cash is received,
then the cash account is debited;"'^ if services are received, accounts like
manager's salary, commissions, etc., are debited;"' and if property is
received, the fixed asset accounts are debited.^*' When going concerns are
taken over by new corporations, it is customary to debit the itemized assets
and credit a vendor account, to credit the itemized liabilities and debit the
vendor account, and then to close the vendor account against the sub-
scriber's account."* These entries are illustrated in Chapter VI, Volume II,
under the caption "opening entries for amalgamated companies." Some-
times a sundry asset account and a sundry liabilities account are used
instead of the vendor account."^' In auditing the payments for stock, the
auditor should refer to the minute book to verify the authorization of
issues for property or for cash at varying rates of discount or premium.'"*

Premium and Discount on Stock — Since the subscriber's account used in
the second section of the proposed detailed procedure for opening cor-
porate books is an asset representing the amount the subscriber promised
to pay for the stock, premium and discount on capital stock are recorded
in the second section. If the stock is .sold at a premium, the debit to
subscribers offsets credits to both the subscriptions and premium on stock
accounts."" If the stock is sold at a discount, the debits to subscribers and
discount on stock accounts are offset with the single credit to subscriptions
account.*'^*

Discount on stock should not be regarded as organization expense.*'* It
may and should be extinguished by premiums, assessments, surplus, or by
the retirement of an equivalent amount of stock."" Some accountants show
discount on capital stock on the balance sheet as a deferred asset,'" while
others list it as a deduction from the par value of the outstanding stock."'
The latter method seems preferable as the discount really causes a capital
deficit.

Premium on stock is a capital surplus,"' and .should therefore not be
distributed as dividends, although such action is not illegal."* The premium
on stock account should be kept open as a special surplus account and
this special surplus should not be transferred into general surplus where
it will be looked upon as available for dividends."'

The Interstate Commerce Commission requires that the discount on
issued stock be subtracted from the premium on issued stock, and that any
balance be shown on the balance sheet as a deferred item."'

Donated Stock — When stock is donated to the corporation, it is recorded
at par value."' There are two methods of handling donated stock, which
are illustrated in the following entries required for a donation of shares
having a par value of $10,000, but which realized only $7,500.

CORPORATION STOCK 137

Entry No. 1 (Same both methods) ''*

Treasury Stock $10 , 000 , 00

Donation Account (or Working Capi-
tal Donated) $10 , 000. 00

Entry No. 2 (Same both methods) '-^

Cash 7,500.00

Donation Account 2 , 500 . 00

Treasury Stock 10,000.00

Entry No. 3 (First Method) '««

Donation Account 7,500. 00

Contributed Surplus 7,500. 00

Entry No. 3 (Second Method)'"

Donation Account 7,500.00

(blank) Account (Insert name of
fictitiously valued asset) 7 , 500 . 00

The second method is preferable in that it gives a conservative pres-
entation of conditions, but the choice of method is a matter to be decided
by the treasurer and directors of the corporation.'**

If desired, the discount or premium on treasury stock may be shown in
separate accounts under those titles, instead of being recorded directly in
the donation account, but such accounts would be merged into the donation
account when all the stock was sold.'" Sometimes the subscriptions to
treasury stock and subscribers to treasury stock accounts are also used."*

Bonus Stock — Stock given as a bonus to subscribers for the issue of
other corporate securities is usually treated as organization expense and
written off over a period of years."° However, as a bonus is practically
discount on treasury stock, it seems preferable to treat a bonus as discount
on stock instead of as organization expense."* Bonus stock is usually
treasury stock, as original stock cannot be issued below par as paid-up
stock."'

Redemption of Stock — Reduction in capital stock cannot be accom-
plished without the consent of at least a majority of the stockholders"*
and authorization by the state.'*° In most states a corporation cannot
reduce its capital stock to an amount less than that of its liabilities.""
Redemption at book value is accomplished by debiting capital stock for its
par value and surplus for the pro rata share in the surplus, and crediting
cash."' Redemption at par affects only the capital stock account, but
redemption at other than par affects both the capital stock and surplus
accounts.'"

Audit of Capital Stock — The charter, by-laws, and minutes should be
examined by the auditor for information relative to authorized capital,
method of payment, and all other provisions governing the issuance of
stock."" A complete record of the authorized and issued stock should be
made.'**

The stock certificate book should be examined and reconciled with the
stockholders' ledger,"" all canceled certificates being inspected or accounted

138 C. P. A. ACCOUNTING

for."" The uncanceled certificates repiesent the outstanding stock.^"' An
auditor is not required, as a general thing, to examine the transfers."' He
should, however, obtain a certificate from the transfer agent as to the
capital stock outstanding.'**

A trial balance should be taken of the stockholders' ledger to see that
the aggregate outstanding stock agi-ees with the general ledger account.^""

The auditor should see that the certificates of treasury stock have been
endorsed over to the corporation or its trustee, and, if the treasury stock
was donated, the intent of the donors should be ascertained.*"' The pro-
ceeds of stock sold during the period should be verified."'"

The auditor must assure himself that all issued shai-es have been fully
paid,"" but he is not called upon to challenge the good faith of the di-
rectors.^"* If stock has been sold on the installment plan, he shoidd ascer-
tain whether or not the calls have been promptly met."**

Stock pledged as collateral should be properly designated and shown
on the balance sheet as a deduction from the outstanding stock.""*

Organization Expense — Organization expenses are those costs neces-
sarily incurred for the purpose of getting a corporation started.^*" Some
accountants stress the fact that a corpoi-ation organized and ready to
commence business is in a better position than an unorganized company,
and the fact that the value of these costs will last as long as the corporate
existence."" They therefore classify organization expense as an intangible
asset."" Other accountants, while admitting these two facts, stress the
need of keeping the balance sheet free from assets which have no salable
value, and therefore regard organization expense as a deferred charge to
income, which should be Avritten off in about five years."" A few account-
ants are still more conservative and advocate charging otf organization
expenses as they are incurred, or, at most, over tlie first two years' opera-
tion."' Since organization expense is an unsalable asset, it should be
written off, but it would be better to write it off in five years than in two,
as this would not reduce the dividends so severely. Organization expense
written off is sometimes ti'eated as a financial expense'" and sometimes as
an administrative expense,'" but it seems preferable to charge it directly
to surplus.'"* As organization expense should be written off directly
against surplus, it should be shown on the balance sheet as a deduction
from the net worth accounts.

Investments in Stocks — Sometimes stock investments are listed under a
special caption,"' but temporary stock investments, or stocks of ready
marketability in which current funds are tied up temporarily,'" may be
classified as current assets,""' and permanent stock investments, or stocks
representing control in affiliated or subsidiary companies,"* may be classi-
fied as fixed assets."*

Temporary investments in stocks should be valued, for balance sheet
purposes, at cost or market, whichever is the lower."" Many accountants
advocate valuing them at market, regardless of cost;'" indeed, insurance
companies are legally compelled to do so.^" It is, however, j>referable, in
order to avoid bringing unrealized profits into the cui-rent period, to value

CORPORATION STOCK 139

them at cost or market, whichever is the lower. If desired, the market
value may be shown in a footnote to the balance sheet."^

As it is undesirable to have the value of the temporary investments
changed on the books every time the })Ooks are closed, these stocks should
be booked at cost, and, whenever the market value is less than cost, the
discrepancy should be shown in the reserve for investment fluctuations
account which would be subtracted fi'om the investment account on the
balance sheet.'"

Many accountants value at cost the permanent investments in stocks of
other companies."" However, it is preferable to use the actual value of the
stock as shown by the certified balance sheet of the affiliated company.""

The dividends received on stock investments should be entered as non-
operating income in the profit and loss statement,"" unless the stock is
booked at its actual value as per the certified balance sheet of the affiliated
company, in which case the dividend would be credited to the investment
account instead of to the income account."' The auditor should list all the
stocks held during the period of the audit so as to ascertain that all divi-
dends have been })roperly recorded."^"

All the stocks owned should be verified by actual inspection,"" and a very
complete and detailed list of them prepared."* Securities out as collateral
should be verified by correspondence,"" and those in transit to the firm
under audit should be checked upon their receipt, and the transmitter
circularized."^ Stocks purchased during the pei-iod of audit should be
verified by correspondence, by biokers' notices, and by inspection."*

140 C. P. A. ACCOUNTING

QUESTIONS
c»rporation stock

General

1. What is a corporation? (Mich., July, 1906; Iowa, Dec, 1918.)

2. What is a close corporalion? (Iowa, Dec, 1918.)

3. What are the distinguishing: characteristics of the "corporation" as
compared with other forms of business orsranization ? (Mich., Julv, 1906*;
A. I. of A., Nov., 1918.)

4. State the advantages and disadvantages of conducting a mercantile
business as a corporation as compared with a partnership. (Mich., June,
1913; Mass., Oct., 1914; Del., June, 1915*; A. I. of A., Nov., 1918.)

5. In the case of an important public corporation having a number of
stockholders throughout the country, vigorous action is displayed between
two opposing interests to obtain control of the directorate and officers, ren-
dering it important that the proxies from the stoekholdei's should be cor-
rectly reported at the meeting. For this purpose you are requested to
certify to the number of proxies received in favor of the respective in-
dividuals. State what information, papei-s, or records you would require
to examine, and how you would proceed. Also draft a form of certificate
you would furnish. (111., May, 1914.)

6. A trading corporation incorporated under the laws of Maine, whose
stockholders are citizens of Massachusetts, decides to reincorporate under
the laws of Massachusetts, (a) State a strong reason to influence the
stockholders in this decision, (h) Describe briefly what the minutes of
each corporation should contain to complete this change. (Mass., Oct.,
1914.)

7. You are called upon by the organizers of a manufacturing company
to advise as to process of securing charter. Company to have a capital of
$50,000. To be incorporated under the laws of Pennsylvania. Give
method of procedure. (Pa., May, 1900.)

8. A. B. has a chance to buy 49 per cent of the stock of the Johnson
Sales Company. All of the stock is now owned by C. J. and he will con-
tinue to hold the balance of 51 per cent. A. B. is anxious to invest, as the
business is very profitable, but hesitates for fear that C. J., who is heavily
involvetl in outside matters, may be forced to sell his stock, and that the
new owners might try to "freeze him out." C. J. has offered to protect
A. B. as far as possible in this respect. What would you advise A. B. to
do? (111., May, 1915.)

CORPORATTON STOCK 141

0. Sketch the history of corporations. Define a modei-n corporation
giving examples of the various kinds. Descrihe safei^uards ajjainst the
abuse of coi-jiorate poAvers or i)rivileges which are in force in countries
other than Florida, and give reasons for and against the adoption of
similar safeguards here. (Fla., July, 1909.)

10. What is the principle underlying capital stock having no par value?
How should it appear on the Balance Sheet of the corporation issuing it ?
How should it appear on the Balance Sheet of the owner thereof! (111.,
Dec, 1918.)

11. In setting up the Balance Sheet of a corporation which has an
issue of 100,000 shares of stock of no par value but a stated value of $5 a
share and an excess of assets over liabilities of $1,500,000, how would you
show the capital on the balance sheet? (A. I. of A., Nov., 1919.)

12. What evidence would you consider satisfactory for the correctness
of the following expenditure: Commissions on sale of stock? (N. C, Nov.,
1919.)

13. What are the underlying principles of corporation accounting?
(N. Y., Jan., 1920.)

14. Name accounts and use of each that are peculiar to corporation
accounting. (N. Y., June, 1901*; Pa., Nov., 1904*; Mich., June, 1914.)

15. What is the meaning of the word "stock" in reference to a corpora-
tion? (a) What stock does it represent? (h) How is it ti'ansf erred ? (c)
What right have stockholders in and to the corporate profit? (Mich., July,
1906.)

16. How should the right to remuneration claimed by officers and direc-
tors of a corporation be verified? (N. Y., Dec., 1898.)

17. In an audit of the books of a company, it is found that the Presi-
dent's Salai-y account is credited with a bonus of $5,000 for "extra service,"
in addition to the usual salary paid him ; what steps should be taken to
ascertain that this item is con-ect? (N. Y., Dec, 1897; N. Y., Feb., 1910*;
Ind., June, 1916.)

18. What would you consider satisfactory evidence of the correctness
and propriety of expenditures of directors' remuneration. (A. I. of A.,
May, 1918; N. C, Nov., 1919.*)

19. In examining the books of a corporation you find that an officer is
a partner in a business from which the corporation makes purchases.
Upon scrutiny you find that all the transactions are at proper figures.
Would you, under such conditions, call attention to the fact when making
your report to the directors? (R. I., Dec, 1907.)

20. After having been employed as auditor of a firm for several years,
the partners advise you that they have decided to conduct their business
as a corporation and have secured a charter under the general laws of the
state accordingly. In Avhat way would your duties as an auditor be affected
by such a change? (111., Nov., 1908.)

21. The Best Store Company was incorporated for $50,000 on March

142 C. P. A. ACCOUNTING

15, 1918, by the three partners, "A," "B," and "C." The change in or-
sanization was not iiiven eflfeet upon the books of the company. Proprie-
tary interest on Januaiy 1, 1918, was $75,000. The profits for the year
1918, determined in January, 1919, are found to be $10,000. Specifically
state how yon would correct this condition on the books of the Company
when you are called in February, 1919. (Wis., Nov., 1919.)

22. A company is organized under the laws of Florida to purchase a
patent and to manufacture and .sell the patented article. The patent is
jiaid for by the entire issue of stock, and the patentee gives back to the
company 49 per cent of the entire stock, to be used for developing pur-
poses. Describe the formalities which must be complied with, and draw
the opening entries in the books, stating what books are required. (Fla.,
July, 1909.)

23. A corporation has a capital stock of $100,000. It ha.s assets at
inventory value amounting to $160,000. With a view to reducing the
number of its enterprises, it sells two of its stores for $85,000 at inventory
value. This $85,000 is distributed among its stockholders. What entries
should be made upon the books, and what procedure would you recommend
in order to safeguard all interest in making such distribution? (111., Nov.,
1904.)

24. Give an example of that portion of the Balance Sheet of a corpora-
tion which deals with the Share and Debenture Capital account. State and
set out the same in proper columns, assuming the following to be the
position of the company's share and debenture capital: (a) share capital,
authorized, $100,000; (6) share capital. Issued or subscribed, $80,000; (c)
share capital, called up, $60,000; (d) calls paid in advance, $5,000; (e)
calls in arrear, $1,000; (/) debenture capital, authorized, $50,000; (g) de-
benture capital, issued or subscribed, $40,000; (h) debenture capital, paid
up, $35,000. (111., Dec.. 1910.)

25. Name the diffei'ent kinds of ])ei*sons who would have an interest in
audit reports prepared for a corporation ; indicate what the interest is,
and show the responsibilitv of the auditor to each class. (Mich., June,
1914.)

26. Formulate, in an imaginary ease, the Journal entry or entries for
the conversion of a partnership into a joint stock company with the
same resources and liabilities. (N. Y., June, 1898; Wash., Mav, 1903;
Va., Nov., 1918.*)

27. State the entries necessary to open a set of corporation books so
that the assets may appear properly on the Ledger. (N. Y., Dec, 1898;
Pa., Nov., 1903*; Va., May, 1917; Va., Nov., 1918*; Iowa, Dec, 1918.*)

28. A corporation is owned by four persons who have an equal number
of shares. During the operations of the company each one of the above
parties is ci-edited through the Cash Book at various times with equal
amoimts as loans to the corporation, and the Cash Book is kept in balance
by increasing the payroll by the amounts credited. Each of the parties
is credited also with interest on undrawn credit balances thus obtained.

CORPORATION STOCK 143

In what manner does such action aifect the results of the business? Please
explain fully. (Pa., Nov., 1904.)

29. A corporation has the following: items in its Balance Sheet : Ac-
counts Payable, Accounts Receivable, Cash, Capital Stock, Expense Ac-
crued not due, Expense Paid in Advance, Goodwill, Merchandise, Machin-
ery, Notes Payable, Patents, Real Estate, Reserve for Depreciation on
Plant, Surplus, Trade Marks, and Treasury Stock.

You are asked to figure the value of the stock. State which items you
would take to get the gross, and which items you would deduct from the
gross to get the net amount, and how you would obtain the value of each
share. (Mass., June, 1913.)

30. What knowledge must a transfer agent possess in order to safe-
guard his com)>any in the transfer of its certificates of stock? (N. Y.,
June, 1913.)

31. A manufacturer having turned his business into a joint stock com-
pany and as yet owning all the stock himself — only a few shares standing
nominally on the company's books as belonging to friends — finds after a
time that the business needs more capital. Thereupon he agrees to sell a
portion of the stock to outside parties for cash, stipulating that the
money so obtained shall be put into the business; that is to say, shall be
at once expended in purchasing new machinery and in repairs and im-
provements, which is done accordingly. How is the transaction properly
to be brought into the company's accounts? (Mich., June, 1910.)

Corporate Books

32. List books and give purpose of each, used by a corporation but not
by a partnership. (N. Y., Dec, 1898*; Pa., Nov., 1899*; N. Y., Jan.,
1901; Pa., Nov., 1901*; N. Y., Jan., 1902; Pa., May, 1902; Md., Oct.,
1903*; Mich., July. 1906*; Mich., Dec, 1906*; Ohio, Dec, 1908*; Va.,
Oct., 1911*; La., May, 1913*; Mich., June, 1913*; Mich., June, 1914;
W. Va., May, 1917*; A. I. of A., May, 1918.*)

33. How would you organize a set of books for a corporation? (Ohio,
Dec, 1908.)

34. What would be your procedure in examining the capital stock
books of a corjioration ? What books would you require? Give reasons
why such an audit may be necessary. (N. Y., June, 1911.)

35. In auditing the accounts of a corporation, for the first year of its
existence, what records and documents should be examined in addition to
the books of accounts and the vouchers? (Ind., May, 1917.)

36. In auditing the accounts of a corporation for the first time, for
what books and i-ecords would you ask and what purpose would you expect
each to .serve in connection with the audit? (N. Y., Dec, 1896; N. Y.,
Jan., 1900*; Wash., May, 1903*; N. Y., Jan., 1904*; Cal., May, 1908*;
Mass., June, 1910; Va., Nov., 1910*; A. I. of A., June, 1917*; Ohio, Oct.,
1919.*)

144 C. P. A. ACCOUNTING

37. What records and documents should an auditor have access to in
an audit of a corporation? (N. Y., Dec., 1898*; Pa., Nov., 1899*; Pa.,
May, 1902*; 111., Nov., 1903*; Mich., July, 1906*; N. Y., June, 1908*;
Kan., May, 1916; A. I. of A., May, 1918*; Iowa, Dec., 1918.*)

38. In the case of a corporation which has been in existence for several
years, if you were engaged to audit the accounts for the last year only,
would you consider it necessary to inspect the Minute Book, Stock Ledger,
Bond Register, or any of the entries in the books of accounts at dates
prior to that covered by your audit? Give reasons. (N. Y., Jan., 1906*;
Ya., Nov., 1910.)

39f Describe the correct manner of writing up, and keeping the fol-
lowing books: Stock Certificate Book, Stockholders' Journal, Transfer
Record, Stockholders' Ledger. Sketch a simple form of each of the above
books. (111., Nov., 1904.)

40. Distinguish between the registration of stock certificates and the
registration of negotiable bonds of a corporation and explain fully the
purposes of such registrations. (Md., Jan., 1909.)

41. What is a Stock (or Shares) Ledger? (N. Y., .Jan.. 1897*; N. Y.,
June, 1900.)

42. Describe how the Stock Ledger (Shares Ledger) of a corporation
is kept. (N. Y., Jan., 1897; N. Y., Jan., 1900; Pa., May, 1903*; N. Y.,
Jan., 1906* ; N. Y., Feb., 1910 ; Mass., April, 1911* ; N. Y., June, 1911* ;
Va., Oct., 1912.*)

43. Give the ruling of a Stock or Shares Ledger for a corporation.
(N. Y., Jan., 1900; N. Y., Feb., 1910; N. Y., June, 1912.*)

44. State the full procedure leading up to the entry of the following
transactions in the shares of a corporation, the par value of which is $100.
April 5, 1901, James Williamson received certificate No. 75 for 100 shares
full paid. May 3, 1901, James Williamson requests a transfer to Geo. T.
Jenkins of 30 of his 100 shares. Outline a form of Stockholders' Ledger
and properly enter the above items therein. (N. Y., Jan., 1902.)

45. What relation does the Stock or Shares Ledger bear to the general
books of the corporation? (N. Y., Jan., 1900; N. Y., June, 1900; N. Y.,
Feb., 1910.)

46. Explain the nature of the records of a Stock (or Shares) Ledger,
and describe the manner in which they are made. (N. Y., June, 1900.)

47. What is the purpose and method of registering stock certificates
and other corporate securities? (Pa., Nov., 1906.)

48. Describe the method of determining the number of shares of capital
stock, both common and preferred, held by each of the several stockholders
of a corporation. (N. Y., Jan., 1906; N. Y., June, 1911* ; Va., Oct., 1912.)

49. Give reasons for or against the necessity of an auditor's verifying
the Stock Ledger of a corporation. (N. Y., Jan., 1900; Wash., May,
1903*; N. Y., Feb., 1910* ; N. Y., Jan., 1918.*)

50. How would you audit the Stock Certificates book of a corporation

CORPORATION STOCK 145

(a) when the corporation has no register, (h) when the corporation hav,
a register? (Pa., Nov., I!)n4; Md., Jan., 1900.)

51. I3i an audit of the accounts of a corporation, should the auditor
accept as conclusive the certificate of the rej^istrar of the stock as to th«
total amount of capital stock outstandin":'? If not, why not? (N. Y.,
June, 1904.)

52. In making: an audit of the accounts of a corporation, would you
consider it part of your duty to verify the transfers of the certiticat&s of
capital stock occurrins: during the period covered bv vonr examination?
(111., May, 1908.)

53. Submit rulings of Transfer Journal suitable to record heavy trans-
fers of a listed stock and all necessary transfer records to be used therewith.
Explain fully the use of each record and its relation to the others. (N. Y.,
Jan., 1911.)

54. Describe the Minute Book and how used. (Pa., May, 1903.)

55. Do you consider it necessary, and if so, why, for an auditor of a
corporation to peruse the minutes of directors' and shareholder' meetings?
(N. Y., June, 1909; Wash., Nov., 1913; Del., June, 1915; N. Y., June,
1917.*)

56. Of what use is the Minute Book of a corporation to an auditor?
(Pa., Nov., 1899; Md., Oct., 1903; N. Y., June, 1909; Md., Jan., 1909;
Va., Oct., 1911*; Del., June, 1915*; Ohio, Nov., 1917.)

57. What should an auditor do in case he is refused access to the
Minute Book? (N. Y., June, 1909* ; Del., June, 1915; N. Y., June, 1917.*)

58. State how you would deal with the following items in auditing a
cash book of a large corporation : (a) Payments of an exceptional nature,
such as the expenses of officials visiting the corporations in England, a
large political contribution, and gifts to members of the board of directors ;

(b) payments to directors for special services in addition to the ordinary
and regular directors' fees. (N. D., July, 1918.)

59. What is the value of a Minute Book in opening the books of "a
corporation? Explain fully. (Pa., Nov., 1904.)

60. Mention three classes of transactions the verification of which
in a corporation audit would lead you to refer to the Minute Books of the
corporation. Give reasons in each ease. (Ohio, Nov., 1918.)

61. (a) Would you refuse to sign an audit certificate if you had been
refused access to the Minute Book of a corporation?

(b) If the answer is "yes" would you sign the certificate with a quali-
fication ?

(d) If the corporation were a "close" one and practically no minutes
were kept, what action would you take and why? (A. I. of A., May,
1919.)

62. Describe the necessary precautions to be taken by a transfer agent

140 C. P. A. ACCOUNTING

to safeguard his corporation, when an executor presents a certificate of
stock for transfer. Outline entries which should appear on the Transfer
Books. (N. Y., Jan., 1918.)

63. To what extent should the auditor of a corpoi'ation check the jne-
fen-ed and common stock certificate registers'? (N. D., July. 1918.)

(54. What method would you adopt to prove the outstanding certificates
of stock to be correct as represented on the Transfer Ledger? (N. Y..
June, 1913.)

Classes of Stock

65. Define: Stock. (Mich., June, 1908.)

66. Name the various forms of capital stock and how created, stating
the rights and privileges of each. (Mich., July, 1906*; Mich., Dec, 1906;
Mich., June, 1913.*)

67. Define: Capital stock. (X. Y., Dec, 1896; Pa.. May. 1903; 111.,
Nov., 1903: Wash., Sept., 1907; Ohio, March, 1910; La., May, 1913*; Cal,,
May, 1916.)

68. How would you verify the liability of a corporation as to capital
stock? (III., May, 1904; Ohio, Dec, 1908.)

69. To what extent would you consider it necessary to verify the
capital stock, and what reference to such verification would you make in
your report? (Mass., June, 1913.)

70. How would you proceed to determine the book value of capital
stock? (N. Y., June, 1919.)

71. State what verification you would make of stock. (N. C, Aug.,
1917.)

72. In making a detailed audit, what procedure would you follow to
verify the capital stock issued? (N. Y., June, 1909*; Mo., Dec, 1915;
Kan.^ Dec, 1915; Ohio, Nov., 1916*; A. I. of A., June, 1917*; Wash.,
July, 1917.*)

73. To what extent do you think it is necessary to veiify the outstand-
ing capital stock of a corporation? (A. I. of A., Jime, 1917.)

74. State what course you would advocate to prevent an over issue of
stock. (Mass., April, 1911.)

75. If called upon to verify the outstanding capital stock of a cor-
poration, what records would you consult? (Mass., April, 1911*; Ohio,
Nov., 1916.)

76. Define: Common stock. (N. Y., Dec, 1896; N. Y., June, 1898*
N. Y., Dec, 1898; Wash., May, 1903*; Pa., Nov., 1903; Mich., Nov., 1907*
Wash., Mav, 1911; Wash., June, 1915; Cal., May, 1916; N. D., July, 1916*
W. Va.. May, 1917; N. C, Nov., 1918; S. C, Sept., 1919; N. C, Nov.,
1919; N. C, June, 1920.)

77. Define: Preferred stock. (N. Y., Dec, 1896; N. Y., Dec, 1898;
Pa., May, 1903 ; Wash., May, 1903* ; Pa., Nov., 1903* ; Mich., Nov., 1907* ;
Wash., June, 1915; Cal., May, 1916; N. D., July, 1916*; W. Va., May,

CORPORATION STOCK 147

1917; Wash., July, 1917; N. C, Nov., 1918; S. C, Sept., 1919; N. C,
Nov., 1919; N. C, June, 1920.)

78. How would you verify the Preferred Capital Stock account in mak-
ing a Balance Sheet audit? (Mass., Oct., 1914; Ohio, Nov., 1915.)

79. You are elected the auditor of a corporation by the holders of both
common and prefeiTed stock atid it is your duty to safeguard the interests
of both classes of stockholders. The preference stock bears 7 per cent,
and is noncumulative. Mention what precautions you would adopt to
safejfuard the interests of the preference shareholders, giving reasons
therefor. (111., May, 1907; Mich., June, 1912*; Wis., April, 1914*; Ind.,
June, 1916*; Ohio, Nov., 1916.*)

80. Define: Cumulative preferred stock. (Wash., May, 1911; Wash.,
Nov., 1913; Cal., May, 1916; N. D., July, 1916.*)

81. In its prospectus a corporation represents that it has an issue, of
"cumulative, nonvoting, nonparticipating, 6 per cent preferred stock."
(jrive your interpretation of this expression. (Mass., Oct., 1915.)

82. Define: Founders' stock. (N. C, Nov., 1918; N. C, Nov., .1919.)

83. Define : Guaranteed stock. (N. C, Nov., 1918; N. C, Nov., 1919;
N. C, June, 1920.)

84. Define: Debenture stock. (111., May, 1914*; N. C, Nov., 1918;
N. C, June, 1920.)

85. Define: Share capital. (N. Y., Dec., 1896; Cal., May, 1916.)

86. Explain fully and state how Authorized Capital Stock account
should be carried upon the books. (Mich., Nov., 1907.)

87. What is "watered stock"? (N. Y., Dec., 1898; Mich., Dec, 1906;
Wash., May, 1911; Mich., June, 1914*; Wash., June, 1915; Cal., Nov.,
1916; W. Va., May, 1917; Cal., June, 1917; Mich., June, 1919.)

88. How should watered stock appear on the books? (Mich., Dec,
1906; Cal., June, 1917.)

89. How should watered stock be treated in audit reports? (Mich.,
June, 1919.)

90. A company Avhose stock is widely distributed and much dealt in,
increases its capital stock of $500,000 by a stock dividend of 100 per cent.
Some years subsequently an original stockholder brings suit for elimination
from the capital stock of what he claims is "water." How can the stock
issued as dividend be eliminated from the $1,000,000 of stock outstanding?
(111., May, 1905.)

91. How do you determine the amount of watered stock? (Cal., June,
1917.)

92. Define: Donated Stock. (Mass., Oct., 1917.)

93. How would donated stock affect the book value of capital stock?
(Mass., Oct., 1917.)

94. State how you would show capital stock donated to the company
on the Balance Sheet. (Ohio, Nov., 1917.)

148 C. P. A. ACCOUNTING

95. Mention and explain two common views concerninj;: tlie trcalineiit
of donated capital stock. (A. I. of A., Nov., J918; Pa., Nov., 1919.)

96. Does unsubscribed stock in a corporation constitute a liability f If
it does, under what account would it appear in a ledprer? (Mich., Juno,
1908.)

97. Say how you would show capital stock authorized but not sub-
scribed on the Balance Sheet. (Ohio, Nov., 1917.)

98. How would you treat in the accounts bonus stock Issued with
bonds? (Cal., Nov., 1916.)

99. A corporation has two classes of stock fully issued: $5,000,000 — 7
per cent cumulative preferred a.s to dividends and assets, 10 per cent divi-
dends are in arrears; $12,000,000 — common, on which no dividend has been
paid. The corporation proposes to retire by purchase $2,000,000 com-
mon. What would be the effect, if any, on the interests of the preferred
stockholders'? Give reasons supporting? your answer. (Mass., April,
19n.)

100. A corporation is fonned whose capital stock has no par value.
Shares issued, 1,000; as.sets, $8,000; liabilities, $4,000. Prepare the
Journal entries to open the books. (N. Y., Jan., 1919.)

101. Differentiate unsubscribed stock, unis.sued stock, issued stock and
treasury stock. (N. Y., Jan., 1916.)

Treasury Stock

102. Define : Treasury stock. (N. Y., Jan., 1902* ; Pa., May, 1903» ; 111.,
Nov., 1904*; N. D., June, 1914; Wa.sh., June, 1915; Wis., Mav, 1916; Cal.,
May, 1916; Pa., Nov., 1917; N. Y., June, 1918; Va., Nov., 1918; N. C,
Nov., 1918; Iowa, Dec., 1918; A. I. of A., May, 1919; N. C, June, 1919;
N. C, Sept., 1919'; N. C, Nov., 1919; N. C, June, 1920.)

103. "Treasury stock or bonds are merely so many legalized pieces of
paper, and cannot in any sense be considered as assets of the corporation
creating and issuing them." (Dickinson.) Defend. (Kan., May, 1916.)

104. Discuss briefly the following statement: "Treasury stock is unis-
sued capital stock." (Cal., Nov., 1916.)

105. In your opinion, what is the correct accounting procedure in
cases where an incorporated company sells its treasury stock at premium?
(Wash., June, 1912.)

106. A corporation having issued its capital stock at par buys 1,000
shares at 95. It later sells 500 of these shares at 98, and 300 at 85, and
200 at 101. Give the journal entries covering these transactions. How
should the items appear cm the Balance Sheet inuiiediately after purchas-
ing the stock, and inunediately after each of the sales? (A. I of 4., June,
1917.)

107. On which side of the ledger should the balance of the treasury
stock account appear? (Mo., Dec, 1914.)

CORPORATION STOCK 149

lOS. Explain fully and state how accounts should be carried on tb«
books with treasury stock. (Mieh., Nov., 1907; Mich., June, 1915.*)

109. How would you show treasury stock on a Balance Sheet t If your
answer is "as an asset," state your reason. (Cal., May, 1916; Pa., Nov.,
1917*; N. C, Nov., 1918*; N. C, June, 1919; N. C, si^t., 1919.)

110. (a) How would you deal in the Balance Sheet of a corporation
with shares recovered from a vendor to whom they had been issued as
fully paid and who had returned them in s^lement of a claim for
fraudulent misrepresentation in respect of the property sold by him to the
corporation ?

(h) How would yon deal with these shares for the purposes of a
dividend?

(A. L of A., June, 1917; Ind., Nov., 1917.*)

111. A corporation is organized with an authorized capital stock of
$50,000 of which only $10,000 is sold, and stock certificates issued therefor.
Two conflicting: methods of recordingr the capital stock on the books are
urged by rival accountants as follows: (a) Treasury stock to capital stock
$50,000, cash and properties to treasury stock $40,000; (6) cash proper-
ties to capital stock $40,000. Which method is the better and why?
(N. Y., Jan., 1906; Cal., June, 1917.)

112. A company has acquired at $90 per share 100 shares of its own
jpital stock, of the par value of $100 per share. Its Balance Sheet

shows treasury stock $9,000. Is this correct? If so, why? If not, state
how vou would adjust the books. (N. Y., June. 1912; Mich., Dec, 1913;
Ohio,' Nov., 1917; N. Y., June, 19ia*)

113. What is involved in the verification of treasury stock? (Cal.,
May. 1916: Mich., Dec., 1916.*)

114. It frequently happens that a corporation contracts to purchase
property at an agreed price, which on the face of the contract is declared
to be its value, and that by another clause in the contract, or by another
contract, the vendors agree to provide in addition to the property, a cer-
tain sum for working capital or even for free surplus.

It is sometimes maintained that this free sum so provided is a profit or
surplus of the new corjxjration available for payment of dividends if the
directors so determine.

Write a brief expression of your opinion as to the proper treatment of
the sum turned back.

(A. I. of A., May, 1919.)

115. Prepare Journal eitry for retiring treasury stock of the par value
of $100 acquired at $50 and the book value of $125. (N. C, June. 1920.)

116. A company with an authorized capital stock of $3,000,000, $100
par value, issues $2,400,000 of shares in pajTuent of various properties.
In order to secure working capital the shareholders return to the eom-
1 any three eightlis of their holdings to be sold at $50, and on the same
day 3.000 shares are so sold and |>aid for. How would you treat this
matter?

150 C. P. A. ACCOUNTING

(a) Draft entries and show Ledger accounts and balances.
(6) After all the treasury stock has been sold, state what should be
done as to entries, and the resultant effect upon property account.

(Mich., Dec, 1916*; Okla., Nov., 1919.)

117. A financing corporation which had paid $450,000 for six patents
of equal value, sold one of these patents during the first year of its exist-
ence and received as the consideration for the sale 1,500 shares of pre-
ferred stock (par value $100) in a subsidiary company organized for the
purpose of working the patent. During the second year of its life the
financing corporation sold the 1,500 shares of preferred stock for $100,000.
State how you would treat the accounts in respect to these tw'o transactions
in the financing corporation at the end of the first and second years
respectively. (N. D., July, 1918.)

Organization Expense

118. What are organization expenses? (Wash., Nov., 1913; A. I. of
A., June, 1917; Ind., May, 1918.)

119. What class of expenditures do you consider properly belong to
"organization expense account," on the books of a corporation? Give
examples and reasons. (N. Y., Jan., 1919.)

120. How should organization expense be treated on the books of a cor-
poration? (N. Y., Jan., 1904*: N. Y., Jan., 1906* ; Mass., June, 1910;
Va., Nov., 1910*; Mich., June, 1913* ; Colo., Dec, 1913; A. I. of A.,
June, 1917; Mass., Oct.. 1917*; Ohio, Nov., 1917; Ind., May, 1918*; Va.,
Nov., 1918; Iowa, Dec, 1918*; A. I. of A., May, 1920*.)

121. At what point do expenses cease to be organization expenses and
become operating expenses? (A. I. of A., June, 1917; Ind., May, 1918.)

122. What is usually included in the account, Organization Expenses, in
the books of a company? (Mass., June, 1910; Colo., Dec, 1913.)

123. Upon what basis should organization expense, carried as a de-
ferred asset, be valued? (Cal., Nov., 1916.)

124. Classify the accounts properly recording the following items ac-
cording to the subdivision of assets, liabilities, proprietary interest, in-
come and expenses under which it should be grouped, (a) organization ex-
pense, (b) organization expenses written off. (Wis., May, 1919.)

125. A pei-son is interested in the profits of a corporation, but is not
a shareholder therein. He objects to having the preliminary expenses
enter into the Profit and Loss accounts. Is his position tenable? Give
reasons. (R. I., Dec, 1907.)

Subscriptions

120. Define: Subscription. (N. D., June, 1914.)

127. Describe the nature of the Subscription account. (N. Y., Dec,
1S96; N. Y., June, 1899; Wash., Aug., 1908; Ya., Oct., 1912*; W. Va.,
May, 1917.)

CORPORATION STOCK 151

128. On which side of the ledj^er should the balance of the Capital
Stock Subscription account appear? (Mo., Dec, 1914.)

129. Explain fully and state how accounts should be carried upon the
books with unsubscribed stock. (Mich., Nov., 1907.)

130. Of the authorized capital stock of $100,000 one-half, or $50,000
has been subscribed and only $25,000 has been paid in in subscriptions.
Submit the Balance Sheet, (Cal., May, 1916.)

131. Define: Stock right. (N. Y., Jan., 1911; Kan., May, 1916.)

132. (a) State the purposes for which subscription privileges or
"rights" may be given stockholders, (b) How may a stockholder use the
"right'"? (c) What is the value of a "right" in the following case: The
par value of the outstanding capital stock of a corporation is $1,000,000;
market value, $150 per share. The stockholders of a certain date are of-
fered $500,000 more of this same class of stock at $125. (Wis., May,
1919.)

133. "B" contracts for $5,000 of capital stock in the Stone Manu-
facturing Company, which is to be paid for in ten equal installments. He
fails to pay the last installment and forfeits the stock to the corporation
who sells it for $3,800. The cost to the corporation was $50. Journalize
the transaction. (N. D., June, 1914.)

134. If you found a Journal entry in the General Journal of a cor-
poration cancelling an obligation due from subscriber to capital stock, for
his subscription to capital stock, what evidence would you require in
support of such entrj^? (N. Y., Jan., 1920.)

135. How should money received on account of stock subscriptions and
forfeited by nonpayment of installments as they mature, be treated on the
books of the corporation"? (N. Y., June, 1906; Fla., July, 1909.*)

136. A corj)oration is organized under the laAvs of this state, with an
authorized capital of $50,000 divided into shares having a par value of
$100 each. Six men agree to subscribe to 10 shares each. Omitting the
explanations that should accompany original entiies, draft three types of
opening entries for the corporation and point out which one you would
favor. Give reasons. (N. Y., Jan., 1917.)

137. A corpoT'ation was duly authorized to do business in this state,
capitalized at $100,000, which amount was fully subscribed for before in-
corporating. Only 50 per cent of that amount was called in, viz., $50,000;
and, after completing the first year's opeiations, it was decided that it
would be unnecessary to call in the balance of the amount subscribed for.

At a general meeting of the membeis of the corporation, a resolution was
passed unanimously, and recorded in the minutes, reducing the capital to
$50,000, and authorizing and directing the bookkeeper to clear off the bal-
ance of $50,000 standing at the debit of Subscription account.

As auditor, would you consider that those enti-ies called for comment?
If so, state fully for what reason.

(Wash., April, 1906.)

152 C. P. A. ACCOUNTING

Stock Discount and Premium

138. How should the losses on shares of stock issued at a discount be
dealt with in the accounts of a corporation? (N. Y., June, 1898; AVash.,
May, 1903; Ind., June, 1916; Va., Nov., 1918.)

139. How should stock sold at a premium be treated in the books of a
corporation? Give reasons for your answer. (N. Y., June, 1901*; R. I.,
Dec, 1907*; Wash., May, 1910; Ohio, Nov., 1917*; Ohio, Nov., 1918*;
N. Y., Jan., 1919.*)

140. May premiums received on account of sales of capital stock be
applied against discounts of former years ? (Cal., Nov., 1916.)

141. How should the discount and premium arisinjr from the sale of a
company's own securities held in its treasury be treated on the books?
Give examples. (N. Y., June, 1902.)

142. Is it proper for a corporation to pay a dividend out of surplus
arising from the sale of treasury stock at a premium? Whv? (N. D.,
July, 1918* ; Ohio, Nov., 1918* ; N. Y., Jan., 1919.)

143. A corporation increases its capital stock, which it sells at auction,
receiving therefor, as premiums above the par value, $3,000. The treasurer
credits this amount to Profit and Loss account and, in his statement, shows
it as a part of the profits. State: (a) your opinion thereof: (b) to what
account, if other than Profit and Loss, the amount should be credited; (c)
how it should be shown in the'treasurer's statement; and (d) your reasons.
(Mass., April, 1911.)

144. What, in your opinion, is the coriect method of recording on its
books of account the purchase of property and plant by a corporation
where payment is made in capital stock of the purchasing company, the
par value of such stock being greatly in excess of the actual value of the
assets acquired? (N. Y., June, 1918.)

Securities

145. Under what circumstances, if any, would you examine the securi-
ties owned by a corporation, and, if you think this course unnecessary,
give your reasons why, and should you think it necessary, state how you
would proceed in the event the securities are not in the company's posses-
sion. (111., May, 1913: Ohio, Nov., 1915.)

146. How would you. as auditor of an incorporated corai)any, satisfy
yourself of the existence of shares or bonds given as security for loans to
the company? '(Wash., Aug., 1908.)

147. In examining se<'uri(ie'^ what data .should be recorded to protect
the auditor? What is to be apprehended? (N. Y., Jan., 1914; Ohio,
Nov., 1915; Ohio, N«v., 1916.*)

148. What precautions should be taken to avoid substitution or other
xnanipulation during the inspection of securities? (111., Dec, 1918.)

CORPORATION STOCK 153

149. How may the correctness of securities in a Balance Sheet be de-
termined? (N. Y., June, 1897*; N. Y., Dec, 1897*; N. Y., Jan., 1902*;
N. Y., Jan., 1906* ; N. Y., June, 1906* ; N. Y., Feb., 1908* ; Ohio, March,
1910*; Mass., June, 1910; Mich., June, 1912*; Kan., May, 1916; N. C,
June, 1916; Mass., Oct., 1916*; Ind., Nov., KIT*; 111., Dec, 1918.*)

150. To what extent are you justified in accepting the certificates of
officials of a corporation as to bonds and stocks of outside companies
owned? (Ind., Nov., 1917.)

151. How would you record on the books of account the purchase of
securities which had been only partially j^aid for? (N. Y., June, 1919.)

152. In the course of an audit you find the following classes of security :
(1) Real estate, (2) mortgages on real estate, (3) chattel mortgages, (4)
stocks and bonds held as collater-al security. For each of these classes
state (a) the method of examination, (b) special points to be examined,
(c) form of report. (Fla., July, 1909.)

153. A manufacturer makes extensive investments in stocks and bonds,
buying and selling from time to time as the market conditions warrant and
clearing all such transactions through his regular books of account. How
should such transactions be isolated from his manufacturing operations
and what books and accounts should he employ to record the details of
the principal and income from such investments? (N. Y., Jan., 1906.)

154. Your vei'ification of the securities of a corporation has to be made
at a date about two months subsequent to the date of the Balance Sheet
you are asked to certify. Can you suggest steps which will enable you to
do this without risk of overlooking serious overstatement? (A. I. of A.,
Nov., 1918; III., Dec, 1918.)

155. In making a detailed audit what procedure would you follow to
verify the proceeds from sale of marketable investment? (Kan,, Dec,
1915; Mo., Dec, 1915.)

156. In prei)aring a Balance Sheet of a corporation how would you
classify or deal with securities representing (a) an interest in a competing
company, (6) the entire ownership of a plant, (c) an investment of a
temporary surplus of cash? (A. I. of A., June, 1917.)

157. Classify the Income from Stocks and Bonds Owned account prop-
erly, according to the subdivision of assets, liabilities, proprietary interest,
income and expenses under which it should be grouped. (Wis., May,
1919.)

158. A concern has an authorized issue of bonds to the amount of
$100,000; $40,000 are sold at par, $10,000 are sold at 10 per cent pre-
mium, $30,000 are put up as collateral to a $25,000 loan at the bank, and
$20,000 are on hand. Pre])are a Balance Sheet showing the above trans-
actions, supplying the other needed accounts. (N. Y., June, 1908* ; Mich.,
June, 1910*; "n. Y., Jan., 1914*; Mich., June, 1914; Md., Oct., 1919.)

159. The Oak Furniture Company i)laced $50,000 of its undivided earn-
ings in the hands of a broker to invest in United States 4 per cent bonds.
The bonds were for $1,000 each and cost 101%, commission Vs- Prepare

154 C. P. A. ACCOUNTING

detailed entries to record properly the transacticn of the company's books.
(N. Y., June, 1915.)

160. The Bristol Manufacturing Company issued and sold on the 1st of
January, 1911, to "A" and "B" (50 to each at the same price), first mort-
gage bonds of $500 each, bearing interest at 1 per cent per annum, and
received $4S,000 in cash. What records of the transactions should be
made, and in what books? (111., May, 1911.)

161. An investment company purchased for investment $100,000 of 6
per cent 10-year municipal debentures at 96, and $200,000 of 5 per cent
industrial bonds, 15 j-ears to run, at 104. How would you treat the dis-
count and the premium in the accounts? Give the Journal entries. (Wis.,
April, 1914*; Wash., June, 1915.)

162. In auditing the books of a corporation you find record of the
ownership of stocks and bonds, some of which are in hand, some are
deposited with bankers or others for safekeeping, and other? are lodged
as security for loans. State what kind of evidence you would require in
each case, specifying particularly in the case of stocks and registeretl
bonds; if not registered in the name of the corporation, what would you
consider necessary to protect your client's interests? (A. I. of A., May,
1920.)

163. What means should be employed to veiify the value of investment
securities? (N. Y., Dec., 1896*; N. Y., June, 1898*; N. Y., Dec., 1898*;
Pa., May, 1900*; N. Y., Jan., 1907; N. Y., June, 1909*; Ohio, March,
1910*; N. Y., Jan., 1911*; Va., Oct., 1912*; Cal., May, 1916*; Mass., Oct.,
1917.*)

164. What procedure would you follow in detennining the connect
valuation, for Balance Sheet purposes, of investment securities purchased
at a premium or at a discount? (Ohio, Oct., 1919.) "■

165. Finance corporations holding a large number of shares in other
corporations are in the habit of valuing their securities for Balance Sheet
purposes at either (a) cost price, or (6) market price at the date of the
balance sheet. Discuss the respective merits of the two methods and say
which you consider the soundest from an accountant's point of view. (111.,
May, 1905.)

166. Discuss generally the duty of an auditor in relation to the question
of depreciation of outside investments of fluctuating value. (Mich., June,
1913*; Wash., Nov., 1913; Mass., Oct., 1917.*)

167. A corporation formed to invest in certain classes of securities has
made a serious loss on paper, by a fall in the ])rice of some of its pur-
chases, while it has earned enough on income to pay the usual dividend.
How should this be dealt with in the annual accounts? (111., May, 1910;
Mich., June, 1913.*)

168. Where would you place the Appreciation of Securities account
in the Income and Profit and Loss account? (Md., Dec, 1917.)

169. How would you classify investments in stocks in preparing a

CORPORATION STOCK 155

certificate of condition, to be filed with the Secretary of the Common-
wealth? (Mass., April, 1911.)

170. A corporation has a number of investments in stocks and bonds
wliich are listed, and have a definite market price from day to day. It
carries them at their cost prices in the Ledger and wishes to retain these
cost prices, but at the same time wishes to have them show in the Balance
Sheet at the market prices. State a convenient method of doing this with-
out changing the cost values in the Ledger. (Matis., June, 1913.)

171. A. B. is a heavy speculator on margin on the stock exchange,
buying and selling in numerous transactions a large variety of seciu-ities.
His broker, C. D., renders him monthly a statement of transactions and
an account current. State the steps you would take to completely audit
C. D.'s monthly account cui'rent and statement. (Mass., June, 1913.)

172. In consolidating two banks, at what value should the bond invest-
ments be set up? (Mich., June, 1919.)

173. In auditing the accounts of a large corporation you find an
account with Liberty Bonds, charged with $200,000.00, representing the
cost of bonds subscribed and paid for by the company. At the date of
the balance sheet to which you are to certify, the bonds had a market
value of $187,500.00. What attitude would you take as to their valuation
in the balance sheet? (A. I. of A., Nov., 1920.)

174. What steps should be taken in the most complete possible verifica-
tion of the capital stock account of a corporation in an audit for a year,
if during that year the authorized capital was increased and new stock
was issued, and certain shares were acquired and held by the company
(assuming that it was legal to do so), and if (a) there is a registrar of the
stock and (b) there is not? (A. I. of A., Nov., 1920.)

156 C. P. A. ACCOUNTING

PROBLEMS

CORPORATION STOCK

1. A corporation incorporated under the laws of the State of South
Dakota with an authoiized capitalization of $2,000,000 offers stock for
subscription under the following terras and conditions :

The sale of shares of preferred stock, par value $100, at a discount of
25 per cent, payable in five installments. To each purchaser of preferred
stock shall be donated one share of common stock, par value $100.

At the end of the year it was found that the money had been received
from installments paid on subscriptions to preferred stock as follows:
First installment, $120,750; second installment, $96,600; third install-
ment, $96,600; fourth installment, $96,600; fifth installment, $96,600.

The organizer of the corporation had purchased a vacant building and
real estate suitable for the factory site, paying therefor $27,500. The
property purchased was appraised by disinterested appraisers and valued
conservatively at $45,000.

The owner (organizer) then turned the said property over to the cor-
poration at the appraised value, viz., $45,000, and received therefor pre-
ferred stock at same price as subscribers, which was at 25 per cent dis-
count, and also received one share of common stock (donated) for each
share of preferred stock.

The expense of organization and sale of stock at the end of the year was
found to be as follows: Commissions on sale of stock, $10,000; office
expenses, clerk hire, heat and light, stationery and other expenses, $3,000 ;
appraisal, $250; betterments and remodeling building for occupancy,
$2,000.

Draw up a statement showing the condition of organization, using re-
ceipts and disbursements as above and showing the condition of stock sub-
scriptions and stock issue. (Iowa, Dec, 1918.)

2. The Unique Manufacturing Company, a corporation, was organized
July 1, 1913, with an authorized capital stock of $215,000, par value of
shares, $100 each, for the purpose of manufacturing novelties. The five in-
corporatoi'S subscribed and paid for five shares each, organization expenses
were incurred to the amount of $5,000 and paid for in stock, and tlie bal-
ance of the stock was disposed of on the following conditions: 10 per cent
upon subscription, and thi-ee eciual calls for the balance at 30, 60 and 00
days.

On July 31, the Unique Manufacturing Company secured an option for
30 days on the plant of "A" and "B" for $10,000, agreeing to take over
the assets, exclusive of cash, and assume the liabilities of the partnershii)

CORPORATION STOCK

157

as at July 31, for the sum of $200,000, payable $90,000 immediately after

taking over the business, and the balance in 90 days. At the expiration of
the option, the corporation took over the plant as agreed.

The following- is a transcript of "A" and "B's" ledger balances as at
July 31, 1913:

Land $30,000

Buildings 35,000

Machinery 20,000

Furniture and fixtures -. 5,000

Raw Material 10,000

Tools 2,500

Finished goods 10,000

Work in process 5,000

Supplies 7,500

Accounts Receivable 25,000

Cash 8,200

Mtortgages on Buildings 10,000

Reserve for Depreciation — machinery 2,500

Reserve for Bad Debts 1,000

Accounts Payable 15,000

"A" 77,820

"B" 51,880

During the interval "A" and "B," with the consent of the corporation,
had sold finished goods for $5,000, which was 2o per cent above cost.

The subscriptions to the stock of the corporation were met on call with
the exception that on the second call a subscriber for 25 shares notified
the corporation that lie was unable to complete his agreement, and he was
released witliout further liability. The forfeited stock was sold for cash,
at par.
From the foregoing, draft:

(a) Journal entries necessary to close the books of the partnership.
(6) To open the books of the corporation and to show all transactions
on the Unique Company's books.

3. On June 30, 1917, Mace & Morgan, partners operating a manu-
facturing plant, decided to incorporate under the general laws of the
State of Virginia. The corporation purchased all the assets and assumed
all the liabilities of the partnership as set forth in the Balance Sheet
dated June 30, 1917.

The corporation has an authorized capital of $500,000 and it gave its
entire issue of capital stock as the consideration for the purchase of the
partnership. The entire stock was taken by Mace & Morgan.
Balance Sheet, June 30, 1917

Assets

Plant and Machinery $175,000

Inventory 102,625

Accounts Receivable 113,750

Notes Receivable 7,500

Cash 32,125

$431,000

Liabililies

Mace's Investment $300,000

Morgan's Investment

Accounts Payable

Notes Payable

Wages Due and Unpaid . .

100,000

26,250

3,500

1,250

$431,000

158

C. P. A. ACCOUNTING

The change in organization was not retlected on the books at the time
of incoi-poration, but at the close of the fust fiscal year (June 30, 1918)
of the corporation's existence the condition of the books was shown by the
following trial balance :

Debits

Credits

Mace's Investment

Morgan's Investment

Plant and Machinery

Material Inventory, June 30, 1917

Sales

Purchase

Labor

Office Salaries

Traveling Expenses

Interest

Stationery and Printing

Rent and Taxes

Allowances on Sales

Cash Discounts

Fuel

Insurance

Freight Inward

Commission

Advertising

Notes Receivable

Notes Payable

Accounts Receivable

Accounts Payable

Cash

$187,500
102,625

240,000

172,500

35,000

12,000

3,000

875

21,000

1,250

10,000

23,000

875

8,750

31,875

2,500

30,575

180,575

37,875

$300,000
100,000

657,025

5,500
39,250

$1,101,775

Depreciation on Plant and Machineiy, 5 per cent; Unexpired Insurance,
$375; Bad Debts, $4,625; Inventory of Material on hand June 30, 1918,
$98,025.

The bad debts represent a part of the Accounts Receivable taken over by
the corporation June 30, 1917, which accounts were guaranteed by Mace
& Morgan individually on a basis of the investment of each at the time
the business was incorporated.

Make such entries as would convert the partnership books into those of
the corporation and prepare an Income account and analysis of Profit and
Loss for the year ending June 30, 1918, and a Balance Sheet as of June
}0, 1918.

(Va., Nov., 1918.)

4. A stockholder desires to know the book value of his stock in a cor-
poration for the purpose of accepting an offer from a purchaser who
agrees to buy his stock at the book value as shown by the following Balance
Sheet. Prepare a statement showing the book value of the stock.

CORPORATION STOCK

150

Assets

Cash on hand $2r),()nn

Accounts Receivable 100,000

Notes Receivable 30,0(K)

Inventories 1(X),000

Treasury Stock (1,(X)0

shares) 125,000

Cost of i lant 800,000

$1,180,000

Liabilities

Accounts Payable $15,000

Notes Payable 50,000

Bonds Outstanding 200,000

Reserve for Shrinkage of

Inventories 25,000

Reserve for Depreciation 50,000

Reserve for Extinguish-
ment of Bonds 100,000

Reserve for Additions to

Plant 50,000

Capital Stock (3,000

shares) 300,000

Reserve for Working

Capital 200,000

Undivided Profits 190,000

$1,180,000

(N. C, Nov., 1918.)

5. In Mr. Jones' Private Ledger he keeps accounts with each invest-
ment he makes, one of which is an investment of 1,000 shares (par value
$100) of the A. B. Company which he acquired in July, 1914, for $85,000.
After this date and up to December 31, 1918, he makes further purchases
and sales of this stock. A certified public accountant called in to prepare
Mr. Jones' income tax return for 1918 finds that these and other transac-
tions have been wiitten up in the following manner, no effort to show the
profit of the sale of 1,000 shares on June 1, 1918, having been attempted.

Investment A. B. Company Account

July 1, 1914
Dec. 31, 1914
May 31, 1915
Nov. 30, 1915
Dec. 31, 1915
July 1, 1916

Feb. 28 1917
Dec. 31, 1917

June 1, 1918

1,000 shares purchased

Entry to carry this stock at par

Purchased 1,500 shares at par

Sold 300 shares at 125

Profit and loss — profit on sale of 300 shares

Stock dividend of 50 per cent on 2,200
shares declared from profits, accumulated
prior to Mar. 1. 1913

Sold 700 shares at 110

Profit and Loss, profit made on sale of 700
shares

Sold 1,000 shares at 125

Rewrite this entire account to show how it should have been kept in order
to show actual profit on each sale and also calculate the actual profit on
the last sale of 1,000 shares. What is the book value of the total shares on
hand December 31, 1918?

(A. L of A., Nov., 1919.)

160 C. P. A. ACCOUNTING

6. The directors of the Clinrles Manufactiuing- Company decide to
change their plan of capitalization by retiring their common stock and
issuing preferred stock and new comiuon stock in place of it. On De-
cember 31, 1917, their books shewed $1,000,000 common stock and $300,000
surplas. The new plan offered each common stockholder 1.3 shares of pre-
ferred stock and 1 share of new common stock for each share of old com-
mon stock, fractional shares amounting to $6,400 to be redeemable in
cash. Amendments to the articles of incorporation were duly made pro-
viding an authorized amount of $1,500,000 of preferred stock and
$2,000,000 of common stock. On April 1, all exchanges had been com-
pleted with the following excej^tions: unissued common .stock, 1,000 shares;
unissued preferred stock, 1,300 shares; fractional shares, $300. The par
value of each kind of stock is $100 per share.

Draft the necessary Journal entry or entries to record the above
changes.

(Wis., April, 1918.)

7. The authorized capital stock of a corporation is $500,000, divided
into 5,000 shares, par value $100. Of this amount $400,000 has been sub-
scribed and paid for in full. The corporation purchases ten shares of a
dissatisfied stockholder for $75 a share, and five other stockholders each
donate five shares to the company. Five shares of the purchased stock and
all the donated stock are sold for $50 a share.

(a) Draft proper entries and show the Ledger accounts and balances.
(6) How would the balances of the accounts in (a) appear in a Balance
Sheet? (c) Give the entries and show the Ledger accounts and balances
if the capital stock were of no specified par value, but 5,000 shares had
been issued at $80 and the other conditions remain as stated in the first
paragraph, (d) How would the balances of the accounts in (c) appear
in a Balance Sheet?

(Wis., April, 1917.)

8. J. B. Brown and L. C. Smith are partners, and in order to raise
more capital and to preserve the organization they decide to incorporate.
A company was duly incorporated under the name of The Eclipse Com-
pany, with an authorized capital of $800,000, di\-ided into 8,000 shares
of the par value of $100 each.

The partners agi-eed to sell for the sum of $800,000, payable in capital
stock of the corporation at par, all rights to and title in the net assets of
the partnership, exclusive of the cash, which was divided between the
partners in proportion to their several interests at the time of the sale of
the property.

According to the articles of partnership, Brown and Smith weie ecjually
interested in the assets, but the profits and losses were on a basis of 60
per cent and 40 per cent, respectively.

The partnership Balance Sheet at the time of the sale was:

CORPORATION STOCK

161

Land and Buildings $2(M),(K)0

Cash 10,000

Inventories 100,0(K)

Accounts Receivable 150,000

Machinery and Equipment 100,000

$560,000

Notes Payable $100,000

Accounts Payable 40,000

Brown's Capital 210,000

Smith's Capital 210,000

$560,000

For the purpose of providing workin^^ capital, the partnership donated
$300,000 of the capital stock to the corporation, which was subsequently
sold at $50 per share.

You are required to (1) close the partnership books, showing Ledger
accounts of partners only; (2) open corporation books; (3) prepare a
Balance Sheet of the corporation before sale of donated stock; (4)
prepare a Balance Sheet after sale of donated stock.

(Ohio, Oct., 1919.)

CHAPTER IX

INTEREST

Interest and Discount — Although both disooiint and interest are fre-
quently recorded in the same account/ they must not be confused. Dis-
count is the allowance made for the realization upon an undue asset/ while
interest is the payment made for the use of capital/ Discount includes
allowances made for prompt payment, or cash discounts; allowances made
to customers from list prices, or trade discounts; differences between par
and a purchase price less than par, or discount on securities; and interest
paid in advance, or commercial discount,* the last being the only kind of
discount included in the interest and discount account.' If simple interest
is collected in advance, it is called commercial discount ; if compound in-
terest is collected in advance, it is called true discount."

It has been claimed that as bank discount is prepaid interest,' it should
be designated intei'est and not discount.* However, interest is calculated
on principal only, while bank discount is calculated on both principal and
intei'est.' The interest on a note for $1,000 due at six per cent for one
year would amount to $00 at the end of the year, but if money is worth six
per cent, the bank discount at the beginning of the year would be six
per cent of $1,060, or $63.60.

If interest is figured on a constant principal, it is called simple interest,
while if it is figured on a principal periodically increased by the simple
interest, it is called compound interest.'"

Prepaid Interest — Prepaid interest on notes payable and receivable are,
respectively, deferred charges to operation" and deferred credits to in-
come." Both kinds of prepaid interest may be created directly upon the
receipt or payment of the money, in Avhich case the prepaid interest would
be prorated between the accounting pei-iods," or by adjusting entries which
separate the real and nominal elements in the interest expense and interest
income accounts."

Accrued Interest — Accrued interest receivable and accrued interest pay-
able are current asset''' and current liability accounts,*" respectively. They
are created by charging or crediting the accounts, as the case may be, with
the amounts of the accrued interest, the ofTsetting entries being made to
the interest expense" and intei'est income accounts." While it is desirable
to show the full accrued interest on doubtful notes and accounts receivable
for which reserves have been established, the interest should be credited
to the reserve instead of to income."

There has been a tendency to neglect adjusting the books for prepaid
and accrued interest on the ground that the amount at the beginning is

'For explanation of superior figures see page 337.

162

INTEREST 163

about the same as at the end of the period. This is absolutely unscientific
and untrustworthy. Financial institutions have met this situation by
having the amounts of the loans i-ecorded on a tickler under the due date.
When the adjustments are calculated, the unpaid loans are totaled each
day and then the interest is figured.

Interest Expense and Income — It is advisable, though not absolutely
necessary, to have separate accounts for the expenses and incomes arising
from interest.^" The interest expense account may be divided into interest
on notes payable, interest on bonds payable, etc. ; and the interest income
account also may be divided so as to indicate the source of the income."
All of these accounts should be classed as non-operating items in the profit
and loss statement," although some accountants treat interest on bonds
and loans payable as an administrative item."

Calculation of Interest — In calculating time in connection with interest,
the first day should be excluded and the last day included, or vice versa."
When the interest period is expressed in months, the due date is the same
in the proper month, but if the period is expressed in days, the due date
is found by counting the actual days." For instance, a note dated April
11 would be due on July 11 if the interest period is three months, or
would be due on July 10 if the interest period is ninety days. In calculat-
ing discount, banks always count the number of days regardless of the way
the interest period is stated on the notes.^" The legal riile for calculating
interest, which is used by the government and by accountants in computing
interest on judgments and whenever judicial actions and decisions are
involved, is based on a 365-day year, while the ordinary business rule is
based on a 360-day year."

Interest on Partial Payments — The United States rule for calculating
interest on partial payments applies a payment first against the interest
due. If payment exceeds the interest, the surplus reduces the principal
on which the future interest is computed. If a payment is less than the
accrued interest, it is held in reserve, and interest on the old principal
continues until a payment, together with the payments held in reserve,
exceeds the acci'iied interest, in which case the excess is used as above.**

The merchants' rule charges interest on the principal from its creation
to its cancellation, and allows interest on all payments from the date of
each payment till the date the whole principal is canceled."

Audit of Interest — When the auditor is verifying the assets and liabili-
ties, he should make lists showing the securities and notes receivable owned
and the notes and bonds payable owed during the period.'" All interest
arising therefrom should then be checked against the interest income and
expense accounts."" The verification of interest paid is especially impor-
tant, as notes payable which are not shown on the books may be dis-
covered.'' The interest on bank deposits should be verified by ascertaining
the rate of interest and by roughly checking the average daily balances."

Interest as a Cost of Manufacture — One school of accountants believes
that interest should be included on the books as a cost of manufacture,**
while another school holds the opposite view."

164 C. P. A. ACCOUNTING

The contention that intei-est is an element in the selling price cannot be
denied. Whether interest should be shown on the books as a cost of manu-
facture, however, depends on whether it is preferable to include interest
in the manufacturing burden or in the profit charged on the product ; in
either case the interest charge affects the selling price."""

The objections frequently raised to including interest as a cost of manu-
facture are: first, the difficulty of determining the rate to be charged;"
second, that interest is usually charged only on fixed investments;™ third,
the difficulty of handling the credit offsetting the interest ;'° fourth, that a
more or less constant element representing interest tends to obscure fluctua-
tions in the other costs ;^ and fifth, that the inclusion of interest as a cost
in financial statements confuses the business world.*'

The first of these objections is not unsurmountable, for the interest rate
to be charged does not represent the actual cost of the capital invested
but only the market rate of interest.*^ The second objection is faulty, as
interest is unimportant except whei'e the element of time is vital." Thus,
interest need not be charged on inventories whose turnover is rapid, to
justify the inclusion of interest as a cost in the case of seasoned lumber,
etc." The fourth objection may be an.swered by stating that correct cost
figures may be preferable to incorrect cost figures even though the correct
figures may be harder to analyze.

The third and fifth objections to the inclusion of interest as a cost of
manufacture are very real and vital. The credit offsetting the interest
charge is usually made to profit and loss, which is absolutely incorrect as
it anticipates a profit. The charge to manufacturing burden is transferred
to finished goods where it may enhance the inventory — another illustration
of the anticipated profit." Some cost accountants are meeting these
objections by crediting a reserve account when interest is charged to manu-
facturing burden,*' and then writing off to profit and loss all of the reserve
except an amount equal to the interest included in the inventories at the
end of the period." This i-eserve account is then deducted from the inven-
tories on the balance sheet."

As the calculation of the interest in the final inventories is very compli-
cated, and as most of the advantages of including interest as a cost manu-
facture can be obtained by including it in statistical studies and excluding
it on the books, it would seem expedient to refrain from including interest
in burden, except in cases where the time element is unusually important
and where the accounting departments of the firms are competent to clear
the interest charge through the books in such a way that it will not cause
an anticipated profit.

Compound Interest Processes — A knowledge of compound interest pro-
cesses is necessary in dealing with the valuation of bonds, the writing off
of bond discounts and premiums, the calculation of depreciation by cer-
tain methods, the computation of sinking funds or the amounts required
to redeem an obligation at maturity, and the handling of all transactions
involving annuities." Annuities are payments of specified sums of money
made at regular intervals for a stated duration of time.'^"

INTP]REST 1G5

Compound interest processes are all based upon the ratio of increase,
or one added to the rate of interest (1 + i)." They may be classified, how-
ever, into those involving interest and those involving discount. The
class involving interest is calculated by using the rate of increase as a
multiplier, while the latter class is calculated by using the rate of increase
as a divisor.

Process Involving Interest — Compound interest processes involving in-
terest are used in calculating (a) the amounts of principals payable at
future dates at compound interest, (b) the amount of annuities, and
(c) sinking fund installments.

(a) The amount of a given pi-incipal payable after a given number of
periods, interest being compounded at a given rate, is found by multiply-
ing the given sum by the ratio of increase multiplied by itself as many
times as there are periods."

Illustration.
Formula for Find the amount that $10,000 will aggregate

Amount of Principals if invested for four periods at two per cent per
P X (l + i)" period.

$10,000 X (1.02)' = $10,824.32

(b) The amount of an annuity at the end of a given number of periods,
if the payments have been invested at compound interest at a given rate of
interest, is found by multiplying the amount of each payment, called the
rent of the annuity, by the quotient of the total interest (amount of $1 for
the given time at compound interest at given rate minus one) divided by
the rate of interest."'

Illustration.
Formula for Find what a four-payment annuity, whose

Amount of Annuity rent is $10,000, will aggregate if payments are
(l-fi)" — 1 invested at compound interest at two per cent

^ i per period.

$10,000 X ^ ^' = $41,216.08

(c) The amount of annuity payments (sinking fund installments) re-
quired to produce a given sum in a given time, if the payments are invested
at a given rate of interest, is found by dividing the desired sum by the
amount of an annuity of $1 for the same time at the same interest rate."
The terms "sinking fund installments" and "rents of annuities" are
synonyms.

Illustration.
Formula for Find the amount which, set aside at four

Sinking Fund equal intervals at compound interest at two per

Installments cent per period, will amount to $41,216.08 at

(1 + i)" — 1 end of the four periods.

' $41,216.08 ^ ^"''^^Q^)"^ = $10,000.00

166 C. P. A. ACCOUNTING

The connection between the formulas for finding the amounts of an-
nuities and of sinking fund installments can be seen from the following
equations :

Rent X amount of annuity of $1 = Amount of given annuity.

Rent =^ amount of given annuity -f- amount of annuity of $1.

The following illustration may show the reasoning back of the above
formulas. If $1 were left on deposit in one bank at two per cent interest
for four years, and the annual interest of two cents withdrawn annually
and deposited in another bank at two per cent, compounded annually,
formula (a) shows that at the end of the four years there would be the
original $1 in the first bank and $.082432 in the second bank. The latter
sum is the amount with interest of the periodic payment (an annuity) of
two cents. If the amount of an annuity of two cents is $.082432, the
amount of an annuity of $1 must be $4.1216 ($.082432 X V2 X 100).

Processes Involving Discount — Compound interest processes involving
discount are used in calculating (a) the present worth of payments to be
made at future dates, (b) the present worth of annuities, (c) the rent of
annuities, (d) premium on bonds, and (e) discount on bonds.

(a) The present worth of an amount payable at a future date is found
by dividing the amount bj^ the product of the ratio of increase multiplied
by itself as many times as there are periods.'"

Illustration.
Formula for Find the present worth of $10,824.32 payable

Present Worth at the end of four periods, if money is com-

of Future Amounts pounded at two per cent per period.
A ^ (1 + i)n $10,824.32^(1.02) =$10,000.00.

(b) The present worth of an annuity is fouiul ])y multiplying the rent
of the annuity by the quotient of the total discount (one minus the present
worth of $1 payable at the end of the annuity) divided by the rate of
interest." Illustration.

Formula for Find the pre.sent worth of a four-period an-

Present Worth nuity of $10,000 when the money is worth two

of Annuity per cent per period.

(1 + i)n (1.02)*

R X ' $10,000.00 X ^Ti = $38,077.29

1 .UJ

(c) The rent of an annuity that can be purchased for a given sum,
when money is worth a given rate of interest, is found I)y dividing the
sum by the present worth of an annuity of $1 for the same number of
periods at the same rate of interest." Illustration

Formula for Find the rent of a four-pei-iod annuity that

Rent of Annuity can be purchased for $38,077.29 wlien money

1 is worth two per cent per period.

1- nTFTj^ i_

^~ i (].02)'

1 $38,077.29 -f- — — - = $10,000.00

INTEREST 167

(<l) The premium on a bond is the present worth of an annuity whose
rent equals the excess of the actual interest receivable over the interest it
would bear at the current rate of interest, whose life is the life of the
bond, and whose interest rate is the current rate.^'

Illustration.

Formula for Find the premium on a bond whose par,

Bond Premium $1 0,000, due after four periods, bearing interest

1 at two and one-half per cent per period, if the

n -I- n " current interest rate is two per cent per period.

(AT— Cl)X ^ ^ 1

1 1 ;—,

$50.00 X ^^^f^^ =$190.39

(e) Bond discount is calculated like premium on bonds, except that
the rent of the annuity whose present worth must be computed, is the
excess of the interest that the bond would bear at the current rate of
interest over the actual interest receivable.™

Illustration.
Formula for Find discount on above mentioned bond if

Bond Discount current rate of money is three per cent per

1 period.

(CI— xVI)X-

:i + i)» -J L

' $50.00 X yr-^ = ^^ ^^-^^

The connection between the formulas for finding the present worth and
rents of annuities can be seen from the following equations :

Rent X present worth of annuity of $1 = present worth of given annuity.
Rent = present worth of given annuity -^ present worth of annuity of $1.

The connection betAveen the formulas for finding the amount and present
worth of annuities can be seen from the fact that the amount of the
annuity is a sum payable in "n" periods, money worth "i" per cent interest.
The amount of the annuity discounted back to the present would be its
present worth, or

1
(1-f i)" — 1 1 ^ 1 — (1 + i)"

i ' ^ (l + i)n i

Valuation of Serial Bonds — When bonds mature at dififerent dates, the
initial value of the series can be found only by calculating the initial values
of each installment and then adding these initial values.'" After the value
of the .series has been thus calculated, the amortization of premium or
discount would be computed as if the bonds were not in a series."'

Valuation of Short Terminal Bonds — When bonds do not mature on
one of their interest dates, there is a short terminal period to be considered
in evaluating the bonds. The rule for evaluating bonds with short terminals

168

C. P. A. ACCOUNTING

is to ascertain the value for the full number of periods, disreprardin^ the
terminal; and to this value add the short interest (that part of the nominal
interest per period that the short term is to the normal interest period) and
then to divide the sum by the short ratio (one plus that part of the effective
interest period that the short term is to the normal interest period)/'

Suppose a five per cent bond, par $10,000, yielding four per cent,
maturing October 1, 1919, interest payable May 1 and Nov. 1, was pur-
chased May 1, 1914; the bond runs 10 5/6 periods; short ratio rate is
1.016667; and short interest rate .020833. The bond for the ten periods is
worth $10,449.13, which together with $208.33, is $10,657.46, which amount
divided by 1.016667 gives $10,482.75, the value of the ]>ond. If a bond
were issued between interest dates and matured between interest dates, this
process is applied twice."

Amortization of Bond Premium and Discount — The scientific adjusting
of the valuation of bonds purchased above or below par so that the bonds
will be valued at par when they mature, is called the amortization of bond
premium and discount.*^^ Bond investments have two interest rates, namely,
the coupon or nominal interest rate, and the effective rate or the real
income rate on the basis of the price paid for the bonds." At the end of
each period the bonds are revalued by adding the excess of the effective
over nominal intei'est to the value of the bonds if the bonds wei*e puichased
below par, or by subtracting the excess of the nominal over the effective
interest from the value of the bonds if the bonds were purcha.sed at a
premium.''

The following table"' shows the amortization of bond premium and the
revaluation of the bond at each interest date.

5% bond, par $10,000; purchased Jan. 1, 1917, on a 4% basis for
$10,190.39 ; 2 years to run ; interest January and July.

Date

Nominal

Interest

(a)

Effective

Interest

(b)

Amorti-
zation

(c)

Value of
Bond

(d)

1/1/17

7/1/17
1/1/18
7/1/18
1/1/19

$250.00
250.00
250.00
250.00

$203.81
202.88
201 . 94
200.98

$46. 19
47.12
48.06
49.02

Sl.000.00

$809.61

$190. 39

$10,190.39
10,144.20
10.097.08
10,049.02
10,000.00

(a) 2}/^ per cent of par.

(b) 2 per cent of (d).

(d) Value on previous date minus (c).

A similar table,** showing the amortization of bond di.scount and the
periodic revaluation of the bond, is 3.3 follows ;

INTEREST

169

5% bond, par $10,000; purchased Jan. 1, 1917, on a 6% basis for
$9,814.15; 2 years to run; interest January and July.

Date

Nominal

Interest

(a)

Effective

Interest

(b)

Amorti-
zation

(c)

Value of

Bond

(d)

1/1/17
7/1/17
1/1/18
7/1/18
1/1/19

$250.00
250.00
250.00
250.00

$294.42
295.75
297.13
298.55

$44.42
45.75
47.13
48.55

$9,814.15
9,858.57
9,904.32
9,951.45

10,000.00

$1,000.00

$1,185.85

$185.85

(a) 2J/^ per cent of par.

(b) 2 per cent of (d).

(d) Value on previous date plus (c).

In both of the above tables the nominal interest is the product of the
nominal interest rate multiplied by the par value of the bonds, while the
effective interest is the product of the purchase price of the bonds multi-
plied by the rate of interest the bonds actually yield on the money invested.

As the amortization of bond premium and discount is accomplished
through the bond interest account, this subject will be further discuissed in
Chapter XI.

Bond Purchased at Intermediate Dates — When bonds are purchased
between interest dates, the buyer pays the seller accrued (simple) interest
on the bonds, and the premium or discount is considered to vanish by an
equal portion each month.™ If the bond mentioned in the preceding section
as purchased at a premium on January 1, 1917, was sold on a 4% ba is
on February 1, 1917, the accrued simple interest would be $41.67
(1/6 X $250) and the amortizement, $7.70 (1/6 X $46.19), so the seller
would receive $10,224.36 (.$10,190.39 — $7.70 + $41.67). A simpler rule
is to add the simple interest for the lapsed time on tlie value at the previous
interest date calculated at the effective interest ra^e.'" By this rule the seller
would receive $10,224.36 ($10,190.39 + ($10,190.39 X .04 X 1/12)).

Interest Bearing Debt Paid by Equal Annual Imtallments — The amount
of equal periodic installments including principal and interest which will
repay an interest-bearing debt in a given numl)er of payments is found
by multiplying the principal by the amount of the sum of $1 under the
given conditions and by dividing that product by the amount of an an-
nuity of $1 under the same conditions."'

For example, what equal annual payments including pi-incipal and
interest will repay in foui- annual payments a debt of $10,000 l)eaiing two
per cent interest?

;1.02)^ — 1

($10,000 X (1.02)^) ^

.02

.$2,626.24, annual payment.

170 C. P. A. ACCOUNTING

Optional Bond Redemption — When the issuer has the option of redeem
ing bonds prior to maturity, the premium or discount on the bonds will
be affected, if it is to the issuer's advantage to call the bonds. If the
issuer can redeem at par before maturity, the purchase price should be
calculated on the assumption that the right will be used if the bonds are
bought at a premium, or that the riglit will not be used if the bonds are
bought at a discount."

Bonds which will be redeemed above par before maturity, should be
valued by separately calculating, at the effective interest rate, the present
worth of the principal as a future sum and the present worth of the
coupons as an ordinary annuity."

For example, find, on a four per cent basis, the value of a five per cent
$10,000 bond, due in ten years, but to be redeemed at 110 in two years.

Value of $11,000 in two years:

$11,000 ^ ( 1.02 ) ' = $10,162.30

Value of coupons :

"^~(1.()2)'
$250 X -rp-^ = ^^'^•^^

Sum of value of pi-incipal and intei-est $11,114.23

Computing an Unknown Rate — The C. P. A. candidate need not fear
questions in compound interest when the rate is the unknown, as such
problems are solved by refeience to annuity tables, but he should be able
to approximate the rate, if given access to annuity tables or data therefrom.

Assume a problem asking at what i-ate an ordinary annuity of four rents
of $10,000 would amount to $41,216.08, if the available annuity table did
not show the amounts at a 2 per cent basis, but showed the amounts at
1% and 21/4 pei" cents. The closest amounts in the four-period line would
be taken, and the diffei-ence made by an increase in one per cent ascertained.

Amount at 2M% $4.1.3703639

. Amount at 1M% 4.10623036.

Differences }4% .f .03080603, or

Differences 1% ' $.06161206

Amount at unknown rate $4.12160800

Next lower amount 4.10623036

Difference $.015 7764

If an increa.se $.06161206 is caused by an increase of 1 per cent, the
increase of $.01537764 must be caused by an increase of .249 ( .01537764 -H
.06161206) per cent. Hence the approximate rate is 1.999 (1.75 + .249)
per cent.'*

Computing Effective Bond Rates — When a bond is purchased at a price
not listed on a bond table, the effective interest i-ate may be approximated
by interpolation." Assume that a $10,000 5 per cent bond, due in two

INTEREST 171

years, Avas sold for $10,190.39. The purchase price should be looked up on
a bond table on the four-period line, which would show the price in the
two per cent column. If the price was not given, the nearest prices on the
four-period line Avould be taken, and the difference made by an increase
of one per cent ascertained.

Price at 1%% $10,287.32

Price at 2}4% 10,094.62

Differences ^% $192.70, or

Differences 1 % $385.40

Next higher price $10,287.32

Price at unknown rate 10,190.39

Difference $96.93

If an increase of $385.40 is caused by an increase of 1 per cent, the
increase of $96.93 must be caused by an increase of .2515 (96.93 -^ 385.40)
per cent. Hence the approximate effective bond rate is 2.0015 (1.75 +
.2515) per cent.

Computing an Unknown Time — The unknown time can be approximated
if the other facts regarding the annuity are available." For example,
find in how many periods rents of $5,000 will amount to $93,196.43 at 2
per cent.

Dividing $93,196.43 by 5,000, the amount of an annuity of $1 is found
to be 18.639286.

18.639286 = ( ( 1 .02 ) " — 1 ) -^ .02
.37278572= (1.02)" — 1
1.37278572= (1.02)"
1.37278571 = (1.02)'",
so annuity runs sixteen periods.

It should be noticed that in the above illustration sixteen periods is not
quite correct, but it is close enough for all practical purposes. The raising
of 1.02 to a high power in the effort to match 1.37278572 can be readily
done by rememl)ering that in raising numbers to powers the exponents
are added. (1.02)" can be calculated bv four successive multiplications,
viz., (a) 1.02X1.02= (1.02)'; (b) "(1.02)' X (1.02)' = (1.02)*; (c)
(1.02)* X (1.02)*= (1.02)'; and (d) (1.02)' X (1.02)' = (1.02)".

Amount of Annuities with Interim Interest Dates — If the interest is
compounded more frequently than the rents are payable, the amount of
such an annuity would be found by dividing the total compound interest
by the effective interest rate per rent period." Letting the annual interest
rate, the frequency of conversion, and the number of years be respectively
represented by "j," "ni," and "n," the formula for the amount of an
annuity with interim interest dates is'"

(1 + j/m)'"" — 1
^ (1 + j/m)'" -1

172 C. P. A. ACCOUNTING

For example, find the amount of an ordinary annuity of four annual
rents of $100, if the rents are invested at 4 per cent per annum, com-
pounded semi-annually.

(1.02)' — 1
The amount would be : $100 X , = $424.90

y ± ,\)ct ) -L

Present Worth of Annuities tvith Interim Interest Dates — If the interest
is compounded more frequently than the rents are payable, the present
worth of the annuity would l)e found by di\dding the total compound
discount by the effective interest rate per rent period.'* Letting the annual
interest rate, the frequencj' of conversion, and the number of years be
respectively represented by "j," "m," and "n," the formula for the present
worth of an annuity with interim interest dates is*"

1
1

RX ^^ + -i/"^^'

(H-j/m)rn — 1

For example, find the present worth of an ordinary annuity of four
annual rents of $100, if the rents are invested at 4 per cent per annum,
compounded semi-annually.

""(1.02)"
The present worth would be : $100 X ,_ = $362.65

Present Worth of Deferred Annuities — If the rents of an annuity do
not commence to run until after a certain number of periods have elapsed,
the annuity is called a deferred annuity." If an annuity of $1 for "x"
periods is deferred for *S" periods, its present worth can be found either
(a) by multiplying the present worth of an ordinai*y annuity of $1 for
"x" periods by the present worth of $1 due "y" periods hence,*" or (b) by
subtracting the present worth of an ordinary annuitj' of $1 for "y" periods
from the present worth of an ordinary annuity of $1 for "x" plus "y"
periods." If a bond table is available, the second method is preferable, but
otherwise the first should be used.

For example, find the present worth of a four-period annuity, whose rent
is $10,000, when money is worth two per cent per period, if the annuity
is deferred five periods.

First Method.
1

(1.02)' 1

X ,X $10,000 = $34,487.77, present worth.

.02

Secon<l Method.

:i.02)' (1.02)'^

-^02 Q2~J X $10,000 = $34,487.77, present worth.

INTEREST 173

Amount of Annuities Due — Annuities whose rents are due at the end of
the periods are "ordinary" or "immediate" annuities, but annuities whose
rents are due at the lie^inning of the periods are called "annuities due.""
The amount of an annuity due of "n" rents can be found either (a) by
multiplying the amount of an ordinary annuity under the same conditions
by the ratio of increase/'' or (b) by subtracting one rent from the amount
of an ordinary annuity under the same conditions except for "n + 1"
periods/" or (c) by adding the compound interest on the first rent for "n"
periods to the amount of an ordinary annuity of "n" periods.*'

For example, find the amount of a four-period annuity due, whose
rent is $10,000, when money is worth two per cent per period.

First Method.

tl 02 V 1

-— — ^— X 1.02 X $10,000 = $42,040.40, amount of annuity due.

Second Method.
I (1.02) —]_ _ -^ I. ^ $10,000 = $42,040.40, amount of annuity due.

Third Method.
[(1.02)^ — 1] + ^'^'^^\~~^[x $10,000 = $42,040.40, amoimt of annuity

.02

due.

Present Worth of Annuities Due — The present worth of an annuity
due of "n" rents can be found (a) by multiplying the present worth
of an ordinary annuity under the same conditions by the ratio of increase,"
or (b) by adding one rent to the present worth of an ordinary annuity
under the same conditions except for "n — 1" periods,"' or (c) by adding
the compound discount on the first rent for "n" periods to the present
worth of an ordinary annuity of "n" periods.

For example, find the present worth of a four-period annuity due,
whose rent is $10,000, when money is worth 2 per cent per period.

First Method.
1

^"^•'^•^ X 1.02 X $10,000 = $38,838.83, present worth.

Second Method.

r. 1

(1 02 V I

_ir — L+ 1 fx $10,000 = $38,838.83, present worth.

Third Method.

(1.02)V,
002?' "^ 02~ ^ $10,000 =: $38,838.83, present worth.

174 C. P. A. ACCOUNTINd

QUESTIONS

INTEREST

1. Distino:insh between sini))le aiul compound interest. (N. Y., June.
1913.)

2. Define: Discount. (Wash., July. 1917.)

3. Explain four different uses of the word "discount" as used in ac-
counting. (Colo., Dec., 1913.)

4. Classify the Interest account. (Iowa, Dec., 1918.)

5. How should interest appear on a Trading statement? (Iowa,
Dec, 1918.)

6. (a) What are the elements of interest? (6) What is the rate of
discount corresponding to 2 per cent interest? (c) In a 4 per cent
bond to net 2^/2 per cent, what is the difference of rates? (Mich., June,
1912.)

7. Why is unearned interest on bills receivable seldom taken into con-
sideration in ordinary business houses? (S. C, Sept., 1919.)

8. How would you treat such aci;'ount as the following, if closing the
books at a certain period, with a view to ascertaining the loss or gain :
Mortgages, Notes, and other paper as to interest? (N. J., 1904-1909.)

9. In making aii audit of a company, you find that they have notes
receivable bearing interest, some paid in advance and included in the face
of the notes, othei"s with interest accruing. Exi)lain your handling of this
interest in your report. (Mich., June, 1910.)

10. State what is indicated by the Interest account (a) when the ac-
count shows a debit balance; (b) when the account shows a credit bal-
ance. Explain fully. (N. Y., Jan., 1900.)

11. In order to facilitate the preparation of monthly Profit and Loss
statements by a corporation, how would you recommend that the Interest
Payable be treated on it.s books from month to month? (Wash., April,
1906.)

12. Explain the inaccuracies from an accounting standpoint of the
ordinary Interest and Discount account. (Mich., Dec,, 1913; N. Y., Jan.,
1919.*)

13. Describe fully the Interest accoimt, showing what entry may be
made on each side and what disposition should be made of the balance.
(N. Y., June, 1898.)

INTEREST 175

14. Explain by entries the proper accounting for each case in which
interest and discount is involved in handling both Bills Receivable and
Bills Payable. (Mich., Dec, 1913; N. Y., Jan., 1919.*)

15. "A" purchases "BV business as a going concern, paying part of
the purchase price in casli on the date of the transfer, and giving interest-
bearing notes for the balance. How would you, as auditor, expect to find
the interest on the notes treated in "A's" books? (Wash., April, 1906.)

16. A large hotel is furnished on the installment plan. Explain, giving
reason, whether the question of interest is of importance to (a) the seller;
(6) the buyer. (N. Y., June, 1913.)

17. In making a detailed audit what procedure would you follow to
verify the Interest Prepaid on Notes Payable? (Kan., Dec, 1915; Mo.,
Dec, 1915.)

18. In preparing the Balance Sheet of a business at the close of a
year, how should j'ou treat Interest Paid in Advance on Notes Payable
Discounted? (Mass., June, 1910.)

19. In a statement of condition, requiring classification of assets and
liabilities into fixed assets, current assets, etc., in what class would you

^lace prepaid interest? State reasons for your answer. (Mass., June,
1912.)

20. A corporation redeems part of its outstanding mortgage bonds
and holds the bonds as an asset, collecting the interest thereon through
its fiscal agent. The interest thus collected is regarded by the officers
of l>e company as income. In pieparing a statement for publication
how should the account treat such interest? (N. Y., June, 1917.)

21. On which side of the Ledger should the balance on the Interest
Collected in Advance account appear? (Mo., Dec, 1914.)

22. Define: Accrued interest. (A. I. of A., May, 1919.)

23. How would you verify the correctness of accrued interest? (N. Y.,
June, 1909.)

24. Formulate Journal entries to express fully the following transac-
tion: The adjusting of an Interest account for interest earned but not yet
collected. (Wash., May, 1903.)

25. What in your opinion is the proper treatment of the accounts
named below in arriving at the profit or loss of a business for a specific
fiscal period: Accrued Interest on Notes Receivable; Accrued Interest
on Notes Payable? (Ohio, Dec, 1908.)

26. On which side of the Ledger should the balance of the Interest
Accrued on Notes Receivable account appear? (Mo., Dec, 1914.)

27. In what section of the Balance Sheet and in what order would
you show the Interest Accrued Payable? (A. I. of A., Nov., 1919.)

28. State in the form of Journal entries the following transaction:
the adjustment of interest accrued but not yet payable on a mortgage.
(N. Y., June, 1898.)

176 C. P. A. ACCOrNTIN(J

29. Define: Annuity. (Ohio. Nov., 1916.)

30. Define: Ratio of increase; accumulation. (Kan., Dec, 1915; Mo.,
Dec., 1915.)

31. Define: Effective rate; Nominal rate. (N. Y., June, 1913*; Kan.,
Dee., 1915; Mo., Dec., 1915.)

32. What do you understand by : "present worth of a deferred pay-
ment"; "amount of an annuity"? (Kan., Dec, 1915; Mo., Dec, 1915.)

33. Define: Amortization. (N. Y.. Jan., 1911; Colo., Dec, 1913; 111.,
May, 1914*; Mich., Dec. 1914; Del., June, 1915*; Kan., Dec, 1915; Mo.,
Dec, 1915; Ohio, Nov., 1916; Wis., April, 1917; A. I. of A., Nov., 1917;
Ind., Nov., 191S*; 111., Dec, 1918; A. I. of A., May, 1921.)

34. What is an Amortization account? (N. D., July, 1916.)

35. (a) What is the principle of amortization? (ft) How and when
used? Illustrate. (Iowa, Dec, 1918.)

36. Explain the method of valuinj; permanent investments in bonds
on an amortization principle. (Mass., Oct., 1914.)

37. Under what theoiy is the present value of deferred payments ascer-
tained? (N. Y., Jime, 1917.)

38. Describe the annuity method of writing off the premium. Is there
any objection, in your opinion, to this method? If so, state it. (Mo.,
Dec, 1913.)

39. What mathematical procedure would you adopt to amortize the
premium on bonds having a number of years to run? (N. Y., Jan., 1914;
N. D., Aug., 1917.)

40. How would you determine the amount of a sinking fund install-
ment if you were unfamiliar with the use of mathematical tables and
knew no mathematics beyond arithmetic? Explain and illustrate. (N. Y.,
Jan., 1917.)

INTEREST

17i

PROBLEMS

INTE31EST

1. What sum invested at 6 per cent compounded annually will amount
to $1,000 in five years? (Cal., June, 1904.)

2. The present value of an annuity of $1 for four periods at 2 per
cent is $3.80772870. What is tlie value on January 1, 1914, of a 5 per cent
per annum bond issue of $100,000 bought on a 4 per cent per annum basis
(semiannual coupons), due January 1, 1916?

Prepare amortization table as follows :

Date
1-1-14
7-1-14
1-1-15
7-1-15
1-1-16

Totallnterest Income Amortization Book Value

2J^ per cent

2 per cent

Par Value

$100,000

Insert values under the various heads to the nearest cent.

(Kan., Dec, 1915; Mo., Dec, 1915.)

3. In auditing the books of a corporation you find that in order to
provide a sum to redeem a mortgage of $100,000 falling due at the end of
ten years, a reserve of $8,000 per annum has been set aside annually for
three years, but that contrary to intention, tlie company has failed to
accumulate interest thereon. Assuming interest at 4 per cent (convertible
annually), what should have been the total accumulations to date, and
what amount should now be set aside annually for the next seven years
in order to complete the sinking fund? (1.04)^=1.31593. (A. I. of A.,
May, 1918.)

4. A lease has 5 years to run at $1,000 a year, payable at the end of
each year, with an extension for a further 5 years at $1,200 a year. On
a 6 per cent basis, what sum should be paid now in lieu of 10 years'
rent (V^ at 6 per cent=.7473)? (A. I. of A., May, 1919.)

5. "A" owns an annuity of $50 per annum, the first payment on which
falls due 1 year hence and which continues for a period of 20 years
certain. State: (a) the present value of the benefit; (b) the amount which
he will have aeeunuilated at the end of the period if he invests each moiety
as it becomes due.

178 C. P. A. ACCOUNTING

Assume interest at 4 per cent annually. In -this connection tlic value
of 1.042" js gtatotl to be equal to 2.191123.

(A. I. of A., Nov., 1917.)

6. An annuily of $3,G00 at 6 per cent compound interest is to be paid
in four quarterly payments. Furnish the annuity depreciation account
with quarterly balances. (N. Y., June, 1919.)

7. The present value of an annuity of $1,000, payable in half-yearly
installments for 45 years, at the rate of 6 per cent, semiannually, bein<?
$15,501.20, what is the value of the same annuity if paid annually, the
rate being the same as before? (Ohio, Nov., 1915.) (Note: 45th power
of 1.06 is 13.76401083, Avhose reciprocal is .07205007.)

8. Purchased May 1, 1904, ex coupon, $100,000 of 5 per cent bonds,
interest payable May 1 and November 1, on the basis of 4 per cent semi-
annually, principal to mature May 1, 1929. Required the amortizement
of the premium for the half year endius: November 1, 1924. (Ohio, Nov.,
1915.) (Note: 9th power of 1.02 is 1.19509257, whose reciprocal is
.83675527.)

9. The discount on $1 for 35 years, at 3V2 per cent, semiannually,
being $0.7031133, what is the value of $100,000 of bonds paj'ing 5 per
cent, semiannually, and maturing in 34% years, the investment rate being
the same as before? (Ohio, Nov., 1915.)

10. If $100,000 of bonds, paying $3,000 each six months (May 1 and
November 1) is worth $123,408.34 on May 1, 1915, ex coupon, and the
investment rate is 4 per cent semiannually, what is the present value of
an annuity of $1,750, payable annually during the life of the bonds, the
investment rate being the same as before? (Ohio, Nov., 1915.) (Note:
32nd power of 1.02 is 1.88454059, whose reciprocal is .53063330. 10th
power of 1.04 is 1.87298125, whose reciprocal is .53390818.)

11. Smith's baby owns an annuity of $100 per annum, the first pay-
ment on which falls due 1 year hence, which continues for a period of 20
years certain.

You are asked to state: (a) The present value of the benefit; (ft) the
amount which he will have accumulated at the end of the period, if he
invests each payment as it becomes due; (c) an arithmetical formula for
computing compound interest for the period. Assume interest at 4 per
cent, payable annually. The value of $1 at 4 per cent compound interest
is assumed to be $2.191123.

(Ind., May, 1918.)

12. If a principal of $1 will amount to $3.3863549 in 25 years, at 5
per cent per annum, what would be the present value of an annuity of
$1,250 for 30 years at the same rate? (Ohio, Nov., 1915.) (Note: 30th
power of 1.05 is 4.32194238, whose reciprocal is .23137745.)

13. A manufacturer owes $100,000 on his plant at 5 per cent per
annum, due at the end of the 5 years from date. He secures the agree-
ment, however, to pay the debt in equal installments, which will include
interest and principal. What amount is he required to pay each year?

INTEREST 179

(Pa., Nov., 1912.) (Note: 5th power of 1.05 is 1.27628156, whose recip-
rocal is .78352617.)

14. A corporation needing some additional capital for a short term
of years, issues .f.300,00() of debenture bonds carrying 6 per cent interest,
payable one-fifth each year for five years. Coupons are attached to the
bonds maturing every six months; the bonds are sold at 90 flat.

What average rate of interest does the company pay for the money,
excluding interest on interest?

(Ill, Nov., 1904.)

15. A certain issue of $100,000 4 per cent bonds is dated September
1, 1908, and interest begins at that date, but interest is payable on Feb-
ruarj"- 1 and August 1, and the principal (with 4 months' interest) is
payable December 1, 1912. What is the value of these bonds on a 3.60
basis at that date of issue? What is their value on the same basis, if pur-
chased on December 1, 1908? (Note that you are interloping into a five-
month period, not a six-month, in the beginning.) (Mich., July, 1909.)
(Note: 7th power of 1.018 is 1.1330121, whose reciprocal is .882603.)

CHAPTER X

RESERVES AND FUNDS

Classes of Beserves — The term "reserve accounts" has been indiscrimi-
nately applied to items which are essentially different/ In financial insti-
tutions, the term "reserve" indicates the amount of cash and cash items
on hand and on deposit, which may legally be counted as a cash reserve
fund held against deposits."

The following table shows the classes of reserves found in ordinary
businesses :

A. Valuation Reserves :

(a) Asset valuation reserves.
I. Depreciation reserves.

1. For buildings.

2. For machinery.

3. For equipment.

4. For merchandise, etc.
II. Depletion reserves.

1. For mines.

2. For timber.

3. For oil, etc.

III. Bad debts reserves.

1. For uncollectible accounts receivable.

2. For sales discounts.

3. For uncollectible notes receivable, etc.

IV. Market fluctuations reserves.

1. For merchandise inventories.

2. For securities, etc.

(b) Liability valuation reserves.
I. Operating reserves.

1. For taxes.

2. For accrued wages.

3. For accrued salaries.

4. For accrued rents, etc.

B. Proprietorship Resei'ves :
(a) Recorded reserves.

I. Appreciation reserves.

1. For buildings and machinei'y.

2. For land.

'For explanation of superior figures see page 337.

180

RESERVES AND FUNDS 181

II. Contingency reserves.

1. For fire insurance.

2. For flood loss.

3. For accidents.

4. For guarantees.

5. For pending law suits.

6. For obsolescence, etc.
III. Open reserves.

1. For debt extinguishment,

2. For plant extension,

3. For betterment and improvements.

4. For working capital,

(b) Unrecorded reserves.
I. Secret reserves,

1, Understatement of assets.

2, Overstatement of liabilities,

3, Overstatement of asset valuation reserves.

Asset Valuation Reserves — Asset valuation reserves represent the provi-
sion made for losses actually sustained in the value of assets, or anticipated
losses known to be certain,' Their balances are suspended or deferred cred-
its to the corresponding assets, and are neither liabilities nor surplus.* Al-
though occasionally found on the right side of the balance sheet," asset
valuation reserves should be deducted from their related assets on the
balance sheet,'

The depreciation and bad debts reserves are thoroughly discussed in
Chapter XV, Volume I, and Chapter III, Volume II, I'espectively, As
leasehold property and patents become valueless after a certain length
of time, reserves for amortization of improvements on leasehold property'
and for expiration of patents should be created ;' both reserves being asset
valuation reserves of the depreciation gi'oup.

The depletion reserves are credited with the estimated amount of wasting
assets consumed,* The related asset minus the reserve gives the net book
value of the remaining wasting asset.

Market fluctuation reserves are credited for excess of the cost price of
the related asset over its market price,*" At the close of each period the
reserve is adjusted so that it equals this excess, the offsetting entry being
to profit and loss," Fluctuations above cost are disregarded on the balance
sheet except for parenthetical references,"

Operating Resettles — Operating reserves are not appropriations of sur-
plus," but are liabilities." They may be divided into those offsetting
estimates of expenses, the exact amounts of which are not known, and
those offsetting expenses, the exact amounts of which are known but are
unpaid," The reserve for taxes is an illustration of the first group, while
the reserves for accrued wages, salaries, and rents are illustrations of the
second group,"

182 C. P. A. ACCOUNTING

The use of the title "reserve" for items covered by the operating reserves
is unfortunate, except in cases where the amount of the expense items can
not be approximately predetei'mined.'' Thus it would be preferable to use
the title "wages accrued" rather than "reserve for wages," but the use of
the title "reserve for taxes" may be justified." Many accountants, however,
use the term "accrued taxes" instead of "reserve for taxes.""

Appreciation Reserves — An appreciation reserve represents the un-
realized profit put on the books when the assets were raised to the appraisal
value, the reserve being credited instead of surplus to prevent the un-
realized profit from being declared as dividends.*"

Contingency Reserves — It is extremely difficult to draw a dividing line
between operating and contingency reserves, it being a matter of degi-ee
as to the certainty of the events happening for which provision is being
made." Since the liabilities covered by contingency reserves are not likely
to materialize, the reserves are surplus temporarily debarred from dividend
distribution.*^

The operation of a contingency reserve is shown in Chapter XIV,
Volimie I, under the caption "reserve for insurance."

Secret Reserves — Secret reserves represent the excess of the actual net
worth of a concern over the amount indicated on its balance sheet." They
may be created either by undervaluing the assets" or overstating the
liabilities;^ the former is the more popular method as the creditors them-
selves check up all actual liabilities.*" The actual value of the firm's net
worth should be conservatively valued, but an auditor should not counte-
nance secret reserves as they prevent the balance sheet from being a true
statement of condition.*'

An advantage claimed for secret reserves is that extraordinary losses,
which would result in very unfavorable fluctuations in stock values, may
be charged against them.*' However, an extraordinary loss should not be
concealed from the prospective investor. The claim that secret reserves
have the advantage of permitting the maintenance of a uniform di\'idend
rate** must be admitted, but the desired result can also be obtained with
an open surplus account.

Secret reserves are objectionable because they prevent stockholders from
recei\nng their share of the profits made during the period of their stock
ownership,*" and from receiving the true value of the stock in case of sale."
Secret reserves are also objectionable as they afford the directors an
opportunity of concealing losses due to speculation and mismanagement."

Open Proprietorship Reserves — The open proprietorship reserves repre-
sent profits reinvested in the business and withheld from distribution to
stockholders." These reserves are frequently called the true reserves.**
They are nothing but subdivisions of surplus and should be shown as such
on the balance sheet." The separation of a portion of surplus into open
proprietorship reserves is almost entirely a matter of bookkeeping, de-
signed to inform stockholders that the amounts so set aside will not be
distributed as dividends." A surplus account is an open proprietorship

RESERVES AND FUNDS 183

reserve account representing pj-ofits reserved for general rather than for
speeifie purposes." Open proprietorsliip reserves are created by debiting
surplus directly/* and after the purposes of accumulating the capital,
such as debt extinguishment and plant extension, have been accomplished,
the reserves should be closed back into surplus.'*

Funds — Funds are debit accounts consisting of money or securities set
aside for specific purposes.^" They are financial expedients to ensure the
possession of ready money to meet the object for which the fund is estab-
lished when the necessity for its use arises."

Unless protected by directors' resolutions, funds can be used for pur-
poses other than those for which they were created," or can be reverted to
general cash." Funds are current assets."

Reserve Funds — Some accountants use the term "reserve fund" to mean
a surplus reserve." This use is incorrect, for reserve funds are assets set
aside for a purpose, for the accomplishment of which a reserve has also
been established.'^ If money is set aside for a definite purpose, a fund is
created." If profits are retained in the business for the same purpose, a
reserve is created.^* If both a fund and reserve are created for the same
purpose, the fund is a re.serve fund."

Sinking Fund — A sinking fund is assets set aside for the purpose of
meeting a debt or retiring an issue of stock." Sinking funds are usually
increased by more or less regular amounts set aside at regular intervals."
These installments are usually placed in the hands of trustees," who either
place the money in banks or purchase gilt-edged securities with it." Re-
gardless of the fact that many deeds of trust require that sinking funds
be created out of pi'ofits, the sinking fund should be still created by setting
aside cash, but, Avhen this is done, an equal amount should be reserved from
profits thus creating a sinking fund reserve in addition to the sinking
fund."

If the sinking fund is in the hands of the company, the auditor should
verify the sinking fund securities and deposits." If the sinking fund is
controlled by a trustee, the auditor should secure a certificate as to the
funds.'" If the sinking fund has been invested in the corporation's own
bonds which have been surrendered by the trustee, the auditor must ex-
amine them and ascertain whether illegal use of them has been rendered
impossible."

When sinking funds are shown on the balance sheet, differentiation
should be made between the investments which have been made and the
cash on hand.'' Sinking fund holdings of the corporation's own bonds
payable may be either listed on the balance sheet among the assets'" or
deducted from the outstanding bonds payable,*" the latter method seeming
preferable as treasury bonds are not assets any more than treasury stock.
If the sinking fund I)onds are canceled, they must either be deducted from
the outstanding bonds payable on the balance sheet'' or only the net out-
standing bonds shown,"' tlie latter method seeming preferable as canceled
debts are not usuallv shown on the balance sheet.

184 C. P. A. ACCOUNTING

Income derived from sinking funds may be turned over to the company,
retained by the trustee as an addition to the sinking fund, or applied as a
deduction from the next sinking fund installment."' This income should
be shown in a special account, which should be closed into the corpora-
tion's ordinary profit and loss account.*^

Although premium or discount on bonds piirchased as sinking fund
investments is frequently written oft" at once to the profit and loss account,"
it should be amortized over the life of the bonds." If the bonds are can-
celed, the pi'emiura or discount thereon should be written otf at once to
profit and loss."

When the bonds covered by the sinking fund mature, the sinking fund
(outside) securities are converted into cash,'* any ditferencc in the realized
and book values of the securities being written oft" to the profit and loss
account. The cash is then used by the trxistee to redeem the bonds,'* and
any cash remaining after the redemption of the bonds is turned over to
the corporation.'* Treasury bonds in sinking fund would then be canceled
and written off against bonds outstanding.''

Entries for Sinking Fund — The following entries show a complete his-
tory of a sinking fund. The account titles are suggestive only, as many
varying titles are used.

Entry No. 1

Sinking Fund Cash Held by Trustee xxxxxxx

Cash xxxxxxx

(For sinking fund installment.)

Entry No. 2

Sinking Fund Investments xxxxxxx

Premiums on Sinking Fund Investments xxxxxxx

Sinking Fund Cash Held by Trustee xxxxxxx

(Purchase at premiiun of bonds for sink-
ing fund.)

Entry No. 3

Sinking Fund Expenses xxxxxxx

Sinking Fund Cash Held by Trustee xxxxxxx

(For expenses chargeable to fund.)

Entry No. 4

Sinking Fund Cash Held by Trustee xxxxxxx

Sinking Fund Income xxxxxxx

Premium on Sinking Fund Investments .... xxxxxxx

(For interest received on sinking fund
bonds and amortization of premium
on same.)

Entry No. 5

Sinking Fund Income xxxxxxx

Sinking Fund Expenses xxxxxxx

Profit and Loss Account xxxxxxx

(For closing net sinking fund income
into profit and loss.)

RESERVP]S AND FUNDS 185

Entry No. 6

Sinking Fund Cash Held by Trustee xxxxxxx

Loss on Sale of Sinking Fund Investments . . . xxxxxxx

Sinking Fund Investments xxxxxxx

(For cash received and loss incurred on
sale of sinking fund securities.)

Entry No. 7

Profit and Loss Account xxxxxxx

Loss on Sale of Sinking Fund Investments . . xxxxxxx

(To close loss on sale into profit and loss.)

Entry No. 8

First Mortgage 6% Bonds xxxxxxx

Sinking Fund Cash Held by Trustee xxxxxxx

(For redemption of bonds.)

Entry No. 9

Cash xxxxxxx

Sinking Fund Cash Held by Trustee xxxxxxx

(For cash turned over by trustee to com-
pany.)

Reserve for Sinking Fund — While it is not necessary to have a sinking
fund reserve to have a sinking fund, and vice versa, accounts are usually
seen together due chiefly to the fact that so many deeds of trust require
that sinking funds be created out of profits." As sinking funds can only
be created out of assets, a sinking fund reserve account is usually created
by charging surplus" immediately on the creation of the fund (Entry
No. 1, page 184). The profit and loss account is frequently debited at the
creation of sinking fund reserves,'* but it is preferable to debit surplus
directly as such action emphasizes the fact that the reserve is a part of
surplus.

If the premium or discount on sinking fund investments is gradually
amortized, as shown in entry No. 4 above, no adjustment with the sinking
fund reserve is necessary. If the premium and discount are written off
immediately, the former should be debited and the latter credited to the
sinking fund reserve, as the reserve should be kept in harmony with the
fund." After the net profit or loss from the sinking fund has been trans-
ferred to profit and loss (see entry No. 5 above) and then to surplus, the
net increment or decrement should be transferred from surplus to the
sinking fund reserve."

After the losses and gains on sale of sinking fund investments have been
transferred to profit and loss (see entry No. 7 above), the sinking fund
reserve must be brought into agreement with the sinking fund," the off-
setting entries being to surplus.

After the bonds have been redeemed and the excess cash has been turned
over by the trustee to the company (see entries No. 8 and No. 9 above), the
sinking fund reserve is turned back into surplus,"

18G C. P. A. ACCOUNTING

QUESTIONS

reskives and funds

Reserves

1. Define: Reserve account. (Md., Oct., 1903* ; N. Y., Feb., 190S* ;
Mich., June, 1908*; Ohio, March, 1910*: Va., Nov., 1910: Wash.. May,
1911*: Wash., June, 1912; Mich., June, 1912*; Wis., April, 1914; Wis.,
May, 1916; Ohio, Nov., 1916*: N. D., Aug., 1917; Mass., Oct., 1917;
Va., Nov., 1918; Iowa, Dec, 1918.)

2. Define: Qualified reserve. (111., Dec., 1918.)

3. Name various ways in which reserves may appear on, or affect the
items of, a Balance Sheet. (Wis., April, 1914.)

4. Discuss briefly the various kinds of reserves you are familiar with
and state how they should be handled on the books and on the Balance
Sheet. (Pa., Nov!, 1917.)

5. Distinguish between "voluntary reserves" and "necessar\' reserves"
and how would you treat such on a Balance Sheet? (N. C, June, 1916.)

6. Are sinkinof fund or debt extinguishment reserves a charge against
income or are they allocations of the surplus? (N. C, June. 1916.)

7. Under what conditions would you group reserves with surplus upon
a general Balance Sheet? (Cal., Nov., 1916.)

8. Distinguish and name some of the resei'v^e accounts created or pro-
duced by a charge to operating expenses, from that class of reserve ac-
counts created or produced by a charge to the surplus account. (N. C,
June, 1919; N. C, Sept., 1919; N. C, Nov., 1919.*)

9. Define operating reserves and illustrate briefly their uses in two
separate instances. (Minn., Oct., 1916; 111., Dec., 1918.)

10. What is your understanding of the difference between Liability
Reserves and Surplus Reserves, and name examples of each class? (N. C,
Nov., 1918.)

11. Explain the difference between real reserves and nominal reser\'es.
Give two examples of each. (A. I. of A., May, 1920.)

12. From the viewpoint of a Balance Sheet, what is the logical place
of (a) reserves for depreciation of physical a.ssets, created by charges to
operations; (h) operating reserves; (c) reserves for redemption of lia-
bilities; {d) reserves for contingencies? Give reasons for your opinion
(N. Y., Jan., 1914.)

RESERVES AND FUNDS 187

13. Under what condition and upon what basis would you set up the
following reserves and how would you finally dispose of them: (a) Sinking
funds; (&) appreciation of leasehold; (c) depreciation of leasehold; (d)
exhaustion of oil wells? (Cal., Nov., 1916.)

14. (a) State whether each of the following accounts is a liability
account or a proprietary interest account: (1) Reserve for Depreciation;
(2) Reserve for Extensions; (3) Reserve for Bad Debts; (4) Reserve for
Contingencies; (5) Reserve for Inventory Adjustment; (6) Reserve for
Sinking Fund.

(b) Discuss the accuracy of the terminology employed in each of the
above account names.

(Wis., April, 1917.)

15. How are reserves created? (Wash., May, 1911.)

16. For what purpose are reserves created? (Md., Oct., 1903; Mich.,
June, 1912.)

17. How are the Reserve accounts used? (Ohio, March, 1910.)

18. Show proper classification of a reserve on the debit and credit
sides of a Balance Sheet. (Mich., June, 1908.)

19. How may a Reserve account be properly established and for what
purpose? What, if any, contra account should be maintained? Under
what circumstances should these accounts be maintained? Why? (N. Y.,
Feb., 1908.)

20. How would a Reserve affect the book value of capital stock?
(Mass., Oct., 1917.)

21. Discuss briefly the following statement: A reserve is always cap-
ital. (Cal., Nov., 1916.)

22. A corporation having issued first mortgage bonds to the amount
of $50,000 sets aside out of the profits $5,000 each year and pays off at
par bonds to a similar amount. How .shall these items appear in a
Balance Sheet at the end of five years? (Mass., Oct., 1916.)

23. What is a "contributed reserve"? Commonly employed by what
kind of organization? (Iowa, Dec, 1918.)

24. Explain "contingency reserve." How would it affect the book value
of capital stock? (Mass., Oct., 1917; A. I. of A., May, 1921.*)

25. In the Balance Sheet of a corporation how should the Reserve for
Contingencies be stated? (111., May, 1912.)

26. In connection with the audit of the books of a corporation describe
briefly the procedure you would consider to be essential in verifying the
Reserve for Allowances and Discounts. (Wash., July, 1917.)

27. Define : Reserve for Amortization of Improvements on Leasehold
Property. (Wash., July, 1917.)

28. Define: Reserve for Expiration of Patent Rights. (Wash., July,
1917.)

29. Classify Reserve for Depreciation on Buildings according to the
subdiNasion of assets, liabilities, proprietary interest, income and ex-

188 C. P. A. ACCOUNTING

penses under which it should be ^ouped. (N. Y,, Jan., 1907*; Mass.,
June, 1912*; Wis., May, 1919.)

30. Classify Reserve for Income and Excess Profits Taxes according
to the subdivision of assets, liabilities, proprietary interest, income and
expense under which it should be grouped. (Wis., May, 1919.)

31. To what extent would you consider it necessary to verify the
Reserve for Depreciation of Plant and the Reserve for Sales Discount,
and what reference to such verification would you make in your report?
(Mass., June, 1913.)

32. What provision, if any, would you make for income and excess
profits taxes in closing accounts before the passing of a pending act
levj'ing these taxes, either in general circumstances or when profits are
partlv divisible under some special contract or arrangement? (A. I. of A.,
Nov.,' 1918.)

33. As at December 31, how would you djs'^lnse upon a Balance Sheet
the surplus appropriated for additions and betterments on the books of a
steel plant? (Cal., May, 1916.)

34. A corporation owns nearly all of a block of land. The remaining
portion is purchased subject to an existing lease. The corporation sets
aside out of surplus an amount believed to be sufficient to extend its plant
over the entire block at tlie expiration of the lease. What ledger title
should be given to the amount set aside and how should the amount be
set up in the Balance Sheet? (A, I. of A., Nov., 1919.)

35. An interurban railway company, wishing to provide against pos-
sible accidents, adopted the plan of depositing 2 per cent of their gross
7'eceipts each month in a local savings bank as a reserve for that purpose,
charging the funds so set aside to an account which they designated "Re-
serve for Accidents." The total fund for the j'ear amounted to $4,869.26,
out of which they paid $950 for accidents occurring and settled during the
twelve months, debiting such payment to Accident account, and leaving
cash balance in the bank on December 31 of $3,919.26.

The bookkeeper endeavored to close the books by showing the $4,869.25
as a charge against operating for the year arising out of accident liability,
carrying over the balance in bank ($3,919.26) to provide for future acci-
dents, and making a corresponding credit to the "Reserve for Accidents"
account. This left the company with cash assets of $3,919.26 not repre-
sented on the books.

Wherein did the bookkeeper err, and what entries should have been
made to show the transaction correctly?

(111., Dec., 1907.)

36. Define: Reserve for Bad and Doubtful Accounts. (Wash., July,
1917.)

37. When preparing a Trading and Profit and Loss account at the
end of a fiscal year, in what manner would you treat the Reserves for Bad
Debts? (N. Y., Jan., 1907.)

RESERVES AND FUNDS 18!)

38. Would a Reserve for Doubtful Accounts, the account of which is
based entirely upon the amount of loss of the year preceding, be shown
on a Balance Sheet as a liability, or as an allocation of the surplus?
State your reason. (N. C, June, 1910; N. C, Sept., 1919.)

39. In connection with the audit of the books of a corporation describe
briefly the procedure you would consider to be essential in verifying the
Reserve for Bad and Doubtful accounts. (Wash., July, 1917.)

40. In what respects, if any, does a Reserve for Replacement differ
from a provision for depreciation? (Ohio, Oct., 1919.)

41. In conducting an audit: (a) What would be your object in ex-
amining reserve accounts that were allocations of the surplus and are
not liabilities? (b) If you found liability reserve excessive or deficient,
what would be your procedure? (N. C, Nov., 1918.)

42. State fully how you would deal with excessive and deficient re-
serves. (N. C, June, 1916; N. C, Nov., 1919.*)

43. What is a secret reserve? (Wa.sh., Sept., 1907*; Mich., June,
1908; Fla., July, 1909*; Wash., May, 1911*; Mo., Dec, 1914*; Ohio,
Nov., 1916; Cal., Nov., 1916*; N. C, Aug., 1917; Mass., Oct., 1917*; Md.,
Dec, 1917; Iowa, Dec, 1918.)

44. (a) How are secret reserves usually created? (6) What is the
effect of such practice? (c) What, if anything, can be said in extenuation
of this practice? (Ohio, Nov., 1913*; Ohio, Oct., 1919.)

45. (a) Illustrate different kinds of secret reserves. (6) Are secret
reserves legal? (Mich., June, 1919.)

46. Briefly discuss the question of an understatement of the financial
condition and state whether this is ever justifiable, giving your reasons.
(Ohio, Oct., 1919.)

47. Discuss briefly the ethics of charging expenditures for construc-
tion and betterments to profit and loss. (Cal., Nov., 1916.)

48. Describe the object and effect of a Secret Resei*ve. (Wash., May,
1911.)

49. You are employed to make an audit by a stockholder who believes
the management of the corporation is piling up large secret reserves with
the view of buying up the stock of the minority holders. You are given
free access to the books. Explain in detail what investigations you would
make to detennine the truth or falsity of this belief. (Mich., Dec, 1913.)

50. Give your opinion as to the advantages or dangers arising from
secret reserves. (Fla., July, 1909.)

51. Give some examples of secret reserves and state your opinion aq
to the propriety, or otherwise, of the creation of such reserves, giving
reasons. (Wash., Sept., 1907; Mich., June, 1908*; Md., Dec, 1917.*)

52. State what you would consider an auditor's duties relative to
secret resei-ves. (Fla., July, 1909*; N. Y., Feb., 1910*; Mo., Dec, 1914;
Mich., June, 1919.*)

190 C. P. A. ACCOUNTING

53. How would a secret reserve affect the book value of capital stock?
(Mass., Oct., 1917.)

54. Where do secret or hidden reserves differ from ordinary reserves?
How are such reserves created and for what purposes? (Mo., Dec, 1913;
111., May, 1914.)

55. Define: Hidden reserve. (111., May, 1906*; Pa., Nov., 1906*; Pa.
Nov., 1912*; Mich., Dec, 1914; Mass., Oct., 1916.*)

56. Describe two instances of hidden reserves and their treatment in
the accounts. How would you deal with these in a Balance Sheet?
(Mass., Oct., 1916.)

57. How far in your opinion is an auditor justified in omitting to
mention hidden reserves in a certified statement? Would you treat them
differently in a statement for credit purposes, a statement to stockholders,
and a statement to the State of Massachusetts? If so (a) how, and (h)
why? (Mass., April, 1911.)

58. Express your opinion of the soundness of hidden reserves from
an auditor's standpoint. (111., May, 1906; Pa., Nov., 1906; Pa., Nov.,
1912.*)

59. Support your views on the use of secret reserves. (N. D., June,
1914.)

60. Express your opinion of the soundness of hidden resei'ves from
the viewpoint of a shareholder, and a director, respectively. (111., May,
1906; Mich., June, 1913.*)

61. Define: Reserve for Sinking Fund. (Wis., April, 1917.*)

62. State clearly under what conditions reserves for sinking funds
should be carried. (Cal., June, 1917.)

63. Indicate the pro forma entries for the creation of a sinking fund
reserve. (Cal., June, 1917*; Wis., May, 1919.)

64. If a reserve has been created out of profits to pro\ide for a
sinking fund to pay off a bonded debt at maturity, what does the Reserve
account represent after the redemption and cancellation of the bonds?
(Ohio, Nov., 1917.)

65. Discuss the disposition of a Sinking Fund Reserve account which
is no longer necessary. (Wis., May, 1916; Cal., June, 1917*; Ohio, Nov.,
1917*; Wis., May, 1919.)

66. The officers of a company of which you are the auditor elected by
the shareholders, submit to you for audit a Balance Sheet in which the
following item appears: "Miscellaneous Reserves (including premium on
stock), $248,000." On investigation you find the item is made up as
follows: General Reserve, $86,000; Operating Reserves, $6,000; Provision
for Plant Depreciation, $46,000; Provision for Amortization of Lease-
holds, $40,000; Provision for Bad Debts, $36,000; Premium on Capital
Stock sold, $34,000; Total, $248,000.

What recommendation would you make to the oflieers and what course
would you take if your recommendation were not followed ?

(A. I. of A., June, 1917.)

RESERVES AND FUNDS 191

67. The Balance Sheet of a corporation shows the following credit
balances: Reserve for Depreciation; Reserve for Extension of Plant;
Reserve for Bad and Doubtful Debts; Sinking Fund Reserve; Insurance
Reserve; Reserve for Pensions; Reserve for Contingencies; Reserve for
Taxes.

What would you assume to be the nature of each of these items' Can
better terms be submitted for any of those used? In what circumstances
would each of the above accounts be debited, and when debited, what
would be the corresponding credit? If the business were to be sold for
the amount of its net worth, as shown by the Balance Sheet, which of
these items would represent a proper addition to the capital stock in
determining the selling price?

(A. I. of A., June, 1917.)

68. With the present trend toward prohibition, what accounting propo-
sition would you make in the books of a corporation owning a brewery
in order to maintain its financial integrity before authorizing the declara-
tion of a dividend? (Mich., Dec, 1916.)

69. Assuming that a Balance Sheet consists of three principal divisions
of accounts, viz., assets, liabilities, and net worth, state in what division
you would place the following accounts: (a) Reserve for Depreciation;
(b) Reserve for Improvements and Additions; (c) Reserve for Shrinkage
of Inventory Values; (d) Reserve for Losses on Hedging Contracts; (e)
ReseiTe for Federal Taxes (Income and Excess Profits); (/) Reserve for
Unpaid or Accumulated Dividends of Preferred Stock; (g) Reserve for
Doubtful Accounts; (h) Reserve for Contingent Losses; (t) Reserve for
Non-admitted Assets; (_;) Reserve for Extinguishment of Bonds. (N. C,
Nov., 1918.)

70. You are called upon to examine the accounts of a corporation for
the purpose of certifying its Balance Sheet. An item is carried on the
"liability" side described "Sundry Reserves— $375,000." You find that
this amount is made up as follows:

Reserve for Contingencies $50,000

Plant Depreciation Reserve 80,000

Reserve for Bad Debts 10,000

Reserve for Collection Expenses 15,000

Premium on Sale of Capital Stock 12,00J

Reserve for Personal Injury Suit which has just been

decided against the Company 8,000

Reserve for Patent Litigation pending 20,000

Reserve for Income and War Excess TProfits Taxes 40,000

Special Reserve against a possible drop in market values

of merchandise on hand 30,000

Sinking Fund for Retirement of bonds 48,000

Provision against dismantlement of Aurora Works 34,000

Pension Fund 28,000

$375,000

The president is unwilling to change the company's Balance Sheet with-
out consulting the board of directors and states that if you take exception

192 C. P. A. ACCOUNTING

to this item you should write him your views so that he may bring the
matter formally before them. Write such a letter stating clearly the
reasons for any exceptions you may take. (Ill-, Dec., 1918.)

71. A company incorporated M'ith a capital of $200,000, fully paid up,
has sold its stock at a premium of 25 per cent, thus realizing in cash
$250,000. The by-laws, which cannot be amended except in a stock-
holders' meeting and after proper notice of such amendment, having
been mailed to each stockholder ten daj's prior to the meeting, contain
a provision that the $50,000 so received over and above the capital stock at
par, shall be placed to the credit of a Special Reserve account, and that
this fund shall not be applicable towards the payment of dividends. At
the close of the first fiscal year, it is found that the company has made a
net profit of $4,000, after charging $6,000 for depreciation on the buildings
and machiner}\ The directors desire to pay a cash dividend of 5 per cent
and pa.ss a resolution ordering that the depreciation refened to above
shall be charged against the above Special Reserve account instead of
against Profit and Loss, and they then pi'oceed to declare a dividend of
5 per cent. Discuss the above situation from the standpoint of an ac-
countant. (111., Nov., 1904.)

72. A public utility company issues $500,000 first mortgage bonds due
in equal installments from the tenth to the twentieth year. The mortgage
required that a reserve for sinking fund nuist be provided at the rate of
$15,000 per year.

What is the effect of such a provision? What entries should be made
each year and what entries when the bonds are paid?

(111., May, 1915.)

73. What reason can you give for the creation of a reserve for a
sinking fund when the reserve is not to be funded? (N. Y., June, 1912;
N. D., July, 1916.)

74. A sinking fund reserve is created out of annual earnings. How is
the book value of the company's stock affected by such policy? Explain.
(Mass., Oct., 1917.)

75. How would you classify the sinking fund reserve in the Balance
or Profit and Loss account? (Kan., Dec, 1915; Mo., Dec, 1915.)

76. Classify Reserve for Sinking Fvmd according to the subdivision of
assets, liabilities, proprietary interest, income and expenses under which
it should be grouped. (Wis., May, 1919.)

77. What is involved in the verification of reserves for sinking funds?
(Cal., May, 1916.)

78. How should a Reserve account and a sinking fund, both relating to
the redemption of the same debt, be simultaneously operated? What pur-
pose is accomplished thereby and how do said accounts respectively appear
on the Balance Sheet? (N. Y., Jan., 1906; Cal., June, 1917; N. Y.,
Jan., 1920.*)

79. Are sinking fund reserve appropriations a satisfactory protection
to the bondholder? (Wis., May, 1916.)

RESERVES AND FUNDS 193

Funds

80. Distinguish between a fund and a reserve. (Mo., Dec, 1913.)

81. Define: Reserve fund. (N. Y., Dec., 1897*; N. Y., June, 1900;
Pa., May, 1903*; 111., May, 1904; Wash., April, 1906; Wash., June, 1912;
La., May, 1913*; Wis., May, 1916; W. Va., May, 1917*; N. D., Aug.,
1917; Mass., Oct., 1917.*)

82. State the object of the Reserve Fund account. (N. Y., Dec., 1898;
Mich., July, 1906.*)

83. How are reserve funds created on the books'? (Mich., July, 1906.)

84. If asked to criticize a Balance Sheet prepared by a client's book-
keeper, state what you Avould say regarding the following caption found
on the liability side of the Balance Sheet : "Reserve Fund for Redemption
of Bonds— .$50,000." Explain fully. (N. Y., June, 1918.)

85. How would a reserve fund affect the book value of capital stock?
(Mass., Oct., 1917.)

86. Support your views on the use of reserves that are funded and
reserves that are not funded. (N. D., June, 1914.)

87. Distinguish between a reserve account and a reserve fund. (N. Y.,
June, 1902; N. Y., Feb., 1908; 111., Dec., 1908; Mo., Dec., 1914; 111., Dec,
1916; Mich., Dec, 1916.*)

88. On which side of the Balance Sheet should a reserve fund be
found? (N. Y., Jan., 1917.)

89. State whether or not you consider the keeping of reserve funds
advisable, and j'our reasons. (Wash., May, 1911.)

90. Under what circumstances, if any, may a reserve fund or a reserve
appear on the books of a company without the other? (111., Dec, 1916.)

91. Should a reserve fund be invested in interest-bearing securities?
State the custom. If so invested, what account should be credited with the
income? (N. Y., June, 1897.)

92. State your views fully of (a) how Reserve Investment Funds shoul^J
be invested. (6) Why is it not advisable to keep reserve funds in the
business? (Md., Oct., 1903.)

93. Define: Sinking fund. (N. Y., Jan., 1900*; N. Y., June, 1900;
Pa., Mav, 1903*; 111., May, 1904*; Pa., Nov., 1904*; N. Y., Jan., 1906*;
Md., Jan., 1909*; Mass., June, 1910*; Va., Nov., 1910*; 111., May, 1912*;
Mich., June, 1912*; Wis., April, 1914; Cal., Nov., 1916; Wis., April,
1917; W. Va., May, 1917*; N. Y., June, 1918*; Va., Nov., 1918; Iowa,
Dec, 1918; Wis., May, 1919.)

94. What is the purpose of a sinking fund? (Md., Oct., 1903* ; Mich.,
July, 1906; 111., May, 1909*; Mich., June, 1912; Ohio, Nov., 1913*; Cal.,
Nov., 1916.)

95. State the plan most frequently approved by writers on corporation
finance as being the most satisfactory for accomplishing the purpose for
which a "sinking fund" is created. (Wis., May, 1919.)

J!J4 C. V. A. ACC()L'XTIX(;

96. What is the eflPect on a business of a sinking fund? (Pa., May,
1906.)

07. State how a sinking'- fund should be treated in the books of a
corporation. (N. Y., Jan., 1900*; N. Y., Jan., 1901'; N. Y., Jan., 1906;
III., May, 1906*; N. Y., June, 1909; Va., Nov., 1910; Mich., June, 1919.*)

98. Indicate the pro forma entries for the creation of a sinking fund.
(N. Y., June, 1902*; Mich., July, 1906*; Wash., March, 1909*; 111., May,
1914*; Mich., June, 1915*; Mass., Oct., 1915*; Wis., May, 1919.*)

99. Give the entries for sinking fund required when the bonds are paid
off at maturity. (111., May, 1912* ; Mass., Oct., 1915; N. Y., Jan., 1920.*)

100. (a) Stout and Company, acting as trustees in an issue of $250,000
thirty year bonds of the Modern Gas and Electric Conii)any, engage you
as an accountant to advise them as to the merits of the various methods of
recording funded debt transactions upon the books of the utility.

In your report construct hypothetical balance sheets to show four
methods of handling the funded debt and explain fully the advantages
and disadvantages of each, bearing in mind that you are working for the
trustee whose chief desire is security for the bondholder.

(b) A director of the utility argues that if appropriations are made out
of profits for sinking fund purposes, then it is unnecessary to make pro-
visions for depreciation on the property of the utility. Include in your
report to your client recommendations upon this point.

(Wis., April, 1918.)

101. Argument has been strongly urged that aside from any question
of possible mismanagement, or of the difficulty of making satisfactory
investments to yield the same rate as is paid on the bonds, a sinking fund
for bonds is more expensive than an arrangement for the serial payment
of bonds. This is illustrated by the case of $20,000 5 per cent bonds. If
these are paid off in a series, one each year, the total payment made will
be principal $20,000, interest .$10,500, total $30,500. The annual sinking
fund to pay these bonds would on a 5 per cent basis amount to $604.85,
making in twenty years $12,097, and the interest paid on the bonds would
be $20,000, total payments $32,097. The apparent excess burden is ac-
cordingly $1,597.

Discuss the above argimient and show clearly just what the figures mean
and in what the apparent saving actually consists.

(A. I. of A., June, 1917.)

102. State the theory and purpose of e.ich of the following, and show
wherein they differ: (a) reserve fund; (b) sinking fund. (N. Y., June,
1899; Dec., June, 1915*; N. D., July, 1916.*)

103. Name various ways in which sinking funds may appear on, or
affect the items of a Balance Sheet. (Wis., April, 1914; Wis., May,
1916.*)

104. Should a sinking fund represent actual investments or may it be
offset by contra entries? (N. Y., Jan., 1918.)

105. Classify the account Sinking Fund for Bond Redemption, ac-

RESERVES AND FUNDS

195

cording' to the subdivision of assets, liabilities, proprietary interest, in-
come and expenses under which it should be grouped. (Wis., May, 1919.)
106. You are auditinp: the accounts of a corporation and you find
the following entries in one month without sufficient explanation:

Profit and Loss

To Accrued Sinking Fund .

Accrued Sinking Fund

To Reserve for Sinking Fund .

Union Trust Company, Trustee.
To Accounts Payable

Accounts Payable ,
To Cash

Sinking Fund No. 1

To Union Trust Company

Reserve for Sinking Fund ,
To Profit and Loss ....

$8,333.33
100,000.00
100,000.00

100,000.00
100,000.00
100,000.00

$8,333.33
100,000.00
100,000.00

100,000.00
100,000.00
100,000.00

What would you conceive the situation to be and what recommendation
would you make?

(Cal., May, 1916; Mich., Dec, 1916.*)

107. On which side of the Ledger should balance of the Sinking Fund
aecoimt appear? (Mo,, Dec, 1914.)

108. Name the various ways of figuring a sinking fund. (111., May,
1912*; Wis., April, 1914; Wis., May, 1916.)

109. What are the usual sinking fund provisions to be found in a
trust deed securing an issue of bonds of a corporation? (111., May, 1912*;
111., May, 1914; Wis., May, 1919.*)

110. Compare the sinking fund provision of typical preferred stock
issues with the sinking fund provisions of typical bonds issues as to
entries to be made: (1) When the sinking fund is set up; (2) when the
purpose of creating the sinking fund has been attained; (3) when any
balances remain in the sinking fund or allied accounts. (Wis., Nov.,
1919.)

111. A city wishes to borrow $90,000 for 30 years, this debt to be
extinguished either by a sinking fund or by an issue of serial loan bonds,
payable so much per annum. Which, in your opinion, would be the
better way, and why? Answer fully and differentiate clearly between
these two methods of extinguishing the debt. (Mass., April, 1911.)

112. A mortgage provides for a sinking fund to be accumulated in the
hands of a trustee from profits prior to dividend payments. Prepare
skeleton Balance Sheet to disclose the state of the fund, dividends declared
and payable, appropriation of profits for purpose of the fund and an
unappropriated surplus. What effect would losses in excess of such un-

196 C. P. A. ACCOUNTING

appropriated surplus have on the sinking fund? (N. Y., Jan., 1911.)

113. From a theoretical point of view, are the contributions to a sink-
ing fund a proper charge against profits? Give your reasons. (Ohio,
Nov., 1913.)

114. From what source is a sinking fund derived and what account
is charged? (Pa., Nov., 1904; Md., Jan., 1909.)

115. May a sinking fund be established by appropriating profits?
(Cal., Nov., 1916.)

116. Where the establishment of a sinking fund is compulsory, is it
theoretically correct to charge income with the annual appropriations
required by the mortgage? Give reasons. (Ohio, Nov., 1917.)

117. If not set aside, in compliance with requirements of a bond issue,
how may a sinking fund afifect a corporation? (Pa., Nov., 1904; Md.,
Jan., 1909.)

118. In the course of a Balance Sheet audit state how you would
proceed to verify the correctness of a sinking fund. (Ohio, Oct., 1919.)

119. In preparing a Balance Sheet of a corporation, how would you
classify or deal with securities representing the investment of a sinking
fund? (111., May, 1906*; N. Y., Jan., 1907*; A. I. of A., June, 1917.)

120. How may sinking funds be invested? (Wis., May, 1916.)

121. A concern has established a sinking fund for the retirement of a
mortgage. An investment has been made in bonds, the present market
value of which is below cost. Would you inventory them at market value
or at book value? Why? (Mich., Dec, 1914.)

122. Define: Sinking Fund Investment account. (Wash., Nov., 1913*;
Wash., July, 1917.)

123. Explain in some detail the procedure you would follow as an
auditor in verifying Sinking Fund Investment account appearing in the
books and accounts of a company. (Wash., June, 1915.)

124. How should interest on sinking fund investments be treated in
the accounts? (Cal., Nov., 1916.)

125. Define briefly the following terms: (a) Redemption fund; (6)
Depreciation fund; (c) Contingent fund; {d) Investment fund. (111.,
May, 1904.)

126. Describe the nature of the following accounts : (a) Sinking fund;
(b) Reserve Fund; (c) Redemption Fund; (d) Depreciation Fund; (e)
Contingent Fund; (/) Investment Fund. (N. Y., Dec., 1896; W. Va.,
May, 1917; S. C, Sept., 1919.)

127. State the object of the following: Redemption Fund account.
(N. Y., Dec, 1898.)

128. Define the difference, if any, between a sinking fund and a depre-
ciation fund. Explain fully. (N. Y., June, 1906*; Mass., Oct., 1915*;
Cal., Nov., 1916; N. Y., June, 1918*; Md., Oct., 1919.)

RESERVES AND FUNDS 197

129. A municipality has built a public building from the proceeds of
a bond issue. Should the municipality write off depreciation of the
building and at the same time also create a sinking fund? (Wis., May,
1916.)

130. Explain in some detail the procedure you would follow as an
auditor in verifying the invested funds appearing in the books and
accounts of a company. (Wash., June, 1915.)

131. Define and differentiate sinking fund and Reserve account. Where
does each appear on the Balance Sheet, and what does each represent?
(Va., Oct., 1912.)

132. Under the conditions of a general mortgage given by the Red Clay
Brick Company to protect its issue of bonds, provision is made for pay-
ments to the trustee at stated periods, which, together with all accretions
from interest and profits, are to be held and disbursed by the trustee as
one fund. Should any distinction be shown on the books of the brick
company between interest and profit so obtained? If so, give reasons.
(N. Y./June, 1918.)

198 C. P. A. ACCOUNTING

PROBLEMS

RESERVES AXD FUNDS

1. On the 1st of July, 1905, a company borrowed $100,000 at 4 per cent
per annum, payable half-yearly, and payment of loan to be made at end
of 10 years at 105 per cent. It was decided to set aside annually out of
the profits such a sum as would with interest at 4 per cent per annum
pronde for the payment of the premium on the loan at the end of the
term. (What was this sum?) (Fla., April, 1907.)

2. A corporation wants to retii'e a debt of $103,000. bearino; 5 per cent
interest, payable annually. The tenth payment, including interest, is to
be $15,000. The other nine periodical payments are all to include interest
and to be of the same amount. Required : the amount of each of such
nine payments. (1.05»=1.551.328.) (A. I. of A., Nov., 1918.)

3. A company is under obligations to pay $10,000 to sinking fund
trustees "out of protits," The following transactions take place:

1914

Pe*^. 31, $10,000 cash paid to sinking fund trustees.

1915

Jan. 5, Trustees invest in $10,000 of the 5 per cent bonds of the company at

98 and interest (from Jan. 1).
July 1, Coupons on above bonds collected.
Dec. .31, $10,000 paid to sinking fund trustees.
1916

Jan. 1, Coupons collected.

Jan. 2, $11,000 bonds bought for sinking fund at 95.
July 1, Coupons collected.

Dec. 31, $125 paid for expenses of sinking fund.
Dec. 31, $10,000 paid to sinking fund trustees.
1917

Jan. 1, Coupons collected.
Jan. 10, $10,000 bonds bought at 101 and interest.

Give the Journal entries on the company's books for the above transac-
tions. (A. I. of A., June, 1917.)

4. "C," "D" and "E" are partners with ecjual capital and share e<^pially
in the profits. After trading for three years, "E" wishes to retire and
"D" elects to remain and purchase the share of the former. The part-
nership agreement provides that the retiring partner shall receive a share
of the goodwill. The value of the latter to be equal to two-thirds of the
average of the ]irofits of the last three years preceding his retirement.

The following are the figures and we are requested to prepare a Balance
Sheet and a Profit and Loss account as of June 30, 1916, and an account
showing the amount due to "E" from the remaining partners:

RESERVES AND FUNDS 199

Capital Account, "C" $8,000

Capital Account. "D" g 000

Capital Accour.t, "E" 8*000

Plant and Equipment 14*840

Trade-marks 4',500

Inventory, June 30 191G 7*600

Inventory, July 1, 1915 4*800

Accounts lloceivable 19,400

Merchandise Creditors 13 402

Sales ; 5.5^188

Purchases . . 27,804

Wages and Salaries 4,600

General Expenses l|560

Partners' Drawing Accounts:

"C " Debit Balance 5,500

" D " Debit Balance 5,500

"E" Debit Balance 5*500

Cash in bank and on hand 3,974

The following' adjustments are to be made for the year just closed:
Ten per cent depreciation on tlie i)lant and equii)ment; 15 per cent
on the trade-marks; 10 per cent reserve for bad and doubtful debts.

There is on the books a special Reserve account to cover depreciation
of the stock on hand, which is of a very perisliable nature. The reserve
amounts to $5,388 and must be equitably dealt with in the dissolution of
the partnership.

The previous two years' profits were $17,816 and $22,020, respectively.

(Minn., Oct., 1916; Cal., Nov., 1916.)
5. The Jones Company, Inc., acquired the business from S, R. Jones,
who took bonds amounting to $50,000 in part payment. These mature
in 20 years and can be canceled by payment after 15 years, and bear
interest at the rate of 6 per cent per annum. A sinking fund is to be
established for their redemption by payment to the Bankers Trust Co.,
Trustees, of $2,500 a year, the interest on this fund to accumulate to help
in retiring the bonds before 20 years.

November 30, 1918, was the end of the first fiscal year and the trial
balance of that date is as follows:

Real Estate

Buildings

Machinery

Accounts Receivable

Cash

Merchandise

Labor

Office Expense

Miscellaneous Investments .

Bond Sinking Fund

Interest Paid on Bonds ...

Capital Stock

Bonds Payable

Net Sales

Notes Payable

Accounts Payable

Miscellaneous Income

$30,000.00
30 000.00
43; 150.00

4,260.00
12.759.60
46^540.00
20,000.00

1,950.00
440.40

2,500.00

3,000.00

$194,600.00

$.50,000.00

.50,000.00

68,090.00

5.000.00

21,450.00

60.00

$194,600.00

200 C. P. A. ACCOUNTING

Inventory of merchandise is $28,500.

Under date of May 30, 1918, the company paid the Bankers' Trust
Co. $2,500. Under date of November 30. 1018 the Bankers' Trust Co.
reported that they had received the $2,500; that on June 15, 1918,
they purchased two $1,000 bonds at par and accrued interest. Rate of
interest 5 per cent, payable in November and May each year; that they
collected $50 interest on November 1, 1918; and that they have allowed

4 per cent interest per annum, computed semiannually, on the lowest
amount of cash in the fund during- the period.

They show the cash in the fund which you are asked to compute from
the above to verify the correctness of their balance.

(1) Make the necessary Journal entries to close the books for the
fiscal year. (2) Construct Income and Expense account for the year. (3)
Construct Balance Sheet as of November 30, 1918. (4) Prepare statement
of sinking funds in hands of Bankers' Trust Co.

(Iowa, Dec., 1918.)

6. A corporation issued 10-year first mortgage bonds on April 1, 1914,
bearing 6 per cent interest, payable semiannually (April and October).
The bonds provided for annual contributions to a sinking-fund trustee,
a trust company, that allowed 2 per cent compound interest. The bonds
were sold at a premium and payment was received therefor on April 1,
1914. Show pro forma entries as of the following dates: (a) April 1,
1914; (&) October 1, 1914; (c) April 1, 1915; {d) April 1, 1924. (N. Y.,
June, 1915.)

7. A contractor proposes to build a bridge to Belle Isle and accept the
city's 4 per cent 20-year bonds to the amount of $2,000,000 in payment.
He advocates as a means of retiring the bonds the establishment of a toll
system on foot passengers and automobiles at the respective rates of 1 and

5 cents each. Assuming the ratio of foot passengers to automobiles to be
10 to 1, how many of each would be necessary to pay the interest annually
and create a fund which, placed at the same rate of interest, would be suf-
ficient to retire the bonds at maturity. (Note: $1 compounded at 4 per
cent for 20 years equals $2.19112314.) (Mich., Dec, 1915; Mich., June,
1919.)

8. You are called upon to state what is the annual sinking fund neces-
sary to redeem a principal sum of $1,000,000 due 30 years hence, it being
assumed that the annual sums set aside are invested at compound interest
at 5 per cent. (Note: 30th power of 1.05 is 4.32194238.) (A. I. of A.,
Nov., 1917.)

9. A municipality borrowed $150,000 for 5 years at 4 per cent interest,
payable annually. To meet the debt when it became due, a sinking fund
was created by depositing at 5 per cent compound interest an equal sum at
the expiration of each of the five years. What was the annual amount
deposited? (Mich., June, 1910.)

10. A company wants to set aside a sinking fund on a 3 per cent
basis so as to retire $100,000 in three equal annual payments. Required

RESERVES AND FUNDS

201

the amount necessary to be annually invested at 3 per cent per annum.
(Kan., Dec, 1915; Mo., Dec, 1915.)

11. What amount, including interest, must be set aside annually to
provide a sinking fund sufficient to retire an issue of bonds amounting
to $100,000, originally sold at 90, interest payable semiannually at 6 per
cent, and maturing in ten equal annual installments after the fifth year?
Show method. (Mich., Dec, 1914.) (Note: Assume sinking fund install-
ments set aside at beginning of each year and first bonds redeemed at
beginning of sixth year.)

12. A company is issuing $100,000 of 4% 20-year bonds, which it
wishes to pay at matuiity bj^ means of a sinking fund, in which equal
annual deposits are to be made. The board of directors wishes to assume
that this fund will earn 5^/^% interest for the first five years, 5% for the
next five years, and 4% for the last ten yeai's. What is the annual deposit
required ?

Given:

5y2%

5.581

12.875

1.307

1.708

5.526

12.578

1.276

1 . 629

5.416

12.006

(1-1- i)»

1.217

(l+i)^''

1.480

(A. I. of A., May, 1920.)

CHAPTER XI

BONDS

Classes of Bonds — Bonds are sealed documents promising to pay a cer-
tain sum of money with interest thereon at a specified rate.* Bonds have
been classified by Lawrence Chamberlain in ''The Principles of Bond In-
vestment" under the following headings :

A. Character of Issuing Corporation

(a) Governmental

(b) Commercial

B. Character of Security

(a) Unsecured

(b) Secured

I. Cruaranty Security
II. Lien Security

(1) On Personality

(a) Paper Collateral

(b) Rolling Stock

(2) On Realty

(a) General Property

(b) Specific Property

C. Purpose of Issue

D. Payment of Interest

(a) Conditional

(b) Unconditional

(d) Coupon

E. Payment of Principal

F. Maturity of Principal

(a) Fixed Date

(b) Unsettled Date

I. Option of Payer

II. Option of Payee

Unsecured bonds or debenture bonds are merely formal acknowledg-
ments of debts under seal." Income bonds may or may not secure the

'For explanation of superior figures sec page 337.

202

BONDS 203

principal by a pledge of specific property or by a preference claim against
corporate property, but payment of interest always depends entirely on
the existence of net profits.'

Guaranty security bonds are those which, in case of default, will be
paid both as to principal and interest by the sponsor/ The chief kinds
of guaranty security bonds are assumed bonds, guaranteed bonds, en-
dorsed bonds, stamped bonds, and joint bonds.

Collateral trust bonds are good examples of bonds secured by a lien on
personality consisting of securities." Car trust and equipment bonds are
likewise secured by lien on personality, but the property is in the form of
railroad rolling stock.' The personalty securing sinking fund bonds is in
the form of funds.

Bonds secured by liens against real estate nuiy be safeguarded by
mortgages on the general corporate property, or on realty of a certain
class, or on sections of the corporate property.' Land grant bonds are
railroad bonds secured by liens on lands granted l)y the government.*
Railroads sometimes issue divisional bonds secured l)y mortgages on specific
railroad divisions.*

The matter of mortgage piiority is vital as the pledged property may
be sufficient to liquidate only the senior issues, thus leaving the junior
issues unprotected except for the general corporate property.'"

Bonds may be designated according to the purpose for which the money
was raised. For instance, funding bonds represent the consolidation of
the corporate unfunded debt. Purchase money bonds are issued in full or
part payment for a property." Refunding bonds are issued in lieu of
maturing obligations and have the same security as the redeemed bonds."
Consolidated bonds replace several prior issues and unite the securities for
the retired issues.^'

Ordinary bonds contain unconditional promises to pay a specified
amount of interest. However, there are some exceptions, like income
bonds which pay interest only if a net profit is made by the corporation,"
or participating bonds, the interest of which may run from a specified
minimum to a specified maximum (in limited participation), or to what-
ever is earned (in unlimited participation)." Bonds may be registered as
to interest, in which case the interest is remitted by check, or they may
have interest coupons attached, which are cut and cashed when due."
Bonds may be registered as to principal, regardless of whether they are
registered as to interest.^'

Bonds are sometimes designated according to the exchange medium in
which thev are redeemable, viz.: Gold bonds, silver boiuls, and currency
bonds."

The bonds which mature at a settled date are either straight bonds, those
nominally maturing all at one time, or serial bonds, those maturing in
regular installments." Redeemable bonds and callable bonds are illustra-
tions of bonds the maturity of which is affected by the payer's right to
retire them before the obligatory maturity date.*" Convertible bonds are,
at the option of the payee, eonvei-til)le generally into other securities of the

204 C. P. A. ACCOUNTING

same corporation." Perpetual bonds are those containing no promise to
liquidate the principal."

Unissued Bonds — Some accountants list unissued bonds among the assets
on the balance sheet," while other accountants deduct the unissued bonds
from the authorized bonds." The latter procedure seems preferable, as
it shows the right to issue the bonds and yet does not tend to confuse the
lay reader. Unissued bonds are sometimes called reserved bonds," but this
practice is not good because the title is not self-explanatory.

Treasury Bonds — As bonds may be issued below par, it is not very im-
portant to distinguish between unissued and reacquii'ed bonds." However,
it is preferable to reserve the term "treasury bonds" for reacquired bonds."
The method of presenting treasury bonds (sinking fund securities) on the
balance sheet is discussed in Chapter X under the caption "sinking funds."
It must be remembered, however, that the Interstate Commerce Commission
compels transportation companies to classify authorized bonds, signed and
sealed by the mortgage trustee, as working assets.

Bonds as Collateral — As treasury bonds out as collateral are still the
property of the borrowing company, they need be accounted for only by
memorandum entries,** although the fact that they are pledged should be
indicated on the balance sheet by showing the pledged and unpledged
bonds separately.^

Issue of Bonds — There are two methods of recording the issue of bonds.
Assuming the authorized issue of $1,000,000, of which $750,000 are sold at
par for cash, the balance remaining unissued, the entries would be :

First Method^"

Unissued Bonds $1,000,000.00

Bonds Payable $1,000,000.00

Cash 750,000.00

Unissued Bonds 750,000.00

Second Method^^

Ca.sh $750,000.00

Bonds Payable $750,000. 00

The second method, which presupposes that the authorized issue would
be carried parenthetically in the account title, is preferred by accountants
who depreciate the use of memorandum accounts." The first method seems
preferable, however, as the accounts themselves then give a complete his-
tory of the transaction.

If the above-mentioned bonds were sold on the installment basis instead
of for cash, the bonds would not be issued until the subscriptions were
paid." The entries would be as follows:

BONDS 205

Unissued Bonds SI ,000,000.00

Bonds Payable $1 ,000,000. 00

Bond Subscribers 750,000. 00

Bond Subscriptions 750,000.00

Cash (1st Installment) 375,000. 00

Bond Subscribers 375,000.00

Cash (2nd Installment) 375,000.00

Bond Subscribers 375,000. 00

Bond Subscriptions 750,000.00

Unissued Bonds 750,000.00

Bond premium and discount are entered on the books in the same manner
as the premium and discount on stock.'* Using the above data, and
assuming that $150,000 of the unissued bonds were sold at 102 and the
remaining at 99, the entries, illustrating the first method only, would be:

Cash $153,000.00

Unissued Bonds $150,000.00

Premium on Bonds Payable 3,000.00

Cash 99,000.00

Discount on Bonds Payable 1 ,000. 00

Unissued Bonds 100,000. 00

Discount on bonds payable is an asset, as it represents the privilege of
using money at less than the market interest rate, while premium on bonds
payable is a liability, as it represents an obligation to pay more than the
market rate of interest.'" Discount and premium on bonds payable should
be shown on the balance sheet as deferred charges^' and defended credits
to income," respectively. This procedure is prescribed for transportation
companies by the Interstate Commerce Commission. Discount on bonds
is sometimes treated as a valuation item,^* but this seems incorrect. Bond
discount should not be deducted from bonds payable because the incurred
liability is the par value of the bonds issued.

Expenses incurred in floating a bond issue may be shown in a bond
issue expense account,^' or an underwriting expense account,*' or may be
shown together Avith bond discount in a bond discount and expense
account." The last method seems preferable as the expense should be
prorated on the amortization principle. It is sometimes advocated to
charge the issuing expenses to organization expense," but this seems in-
advisable.

The opening entries for an issue of collateral trust bonds should be
preceded by an entry debiting pledged investments and crediting invest-
ments for the amount of the collateral."

When equipment trust bonds are issued, the transaction is in the nature
of a conditional sale or lease, the company paying installments annually
and the trustee, acting for the vendees, holding a lien on the entire prop-
erty until the last installment, or rental, is paid, when a release is given."

206 C. P. A. ACCOUNTING

The entries for tlie insue of $100,000 of equipment trust bonds and the
payment of the first installment would he:"

Leased Equipment $100,000.00

Equipment Trust Bonds $100,000.00

Equipment Trust Bonds 10,000.00

Cash (assuming ten equal payments) 10,000.00

Equipment 10,000.00

Leased Equipment 10,000.00

Bond Interest — Interest on registered bonds is sent to the bondholders
either by the treasurer or fiscal agent of the corporation/" As coupons are
frequently unredeemed at the end of the fiscal period, it is unsatisfactory
to record the interest only as it is paid. The correct procedure would be
to debit bond interest and credit bond interest accrued at the end of each
month for one-sixth of the semi-annual interest charges, and to debit bond
interest accrued and credit cash Avhen coupons are redeemed."

Accountants usual h" record the interest on treasury bonds," although
it is not necessary to do so, unless tlie treasury Jjonds are held by a
trustee under a sinking fund provision requiring that the trustee receive
the interest and control its investment.

Interest on guaranteed bonds is normally paid by the issuing company
in the usual way, but, in cases of default, the guaranteeing company must
make the payment." The entry would be a debit to advances to subsidiary
company and a credit to ca.sh on the books of the parent company, and a
debit to the bond interest and a credit to advances from parent company
on the books of the suljsidiary company.""

Although intei-est on income bonds is unusual in that it is paid only
in the event that the company's profits are sufiicient to pay it," there are
no irregularities in the accounting procedure in recording the interest
payments."'

Since bond premium represents the present worth of an annuity the
rent of which is the excess of the stated bond interest over the el¥ective
interest, the periodic payments extending over the life of the bonds, the
premium is not an earning but an offset to excess bond interest." On the
other hand discount on bonds is an addition to the interest paid on bonds."*
Bond premium and bond discount are therefore gradually written off as
a credit and debit, respectively, into the bond interest account." The
usual way of prorating bond premium and discount is to write off an
equal amount annually over the life of the bonds."" The scientific or effec-
tive rate method is to amortize the difference between the stated and effec-
tive bond interest through the bond interest account."

If a bond $10,000 par value, bearing five per cent, life two years, interest
]>ayable January and July, was sold on a four per cent basis for $10,190.39
on January 1, 1917, the entry on July 1, 1917, for bond interest and the
amortization of bond premium would be as follows :

BONDS 207

Bond Interest $203.81

Premium on Bonds Payable 46. 19

Cash .' $250.00

If the bonds were sold on a six per cent l)asis for $9,814.15, the entry
to be made would be :

Bond Interest $294 . 42

Cash $250. 00

Discount on Bonds Payable 44. 42

The mathematics for the above entries is shown in the bond premium and
discount amortization tables given in Chapter IX under the caption "Amor-
tization of Bond Premium and Discount."

Bond Register — While no record of ownership need be kept for coupon
bonds, a record of the holders of registered bonds must be kept either by
the corpoi'ation or by its transfer agent.'* This bond ledger or register
consists of a sheet or card for each class of bonds ruled into columns for
number and date of bond, name and address of person to whom bond is
issued, names and addresses of transferees, par value of bond, and interest
payments under the different due dates.™

Coupon Register — Paid and canceled interest coupons may be recorded
in a coupon register in which an entire page is allotted to each bond for
the pasting of the coupons in spaces numbered to correspond with the
particular coupons."" However, the modern practice is to deliver all paid
and canceled coupons to the trustee of the mortgage, who destroys them
and issues a certificate to that effect.

Audit of Bonds Payable — The auditor must read the bond .agreement
and ascertain that all provisions have been fulfilled."^ A complete schedule
of authorized and issued bonds should be made."^

All bonds certified by a trustee and delivered to a corporation must be
accounted for.'" The proceeds of all bonds sold should be traced into the
proper accounts."^

On account of the safeguards placed by bond holders on bonds, little
difficulty is incurred in determining the outstanding bonds." They may be
shown, (a) by the bond register which should be checked against the ag-
gregate shown in the general ledger;"' (b) from the cash receipts journal
if sold for cash, or from general journals if sold for property or other as-
sets;*" (c) through the interest checks or interest coupons if all have
been returned;"* (d) by obtaining final proof through a certificate of the
trustee.**

The auditor must see that bond interest is correctly shown in the
accounts." He should see that interest on income bonds is taken care of
before any dividends are paid out of profits."

Investments in Bonds — Bonds purchased may be classified into those held
temporarily and those held permanently. The former are valued and
accounted for in the same way as temporary stock investments (see
Chapter VIII), while permanently held bonds are accounted for on the

208 C. P. A. ACCOUNTING

amortization principle. As to the application of the amortization prin-
ciple to bonds purchased at a discount, it is desirable to set up a reserve
for possible losses, if the discount on the bonds was influenced by the bad
credit of the issuing company."

The entries covering the purchase and the first interest payment of a
bond, $10,000 par value, bearing five per cent, life two years, interest
receivable January and July on a four per cent basis, for $10,190.39
would be:

Bond Investment Account $10,000.00

Premium on Bonds Purchased 190. 39

Cash $10,190.39

Cash. . 250.00

Premium on Bonds Purchased 46. 19

Interest on Bonds Purcha.sed 203.81

if the the bonds had been purchased on a six per cent basis for $9,814.15,
the entries would be:

Bond Investment Account $10,000.00

Discount on Bonds Purchased $185 . 85

Cash 9,814.15

Cash 250.00

Discount on Bonds Purchased 44 . 42

Interest on Bonds Purchased 294.42

The calculation of the amounts that should be written off from the bond
premium and bond discoimt is illustrated in the amortization tables given
in Chaptel" IX under the caption, "Amortization of Bond Premium and
Discount."

If there are only a few transactions involving the purchase of bonds, no
special ledger is needed, it being satisfactory if a separate account is kept
in the general ledger for each purchase. If such transactions are numerous
a special "bonds owned register" should be used, which would allot to
each transaction a page, containing space for the name of the issuing
company, name of bonds, how, when, and where payable, nominal and
effective interest rates, numbers of the bonds, and columns for the date,
voucher, principal, par value, original cost, book value, and market value."

The bonds owned should be verified by actual inspection,'* and a very
complete and detailed list of them prepared." The auditor should also list
all bonds owned during the period of the audit and ascertain therefrom
whether all interest has been properly collected and recorded." Bonds
out as collateral should be verified by con-espondence." Bonds purchased
during the period under audit should be verified by correspondence, by
brokers' notices, and by inspection." The auditor should ascertain that
the coupons on bonds are intact.™

BONDS

209

QUESTIONS

BONDS

General

1. What is a bond? (Iowa, Dec, 1918.)

2. Do unsold treasury bonds constitute a liability? Why? (Mich,,
June, 1908; N. Y., June, 1919.)

3. Do unsold bonds of a railroad company constitute a liability? If
they do, under what accounts would they appear on the Ledger? (N. Y.,
Jan., 1919.)

4. In examining the accounts of a corporation you find the following
accounts on the books in connection with Liberty loans :

Company's subscriptions

Subscription for employees

Loans from banks secured by $100,000 Liberty bonds .
Payments by employees

Cr.

$72,000
12,000

(a) State how you would proceed to verify each of the above accounts,
assuming the examination is made two months after the close of the year.

(&) State how you would enter these transactions in the Balance Sheet
of a corporation.

(111., May, 1915.)

5. A corporation has issued $1,000,000 5 per cent debenture bonds,
redeemable at par, out of profits, at the end of twenty years. State
what method should be adopted to provide for such redemption so that
each year's profit may bear its due proportionate burden of contribution.
(N. D., July, 1918.) '

6. The Ledger of a corporation has an account entitled : "First Mort-
gage Bond Script," showing a credit balance of $967.54. What does
this balance represent and how would you treat the item in the Balance
Sheet? (N. Y., Jan., 1904.)

7. Explain fully in what way, if at all, the loss on bonds held and
disposed of during the period should enter into the Trading and Profit
and Loss statements of a mercantile concern. Give reasons for including
or excluding. (Kan., May, 1916.)

210 C. P. A. ACCOUNTING

8. Sketch the form of a Bond Ledger which will provide the purchaser
of a bond at a premium with a perpetual detail record of each bond
transaction. (Wis., April, 1015.)

9. Make entries in journal form, with ])roper explanations, for all the
various ways in which bonds issued by a corporation may be sold by it
and afterwards paid. (Mich., Dec., 1914.)

10. A company, having $500,000 of debentures, bearing 5 per cent
interest, which have been in existence for some years, and which are re-
payable February 1, 1907, arranges to provide the necessary capital by
the issue, at par, of $500,000 4 per cent permanent debentui-e stock, the
interest on which runs from January 1, 1907 ; the accounts of the company
are made up to June 30, 1907. What, in your opinion, is the proper
amount of debenture interest to be charged against the profits of the half
year? Give the reasons upon which your opinion is based. (Ill,, Dec.,
1910.)

11. Outline an entry recording bond interest due but not paid at time
of making the entry. What are the advantages of such an entry? (N. Y.,
June, 1902.)

12. How would you disclose on a Balance Sheet dated December 31
bond interest due January 1? (Cal., June, 1917.)

13. What is the advantage of amortization in regard to the valuation
of bonds? (Del., June, 1915.)

14. A company has issued bonds of a par value of $100,000 redeemable
20 years hence at a premium of $105. The trust deed provides that the
company must set aside out of profits and invest at the end of each year
the sum of $5,000; the bonds issued were sold for $95,000.

1. Included in the sinking fund are certain of the company's bonds

purchased at 98. Should these bonds purchased be stated at
98, 100 or 105?

2. How should the interest from the investment of the sinking fund

be treated in the preparation of the accounts of the company?

3. Would it be correct to write off the discount of $5,000 on the bond

issue during the first year's operations because the company
had a successful year?

4. How should the company provide for the repayment of the bonds

at tbe end of 20 years? Would this provision apply to the
bonds purchased as part of the sinking fund investment?

Explain the reasons for the answers of this question.

(Kan., Dec, 3915; Mo., Dec., 1915.)

15. How would you show in the Balance Sheet bonds which have been
put up as collateral and the indebtedness for which they are collected?
(Mich., June, 1919.)

16. In the Balance Sheet of a corporation, how should the following
item be stated: 5 per cent mortgage bonds authorized, $1,000,000; certified

BONDS 211

and issued by the trustees, $750,000. viz., (1) in the hands of the public,
$400,000; (2) pledged as collateral to secure the company's notes pay-
able, $100,000; (3) in the custody of the treasury, $250,000. (111., May,
1912.)

17. On March 15, 1919, you received instructions to audit the accounts
of a larjje corporation whose fiscal year ended December 31, 1918, The
corporation has subscribed for Liberty bonds through various banks and
at December 31, 1918, certain subscriptions had been paid for in full and
delivery of bonds accepted, while in other eases part payments only had
been made. Bonds have also been delivered to employees who have sub-
scribed and paid for them in full. Describe how you would proceed to
verify the asset shown on the Balance Sheet at December 31, 1918, repre-
senting bonds on hand and part payments made on subscriptions, so that
you can give an unqualified certificate to your clients as of December 31,
1918. (A. I. of A., Nov., 1919.)

18. How would you deal with Bond Issue Expense account in prepar-
ing the annual accounts of a company? Comment briefly on any points
which would need special consideration. (A. I. of A., May, 1920.)

19. When preparing a Trading and Profit and Loss account at the
end of a fiscal year, in what manner would yon treat the interest on
bonds? (N. Y., Jan., 1907.)

20. A company authorizes its officers to borrow for its account $100,000
and give as security $200,000 of the first mortgage bonds of the company.
How should this transaction be treated in the Balance Sheet? (Ohio, Nov.,
1917.)

21. How would you disclose on a Balance Sheet dated December 31,
bonds put up as collateral when there is a strong probability of their not
being released? (Cal., June, 1917.)

22. What advantage, if any, has the serial plan of paying bonds over
the sinking fund plan? (Del., June, 1915; Wis., May, 1916.*)

23. A certified public accountant, having perfonned the duty at the
close of several years, takes up for the year just past the examination of
bonds — the property of an institution. At his last examination he found
coupon bonds in three classes, registered as to principal, registered as to
principal and income, and unregistered. In his examination of the books
of account of the institution, he found that bonds had been bought during
the year. To make an efficient examination in the most expeditious way,
how might he treat these various classes? (Mass., June, 1913.)

24. If called upon to verify the integrity of a trust fund consisting
principally of bonds, state specifically what particulars of said bonds you
would examine critically. (N. Y., Jan., 1918.)

25. What entries would you, as auditor, deem proper to record the
redemption of bonds by a company with the cash deposited with its fiscal
agent, where such bonds were cancelled? (N. Y,, June, 1918.)

26. A corporation borrows $120,000 for a period of ten years to pay
off an existing loan at a higher rate of interest, paying therefor in broker-

212 C. P. A. ACCOUNTING

nge and costs $2,750. How would you treat this item on the books?
(ind., Nov., 1917.)

Classes op Bonds

27. Name five classes of bonds, describing briefly each class with regard
to issue, purpose, redemption, etc. (Mich., June, 1908; Mich., June,
1913*; N. Y., Jan., 1917*; N. C, Aug., 1917.*)

28. Define : Mortgage bond. (N. Y., June, 1898* ; Wash., May, 1903* ;
Pa., Nov., 1906*; N. C, June, 1916; N. C, Nov., 1918; N. C, Nov., 1919.)

29. Define: First mortgage bonds. (Wash., Sept., 1907.)

30. Define: Second mortgage 6 per cent serial gold bonds. (Wash.,
July, 1917.)

31. Define: Collateral trust bonds. (Pa., Nov., 1906*; N. C, Nov.,
1918; N. C, Nov., 1919.)

32. Define: Guaranteed bond. (N. C, Nov., 1918; N. C, Nov., 1919.)

33. Define: Income bonds. (N. Y., June, 1898*; Wash., May, 1903*;
Pa., Nov., 1906*; Wash., June, 1912; 111., May, 1914*; Wis., May, 1916;
N. C, June, 1916; N. D., Aug., 1917; N. C, Nov., 1918; N. C., Nov.,
1919*; A. I. of A., May, 1921.)

34. Define: Serial bond. (Kan., Dec., 1915; Mo., Dec, 1915.)

35. Define: Coupon bonds. (N. C, June, 1916.)

36. Define: Registered bonds. (N. C, June, 1916.)

37. Define : Debenture bond. (N. Y., June, 1898* ; Wash., May, 1903* ;
Cal., May, 1916; N. C, June, 1916; N. C, Nov., 1918; N. C, Nov., 1919.)

38. Define: Underlying bond. (Cal., May, 1916.)

Bond Discount and Premium

39. Define: Bond discount and bond premiums. How should each be
treated in the annual statement of a concern? (Minn., Oct., 1916.)

40. Show the method by which entries would be made for receipts
from bonds sold below or above par. (Mich., June, 1913; Mich., June,
1919.)

41. How would you treat the discount on bonds on the Balance Sheet
of issuing company? (111., Mav, 1914*; Mo., Dec, 1914*; 111., May,
1915.*)

42. In the Balance Sheet of a manufacturing concern, how should
commissions paid and discounts allowed on bonds sold be treated? (111.,
May, 1912.)

43. On which side of the Ledger should the balance on the Bond Dis-
count Amortization account appear? (Mo., Dec, 1914.)

44. The Fort William Manufacturing Company has created a first and
second issue of mortgage bonds which have been placed through a syn-
dicate. The first mortgage bonds are to run 20 years and were sold at 115.

BONDS 213

The second mortiraire bonds are to run 40 years and were sold at 60.
State how the same should be entered on the books of the company, as-
suming the total par value of the first mortgage to be $5,000,000 and the
second $2,500,000. (Md., Oct., 1919.)

45. A corporation has issued $1,000,000 of 6 per cent 20-year bonds
at 90 and for 8 years has written off 5 per eait of the discount each year.
Last year an opportunity occurred to buy in $200,000 at 85, which was
done and the bonds cancelled. The directors propose to take up into their
year's revenue $30,000, the discount saved upon extinction of this liability.
Do you approve? If not. what course would you advise, or, if they
insist, how would you act? (A. I. of A., Nov., loiS; W. Va., May, 1919.)

46. What proportion of $15,000 — commission paid for n^x»tiating a
sale of bonds, to run 10 years — should be treated as an asset at the ead of
the first year? Give reasons. (N. Y., Jan., 1901.)

47. If a company sells its own bonds at a premium, is the pranium
received a legitimate profit of the company? (Ohio, Nov., 1915; W. Va.,
May, 1919; N. D., July, 1919.)

48. Explain the different ways in which the discount on bonds sold
below par may be written off bv the issuing concern. Which is the best?
(Mich., Pec., 1913; Mich., Dec.,'l914.»)

49. "Discounts and premiums on bonds are in effect an addition to or
a deduction from the interest rate paid on the bonds over their life."
(Dickinson.) Defend and illustrate this statement in view of your defi-
nition of interest. (Kan., May, 1916.)

50. Classify according to the subdivision of assets, liabilities, pro-
prietary interest, income and expense under which they should be grouped :
(a) discount on bonds purchased; (6) amortization of discount on bonds
purchased; (r) amortization of premium on bonds issued; (d) premium
on bonds issued. (Wis., May, 1919.)

51. State the various accounts which should be kept for; (1) recordii^
bonds issued and bonds purchased; (2) the premium and discount on these
bonds; and (3) outline four methods of treating premium and discounts
on bonds. (Wis., Nov., 1919.)

52. A corporation sells its first mortgage bonds at $10,000 premium
and its second mortgage bonds at $10,000 discount. Give your views as
to the proper treatment of these items of premium and discount (N. Y,
Jan., 1901: Wis., April, 1914.*)

53. What does the Interstate Commerce Commission require in con-
nection with the recording and the financial presentation of premiums and
discounts on bonds, and premiums and discounts on stocks? State the
theoretic reason for the difference, if any, in the handling of these two
classes of facts. (N. Y., Jan., 1914.)

54. Frame any entries necessary to record the action of the directors
as it appears in the minutes of the meeting. The president reported that
a finn of bankers had offered to purchase $200,000 of the company's 20-
year 5 per cent bonds to be dated October 1, 1917, at 93 and accrued

214 C. P. A. ACCOUNTING

interest. He was authorized to accept the offer and deliver bonds on
that date. (A. I. of A., Nov., 1917.)

55. A company having sold its bonds at a rate above par, how should
the premium received be treated on the books of the company? (N. Y.,
June, 1906*; AVash., Sept., 1907*; Ohio, Nov., 1913.)

56. What, in your opinion, is the most equitable basis of writing off
discount incurred on an issue of serial bonds by a corporation? Mention
at least two other bases which might be followed, stating wherein the
method you suggest is more equitable than the others. (111., May, 1914.)

57. A firm purchased ten $1,000 bonds at 97^/2, due January 1, 1915,
bearing 5 per cent interest, payable semiannually. What procedure would
you adopt to care for the discount at maturity? (N. Y., Jan., 1914; N. D.,
Aug., 1917.*)

58. How should the interest received en a bond bought at a premium
be treated? (N. Y., June, 1897.)

59. Give various methods of treating premiums and discounts on bonds
purchased. Give the advantages and disadvantages of each method and
state which you consider the best, with reasons for your belief. (111.,
May, 1907*; Fla., July, 1909; Va., Nov., 1910*; Mich.,^ Dec, 1916.*)

60. A company having an issue of $1,000,000 of bonds running for
the period of 30 years and bearing interest at the rate of 6 per cent per
annum, payable annually, has asked your advice as to an equitable method
of disposing in its accounts of a discount of $50,000 paid to its brokers
for the negotiation of the bonds. Y''ou have ascertained that the bonds
are payable in annual installments of $25,000 during the fii-st 20 years
and in installments of $50,000 per annum during the next 5 years, the
final payment of $250,000 being due at the end of the 30th year. In
answering this question, submit details of the process you adopt in arriv-
ing at your conclusion. (Wash., July, 1917.)

61. Illustrate in the form of Journal entries the accrual of discount
and the amortization of the premium on bond investments. Explain or
illustrate the relation of each to the interest receipts and to the income
returns. (Md., Jan., 1909.)

62. A concern of which you are the auditor buys for investment $10,000
worth of 7 per cent 15-year gold bonds at 115. How would you show
these in the Balance Sheet of the concern and what disposition would
vou make of the premium on the books? (N. Y., Dec, 1897*; N. Y.,
Feb., 1910*; Ohio, Nov., 1918.)

63. In case of bonds purchased at a premium or at a discount, to be
held until maturity, state how the price should be disposed of on the
books at purchase, at maturity, and at any intervening time. (N. Y.,
June, 1898.)

64. How would you treat in the accounts bonds bought at 90, with 11
years yet to run? (Cal., Nov., 1916.)

BONDS 215

Auditing

65. State how yon would verify the Bonds Payable. (Ohio, Dec., 1908;
N. C, June, 1916; N. C, Aug., 1917*; 111., Dec, 1918.*)

66. State in detail what steps you would consider necessary to verify
the First Mortgage Gold Bonds. (111., May, 1904*; 111., May, 1916.)

67. How would you verify the Investment Bonds in making a Balance
Sheet audit? (Mich., June, 1912; Mass., Oct., 1914*; Ohio, Nov.,
1915.)

68. State for Balance Sheet purposes the rules of valuation that apply
in long-time bonds bought at a discount for speculation, the market value
of which has advanced. (N. Y., Jan., 1911.)

69. State for Balance Sheet purposes the rules of valuation that
apply in long-time bonds bought at a jiremium for investment, the market
value of which has advanced. (N. Y., Jan., 1911.)

70. Under what circumstances would you pei'mit a client to carry bonds
at cost when the market is lower? (Cal., May, 1916.)

71. What is the general rule as to bonds of other corporations held
as an investment? (N. Y., Dec, 1898*; Va., Oct., 1912*; Ohio, Nov.,
1918.)

72. "What Avould you consider satisfactory evidence of the correctness
and propriety of expenditures of Commission Paid to Bankers for Sale
of Bonds? (A. I. of A., May, 1918.)

73. How would you proceed to verify the Liberty bonds on hand rep-
resenting company's and employees' subscriptions? (111., Dec, 1918.)

216 C. P. A. ACCOUNTING

PROBLEMS

BONDS

1. A $10,000 5 per cent semiannual coupon (bond) is bought on a 4
per cent basis, due 1^ years hence. What did it cost? (A. I. of A.,
Nov., 1918.)

2. Determine the price of a 4^ per cent bond in the amount of $10,000,
with four years to run, purchased so as to net 3^/^ per cent. The interest
is payable semiannually. Construct a schedule of amortization. (Pa.,
Nov., 1918.) (Note: 8th power of 1.0175 is 1.14888178, whose reciprocal
is .87041157.)

3. What must be paid for a bond $1,000 par maturing in 10 years
Avith 4 per cent interest, payable semiannually, to net the purchaser 6
per cent? (Mich., Dec, 1913.) (Note: 20th power of 1.03 is 1.80611123,
whose reciprocal is .55367575.)

4. "X" and "Y" are dealers in bonds and securities, sharing profits
and losses in the proportion of: "X," three-fourths and "Y," one-fourth.
They employ "Z" to sell securities, agreeing to pay him, in lieu of a salary,
an amount equal to 25 per cent of the net profits to be divided between
the partners. During the period of "Z's" employment the firm purchased
$100,000 Topeka Traction Company first mortgage 5 per cent bonds, on
a 3 per cent basis. The bonds mature in one year and one-half. Interest
is payable semiannually. These bonds are held by "X" and "Y" until
maturity.

Prepare a statement of the Topeka Traction Company bond accounts,
showing cost, amortization, and interest. The total profit to be adjusted
in the contract with "Z" is $15,000. Show the division of this profit.

(Kan., May, 1916.)

5. A bond, bearing interest at 5 per cent per annum, payable annually,
and repayable in five years, with bonus of 10 per cent, is for sale. What
price can a purchaser pay who desires to realize 6 per cent on his invest-
ment? (V^ at 6 per cent =r .7473.) (A. I. of A., May, 1919.)

6. On Januar\' 1, 1915, an investor purchased {ex interest) a 5 per
cent $10,000 bond, the interest being payable, $250 on January 1 and $250
on July 1, of each year.

Assuming that the bond matured on July 1, 1917, and yielded 2 per
cent semiannuallv on his investment, what price did he pav? It is given
that (1.02)' = 1.104081.

Using the figures derived from your eoiiii)iitation, make illustrative
entries for income and amortization covering the first two periods.

BONDS 217

(Mass., Oct., 1917.) (Note: 5th power of 1,02 is 1.10408080, whose re-
ciprocal is .90573081.)

7. A savings bank on July 1, 1916, purchased 50 bonds of par value
$1,000 each of the "A. B." R. R. Company. The bonds mature January
1, 1925, and bear interest at the rate of 41/2 per cent per annum, payable
semiannually. They were purchased on a semiannual basis of 2 per cent,
(1) What was the total cost of the bonds? (2) Construct a schedule of
amortization for the premium on the bonds. (3) Set up an account with
the bond issue, showing what entries would be made on each interest date.
(Pa., Nov., 1916.) (Note: 17th power of 1.02 is 1,40024142, whose
reciprocal is .71416256.)

8. A corporation decided to issue and sell bonds to the amount of
$100,000. The denomination of such bonds, $1,000 each; term of bonds,
15 years; interest rate, 5 per cent, payable semiannually. On January 1,
1914, these bonds were sold for $105,411,33, or on a 414 per cent return
basis, July 1, 1914, interest was paid, amounting to $2,500,

(a) What entry should the corporation have made when the bonds

were sold?
(&) What entry should the corporation have made when it paid the

$2,500 interest referred to above?
(c) What entiy should the purchaser of these bonds have made when

he received the first interest payment?

(Wis,, April, 1915,)

9. An issue of $500,000 of bonds is made by a corporation, redeemable
at par in 10 years. The trust deed provides for the creation of a sinking
fund for the redemption of the bonds, and for investment of the sinking
fund. The bonds are issued at a discount of 2 per cent.

You are required :

(a) To prepare entries setting up the bond issue on the books of the

corporation,
(&) To prepare (for one year only) the entries which must be made

on the books each year with respect to the sinking fund and the

sinking-fund investment.

of the bonds.

(d) To show how, during the life of the bonds, the various accounts

relative thereto should appear on the books of the corporation.
Note: In your answer disregard interest. (Wash., May, 1910.)

10. On December 15, 1914, the stockholders of the "A" Corporation
authorized an issue of $100,000 10-year 5 per cent first mortgage bonds.
These bonds were sold on January 1, 1915, at 95. On January 1, 1916,
another duly authorized issue of $100,000 20-year 6 per cent bonds was
sold at 102.

In accordance with the terms of the bond recitals the sinking fund in-
stallments were to be invested in outside securities, and on January 1,
1916, a portion of the pro rata installment of the first bond issue was

218 C. P. A. ACCOUNTING

used in purchasing 100 51/2 per cent bonds of the "X" Corporation at 9S.
On January 1, 1917, the pro rata installments were invested as follows:
Issue No. 1, 100 61/2 per cent bonds of the "T" government at 102 ; issue
No. 2, 50 7 per cent bonds of the "W" government at par.

Draft the proper entries to record the above transactions, and show
the ledger accounts and balances as of January 2, 1917. Interest calcula-
tions need not be given.

(Wis., April, 1917.)

11. Corporation "A" issues 50 bonds, par value $50,000, bearing 5
per cent interest, payable annually. The bonds are numbered serially,
and are to be retired in consecutive groups of 10 each year. They are
to be sold at date of issue for an average price of $950.

(a) Submit, in form of ledger accounts, all entities required to handle
this bond issue, in what you consider the most equitable manner,
from date of issue to retirement.
(6) Corporation "B" buys bonds Nos. 21 to 40, inclusive, on date of
issue, at $950 each, and sells Nos. 21 to 30 at the end of two
years for $1,000 each. The other ten bonds are retired when
due.
Submit, in the form of ledger accounts, all necessary entries in Cor-
poration "B's" books for handling the matter in what you consider the
most equitable manner.

(Wis., May. 1916.)

12. What could a purchaser who wished to realize 3 per cent on his
investment give for a bond for $10,000 which had four j-ears to run at 5
per cent interest, payable yearly, and thereafter w^as payable with a bonus
of 10 per cent? (Note: 3rd power of 1.03 is 1.12550881; whose recipro-
cal is .88848705.) (A. I. of A., Nov., 1920.)

13. The 4% per cent Victory notes mature at par on May 20, 1923.
If a purchaser buys at $96.20 on May 20, 1920, calculate the approximate
yield per cent.

Given:

A,.

V».

2H7o

5.4264
.8498

5.4172
.8375

(A. I. of A., May, 1920.)

CHAPTER XII

DIVIDENDS AND SURPLUS

Classes of Dividends — Dividends are those profits of a corporation which
are divided among the stockholders/ However, in common parlance, any
payment made to a stockholder Ls called a dividend. Dividends may be
classified according to source of funds and manner and time of payment.
There aj-e two classes of dividends divided according to source of funds,
namelj^ those paid out of profits and those paid out of capital.' The five
kinds of dividends, classified according to manner of payment, are the
dividends paid in cash,' property,* stock,' bonds,' and scrip.' If the com-
pany is unusually successful, a special dividend in addition to the regular
dividend may be declared, or an interim dividend, a dividend between
regular dividend dates, may be declared.*

Dividends Out of Capital — Except in case of liquidation or a legally
authorized reduction of capital stock, di%'idends paid out of capital are
illegal, and the directors responsible for them are usually jointly and
severally liable therefor." It is legal in some states for extractive industry
corporations to disregard the wasting assets and thus declare dividends in
excess of real profits.'" Modern practice is now requiring the setting up
of reserves for wasting assets, an improvement the adoption of which has
been greatly popularized by the federal income tax requirements. If an
extractive industry corporation wishes to pay its stockholders more than
the net profit after depletion has been charged, the excess should be
charged to the capital payments account, which account would be deducted
from the capital stock account on the balance sheet."

Dividends Out of Profits — Both operating and capital profits, if realized,
may be declared as dividends." Unrealized profits" and premium on
capital stock," however, should not be so distributed. The old English
rule for dividends was that fixed assets could be lost and yet the excess
of current receipts over current payments could be divided, but that the
current assets must be maintained." This rule has not Ijeon changed as
to current assets, but all waste, both of fixed and current assets, inci-
dental to the process of making profits must now be made good out of
the profits earned l>efore dividends can be paid."

Declaration of Dividends — The declaration of di\'idends is subject to
the provisions of the corporate charter and by-laws, and the rights of
other stockholders," but otherwise, in the absence of fraud, is under
the control of the directors." However, obligation is. incumbent on the
directors if any improper withholding can he shown." The minute

'For explanatiou of superior figures see page 337.

219

220 C. P. A. ACCOUNTING

books should give the dividend rate, date and manner of payment, and
to whom payable.'" Dividends are paid to stockholders of record as
of a set date ;" they may be postdated but may not be antedated." Stock-
holders are entitled to be notified of each dividend declaration." The
declaration of dividends may be revoked up to the time, but not after,
notice has been given except in the case of illegal dividends which may
be revoked any time previous to payment," and after payment to stock-
holders cognizant of the source." Treasury stock does not draw dividends.^'

Payment of Dividends — When dividends are declared and notice thereof
given, a liability is incurred." This liability should be shown in the
dividends payable account, if the dividend is not payable on the day
it was declared.** Sometimes declared dividends are not recorded until
paid, but this overlooks a current liability which should appear on a
balance sheet prepared between the dividend declaration and dividend
payment dates,* and also overlooks unclaimed but payable dividends
which should be shown among the current liabilities.^ Unclaimed dividends
can be returned to surplus only by action of the directors." When the
dividends paj'^able are set up, either the current profit and loss account"
or the surplus account may be charged," but, as dividends frequently ex-
ceed the profits of any one year, it seems preferable to debit the surplus
account. If the dividends are charged to profit and loss, the debit is
frequently made through the dividends declared account," which account
would appear in the appropriation section of the profit and loss state-
ment."

If dividends are payable in cash, the entries to record them would be :"

Entry No. 1

Surplus (or Profit and Loss) xxxxxxx

Dividends Payable xxxxxxx

Entry No. 2

Dividends Payable xxxxxxx

Cash xxxxxxx

Sometimes property, instead of cash, is distributed as dividends.'' On
account of the difficulty of equitably distributing property, dividends
paid in property are rare, except for the property dividends which
distribute corporate securities." Property dividends are recorded the same
as cash dividends, except that the property distributed, instead of cash, is
credited in the second entry above.*

Directors sometimes declare dividends payable in either unissued or
treasury stock, the entries being the same as for cash dividends except that,
instead of cash, unissued stock or treasury stock, as the case may require,
is credited in the second entry.**

If directors are unwilling to issue stock and cannot borrow money to
advantage, they may declare a scrip dividend, if they wish to liquidate the
debt within a short time," or a bond dividend, if the obligation is not to
mature in the near future." The entries for such dividends would consist
of entry No. 1, as al)ove, followed by a debit to dividends payable and a

DIVIDENDS AND SURPLUS 221

credit to bonds payable or scrip payable, and, at the maturity of the obliga-
tions, by a debit to bonds payable or scrip payable and a credit to cash."
The entry for the interest on the bonds or scrip would be a debit to interest
and a credit to cash."

Dividends are sometimes applied on unpaid installments on capital
stock subscriptions." In such cases the dividends payable account is
debited and the installment on stock account credited for the amount so
applied.*"

Cumulative Dividends — When a preferred dividend is "passed," the sur-
plus account may be debited and the unpaid preferred dividend account
credited, but this procedure is poor in that it reduces the surplus, and,
indeed, may change a surplus into a deficit, for the sake of a liability which
is only contingent." A substitute entry is to debit preferred stock divi-
dends account (an asset) and credit unpaid preferred dividends account,
a procedure which offsets a contingent asset with a contingent liability.**
Another way of handling "passed" cumulative dividends is simply to men-
tion them in a footnote to the balance sheet." The last method seems the
best, as cumulative dividends are not really liabilities until they are de-
clared.

Dividend Book — The dividend book is a bound or loose-leaf book, con-
taining for each declared dividend an alphabetical list of the stockholders
entitled to receive dividends, together with their addresses, number of
shares held, amount of dividends paid, and, if the dividends are paid by
mailed checks, the check numbers, or if the dividends are paid in the office,
the stockholders' signatures.""

Audit of Dividends — The authority for the dividend should be verified
from the minute book." The list of stockholders' holdings in the dividend
book should be verified by checking a few of the larger amounts, taken at
random, with the capital stock ledger, and by checking the addition of the
number of shares, as listed in the dividend book, against the aggregate
shares outstanding, as shown in the general ledger." The audit of the
dividend payments consists in comparing the verified list of the amounts
due to stockholders with the dividend checks or warrants which have been
paid after endorsement by the stockholders." The outstanding dividends
payable must then be traced."

Profit Sharing — When a part of the profits is distributed to employees
as such, the process is known as profit-sharing and should be recorded by
debiting surplus or profit and loss and crediting the "bonus to employees"
account, which account is closed when payment is made."

Undivided Profits Account — Most corporations make little or no dis-
tinction between undivided profits and surplus,'" but banks usually treat
surplus as a part of the permanent capital created by systematic alloca-
tions of current profits, and treat undivided profits as a reservoir to hold
profits remaining after the declaration of dividends and the allocations to
surplus." . ,

222 C. P. A. ACCOUNTING

Surplus Defined — In the broadest sense, surplus I'epresents the excess
of the net worth of a corporation over the par value of the capital stock
outstanding."* Under this definition, true reserves are the part of surplus
called restricted or appropriated surplus,"* while the surplus available for
dividends is called free surplus.'" In the narrower sense, surplus repre-
sents the retained past profits which are available for dividends." As
the narrower use of the word tends toward clearness, it is the preferable.

Kinds of Surjiliis — Surplus may be classified by sources into (a) con-
tributed, or surplus created by contribution either at the sale of stock by
issue at a premium*" or after donation of stock •,"^ (b) revaluation, or
surplus created either by increasing the book valuations of fixed assets,** or
by reducing par value of capital stock,°° and (c) revenue, or surplus
accumulated out of past profits.'' This classification is noteworthy as con-
tributed and revaluation surplus should not be declared in dividends
although such declaration is not illegal," while revenue surplus may be
distributed as dividends. "Capital surplus" is sometimes used as a
synonym for "contributed surplus.""*

Statement of Surplus — All mistakes made in prior periods in the valua-
tion of inventories, or in the estimate of losses due to depreciation and bad
debts, or in the failure to differentiate between capital and revenue ex-
penditures should be adjusted directly into the surplus account and not
through the pi'ofit and loss account.™ Losses and gains not occasioned by
the ordinary operation of the business are also recorded directly in the
surplus account.'" If these adjustments are few and simple, a statement
of surplus may be either annexed to the profit and loss statement" or em-
bodied in the balance sheet." If the adjustments are numerous and com-
plex, a separate statement of surplus should be prepared."

The statement of surplus is prepared somewhat as follows :'*

Statement of Surplus, December 31, 1920

Balance of Surplus as of December 31, 1919. . . . xxxxxxx

Adjustments applicable to period ending Decem-
ber 31, 1919:

Additions (itemized) xxxxxxx

Deductions (itemized) xxxxxxx xxxxxxx

True Surplus as of December 31, 1919 xxxxxxx

Extraordinary Profits (or Losses) this period.. . . xxxxxxx

Net Profit this period xxxxxxx xxxxxxx

Amount available for appropriations xxxxxxx

Appropriations of Surplus:

Reserves (itemized) xxxxxxx

Dividends declared xxxxxxx xxxxxxx

Net Surplus as on December 31, 1920 xxxxxxx

Audit of Surplus — The auditor must secure a detailed analj'sis of the
surplus account." This is accomplished through the preparation of a
statement reconciling the surplus balances on the balance sheets of the

DIVIDENDS AND SURPLUS 223

previous and current years, viz., tlie drawing up of a statement of surplus."
The books should be examined to ascertain if- the surplus was earned, and,
if it was not, a careful record of its creation should be made."

Deficit — A deficit is the excess of the par value over the actual value of
the stock issued.'" Although the deficit account is sometimes shown on the
balance sheet as an asset,™ it should be deducted from the other net worth
accounts as it is not an asset."

224 C. P. A. ACCOUNTING

QUESTIONS

dividends and surplus

Dividends

1. Explain the meaning and use of the Dividend account. (La., May,
1913.)

2. Describe the nature of the Dividend account. (N. Y., Dec, 1896;
W. Va., May, 1917.)

3. Describe fully the Dividend account. (N. Y., Jan., 1902; Pa., May,
1903; Ohio, March, 1910.*)

4. Give the theory of dividends. (N. Y., Jan., 1920.)

5. What is a dividend? (Mich., July, 1906; Iowa, Dec, 1918.)

6. What is an interim dividend? (Wash., June, 1915.)

7. What is a cash di\ddend? (Wash., June, 1915.)

8. State where the Dividend account is employed. (N. Y., Jan., 1902* ;
Ohio, March, 1910.*)

9. When mav dividends on common stock be paid? (Iowa, Dec, 1918;
S. C, Sept., 1919.*)

10. What examination should the auditor make of the items in a Bal-
ance Sheet to determine whether a dividend is justified? (S. C, Sept.,
1919.)

11. (o) Out of what funds may dividends be paid? (h) If dividends
are not paid in accordance with your answer to the preceding question,
have the creditors of the corporation any grounds for action against the
company or its stockholders? (N. D., July, 1916.)

12. From what funds are dividends payable and what penalties attach
to improperly declaring or paying them? (Fla., April, 1907.)

13. State how declaration and payment of dividends are usually re-
corded in books of accounts. (Mich., July, 1906; A. I. of A., May,
1919.*)

14. How would you treat the following dividends on common stock
in preparing a Balance Sheet : Dividends declared and receivable on
stock of subsidiary company which is controlled and whose accounts are
consolidated? (Mo., Dec, 1914.)

15. How would you treat the following dividends on common stock in
preparing a Balance Sheet: Dividends declared on stock in treasury;
declared in reduction of capital? (Mo., Dec, 1914.)

DIVIDENDS AND SURPLUS 225

16. How would you classify the followinj? item in the Balance Sheet
or Profit and Loss account: Capital stock dividend? (N. Y., Jan., 1907*-
Kan., Dec, 19155 Mo., Dec, 1915.) '

17. How would you indicate on the Balance Sheet, December 31 : Or-
dinary dividends for the year, declared the following January 22? (A I
of A., Nov., 1918; W. Va., May, 1919.)

IS. How would you deal with the noncumulative preferred dividends
declared June 30, 1914, in auditing a Balance Sheet as at June 30, 1914,
to be certified by you? (Mo., Dec, 1914; A. I. of A., Nov., 1918* ; W. Va.,
May, 1919.*)

19. How would you deal with the preference dividends declared July
1, 1914, in auditing a Balance Sheet as at June 30, 1914, to be certified
by you? (Mo., Dec, 1914.)

20. Classify Dividends Declared and Dividends Payable according to
the subdivision of assets, liabilities, proprietary interest, income and ex-
penses under which they should be grouped. (Wis., May, 1919.)

21. In preparing the Balance Sheet of a corporation, how would you
treat arrears of cumulative dividends on preferred stock? (N. Y., June,
1901*; N. Y., June, 1902*; Wash., Sept., 1907*; 111., May, 1908*; N. Y.,
Feb., 1910*; Va., Nov., 1910; Va., Oct., 1912*; La., May, 1913*; Wis.,
April, 1914*; 111., May, 1914*; Mass., Oct., 1914*; Ohio, Nov., 1915*;
Ohio, Nov., 1916; Md., Dec, 1917*; N. Y., June, 1918*; Pa., Nov., 1918*;
A. I. of A., Nov., 1918*; W. Va., May, 1919*; Mich., June, 1919.*)

22. How would you handle cumulative dividends in arrears on the
Balance Sheet in the case of a corporation owning the stock with respect
to which the cumulative dividends are in arrears? (Pa., Nov., 1918.)

23. When is it proper to record on the books of a corporation a divi-
dend on cumulative preferred capital stock? (N. Y., June, 1919.)

24. When do dividends on preferred stock become an obligation of
the company? (Iowa, Dec, 1918.)

25. How would you classify the Dividend Declared on Preferred Stock
but not paid until the following year, in the Balance Sheet or Profit and
Loss account? (Kan., Dec, 1915; Mo., Dec, 1915; Iowa, Dec, 1918.*)

26. What relation do cumulative preferred stock dividends bear to the
cost of operating? (Mich., July, 1906.)

27. Explain in some detail the procedure you would follow as an audi-
tor in verifying the Preferred Stock Dividends in Arrears, appearing in
the books and accounts of a company. (Wash., June, 1915.)

28. What do you understand by the term "Dividends Paid Out of
Capital"? What, in your opinion, would constitute such payment, and
mention any circumstances that may occur to you to justify such pay-
ment? (111., May, 1913; Wis., April, 1915*; Ind., June, 1916; Md., Oct.,
1919.)

29. A corporation has been accused by a stockholder of paying divi-
dends unlawfully. How should he proceed in the matter? You as an

22() V. P. A. ACCOUNTING

aceonntanl have been called in, Wbat would you do (o prove or disprovr
(he accusation? (Del., June, 1915.)

30. The Hayward Company has declared a dividend of 10 per cent on
its capital stock of $100,000, payable July 1, 1910; stock books close on
June 15, 1910. Describe the accounting procedure incident thereto and
state who may participate in the dividends. (N. Y., June, 1911.)

31. On which side of the Ledger should the balance on the Unclaimed
Dividends account appear? (Mo., Dee., 1914.)

32. How would you deal with the Unclaimed Dividends account in
preparing the annual accounts of a company? Comment briefly on any
points which would need special consideration, (A. I. of A., May, 1920.)

33. What evidence would you consider satisfactory for the correctness
of the dividends? (N. C, Nov., 1919.)

34. How would you treat unclaimed dividends? (A. I. of A., May,
1919.)

35. What is your method of checking dividends paid? (R. I., Dec,
1907.)

36. In case a corporation of five persons owning all the stock should
credit each party in proportion to their several holdina-s with the profits
as shown by the books, without formally declaring a dividend, and the said
stockholders were also credited with interest on the undrawn credit bal-
ance, what would be your action? (Pa., Nov., 1904.)

37. Discuss the subject of dividends: (a) when declared out of pre-
mium secured from sale of capital stock; (b) when company's sole invest-
ments are in diminishing (or wasting) assets. (Wis., April, 1915.)

38. Can you mention any distinction between dividends declared out
of income and dividends declared out of pi'ofits realized from the incre-
ment of invested values? (A. I. of A., May, 1919.)

39. How would excessive dividends affect the individual holders or
subscribers? (Mich., June, 1913.)

40. It has been stated that the right to declare a dividend depends
upon the state of a company's finances at the time when the dividend is
declared. Give your opinion as to conditions under which a company may
borrow monev for the purpose of paying a dividend. (111., May, 1910;
N. D., Aug., 1917.)

41. Under the law permitting payment of dividends solely out of
surplas earned, a corporation pays a dividend out of general surplus after
carrying its losses for the period against the account. Would you make
mention of the fact in the recital accompanying your statements or Avould
you let it go without specific mention? Give reasons. (R. I., Dec., 1907.)

42. What is a stock dividend? (Wash., June, 1915; Iowa, Dec, 1918.)

43. In what respect do stock dividends differ from cash dividends?
(N. Y., Jan., 1920.)

44. What must be the condition of the business to justify the issue of
stock dividends? (Iowa, Dec, 1918.)

DIVIDENDS AND SURPLUS 227

45. In three successive fiscal years a niannfacturing corporation values
its supplies, etc., in hand at cost, with deductions for deterioration as
follows : At end of fir.st year 5 per cent ; at end of second year 10 per
cent, and at end of third year 15 per cent. With the inventory taken on
this basis the profits for the second year did not equal the dividends de-
clared and in the third year the dividend paid was so much in excess of
profits that the surplus was entirely exhausted and a debit balance created
in the Profit and Loss account. In auditing the books, how would you treat
the above condition in your report? (Pa., May, 1905.)

46. Prepare Journal entries for dividend paid out of treasury stock
acquired at half of its book value. (N. C, June, 1920.)

47. The stockholders of the Farmers Cooperative Store share the store's
earnings in proportion to purchases made during the year, and dividends
may be withdrawn in trade or in cash. The fiscal year corresponds to the
calendar year, but the dividend year runs from March 15 to March 14.

(a) The following facts are given you with the request that you ascer-
tain the status of the Surplus account on December 31, 1917, and indicate
the disposition of any dividends which may have been paid out in excess
of available surplus.

The balance of the Reserve for Dividends account on December 31, 1916,
was $2,540.15. This represented the dividends which might be withdrawn
in cash during the period, January 1, 1917, to March 15, 1917.

The dividends withdrawn in cash during the year 1917 amount to
$1,015.37, and those withdrawn in trade during 1917 amount to $24,786.29.
In order to reduce trade dividends to a cash basis, 20 per cent is deducted
from the selling price of goods so withdrawn and charged back against the
sales.

The balance of surplus available for dividends on December 31, 1916,
was $20,710.43.

An examination of the accounts shows that dividends to the amount of
$2,496.63 (cash basis) may be withdrawn between January 1, 1918, and
March 14, 1918.

During the period January 1, 1917, to March 14, 1917, dividends were
withdrawn to the amount of $1,720.15, cash basis.

(b) The sales to members for the year 1917 are $162,280 and the net
profits are $20,285. In your judgment, what dividends should be declared
in trade and in cash for the year 1918?

(e) Briefly criticize the plan followed by this company in distributing
the earnings to the stockholders.

(Wis., April, 1918.)

48. A firm is incorporated under the laws of the State of New York
to do business within the state, with an authorized capital of $100,000.
Its assets, including $10,000 for goodwill, aggregate $30,000; the lia-
bilities other than capital stock, aggregate $30,000. When the books were
closed at the end of the first year, the net profits shown amounted to
$8,000. Are the directors warranted in declaring a dividend? If so, for
what amount? (N. Y., June, 1917.)

228 C. P. A. ACCOUNTING

49. The books of a corporation (with a capital stock of $800,000) at
the beginning of the last fiscal year showed a surplus of $28,450.

During your examination, immediately subsequent to the close of the
fiscal year, you learn the following facts :

That the net profit on goods delivered to customers during the year
amounted to $115,350.

That prior to, and at the close of the year, the company owned bona
fide contracts for the delivery of goods during the next few months.

That the company had purchased a sufficient quantity of merchandise
in order to fill these contracts.

That the company after making due allowances for all production cost,
expenses incidental to the delivery of the contract goods, cost of selling,'
etc., had arrived at a net profit amounting to $51,120, which was carried
to Profit and Loss account. This made a total net balance of $106,470.

That tliere was declared and paid a dividend of 20 per cent (or $160,000)
and that $6,470 was carried to surplus account.

Would you consider it necessary to call particular attention to this
matter in your report to the stockholders? State your reasons.

(Wis., April, 1914.)

50. An Indiana company is incorporated with a capital stock of
$100,000, of which $90,000 was paid in. In making their application for
the charter all the stock was subscribed. The full capital, however, was
not required.

It was recently decided that, inasmuch as a surplus of $15,000 had
accumulated, they would declare a stock dividend, pro rata, for the $10,000
of stock unissued but subscribed for by one of the present stockholders.
No action on the transaction was taken by the board of directors, and no
record of it appears in the minutes of the corporation.

Is it necessary that a transaction of this character be recorded in the
minutes, inasmuch as all of the stock was originally subscribed?

Will not this stock dividend have to be reported as income for the
current year if the surplus was earned since 1910?

What would be your recommendations in regard to the proper procedure
in this matter?

(Ind., May, 1918.)

51. By a charter provision a company is directed annually to retire
out of the ordinary profits arising from the conduct of the business 5
per cent of its 7 per cent dividend paying preferred stock. This pre-
ferred stock is now worth, say, 110 in the market and during the past
year the company succeeded in buying in 1,000 shares of the par value of
$100 at $80, borrowing for that purpose $80,000 for four months at 41/2
and paying the note at maturity.

(1) What is the amount of the profit? (2) How should the amount be
treated in the company's published accounts? (3) Would the directors
be justified in utilizing the amount for the payment of a common stock
dividend, and should this be treated as a cash dividend or a repayment of
capital? (Kan., Dec, 1915; Mo., Dec, 1915.)

dividp:nds and surplus 229

52. Under what circumstances would you permit a client to distribute
capital stock as dividends prior to dissolution? (Cal., May, 1916.)

53. Define: Scrip. (N. Y., Jan., 1911.)

54. Explain briefly the following term: Dividend scrip. (III., Nov..
1903.) '

55. May di\idends be paid in other than cash? Explain. (Iowa. Dec.
1916.) ^ V , ,

56. State when and how dividends become effective. (Mich., July,
1906; Fla., April, 1907.)

Surplus

57. Define: Surplus. (N. Y., Dec, 1896; N. Y., Dec, 1897*; N. Y.,
June, 1900; N. Y., Jan., 1901*; N. Y., Jan., 1902*; Pa., May, 1903*;
111., Nov., 1903*; N. J., 1904-1909; Ohio, March, 1910*; La., May, 1913*;
Wash., Nov., 1913*; Wis., April, 1914; N. D., June, 1914; Cal., Nov.,
1916; Mass., Oct., 1917*; Va., Nov., 1918; Iowa, Dec, 1918; N. C, June,
1920.)

58. Define: Appropriated surplus. (Wis., May, 1916; Wis., April,
1917*; Mass., Oct., 1917.*)

59. Define: Free surplus. (Wis., April, 1917.)

60. What do you understand by capital surplus ? Is it invested capital ?
(Wis., Nov., 1919.)

61. How is the Surplus account used? (N. Y., Jan., 1902*; N. J.,
1904-1909; Ohio, March, 1910.)

62. What is the purpose of the surplus of a stock company? (N. Y.,
Dec, 1898*; N. Y., Jan., 1901.)

63. How would surplus and appropriated surplus affect the book
value of capital stock? (Mass., Oct., 1917.)

64. May surplus be created by "marking up" the value of fixed assets?
May such surplus be used as a basis for declaring dividends? (Iowa,
Dec, 1918.)

65. Mention and differentiate between accounts properly belonging to
Profit and Loss and Surplus accounts. (Mass., June, 1913.)

66. (o) What items do you consider should be charged or credited
direct to surplus? (6) Would you regularly make small adjustments of
subsequently discovered errors through this account? (c) Is the balance at
credit of surplus ever in any circumstances a liability, and if so, to whom ?
(A. L of A., Nov., 1918.)

67. When preparing a Trading and Profit and Loss account at the end
of a fiscal year, in what manner would you treat the surplus or deficit
brought forward from prior year? (N. Y., Jan., 1907.)

68. Distinguish between reserve and surplus. (Wis., April, 1914;
Ohio, Nov., 1916.*)

230 C. P. A. ACCOUNTING

69. Define: Undistributed Profit account. (Iowa, Dec, 1918.)

70. How do the accounts of a corporation and of a copartnership differ
in the statement of division and distribution of profits'? (N. Y., Jan.,
1904; Va., Nov., 1910*; Cal., Nov., 1916.*)

71. How is the profit of the following concern divided : Stock com-
pany? (Mich., Dec, 1906.)

72. Give thi'ee sound accounting principles governing the determination
of profits distributable as dividends of a corporation. (Mass., Oct., 1915.)

73. When is surplus available for dividends? When not available?
(Cal., Nov., 1916.)

74. On which side of the Ledger should the balance on the Undivided
Profits account appear? (Mo., Dec, 1914.)

75. A corporation purchased a business as a going concern on January
1, 1908, with a right to the profits from October 1, 1907. Its capital is :

Five per cent first preferred stock, $250,000 ; 6 per cent second preferred
stock, $250,000; common stock, $124,000.

The year's profits to September 30, 1908, are found to have been
$38,320. What appropriation of such profits would you consider to be
correct ?

(111., May, 1910; N. C, Nov., 1918.*)

76. What in your opinion would be the proper accounting record for a
business corporation to make for an appropriation from its surplus profits
for the account of a permanent investment in property? (Md., Jan., 1909.)

77. On which side of the Ledger should the balance on the Building
Appropriation account appear? (Mc, Dec, 1914.)

78. What support is usually necessary, in addition to approval vouch-
ers, for the distribution chargeable to Undivided Profits or Surijlus ac-
count? (N. C, Nov., 1918.)

79. If assets taken over by a company are in excess of its capital
stock, would you credit the excess to surplus? If not, why and to what
account would yau credit such excess? (111., May, 1906.)

80. How would you treat the deficiency in the early years of a corpora-
tion's activities? (Ind., May, 1918.)

81. Can surplus be created in any way other than through profits
earned from operations? Explain. (A. I. of A., May, 1920.)

82. The books of a company, when closed for the fiscal year, show a
substantial net profit. No dividends were paid during the year and there
is no cash available with which to pay dividends, (a) What would account
for this condition? (6) Illustrate your explanation by a statement sup-
plj'ing the figures. (Mass., Oct., 1916.)

83. Is the deficiency in the early j'ears of a corporation's activities
(whether an actual loss or a deficiency between the earnings and the nor-
mal rate of return) similar to organization expenses? How should such
deficiencies be treated in the accounts? To what extent is such a deficiency

DIVIDENDS AND SURPLUS 231

similar to interest paid during construction? Should such deficiencies be
carried on the Balance Sheet? If so, should they be written off, and
how and when? May the deficiencies representing the difference between
actual earnings and normal rate of return be capitalized, in the strict
sense of having capital stock issued to a corresponding sum? State
clearly just who is affected, and how, by the different methods of treating
the items mentioned above. (A. I. of A., June, 1917.)

84. How would you distinguish between: (a) Earned surplus, (b)
paid-in surplus, (c) capital surplus, (d) appropriated surplus? (A. I. of
A., May, 1921.)

232 C. P. A. ACCOUNTING

PROBLEMS

DIVIDENDS AND SURPLUS

1. A corporation's profits for the year ended December 31, 1908,
amount to $451,000. The by-laws require a reserve equal to 10 per cent
of any dividend paid to common stockTiolders, and any surplus remaining
after such dividend has been paid is also to be applied to the resen'e,
until such reserve account amounts to $250,000, The reserve at December
31, 1907, was $156,020. The capital is $2,000,000, one-half cumulative
preference 6 per cent and one-half common, all fully paid. On December
31, 1908, the preferred dividend is two and one-half years in arrear. On
December 31, 1907, Profit and Loss account was in debit $202,000. Set
out your treatment of the profit for 1908. (111., Dec., 1910; Colo.,
Dec, 1913.)

2. The profits of a corporation with a paid-up capital of $5,000,000
amount to $337,193.08 for a given year, without allowing for its mort-
gage interest. At the end of the previous financial year, there was left a
balance of undivided profits of $27,806.92.

Its 4 per cent mortgages are $500,000 and its 6 per cent mortgages are
$750,000. How much must be taken from the pre\'ious year's surplus
balance to pay the stockholders a dividend of 6 per cent?

(111., May, 1911.)

3. Frame any entries necessary to record the action of the directors
as it appears in the minutes of the meeting.

The treasurer reported that the profits for the year as audited amounted
to $59,287. Voted that a dividend of $40,000 be paid on October 1 to the
stockholders of record September 15 and that $10,000 of the profits
be appropriated as a reserve for relief of employees disabled while in
the service of the United States and invested in Libertv Bonds.

(A. I. of A., Nov., 1917.)

4. Before making the charges referred to below, the Profit and Loss
account of a corporation for the year shows a credit balance of $60,000.
The accounts receivable are $40,700 and the Plant and Machinery account
is $55,000. The 6 per cent preferred stock is $50,000, and the common
stock $150,000. It is decided (a) to provide out of the above-named
Profit and Loss balance 7y2 per cent depreciation on plant and machinery;
(b) to write off as uncollectible $1,500 of the accounts receivable and to
make a reserve of 2 per cent on the remainder of the accounts receivable
to provide for possible losses thereon; (c) to provide for the preferred
gtock dividend for the year; (d) to provide for a bonus of $7,500 to the

DIVIDENDS AND SURPLUS 233

employees; (e) to provide for a dividend on the common stock of 15 per
cent for the year, and (/) to carry the balance then remaining on Profit
and Loss account to Undivided Profits account.
Draft entries to comply with the above provisions.

(Wash., April, 1906; Mo., Dec., 1913.)

5. In an audit of the Acme Motor Car Company you find the Reserve
for Depreciation account and the Surplus account (jpmposed of the items
as here enumerated :

The Reserve for Depreciation account was opened on December 31, 1915,
the close of the first business year, by debiting the depreciation accounts of
the various assets with $265,000.

The Reserve for Depreciation account was also credited with $25,000
on December 31, 1916, and with $20,000 on December 31, 1917.

During 1916 and 1917 the following items have been charged against
this Reserve for Depreciation account: assets scrapped, $125,000; bad
debts, $25,000; repairs, $10,000; fire loss on building and equipment,
$7,500; organization expense, $65,000; salesmen's extra commission,
$12,000.

The Surplus account for 1915 and 1916 has been closed, the balance
having been paid out in dividends.

The Surplus account on December 31, 1917, is found to consist of the
following credit items: reserve for car guarantees, $50,000; premium on
stock sold, $50,000; reserve for obsolescence, $50,000; bonus from Com-
mercial Club, $50,000; reserve for income and excess profits taxes, 1917,
$80,000; operating profits, $750,000.

You are requested to make such adjustments in the Reserve for Depre-
ciation accoimt and Surplus account as are appropriate, and to show how
the several items and accounts should appear in the financial statement.

(Wis., April, 1918.)

6. The books of the "X" Manufacturing Company were audited to De-
cember 31, 1913, and in making up the Balance Sheet and Profit and Loss
account at that date the auditors recommended the following adjustments:
(a) Transferred to profit and loss, $4,231.07, which had been charged to
real estate and buildings in error; (6) provided for depreciation of build-
ings, etc., $7,200; (c) adjusted salaries amounting to $1,400, due for 1913
services but not entered on the books until January, 1914; (d) reduced
tlio amount of inventory because of errors, $12,000.

The same auditors were again called in to audit the books to June 30,
1914, and found that the above adjustments had not been entered on the
books. They also found that during the half-year $1,000 had been charged
to real estate, buildings, etc., instead of to expense ; that no provision had
been made for depreciation for the period, amounting to $3,600 ; and that
the inventory had been footed $10,000 too much. Also that the unexpired
insurance amounted to $750 more than was entered on the books. The
following are condensed trial balances of the "X" Manufacturing Com-
pany's books as the auditor found them as of December 31, 1913, aud
June 30, 1914:

234

C. r. A. ACCOUNTING

Real Estate, Buildings, Etc.

Capital Stock

Debentures

Cash

Accounts Payable

Accounts Receivable

Loans

Stocks and Bonds

Inventory

Unexpired Insurance

Surplus

Profit and Loss, 1914

Dec. 31, 1913

June 30, 1914

$102,840.26

14,672.14

22,436.10

17,502.50

246,153.42

1,471.23

$405,075.65

$200,000.00
100,000.00

9,431.17

10,000.00

85,644.48

$405,075.65

$115,226.80

22,143.21

28,250.40

19,150.00

288,360.14

742.26

$200,000.00
100,000.00

11,698.21

5,000.00

85,644.48
71,530.12

$473,872.81 $473,872.81

From the above facts prepare: (1) A correct Balance Sheet, June 30,
1914; (2) state the adjusted ambunt of profits for the half-year to June
30, 1914; (3) prepare statement reconciling the Balance Sheet figures
with the original trial balance of June 30, 1914.

(Mass., Oct., 1914.)

7. On January 1, 1919, the close of its third year's business, the fol-
lowing accounts were open upon the General Ledger of the Winner Manu-
facturing Company:

Preferred Capital Stock

Common Capital Stock

Cash on Deposit

Imprest Cash Fund

Real Estate

Buildings

Notes Receivable

Factory Equipment

Accounts Payable

Notes Payable

Reserve for Depreciation, Buildings

Reserve for Depreciation, Factory Equipment

Accounts Receivable

Patents

Patterns

Auto Trucks

Bonds Issued

Premium on Bonds Issued

Inventory Raw Material

Inventory Finished Goods

Inventory Goods in Process

Reserve for Depreciation, Auto Trucks

Surplus, January 1, 1918

1918 Operating Profit and Loss

$50,000
500
250,000
300,000
8,000
450,000

75,000

25,000

10,000

180,000
40,000
70,000

$376,000
600,000

53,000

25,000

6,000

75,000

200,000
2,000

4,000
50,000
67,501

$1,458,501 $1,458,501

DIVIDENDS AND SUKPLl'S 235

The preferred capital stock was $400,000 7 per cent cumulative, and
the provisions of its issue require that 3 per cent of the authorized
amount be set aside annually as a sinking fund for its redemption at
$125.

The common capital stock of the company is without par value; 20,000
shares have been authorized ; 12,000 shares issued.

The Real Estate account is found to consist of the following items:

Factory Real Estate $ 20,000

Fertile Farms Investment 120 000

City Real Estate Investment 110,000

The bonds of the company are 20-year, 7 per cent gold bonds, sold on
September 30, 1918, for 101. Interest is payable October 1 and April 1.
The bond recital provides for the creation of a pro rata sinking fund to be
reserved out of the profits of each year and for the setting aside of cash
equivalent to such resei-vation.

The income taxes for the year are estimated at $5,000.

You leam that the directors met on Januai-y 10, 1919, and declared a
dividend of 7 per cent upon the preferred stock, authorized the purchase
of shares of preferred stock in accordance with the terms of issue and
declared a dividend of five dollars ($5) per share of common stock. The
dividends were paid on January 15, 1919, and the preferred stock was
purchased on that date.

In view of the above conditions, you are asked to prepare a financial
statement of the Winner Manufacturing Company as of January 1, 1919,
after the books for the year have been closed finally.

(Wis., Nov., 1919.)

8. At the close of its fiscal year, December 31, 1915, the trial balance
of the Nau-Pace Company was as given on next page.
You are to take into consideration the following facts :

1. Real Estate, Machinery and other Factory Equipment, and Patents

are stated at cost.

2. Of the Real Estate, $25,000 is for land, and $200,000 is for buildings.

3. All capital stock authorized has been issued and is outstanding.

4. Allowances for depreciation are: machinery and factory equipment,

$15,000; buildings, 3 per cent on cost; patents, 1/17 of cost.

5. $15,000 is to be set aside as a reserve for bad accounts.

6. Ten per cent of the book values of Stable Equipment and Office

Equipment and one-sixth of the book value of Drawings and
Patterns are to be charged off.

7. Inventories at the close of the year were: raw materials, $63,580.40;

finished goods, $58,864.56; goods in process, $27,024.52; fuel,
$4,823.43; factory supplies, $1,525; office supplies, $500; prepaid
insurance, $500.

8. The accruals are: taxes, $7,000; Direct Labor, $12,618.75; Indirect

Labor, $2,040.50; Interest on Bonds, $1,000; Advertising,
$4,718.50.

236 C. P. A. ACCOUNTING

Trial Balance, Nau-Pace Company, December 31, 1915

Real Estate

Fixed Machinery

Movable Equipment

Shaftings, Pulleys, etc

Stable Equipment

Office Equipment

Drawings and Patterns

Patents

Capital Stock

First Mortgage Bonds

Profit and Loss

Surplus

Dividends

Interest on Bonds

Other Interest Paid

Interest Received

Cash Discount on Purchases

Cash Discount on Sales

Sales

Return Sales -

Cash

Bills Receivable

Accounts Receivable

Raw Materials

Finished Goods, January 1, 1915

Goods in Process, January 1, 1915. . .

Fuel

Insurance

Taxes

Bills Payable

Accounts Payable

Reserve for Depreciation :

Machinery and Equipment

Buildings

Patents

Bad Accounts

Salaries, Offices and Clerks (General)

General Office Supplies

Postage, Telegraph, and Phone

Miscellaneous General Expenses

Advertising

Salaries and Expenses, Salesmen

Agents' Commissions

Credit Department Salaries

Miscellaneous Expenses, Selling

Stable Expenses

Direct Labor, Manufacturing .......

Indirect Labor, Manufacturing

Superintendence, Factory

Factory Supplies

Repairs, Machinery and Equipment .

Repairs of Buildings

Power, Heat, and Light

$225,000.00

150,000.00

18,000.00

10,500.00

3,500.00

2,915.90

9,000.00

75.000.00

5,000.00
1,323.10

2.861.50

8,258.25

27,750.65

50.750.00

298;650.25

622,190.90

62.735.06

24.747.27

38.688.28

4,000.00

5,000.00

56,150.00

2.950.75

1,560.00

850.00

35,000.00

72,350.31

30.141.40

7,560.00

610.00

3,963.46

508,311 .39

44.981.01

6,000.00

8,547 . 18

7,418.52

2,860.47

2.875.80

$500,000.00
100,000.00

86,140.28
300.00

2,469.50
13,389.52

1,540.816.75

40,000.00
46,585.85

50,000.00

30,000.00

22,058.80

6,240.75

$2,438,001 .45 $2,438,001 .45

DIVIDENDS AND SURPLUS 237

9. The depreciation on stable equipment (see item 6) is to be charged
to Stable Expenses, and one-third of the latter is apportioned to
ManufacturiiiiT Expenses, and two-thirds to Selling Expenses.

10. The cost of fuel used is to be charged to Power, Heat and Light.

11. Maintenance of Real Estate is to be charged with cost of repairs

to buildings, depreciation on building's, 20 per cent of taxes for
the year, and $1,000 for insurance. The total cost for such main-
tenance is to be shown as an item of manufacturing expense on
the Statement of Cost of Sales.

12. The portion of insurance remaining after charging Maintenance of

Real Estate is to be allocated to Manufacturing Expenses.

13. Thirty per cent of the taxes for the year is to be apportioned to

Manufacturing Expenses, and 50 per cent is to be charged against
Income.

14. Of the Salaries of Officers and Clerks, General, $3,600 should be

apportioned to selling expenses.

15. Amongst the Bills Receivable is a note for $5,000, pertaining to a

previous fiscal year, which is considered to be worthless. No
provision was made for such loss.

16. Regardless of theory, cash discounts on purchases and sales are to

be treated as pertaining to income.

17. On the 10th of December, 1915, a dividend of 10 per cent on the

capital stock was declared and made payable on January 10,
1916, for which no entry was made prior to taking off the trial
balance.
Given the foregoing information, you are asked to prepare the following
statements in approved form for the information of your clients:

1. Cost of Sales.

2. Profit and Loss, showing (a) the gross profit and the per cent of

same on sales; (6) selling expenses and per cent of same on gross
profits; (c) general expenses and the percentage that such ex-
penses bear to gross profits; and (d) the net profits and the per
cent of same on sales.

3. Balance Sheet, showing the surplus at the beginning of the fiscal

year, and the amount at the close of the year.

(Ohio, Nov., 1916.)

CHAPTER XIII

TRADING ACCOUNTS

Old Merchandise Account — The old merchandise account was an ac-
count in which were gathered all the factors affecting the gi-oss profit on
sales/ The structure of the merchandise account was as follows:'

Debits

Credits

Initial inventory.

Sales.

Purchases of the period.

Returned purchases.

Freight and cartage inward on pur-

Freight and cartage inward, paid at

chases.

time of purchase, on purchases

Freight and cartage outward on

now returned.

sales.

Trade discounts on purchases.

Returned sales.

Merchandise destroyed as unfit for

Freight and cartage inward on re-

sale.

turned sales.

Deterioration of merchandise.

Trade discounts on sales.

Freight and cartage inward on pur-

Gross profit on merchandise.

chase applicable to goods unsold.

Closing inventory.

In objecting to the use of the old merchandise account great stress is
frequently made about its being a mixed account.' As the inventory
account, one of the accounts which replaces the merchandise account, is a
mixed account as soon as a sale has been made, this objection does not seem
vital. The real objection is that the old merchandise account makes it
impossible, without a laborious analysis, to give the executives statistics
which will show how business is progressing.* Modern accountants, there-
fore, use a separate account for each of the factors listed above, although
some of the closely-related factors are sometimes combined for convenience.*

Purchase Records — When the storeskeeper discovers a shortage of a cer-
tain material, he sends a requisition for an order to be placed by the pur-
chasing department, and files a carbon of the requisition.' The purchasing
agent sends the order to the jobber and a carbon of the order (details not
usually shown on this copy)' to the receiving department and to the stores-
keeper; he then files a copy, together with the original requisition, in his
own files." When the jobber ships the material, he submits an invoice
which the purchasing agent files with the order.' On receipt of material
the receiving clerk makes out a report of material received, two copies
going with the material to the storesroom and the third copy being placed
in the receiving clerk's files with the carbon of the original order." After
inspection, a copy of the report of material received, properly signed, is
sent by the storekeeper to the purchasing agent, who compares it with

'For explanation of superior figures see page 337.

238

TRADING ACCOUNTS 230

the order and invoice, and then files tlie order and report of material re-
ceived and sends the invoice, properly endoi'sed, to the disbursing officer,
who pays it with a voucher check." Of course, this procedure varies
gi-eatly in difi'erent concerns, but these records, or substitutes therefor, are
the vouchers the auditor uses to verify the purchases." The auditor should
never attempt to verify all of the purchase vouchers but should only make
copious checks.*^ Some auditors <'heck each invoice against the purchase
journal for only three or four months out of the twelve months, always
including the last month of the period," while others check them all." In
either case, purchases recorded during the first few weeks after the date
of closing should be scrutinized to prevent the goods from being included
in the inventory without having been recorded in the purchase journal."

The form of the purchase book or register depends on whether the busi-
ness is departmentalized, as separate columns should be assigned to each
department. Again, purchases may be classified as to the kind of ma-
terial, viz., woolens, and trimmings, in the clothing industry. However, the
accounting procedure is the same whether there is only one purchase
account or whether there are a dozen. The auditor must check the dis-
tribution of the charges," but the checking of the distribution of about
every fifth voucher will suffice," if vouchers for substantial sums are
chosen.

In a fairly large concern, the purchase journal footings of about every
tenth or twelfth page in addition to the last page of each month should
be verified, but, in a smaller concern, proving every fifth or sixth page,
including always the last page of each month, will suffice."

The posting of the totals of all the columns in the purchase book must
be verified,^" but the checking of the credit postings can usually be omitted"
(see audit of accounts payable in Chapter III, Volume II).

Unrecorded Purchase Orders — Some accountants believe that small un-
recorded orders for merchandise, w^hether unshipped, in transit,"* or de-
livered at or just before inventory time," may be ignored on fmancial
statements, unless there is a wide difference between the contract and
market price, although important orders must be recorded. Other ac-
countants add all unrecorded purchase orders to the inventory and to the
accounts payable." As the firm under audit is liable for the purchase
price of the material, the second view seems preferable.

Sales Egcords— Systematic record should be kept of all sales orders,
which should be checked with the invoices before the latter are sent out."
The shipping clerk should keep an independent record of shipments.
When practicable, the sales book should consist of the first carbon of the
invoices, as this makes the sales book admissible in court as an exact copy
of the invoices.'" The auditor should vouch the sales book with the original
orders of sales and the original record of shipments." It will suffice, how-
ever, if the sales for three or four months scattered over the year, but
always including the last month, be vouched in detail.

Where the business is departmentalized, an elaborate sales journal with
columns for each department may be kept.'* These columnar sales journals

240 C. P. A. ACCOUNTING

should be audited as to the total sales column in the same manner as the
simpler forms and the distribution of the sales should be only test-checked.
The monthly or other aggregates of the sales postings should be checked,
but the individual debit postings need not be verified^ (see audit of ac-
counts receivable in Chapter III, Volume II). As to sales journal foot-
ings, every eighth page in large concerns and every third or fourth page
in small concerns should be verified, but in every case the last and some-
times the next to last page of each month should be checked.^

Cash Sales — In regard to cash sales, the auditor should first examine the
system of internal check; any weaknesses discovered should be mentioned
in the report and should be thoroughly tested during the audit. Where the
system of internal check is good, the auditor need test only the sum-
maries of the cash sales as posted in the general books, but, where the
system is not extensive, he must make thorough tests of the cash sales."

C. 0. D. Sales — "When merchandise is sold on a C. 0. D. basis, a credit
is made to the sales account and a debit to the C. 0. D. account.'' When
collections are made, cash account is debited and C. 0. D. account credited.
The balance of the C. 0. D. account represents undelivered sales," and the
auditor must verify this balance." The C. 0. D. department charges each
route for the new C. 0. D. sales and credits it with the cash returned and
goods returned into stock as refused, and prepai'es for the driver a route
sheet which shows the held-overs from the previous day, the new C. 0. D.
sales, and the i-eturns made.^° Some accountants make only memorandum
entries until collection has been made for C. 0. D. sales.'*

Installment Sales — Theoretically the profit and loss account should
be credited with the profit on installment sales and debited with the
estimated bad debts and estimated collection expenses, but the calculation
of the necessary reserves is too difficult for practical purposes.'^

Assume that an installment house, whose gross profit percentage based
on sales was 100 per cent, sold an article for $60, terms $10 down and
$5 a month. If the books were closed for the end of the fiscal period
after the first monthly pajanent, the entries, according to the procedure
approved by the income tax authorities, would be :^

Installment Sales Contracts (1920) $60. 00

Goods Sold $30.00

Unrealized Gross Profit on Installment Sales

Contracts (1920) 30. 00

(For sale)

Cash. 15.00

Unrealized Gross Profit on Installment Sales Con-
tracts (1920) 7 50
Installment Sales Contracts (1920) ............ 15. 00

Realized Gross Profit on Installment Sales

Contracts 7. 50

(For deposit and first monthly payment.)

Realized Gross Profit on Installment Sales Con-
tracts 7 . 50

Profit and Loss 7. 50

(For closing books)

TRADING ACCOUNTS 241.

Sales for Future Delivery — Under ordinary conditions sales for future
delivery are not booked until delivery/' and profit thereon should not be
taken/" If a valid contract exists, upon which a customer can be sued,
the profit may be taken if the goods ai-e ready for shipment, but the profit
should not be taken if the goods are unmade." Selling expense incurred on
undelivered sales is a deferred charge to income.*^

Goods for current shipment delayed in delivery should be added to the
accounts receivable and sales accounts, and profit thereon taken/'

Sales to Branches — Shipments to branches should be credited to a branch
shipment account to differentiate them from the real sales/* The branch
shipment account in the head office's books is offset by the "purchases from
head office" account in the branch office's books, when the accounts of the
main office and the branch are consolidated at the end of the period/" If
the goods have been billed to the branch at a figure other than cost, an
adjustment entry must be made at the end of the period to bring the
branch inventory to a cost basis/"

Consignment Sales — As shipments to commission merchants are still
owned by the consignors, they must be differentiated from the real sales/'

The accounting for consignments is treated in Chapter XV, Volume II.

Sales of Scrap or By-Products — Sales of scrap material or by-products
are credited to a special account instead of to the regular sales account."

The accounting for sci*ap material and by-products is treated in Chapter
XVI, Volume I.

Sales to Proprietor — Theoretically, sales to the proprietor should be
charged at cost to the proprietor's personal account and credited to the
purchase account." If, for convenience, they aie recorded in the sales
journal, a correcting entry in the general journal, debiting the proprietor's
personal account and crediting the accounts receivable, must be made for
the aggregate of such transactions.'^ As these transactions are too small
to vitiate percentages based on sales, the transferal of the credit from the
sales account to the purchase account may be omitted."

Sales on Approval — As goods sent out on approval are not sold until
they have been accepted, they must not be entered directly into the sales
account."" The prevailing practice is to charge approval accounts receiv-
able at selling price and credit approval sales, reversing the entry if the
goods are returned." If the sale is consummated, it is recorded as a
regular cash or credit sale," and the original entry to approval accounts
receivable and approval sales is reversed. For balance sheet purposes, all
goods out on approval should be shown in the inventory." On account of
the risk involved, a very liberal reserve for losses should be set off against
this part of the inventory.

Sales of Fixed ^sse^s— Sales of fixed assets should not b^ credited to
the sales account.'" The special features involved in such sales are treated
in Chapter IV, Volume II.

The Turnover — Turnover is sometimes defined as the prime cost of
sales." This use of the term is unfortunate, as it is frequently confused

242 C. P. A. ACCOUNTING

with the rate of turnover, or the number of times tlie stock has been
turned over in tlie period."* The rate of turnover is the quotient of the
cost of sales divided by the initial (if normal) inventory."'

Merchandise Expenses — The merchandise expenses which affect the cost
of purchases are freight in;'" cartage in;"' warehouse rent, wages, and
supplies;*' insurance during transit and storage;"' duty;" seasoning or
aging costs ;'^ and buying expense." Sometimes warehouse expenses are
classified as selling expense,''' but it seems preferable to prorate them
betw^een the purchases and sales.*** Sometimes buying expense is shown on
the profit and loss statement as a separate kind of operating expense,"
but, where practicable, it seems preferable to have the buying expense
affect the cost of purchases. These costs are recorded separately, and
added to the invoice price of the stock-in-trade at the end of the period.'*

Freight outward and cartage outward are considered as deductions from
sales by some accountants," and as selling expenses by others.'' If the
firm ordinarily sells goods F. 0. B. destination, such fi-eight and cartage
outward should be deducted from sales, but, if this is not the custom,
these outlays should be treated as selling expenses." The cost of delivering
goods to local customers should be regarded as a selling expense.'* Ship-
ping expenses, salesmen's salaries, traveling expenses, commissions, and
advertising are selling expenses."

The auditor, in examining the contracts with the salesmen to verify the
payments made to them, should pay special attention to the bases on
which commissions should be calculated and to any limits that may have
been placed on traveling expenses.'" Advertising in current new^spapers
and magazines should be closed into profit and loss," but ispecial advertis-
ing campaigns entailing heavy outlays, the results of which can not
possibly become evident until some f utm-e date, may be treated as deferred
assets and written off as soon as pi-acticable."

Although sometimes classified as selling expense,'* credit department
expense appears to be a general administrative expense.*"

Returns on Sales and Purchases — Returned sales and returned pur-
chases are deductions from the sales and purchases accounts, respectively."
For the recording of these transactions, separate journals called returned
sales books and returned purchases books, respectively, should be used
as posting media.*^

In auditing the returned sales book the auditor should prove the foot-
ings, check enti'ies against approved credit slips and stock records for
returned merchandise, and check the postings to the controlling accounts."
The footings in the returned purchases book must be checked,** the entries
vouched with the stock records, shipment records, and credit memos from
the vendors," and the postings to the controlling accounts verified.

Rebates and Allotcances — Rebates are of much the same nature as
allowances and have the same effect as special allowances.*' The allowances
on sales and on purchases should be separated from the returns on sales
and on purchases, respectively."' It is sometimes claimed that rebates

TRADING ACCOUNTS 243

aiul allowances on sales are deductions from sales when they are beyond
the control of the sales department, and selling expenses when they are
controlled.'" Some accountants treat allowances to customers as a financial
expense,™ Avhile other accountants always regard them as deductions from
sales."" The latter view appeal's prefei-able, as transactions occurring after
the sales have been consummated can hardly create selling or financial
expenses. For administrative purposes it is sometimes advisable to
classify the allowances on sales according to the reason therefor, viz.,
defective goods, breakage, damage, loss, etc." Rebates and allowances on
purchases should be deducted from the cost of the purchases."

The procedure in auditing the sales allowances and purchases allowances
should be to check them with the credit memoranda." An auditor has
little to fear in regard to purchases allowances. He must, however, take
unusual care in auditing the sales allowances, as they are frequently used
as a cover for fraud.**

Guaranteed Sales — Guarantees of goods are contingent liabilities, and
an estimated amount based upon past experience should be charged to a
suitable expense account and credited to an appi'opriate liability reserve
therefor.*"

The treatment of contingent liabilities is discussed in Chapter III.

Sales in Transit — If goods are lost in transit and another shipment made,
the railroad company would be debited and a "lost in transit" account
credited.*" When the damages are received, cash is debited, the railroad
company credited,*' and the "lost in transit" account closed into sales. If
a financial statement is prepared prior to settlement of the damages, the
goods lost in transit would appear at cost in the inventory, as, if located,
they can be returned by the railroad company.

Book and Physical Inventories — Inventories may be defined as itemized
lists of goods or valuables with prices attached.*' If the lists are prepared
after actual count of the goods, the inventories are called physical inven-
tories.** If separate accounts showing the various receipts and disburse-
ments are kept for each kind of goods, a list of the balances of these
accounts would constitute a perpetual or book inventory.'**

Even where book inventories are maintained, their accuracy should be
verified by physical inventories taken from time to time."' This can be
readily done by inventorying each kind of goods when its stock is low.'
Where the large bulk of stocks like ore, pig iron, etc., makes a physical
inventory impracticable, and, where it may be several years before the
supply is materially reduced, it is customary that a small percentage on
the consumption be allowed for waste or loss.'*'

Verifying Inventories — In checking merchandise inventories, an auditor
should (a) have the stock sheets— if possible, the originals'*"— certified by
persons responsible therefor;'*' (b) test the calculations including all large
items;'** (e) prove the footings;'" (d) compare the book and physical in-
ventories;'"' (e) see that invoices for inventoried goods are ^recorded ;
(f ) verify the handling of consignments and branch shipments;"* (g) check

244 C. P. A. ACCOUNTING

the additions of duties, freight, etc., to cost of purchases;'" (h) compare
prices with those of the latest piu'chases of similar goods;'" (i) determine
whether the quantities of goods on hand are reasonable and in accordance,
in particular instances, with the average consumption and average pur-
chases over a fixed period;"^ (j) use the "gross jDrotit check" and compare
the percentage of gross profit with that of former years;"* (k) compare
quantities and prices of classes of stock with corresponding data in pre-
vious inventories;'" (1) see that proper allowances have been made for
damaged and obsolete goods;"* and (m) compare the inventory prices and
the selling prices of some of the goods sold after the computation of the
inventory, to determine whether there is sufficient margin between the two
prices to indicate a profit ; otherwise it may be inferred that the inventory
prices have been padded."'

In complying with rules (g) and (h) above, care should be taken to
have the merchandise inventories valued at cost or market, whichever is
the lower."* If it is desired to show inventories at cost when the prices
have declined, a market fluctuation reserve should be used.'" The use of
market fluctuation reserves is discussed in Chapter X.

The "gross profits check" mentioned in rule (j) above is applied by
calculating the average gross profit in the past and then computing a
theoretical final inventory by using the actual figures for the sales, pur-
chases, and initial inventory, and an estimated figure for the cost of sales
based upon the average gross profit percentage. If the gross pi'oflt per-
centage is based on sales, the cost of sales is the product of the sales
multiplied by unity minus the gross profit percentage,'"" but, if the gross
profit percentage is based on the cost of sales, the cost of sales is the
quotient of the sales divided by unity plus the gross profit percentage.'"
The average gross profit percentage is sometimes calculated as the simple
arithmetic average of the annual averages.'^ but greater accuracy would
be obtained by using a w^eighted arithmetic average.

Trade Discount — A trade discount is a deduction from list price made
by wholesalers to retailers.'" Usually trade discounts do not appear on
the books, being deducted directly from invoices.'"* Where trade discount
is shown on the books, it should be deducted from the sales'" or pur-
chases'^" as the case may be. Sometimes trade discounts have a time limit
such as when seven per cent is allowed for payment within thirty days.
The test of a trade discount is the rate, it being the usual rule that terms
exceeding "2 per cent 10 days, net 30 days" are trade discounts."'

The auditor is supposed to have a general knowledge of the prices of
commodities and trade discounts, and in vouching the purchase journal
should be able to detect any flagrant irregularities.'^'

Cash Discount on Purchases — An allowance from the billed price for
paj-ment within a specified time is a cash discount, if the rate of discount
does not exceed what a business could afford to pay for the use of the
money for the credit period.'™ Some accountants look upon cash discounts
on purchases as a reduction in the price of the goods, and therefore
deduct it from purchases ;'*" while other accountants emphasize the element

TRADING ACCOUNTS 245

of financing the business and treat the discount as a financial profit."' As
the realization of the reduction in price depends on having sufficient
capital, the latter treatment seems preferable.

Where payments are made by checks, the auditor has little to fear about
discounts on purchases. He should, however, scrutinize in a general way
the payment of accounts payable on which no discounts are recorded."'

Cash Discount on Sales — Some accountants regard a cash discount on
sales as an overstatement of a revenue, and therefore deduct it from the
sales ;"^ others regard it as an inducement offered to prospective customers,
and treat it as a selling expense ;"* while still others regard it as composed
of the two factors, interest and bad debts expense, and accordingly treat
it as a financial expense."'. The last treatment seems preferable.

The auditor should secure from his client an authoritative list of cash
discounts allowed and use it as the basis for a fairly exhaustive test of the
discounts stated in the cash book."" As overstating discount allowances is
a frequently used method of fraud, this test should be exhaustive for the
period covered, but it need only extend over a few days or weeks, depend-
ing on the volume of collections."'

Neglected Discounts — Some accountants, who consider that cash dis-
counts should be deducted fi'om the invoiced prices, consider it advisable
to have the neglected discounts shown on the books."' This is accomplished
hj debiting purchases discount account for all the discounts which are
offered and crediting it with those taken."* Another method of handling
this matter is to debit a neglected discounts account, and to credit cash for
the discount not taken, the purchase being originally charged to purchases
and credited to accounts payable at the best available price.""

Reserve for Cash Discounts — Some accountants favor the use of reserves
for cash discounts,'" while others do not.'*^ The use of the reserves seems
preferable, for, if prospective sales discounts are ignored, the balance
sheets do not reflect true condition of the business. Reserves for sales dis-
counts should be deducted from the accounts receivable on the balance
sheet,'" although they are sometimes classified as current liabilities,"* and
are sometimes shown on the right side of the balance sheet under the
caption "reserves."'" The reserves for purchase discounts should be de-
ducted from the accounts payable on the balance sheet.'" Unless the pros-
pective discounts are of a considerable amount, however, they may be
disregarded.'*'

246 C. P. A. ACCOUNTING

QUESTIONS

trading accounts
General

1. How should the guarantee given that machinery sold will last five
years be treated in the Balance Sheet? (A. I, of- A., June, 1917.)

2. In an accounting system embodying a storeroom, how should pay-
ments on account, covering an investment charge, be treated, and how
should the final bill be treated? (111., May, 1905.)

3. Define: Freight in and freight out. (Mich., June, 1908.)

4. Describe the proper method of handling discounts, freights and
haulage on goods and machinei*y purchased. On goods sold. (Ind., Nov.,
1917.)

5. A corporation that has been lax in its accounting methods carries a
freight account into which it charges all payments of whatever nature it
makes to railroad companies, even payments made on delivery of goods
purchased f. o. b. location of said corporation. If called upon to reor-
ganize their methods, what suggestions and altei'ations would you make
in the matter? Give reasons. (111., May, 1906; Ind., June, 1916.)

6. In examining the affairs of a manufacturing concern you find among
the assets finished goods inventory of $175,798 and ascertain that included
in the above total is the sum $50,000 covering goods deposited as collateral
to secure notes which are included in the Notes Payable account. How
would you treat this in statement prepared for credit purposes? Explain
why. (A. I. of A., May, 1919.)

7. A grain dealer charges his customers 15 cents apiece for sacks that
cost him 10 cents. He agrees to receive back any sacks returned in good
condition at 12 cents each, calculating that they would be worth 7i/'2 cents
each. How should these transactions be treated on the dealer's books?
(N. Y., June, 1906; N. Y., Jan., 1918.*)

8. A manufacturing company ships its products in packages costing
7% cents each. They are charged to customer at 10 cents each but subject
to credit when returned in good order at same price as charged. At close
of year, package account shows an apparent gain, being the difference
between the cost of package and amount of contingent sales. What
disposition should be made of the ledger gain at close of year? (Mich.,
Dec., 1906.)

9. Define: Turnover. (Mich., June, 1912*; N. Y., Jan., 1916*; Ohio,
Nov., 1910; Iowa, Dec, 1918; A. I. of A., May, 1921.)

TRADING ACCOUNTS 247

10. Wiiat is meant by percentage on turnover and how is it ascertained?
(N. Y., June, 1917.)

11. How can the amount of turnover be shown in the Trading ac-
count? (Mich., June, 1912.)

12. The ABC Manufacturing Company shipped a bill of goods
amounting to $300 to a customer, rendering the usual invoice therefor. The
goods were destroyed in transit by a railway wreck. The ABC Company
subsequently made a second shipment to its customer to replace the lost
goods, and collected $300 from the railway company in payment for the
lost shipment. To what account should this last $300 be credited? (N. Y.,
June, 1915.)

13. Suppose, in examining a set of books for an importer of tea, you
find that upon arrival all tea is placed in bonded warehouse for subse-
quent withdrawal, the tea having been received by the importer on orders
previously placed against six months' acceptances bearing interest, and
that the importer has omitted the tea from his inventory and the ac-
ceptances as his liability. How would you, as auditor, ti'eat such matters
in pi'eparing a certified statement of the importer's financial affairs?
(N. Y., Jan., 1919.)

14. A wool merchant has entered into an agreement to take 1,000,000
pounds of wool, in the grease, on joint account with the shipper, to have
it washed, scoured, combed, etc., and sell the product, the profit or loss
to be shared equally.

The grease wool is sent to the scourer in lots as received from the shipper
and returned from day to day in smaller quantities as grades A, B, C,
D, and E; these lots (or some of them) and combinations of said lots are
sent to combers and again returned in smaller quantities from day to day
as grades Nos. 1, 2, 3, 4, and 5.

The wool may be sold in any form that is in the grease as grades A, B,
C, D, and E, or as grades Nos. 1, 2, 3, 4, and 5.

It will be necessaiy for the merchant to report the results of the
transactions in each lot separately.

Submit a method for keeping a record of this stock and accounts from
which proper statements can be made to the shipper showing the loss in
the various processes, the quantities sold, to whom, prices, etc., and the
net loss or gain.

(Pa., Nov., 1908.)

Inventory

15. Define: Inventory. (Wash., June, 1915.)

16. Give your definition of a correctly extended inventory. (111., May,
1908.)

17. A concern inventories its property and makes statement of assets
and liabilities on the first of the year. The business continues and up to
October 1, $10,000 additional capital is paid in. Plant amount during
the same period increased $5,000. From trial balance of October 1, how

248 C. P. A. ACCOUNTING

would you determine the amount of merchandise and supplies necessarily
on hand to show neither gain nor loss for the period between January 1
and October 1? (Mich., Dec, 1906.)

18. What responsibility attaches to an auditor as to the inventory?
(N. Y., Dec, 1896*; N. Y., Jan., 1904*; Pa., Nov., 1904; Fla., April,
1907* ; Fla., April, 1908* ; 111., May, 1909* ; Fla., July, 1909* ; Mich., June,
1910*; Va., Nov., 1910*; Wash., May, 1911*; Mich, June, 1913*; 111.,
May, 1914*; 111., May, 1915; Ind., June, 1916*; Ohio, Nov., 1916; Mass-,
Oct., 1917*; Ohio, Nov., 1918*; N. D., July, 1919*; S. C, Sept., 1919;
A. I. of A., May, 1919.*)

19. An auditor is required to certify to the correctness and value of an
inventory with which he is unfamiliar. Should he decline to do so? Give
reasons. (N. Y., Jan., 1914; Ohio, Nov., 1915.)

20. Woxild you examine the inventory of a firm, in view of the fact
that the auditor is not responsible for the inventory? If so, why? If not,
why not? (N. Y., June, 1915.)

21. In making the audit of a concern doing a mercantile business, what
would you require to enable you to certify to the eoiTectness of the in-
ventory of merchandise that they had prepared? (N. D., July, 1916.)

22. How would you verify the inventory? (N. Y., Jan., 1902*; 111.,
Nov., 1903*; N. Y., June, 1912*; Mass., Oct., 1914*; Mo., Dec, 1914*;
111., May, 1915*; Mass., Oct., 1915*; Ohio, Nov., 1915*; Kan., Dec, 1915*;
Mo., Dec, 1915*; N. Y., Jan., 1916*; Cal., May, 1916*; Ohio, Nov., 1916*;
W. Va., Mav, 1917; Ind., May, 1917*; A. I. of A., June, 1917*; Cal., June,
1917*; Pa., Nov., 1917*; N. D., July, 1918*; Ga., May, 1919*; Mich.,
Jime, 1919.*)

23. To what extent would you consider it necessary to verify the mer-
chandise, and what reference to such verification would you make in your
report? (Mass., June, 1913.)

24. How would you prove in quantities the inventory of materials at
beginning of year, if you had superintended an actual inventory at end of
year? (A. I.* of A., May, 1919.)

25. State briefly the essential points to be considered in a.scertaining
the correct profits so far as the inventories are concerned? (N. D., July,
1919.)

26. Under what circumstances should an auditor require the officials of
a company which manufactures and sells to retailers, to furnish him with
a certificate as to inventorj' prices and any other items that may be con-
sidered necessary? Draft such a certificate or certificates and indicate the
circumstances under which the different paragraphs or clauses should be
included in the certificate. Who should sign the certificate? Is the auditor
released from all liability for the accuracy' of the items covered by the
certificate? Why? (Ill.l! May, 1915.)

27. State fully how you would test the accuracy of inventoi'y values.
(N. Y., Dec, 1898*; Pa., May, 1902*; N. Y., Feb., 1910*; N. Y., June,
1911*; Mich., June, 1915*; N. D., July, 1918*; N. C, Nov., 1919.)

TRADING ACCOUNTS 240

28. At what value should inventories be shown on the Balance Sheet?
(111., May, 1904*; Mich., June, 1908*; Va., Oct., 1911; Wash., June*
1912*; La., May, 1913*; Wash., Nov., 1913*; Mich., June, 1914*; N. Y.,
Dec., 1916*; 111., May, 1917*; N. C, Aug., 1917*; Ohio, Nov., 1917*;
A. I. of A., Nov., 1918*; Iowa, Dec, 1918; A. I. of A., May, 1919*;
Ga., May, 1919*; N. Y., June, 1919*; Ohio, Oct., 1919*; N. C, Nov.,
1919.*)

29. (a) What is the reason for the general rule as to valuation of
merchandise for inventory purposes? (b) Is it based on any accounting
principle? Explain. (Ohio, Oct., 1919.)

30. For inventory purposes what principles should govern the valua-
tion of second-hand goods taken in trade? In your opinion how should
transactions in second-hand goods be reflected in the Profit and Loss ac-
counts? (111., Dec, 1918.)

31. Can you suggest circumstances in which you would approve a de-
parture from the general rule for valuation of merchandise? Would you
be influenced by events of conditions subsequent to the date of closing the
accounts? Give reasons. (111., Nov., 1908* ; 111., May, 1913* ; A. I. of A.,
Nov., 1918; Ohio, Oct., 1919.*)

32. Discuss fully the proper principles to be observed in the valuation
on a certified Balance Sheet of inventories of (o) goods of last season's
styles, (&) goods in cases awaiting shipment. (Pa., Nov., 1919.)

33. The theory has recently been advanced that inventory should be
taken up at cost on the Balance Sheet, even if the market price is lower,
on the ground that you are no more justified in anticipating losses than in
anticipating profits. Wherein is the theory faulty? (Cal., May, 1916.)

34. A wholesale and retail company, which also manufactures most of
the goods sold by it, determines through its cost system in the factoi'y the
cost of manufacture, and proposes to bill its wholesale department for all
goods manufactured at cost plus 10 per cent. What effect will such pro-
cedure have on statements issued by this company? (A. I. of A., Nov., 1919.)

35. A manufacturing corporation has been accustomed to estimate its
inventory value at the end of each year, and did so December 31, 1915, and
December 31, 1916. What method would you suggest for refiguring the
profits of 1916? (Mass., Oct., 1917.)

36. In valuing inventories, what does the term cost mean? What does
the term market mean? (Wis., May, 1919.)

37. In an inventory, how should stock purchased on credit subject to
usual discounts be valued? (N. Y., June, 1897; Pa., Nov., 1911*; Mass.,
Oct., 1915.*)

38. You are auditing the accounts of a corporation which carries on its
books and Balance Sheet an account called "Adjustment of Inventory,"
which represents the difference between the actual inventory of raw ma-
terial on hand and the book inventory carried as part of its cost records.
What would you recommend doing in regard to ttis account? (Ohio, Nov.,
1917.)

250 C. P. A. ACCOUNTING

39. If the market price of items shown on the inventory is less than
inventory value, how would you adjust the difference? If inventory values
were less than market? (Va., Oct., 1912.)

40. Explain fully in what way, if at all, overvaluation of opening?
inventory should enter into Trading: and Profit and Loss statement, with
reason for inclusion or exclusion. (N. Y., Jan., 1911; Mass., June, 1913;
Kan., May, 1916; N. C, Nov., 1919.*)

41. In analyzing the inventory of a corporation you find that the fol-
lowing have been included therein: (a) raw material, (6) in process
merchandise, (c) finished merchandise, (d) factory supplies, (e) advertis-
ing, (/) office supplies, (g) insurance prepaid, (h) construction materials,
(0 repair parts for equipment.

In preparing your Balance Sheet, would you include all of these items
as Merchandise Inventoi*y? If not, how would you classify the various
items? Give reasons. (Ohio, Nov., 1917.)

42. Give some reasons why the professional auditor should, under pres-
ent-day conditions, give even more attention than in the past to inventories.
(A. I. of A., May, 1920.)

43. Assuming an automobile manufacturing company made a contract
for rubber tires at $35 each with the understanding that it was to receive a
rebate of $5 a tire if the purchases exceeded 40,000 tires, and that at the
end of the season when the accounts were made up, say on July 31, it
was found that 45,000 tires had been purchased and a claim for the rebates
was thereupon made and a check in settlement was received on August 31
following. On July 31, there were 15,000 tires on hand. At what price
should they be valued for inventory purposes, and how should the rebate be
dealt with in the accounts for the year ending July 31? (111., May, 1913.)

44. Smith, Jones, and Smith, as a finn, have transacted business for a
number of years, dealing in Irish linens. Jones decides to retire from the
firm on January 1, 1919. The linens still on hand have been purchased
from time to time, during which period the market fluctuations were fre-
quent and extensive in range, the prevailing prices on December 31, 1918,
being considerably higher than any previously paid. What prices should
be used in preparing the inventory of December 31, 1918, in determining
Jones's interest in the business? (N. Y., Jan., 1919.)

45. How would you treat through the books, the amount of the un-
sustained loss representing the difference between the cost and the market
price of inventories, in case the market price is less than cost, and your
method of taking inventories as reported to the Commissioner of Internal
Revenue was "cost or market whichever is lower" as provided in T. D.
2609? (N. C, June, 1920.)

46. What effect has an overestimated inventory on the business of a
mercantile firm? AVhat effect has an underestimated inventory on the
business of a mercantile firm? (Md., Jan., 1909; (^al., June, 1917.*)

47. Define: Perpetual inventorv. (Wash., May, 1911*; Pa., Nov.,
1912*; Cal., Nov., 1916; Wash., July, 1917.)

TRADING ACCOUNTS 261

i8. Describe a perpetual invenloi-y, how used, its advantag:es and dis-
advantages, if any. (Wash., April, 1906*; Pa., May, 1906; Pa. Nov
1906*; Fla., July, 1909*; Va., Oct., 1912; Mass., Oct., 1914*; Mass., Oct.',
1916; N. C, Nov., 1918.)

49. Explain the method of maintaining a perpetual inventory. (Pa
May, 1902*; Wash., Sept., 1907*; Fla., July, 1909*; Pa., Nov., 1912*;
Mich., June, 1913*; Mich., June, 1915; Mass., Oct., 1916.*)

50. How may a perpetual inventory be verified? What would you
require in relation to such an inventory before accepting it in a Balance
Sheet under your audit without qualifying your certificates. (Pa., Nov,
1912.)

51. Describe the method of determining points of actual stock-taking
under a system providing for a perpetual inventory. (Wash., May,
1911.)

52. To what extent or under what circumstances could you certify to
book inventories in the absence of physical inventories? (Cal., Nov.,
1916*; Cal., June, 1917.)

53. In the case where it is impossible to take physical inventories but
once each year, how would you ascertain the monthly profits? (N. C,
June, 1919; N. C, Sept., 1919; A. I. of A., Nov., 1920.*)

54. What safeguaids in accounting would you suggest to a client to
prevent loss of stock by theft? (Mass., June, 1910.)

55. Define : Book inventory. (A. I. of A., May, 1918* ; 111., Dee., 1918.)

56. Indicate in what circumstances and for what purposes you would
consider a "book inventory" to be used in a manufacturing business: (a)
for current information; (b) for use in the preparation of interim state-
ments of accounts; (c) for use in the preparation of final yearly or
half-yearly accounts. Assuming your client decided to rely entirely upon
such records, what steps should be taken to guard their accuracy? (A. I.
of A., May, 1918.)

57. A. B., a manufacturer, states that he has had a loss in his factory
during his last fiscal period which he can not understand, and calls you in
to ascertain where the loss has occurred. State the nature of the business
used for illustration and describe fully what methods you would employ
to discover where the loss occurred, and how you would prove the correct-
ness of your deductions. (Mass., June, 1912.)

58. For several successive terms, a corporation has regularly deducted
$15,000 from its inventory of stock in process, the inventory prices being
conservatively below market value. Then, for the quarter ended June 30,
1908, while following the same conservatism regarding prices, the $15,000
deduction was discontinued, and the treasurer made his statement of
earnings during the term, based upon the inventory amount of stock in
process. State (a) whether you agree therewith; (b) the reasons for
your agreement or disagreement, and (c) if you disagi'ee with the
treasurer's statement of the matter, how you would deal with the item on
your statement of earnings and of surplus? (Mass., April, 1911.)

252 C. P. A. ACCOUNTING

Books

59. Prepare a ruling for a Sales Book to provide: (1) Total monthly
postings to three good accounts; (2) the separation of cash sales from
charge sales, (3) supplementary distribution of sales among four sales-
men's columns. (N. Y., Jan., 1897; N. Y., Jan., 1907.)

60. Prepare a ruling for an invoice book to provide for total monthly
charges to three Material accounts and two Expense accounts, and also to
detail postings to sundry accounts of capital and revenue. (N. Y., Jan.,
1897; N. Y.,^Jan., 1907.)

61. Submit rulings for correlated Cash Book, Purchase Book and Sales
Book, to classify purchases and sales in three divisions and to provide for
miscellaneous purchases. Provision must be made to record cash sales in
Sales Book and in Cash Book and for customers' and creditors' controlling
accounts. Submit pro forma monthly summary entries for the foregoing
books. (N. Y., Jan., 1911.)

62. The proprietor of a mercantile store asked you to prepare a set of
blanks to be used by him for checking all of his delivery wagons, in-
cluding the returned goods which the drivers collected. He wants to be
able to trace every package. Outline such a set. (Mich., June, 1914.)

63. About a year ago the Ford Motor Company agreed to make a
refund to each purchaser during the succeeding year, if a stated number
of machines were sold during the year. If you had been asked to deter-
mine a method by which the necessary records should be kept in order
that the least inconvenience should be experienced at the close of the
year when this refund was made, it being apparent that the requirement
would be met, what orders would you have given ? Write a report embody-
ing same. (Mich., June, 1915.)

64. What do vou consider a complete checking of the Purchase Journal ?
(R. I., Dec, 1907.)

65. According to the regulations of the United States Food Administra-
tion, wholesale and retail dealers must base the selling price of certain
commodities upon the cost price rather than upon the replacement or the
market value. Outline a stock system for a wholesale grocer to use for this
purpose and record hj'pothetical data upon such forms as you may design,
showing in detail the application of your recommendations. (Wis., April,
1918.)

Merchandise Account

66. Define: Merchandise account. (N. Y., Jan., 1897*; N. Y., June,
1899*; N. Y.. June, 1901*; Pa., Mav, 1903*; Mich.. July, 1906; N. Y.,
June, 1909*; Fla., July, 1909; La., May, 1913*; W. Va., May, 1917.*)

67. State how, in your opinion, the Merchandise account should be
kept. (N. Y., Dee., 1898; Mich., July, 1906.*)

68. Is the common old-fashioned method of adding the inventory of
merchandise on hand to the credit side of the Merchandise account before

TRADING ACCOUNTS 253

closing the books theoretically correct? Explain fully, (N. Y., Jan.,
1901; Mich., June, 1908.)

69. What is the theoretic aspect of the Merchandise account when
kept in modern books? Consider the proposition in connection with the
modem books of original entry. (N. Y., Jan., 1914.)

70. State what is indicated by the Merchandising account (a) when the
account shows a debit balance; {b) when the account shows a credit
balance? Explain fully. (N. Y., Jan., 1900.)

71. State your objections, if any, to the Merchandise account fre-
quently appearing on ledgers. (N. Y., June, 1904*; N. Y., June, 1909*;
Mass., June, 1910*; Ohio, Nov., 1913*; Mo., Dec, 1914.)

72. Explain the proper method of handling Merchandise account, and
outline the various subdivisions. (N. Y., Jan., 1897*; N. Y., June, 1904*;
N. Y., June, 1909*; Fl.a., July, 1909*; Mass., June, 1910*; Mo., Dec,
1914*; Mich., June, 1915; N. D., Aug., 1917.*)

Purchases

73. State how you would verify purchases. (Va., Nov., 1910; Kan.,
Dec, 1915; Mo., Dec, 1915.)

74. What elements enter into the cost of goods purchased for sale?
(Ohio, Oct., 1919.)

75. If you should contract for an audit which provides for an examina-
tion of all vouchers, what would you accept as proper vouchers for pur-
chases? (Ohio, March, 1910*; Wis., May, 1916*; Va., Nov., 1918; Ohio,
Oct., 1919.*)

76. State how you would deal with missing invoices for goods purchased
in auditing .the Cash Book of a large corporation? (N. D., July, 1918.)

77. Tiace the various operations in an office where you have full charge
as an accountant from the time an order is given for the purchase of
material until such material is paid for, to protect the company from any
possible loss in the transaction. (N. Y., Jan., 1900*; Mich., Nov., 1907;
Mass., June, 1910.)

78. Describe a means for the protection of a manufacturing company
in the purchase of necessary materials and supplies and in the payment
for such materials and supplies. (N. Y., Jan., 1900.)

79. When auditing the books of a firm you find that no invoice transac-
tions are recorded on the firm's books until they have matured. Give your
opinion upon this method and show how the Balance Sheet of the firm
would be affected. (Wash., June, 1915; Va., Nov., 1918.*)

80. What check has the auditor on fictitious entries showing pur-
chases? (N. Y., June, 1900; Wash., May, 1903.)

81. In the course of an audit of a stove manufacturer's books as of
March 31, 1912, you notice that three invoices, respectively for pig iron,
sand, and fire brick, dated March 22, 27, and 28, were entered on the

254 C. P. A. ACCOUNTING

books in April. What does this sig-nify and how may it affect your
report? (111., May, 1913.)

82. When you audit the accounts of the ABC Dry Goods Company,
you find that the books do not show any asset or liability in respect of
spring goods in transit. What would you report on this situation, and
why? (III., May, 1916; III., Dec., 1916*; Cal., June, 1917.)

83. In connection with the audit of the books of a corporation, describe
briefly the procedure you would consider to be essential in verifying the
goods in transit. (Wash., July, 1917.)

84. In the trial balance of a corporation, December 31, 1910, the end
of the fiscal term, there is a debit of $50,000 against John Doe for a pay-
ment to him on account of material purchased from him. The material is
to be delivered after said date. How should this be classified in the
Balance Sheet, December 31, 1910? (Mass., June, 1912.)

85. Should you be informed that liabilities representing merchandise
received but not inventoried were omitted, would the explanation be satis-
factory? (Ohio, Nov., 1915.)

86. What routine would you recommend in the checking of invoices of
goods or materials purchased? (N. Y., June, 1901.)

87. How would you classify the following items in preparing a state-
ment of condition, to be filed with the Secretary of the Commonwealth :
(a) Duty paid on foreign merchandise received, invoice for same being
unpaid; (b) an ascertained loss on a contract for the purchase of mer-
chandise to be delivered in the following month? (Mass., April, 1911.)

Returns and Allowances

88. Define : Returns and allowances. (HI., May, 1908.)

89. Describe a safe and easy system of keeping the account of goods
returned, (a) as buyer, (6) as seller. (N. Y., June, 1899; Pa., May,
1900.*)

90. State how you would verify the returned sales. (N. Y., Dec,
1898* ; N. Y., June, 1900* ; N. Y., Jan., 1901* ; N. Y., Feb., 1909* ; Mass.,
June, 1910*; Va., Nov., 1910; Kan., Dec., 1915*; Mo., Dec., 1915.*)

91. Classify the Returned Sales account properly according to the sub-
division of assets, liabilities, proprietary interest, income and expenses,
under which it should be grouped. (Wis., May, 1919.)

92. Under instructions calling for a complete audit and verification of
all entries, what supporting data would you require for returned sales?
(Ohio, March, 1910; Va., Nov., 1918*; Ohio, Oct., 1919.*)

93. State what means should be adopted to verify allowances on sales.
(N. Y., Jan., 1901*; N. Y., Feb., 1909*; Mass., June, 1910.)

94. Under instructions calling for a complete audit and verification of
all entries, what supporting data would you require for returned pur-
chases? (Ohio, March, 1910; Ya., Nov., 1918.*)

TRADING ACCOUNTS 255

Selling Expenses

95. Define: Selling expenses. (Wash., June, 1917.)

96. Where would you i?lace the Entertaining- Customers' account in the
Income and Profit and Loss account? (Md., Dec, 1917.)

97. Classify Expenses Advanced Salesmen according to the subdivision
of assets, liabilities, proprietary interest, income and expenses, under
which it should be grouped. (Wis., May, 1919.)

98. In making a detailed audit, what procedure would you follow to
verify the advances to salesmen? (Kan., Dec, 1915; Mo., Dec, 1915.)

99. Would you consider it proper under any circumstances for a com-
pany to treat all or any of its advertising expenses incurred during the
year as an asset for the purpose of its annual accounts to be submitted
to the stockholders? In your answer state fully the grounds for your
views and explain how you would recommend such expenses should be
dealt with. (N. Y., June, 1908*; 111., May, 1914; Ind., June, 1916.)

100. In closing the books of a company at the end of its first fiscal
year, how would you treat advertising booklets on hand, estimated to last
another year? (Mass., Oct., 1917.)

101. State what is indicated by the Commission account (a) when the
account shows a debit balance, (b) when the account shows a credit bal-
ance. Explain fully. (N. Y., Jan., 1900.)

102. What in your opinion is the proper treatment of the unpaid com-
missions to salesmen in arriving at the profit or loss of a business for a
specific fiscal period? (Ohio, Dec, 1908.)

103. Would you consider it proper to include as an asset the advertis-
ing expenses? (N. Y., Jan., 1897.)

Discounts

104. Explain the various kinds of discounts found in the business
world and the methods by which they should be distinguished in the books
of account. (Fla., July, 1909*; Mich., June, 1913.)

105. Define: Trade discount. (Ill, May, 1908; Va., Nov., 1910; Iowa,
Dec, 1918.)

106. Classify: Trade discount. (Iowa, Dec, 1918.)

107. State how trade discount is used on a Profit and Loss statement
or Balance Sheet, also its classification. (Iowa, Dec, 1918.)

108. Define: Cash discount. (111., May, 1908; Va., Nov., 1910; Iowa,
Dec, 1918.)

109. State two methods of considering merchandise discount. Give
reasons for your preference. (N, D., June, 1914.)

110. State how cash discount is used in a Profit and Loss statement or
Balance Sheet, also its classification. (Iowa, Dec, 1918.)

256 C. P. A. ACCOUNTING

111. (a) State three methods of treating commercial cash discounts,
(b) Sketch sufficient rulings of Purchase and Cash Book to show the
use of each method, respectively. (Wis., May, 1916.)

112. Give your opinion regarding the following, and reasons : Should
ordinary discount of 2y2 per cent a month be considered as a trade or a
time discount? (Mich., June, 1908.)

113. In a given trade goods are purchased on terms of 5 per cent dis-
count for cash in ten days or net thirty days. In certifying a Balance
Sheet in this trade how would you deal with the question of this discount
in stating the value of the inventoi-y of merchandise on hand? Give reason
for the treatment you would advocate. (Pa., Nov., 1911.)

114. Describe the system of running a discount column in the Cash
Book and show how the entries are made both in the General Ledger and
in the Subsidiary Ledger. (N. Y., Oct., 1907.)

115. To what extent should an auditor hold himself responsible for the
correctnes.s of discounts? (N. Y., Dec., 1896; Va., Nov., 1910; Mich.,
June, 1912.)

116. In passing upon discounts, how would you state them in reports?
(111., May, 1905.)

117. State what means should be adopted to verify: (a) Discounts Al-
lowed, (b) Discounts Received. (N. Y., Jan., 1901*; Mass., June, 1910;
Mich., June, 1912.*)

118. How should cash discounts on purchases be treated? (N. Y.,
June, 1902*; Ohio, Nov., 1918.)

119. Assuming that all cash discounts on purchases made during the
year have been taken advantage of, and the Ledger account shows a
substantial credit, to what account would you close the balance? In the
case of a jobbing concern? Of a manufacturer? (111., Dec, 1907; Mich.,
June, 1912*; Ind., Nov., 1918.)

120. Classify Cash Discounts on Merchandise Sales and on Mer-
chandise Purchases according to the subdivision of assets, liabilities, pro-
prietary interest, income and expenses under which they should be
grouped. (N. Y., Jan., 1897*; N. Y., June, 1908*; N. Y., Jan., 1919*;
Wis., May, 1919; N. Y., Jan., 1920.*)

121. In auditing department store "A," you find that cash discounts on
purchases are regularly deducted from invoices when they are entered in
the books, while in store "B," the invoices are entered in full and the dis-
counts are credited to a discount account as and when received. Discuss
the relative advantages and disadvantages of the two methods, and state
what variations, if any, would occur in the valuing of inventories under
the two methods. (A. L of A., May, 1920.)

122. In preparing the Balance Sheet of a business at the close of a
year, how should you treat Discount on Accounts Pavable? (Mich., June,
1908*; Mass., Jime, 1910.)

TRADING ACCOUNTS 257

123. What is the proper treatment of Cash Discounts on Sales?
(Ohio, March, 1910*; Ohio, Nov., 1918.*)

124. Should provision be made out of revenue to provide for Discount
on Accounts Receivable outstanding after the date of closing? Give
reasons for your answer. (N. Y., Jan., 1904.)

125. In preparing the Balance Sheet of a business at the close of a
year, how should you treat Discount on Accounts Receivable? (Mass.,
June, 1910.)

126. A manufacturing company buys its material on 30 days' credit, or
5 per cent cash discount if paid in 10 days. In order to take advantage of
the cash discount, the company borrows money from the bank at 3 per
cent. How should this discount and interest be treated on the books of
the company? (N. Y., Jan., 1918.)

127. A corporation sells all of its manufactured product at 5 per cent
10 days, 3 per cent 30 days, or net 60 days. In making the annual audit
you find that ninety per cent of the concern's customers take one of the
two discounts. What provision would you think desirable to make to pro-
vide for the discounts that will be taken in the period next to the one
under audit? Give arguments for or against such provision. (N. D., July,
1918.)

Sales

128. Under instructions calling for a complete audit and verification of
all entries, what supporting data w^ould you require for Sales? (Ohio,
March, 1910; Va., Nov., 1918*; Ohio, Oct., 1919.*)

129. State how you would verify the Sales. (N. Y., Jan., 1901;
Mass., June, 1910; Va., Nov., 1910.)

130. How would you discover and subsequently prevent defalcations
when a shipping clerk and driver steal merchandise ostensibly sent to
customers? (Cal, May, 1916.)

131. How would you discover and subsequently prevent defalcations
when the manager and cashier of a manufacturing plant in collusion de-
stroy original orders, fail to enter bills against customers in regular books,
and keep returns on same when made? (Cal., June, 1917.)

132. A firm of export merchants desires a thorough investigation of
the past year's transactions, having reason to suspect fraud. State con-
cisely upon what lines you would proceed to satisfy yourself that : (a)
Goods had been taken out of the store on bond in the way shown by the
books; (b) they had been shipped to account of proper consignee; (c)
that no goods had been removed without being charged; (d) that no ficti-
tious entries had been made in the books. (Wash., Aug., 1908.)

133. Sales aggregating $25,000 were entered on the books as at Decem-
ber 31, 1915, but the goods were not all delivered until January 25, 1916.
Indicate what adjustments you would make of the books or of the ac-
counts for the purpose of statement on the Balance Sheet. Give Journal
entries. (111., May,' 1916.)

258 C. P. A. ACCOUNTING

134. If in auditin.af the accoiin(s of a manufacturing corporation you
found that certain orders booked for jiroducts to be manufactured subse-
quent to llie closinc: period, had nevertheless been entered upon the books
as actual sales, how would you treat such entries in the sales record?
(N. Y., June, 1919.)

135. Upon the audit of the partnership accounts of a manufacturing
business the followinjr condition is revealed. Sales toward the end of
tlie period are unusually larije. What would you deduce from this fact
and what would you feel called upon to do? (Kan., May, 191G.)

136. What means should be employed to detect the willful omission to
enter in the books under audit sales made? (X. Y., Dec, 1S96.)

137. A bookkeeper of a manufacturing: concern fails to make all
the proper charges of time sales. No order book was kept. He retains
$1,200 to $1,500 yearly for five years of payments received on account of
tune sales by cashing the checks received in due course out of the cash
drawer, and deposits of said cheeks regularly in the firm's bank account,
properly endorsed by the firm. How would you detect this? (Md., Jan.,
1909.) '

138. How would you require manufactured goods, shipped to customer
for sale to them, as and when used by them, to be statetl in a Balance
Sheet you are asked to certify? How would you ascertain that all goods
so shipped come under your notice? (111., Dec, 1916.)

139. "A" operates a five and ten cent cash store and for the purpose
of selling out the strength of large profits shown in the books, makes false
entries increasing the sales and corresponding entries on the disburse-
ment side of the Cash Book purporting to represent withdrawals. The
records by which the sales might be verified are destroye<l. "A" makes a
proposition to "B" to sell the business and gives statements drawn from
the books showing the profits of the business. "B" engages a certified
public accountant to make an examination, who discovei-s the fraud.

How and by what procedure could he discover the fraud?

(Mass., Oct., 1916.)

140. A house sraids out many goods on approval and treats the transac-
tions as sales. How should such items be treated by the auditor when set-
ting up statements for the period? (N. Y., Jan., 1904.)

141. Illustrate how to handle goods sent out for sale or return. (Mich.,
June, 1919.)

142. A firm is in the habit of supplying goods on the principle of sale
or return, taking payments by installments covering principal and interest,
the purchaser having the option to return the goods at any time, forfeiting
the installments paid. How would you recommend that such conditional
sales should be entered in the books of the selling firm, and how should
the outstanding amounts be from time to time valued? (111., Dec, 1910.)

143. A manufacturer disposes of a special machine, partly by direct
sales to customers and partly by lease with the provision that it may later

TRADING ACCOUNTS 259

be pnreliased. If a customer takes advantage of this provision, the pay-
ment made on the machine from the date of the lease may be applied as a
reduction of the purchase price.

Prepare Journal entries supplying figures showing the necessary ac-
counts for recording the sale and lease transactions of this business.

(Mass., Oct., 1916.)

144. Suggest a plan whereby a department store might adequately
counts for recording the sale and lease transactions of this business,
submit forms. (N. Y., Jan., 1914.)

145. Explain fully transaction involving the sale of a piano on what
is termed an installment lease. Explain how you would handle this on
the books and records from time the transaction is entered into until
completed. (Pa., Nov., 1918.)

146. In the audit of the books of an installment merchandise dealer,
in what particular would you examine the books that would not be neces-
sary in other classes of business? (N. C, June, 1919; N. C, Nov., 1919.)

147. On certain lines of business (e.g., real estate companies, sewing
machine agencies, retail furniture houses) a large proportion of the sales
is made on the installment plan, and at the close of any period a large
number of such transactions may be uncompleted. How should the
profits from such uncompleted sales be treated in the Balance Sheet?
(Fla., July, 1909.)

148. A concern located in a village and employing 400 people, fur-
nishes them with coal, wood and ice at cost, collecting for same in weekly
installments. Describe the best method of keeping the accounts. (Mass.,
June, 1913.)

149. You have been called upon to audit the books of a furniture com-
pany which sells on the installment plan. The books have been closed
when you reach the office, and you are handed a completed Profit and
Loss account and Balance Sheet. The company has been in business one
year only.

On investigation you find that all installment sales are credited to an
account designated "Installment Sales." A controlling account and sub-
ledger are kept for the installment customers.

You find that the total of the installment sales has been credited to
"Installment Sales" account, which has been closed into Profit and Loss.

All accounts, installment and otherwise, that were known to be uncol-
lectible have been charged off. There ai'e no reserves against balances
due from customers on the books.

What criticisms or corrections have you to suggest as to the correctness
or otherwise of the Balance Sheet and Profit and Loss statement handed
to you?

(A. I. of A., May, 1920.)

150. (o) Of the total sales of the X Company, a considerable por-
tion is made on approval for 5, 10, or 30 days, according to the com-
modity. If unsatisfactory, the articles may be returned within the

260 C. P. A. ACCOUNTING

specified time. State how such sales should be treated in the following:
(1) books of original entry, (2) ledgers, (3) revenue account, (4) Balance
Sheet.

(b) Retui-nable packages are charged to customers at a price in
excess of cost. State how such items should be treated at time of sale
and of return, in the following: (1) books of original entry, (2) cus-
tomers' accounts, (3) revenue account, (4) Balance Sheet.

(Wis., May, 1916.)

151. A retail bookstore agrees to deliver certain sets of books at $20,
on payment of $2 down, the purchaser agreeing to make $3 payments for
each of the six months next following. It is expected that sales on this
plan will aggregate several hundred sets. Suggest a method of keeping
the accounts, so that results may be readily shown. (N. Y., June, 1902.)

152. A furniture installment dealer made a sale on installments,
amounting to $200, which was double the cost. During the year install-
ments were collected amounting to $50. During the second year no in-
stallments were collected, but goods were repossessed which were un-
damaged. Journalize the transactions. (N. C, June, 1919.)

153. The Western Farm Machinery Company sells its product to farm-
ers on three years' credit, payable in three equal annual installments. The
cost of production for one year is $10,987,600; sales, $13,210,900; selling
and administration exjienses, $223,300, including all contingencies. Find
an equitable method of stating profits for the year. (N. Y., Jan.. 1914;
N. Y., June, 1917.*)

TRADING ACCOUNTS

201

PROBLEMS

TRADING ACCX)UNTS

JONES MANUFACTURING COMPANY
Trial Balance, December 31, 1913 (Before Closing)

Credits

Accounts Payable

Accounts Receivable

Capital Stock

Cash in Banks

Commissions

Depreciation

Discount on Sales

Discount on Purchases

Finished Product (Inventory at December 31,

1912)

Freight Inward

Freight Outward

Factory Expense

Insurance

Interest

Labor

Machinery and Equipment

Material Purchased

Material Inventory (at December 31, 1912) . . .

Notes Payable

Office and Selling Expenses

Petty Cash

Prepaid Taxes

Prepaid Interest

Power

Reserve for Depreciation

Repairs

Rent

Salaries

Sales

Supplies

Surplus

Taxes

Traveling Expenses

Unexpired Insurance

Work in process (Inventory December 31, 1912)

$42,739.66

3,706.82

7,750.71

12,067.30

4,986.22

110,630.84

4,709.81

3,542.39

52,796.57

5,372.90

3,850.00

179,473.82

120,672.96

158,691.26

10,786.90

14,790.82

150.00

672.80

375.00

7,500.00

5,281.76
15,000.00
32,250.00

6,872.90

2,937.50

4,836.24

6,821.16

53,689.39

$872,955.73

$22,560.71
150,000.00

6,792.40

60,000.00

20,978.23

570,478.31
42,146.08

$872,955.73

262

C. P. A. ACCOUNTING

Inventories at December 31, 1913, are: Material, $9,877.44; work in
process, $56,091.29; finished product, $71,170.10.

From the above trial balance and facts prepare: (a) Balance Sheet, De-
cember 31, 1913; (b) statement showing cost of manufacture and goods
sold; (c) Profit and Loss account. Importance will be attached to the
form and classification of these statements in marking answers.

(Mass., Oct., 1914.)

2. From the following trial balance of the A. B. Stevens Manufacturing
Co. prepare a Balance Sheet at December 31, 1915, and a statement of
profits for the year.

Accounts Payable

Accounts Receivable

Accrued Taxes

Advertising

Allowances

Capital Stock

Cash

Depreciation of Equipment

Discount on Sales

Discounts Received

Electricity

Factory Supplies and Expenses

Freight of Purchases

Income from Bonds

Insurance

Interest Paid

Inventory December 31, 1914

Investment in Bonds

Notes Payable, secured by deposit of $15,000 of

Bonds

Office Expenses

Out Freight

Plant and Equipment

Purchases

Rent

Repair Parts

Return Sales

Salaries, Office and Officers

Salaries, Salesmen

Salaries, Shipping Department

Salary, Superintendent

Sales

Salesmen's Expenses

Sales of Waste

Surplus

Taxes

Unexpired Insurance

Wages in Factory

D(bits

$70,000

3,000
2,200

15,000
3,500
3,100

1,300
3,600
9,000

300

50,000

15,000

900
8,500

40,000

100,000

2,500

1,100

1,000

10,000
6,000
1,500
2,000

2,100

400

800

15,000

$368,100

Credits

$15,000
1,200

100,000
1,800
1,000

10,000

200,300

1,200
37,600

$368,100

The inventory at December 31, 1915, amounted to .+45,000.

(111., Dec, 1916.)

TRADING ACCOUNTS 263

3. Smith, Hill and Davis form a ])aitiiei>liii) under an airreement that
Smith is to have a salary of $200 ; Hill, $150 ; and Davis, $100 a month,
respectively. The profits are to be divided in proportion to the amount
of business secured by each partner. The partners are to be individually
responsible for any direct losses arising from their own business.

They are in business nine months, at the end of which time their books
state as follows: Smith's sales, $5,310; Hill's sales, $3,100; Davis' sales,
$3,200; net profits, $2,468.50.

They then decide to rescind the salary agreement, treating any salary
drawn as an advance, but otherwise to divide the profits according to the
original arrangement.

You find errors during the nine months* period, namely : office furniture,
charged to operation, $65; funds lent by Davis, credited to his salary
account, $400 ; and open items not entered on the books as follows : Smith's
salary (ninth month), $200; Hill's salary (ninth month), $150; advertis-
ing, $27.50 ; clerk hire, $130 ; telephone, $6 ; rent, $50 ; stationery, $15 ; ac-
counts receivable. Smith's business, uncollectible, $210; and that the
sales represent a gross profit of 100 per cent over cost of merchandise.

State the Journal entries necessary to readjust the accounts and prepare
a corrected Profit and Loss account and a statement of the distribution of
the profits.

(Va., Nov., 1910*; A. I. of A., May, 1918.)

4. "A" and "B" were copartners, sharing equally the net profits of
the business ; "B" had exclusive charge of the business and of the accounts
of the firm, with duty of furnishing to "A" at the close of each year a
statement of the condition of the firm's accounts, together with details
of the Profit and Loss account for the year.

According to statements rendered by "B" for the years 1900, 1901, 1902,
the following conditions of account appeared :

On January 1, 1900, "A's" capital account was $135,000 and the in-
ventory amounted to $175,000 ; the purchases during the year were $950,000,
the sales were $1,175,000, expenses were $110,000, and the inventory,
December 31, amounted to $160,000.

For the year 1901 the inventory, January 1, was $160,000, the purchases
were $875,000, the sales were $1,180,000, the expenses were $125,000, and
the inventory, December 31, amounted to $150,000.

For the year 1902 the inventory, January 1, was $150,000, the purchases
were $910,000, the sales were $1,210,000, the expenses were $130,000, and
the inventory, December 31, amounted to $110,000.

"A" had an examination made of the books, and the following irregu-
larities in the accounts were thereby discovered :

(1) There were included in the sales for 1902 goods at an estimated
cost of $20,000, which fonned no part of the inventories or purchases.

(2) Goods were omitted from the inventories of the several years as
follows: January 1, 1901, valued at $30,000; January 1, 1902, valued at
$50,000 ; January 1, 1903, valued at $50,000.

State "A's" Capital account for the several years as it would appear

264

C. P. A. ACCOUNTING

from the statements rendered by "B" and determine and state what modi-
fication of it will result from a correction of the above irregularities, giving
the correct amount of his capital for each year.

Give details of process by which you reach your results.

(Pa., May, 1905; Wash., Sept., 1907.)

5. The board of directors of the "X," "Y," "Z" Company removed their
manager on April 30, 1915, on the general suspicion that his books mis-
represented the true financial condition of the business. Prepare a state-
ment showing the nature and probable extent of his misrepresentation,
also an approximate Statement of the Profit and Loss for the four months
ending April 30, 1915, and a Balance Sheet as of April 30, 1915.

The following is a trial balance taken from the books April 30, 1915 :

Capital Stock

Fixtures

Inventory, Januarv 1, 1915

Cash

Accounts Receivable

Accounts Payable

Loans Payable

Sales

Purchases

Salaries, Salesmen

Advertising

Salaries, Office

Rent

Interest

Insurance, January 1 to December 31, 1915

Stationery and Printing

Reserve for Depreciation of Fixtures

Surplus, January 1, 1915

$10,000

128,600
15,450
24,600

40,700

2,200

1,650

1,100

400

200

999

105

$226,004

$75,000

39,000
10,000
51,000

2,710
48,294

$226,004

An analysis of the Purchases and Sales accounts revealed the follow-
ing: purchases, year 1912, $122,000; sales, year 1912, $153,750; inventory,
January 1, 1912, $101,000; purchases, year 1913, $123,000; sales, year

1913, $153,170; inventory, January 1, 1913, $100,000; purchases, year

1914, $121,000; sales, year 1914, $154,722; inventorv, Januarv 1. 1914,
$102,000. (N. Y., Jan^, 1915.)

6. The Good Music Company sells pianos on the installment basis.

On January 2, 1914, Jones purchases a piano from the company for
$375, to be paid for as follows : $25 down and the balance in quarterly in-
stallments of $50 each, bill of sale to be given on date of final payment.
The piano cost the company $125. The four installments for 1914 were
duly received, the last having been paid on December 31.

(o) Set up the proper Ledger accounts covering this sale and the
payments thereon.

(b) Give the Journal entry (at the close of the year) by which the
year will be credited with its proper proportion of the profit on this
transaction. (Wis., April, 1915.)

TRADING ACCOUNTS

265

7. From the following data (a) prepare one Trading account for the
years 1916 and 1917, stating the gross profit for the two years; (h) pre-
pare a Trading account with estimated inventory for 1918:

Sales 1916 $290,696 .81

Sales 1917 292,548.21

Purchases 1916 241,709 .33

Purchases 1917 253,791 .95

Sales discounted 1916 . . . 1,238 .55

Sales discounted 1917 . . . 1,955 .26

Freight in 1916 3,384 .35

Freight in 1917 4,094 .70

Inventory Jan. 1, 1916 . . 63,784.78

Inventory Dec. 31, 1917. 107,317.80

Sales nominal $493,476.87

Sales in carload lots 39,351 .68

Return sales 15,304 .58

Sales discounts 4,267 .30

Purchases 443,685 . 15

Freight in 6,211.53

Gross gain on carload lots . 1,956.42

(N. Y., June, 1919.)

8. The office of a firm of traders, doing business in San Francisco,
was destroyed by an earthquake. The books of account, which had been
fully posted, were badly damaged. The following Ledger accounts were
found to be legible: Purchases, net, $69,000; Discounts lost, $640; Dis-
counts gained, $3,450; Sales, $54,000; Bills Receivable, $33,000.

Inquiry at the bank disclosed a balance on deposit, $129,000. Bills
receivable amounting to $45,000 had been discounted at the bank. An
audit of the checks paid by the bank showed that $99,000 had been paid
creditors (including $60,000 notes payable).

A Balance Sheet prepared at the last closing of the books was produced
containing the following items : Cash, $60,000 ; Accounts Receivable, $126,-
000; Loans Receivable, $24,000; Real Estate, $90,000; Notes Receivable,
$78,000 ; Capital, $318,000 ; Notes Payable, $60,000.

Prepare a trial balance supplying the missing accounts.

(N. Y., June, 1915.)

CHAPTER XIV
INSURANCE AND GENERAL EXPENSE

Unexpired Insurance — As fire in.surance premiums are paid in advance
for services extending over a duration of time, unexpired insurance is a
deferred charge to income.* In case of cancellation of a policy, the pre-
mium for the period when the insurance was in force would he figured upon
a "short rate," which is considerably higher than the usual rate, and the
excess of the unexpired actual premium over this "short rate" premium
would be returned by the insurance company.^ For financial statement
purposes unexpired insurance is valued on the pro rata basis, except in
case of bankruptcy or in the statement of affairs, when the "short rate"
basis would apply.'

In the case of a fire, that proportion of the imexpired insurance, which
will represent the ratio of the amount of the settlement made by the insur-
ance company to the face of the policy, should be charged ott" to the fire
loss account.*

In order to include insurance in monthly statements, it is advisable to
debit unexpired insurance or prepaid insurance Avhen the premiums are
paid, and then to write that account off to expense (or insurance) monthly."

Fire Insurance Register — "When there are numerous insurance policies,
an insurance register may be used, which will record the policy numbers,
names of companies, dates of policies, dates of expiration, natui'e and
amount of insurance, and amounts of premiums.' The insurance register
contains twelve columns in which the insurance expense applicable to each
month is recorded.' The use of an insurance register greatly aids the
auditor in verifjdng the unexpired insurance.*

Beserve for Insurance — If a large firm desires to carry its own insurance,
it makes an annual charge, equivalent perhaps to regular insurance pre-
miums, to profit and loss, and credits a reserve for insurance.' Any fire
losses would be written against this reserve." In case of liquidation, the
reserve is a part of profits,'*^ but going concerns must maintain the reserve,
although they should show it on the balance sheet as a surplus reserve.
If the reserve increases until it is out of proportion to the fire risk, it may
be written down directly into surplus." Frequently the insurance reserve
is funded in order to insure the possession of liquid assets in case of a fire."

Audit of Fire Insurance — The auditor should call for all fire insurance
policies for the purpose of assuring himself that adequate insurance is
carried" and that the policies are in the company's name." The policies

'For explanation of superior figures see page 337.

266

INSURANCE AND GENERAL EXPENSE 267

will also furnish additional proof of the properties not having been
hypothecated." The auditor should examine the coinsurance and other
restrictive clauses of the policies." All canceled policies should be noted
and the return premium verified." If no register is kept, a detailed
schedule of unexpired policies should be prepared." The auditor should
ascertain that the policies properly describe and locate the insured prop-
erty, and that mortgage clauses are attached, if the property is mortgaged.**
Coinsurance Clause — An 80% coinsurance clause, sometimes called the
average clause, makes the insured a coinsurer with the insurance company
for the difference between 80% of the cash value of the property and the
face of the policy." Let "P" represent the face of the policy; "L," the
amount of the loss; "C," the cash value of the pi'operty; and "A," the
amount that may be recovered from the insurance company; then, in
accordance with the provisions of the coinsurance clause,"

.8C

In using this formula, it must be borne in mind that the insurance company
is never liable for more than the face of the policy."

Fire Losses — After a fire, a fire loss account should be charged with the
full amount of the loss, including related expenses and canceled unexpired
insurance, and credited with the allowance made by the insurance com-
pany." The balance of the account represents the net loss or gain due to
the fire and should be closed directly into surplus.*"

Depreciation accruing from close of last fiscal period to date of fire
should be debited to the depreciation expense account and credited to the
related asset account.*' The portion of the depreciation reserve applicable
to the destroyed asset should be written off to the related asset account,
and then the balance of the asset account should be closed into the fire
loss account." A point in theory, usually disregarded in practice, is to
adjust any difference between the book value and the valuation allowed
by the insurance company directly to surplus as an item occasioned by
faulty depreciation allowances in foi'mer periods.**

When perpetual inventories are not maintained, losses in merchandise
are estimated on the assumption that the gross profit for the period in
which the fire occurred would be the same percentage as normal.*' The
procedure is that used in the "gross profit check" on inventories (see
page 244).

Marine Insurance — Professor Solomon S. Huebner in "Property Insur-
ance" states that the law of general average covers all those losses which
result from the sacrifice of any interest voluntarily and deliberately made
by the master of a vessel in time of distress for the common safety of the
ship, cargo, and freight. Such losses must be repaid proportionately by
all the parties benefited. Assuming a loss of $5,000 when the ship, cargo,
and freight were valued at $50,000, $25,000, and $1,000, respectively, the
loss would be borne in the ratio 50:25:1. It will be noted that jettisoned

268 C. P. A. ACCOUNTING

property bears its share along with the saved property. An insurance
company pays such losses in the proportion which the insured value of
the property bears to its contributory value.

Life Insurance — Premiums on straight life insurance policies of which
the firm is the beneficiary may be capitalized at their cash surrender value,^
the excess of the premiums over the increase in the cash surrender value of
the policies being charged to operating expense." In case of the death of
the insured, the surrender value account would be closed and the excess
of the payment over the surrender value would be credited to surplus."

Employers' Liability Insurance — All premiums paid to insurance com-
panies for insurance against claims for damages for injimes to employees
are proper charges to factory burden.^' As the premiums are paid in ad-
vance, the unexpired insurance must be shown as an asset at the end of
a fiscal period.'^ The auditor should secure a statement from the firm's
attorney's as to pending claims and suits, and should provide reserves for
possible liabilities.^

Burglary Insurance — Premiums for burglary insurance are charged to
factory burden or administrative expense, depending on whether the
property so safeguarded belonged to the manufacturing or sales branch of
the business. Premiums paid for the bonding of employees are usually
regarded as administrative expense.^

Accrued and Prepaid Wages — An auditor must ascei'tain that the ac-
crued wages at both the beginning and end of the fiscal period are reflected
in the accounts." Under ordinary conditions, accrued wages are calculated
on the fractional basis rather than by reference to each individual time
card." Prepayments of wages are current assets, but, although they are
personal accounts, they must not be included among the accounts re-
ceivable."

Payroll Book — The payroll book is a subsidiary book to the general
cash book, containing the names of employees and the payments made to
each.*" In its form and content there is little uniformity. Sometimes it
lists all the employees," and sometimes it omits those working for wages."
It may or may not contain the signatures of the employees for each pay-
ment." The pajToll book is sometimes merely a memorandum record, and
sometimes a book of original entry."

Audit of Payroll — The extent of an audit of the payrolls depends on the
system of internal check," a subject treated in Chapter I. The auditor
should call for all the payrolls, which should be signed by the officials
responsible therefor." Unsigned payrolls should be carefully compared
with those signed. When salaries are paid by checks, the pa\Toll book
should be thoroughly tested with the canceled checks.*' The auditor should
verify the footings of the payroll book of, say, every third week."* Where
employment cards are kept, they should be used to vouch the payrolls."
Accrued wages must be verified." The auditor should suggest all needed
improvements in the payroll system."^ Officers' salaries should be verified
from the directors' minutes.""

INSURANCE AND GENERAL EXPENSE 269

Insurance, Bent, and Taxes as Costs — Most accountants hold that ex-
penses incurred for insurance, rent, and taxes should be prorated between
factory expense and administrative expense in proportion to the capital
invested in the factory and office departments." Others view insurance
and taxes as payments made for the protection of capital, and rent as an
expense due to lack of capital, and therefore treat them as non-operating
expenses."

Income and excess profits taxes are levied on the assumption that the
government is a partner in the business, i. e., that the government shares
in the profits in return for benefits conferred on the business by the gov-
ernment.'° They should, therefore, be charged directly to surplus^* and
shown in the appropriation of profits section of the profit and loss state-
ment." This procedure is not universally followed, for income taxes are
sometimes seen classed as administrative expense'* and sometimes as
financial expense.'"

Assessment taxes for improvements are not expenses but outlays in-
creasing the value of the property taxed, and they should, therefore, be
charged to the related asset account.'"

Rent as Income — When rent is received on property owned, it is non-
operating income;"* but if the I'ent-bearing property is a part of property
which the firm itself is leasing, the rent received may be deducted from the
rent paid/^ or the rent paid may be allocated to operating or non-operating
expense, and all of the rent received treated as non-operating income.*"
The latter procedure gives the truer costs.

Postage — In most audits, postage is unimportant financially, but, as it
is a fi'equent source of petty theft, the auditor should scrutinize carefully
the paj^ments for postage, and, if possible, suggest safeguards which will
reduce the future losses and at the same time remove a source of serious
temptation to junior clerks." Postage is usually treated as a general and
administrative expense," although it may be allocated to the various de-
partments of the business.

Donations — Donations, from which an indirect benefit is not expected,
should be charged directly to surplus and shown in the appropriation of
profits section of the profit and loss statement,^ but donations incurring
indirect benefits are administrative expenses."

Adjustment Entries — Entries required to bring the ledger into accord
with actual facts ai*e called adjustment entries."* There are five kinds of
adjustment entries, namely, those pertaining to (a) merchandise inven-
tories, (b) valuation reserves, (c) deferred assets and liabilities, (d) ac-
crued assets and liabilities, and (e) the correction of errors.

Closing Entries — Closing entries are those made for the purpose of
closing the nominal accounts into the vested proprietorship accounts.**
Some accountants use the manufacturing and trading accounts in addition
to the profit and loss account,'" a practice which seems inadvisable as the
modern use of analytical statements makes the opening of manufacturing
and trading accounts unnecessary. Some accountants close the subsidiary

270 C. P. A. ACCOUNTING

sales and subsidiary purchase accounts into the sales account and purchase
account, respectively, before closing these accounts into the profit and loss
account.'* Other accountants close all nominal accounts directly into profit
and loss," a short-cut which seems warranted by the fact that the analysis
of accounts is usually studied from the financial statements instead of from
the ledger.

Accountants prefer the journal method of closing to the direct or "red
ink" method because it gives a complete record of transfers in the books of
original entry," and because it collects all the closing entries in one place.'*

The auditor should examine the closing entries in order to prevent a
misstatement of income."

INSURANCE AND GENERAL EXPENSE 271

QUESTIONS

insurance and general expense

Fire Insurance

1. In preparing a statement of the cost of making the product would
you include as cost, expenses of the fire insurance premiums on the fire
policies eoverins: the plant? State your reason. (N. C, June, 1919;
N. C, Sept., 1919.)

2. In order to facilitate the preparation of monthly Profit and Loss
statements by a corporation, how would you recommend insurance to be
treated on its books from month to month? (Wash., April, 1906.)

3. State what is indicated by the Insurance account (a) when the
account shows a debit balance, {b) when the account shows a credit bal-
ance. Explain fully. (N. Y., Jan., 1900.)

4. What in your opinion is the proper treatment of the Unexpired
Insurance Premiums account, in arriving at the profit and loss of a busi-
ness for a specific fiscal period? (Ohio, Dec., 1908; Mass., June, 1910.*)

5. On which side of the Ledger should the balance on the Insuranct.
Premiums Unexpired account appear? (Mo., Dec, 1914.)

6. Would you consider it proper to include Insurance Premium Un-
earned as an asset? Explain briefly and give reasons. (N. Y., Jan., 1897;
N. Y., June, 1908.)

7. How would you treat insurance premiums paid in advance, if clos-
ing the books at a certain period, with a view to ascertaining the loss or
gain? (N. J., 1904-1909.)

8. Classify the following account : Prepaid Insurance. (Mass., April,
1911*; Mass., June, 1912*; Iowa, Dec, 1918.)

9. A concern owning a fleet of twenty vessels decides to carry its own
insurance. How will this be dealt with on the books, and what entries
would you make at the close of each fiscal vear? (111., May, 1904; Cal.,
Nov., 191C.*)

To. A corporation invests its capital in a number of subsidiary com-
panies, each subsidiary company having a distinct organization, but its
dividends being payable to the parent company. The parent company
decides to carry insurance for all the subsidiai-y companies and each pays
in to the parent company monthly a specific sum. Fire losses as in-
curred are payable by the parent company. How are such entries treated
and what should the books show ; also, what entries are necessary at close
of fiscal years? (Mich., Dec, 1900.)

272 C. P. A. ACCOUNTING

11. The Insurance account as kept upon the books of the Good Mer-
chandise Company is charged witli the premiums paid on the following
kinds of insurance: Fire insurance on buildings, merchandise and fix-
tures; sprinkler leakage; employer's guarantee bond; safe burglary; rob-
bery and hold-up; automobile fire; theft and liability; general liability;
elevator liability; steam boiler; tornado; plate glass; use and occupancy;
insurance on officers' lives.

You are asked to indicate the proper treatment to be given each of the
above items; i.e., indicate the name of the account or accounts to which
they should be charged, give the adjusting entries, state the section of the
revenue account or income statement in which each would appear, etc.

(Wis., Nov., 1919.)

12. A certain concern decides that instead of paying insurance pre-
miums it will establish its own insurance fund, depositing therein an
amount equal to the premiums which it would otherwise have paid. The
iasurance fund is invested in certificates of deposit bearing 3 per cent
interest.

Using imaginary figures, construct (a) Journal entries covering the
insurance fund transactions as above described for one year; and (b)
the Journal entries required in the event of a fire loss which the said fund
does not fully cover. (Wash., May, 1910.)

13. Give some reasons why the professional auditor should, under
present-day conditions, give even more attention than in the past to in-
surance carried. (A. I. of A., May, 1920.)

14. A corporation manufacturing explosives was compelled to pay
exorbitant rates for a very limited amount of insurance, and in conse-
quence was obliged to install an automatic sprinkler system at a cost of
$75,000. This additional fire protection enabled it to secure a full line
of insurance, though in mutual companies and at a much lower rate than
was obtainable prior to such installation. At the end of the fiscal year
the company received dividends from these mutual insurance companies
aggregating $2,000. To what account should the cost of the sprinkler
system be charged and to what account should this dividend be credited?
State your reasons fully. (N. Y., June, 1915; N. Y., Jan., 1920.*)

15. Assuming that you are a certified public accountant and employed
as auditor by a corporation, state what you would consider it your duty
to do in order to safeguard your clients regarding the fire insurance that
they carry on their stock of merchandise. (N. Y., June, 1912; N. Y.,
June, 1915.)

16. What notice, if any, should an auditor take of the fact that the
client has, at risk of loss by fire, property on which no insurance is car-
ried?

What is the duty of an auditor to his clients regarding the amount of
insurance that they carry on their stock of merchandise?

(Wis., April, 1915.)

17. Define: Coinsurance. (Wis., May, 1916; A. I. of A., May, 1921.) .

INSURANCE AND GENERAL EXPENSE 273

18. Describe the practical application of the coinsurance clause. (Pa.,
Mny, 1906; Mich., July, 1909.*)

19. Describe the practical application of (a) the average clause; (&)
the three-fourths value clause; (c) the three-fourths loss clause; (d) the
use and occupancy form, in the insurance business. (Mich., July, 1909.)

20. A company shows among its assets $2,675 as unexpired insurance
on January 1, 1907. On February 1, 1907, the plant is destroyed by fire
and a total loss of $57,875 occurs, which the insurance company pays.
How would you treat the $2,675 unexpired insurance item? (111., May,
1909; Mass., Oct., 1916.*)

21. How would you determine the loss in case of a fire if the books
had been saved but were not kept so as to show a perpetual inventory?
(Pa., May, 1900*; N. Y., June, 1902*; Pa., May, 1903*; 111., May, 1905*;
Pa., Nov., 1906*; Mich., Dec, 1906*; Wash., Aug., 1908*; Md., Jan.,
1909*; Mich., July, 1909*; 111., May, 1910*; Va., Nov., 1910*; Mass,,
June, 1913*; Mich., Dec, 1913; Mass., Oct., 1914*; Wis., April, 1915*;
Ohio, Nov., 1915*; Ind., June, 1916*; Mich., Dec, 1916*; A. I. of A.,
June, 1917*; Cal., June, 1917; Ind., May, 1918*; Md., Oct., 1919*; A. I.
of A., May, 1921.*)

22. What methods would you adopt to determine the value of stock
or merchandise on hand at an odd date in case of total loss by fire in a
manufacturing business, under each of the following several conditions:
(1) Inventories taken in detail annually on closing only? (2) Running
inventories kept on cards by quantities only, except as to work in progress
and under a system of estimating costs for finished product? (3) Run-
ning inventories kept on Ledgers according to true cost in value and
quantities, but not posted for three months back, and posting media
destroyed, through general books intact? (Mich., June, 1914.)

23. State in the form of Journal entry the following transaction : Loss
by fire of buildings, fixtures and merchandise; loss sustained by owner
over and above the insurance carried, and the amounts due and collected
from the insurance companies. (111., Nov., 1903.)

24. Draft a form of statement you would prepare to support a claim
for loss by fire which was suffered by a retail dry goods store, six months
since an inventory was taken and allowing for all depreciation, discounts,
and freights. A portion of the stock was not damaged, a portion was
damaged to some extent and the remainder was entirely destroyed.
(Wash., Aug., 1908*; Fla., July, 1909.)

25. A clothing store carries fire insurance to the amount of $30,000 on
a stock of $50,000. The policies contain the 80 per cent coinsurance
clause. State (a) the amount collectible if a partial loss of $15,000 was
suffered and (b) the amount collectible if a total loss occurred, (c) If
you believe that a merchant should carry 100 per cent insurance protection
upon his property, draft the entry or entries to record the annual insur-
ance charge. Assume that it is only necessary for him to carry 80 per
cent in outside companies to take advantage of the coinsurance clause.
(Wis., April, 1918.)

274 C. P. A. ACCOUNTING

26. What is the diflferenee, theoretieall.y, between expenditures by a
manufacturing concern for fire and burglar insurance, health and accident
insurance and watchmen? In which section of a Profit and Loss account
should each item be allocated? (N. Y., June, 1917.)

27. An audit discloses payments for insurance during a year amountino:
to $1,600, which is api3roximately a normal yearly expenditure, and the
unexpired insurance, unadjusted, amounts to $600. No account was
raised for the unexpired insurance at the beginning of the year. What
adjustment should be made on the books and how made? (Ohio, Nov..
1913.)

28. The Ledger of a manufacturing corporation contains a Fire In-
surance Fund account. The treasurer submits, for credit purposes, a
statement showing, as "Surplus Funds," the sum of the amount at the
credit of the Insurance Fund account, and of the amount at the credit of
the "Surplus" account. State (n) your comments thereon; (6) the
reasons supporting your answei*. (Mass., June, 1912.)

29. Under what circumstances would you permit the inclusion of
profits of excess amount recovered from an insurance company over the
book value of a plant destroyed by fire? (Mo., Dec, 1914.)

30. A fire in a manufacturing concern resulted in a loss on machinery,
$5,000; merchandise (raw material), $10,000; manufactured goods, $25,-
000 ; which amount of $40,000 was agreed upon and paid by the insurance
companies. Give the entries necessary to record properly the above trans-
actions on the books of the concern. (N. Y., June, 1914.)

Life Insurance

31. A corporation authorized the secureraent of life insurance of its
treasurer for $50,000 payable at death to the corporation. How should
this subject be treated in the accounts? (Mass., Oct., 1914.)

32. How would you classify the following item in the Balance Sheet
or Profit and Loss account : Premium on Life Assurance Policy on which
there is a surrender value? (Kan., Dec., 1915; Mo., Dec., 1915.)

33. A company has insured the life of its president for its own benefit,
and is carrying the amount of premium paid in its Balance Sheet. What
position would you as an auditor take in regard tp these premiums? (Ind.,
May, 1917; A.*L of A., Nov., 1917.)

34. The partnership. Black & White, has insured the lives of its
partners for equal amounts. The policies are payable to the firm. Pre-
miums have been paid for five years, (a) Show the annual entries for each
of the five years. At the end of the fifth year White dies. (6) What
would be the proper entries to make upon receij)t of the amount of the
policy? (Wis., April, 1915; Wash., June, 1915.*)

35. A firm of jobbers, Shea, Kargeau and Company, to provide against
financial strain in the event of the death of one of the partners, takes out
a joint life insurance policy for $15,000, the annual i)remium ($750) being

INSURANCE AND GENERAL EXPENSE 275

charged as a feature of the Profit and Loss account. Eight years there-
after the junior partner dies; assuming that they are equal partners, you
are called in to adjust the accounts upon receipt of the insurance money.
Explain the method you would follow. (Ill,, May, 1912.)

36. It is now becoming quite the common practice for corporations to
insure the lives of their principal officers, so that upon their deaths the
corporations may be in a measure reimbursed for their loss to the business.
In this connection you are asked to indicate what sort of entries would be
made by a company from time to time if it paid the insurance for $50,000
carried on the life of its president under the four classes of insurance
policies indicated below:

10-year renewable term policy.
20-payment life policy.
Straight life policy.
20-year endowment policy.
Also indicate what entries should be made in the books for the receipt
of the $50,000 principal, of the different classes of policies supposing the
president of the company died during, say, the fifth year of the insured
term.

(Wash., July, 1917; A. I. of A., Nov., 1920.)

Payroll

37. Classify the following accounts : (a) Payroll; (b) officers' salaries;
(c) bookkeepers' salaries. (Iowa, Dec, 1918.)

38. Define: Payroll Bank account. (Wash., July, 1917.)

39. Define: Payroll advances. (Wash., June, 1915.)

40. Classify the accounts properly recording the following items ac-
cording to the subdivision of income and expenses, assets, liabilities, pro-
prietary interest, under which they should be grouped: (a) Wages paid
workmen and office staff; (&) wages due workmen and office staff. (Wis.,
May, 1919.)

41. What plan would you suggest for minimizing the risk of fraud in
the payment of wages in a factory where large numbers of men are em-
ployed partly by piece-work and partly at fixed wages? (N. Y., June,
1899*; Pa., Nov., 1906; Mass., Oct., 1915*; Pa., Nov., 1916*; 111., Dec.,
1916.*)

42. In handling large factory payrolls, which do you consider the
better practice for the prevention of fraud, the taking of receipts from
each employee for the amounts paid or the establishment of a good system
of accounting for handling payrolls. Give reasons and explain why you
think one method is better than the other. (N. Y., Feb., 1909.)

43. Classify: Night watchman wages. (Iowa, Dec, 1918.)

44. Would you consider wages in a manufacturing concern to be a
nominal account, or, if not, how should it be classified? (Minn., Oct.,
1918.)

276 C. P. A. ACCOUNTING

45. In what section of the Balance Sheet and in what order would
you show wages? (A. I. of A., Nov., 1919.)

46. An accountant is employed to audit the personal accounts of a
retired capitalist who maintains several estates. What data is required
concerning the employees to form an important schedule of the report?
(N. Y., Jan., 1914.)

47. Give some methods used by dishonest timekeepers and foremen to
falsify records. (Pa., Nov., 1900.)

48. To what extent do you consider it necessary to verify the payrolls?
(N. Y., Dec, 1896*; Va., Nov., 1910; Mich., June. 1912*; 111., May, 1914*;
Pa., Nov., 1916.*)

49. As an auditor, to what extent would you charge yourself with re-
sponsibility for the accuracy both as to facts and figures of the wages?
(111., May, 1913.)

50. "What would you consider satisfactory evidence of the correctness
and propriety of expenditures of wages paidf (N. Y., Jan., 1899*; Pa.,
Nov., 1900*; N. Y., Jan., 1901*; Mich., June, 1915*; Wis., May, 1916*;
A. I. of A., May, 1918.)

51. In making a detailed audit, what procedure would you follow to
verify the payroll? (N. Y., June, 1897*; Wash., May, 1903*; N. Y.,
Jan., 1906*; Mich., June, 1912*; Pa., Nov., 1913*; Kan., Dec., 1915; Mo.,
Dec, 1915; Mass., Oct., 1916*; Mich., Dec, 1916*; N. C, Aug., 1917.*)

52. State how you would satisfy the correctness and regularity of an
unsigned payroll. (N. C, Jime, 1916; N. C, Nov., 1918.)

53. What evidence would you consider satisfactory for the correctness
of the salary of officers? (N. C, Nov., 1919.)

54. What would you consider satisfactory evidence of the correctness
and propriety of expenditures of salary of president? (A. I. of A., May,
1918.)

.55. The president of a corporation engaged four salesmen on a salary
and a profit-sharing basis. To one he gave 40 per cent of the profits,
to the other three, 20 per cent each. The profits of the corporation were
$102,608.18. Show proportion of profits payable to each salesman
(N. Y., June, 1919.)

Administrative Items

56. Define: Administration expense. (Mich., Dec, 1914.)

57. How would you classify Rents Collected in Advance in the Balance
Sheet or Profit and Loss account? (Kan., Dec, 1915; Mo., Dec, 1915.)

58. State what is indicated by the Rent account (a) when the account
shows a debit balance; (6) when the account shows a credit balance. Ex-
plain fully. (N. Y., Jan., 1900.)

59. The Chicago Grocery Company owns and occupies a warehouse
which cost $1,000,000. The management has decided to charge operations

INSURANCE AND GENERAL EXPENSE 277

of the various departments with an annual rental aggregating $75,000.
The accounts as finally prepared show the various departments charged
and surplus account credited with this amount. Does this transaction
meet with your approval, and why? (111., May, 1917.)

60. The Jones Manufacturing Company, needing a larger building for
its increasing business, finds a property desirable in every respect except-
ing that the building is much larger than is necessary. They lease the
property at an annual rental of $18,000, after considering that they can
probably sublease part of the building. Owing to the desirability of the
property and other favorable conditions, they execute a sublease for one-
half of the building at an annual rental of $18,000. How would you
treat these facts in compiling the annual income statement of the Jones
Manufacturing Company? (Wis., April, 1915.)

61. In making a detailed audit, what procedure would you follow to
verify Rents Collected? (Kan., Dec, 1915; Mo., Dec, 1915.)

62. In large establishments, where the outlay on postage is consider-
able, what system would you advise to prevent loss by theft? (111., May,
1904.)

63. Where would you place the Factory Office Expense account in the
Income and Profit and Loss account? (Md., Dec, 1917.)

64. What would you consider satisfactory evidence of the correctness
and propriety of expenditures of pensions paid to ex-employees? (A. I.
of A., May, 1918.)

65. What would you consider satisfactory evidence of the correctness
and propriety of expenditures of expenses of president? (A. I. of A,,
May, 1918.)

66. In what respect would you satisfy yourself of the regularity of
"Unclassified Expenses" in absence of any support other than the itemi-
zation on the voucher or check stub? (N. C, June, 1916.)

67. What information is required in respect of a full and complete
voucher for expenses incurred? (Wis., May, 1916.)

Taxes

68. Classify the following account: Taxes. (Iowa, Dec, 1918; A. I.
of A., Nov., 1919.*)

69. In order to facilitate the preparation of monthly Profit and Loss
statements by a corporation, how would you recommend Taxes to be
treated on its books from month to month? (Wash., April, 1906.)

70. Would you consider it proper to include Taxes Paid in Advance
as an asset? Explain briefly and give reasons. (N. Y., Jan., 1897; N. Y.,
June, 1908.)

71. Classify the accounts propei'ly recording the following items ac-
cording to the subdivision of assets, liabilities, proprietary interest, in-
come and expenses under which they should be grouped: (a) Property
Taxes; (&) Income and Excess Profits Taxes. (Wis., May, 1919.)

278 C. P. A. ACCOUNTING

72. "Would you advise showing profits for prospectus purposes before
or after deducting war profits and income taxes? State your reasons
briefly. (A. I. of A., Nov., 1919.)

73. Define : Accrued taxes. (Iowa, Dec., 1918.)

74. To what extent would you consider it necessary to verify the
Taxes Accrued and what reference to such vex'ifieation would you make
in your report? (Mass., June, 1913.)

75. State how Accrued Taxes are used in a Profit and Loss statement
or Balance Sheet; also state classification. (Iowa, Dec., 1918.)

76. On which side of the Ledger should the balance in the Tax Accruals
account appear? (Mo., Dec., 1914.)

77. In connection with the audit of the books of a corporation de-
scribe briefly the procedure you would consider to be essential in verifying
the Accrued Taxes. (Wash., July, 1917.)

78. You ascertain that a client owes a substantial amount for assess-
ments against local benefits. No liability therefor appears on the books.
How would you proceed to determine the amount due? How would you
reflect such amount on the Balance Sheet? (A. I. of A., Nov., 1919.)

79. Give some idea of what taxes you would charge against income
and what against surplus. Of the former, which, if any, would you take
up into manufacturing costs? (A. I. of A., Nov., 1918.)

80. In a statement of condition, requiring classification of assets and
liabilities into fixed assets, current assets, etc., in what class would you
place taxes paid, but not accrued? State reasons supporting your answer.
(Mass., June, 1912.)

81. In auditing the accounts of a corporation for the first time you
find that during prior years the federal income tax returns (which had
not been audited by the Government) were, in your opinion, inaccurate, and
that a substantial additional amount of tax is due to the Government.
Your client claims that the returns were coi'rect, having been prepared
under the advice of counsel. You believe that the client is acting in good
faith. What, if anything, would you recommend? What bearing, if any,
would the facts have upon a Balance Sheet to be certified by you? (A. I.
of A., Nov., 1919.)

Adjusting and Closing Entries

82. Define: Closmg entries. (Pa., Nov., 1900.)

83. Describe the nature and purpose of closing entries at the closing
of a fiscal period. (N. Y., Jan., 1907.)

84. State the process of closing a Ledger. (N. Y., Jan., 1897*; N. Y.,
Dec, 1898* ; N. Y., June, 1900* ; N. Y., Jan., 1901 ; N. Y., June, 1902* ;
Pa., Nov., 1903*; N. Y., Jan., 1906; N. Y., Oct., 1907; R. I., Dec., 1907*;
Iowa, Dec, 1918.*)

INSURANCE AND GENERAL EXPENSE 279

85. How should inventories be treated in closing the Ledger at the end
of a fiscal year? (N. Y., Jan., 1901.)

86. Why is property unsold credited to the account to which it belongs
before closing? (N. Y., Dec, 1898.)

87. Describe in detail the process of closing the accounts of a business
contained in Ledger "A" and transferring them to Ledger "B." (N. Y,,
Jan., 1904.)

88. In preparing annual accounts from a set of books maintained on
the double-entry system, what general rules or principles would guide you
in deciding Avhether an account should be closed by an entry debiting or
crediting Profit and Loss account, or whether the balance of an account
should be included as an item in the Balance Sheet? (111., May, 1916.)

89. In summarizing the nominal accounts of a manufacturing concern
to determine the results of operations for a period (a) what would be
the order and character of the three closing accounts? {b) What nature
of accounts form the elements of each? (c) Give your reasons. (111.,
May, 1911.)

90. How should expiring accounts, such as premiums on fire insurance,
taxes, etc., be treated? (Md., Oct., 1903.)

91. In closing a set of books at any given period, how would you treat
the different accounts therein (a) of a partnership; (b) of a corporation?
Explain fully. (Pa., Nov., 1900; La., May, 1913.*)

92. Name all the accounts which contribute to the Profit and Loss
account when closing the books. (Pa., May, 1905.)

93. Define: Adjusting entries. (Pa., Nov., 1900; N. Y., Jan., 1907.*)

94. How would you deal with the items accrued and due (such as rent,
commission, and salaries) when closing the accounts of a business at the
end of a fiscal period? (N. Y., Dec, 1898*; N. Y., Jan., 1904*; N. Y.,
Feb., 1910 ; Va., Oct., 1912* ; N. Y., Jan., 1914* ; Kan., May, 1916* ; W.
Va., May, 1919.*)

95. Explain the methods of treating accruals, indicating advantages
and weaknesses of each. (W. Va., May, 1919.)

96. Illustrate prepaid accounts and accrual accounts used by concerns
making monthly showings of operations. (Wis., April, 1914.)

97. How would you treat tax assessments on real estate, if closing the
books at a certain period, with a view to ascertaining the loss or gain?
(N. J., 1904-1909.)

98. What is the necessity of taking into account accruals of interest,
taxes, rent, etc? How should prepaid rents, insurance, etc., be treated
at the end of a fiscal period? (Ohio, Oct., 1919.)

99. In auditing the books of a company whose fiscal year ends Decem-
ber 31 you find charged: (a) Rent for the year ending September 30;.

(b) insurance premiums for tlie year ending March 31, paid in advance;

280 C. P. A. ACCOUNTING

You are informed that in the opinion of the company no adjustment
should be made as a full year's charge for each of these items has been
recorded in the accounts. State your views.

(Wash., June, 1915.)

100. An auditor is called upon to verify a Balance Sheet, and upon
investigation he finds that unexpired insurance, interest paid in advance
on discounted notes, taxes accrued on demand notes and bonded indebted-
ness, royalties, etc., are not included in same. He is informed that it
has not been the custom of the corporation to include in their Balance
Sheet such items, as they offset one another, and that the directors do
not desire any change in the practice they have adopted. Discuss this
proposition, stating reasons for your conclusions. (Ohio, Nov., 1917.)

101. Describe the method of closing the books of a concern, stating
how you provide for depreciation, bad debts, surplus, and dividend ac-
counts. (N. Y., Jan., 1906*; Fla., July, 1909.)

102. In closing a set of books, state how you would treat the following
on Ledger on financial statement: Depreciation on machinery, $1,500;
expenses prepaid, $500; discount on customers' accounts, 3 per cent,
$1,080; salaries and wages accrued, $675. (N. Y., Jan., 1904.)

lOSi'* What are some of the important things to consider before closing
a set of books for a fiscal period? (Iowa, Dee., 1918.)

104. What is meant by an "Expense Inventory" and how would you
treat this item in drawing up the Profit and Loss account and Balance
Sheet? (Colo., Dec., 1913.)

105. Describe three methods of treating accruals and the advantage
or weakness of each. (Ind., Nov., 1917.)

106. Give the treatment of deferred accounts at the close of the ac-
counting period. (Ind., May, 1918.)

INSURANCE AND GENERAL EXPENSE

281

PROBLEMS

INSURANCE AND GENERAL EXPENSE

1. A merchant effected $40,000 insurance on property worth $60,000;
his policies contained the usual 80 per cent coinsurance clause. A loss
of $30,000 was sustained. What sum should the merchant receive from
the underwriters in correct settlement of the loss? (Colo., Dec, 1913.)

2. A fire in a manufacturing concern resulted in a loss on machinery,
$5,000; merchandise (raw material), $10,000; manufactured goods, $25,-
000, of which amount $40,000 was agreed on and paid by the insurance
companies. Give the entries necessary to record properly the above trans-
actions on the books of the concern. (N. Y., June, 1914.)

3. (a) If the value of the property insured is $10,000 and the actual
insurance at the time of the fire is 80 per cent, what should be the settle-
ment if the loss was 50 per cent of the total value? (6) If the property
value was $10,000 with an 80 per cent coinsurance clause and the actual
insurance in force at the time of the fire was $6,000, what would be the
owner's deficiency? (c) How much if the loss was only 40 per cent of
the total? (Mich., July, 1909.)

4. Robert Adams and William Stevens are equal partners. On the
night of July 3, their stock and fixtures were destroyed by fire. A trial
balance which Adams had at his home showed the following condition of
the Ledger at the close of the business June 30 :

Robert Adams

William Stevens

Cash

Fixtures

Merchandise Purchases
Merchandise Sales ....

Notes Receivable

Notes Payable

Interest

Expense

Customers

Creditors

The property is fully covered by insurance. The insurance company,
for the purpose of estimating the value of the merchandise destroyed, has

$600

$7,450

600

7,450

3,309

1,500

32,600

24,800

1,000

2,000

120

780

4,500

3,259

$45,009

282

C. P. A. ACCOUNTING

agreed to allow 35 per cent as the average gross gain on the sales and to
pay 66% per cent on the value of fixtures as shown by the Ledger. On
the basis of this agreement, state the result of the business and the capital
of each partner.

(Mass., June, 1910.)
5. On October 31, 1919, the store of the Good Merchandise Company
was destroyed by fire. It was a total loss. The books and records were
found to be complete, and the trial balance as of October 31 was as
follows :

Accounts Receivable

Accounts Payable

Cash

Merchandise Inventory, January 1, 1919

Merchandise Purchases

Real Estate

Dividends Paid

Buildings and Fixtures

Furniture and Furnishings

Reserve for Depreciation, Buildings and Fixtures . . .
Reserve for Depreciation, Furniture and Furnishings

Unexpired Insurance

Merchandise Sales

Miscellaneous Income

Clerks' Salaries

Light, Heat, and Power

Advertising

Office Salaries ,

Officers' Salaries

Postage

Treasury Stock

Taxes

Telephone and Telegrams

Sundry General Expense

Capital Stock

Surplus

$7,000

2,000
15,000
85,000

3,000

4,000
18,000

5,000

2,500

5,000

1,000

2,000

2,500

5,000

700

10,000

2,500

150

50C

$170,850

$5,000

3,000
300

99,000
1,500

50,000
12,050

$170,850

An average gross profit of 33j/^ per cent was agreed upon by all
parties concerned.

Stock, buildings, fixtures, and furnishings were insured under the 80
per cent clause, the buildings, etc., for $15,000 and the stock for $32,000.
Settlement is made on the basis of these facts.

You are asked to give (a) the profit or loss due to fire, (&) the oper-
ating statement for the period ending October 31.

(Wis., Nov., 1919.)

6. The Star Department Store, organized January 1, 1911, suffers a
fire loss just before inventory December 31, 1913. The books disclose the
following facts:

INSURANCE AND GENERAL EXPENSE

283

Dec. 31, 1911

Dec. 31, 1912

Dec. 31, 1913

Inventory Beginning

Purchases During Year. . .
Allowance on Purchases . .

Sales

Allowance on Sales

Advertising

Salaries

Wages

Delivery

Depreciation of Furniture
Stationery and Printing . .

Gas

Rent

Insurance

Interest

Light

Water

Taxes

Telephone

General

Traveling

Furniture and Fixtures . .

$44,244 .04

171,133.33

11,900.12

197,474.49

4,294.37

3,487.39

8,295.92

16,684.30

567.34

169.31

282.40

75.09

5,350.00

927.15

1,571.02

612.53

29.21

438.80

33.75

2,041.30

352.94

9,000.00

$51,894.68

173,478.81

15,182.62

209,397.00

4,594.50

3,334.45

9,196.72

16,628.75

567.38

372.92

309.30

45.55

5,400.00

856.42

1,506.89

567.40

28.51

597.00

52.27

3,343.37

351 .93

9,500.00

$50,396.40

157,188.09

8,293.54

195,937.98

5,179.19

2,987.56

9,196.72

17,531.22

1,053.34

112.94

300.00

62.02

5,400.00

770.40

1,695.80

525.06

27.63

891 .07

54.00

2,581.32

278.28

10,500.00

You are asked by the appraisers:

(a) To determine the value of assets destroyed.

(&) To arrive at correct amounts to effect a complete adjustment under
the following concurrent policies containino; the 80 per cent coinsurance
clause.

Stock

Furniture

Home Insurance Co

$10,000

15,000

5,000

10,000

$2,000
3,000
1,000
2,000

Glen Falls Insurance Co

Globe In.surance Co

Equitable Insurance Co

(Mich., Dec, 1913.)

7. A merchant's ledger disclosed the following statement on March 31,
1915:

Inventory of goods on hand January 1, 1914, $26,000.

January 31, merchandise purchases, $10,800; merchandise returned to
store, $700; sales, $13,800; purchases returned to seller, $250. February
28, merchandise purchases, $8,600; merchandise returned to store, $375;
sales, $10,575; purchases returned to seller, $325. March 31, mercliandi.se
purchases, $9,675; purchases returned to store, $567; sales, $16,425; mer-
chandise returned to seller, $435. April 30, merchandise purchases, $6,756 ;

284 C. P. A. ACCOUNTING

merchandise returned to store, $437; sales, $12,150; goods returned to
seller, $193. May 31, merchandise purchases, $7,693; merchandise re-
turned to store, $842 ; sales, $14,236 ; goods returned to seller, $178. June
30, merchandise purchases, $6,957; merchandise returned to store, $359;
sales, $20,789; goods returned to seller, $237. July 31, merchandise pur-
chases, $10,764 ; merchandise returned to store, $653 ; sales, $15,283 ; goods
returned to seller, $364. August 31, merchandise purchases, $12,786;
merchandise returned to store, $689; sales, $19,476; goods returned to
seller, $113. September 30, merchandise purchases, $19,436; merchandise
returned to store, $347; sales, $8,679; goods returned to seller, $]47.
October 31, merchandise purchases, $10,798 ; merchandise returned to store,
$878; sales, $17,124; goods returned to seller, $236. November 30, mer-
chandise purchases, $12,745; merchandise returned to store, $1,087; sales,
$22,187; goods returned to seller, $475. December 31, merchandise pur-
chases, $8,649 ; merchandise returned to store, $983 ; sales, .$4,851 ; goods
returned to seller, $122, Inventory as of December 31, 1914, $32,232.

January 31, 1915, merchandise purchases, $9,786; sales, $14,287; goods
returned to seller, $342; goods returned to store, $329. February 28,
sales, $11,364; goods returned to store, $597; merchandise purchases,
$9,873; merchandise returned to seller, $239. March 31, sales, $17,747;
goods returned to store, $324; merchandise purchases, $11,397; merchan-
dise returned to seller, $539.

On the morning of April 1, 1915, previous to time of opening the store
for business, the building and contents were destroyed by fire. It v?ill,
therefore, be necessary for you to state what [was] the book value of the
merchandise on hand at the time of the loss, as of March 31, 1915. You
will make a Ledger account of the foregoing. [Make a] Profit and Loss
statement. What [did] the goods cost that went out of the house, as of
January 31, 1915. What was the ratio of profit to cost of goods and sell-
ing price? Show how you arrive at same. Make statement of the loss.

(Texas, June, 1915.)

8. A severe fire occurred on March 1, 1917, at the factory of the Pitts-
field Woolen Company, by which practically the whole of the buildings
and contents were destroyed, with the exception of the offices.
, The insurance adjusters paid a lump sura of $10,000 in respect of the
buildings, $1,500 for the machinery, and $12,000 for the stock on hand,
the salvage being sold to the Pittsfield Woolen Company for $1,000, which
salvage was deducted from the insurance money on settlement. The
Pittsfield Woolen Company realized $2,000 from the salvage.

In the Pittsfield Woolen Company's books, land and buildings stood at
$17,500, and the value of the buildings not destroyed was $1,000, the land
being valued at $5,000; the machinery stood at $1,600 and was a total
loss; the stock on hand at date of last inventory (June 30, 1916) stood
at 113,500. The sales for the eight months from date of last inventoiy
(June 30, 1916) to date of fire (March 1, 1917) amounted to $30,000, and
the purchases and expenses for the period to $26,000. The gross profit

INSURANCE AND GENERAL EXPENSE

285

on sales was known to be Sj/^ per cent. There were expenses in con-
nection with the fire insurance adjustment of $200.

Show how the above matters should be entered in the books of the
Pittsfield Woolen Company.

(N. D., July, 1918.)

9. The B. Moose Printing Company, a corporation, had a capital of
$50,000, which was held by B. Moose, $25,000 ; U. Moose, $15,000, and L.
Moose, $10,000.

The plant was destroyed by fire December 15, 1917. All books and
records were saved, except the sales records, which were not written up
for December. The insurance companies paid $28,000 on the machinery
and equipment and $7,000 on the stock, which was distributed to the
stockholders as received in proportion to their holdings. On December
30th, the trial balance disclosed the following conditions:

Capital Stock

Machinery and Equipment. . . .
Stock on Hand, June 1, 1917 . .

Accounts Receivable

Accounts Payable

Reserve for Bad Debts

Insurance Adjustment

Cash

Engraving

Printing

December Sales, not segregated

Merchandise Purchases

Wages

Rent

Salaries

Surplus

L. Moose

U. Moose

B. Moose

$30,000

8,750

19,640

3,900

58,800

130,180

1,800

5,750

7,000
10,500
17,500

$293,820

$50,000

12,590

1,250

28,000

77,600
99,350
24,175

855

$293,820

The accounts receivable realized $18,320, and the liquidation expenses
were $1,850, The stockholders turned in their stock for cancellation and
received their proportionate amount in cash. Prepare Journal entries
closing the books of the corporation, and a Profit and Loss account. In-
clude Journal entries for final distribution of cash and for final disposition
of loss or gain.

(Va., Nov., 1918.)

10. A firm manufacturing but one grade of cloaks, insured against
burglary, claims to have been robbed on the night of September 10. The
proof of the loss filed by the assured contained two items for 600 cloaks,
$12,000; silk, 1,000 yards, $1,500. An inventory of the stock on hand,
consisting of cloaks, cloth and silk, had been taken January 1, amounting
to $118,500, the particulars of which have been lost or destroyed.

286 C. P. A. ACCOUNTING

An analysis of the firm's books produced the following information:
purchase of cloth, 37,500 yards, at $1; purchases of silk, 10,000 yards, at
$2; 6,000 cloaks were manufactured, consuming cloth, 40,000 yards, at
$1; silk, 10,000 yards, at $2; 9,000 cloaks were sold between January 1
and September 10. Cost of sales, per cloak, for material, $10; cost of
sales, per cloak, for labor and sundries, $7.

Inventory, September 11 : 2,500 cloaks, at $17; 12,500 yards cloth, at $1;
5,000 yards silk, at $2.

Prepare a report proving or disproving the claim.

(N. y., June, 1909; N. Y., Jan., 1917.)

CHAPTER XV

DEPRECIATION

Nature of Depreciation — Depreciation may be defined as the shrinkage
in value of an asset through use, the passing of time, decay, or obsoles-
cence.^ Repairing property tends to decrease the rate of depreciation but
cannot prevent the loss.^ Depreciation must not be confused with loss in
efficiency/ The efficiency of most machines is almost constant up to the
period in which they are scrapped, yet the depreciation accumulates during
the entire life of the machine.*

Depreciation is a cost of doing business,' the charge being made to the
department of the business using the related asset. The statement that the
reserve for depreciation is a division of surplus" therefore seems incorrect.

Causes of Depreciation — The following table summarizes the causes of
depreciation on tangible property.'

Causes of Depreciation.
I. Physical Depreciation

(a) Wear and tear from operation

(b) Action of time and the elements
II. Functional Depreciation

(a) Inadequacy or supersession

(b) Obsolescence

III. Contingent Depreciation

(a) Accidents

(b) Diseases

Depreciation on intangible property is caused either by the expiration of
time or by the abandonment of the assets.*

Inadequacy — Inadequacy indicates inability fully to perform the in-
tended function." It is caused by (a) changes in original financial policy,
(b) motives of engineering economy, and (c) unforeseen developments.'*
Losses occasioned by inadequacy should be provided for under the head of
a contingent reserve, and not included in the estimate of depreciation,
except in those cases when the loss can be intelligently foreseen."

Obsolescence — Obsolescence, or the shrinkage in value due to the fact
that property has been rendered out of date by new inventions and im-
provements," is usually too uncertain to constitute an element in the cost

Tor explanation of superior figures see page 337.

287

288 C. P. A. ACCOUNTING

of operations." Whenever possible, a reserve for contingent losses due to
obsolescence should be created out of surplus." In industries where obso-
lescence can be foretold with reasonable certainty, however, obsolescence
should be included in the depreciation charge."

Depletion — Depletion, or the "giving out" of assets, must be differen-
tiated from depreciation, or the "wearing out" of assets." However, the
fact that a mine is subject to depletion frequently has a vital effect on the
depreciation of the mine equipment, which is of little value when the ore
is exhausted, i. e., mine buildings having a longer estimated life than the
ore body depreciate at the same rate as the ore body, but, if the life of the
buildings is less than that of the ore body, the buildings depreciate at their
normal rate."

Actual and Theoretical Depreciation — The term "actual depreciation"
signifies the decrease in the selling value of an asset from its state when
new to its used condition." Theoretical depreciation is the loss due to
wearing out of the asset prorated more or less uniformly over the life of
the asset." The use of theoretical depreciation in accounting records is
justified by the fact that going concerns usually replace, instead of sell,
their fixed assets.**

Appreciation and Depreciation — Since fixed assets normally are not sold,
fluctuations in the selling prices of fixed assets are not recognized on the
books of account and appreciation can not therefore be used to offset
depreciation." In fact, if appreciation is booked, the charge for deprecia-
tion will be automatically increased."

Booking of Depreciation — When the periodic charge to the depreciation
expense account is made, the credit can be carried directly either to the
assets or to a reserve for depreciation account f^ the latter procedure is the
better, in order that the asset may be shown at its original cost figtu'es."
The recording of depreciation in connection with the sale of a depreciated
asset is shown on page — .

Although there are some accountants who advocate showing the de-
preciation reserves on the right side of the balance sheet either under the
caption "appropriated surplus"" or under the caption "reserves,""' the
majority deducts the reserves from the related assets" in order to show
the net book value of the assets.

Depreciation Fund — Depreciation or replacement funds are, like all
funds, created by investing in marketable securities an amount equal to
the charge for depreciation.''* The entry for the establishing of a deprecia-
tion fund consists of a debit to the depreciation fund account and a credit
to the cash accoimt." When a depreciating asset is replaced, the fund
securities are sold, the entry being a debit to the cash account and a credit
to the depreciation fund account, the money being used to replace the
asset.^ It is vitally important to remember that there is no connection
between the depreciation fund and the depreciation reserve." The former
is the means of accumulating current assets to replace a depreciated asset,^
while the latter is the means of writing off a depreciating asset into operat-
ing expense." Whether a depreciation fvmd is created depends upon the

DEPRECIATION 289

iinaneial policy of the business/* but a depreciation reserve must be created
unless the credit is made directly to the related asset account.^ A de-
preciation fund is especially serviceable in the case of expensive and short-
lived assets.'"

Depreciation Rates — An auditor would do well to equip himself with the
tables for depreciation rates prepared by the United States Government,
by the various state commissions, and by large private appraisal firms."'
The C. P. A. candidate should be familiar with the general range of the
rates in these tables but should not attempt to memorize the tables.

Plant Ledger — As practically every kind of fixed asset has an individual
depreciation rate, the details of the plant and machinery controlling ac-
count are carried in a subsidiary ledger, called the plant ledger." This
ledger usually has a separate account for each plant unit." These plant
ledger accounts may be ruled to show the year of installation, estimated
life, first cost including installation costs, and annual depreciation charges
for a number of years.*" As these accounts usually provide for the sub-
traction of the annual depreciation charges from previous book values of
the assets, the balance of the plant ledger usually corresponds with the
dilt'erence between the cost figures of the plant and equipment less the
reserve for depreciation.*^

Calculation of Depreciation — The determination of depreciation rates
is an engineering problem, but an accountant should understand how and
when to use the various methods of determining depreciation charges."
These methods may be broadly classified, though with some overlapping,
under the following heads :"

Methods of Calculating Depreciation.

I. Proportion Methods

(a) Straight Line

(b) Working Hours

(d) Service Output

II. Variable Percentage Methods

(a) Fixed Percentage on Diminishing Value

(b) Sum of Year Digits (sometimes known as "Sum of Expected

Life-Periods")

III. Compound Interest Methods

(a) Sinking Fund

(b) Annuity

IV. Miscellaneous Methods

(a) Maintenance

(b) Replacement

(d) Appraisal

(e) Insurance

(f ) Gross Earnings

290

C. P. A. ACCOUNTING

Straight Line Method — The straight line method of calculating deprecia-
tion, so called because its gi-aphical representation is a straight line,"
figures the periodic charge by dividing the difference between the initial
and scrap value of the asset by the number of periods in its service life.'"*
Assuming an asset costing $100, service life 3 years, scrap value $10, the
annual charge would be $30 (1/3 X ($100 — $10)). Where the output is
uniform and obsolescence and inadequacy are unimportant, and where the
cost of repairs is uniformly prorated over the life of the asset, the straight
line method gives satisfactory results.** The straight line method has the
advantage of simplicity." It approximates the actual depreciation about
as closely as the more elaborate methods,** but it makes no provision for the
increased maintenance charges toward the end of the life of the asset."
The method is rigid and does not satisfactorily allow for overtime and
other fluctuations in wear and tear.'" The method is especially adapted to
the calculation of depreciation on short-lived assets."

Working Hours Method — The working hours method of calculating de-
preciation figures the periodic charge by prorating the difference between
the initial and scrap value of the asset between periods, according to the
ratio of actual hours the asset works dui'ing each period." Assuming an
asset costing $100, service life 9,000 working hours, scrap value $10, the
charge for a period in which the asset works 3,000 hours would be $30
(3,000/9,000 X ($100 — $10)). Where the asset performs only a few
processes equally wearing in their effects, where the rate of operation never
exceeds the asset's normal speed, and where the up-keep costs are equitably
distributed, the working hours method gives fairly satisfactory results."
The method makes the periodic charge agree with the use made of the
asset," b«t fails to provide for the increase in the maintenance charges
toward the end of the asset's life.'"

Composite Life Method — The composite life method operates the same
as the straight line method, the outstanding feature being that depreciation
is calculated on the plant as a whole, rather than on the individual assets.**
Assume two machines, one costing $5,000 and having a service life of 10
years and a scrap value of $1,000, and the other costing $4,000 and having
a service life of 5 yeai-s and^ a scrap value of $500. Tlie composite life
depreciation rate can be calculated by the following two methods :

First Method.

Cost
Value

Life
Periods

Scrap
Value

Depre-
ciation

Times
Replaced

(a)

Total Loss

in 10 Years

(b)

Dollar
Years

(c)

S5,000
4,000

10
5

$1,000
500

$4,000
3,500

1
2

$4,000
7,000

$50,000
40,000

$9,000

$11,000

$90,000

DEPRECIATION

291

(a) Number of times renewal of the asset will be required during the

longest life period.

(b) Product of depreciation multiplied by times replaced.

replaced.
$11,000 -^ $90,000 = 12.22 -f- per cent, rate of depreciation.

It is a noteworthy fact that all accountants do not agree with the' above
method of calculating the depreciation on a composite group of assets.
Some accountants calculate the "dollar years" by multiplying the "depre-
ciation" by the "life periods" multiplied by the "times replaced."" This
would seem incorrect as the resulting depreciation rate will be applied on
the cost values and not on the cost less scrap values of the assets. That
12.22 -|- per cent is the correct rate can be seen from the fact that its use
creates a reserve of $11,000 within the ten years, which will exactly offset
the loss due to depreciation. During the ten years the cost of the assets
will total $13,000 ($5,000 -f (2 X $4,000) ), while the scrap value will total
$2,000 ($1,000+ (2 X $500)), the difference of $11,000 being the loss
due to depreciation.

Second Method.

Cost
Value

Life
Periods

Scrap
Value

Cost Less
Salvage

Rate of
Deprecia-
tion

(a)

Annual
Deprecia-
tion

(b)

S5,000
4,000

$1,000
500

$4,000
3,500

10
20

$400
700

$9,000

$1,100

(a) Quotient of 100 divided by Life Periods.

(b) Product of Cost less Salvage multiplied by Rate of Depreciation.
$1,100 ^ $9,000 = 12.22 + per cent, rate of depreciation.

Of the above methods, the second is the better, as it is more simple and
direct. The composite life method of caleidating depreciation is subject
to all the limitations of the straight line method and has the additional
disadvantage of losing sight of the depreciation on individual assets.
However, the method is serviceable in estimating the cost of depreciation
for the plant as a whole, and in furnishing a basis for the comparison of
two similar plants."

Service Output Method — The service output method of calculating de-
preciation is the same as the working hours method, except that the service
life is measured in output instead of working hours." Assume a machine,
costing $100, capable of making 9,000 units of product, scrap value $10,
the charge for a period in which the machine produces 3,000 units would
be $30 (3,000/9,000 X ($100 — $10)). As this method requires the pre-

292 C. P. A. ACCOUNTING

determination of output, the conditions must be uniform and the asset must
perform only a few processes." The method is f requeuth' used in connec-
tion wjth wasting assets," and is also adapted to calculate the depreciation
on machines which have special functions and which are used only at
irregular times."

Fixed Percentage on Diminishing Value Method — The fixed percentage
on diminishing value method of calculating depreciation estimates the
periodic charge as a fixed percentage of the appraised or book value of the
asset as at the time of the last appraisal.'"' Letting "n" equal the number
of periods, "r" equal the periodic depreciation rate, and "sv" and "cv"
equal the scrap and cost values, respectively, the formula for this method,
which in complex cases requires the use of logarithms to solve, is :**

r =1 — '^ C V

For an asset costing $100, service life 3 years, scrap value $10, the de-
preciation rate by the above formula is approximately

1— ^

10
loo = .536.

The periodic charge on such an asset would be $53.60 ($100 X .536) for
the first period, and $24.87 ( ($100 — $53.60) X .536) for the second
period. The chief advantage claimed for this method is that the periodic
charges under it are heavy at the beginning and decrease toward the end,
and thus tend to equalize the increase in the up-keep costs which it is
claimed normally increase with the age of the machine.** However, as
repairs frequently do not increase uniformly during the life of the ma-
chine, but may be incurred very irregularly, this argument is of doulitful
value. The method also involves complex calculations,** is distasteful to
new concerns on account of the heavy initial charges,*' and is subject to
the objections that it prorates the charges on a time rather than a service
or output basis,** and that the life of the asset is not clearly indicated by
the depreciation rate.*" The method can not logically be used in connection
with an asset having no residual value."

Sum of Year Digits Method — The sum of year digits method, sometimes
called the sum of expected life periods method, prorates the loss due to
depreciation (the excess of the cost over the scrap value) over the periods
in the ratio of fractions whose numerators are in the order of the expected
life periods and whose denominators are the sum of all the expected life
periods.'' Assume an asset costing $100, sei-viee life 3 years, and scrap
value $10. As the expected life at the beginning of each period would be
3, 2, and 1 periods, respectively, making a total of 6, the loss due to
depreciation of $90 ($100 — $10) would be prorated 3/6, or $45, to the
first period ; 2/6, or $30, to the second period, etc. The sum of year digits
method gives the same general effect as the fixed percentage on diminish-

DEPRECIATION * 293

ing value method," and is subject to the same objections except that it is
easier to calculate."

Sinking Fund Method — The periodic charge for depreciation under the
sinking fund method consists of a constant amount, representing the
sum of money, which, placed at compound interest at the end of suc-
cessive periods, will accumulate to the amount of the total depreciation of
the asset during its life term.'* Assume an asset costing $100, whose scrap
value after 3 yeai's will be $10. If interest is reckoned at 5 per cent, the
constant amount would be $28.55, calculated by the formula for sinking
fund installments given in Chapter IX, thus:

R = $90 ^ ^^'^^l~'^ = $28.55
.05

As the interest on the fund would be debited to the fund and credited
to income, the interest must be added to the periodic charge and credited
to the reserve." The entries for the second year would be :

Entry No. 1

Depreciation Fund $29. 98

Cash $28.55

Interest Earned ($28.55 X .05) 1.43

Entry No. 2

Depreciation Expense 29 . 98

Reserve for Depreciation 29 . 98

If desired the sinking fund method can be used to calculate the periodic
depreciation charge without the use of a fund." In this case entry No. 1
would be omitted but the depreciation charge would be calculated as
though a fund were maintained'' and entry No. 2 would be made. In the
foregoing illustration the total depreciation charge for the first year would
be $28.55; for the second year $28.55 plus $1.43 ($28.55 X .05), or $29.98;
for the third year $28.55 plus $2.92 (($28.55 + $29.98) X .05), or $31.47.'*

The chief objections to the method are that the periodic charge increases
as the asset advances in age," and that the assumed constant rate of in-
terest may vary materially from the current rates of interest,'" but it is
adapted, if the fund is maintained, to the handling of the depreciation on a
large single piece of property." The fund feature of the sinking fund
method is especially advisable for terminable businesses which will retire
securities when the assets are exhausted, and for continuous busines.ses
which do not require funds for additions and betterments.*^
. The sinking fund method is sometimes called the annuity method,"' a
practice which is unfortunate as it ignores the difference between the sink-
ing fund and annuity methods.

Annuity Method — The annuity method of calculating depreciation is
based on the theory that interest is a cost of production.*"* The annuity
method determines the annual charge by finding sucli sum as, when de-
ducted each year from the sum of the remaining investment and interest

294'

C. P. A. ACCOUNTING

thereon at a given rate, will reduce the investment to scrap value, and
in addition return the full amount of the interest on the investment as
it stands from beginning to end of the plant's life.*° The annuity method
of calculating depreciation treats the investment in the fixed asset as the
present worth of an annuity.*' The calculation of the periodic charge
for an asset costing $100, whose scrap value after 3 years will be $10,
interest to be figured at 5%, is shown by the following table:"

Elements in Periodic Charges

Total
Charge

(d)

Appraised

Value

Plus

Interest

(e)

Depre-

Periods

Fixed
Amount

(a)

Interest on

Fixed
Amount

(b)

Interest on
Invest-
ment

(c)

ciated or

Appraised

Value

(f)

0
1
2
3

28.55
28.55
28.55

"'i.43
2.92

5.00
3.57
2.08

33.55
33.55
33.55

105.00
75.02
43.55

$100.00
71.45
41.47
10.00

$85.65

$4.35

$10.65

$100.65

(a) Calculated as in Sinking Fund

Method.

(b) Calculated as in Sinking Fund

Method.

(d) Sura of (a), (b), and (c).

(e) Sum of (d) and (f).

(f) Difference between (e) and (d).

The "total charge" in the above table can be computed by the use
of the following formula, by letting "D" stand for the total charge or
periodic depreciation; "C", the cost of the asset; "S", the scrap value;
"p", the present value of $1 at given rate due at scrapping of asset;
and "P", the present value of annuity of $1 at given rate for as many
periods as life of asset.**

p_ C-(SXp)

The total depreciation charge or "total charge" then would be:
100— (10 X .86383760)

2.72324803

= $33.55

The annuity method of calculating depreciation automatically .secures
a charge for interest on investment as a part of tlie depreciation charge,
a result that should be avoided because, whether or not interest is an
element in cost, its inclusion under the title of depreciation is misleading
and indefensible."" The real depreciation charge is the same under the

DEPRECIATION 295

annuity as under the sinking fund method."* The journal entry for the
second period in the foregoing illustration would be :**

Depreciation $33 . 55

Interest on Investment $3 . 57

Reserve for Depreciation (S28 . 55 + $1 . 43) 29. 98

The method is subject to the objection that the periodic charges in-
crease with the age of the asset.*^ The application of the mettiod is
mathematical rather than practical,*^ but the method is adapted for cal-
culating depreciation on long-term leases and similar assets.'*

Maintenance Method — The maintenance method periodically charges
depreciation with an amount equal to the cost of maintaining the asset
during the period.*' The method is faulty because it makes the charging
of depreciation a matter of business convenience, instead of a necessary
cost of production, and because under it the charge fluctuates violently
and tends to increase with the age of the asset.**

Replacement Method — The replacement method makes no charge for
depreciation but in lieu of such an expense item, it charges all renewals
and replacements to revenue.*' This method may prove a satisfactory
way of making good the loss due to depreciation after the point of
normal replacements has been reached in a plant large enough for the
law of averages to equalize the replacement charges.*' The method is
suitable only if the asset consists of short-lived units.** It disregards
accrued depreciation up to the point of normal replacements.***

The Fifty Per Cent Method — The fifty per cent method is the same as
the replacement method except that after the assets have reached the re-
newal stage, the total depreciation, which maj' or may not be booked, is
held to be fifty per cent of the cost of the property, the constant renewal
of parts preventing its exceeding that percentage.**' Although this method
is inadequate as a means of prorating the depreciation cost over the prod-
uct, it may serve fairly well as a method of valuation.***

Appraisal Method — By the appraisal method, the periodic charge for
depreciation is the difference in value between the appraisals at the begin-
ning and end of the period.**^ This method is inadequate, as the physical
facts of depreciation ai'e not usually discernible at such short intervals.***
The method leads to inaccuracy because appraisals usually take into
account market fluctuations.*"' The appraisal method is expensive on
account of engineers' fees,**" but it is useful as an occasional check upon
the other methods.**'

Insurance Method — The insurance method, so called because of the
analogy between it and the policy practiced by some firms of carrying their
own fire insurance, is a means of financing replacements and renewals
rather than a means of distributing the depreciation cost to the product.***
The f und«provided by this method is neither designated for the replacement
of any specific asset nor reserved until it can be expended in replacing the
identical asset upon which it was figured, but it is spent, wholly or partly,

296 C. P. A. ACCOUNTING

during the same year in which it is created, in replacing other equipment
or purchasing new equipment/**

Gross Earnings Method — The gross earnings method of calculating the
periodic charges for depreciation estimates the expected gross earnings
during the composite life-period of the plant, and then prorates the loss
due to depreciation to the periods on the basis of the gross earnings for
each period as compared with the estimate."* If the product is standardized
and has a fairly constant selling price, gross earnings fluctuate with out-
put, and in such cases the gross earnings method may be satisfactory."'
The method is sometimes used because it tends to make the periodic net
profits equal, but this reason alone does not justify its use.'"

DEPRECIATION 297

QUESTIONS

depreciation

Theory

1. What is depreciation ? (Pa., Nov., 1899* ; N. Y., June, 1900* ; N. Y.,
June, 1902*; Md., Oct., 1903*; Pa., Nov., 1904* ;' Wash., April, 1906*;
N. Y., Feb., 1908*; Md., Jan., 1909*; Ohio, March, 1910*; N. Y., Jan.,
1911*; Colo., Dec, 1913*; Wis., April, 1914*; N. D., June, 1914*; W. Va.,
Mav, 1917*; A. I. of A., Nov., 1917*; Va., Nov., 1918*; Ind., Nov., 1918*;
N. D., July, 1919.)

2. Give your understanding of the term "depreciation" and state
wherein it is or is not equivalent to "wear and tear." (111., May, 1909.)

3. State the theory of depreciation. (Mich., Dec.^ 1914*; Ohio, Nov.,
1915; Ind., Nov., 1918; Ohio, Nov., 1918.)

4. Why ought depreciation to be considered? (N. D., July, 1919.)

5. Is the necessity of a provision for depreciation commonly recog-
nized in the accounts of American corporations? (Ohio, Oct., 1919.)

6. What are your views as to the necessity of a provision for depre-
ciation on fixed or capital assets? (N. Y., June, 1901*; Mich., June,
1908*; Mo., Dec, 1914; Ohio, Oct., 1919.*)

7. It is contended that it is unnecessary to write off depreciation on
(a) Freehold premises; (b) plant and machinery, provided that they are
maintained in a full state of efficiency out of revenue. Give briefly your
own views on this subject. (111., May, 1905.)

8. From an audit of a public service corporation it is found that no
depreciation of capital assets has been provided by a charge against earn-
ings, the officials believhig that appreciation of certain real estate offsets
a fair amount of depreciation. Is this a proper disposal of the matter?
Give reasons. (Mass., June, 1912*; 111., May, 1916*; Mass., Oct., 1916;
Ohio, Nov., 1917*; A. I. of A., Nov., 1918*; A. I. of A., May, 1921.*)

9. Do you consider it good accounting practice to charge off deprecia-
tion on machinery in years when the operation of the plant results in a
loss? Give reasons. (N. Y., June, 1919; N. C, Nov., 1919.*)

10. State the object of the Depreciation account. (N. Y., Dec, 1898;
Mich., July, 1906*; Va., Oct., 1911.*)

11. What is the effect on a business of depreciation? (Pa., Nov.,
1900*; N. Y., Jan., 1901*; Pa., Nov., 1904*; Pa., May, 1906; A. I. of A.,
May, 1920.*)

2[)H C. P. A. ACCOUXTIXG

12. Define: Obsolescence. (Ill,, Dec, 1918.)

13. What is the difference, if any, between depreciation, obsolescence
and depletion? (W. Va., May, 1919.)

14. A company manufacturing' tin tags charges to cost of manufacture
(as depreciation) one-fourth of the cost of the stamping machine, which
had been in service about one year. The life of this machine was esti-
mated to be ten years, but owing to the discovery by a competitor of a
new method of stamping, which, while still imperfect, promises to revolu-
tionize the business, the stamping machine now in use will probably be
obsolete within a period of three years. What would you say concerning
the propriety of the above charge to prime cost? (N. Y., Jan., 1918.)

15. Define the difference between fluctuation and depreciation in the
value of assets. (N. Y., June, 1919.)

16. Define and distinguish "depletion" and "depreciation" and state
how you would handle these through the Balance Sheet and the operating
statement. (N. C, June, 1920.)

17. Name three of the principal elements that cause obsolescence.
(N. Y., June, 1919.)

18. Can you name some other reason why depreciation should be con-
sidered in respect to machinery other than that of wear and tear? (111.,
May, 1901; Mass., June, 1910.)

19. Name the advantages or disadvantages of the following methods
of bringing on to the books of a company the depreciation on its machin-
ery: (a) Crediting Machineiy account with 10 per cent of the balance of
the account each year and charging profit and loss; (&) crediting a reserve
for machinery dejireciation with 10 per cent of the balance of the account
each 5'ear and charging profit and loss. How can you combine the best
features of both the above methods? (111., May, 1907.)

20. A company engaged in the manufacturing business has instructed
its accountant to show depreciation as an operating expense and a credit
to plant, to set up a depreciation reserve and create a depreciation cash
fund. Prepare the necessai-y Journal entries to illustrate the idea of the
company, and discuss the question. (111., Nov., 1904.)

21. What do you consider the best way of entering on the books of a
manufacturing company the amount written off to profit and loss for
depreciation on (a) buildings; (b) large or fixed tools; (c) small or
expense tools? (N. Y., Feb., 1908.)

22. A public service corporation that regularly sets aside from its
profits a sufficient amount to provide for depreciation removes part of its
old plant and replaces it with a larger and more costly one. The old
plant is sold for scrap. How should the cost of the new plant and the
proceeds from the sale of the old plant be treated in the accounts of the
company? Give reasons. (N. Y., Feb., 1909; Kan., May, 1916; N. C,
Nov., 1919*; N. C. June, 1920.*)

23. State various ways of treating depreciation upon the books. (N. Y.,
June, 1898*; N. Y., Jan., 1901*; N. Y., Jan., 1904*; 111., May, 1904*;

DEPRECIATION 299

Mich., July, 1006*; N. Y., Feb., 190S*; III., May, 1908*; Mrl., Jan., 1909*;
III., May, 1909*; N. Y., Feb., 1910*; Ohio, March, 1910*; Wash., May,
1910*; Va., Oct., 1911*; Wash., June, 1912*; Mass., June, 1912*; Ohio,
Nov., 1913*; Wis., April, 1914; Mo., Dec, 1914*; Mo., Dec, 1915*; Kan.,
Dec, 1915*; Mich., Dec, 1916*; W. Va., May, 1917*; Ohio, Nov., 1918*;
S. C, Sept., 1919.*)

24. What disposition would you make of any depreciation reserve
account when constructing the Balance Sheet? State your reason for
above answer. (111., May, 1904*; Md., Jan., 1909*; Mass., June, 1910*;
Va., Oct., 1912; Ohio, Nov., 1913*; Ohio, Nov., 1915*; Cal., May, 1916*;
Ohio, Nov., 1917*; Ind., Nov., 1918.*)

25. How would you treat in the Balance Sheet of a company you were
auditing: Reserve for depreciation of capital assets; (a) invested in se-
curities; (b) not specially invested? (111., May, 1914.)

26. What, in your opinion, is the proper treatment of the depreciation
on plant and equipment in arriving at the profit or loss of a business for
a specific fiscal period? (Ohio, Dec, 1908.)

27. Are depreciation charges properly considered to be in the nature
of expense items, or as an application of the profits? Explain. (N. Y.,
Jan., 1918.)

28. In order to facilitate the preparation of monthly Profit and Loss
statements by a corporation, how would you recommend depreciation be
treated on its books from month to month? (Wash., April, 190B.)

29. The balance on Machinery Depreciation account shows an increase
for the year of the amount provided out of income which is computed at
the rate of 4 per cent on the balance of Machinery account at the com-
mencement of the year. The method of keeping the Machinery and Ma-
chinery Depreciation accounts has been in force from the commencement
of operations. Draft your comments as auditor of these accounts, assum-
ing that no item other than those above mentioned call for any comments.
(A. I, of A., May, 1918.)

30. The book value of the plant of a corporation has been reduced to
merely a nominal sum. Under this condition, state (a) whether, periodi-
cally, a reservation should be made of an amount estimated to cover depre-
ciation; (6) the reasons supporting your answer. (Mass., June, 1912.)

31. How should expenditures for repairs or replacements be treated
in so far as they relate to the question of depreciation? (Mich., June,
1913.)

32. Corporation "X" makes a practice of charging to expenses and
carrying to Depreciation Reserve account every half year a certain per-
centage of the book value of its plant and machinery. What, in your
opinion, is the correct method of dealing in this case with repairs and re-
newals, i.e., should the latter be charged to Profit and Loss or can they
be properly charged to Depi'eeiation Reserve account? Give reasons for
your answer, (Wash., Sept., 1907.)

300 C. P. A. ACCOUNTING

33. What is the effect on a business of reserve for depreciation ? (Pa.,
May, 1906.)

34. Explain the theory of a depreciation reserve. As auditor of a
manufacturing concern, what would be your duties in respect thereto ; and
what, if any, charges would you permit to be made to the account? (111.,
May, 1912.)

35. What are the two principal purposes of a Reserve for Deprecia-
tion account? (111., May, 1912.*)

36. You are asked by a client to discuss with him the question of
reserves for depreciation and depletion of his various capital assets.
State your position on this subject and enumerate the considerations you
would advance in support thereof. Would you, or would you not, be
guided by the rules laid down by the intei'nal revenue authorities in
deciding upon the rates to be used? (A. I. of A., May, 1918.)

37. Explain the relationship between a sinking fund and an allowance
for depreciation. It is claimed that in municipal enterprises the require-
ments that rates must be high enough to provide both for a sinking fund
to pay off the bonds and also for a reserve for depreciation with which to
replace the plant results in a double charge to consumers. Criticize or
explain this theory. (A. I. of A., June, 1917.)

38. Under what circumstances should deduction be made for deprecia-
tion? (N. Y., Dec, 1897.)

39. What classes of property, if any, in your opinion, are exempt
from depreciation? Give reasons. (N. Y., Dec., 1897*; Mich., Dec,
1906.)

40. If asked to give advice concerning the proper rates per cent to be
adopted in providing for the account for depreciation on buildings, ma-
chinery, tools, etc., what could vou recommend? (N. Y., Jan., 1901*;
N. Y., Jan., 1907; N. Y., Jan., 1908.*)

41. Name a fair allowance for depreciation per annum on the follow-
ing plant assets: (a) Real estate, including fences, sidewalks, tracts, etc;
(b) building and building fixtures — fireproof construction; (c) factoi*y
equipment, including benches, cupboards, etc.; (d) machinery, both iron
and woodworking; (e) fixed tools, both iron and woodworking; (/) loose
tools, both iron and woodworking; (g) power plant; (h) electric wiring
and apparatus, including dynamos, motors, etc; (i) blower system; (j)
office furniture and fixtures, including typewriters, adding machines,
graphophones, multigraphs, etc.; {k) horses and mules; (l) wagons, har-
ness and trappings; (m) patterns, iron and wood, and drawings. (Mich.,
June, 1908.)

42. A machine costing $81 is estimated to have a life of four years,
with a residual value of $16. Prepare a statement showing the annual
charge for depreciation according to each of the following methods: (o)
Straight line; (b) constant percentage of diminishing value; (c) annuity

DEPRECIATION 301

inelhod. (For eonvenieiice iu aiitlmietical calculation assume the rate of
interest to be 10 per cent.) Discuss the significance of each of the meth-
ods. (A. I. of A., June, 1917.)

43. Explain six different ways of apportioning depreciation charges
from year to year and point out clearly their distinguishing features.
(N. Y., June, 1913.)

44. A manufacturing concern owning lands, buildings, engines, boilers,
and machinerj', has been in operation for ten years, but has made no
allowance for depreciation, current repairs having been charged to Oper-
ating Expenses and new machinery bought having been charged to Plant
account. You are given carte blanche in the matter of arranging for such
depreciation at the time of the audit and also in the matter of providing
for it in the future.

State the steps you would take and the entries you would direct for
both cases, using your own figures. (Fla., July, 1909.)

45. An individual buys a fleet of ships. He then forms a corporation
to take them over at double the sum paid by him, payable one-half in
debenture bonds of the company and one-half in its capital stock. A sink-
ing fund is to be provided for the gradual retirement of the debenture
bonds. A public accountant is called in at the end of five years to make
up the accounts. He insists on creating a depreciation fund based on
the full consideration paid by the corporation. The directors argue that
the depreciation fund should be based on the amount of debenture bonds
issued, on the theorj' that the capital stock issued to the vendor was in the
nature of a bonus and did not represent any real value. State your views
regarding the two propositions. (N. Y., June, 1904.)

46. What do you consider to be the proper basis for providing for
depreciation or exhaustion of the following classes of property: (o)
buildings; (6) machinery; (c) small tools; (d) freight cars; (e) motor
trucks; (/) patterns; (g) patents; (h) mine equipment; (i) ore mine;
(j) special machinery for the manufacture of war munitions. (111., Dec,
1918.)

47. Give rates of depreciation commonly used for the following classes
of property, stating the method of applying them; it being understood
that ordinary repairs and maintenance are charged against earnings: (a)
buildings, brock mill construction; (6) machinery, large machinery such
as used in automobile manufacturing; (c) steam boilers, stationary; (d)
ofiRce furniture. (Mass., Oct., 1914.)

48. Mention four items of assets subject to depreciation in the Balance
Sheet, and state the annual rate that you would recommend to be charged.
(N. Y., June, 1902.)

49. Name the elements essential to the proper calculation of a depre-
ciation charge. (N. Y., June, 1911*; N. Y., June, 1913*; Mo., Dec,
1914*; Mass., Oct., 1915*; A. I. of A,, May, 1919; S. C, Sept., 1919*;
Wis., Nov., 1919.*)

302 C. P. A. ACCOUNTING

50. List the various kinds of plant assets and indicate the various per
cent of allowances for depreciation, making si;ch explanations as are
neeessarj\ (Mich., June, 1914.)

51. Name some reasons why it is important to keep distinct the
various items of cost in the construction of a building containing boilers,
engines, shafting and heating plant. In the erection of the building itself,
why should the cost of the foundations be kept distinct from the balance
of the building? (EL, May, 1904.)

52. Give some general principles which will guide you in determining
whether too much or too little provision has been made for depreciation
of buildings, machinery', tools, goodwill, patents, franchises. Would a flat
rate cover all these assets satisfactorily? (A. I. of A., Nov., 1918; W. Va.,
May, 1919.)

53. Where a plant is purchased as a whole without valuation of its
different parts, how would you provide for depreciation? (Pa., May,
1902*; Pa., Nov., 1904.)

54. In the event of a difference of opinion between auditor and direc-
tors concerning the rate of depreciation on plant and machinery as would
involve an important alteration in the proposed rate of dividend, how
can the matter be settled to the satisfaction of both parties? (N. Y.,
June, 1899.)

55. Upon the audit of the partnership accounts of a manufacturing
business, the following condition is revealed : Depreciation or discount
from the value t)f a certain class of the inventory instead of being 30
per cent as in prior years is shown as 10 per cent. What would you
deduce from these facts and what would you feel called upon to do in
this instance? (Kan., May, 1916.)

56. What is your understanding of the relationship between a sinking
fund and an allowance for depreciation? (Ind., Nov., 1917.)

57. State three important methods of calculating depreciation, briefly
explaining each. (Fla., April, 1907*; Wash., June, 1912*; Mass., Oct.,
1914; Del., June, 1915; Mass., Oct., 1915*; N. Y., Jan., 1916*; Mich.,
Dec, 1916* ; Ohio, Nov., 1917* ; Mich., June, 1919* ; N. D., July, 1919* ;
Ohio, Oct., 1919*: Md., Oct., 1919; A. I. of A., May, 1920.*)

58. In what eases should depreciation be calculated as a percentage to
cost? In what cases as a percentage to the net value (cost less deprecia-
tion reserve) ? Give the reasons in each case. (111., May, 1915.)

59. The following are the methods usually adopted for the writing off
of depreciation: (a) A fixed proportion of original value; (6) a fixed
percentage of reduced balances throwing the greater part of the loss on
the first few years; (c) a sinking fund. Illustrate the three methods to
reduce $200 to $100 in ten years. (Md., Oct., 1903.)

60. Why is an excessive allowance for depreciation objectionable? (&)
On what grounds is this usually condoned? (Ohio, Nov., 1917.)

DEPRECIATION 303

61. What is the effect of an excessive charge for depreciation? (Ohio,
Nov., 1917*; Ohio, Nov., 1918*; Ohio, Oct., 1919.)

62. State what verification you would make of the reserve for deprecia-
tion. (N. C, Aug., 1917.)

63. To what extent should an auditor hold himself responsible for the
con-ectness of depreciation? (N. Y., Dec, 1896; N. Y., June, 1899*;
Va., Nov:, 1910*; Mich., June, 1912*; Mich., June, 1913*; Wash., Nov.,
1913*; 111., May, 1914.)

64. State how you would determine that the amount of depreciation
charged off annually was correct. (Wash., May, 1910*; Mich., June,
1912*; N. C, Nov., 1918; N. C, June, 1919*; N. C, Sept., 1919.*)

65. Discuss concisel}' your conception of an auditor's duties in con-
nection with an annual audit, where a difference of opinion exists between
the auditor and the client as to the sufficiency of depreciation or depletion
charges. (Ohio, Oct., 1919.)

66. In an audit of the books of the "A" Company you find that the
fixed depreciable asset accounts, their reserve for depreciation accounts
and the operating expense accounts have been improperly kept. Charges
which should have been made against the reserve for depreciation accounts
have been made, in some cases, to the operating expense account and, in
other cases, to the asset accounts. Scrapped assets have been allowed to
remain in the asset accounts at original cost. The balances in the reserve
for depreciation accounts exceed the balances of the depreciable ass^^t
accounts. Outline the procedure which you would follow in analyzing
these accounts and state all the effects upon the net profits for the years
under review. (Wis., Nov., 1919.)

67. What are the duties of an auditor when he finds no charges made
against maintenance or other accounts for depreciation of plant? Should
he be concerned with the condition in this respect which obtains through-
out the period prior to the one to be covered by his audit? How should
he report to his client having regard for the possibility of his report being
used for purposes of obtaining loans, obtaining additional capital in the
business, or selling some part of the existing capital interests? (N. Y.,
Feb., 1909.)

68. In the preparation of a Balance Sheet explain the basis upon which
you would ascertain that reserve for depreciation was properly valued.
(Wis., April, 1914.)

69. What are the principal conditions which would influence you in
fixing the rate of depreciation on buildings, machinery and tools, fixtures
and patterns? State your reasons pertaining to each class of property.
(N. Y., June, 1918.)

304 C. P. A. ACCOUNTING

PROBLEMS

DEPRECIATION

1. A factory consists of two blocks of buildings, "A" and "B." On
the 1st of January, 1907, "A" contains engine and boiler which cost $4,000,
and machinery costing $13,000; "B" contains machinery costing $7,000.
The following are purchases of machinery : October 1, 1907, "A," $1,000 ;
July 1,1908, "A," $750; "B," $1,500; April 1, 1909, "A," $600; "B,»
$900 ; October 1, 1909, "B," $250.

On January 1, 1908, machinery (costing January 1, 1907, $1,000) is
sold from "A" for $625, and on July 1, 1908, machinery (costing $1,300
January 1, 1907) is sold from "B" for $1,000.

The accounts are made up to December 31 each year. On December
31, 1909, the whole premises and contents are destroyed by fire and the
fire insurance company agrees to pay upon the following basis : engine and
boiler, cost price, less depreciation 8 per cent per annum upon that sum ;
machinery in "A," cost less depreciation at 10 per cent per annum and
upon diminishing value; machinery in "B," cost, less depreciation at 7^2
])er cent per annum upon diminishing value.

Prepare Ledger accounts showing how much is recoverable upon this
basis. (111., May, 1910.)

2, In your examination of the Aiatomobile Delivery Truck account of
a company, you find the following entries:

Debits

January 1, 1914, Trucks 1, 2, 3, 4, at $1,200 $4,800

July 1, 1914, Truck 5 1,500

August 1, 1914, Truck 6 1,500

Credits

August 1, 1914, Truck 2 $900

September 1, 1914, Truck 4 750

Balance, September 1, 1914, $6,150.

The Reserve for Depreciation for Automobile Delivery Truck account
stood credited on January 1, 1914, with $1,800.

Upon analyzing the transactions represented by these items, you find
the following facts:

(a) Truck 5, purchased July 1 replaced Truck 1. The portion of the
reserve for depreciation accumulated on January 1 for Truck 1 amounted
to $900. Truck 5 was purchased on open account.

(b) Truck 2 was traded in for $850 on the purchase of Truck 6
costing $1,500. The difference was paid in cash. The reserve which had

DEPRECIATION

305

been accumulated for depreciation on Truck 2 on January 1 amounted to
$300.

(c) Truck 4 was totally destroyed by an accident September 1. The
reserve for depreciation on this truck amounted on January 1 to $300
and it was insured for $750.

Assume the rate of depreciation to be 25 per cent per year.

Give Journal entries which would properly record the above facts and
show the balances of all accounts affected, as of September 1, 1914.

(Wis., April, 1915.)

3. From the data given below, state clearly and explain at least three
different methods of arriving at the amount to charge annually for the
depreciation of any one or all of the following items:

Items

Value

Estimated
Life

Scrap
Value

Buildings .
Machinery

Tools

Patterns. .

$50,000

20,000

5,000

10.000

50 years

20 years

5 years

3 vears

$1,000

2,000

100

(Wis., April, 1915.)

4. A corporation has been accustomed to charge the purchase of ma-
chinery to the Machinery account, and each year to charge the Manufac-
turing account and to credit a Reserve for Depreciation account with an
amount which will offset the cost of the machinery by the time it is esti-
mated that it will be advisable to scrap the machines. During the period
that you have been employed to audit the account, you find that the
corporation has sold two machines for $500 each, and this amount has
been credited to the Machinery account. One of them cost $1,000 and the
amount reserved for depreciation on this machine is $600. The other cost
$1,500 and the amount reserved for depreciation on this machine is $850.
Make the adjusting entries to correct the books. (Mass., June, 1913.)

5. An engine installed in a factory January 1, 1914, at a cost of
$1,000 is replaced by one of larger capacity December 31, 1917, costing
(second hand) $2,800. The discarded machine was sold for $900. The
cost of making the change was $200. It has been the practice of the
company to charge off 10 per cent depreciation annually (on the diminish-
ing basis) carrying the credit to a Depreciation Reserve account. Make
the necessary Journal entries. (111., Dec, 1918.)

6. A machine costing $12,000 was estimated to have a life of twelve
years with a residual value of $1,500. At the close of each year a charge
of $875 was made to depreciation and a like amount credited to "reserve"
for depreciation. Just prior to closing the books at the end of the
twelfth year the machine was discarded and sold for $2,000 (cash) and a
similar machine was bought, costing $16,000. Show the Journal entries
you would make to close the books at the end of the twelve years, in order

306

C. P. A. ACCOUNTING

to close the transactions and to make necessary adjustmenfs. (A. I. of A.,
June, 1917* J Ind., Nov., 1918.)

7. The "A" Manufacturing Company has four general types of de-
preciable assets.

Buildings

Machinery "A". .
Machinery "B" . .
Office Equipment

Rate

20%
10%

Cost

$51,000

11,000

12,000

4.100

Scrap
Value

$1,000

1,000

2,000

100

The directors desire to keep but one Reserve for Depreciation account
and request you to determine the composite rate which may be used in
determining the annual depreciation charge.

Determine the composite rate as requested, tabulate the necessary facts
used in determining it, and comment upon the practicability of such a
plan. (Wis., Nov., 1919.)

8. A manufacturing concern has annually for the past six years made
provision at the rate of 10 per cent per annum for depreciation of its
plant and machinery, crediting the amount of such depreciation to a
suitable Reserve account. During the year an engine which cost originally
$5,000 was replaced by an improved engine costing $6,800. The cost of
the new engine was charged to Machinery account at time of purchase.
$300 was realized from the salvage of the old engine, this amount being
credited to "Scrap Sales," when received, and later closed to Profit and
Loss.

Draft the adjustment entries which j'ou consider necessary and explain
the principle upon which these entries are based.

(Ohio, Nov., 1918.)

9. "A," "B," and "C" form a partnership January 1, 1917. "A"
invests $65,000; "B," $45,000; and "C," $40,000. Profits are to be deter-
mined semiannually and are to be shared in the ratio of the original
investments. No interest to be calculated on Partners' Capital accounts.
At the end of six months the Ledger contains the following balances:

Accounts Receivable $100,000

Accounts Payable 32,400

Insurance 6,000

Interest Paid 200

Interest Received 500

Notes Receivable 20,000

Notes Payable 20,000

Purchases 600,000

Purchase Allowances 1,000

Purchase Discounts 6,000

Purchase Returns 3.000

Sales $592,600

Sales Returns 2,000

Sales Allowances 500

Salaries and Wages 30,000

Rent 5,000

Securities Owned 5,000

Miscellaneous Expense. . . 11,800

Cash 25.000

"A" Capital Account 65,000

"B" Capital Account. . . . 45,000

"C" Capital Account. . . . 40,009

DEPRECIATION 307

The inventory of stock on June 30 amounted to $110,000. Of the ac-
counts receivable, it is estimated that 2 per cent are uncollectible. During
the six months the firm discounted notes receivable amounting to $10,000
of Avhich a note of $1,000 will not be due until August 1.

The insurance premiums paid were for insurance covering a three-year
period, expiring January 1, 1920.

The following minor bills are outstanding: telephone and telegraph,
$20; electric light, $130; drayage, $100. The estimated taxes for the
year 1917 are $6,800.

The notes payable are represented by two notes of $10,000 each, for
four months at 6 per cent interest, dated May 1 and June 1, respectively.
The first note was discounted ; interest on the second note was payable at
maturity.

On July 1, 1917, "A'- withdraws from the firm, his interest being pur-
chased by "B," "C," and "D" in such proportions that the capital of all
pax'tners shall be equal. It is agreed by all parties that the value of the
goodwill is $15,000, which has been created during the period of the
partnership, and which amount it is decided should be set up on the books.

(a) Construct trial balance as at July 1; (b) prepare Journal entries
indicating the necessary adjustments; (c) prepare a Profit and Income
Statement for six months ending June 30; and (d) prepare a Balance
Sheet as of July 1 after the withdrawal of "A" and the entrance of "D."

(111., Dec, 1917.)
10. (a) The X Y Z company established for ten years has a machinery
and equipment account which has been increased from year to year as
new equipment purchases have been made. It appears also that certain
renewals and repairs have been charged to this account. Each year a
credit has been made to the account for depreciation, offset by correspond-
ing debit to profit and loss account, the ratio of depreciation being ade-
quate. The company now disposes of a part of its plant at a price equal
to what was paid for it seven years previously and credits the entire amount
to machinery and equipment account. What adjustments, if any, are
needed to correct the account?

(b) The company also has several delivery trucks charged to truck
account at cost, against which it has set up depreciation at end of each
year by credit to a separate reserve for depreciation of trucks, debiting the
amount to profit and loss account. A truck was purchased January 1,
1918, for $4,000. Depreciation has been provided at 20 per cent per
annum. On December 31, 1919, the truck is wrecked by collision. $1,000
is obtained from the insurance company and $250 obtained from salvage.
What entries are needed to adjust the ledger accounts?

(A. I. of A., Nov., 1920.)

308

C. P. A. ACCOUNTING

]1. (a) Determine the average life of the following fixed assets belong-
ing to the Western Hardware ComiDany:

Assets

Buildings .
Machinery

Tools

Patterns. .

Cost

$100,000
70,000
20,000
10,000

Estimated
Scrap Value

J.3o . 000

25.000

5.000

Estimated
Life in Years

20
15
10

(b) After determining the average life of the fixed assets, state the
amount of annual depreciation by the straight-line method.

A. I. of A., May, 1921.)

12. A company has acquired machinery, which cost $100,000, which it
expects to be able to u;;e for 10 years. The scrap value at the end of that
time is esiimaied at $25,000. A bond issue of $75,000 due in 10 years,
bearing 6 per cent inteiest and secured by a mortgage on the machinery,
was floated at 98 soon after the purchase of the machinery. The trust
indenture requires that at the end of each year, before the payment of divi-
dends, a smu shall be set aside and charged against earnings sufficient to
prove a sinking fund on a 5 per cent basis for the redemption of the bonds
at maturity.

The president of the company is in favor of providing a reserve for
depreciation on the machinery by the sinking-fund method, using 5 per
cent as a basis, although he does not advocate creating a replacement fund
for the machinery as well as a sinking fund for bonds.

(a) Compute the amount of the annual contribution to sinking fund
for the redemption of the bonds.

(b) Set up a table showing the accumulation of the fund, on the as-
sumption that it earned exactly 5 per cent.

Also indicate the annual entries for the sinking fund and for the sink-
ing-fund reserve. (1.05)'" = 1.62889463.

(A. I. of A., May, 1921.)

CHAPTER XVI
MANUFACTURING ACCOUNTS

Nature and Function of Cost Accounting — Cost accounting is that
specialized application of the principles of accounting that results in the
collection of the data used to determine the cost of producing a unit of
product in a factory/ It is possible to obtain from the general books
certain ideas as to the manufacturing costs, but it is quite impossible to
obtain from the general accounts the cost of a particular unit of product
in case more than one kind of article is turned out.

Cost finding, the method used in determining in advance what the cost
of an article should be under existing conditions, must not be confused
with cost accounting, the method of determining costs while the article is
being produced."

The purposes of cost accounting are: (a) to determine the cost, or the
profit on each unit of product, (b) to determine the profitable lines for
manufacture, (c) to secure accurate and perpetual inventories, and (d)
to secure information necessary to lay down wise managerial policies.'

Components of Cost Data — The ordinary manufacturing concern natu-
rally divides itself into three parts : a fabricating section, an administrative
section, and a selling section. Each of these sections has its own charges
to contribute to the final cost of the product placed in the hands of the pur-
chaser. The fabricating section, however, has three kinds of charges quite
different in nature, namely, material, direct labor, and overhead.* Upon the
addition of each of these various classes of expenses to the value charged
against the product, a new kind of cost is secured, as shown in the follow-
ing chart" :

.Prime Cost

Factory Cost

Selling Cost

Total Cost.

The outlays witli wliich cost accounting is concerned include the charges
necessary to put the product through the factoi'y." The analysis of factory
expenses demands an understanding of the terms "direct" and "indirect"

*For explanation of superior figures see page

309

337.

310 C. P. A. ACCOUNTING

as applied to labor. The cost of direct, or productive, labor is the charge
for services rendered directly at the tool-point in the fabricating process.'
The cost of indirect labor is the outlay necessary to the conduct of plant,
but is not directly chargeable to certain specific units of product, as the
salaries of foremen, of timekeepers, and of repairmen.*

The usually accepted cost of raw materials is the invoice price plus in-
freight. This cost, added to the cost of direct labor, makes up the prime
cost.* Manufacturing expense, or factory overhead, includes such charges
as taxes, insurance, maintenance and depreciation of factory buildings and
machinery, power, heat, light, superintendence, and other indirect labor,
and miscellaneous supplies.**

Relation of Cost to General Accounting — General accounting is the rec-
ord of facts involving the economic relationship of the manufacturer to the
world at large, while cost accounting is the record of facts involving the
internal relationship of the various cost elements and production depart-
ments. Greneral accounting is fiscal in its nature, while cost accounting is
statistical. General accounting shows the net profit made on the business
as a whole, while cost accounting shows the net profit made on each oper-
ating department, job, contract, or class of product."

Cost accounting is not a system per se to be set aside and distinguished,
as we distinguish single entry and double entry as bookkeeping "systems" ;
it is rather the application of double entry principles for the purpose of
determining unit cost in manufacturing."

The manufacturing accounts are controlled by certain accounts in the
financial books." This control may be accomplished by either of two gen-
eral methods. Under the first, a general ledger account, termed "factory
ledger," is debited with all charges against manufacturing operation and
credited with all products coming from the factory." A similar account in
the factory ledger is used, bearing the name "general ledger," the entries
to which are contra to those in the factory ledger account in the general
books." The second method is to eaiTy in the general ledger several ac-
counts by means of which the cost accounts are controlled. Such general
ledger accounts would be "productive labor," "raw materials," "f actorj- ex-
pense," "goods in process," and "cost of sales.""

Wherever practicable, the factories are divided into departments, and
departmental accounts are set up." The advantage of having separate de-
partmental accounts for rent, depreciation, power, etc., can readily be seen
from the fact that one department may have little machinery and a large
amount of floor space, while another department may have very little floor
space and very costly machinery.

Comparison of Cost and Non-Cost Systems — In order to illustrate the
difference in the operation of the accounts under cost and non-cost systems,
journal entries covering the \arious classes of transactions under the two
systems will be tabulated and posted to the accounts given in a starting
balance sheet, which is the same under both systems, and then trial balances
and financial statements will be drawn up for the accounts vinder each
system.

MANUFACTURING ACCOUNTS

311

JOHN KAY MANUFACTURING COMPANY
INITIAL BALANCE SHEET

Cash $3,000.00

Accounts Receivable 2,000. 00

Raw Materials 6,000. 00

Finished Goods 7,000.00

Goods in Process 3 , 000 . 00

Plant and Equipment 75,000. 00

$96,000.00

Liabilities and Capital

Accounts Payable $4 , 000. 00

Bonds Payable 30,000. 00

Capital Stock 50,000. 00

Surplus 12,000.00

$96,000.00

JOURNAL ENTRIES
Under Non-Cost System : Under Cost System :

When purchases of raw materials are made:

Raw Materials. $50,000.00
Accounts
Payable. . .

$50,000.00

Raw Materials. $50,000.00
Accounts

Payable. . . $50,000.00

(No entry)

Productive

Labor ....

Cash

When raw materials are requisitioned:
Goods in Pro-
cess $45,000.00

Raw Mate-
rials $45,000.00

When productive labor is paid:
Goods in Pro-
cess $30,000.00

$30,000.00 Cash $30,000.00

$30,000.00

Factory Ex-
pense $10,000.00

Cash $10,000.00

When factory expense is incurred:
Factory Ex-

pense $10,000.00

Cash $10,000.00

When factory expense is prorated over jobs:
(Not done) Goods in Pro-
cess $10,000.00

Factory Ex-
pense $10,000.00

When operating expenses are incurred:
Salesmen's

Salesmen's

Salaries $2,500.00

Advertising.... 1,000.00

Office Expense . 3,000.00

Legal Expense. 500.00

Cash

Salaries $2,500.00

Advertising. . . . 1,000.00

Office Expense . 3,000.00

Legal Expense. 500.00

Cash

Interest Ex-
pense $2,000.00

$7,000.00

When non-operating expenses are incurred:
Interest Ex-

Cash.
(No entry)

pense $2,000.00

Cash

$2,000.00
When work in process is completed:

Finished Goods $80,000.00
Goods in Pro-
cess

$7,000.00

$2,000.00

$80,000.00

312

C. P. A. ACCOUNTING

JOURNAL ENTRIES— Continued
Under Non-Cost System: Under Cost System:

When sales are made:

Accounts Re-
ceivable. . . $125,000.00
Sales $125,000.00

Accounts Re-
ceivable... $125,000.00
Sales $125,000.00

When non-operating profits are made:

Cash $1,000.00

Interest
Earned... $1,000.00

Accounts Pay-
able $45,000.00

Discount on

Purchases. $2,000.00

Cash 43,000.00

Cash $1,000.00

Interest
Earned... $1,000.00

When creditors are paid:

Accounts Pay-
able $45,000.00

Discount on

Purchases .

Cash

$2,000.00
43,000.00

When customers settle their accounts:

Cash $105,000.00

Accounts Re-
ceivable. . . $105,000.00

(No entry)

Cash $105,000.00

Accounts Re-
ceivable. . . $105,000.00

When cost of sales for period is determined:

Cost of Sales. . . $75,000.00
Finished
Goods $75,000.00

TRIAL BALANCES

Cash

Accounts Receivable. . ,

Raw Materials

Goods in Process

Finished Goods

Plant and Equipment. .

Productive Labor

Factory Expense

Cost of Sales

Salesmen's Salaries. . . .

Advertising

OflBce Expense

Legal Expense

Interest Expense

Accounts Payable

Bonds Payable

Capital Stock

Surplus

Sales

Interest Earned

Discount on Purchases .

Non-Cost

$17,000.00

22,000.00

56,000.00

3,000.00

7,000.00

75,000.00

,30,000.00

10,000.00

nil
2,500.00
1,000.00
3,000.00
600.00
2,000.00

$9,000.00

30,000.00

50,000.00

12,000.00

125,000.00

1,000.00

2,000.00

$229.000. 00 $229,000. 00 $229,000.00

Cost

$17,000.00

22,000.00

11,000.00

8,000.00

12,000.00

75,000.00

nil

75,000.00
2,500.00
1,000.00
3,000.00
500.00
2,000.00

$9,000.00

30,000.00

50,000.00

12,000.00

125,000.00

1,000.00

2,000.00

$229,000.00

MANUFACTURING ACCOUNTS

313

From the above it can be seen that the non-cost trial balance can be
turned into the cost system trial balance by the following journal entry :

Goods in Process $5,000.00

Finished Goods 5,000.00

Cost of Sales 75,000.00

Raw Materials $45,000.00

Productive Labor 30,000.00

Factory Expense 10,000.00

The above credit it^ms, totaling $85,000, represent the total manufactur-
ing cost charged to goods in process. Of this, $80,000 represents the pro-
duction costs of goods in process completed during the period and trans-
ferred to the finished goods account, and the remaining $5,000 represents
the amount added to the inventory of the goods in pi'ocess. Of the $80,000
charged to the finished goods account, $75,000 represents the production
cost of the goods sold that was transferred from the finished goods account
to the cost of sales account, and the remainder represents the amount
added to the finished goods inventory.

Before a financial statement can be made from the non-cost trial bal-
ance, the inventories must be ascertained. The inventories are : raw ma-
terials $11,000, goods in process $8,000, and finished goods $12,000. It
will be noted that these inventories are the balances of the respective
accounts in the cost system trial balance."

The balance sheet is the same for both systems of accounting, so the
following statement will be the balance sheet that would be obtained from
both trial balances :

JOHN KAY MANUFACTURING COMPANY
FINAL BALANCE SHEET

Assets

Cash $17,000.00

Accounts Receivable 22 , 000 . 00

Raw Materials 11,000.00

Goods in Process 8,000.00

Finished Goods 12 , 000 . 00

Plant and Equipment .... 75 , 000 . 00

$145,000.00

Liabilities and Capital

Accounts Payable $9 , 000 . 00

Bonds Payable 30,000. 00

Capital Stock 50,000.00

Surplus 56,000.00

$145,000.00

As cost accounting is merely an addition to financial accounting, which
by internal adjustments shows the cost of the goods manufactured, the
profit and loss statements on page 314 show that the statements obtained
from the cost and non-cost trial balances are identical, after the gross
profit on sales has been obtained.

Kinds of Cost Systems — The particular cost system established, the
method of control, and the accounts used must depend upon the type of
business. The collection of costs is dependent upon the manner in which
articles proceed through the processes of manufacture. Where a prac-

314

C. P. A. ACCOUNTING

tically steady flow of material is put into operation and poes uninter-
ruptedly through the plant to turn out a uniform product, one lot of
material following another without relation to a particular order or article,
the "product or process system" of calculating costs is used;" and where
unlike orders are put through the plant, each having its own special list of
material and method of processing, costs are collected upon each order or
"job," under the "special order system."^"

JOHN KAY MANUFACTURING COMPANY
PROFIT AND LOSS STATEMENT (DATE)

Under Non-Cost System

Under Cost System

Sales

$125 ,000

Cost of Sales:
Raw Materials:

Initial Inventory and
Purchases

$56,000
11,000

Final Inventory

$45,000

30,000
10,000

Productive Labor

Factory Expense

$8 ,000
3,000

Goods in Process :

Final Inventory

$85,000

Initial Inventory

5,000

Finished Goods:
Final Inventory

$12 ,000
7,000

$80,000

Initial Inventory

5,000

75,000

75 ,000

Gross Profit on Sales

$50,000

$50 ,000

Operating Expenses :
Selhng Expenses :
Salesmen's Salaries

$2,500
1,000

Advertising

$3,500

General Expenses:

Office Expense

$3,000
500

Legal Expense

3,500

7,000

3,500

7,000

Net Profit on Sales

$43,000

$43 ,000

Non-operating Items:
Income :
Discount on Purchases...

$2,000
1,000

$2 ,000
1,000

Interest Earned

$3,000
2,000

1,000

$3,000
2,000

Expense:

Interest Expense

1 000

Net Profit for Period

$44 ,000
44,000

Appropriation of Profits :
Surplus

MANUFACTURING ACCOUNTS 315

There are also two general methods of applying costs over the product,
known as the "productive labor method" and the "process method."**
Under the first name, the costs of labor (figured by hours or by wages)
and of material are charged against the product or order direct, and to
this total is added a pro rata share of the indirect expenses, determined
by the amount, or the time of the productive labor used to produce that
product or order, the grand total being manufacturing eost.*^ Under the
'•'process method," all charges are made against the various processes or
operations, and the total cost so ascertained is then distributed over the
product on a convenient basis — weight, number, or measure, according to
the nature of the product/'

A specialized form of the "process method" of distributing expenses,
applicable where the greater part of the processing is done by machines,
is called the "machine cost method."^* All indirect expenses having been
calculated for a given period, each element of the total is charged against
various machines or groups of machines, according to the floor space or
some other equitable basis, so that the grand total of manufacturing ex-
pense for the period is charged to all the machines in the plant.^' Usually
the unit of measurement taken is the "machine hour"; that is, the total
charge against a machine is divided by the number of hours of running
time of the factory over the period considered.^' Product is then charged
and the machine credited with the machine's hourly burden rate multi-
plied by the number of hours the machine works. If the machine fails
to run full time, it will have a debit standing against it at the end of the
period." This debit is due principally to idle time, and is ordinarily
absorbed by a "supplementary rate" added to the product, sufficient in
size to cover the deficiency.^

Combinations of the two systems of collecting costs and the two methods
of distributing them produce the four general types of cost accounting
systems: (a) special order system, distributing indirect expense by the
productive labor method; (b) special order system, distributing by the
process or machine cost method; (c) product system, distributing by the
productive labor method; (d) product system, distributing by the process
or machine cost method."

One or the other of these types can be used in any factory. The choice
between the special order and the product systems depends on the nature
of the product, uniformity being required for the successful operation of
the product system." The method of distributing factory burden should
be chosen according to the importance of labor and machinery in produc-
tion. Factories, where labor is the predominating element, should use the
direct labor method as the basis of prorating burden, while those where
expensive and complicated machinery predominate should use the process
or machinery cost method.

Control of Material — When material is received, checked, and delivered
into storage, recoi'd of the transaction is made both in the financial books
and the cost records."' In the financial books, the entry is usually made in
the voucher register, debiting raw materials and crediting vouchers pay-

316 C. P. A. ACCOUNTING

able." In the cost records, the individual items are entered in a stores
ledger, wherein an account is kept with each item of stock.'' The stores
ledger thus carries the particulars of the materials account carried in the
general ledger.'*

The effect of the issue of materials from the store room to be put into
production is a debit to the goods in process account and a credit to the
materials account.'* If any of the material so issued is later returned to
stock, a reverse entry is used to cover the transaction.'*

The charge for materials, which is to be entered against a specified unit
of product, is obtained by the use of a lot number or job number. The
requisition ticket, bill of material, or other paper, which authorizes the
removal of material from store rooms, contains a space in which is placed
the number against which they are to be charged." The various amounts
chargeable against a certain job are later assembled on a cost sheet.'* The
individual records of raw materials show the balances which should be on
hand." The balance of tlie raw materials account shows the money value of
these materials," which the stores records usually carry both by number and
value.*^ The stores records should be compared with physical counts made
independently of the materials records.*^ In this way there are three
sources from which a careful scrutiny of materials may be made, viz., the
control account in the financial books, the stores ledger accounts, and the
physical inventory.

Control of Labor Costs — The purposes served by a proper accounting
for labor are three : (a) the measuring of the relative efficiency of labor
as to production value; (b) the discovery of means of increasing produc-
tion and lowering costs; and (c) the determination of a basis for distribut-
ing overhead expenses.

The charges for labor are secured originally from a time-card or time-
ticket which shows the operator, the operation, the time worked, and the
job or lot to which the cost is chargeable, also whether the labor is to be
classed as direct or indirect.*^

Wage Systems — The more commonly employed plans of paying wages
are as follows:

(a) Day Rate. — A flat rate per day regardless of output.**

(b) Piece Work. — A flat rate per unit of output.**

(e) Premium Plan. — A flat rate per hour plus extra pay for time saved;
the time saved equals difference between standardized and actual time.*'

(f ) Bonus Plan. — A rate per hour which increases when output is in-
creased.**

(g) Stint Plan. — A flat day rate, with privilege of going home when the
assigned day's work is completed.**

The above mentioned plans contain the main points of divergence, but
there is a large number of combinations of systems. For instance, Santa
Fe efficiency plan*" has a standardized output which is regarded as 100

MANUFACTURING ACCOUNTS

317

per cent efficiency, all other outputs being sealed as percentages of
efficiency. The workmen are paid by the hour, the hourly rate consisting
of a guaranteed flat amount plus an additional amount which varies
according to the efficiency of the workmen. Thus the Santa Fe plan com-
bines the day rate plan and a rather complicated bonus plan.

Control of Manufacturing Expense — As it is not practicable to ascertain
the exact amount of the manufacturing expenses that have occurred during
the time a given job or order is in process, some sort of estimate is made
to cover the job. Distribution of expenses over product may be made
upon any number of the following bases: (a) cost of productive labor,"
(b) cost of direct materials,"' (c) prime cost," (d) hours of labor spent,**
(e) units of product," and (f ) machine hours."' The use of each of these
methods is indicated in the following table :

Last

Year

Factory

This
Year
Job

No. 6

Cost of Job under Various Methods

OF PROBATINa BuHDEN

•

Labor
Cost

Material
Cost

Prime

Cost

Labor
Hours

Units of
Product

Machine
Hours

Material Cost. . . .

Labor Cost

Burden Cost

Labor Hours

$10,000

$16,000

$14,000

56,000

42,000

10,000

$1.00
|$1 . 60

1 (?)
6
4

$1.00

1.60

il . 40a

$1.00
il.60
1.406

$1.00
1.60
1.40c

$1.00
1.60
1.50d

$1 . 00
1.60
1.40e

$1.00
1.60
1.33/

Machine Hours . .

Pieces Made

$4.00

$4.10

$4.00

$3.93

a. (14,000 ^ 16,000) X $1.60
h. (14,000 ^ 10,000) X $1.00
c. (14,000 ^ 26,000) X $2.60

d. ($14,000-^56,000) X6

e. ($14,000^10,000) XI
/. ($14,000 -^ 42,000) X 4

By-Products — A by-product is a secondary commodity of value inci-
dental to the manufacture of the primary product of a factory." Where
no direct la])or is applied, after the separation from the main product, the
by-product is classed as waste, or scrap, or offal, and is disposed of at the
best going price obtainable, the amount realized therefor being credited
to the material account involved, if both the primary and secondary ma-
terial are clearly defined. When, however, the practice is to accumulate
varying percentages of waste of a given kind and grade, such as borings,
turnings, etc., and no economic purpose would be served by the application
to material costs of such .salvage prices obtained, then the credit is passed
to the overhead accounts of the departments contributing such secondary
commodities. In the latter case, statistics are compiled and the volume
of waste for given periods is compared with the volume of raw material
put into process.

318 C. P. A. ACCOUNTING

Where direct labor is applied, the secondary commodity is called a by-
product. No fixed rule for all classes of production can be formulated as
to the basis for levying charges and passing credits for by-products, but
each case must be governed by physical conditions. Where such by-
product is of comparatively small consequence, the cost involved can be
based on percentages secured by careful tests. On the other hand, where
the by-product is an important feature and where the raw material in-
volved is subject to speculative market conditions, the by-product portions
thereof will in like manner usually reflect market conditions. In such
cases, it is customary to use current quotations for the scrap, as such, in
crediting such scrap or by-product material, to the primary raw material
account. This method is fair to both the primary and secondary product
departments, where each has its own problems to contend with and its own
profits to earn.

The cost of direct labor, materials, and manufacturing overhead used in
producing by-products, is debited to the by-products account, and the cost
of the by-products sold is credited to the by-products account"* and debited
to the sales of by-products account." The income from the sales of by-
products is credited to the sales of by-products account" and the balance
of this account is show^n in the profit and loss statement either as non-
operating income'* or as an item to be shown separately and then added
to the ordinary sales. The latter method seems preferable as the sales of
by-products appear to be operating items.

Inventories — The rules given in Chapter XIII for the valuation and
verification of merchandise inventories should be used in the valuation and
verification of the inventories of the raw materials, goods in process, and
finished goods. The inventories should be valued at cost or market, which-
ever is the lower, cost meaning for the raw materials the invoice price plus
freight-in, and other expenses incurred in placing the goods in the store
room,"^ and for goods in process and finished goods, the cost of the ma-
terials and labor expended thereon plus a proper share of the manufactur-
ing overhead." The dispute as to Avhether interest is an element of manu-
facturing overhead does not extend to the inclusion of interest in the price
of inventories of goods in process and finished goods, as the advocates of
including interest as a cost reduce the inventory valuations to prices ex-
clusive of the interest element.

In cases when a cost system is maintained, the auditor should leave the
inventory prices at the cost figures, as any excess of the cost over the
market values should be shown in a reserve for inventory fluctuations,
which reserve should be deducted on the balance sheet from the inventories
valued at cost.**

Perpetual inventories should be tested, and, if any material discrepancies
are found, they should be investigated."' The adequacy of the cost of the
system should be examined, and, if the system is faulty, the methods of
calculating the prices quoted on the inventories should be carefully
scrutinized."

MANUFACTURING ACCOUNTS 319

QUESTIONS

manufacturixg accounts

Genkral

1. What is understood by "cost" or "factory" accounting'? (N. Y.,
Dec, 1S98; Wash., Sept., 1907; Va., Nov., 1910.)

2. State your opinif)n as to the relative advantages and disadvantages
of a modern system of cost accounting for a manufacturing business.
(Mass., June, 1913.)

3. How many functions are contained in the business of a manufac-
turer? (Minn., Oct., 1916.)

4. What are the main purposes in keeping cost accounts? (Mass., Oct.,
1915*; Cal., Nov., 1916; Cal., June, 1917.)

5. Name the principal elements of manufacturing cost. (N. Y., Dec,
1898*; Pa., Nov., 1899*; N. Y., June, 1901*; Pa., Nov., 1903*; Pa., Nov.,
1904*; Mich., July, 1906*; Wash.. Sej-t., 1907*; Ohio, March, 1910*; Va.,
Oct., 1911*; Cal.," Nov., 1916*; Cal, June, 1917*; Ohio, Oct., 1919.)

6. In determining the cost, of manufactured goods, what are the ele-
ments of indirect ex]ienditures which should be included? Give your
reasons. (N. Y., Jan., 1920.)

7. What information would be required by a manufacturer in order
to determine the price at which he can afford to sell an article? (Mass.,
Oct., 1915*; Minn., Oct., 1916; Cal., June, 1917.*)

8. State wherein manufacturing or factory costs differ from commer-
cial or selling costs. (Pa., May, 1900*; N. Y., June, 1908*; Va., Nov.,
1910.)

9. Define the following terms as used in factory accounting: Store-
keeper, general charges, writing off. (N. Y., Jan., 1901.)*

10. Define: Storeroom. (Mich., June, 1908.)

11. Define: Stores. (N. Y., Jan., 1901; Mich., June, 1908.)

12. Define : Cost of production. (N. Y., Jan., 1901 ; Mich., June, 190S ;
Fla., July, 1909.)

13. Define: Shop cost. (Mich., June, 1908; Fla., July, 1909.)

14. Define: By-product. (N. Y., Jan., 1911.)

15. What constitutes selling cost? (Pa., Nov., 1904; Mich., July,
1906; Va., Oct., 1911.)

320 C. P. A. ACCOUNTING

16. Define: Prime east. (N. Y., Jan., 1901; Mich., June, 1908; Fla.,
July, 1909; Cal., Nov., 191G.)

17. Define: Warehouse. (Mich., June, 1908.)

18. Name and define five accounts peculiar to a manufacturing cor-
poration. (Cal., Nov., 1916.)

19. What books and records are essential to the use of the double-entry
system in a manufacturing business? Give list and description. (Mich.,
July, 1909.)

20. What accounts are generally opened to ascertain the cost of the
details included in operating expenses of manufacturing? (Pa., May,
1902; Pa., Nov., 1904.*)

21. Define cost accounts of a manufacturing business and state what
information they furnish. (N. Y., June, 1908.)

22. Define: Departmental accounts. (Wash., June, 1915.)

23. In what manner, if any, will cost accounts differ from results ob-
tained in general books? Explain fully. (Pa., Nov., 1904.)

24. State generally how the books of a firm doing a manufacturing
business would differ from those kept by a trading concern as to (a)
books of record; (b) Ledger accounts. "(N. Y., Jan., 1902.)

25. Name any three important accounts carried in the financial books
of a manufacturing company, which are directly connected with the con-
trol of a complete cost system and briefly explain each account. (Mass.,
Oct., 1914.)

26. Select some manufacturing business with which you are familiar
and illustrate the accounts you would use in a cost system, and how you
would prove their correctness at the end of the fiscal period. (Mass.,
June, 1912.)

27. How would you classify the accounts in preparing a statement of
a manufacturing business? (N. Y., June, 1901; Mich., July, 1906.)

28. A company engaged in the manufacture and sale of products, de-
sires a separation of their expenses under proper divisional or department
heads. Illustrating, make you own selection of some manufacturing busi-
ness, and prepare classification of accounts. What ledger headings would
you use? (111., Nov., 1904.)

29. What is shown in the Cost Books? (N. Y., Dec, 1898.)

30. Mention four items of information in addition to those usually
shown in the books of a mercantile business, which should appear in a
set of books for keeping the accounts of a factory. Give reasons for your
answer. (N. Y., Jan., 1901.)

31. What is a Cost Book? (Pa., Nov., 1899.)

32. Show the method and the advantages in cost accounting of the
process of articulating the General Ledger, Factory Ledger, and Stores
Ledger by summary accounts. (N. Y., Jan., 1911; Wis., April, 1914* j
Mo., Dec., 1914*; Mass., Oct., 1917.*)

MANUFACTURING ACCOUNTS 321

33. What value has a Cost Book in connection with the general books?
(Pa., Nov., 1903; Wash., May, 1911.)

34. (a) What are the resi^ective functions of the Cost Ledger and the
General Ledger? (b) How should the said ledgers be harmonized or
reconciled with each other? (Wash., March, 1909.)

35. Define: Cost Sheet. (N. Y., Jan., 1919.)

36. State the aim and object of a Cost Sheet. Give an example from
a business of your own choosing. (111., Nov., 1908.)

37. State what is meant by a Cost Sheet, showing its advantages and
how it is made up. Give a form of Cost Sheet for some manufacturing
business with which you are familiar. (N. Y., Dec, 1897; Pa., May,
1900*; Wash., May, 1903; W. Va., May, 1917.)

38. Design a combined Production Order and Summary of Cost form
for any business with which you are familiar. (Md., Dec, 1917.)

39. (a) Differentiate between waste and shrinkage as found in manu-
facturing plants. In cost accounting: (h) state three methods of treating
waste; (c) state two methods of treating shrinkage; (d) state three meth-
ods of treating defective goods. (Wis., May, 1916.)

40. Discuss the treatment of idle time in Cost accounts. (Wis., May,
1916*; A. L of A., June, 1917; Wis., May, 1919.)

41. What do you understand is meant by the "machine rate" system
of cost accounting? How is it operated, and in what particulars does it
differ from any other system of accounting? (Wash., May, 1911.)

42. Name some of the general methods of applying costs in a factory.
Describe briefly. (Ind., Nov., 1917.)

43. Are working or job orders covering a company's expenditures on
its own account of any value to the auditor when examining the general
books? (111., May, 1904.)

44. Discuss the peculiar problems encountered in factory cost account-
ing, briefly outlining the methods of treating with same. (Kan., Dec,
1915; Mo., Dec, 1915.)

45. (a) Explain the difference between cost accounting and cost finding.
(5) Which is preferable, and why? (Wis., April, 1914.)

46. The United States Government, through the Federal Trade Com-
mission, is investigating many lines of business and is "fixing costs."
Select some business with which you are familiar and state what infor-
mation you would require to assist in fixing costs in fairness to all con-
cerned. (Mass., Oct., 1917.)

47. (a) Give a general definition of costs, (b) What are the four
requirements of cost finding? (c) What is understood by "cost plus"
contract? (d) What is the Government ruling as to "defective work" as
applied to cost plus contract? (e) How may information be compiled to
support direct labor costs? (Iowa, Dec, 1918.)

48. Describe a cost system with which you are familiar, covering de-

322 C. P. A. ACCOUNTING

tails, and give your views as to its correctness, or othenvise, and its bearing
upon the general books. (Pa., May, 190G*; Md., Jan., 1909.)

49. Mention the principles that are involved in cost accounting and
state what should be accomplished by properly applj'ing and executing
them. (N. Y., June, 1909; Wash., May, 1910**; Mich.^, Dec, 1914.*)

50. Outline a system of cost accounts with which you are acquainted.
Classify the accounts in their sequential order. (Wash., April, 1906;
Fla., July, 1909.*)

51. In designing a cost system for a manufacturing business, what
fundamental principles are necessary to maintain? (N. C, June, 1916.)

52. What do you consider the important features of a modern adequate
system of accounting for a manufacturing concern? (III., May, 1908.)

^3. Would you recommend that monthly cost department statements
of a manufacturing concern be incorporated in the financial books or
otherwise? Give reasons for your answer, (Mass., June, 1913.)

54. Prepare a chart of accounts of a manufacturing business making
and selling three distinct classes of goods. Using this chart, explain how
profits are traced from group to group until they reach the Surplus
account. (Mich., June, 1912.)

55. Lay up a complete administrative chart for a large manufacturing
concern to show the different departments and departmental heads, from
the board of directors down, so as to place responsibility, indicate con-
trol, and to show to whom reports should be made. (Mich., June, 1912.)

56. State as concisely as possible a proper system of factory cost
accounts. (N. Y., June, 1906.)

57. Describe briefly at least four different types of cost accounting
systems and give a sufficient illustration of each clearly to identify the
types. (Wis., May, 1919.)

58. You are engaged to install a complete factory cost and accounting
system in a large manufacturing plant. Describe the various steps in the
handling of such a proposition and show by charts the accounts (prop-
erly gi-ouped, etc.) of the departments (productive and nonproductive),
logically arranged, and give a list of the various forms, etc., that would
be required to record the factory operations intelligently to handle them
from an accounting viewpoint as an integral part of the accounting system.
(Mich., July, 1909.)

59. In making an examination of the accounts of a manufacturing
company, you criticize the method of handling invoices for incoming goods
and payments therefor and are then requested by the management to
outline a plan which will overcome your objections and provide the com-
pany with a proper internal check. Submit to them your recommenda-
tions in the matter, dealing successively with all steps from the time the
need for the goods is apparent to the time of paying the invoice, explain-
ing fully the different forms or advices that should be prepared, their
origin and disposition, how the accounting department would be satisfied

MANUFACTURING ACCOUNTS

323

as to the correctness of the invoice, and how the officers would be satisfied
as to the propriety of the payiuent before signing the check. (111., May,
1915.)

60. Making your own selection ot a manufacturing industry conducted
on a large scale, outline a complete cost system, showing clearly the prin-
cipal productive departments _and briefly describing their functions. On
what basis, if at all, would you distribute to each of the departments you
have named the following elements of overhead: (a) Purchasing depart-
ment expense; (6) accounting department expense; (c) executive salaries;
{d) heat and light; (e) power; (/) inward freight and handling charges;
(g) advertising? (Pa., Nov., 1919.)

61. A manufacturing concern has been operating for a period of nine
months, but owing to incomplete development of the plant the production
during that period was greatly below the capacity and the cost of pro-
duction consequently abnormal. The directors are anxious to obtain a
statement not only showing the result of operations for the nine months,
but one which would be fairly indicative of what the results would have
been had conditions been normal. Assuming that the actual time lost on
account of the frequent stoppages amounted in the aggregate to four
months, would the auditor be justified in furnishing the latter statement
as Avell as the former, and if so, how would you proceed to show the
desired results from the following items?

Manufacturing materials. . $39,865.69

Freight 5,489.22

Productive Wages 8,827 .84

Non-productive Labor .... 4,441 .73

Salaries 6,877.29

Taxes and Interest $1,398 . 59

General Expenses 6,537 . 14

Sales 42.363.33

Finished goods at cost .... 7,346.45

(Mich., June, 1910*; Mich., Dec., 1913.)

62. A manufacturer produces 100 different kinds of goods for sale
and for each kind he has a formula or unit cost. Detailed records are
kept of sales, returns and allowances, name and quantity of each kind
of goods sold. He wishes to know at the end of the fiscal year the net
sales of each kind and the profit thereon, (a) How would you ascertain
the information desired? (6) How would you prove the profits thus
ascertained? (Mass., Oct., 1915.)

63. Discuss the practicability, or otherwise, of installing a uniform
cost system in a given line of manufacturing, as, for instance, furniture
manufacturing. Outline the basic principles of a cost system for furni-
ture manufacturers which you believe could be used by all manufacturing
plants, whether large or small, or Avhether the furniture manufactured
was diversified or confined largely to one line of furniture, as, for instance,
tables. Submit your answer in report form. (Pa., Nov., 1919.)

64. State what you consider to be the essential principles of cost ac-
counting. Give your opinion as to the manner in which a system of cost
accounting may effect great savings to a business, either directly or indi-

324 C. P. A. ACCOUNTING

rectly. A financier is interested in several businesses of different natures.
He instructs you to install a uniform system of cost accounting for all
the businesses. State what you would do first in such a case, (111., May,
1916.)

65. What are specification costs? What are their special advantages
and disadvantages? (A. I. of A., Nov., 1917; 111., Dec., 1918.*)

66. Explain the various ways of determining the cost of manufactured
articles. (Mich., June, 1913.)

67. What different methods have come under your observation of as-
certaining the cost of articles manufactured? Explain each method fully,
stating which, in your opinion, is preferable, giving reasons. (Mich., Dec,
1906.)

68. Explain the manner of arriving at the cost of mechanism, the
parts of which are made in various departments and brought together in
an assembling room, and also discuss the various headings of costs that
you would expect to deal with and manner of arriving at same. (111.,
May, 1904.)

69. Of what value in auditing is a unit of production? (Mass., June,
1912.)

70. In auditing the cost accounts of a corporation, what ultimate object
has the auditor in ascertaining the correctness of the cost of production?
(N. Y., Jan., 1917.)

71. In auditing the accounts of a manufacturing firm, what salient
features of the Cost Ledger should receive attention? (N. Y., June, 1913.)

72. In auditing the accounts of a manufacturing contractor, what
manipulations of the cost accounts should the auditor anticipate, to guard
against inflating profits? (N. Y., June, 1913.)

73. What common expedient is resorted to by manufacturing contract-
ors to hide their losses in the Cost Ledger? (N. Y., June, 1913.)

Inventories

74. What is the auditor's responsibility as to the correctness of inven-
tories of raw material, goods in process and finished goods as to quantities,
prices, and amounts? (N. Y., Jan., 1902*; Mich., June, 1912*; Ohio,
Nov., 1915*; Ohio, Oct., 1919.)

75. In the audit of a manufacturer's books, what advantage would there
be in preparing a cost statement of the product? (N. C, Nov., 1918*;
N. C, June, 1919; N. C, Sept., 1919.)

76. To what extent are you justified in accepting the certificates of
officials of a corporation as to raw materials and finished product on
hand? (Ind., Nov., 1917.)

77. What points in connection with the inventories of a manufacturing
company would you consider as essential to be brought out in estimating
the correct profits of the companv? Answer fully. (Md.. Dec.. 1917*:
Md., Oct., 1919.) ^ J K , , ,

MANUFACTURING ACCOUNTS 325

78. What are the duties of an auditor as to examination of inventories
of finished product, product in process, and materials and supplies which
have been taken and appraised by representatives of the client in ease he
is not permitted to make tests for the purpose of satisfying himself as to
the integrity of the quantities shown ? How should he cover such a situa-
tion in his report? (N. Y., Feb., 1909.)

79. What are the special points to which an auditor's attention should
be directed in examining and verifying an inventory consisting of raw
stock, supplies, goods in process, and manufactured goods? (N. Y., June,
1902.)

80. Write out in detail the general instruction for taking the inventory
of raw materials, work in process, and finished goods of a small company
manufacturing automobiles. Show the general divisions that the inven-
tory requires and provide against errors in recording the items. (N. Y.,
June, 1908; Mich., June, 1910.*)

81. What principle in the theory of cost accounting procedure is in-
volved in determining the cost of inventories of materials and supplies
used or consumed in manufacturing and maintenance purposes, that may
not be necessary in determining the cost of merchandise purchased for
resale? (N. C, Nov., 1918; N. C, Sept., 1919.)

82. State the general principles to be adopted in valuing the inventory
of a concern engaged in selling various articles, some of which it manu-
factures and others of which it buys complete. (A. I. of A,, Nov., 1917.)

83. Describe the procedure and value of a storeroom audit. (Cal.,
Nov., 1916.)

84. How is the position of auditor affected if the system of the concern
under the audit is defective as to cost methods? (A. I. of A., May, 1918.)

85. When the cost of making a product is known, also the overhead
and other expenses and the amount of the sales, what other information
would you require to determine the profits and losses in the sale of the
product? (N. C, June, 1919.)

86. As an auditor, in what respect would you be concerned with the
methods of cost accounting employed by the concern under audit and
what steps would you take to verify the correctness of the accounts
affected thereby? (Ohio, Nov., 1918.)

87. Discuss fully the proper principles to be observed in the valuation
of inventories of partially used supplies on a certified Balance Sheet.
(Pa., Nov., 1919.)

88. To what extent do you deem it necessary to verify the following,
in order that you may certify to the correctness of a Profit and Loss
statement: (a) Materials and supplies; (b) goods in process, and (c)
finished goods? (Mass., June, 1912.)

89. In a manufacturing concern which you are requested to audit, you
find what appears to be a careful book inventory of raw materials, sup-
plies, and work in process maintained, but no physical inventory has

326 C. P. A. ACCOUNTING

been made for some years. Would you consider this a satisfactory state
of affairs? And if so, on what safeguards would you insist to insure
constant accuracy in the records? (A. I. of A., May, 1920.)

90. You have been retained by a manufacturing company as a con-
sulting accountant and are requested to advise the officers what steps
to take in order to determine the cause of an apparent deficiency in the
inventoiy of factory material and work in process. How Avould you pro-
ceed to inform yourself of the circumstances and what would you suggest
as a possible remedy? (A. I. of A., May, 1920.)

91. You are auditing the accounts of the LaPorte Crane Company and
ascertain that the inventory at December 31, 1915, is carried in the fol-
lowing accounts:

Supplies in Store Room $ 75,000

Work in Process — Labor and Material only 3(X),000

Manufacturing Overhead 350,000

Selling Overhead 175,000

You also ascertain the following facts :

The actual inventory taken at December 31, 1915, amounted to $50,000,
The work in Process — Labor and Material only, at December 31, 1914,
was valued at $200,000, while the manufacturing overhead at that date was
$150,000 and the selling overhead $200,000. What steps would you take
to determine the accuracy of the inventories at the date of your examina-
tion? (111., May, 1916.)

Raw Materials

92. Explain the meaning and use of the Material and Supplies ac-
counts. (La., May, 1913.)

93. Briefly outline the principles of cost accounting Avith reference to
accounting for materials and supplies in the factory. (Md., Oct., 1919.)

94. A concern making baskets buys wood lots, stumpage, logs and lum-
ber. How would you keep the accounts? (Mass., June, 1912.)

95. A company issues an order for material. From that point on,
recite the accounting operations relating to its purchase which a well-
organized concern would employ to safeguard its interests until the bill is
paid. (HI., May, 1914.)

96. Describe the method of maintaining a check upon the materials
of a manufacturing plant and of insuring the proper charging out to jobs
of the materials used on them. (Wash., May, 1911.)

97. Discuss various methods of pricing commodities withdrawn from
storerooms. (Wis., May, 1916.)

98. What, on the books of a company, would be the proper method of
treating cash payments on expenditures for mateiia! for manufacturing
purposes? (Ohio, March, 1910.)

99. If you should contract for an audit which provided for an exami-

MANUFACTURING ACCOUNTS 327

nation of all vouchers, what would you accept as proper vouchers for raw
material on hand? (Va., Nov., 1918.)

100. Give a brief outline of the procedure you would adopt to verify
the inventory of raw material. (N. Y., Dec, 1897*; Ohio, Dec, 1908*;
Ohio, March, 1910*; Mass., June, 1910*; Mich., June, 1912*; 111., May,
1914*; Kan., Dec, 1915; Mo., Dec, 1915; Ind., Nov., 1917*; N. C, June,
1920.*)

101. What test should be made of the prime cost of manufactured
goods to guard against loss of raw material through theft by employees?
(N. Y., June, 1897; N. Y., June, 1908.)

102. On what basis should the raw material be valued in the prepara-
tion of a Balance Sheet? (N. Y., Dec, 1896; N. Y., June, 1898*; N. Y.,
Jan., 1900*; Pa., May, 1900*; N. Y., Jan., 1902*; N. Y., Jan., 1906*;
N. Y., June, 1908* ; Ohio, March, 1910 ; Wis., April, 1914* ; Mass., Oct.,
1914*; Wis., May, 1916*; Wis., April, 1918*; S. C, Sept., 1919*; N. C,
Nov., 1919.*)

103. A manufacturer stated that he wished to have the market value of
raw materials purchased considerably below the market recorded on his
books for insurance purposes. What would have been your reply ? (Wis.,
April, 1918.)

104. In closing the books of a eomj'/any at the end of its first fiscal
year, how would you treat pig iron on hand costing $20 per ton, the
market value being $18? (Mass., Oct., 1917.)

105. At the end of the fiscal year a concern inventories its raw material
at cost. Do you approve of this method? State your reason fully. (N. Y.,
June, 1911.)

106. A manufacturing concern buys raw materials in advance for its
needs. These are liable to fluctuations. At what prices should they be
inventoried? Why? (R. I., Dec, 1907.)

107. Discuss fully the proper principles to be observed in the valuation
on a certified Balance Sheet of inventories of raw materials in excess of
nonnal requirements. (Pa., Nov., 1919.)

108. A manufacturing company purchases a large stock of material
during the year at low piiees, but at time of annual inventory, values had
abnormallj' increased. How in your opinion should inventory and loss
and gain be shown on the books? (Mich., Dec, 1916.)

109. In a Balance Sheet audit, how would you verify as to quantities
and amounts the inventory items of i-epair and replacement parts for
the concern's product? (A. I. of A., May, 1919.)

110. In auditing the accounts of a manufacturing company, what
means should the auditor adopt to satisfy himself as to the inventoiy of
miscellaneous supplies? (Ohio, Dec, 1908.)

111. In what manner would you treat "scrap" as to cost in manufac-
turing? Give reasons. (Pa., Nov., 1904.)

112. The Chicago Silversmith Company has a revenue of $10,000 from

328 C. P. A. ACCOUNTING

the sale of silver and copper scrap. The sales of the year under review
amounted to $300,000 and the material cost was $100,000. How should
this scrap revenue be treated: (1) as a sale; (2) as a deduction from
material cost; (3) as a deduction from overhead, which was applied on
the basis of labor cost; (4) as a miscellaneous revenue; or (5) as a credit
to surplus? (111., May, 1917.)

113. A manufacturing company imports its raw materials and pur-
chases exchange on Europe for use in payment therefor. How should
the exchange account be treated with respect to the cost of production?
(N. Y., Jan., 1920.)

114. A manufacturing corporation is obliged to carry at least six
months' supply of a special kind of raw material, and because such ma-
terial cannot be purchased every day they are obliged to buy when the
material is in the market; consequently the prices fluctuate considerably.
When purchasing such material the company pays spot cash for it. What
method would you adopt to arrive at the cost of the raw material con-
sumed monthly in manufacturing? (Pa., Nov., 1911*; N. Y., Jan., 1919.)

Goods in Process

115. Define : Work in process. (N. Y., Jan., 1911 ; Wash., Nov., 1913* ;
Kan., May, 1916.*)

116. State how you would verify the Stock in Process. (N. Y., June,
1906; Wash., Sept., 1907*; Ohio, Dec., 1908*; Mich., June, 1912*; Kan.,
May, 1916*; Cal., May, 1916*; N. C, Aug., 1917*; 111., May, 1918; A. I.
of A., May, 1919*; N. C, June, 1920.*)

117. If you should contract for an audit which provided for an ex-
amination of all vouchers, what would you accept as proper vouchers for
goods in process? (Va., Nov., 1918.)

118. How should the partly manufactured goods be valued for use in a
Balance Sheet? (N. Y., Dec., 1896*; N. Y.. June, 1898*; N. Y., Jan.,
1900*; Pa., May, 1900; N. Y., Jan., 1906*; Wash., Sept., 1907*; N. Y.,
Jime, 1908* ; Ohio, March, 1910* ; V7is., April, 1914* : Mass., Oct., 1914* ;
Del., June, 1915*; Ohio, Nov., 1918*; S. C, Sept., 1919.*)

119. Discuss fully the proper principles to be observed in the valuation
on a certified Balance Sheet of inventories of work in process which has
produced salable by-products. (Pa., Nov., 1919.)

120. To what extent or i;nder what circumstances could you certify to
work in process in the absence of a cost system? (Cal., June, 1917.)

121. In auditing the books of a manufacturing concern, you learn that
the goods in process have been inventoried at material and labor value
only. State how to detennine the amount of manufacturing expense that
should have been added properly to complete the inventory. (Mich., June,
1^10.)

122. In auditing the accounts of a manufacturing company, how
would you determine the accuracy of the overhead included in the inventory
of work in process? (111., May, 1917.)

MANUFACTURING ACCOUNTS 329

Finished Goods

123. Define: Finished product. (Wash., June, 1915; Wash., July,
1917.)

124. State how you would verify the finished products. (N. Y., Dec.,
1897* ; N. Y., June, 1900* ; Ohio, Dec, 1908* ; Ohio, March, 1910* ; Mass.,
June, 1910*; Mich., June, 1912*; 111., May, 1914*; Wash., June, 1915*;
Kan., May, 1916*; N. C, June, 1916; N. C, Aug., 1917*; Ind., Nov.,
1917*; N. C, June, 1920.*)

125. If you should contract for an audit which provided for an exam-
ination of all vouchers, what would you accept as proper vouchers for
finished product? (Va., Nov., 1918.)

126. How should the completely manufactured goods be valued for
use in a Balance Sheet? (N. Y., Dec, 1896*; N. Y., June, 1898*; N. Y.,
Jan., 1900*; Pa., May, 1900; N. Y., Jan., 1906*; N. Y., June, 1908*;
111., Nov., 1908*; Ohio, March, 1910*; Wis., April, 1914*; Mass., Oct.,
1914*; Cal., May, 1916*; Ohio, Nov., 1918*; S. C, Sept., 1919*; Pa.,
Nov., 1919.*)

127. How can an auditor satisfy himself that the finished product is
listed at proper valuations in a statement of condition? (Mass., April,
1911.)

128. Are there any circumstances where a manufactory might in-
ventory finished goods at selling price instead of at cost? (111., Nov.,
1903.)

129. If called on to verify the Merchandise account of a manufacturing
concern, what steps would you take to make tfie necessary investigation?
(N. Y., June, 1911.)

130. In case of an audit of the books of a manufacturer, how would
you verify the figures, furnished by the superintendent, of the quantity
produced? (N. C, Nov., 1918; N. C, Nov., 1919.*)

131. In the preparation of a Manufacturing and Trading account and
a Balance Sheet, state on what basis the following asset should be valued :
Manufactured product. Give fully your reason. (N. Y., June, 1908.)

132. At what price would you carry recently manufactured goods of a
factory, assuming the market price to have dropped below cost? (Cal.,
May, 1916.)

133. The physical inventory of the manufactured stock of a factory,
taken December 31, 1908, is considerably less than the balance shown by
the perpetual inventory carried on the financial books. When the previous
inventory was taken, six months before, the difference was very slight. You
are asked Avhat steps should be taken (a) to ascertain the cause of the
difference, and (b) to prevent a recurrence of the difference. (Wash.,
May, 1909; Wash., May, 1911; Mass., June, 1913.*)

330 C. P. A. ACCOUNTING

"Wages

134. Briefly outline the principles of cost accounting with reference
to reporting and analysis of labor. (Md., Oct., 1919.)

135. Given a plant emplojang 25 yard laborers at $1.15 i^er day; 70
mechanics at $2.50 to $3.25 jier day; 40 helpers in machine shop at $1.50
per day; 30 molders at $2.75 to $4 per day; 10 helpers and 20 laborers
in foundry at $1.50 and $1.25 per day; 25 patternmakers, $3 to $4
per day; 10 helpei-s in pattern shop at $1.50 per day; 20 foremen and
under-bosses, in all three departments.

Devise a timekeeping system for these various classes of labor and give
your reasons in full for the action you take.

(Pa., May, 1906.)

136. Describe in detail the principles underlying the following systems
of wages, and their effect on the efficiency of labor in a large plant : day
rate, differential piece rate, premium plan, bonus plan, efficiency system.
(Mich., July, 1909*; Mich., June, 1914.)

137. Define: Nonproductive labor. (Wash., Nov., 1913.)

138. What classes of salaries and wages should be charged directly
against the cost of manufacture? Give reasons. (N. Y., Dec., 1898.)

139. Outline in order the various steps you would take in handling
labor tickets. (Mich., June, 1919.)

Overhead

140. What is usually meant bv burden? (111., May, 1912*; Ohio, Oct.,
1919.)

141. Define: Indirect charges. (Mich., June, 1908; Fla., July, 1909.)

142. Define: Nonproductive cost. (N. Y., Jan., 1919.)

143. What do you understand by overhead charges? (Fla., Juh',
1909*; 111., May, 1912*; Mich., June,' 1913; 111., May, 1915*; Ohio, Oct.,
1919.*)

144. What do you mean by accrued manufacturing expense? (Mich.,
June, 19] 9.)

145. In cost accounting, what is meant by "on cost"? (Mich., June,
1908*; 111., May, 1912; Wash., June, 1915.)

146. Upon what basis do you consider "on cost" should be calculated?
Give reasons. (Wash., June, 1915.)

147. What items can properly be considered as part of "overhead"?
(111., May, 1915*; 111., May, 19i7.)

148. Define the following and give a list of expenses which would
properly come under each heading: (a) Shop overhead; (6) general over-
head. (A. I. of A., May, 1920.)

MANUFACTURING ACCOUNTS 331

149. In foniiulating a Profit and Loss account for a manufacturing
concern, in which factory rent is an element, under what classification
would you allocate it in order to be economically sound? (Wash., June,
1915.)

150. Is depreciation an element in the cost of production, or should
provision therefor be made out of net profits? Give your reasons. (111.,
May, 1904*; N. Y., Feb., 1910* ;-Va., Oct., 1912*; Cal., Nov., 1910*;
Ohio, Nov., 1916*; Cal., June, 1917*; Ohio, Nov., 1917; Ohio, Oct., 1919.*)

151. Is interest on capital invested in factory of machinery generally
regarded as a proper charge to cost of manufacturing? Explain. (Mich.,
June, 1913*; Mo., Dec., 1914*; N. Y., Jan., 1917*; 111., May, 1917*; Cal.,
June, 1917*; Pa., Nov., 1917*; Ohio, Nov., 1918; Iowa, Dec, 1918;
A. I. of A., Nov., 1919.*)

152. (a) A manufacturing concern owning its own building included
interest and rent amounting to $35,000 in its distribution of burden during
the year, crediting this amount to income accounts. Assuming that the
production of the factory was worth $200,000 at factory cost, and the
final inventoiy of finished goods amounted to $50,000, what changes, if
any, would you make in the valuation of the inventory?

(b) If the $35,000 had been actually expended for interest and rent
during the year, what difference, if any, would that make in your pro-
cedure? Give reasons for the position you take.

(Wis., May, 1916.)

153. Explain what is meant by distribution of overhead. (N. Y., Jan.,
1916.)

154. Briefly outline the princij^les of cost accounting, with reference to
distribution of "overhead" expense. (Md., Oct., 1919.)

155. Overhead factory expense is computed on the hour basis in a
paint shop with skilled labor. How would such application affect costs?
(Wash., June, 1915.)

156. Show how the appropriateness of each system of distributing
overhead burdens in cost accounting may be affected by the nature of the
business in which it is employed. (A. I. of A., June, 1917.)

157. Two manufacturing companies pay rent for their factories, though
one company pays twice as much rent as the other; in all other respects
the cost of the production is the same. What effect should such rents have
on the unit cost? (N. Y., June, 1917.)

158. A manufacturing corporation carries on its books an unapplied
balance of overhead expense, which it adds to the inventory when closing
the accounts. Is this correct in principle? Explain. (N. Y., Jime, 1917.)

159. Name the various methods of disti'ibuting "Factory Expense" or
"Factory Burden," so as to apportion same to the cost of the article or
articles manufactured, stating advantaucs of each in variou.s kinds of
business. (111., May, 1907; Md., Jan^, 1909*; 111., May, 1909*; Va.,
Nov., 1910*; Mass., April, 1911*; 111., May, 1912; Mich., June, 1912*;

332 C. P. A. ACCOUNTING

N. Y., June, 1913*; Mich., Dec., 1913*; Wis., April, 1914*; III., May,
1914*; 111., May, 1915*; N. Y., Jan., 1916*; Mass., Oct., 1916*; Cal.,
Nov., 1916* ; Cal., June, 1917* ; A. I. of A., June, 1917* ; N. D,, Aug.,
1917*; Mass., Oct., 1917*; Md., Dec, 1917*; A. I. of A., May, 1918*; Ga.,
May, 1919*; Mich., June, 1919*; Ohio, Oct., 1919*; A. I. of A., May,
1920*; N. C, June, 1920.*)

160. Name and explain the various methods bj' which cost accounts may
be handled, bringing out cleariy, among other items, the difference between
the specific order plan and the process plan. (Mich., June, 1919.)

161. Discuss at least two theories of accounting for unearned burden
in a cost system. (Wis., Nov., 1919.)

162. Design a form for recording the distribution of the various items
of esthnated factory burden over three operating departments. Indicate
the basis of distribution used for each item, and explain and illustrate
three methods of charging this departmental burden to the work which
passes through each department. (Wis., May, 1919.)

163. A mill usually shuts down three weeks during the year, for
general renovation. State (a) how you would provide, in the accounts,
through the cost system, for this contingency; (6) how you would treat
the fixed charges during such period. (Mass., June, 1912.)

164. Is rent of factory a proper charge under the caption of Cost of
Production? Explain. (N. Y., June, 1917.)

165. In formulating a Profit and Loss statement for manufacturing
concern in which factory rent is an element, under what classification
would you allocate it in order to be economically sound? (N. Y., June,
1913.)

166. Overhead factoi-y expense is computed on the hour basis in a
paint shop with unskilled labor and in a machine shop with skilled labor.
How would such application affect cost? (N. Y., Jmie, 1913.)

MANUFACTURING AOCOUNTft

333

PROBLEMS

MANUFACTURING ACCOUNTS

1. The Federal Manufacturing Company commenced business on Janu-
ary 1, 1917, with a paid up capital of $2,000,000. It has a system of cost
accounts which are controlled by the general books.

The trial balance of the company at December 31, 1917, was as follows :

Debits

Credits

Cash

$30,000

130,000

25,000

150,000

Accounts Receivable

Notes Receivable

Raw Material

Overhead Burden

Work in Process

100,000

300,000

70,000

1,369,750

Finished Goods

Dividends Paid

Plant and Machinery

Profit and Loss

$23,250

Interest on Plant Investment

60,000

Accounts Payable

41,000

Notes Payable

500

Reserve for Depreciation

50,000

Capital Stock

2,000,000

$2,174,750

The general books of the company show charges and credit to Over-
head account as shown on the following page.

On making an examination of the accounts, you find that the pur-
chases of raw material during the year amounted to $500,000; that
the cost of direct labor was $375,000; and that the sales amounted to
$723,250.

An analysis of the orders in process discloses the following charges:
Materials, $25,000; Direct Labor, $37,500; Burden (100 per cent direct
labor), $37,500; and Total, $100,000.

The number of units completed and delivered to the warehouse was
100,000 and of this number 70,000 units were sold.

You find that a dividend of 3^4 per cent was declared during the fiscal
year and that no entry was made on the books.

334 C. P. A. ACCOUNTING

Overhead Account

Factory Executive Salaries (one-third) $15,000

Indirect Labor 30,000

Cost Department Salaries 10,000

Superintendents' Salaries 10,000

Repairs of Machinery and Buildings 25,000

Power 5,000

Factory Supplies and Expenses 5,000

Interest on Plant and Equipment 00,000

Salesmen's Salaries 20,000

Salesmen's Expenses " 10,000

Advertising 30,000

Freight outbound 10,000

Shipping Department, Labor and Expenses 15,000

Officers' Salaries (Executive, two-thirds) 30,000

Office Salaries (clerks) 15,000

Office Expenses 5,000

Cash Discount on Sales 15,000

Interest on Notes Payable 10,000

Allowances to Customers 10,000

Bad Debts 5,000

Depreciation of Plant and Machinery 50,000

Total $385,000

Credits:

Cash Discounts on Purchases 10,000

Burden applied to cost orders in process during the

year (equal to 100 per cent of direct labor) $375,000

You are asked to prepare a Balance Sheet and a Profit and Loss state-
ment; also a statement showing the cost and net profit per unit.

Submit your working sheet. (Ohio, Nov., 1918.)

2. The Ohio Manufacturing Company commenced business on January
1, 1918, with a paid-in-cash capital of $100,000.

The transactions for the year 1918 were as follows : purchases on credit,
land, $5,000; buildings, $20,000; machinery and equipment, $30,000; raw
material, $100,000; factory supplies and expenses, $10,200; and office
expenses, $3,000.

The cash payments for the year included, factory productive labor,
$40,000; factory non-productive "labor, $20,000; officers' salaries, $10,000;
other office salaries, $8,000 ; and salaries and expenses of salesmen, $10,000.

Inventories at December 31, 1918, were: raw material, $20,000; factory
supplies, $1,000; and work in process amounting to $30,000, two-thirds of
which amount was for materials and one-third for productive labor.

The open accounts receivable amounted to $20,000, after charging off
$1,000 for bad debts; and the accounts payable amounted to $18,200.

The units completed during the year amounted to 10,000, of which
8,000 were sold at $20 each. Provide 10 per cent for depreciation on
maehinei-y and 3 per cent on buildings.

You are required to prepare a Balance Sheet and a Profit and Loss
statement as of December 31, 1918.
(Ohio, Oct., 1919.) (Note: Prorate burden according to direct labor.)

MANUFACTURING ACCOUNTS 335

3. (a) From the following data, explain and illustrate four methods
of distributing the indirect expenses of a factory to production :

Materials Used

Productive Wages

Productive Labor Hours.
Indirect Expenses

Department A

$10,000

$3,200

8,000

$4,000

Department B

$5,000

$2,500

5,000

$2,500

Department C

$5,000
$3,500
10,000
$2,800

The factory is supposed to run 2,400 hours a year.

(h) Apply the results obtained in (a) to the facts given below for
job No. 10, in order to show the different total job costs obtained by each
of the methods. Assume (he material and labor (value and time) charge-
able to job No. 10, to be as follows:

Department A

Department B

Department C

Total

Material

$1.00
1.60
4

$2.00
1.50
3

$1.00
1.05
3

$4.00

Labor Value

4.15

Labor Hours

(Wis., April, 1915.)

4. The boolis of Factory "A," the product of which is charged to the
main office of the X, Y, Z Company, at factory cost, shows the following
facts January 1, 1910 :

Cash (imprest fund), $500; raw materials, $17,688.51; wages unpaid
and distributed, $2,348.67; goods in process, at prime cost, $62,258.61, plus
$11,352.75 for factory expenses, and $9,007.50 for management charges;
finished goods, $45,290.20.

The invoices for purchases of raw material for the year amounted to
$78,375.65; wages paid, $133,041.27; management charges, $53,695; fac-
tory expenses, $36,967.08. The cash receipts for one year's rent of loft
were $1,200 and for 11 months' sale of power, $330, the twelfth month
being unpaid.

The raw materials consumed for the period amounted to $64,188.33;
management charges distributed, $55,761.90; factory expenses distributed
to cost amounted to $43,033.23. There was also a loss on machinery re-
placements of $107.50.

The finished-product output for the year amounted to $324,583.43, in-
cluding all costs. The transfers to the main office were $338,297.90.

At the close of the period, December 31, 1910, there remained unpaid and
undistributed to Goods in Process the regular factory payroll for three
days, amounting to $2,857.93, and also 1,500 hours of operatives' overtime
at an average rate of 45 cents per hour, payable on a basis of 2^4 hours'
overtime as the equivalent of 314 hours' regular time.

Raise all the factory Ledger accounts affected and show final trial
balance. (N. Y., June, 1911; N. Y., Jan., 1920.)

336 C. P. A. ACCOUNTING

5. A company of bicycle manufacturers makes up its accounts Decem-
ber 31, 1907, for the year. The following are the debits to the profit and
loss account:

Raw Material on hand January 1, 1907 $12,500.00

Finished Machines on hand January 1, 1907, 1,600

Wheels at $30 48,000.00

Purchases of Material 62,500.00

Labor, productive 82,500.00

Manufacturing Expenses: Coal, repairs, paint, varnish,
superintendents' salaries, unproductive labor and

sundry other ejcpenses 23,000.00

Agents' Commissions 90,000.00

Branch Expense: Rents, salaries and miscellaneous 40,000.00

Selling Expense: Travelers' expenses and salaries, dis-
counts, rebates and miscellaneous 30,000.00

Bad Debts 8,000.00

Depreciation on Machinery and Plant 5,500.00

The sales for the year 1907 were 6,000 wheels, yielding $540,000; the
raw material on December 31, 1907, taken at cost, were $4,000, and the
finished wheels in stock ready for sale numbered 800. Prepai-e an account
from the above showing:

(a) Number of wheels manufactured ;

(b) The cost per wheel;

(e) The gross manufacturing profit;

(d) The final net result, including in the profit and loss account the
stock of finished wheels on hand December 31, 1907, at their cost as shown
by the accounts.

(Mich., July, 1909.)

APPENDIX

The Appendix contains a "KEY TO REFERENCES,"
and "REFERENCES FOR CHAPTERS." In each chapter
of the text there are superior figures after certain words.
Corresponding figures will be found under the same chapters
enumerated under the heading; "REFERENCES FOR
CHAPTERS," on pages 345 to 367 inclusive.

Immediately following the figures are the Key Letters, and
following these are the pages to which reference is made in
the books designated by the Key Letters, in the KEY TO
REFERENCES, on pages 339 to 344 inclusive.

To utilize the Appendix, proceed as follows:
In Chapter I, page 2, the first superior figure is 9 (after
recommends). Turning to the Contents, page xiii, we find
that References for Chapter I are on page 345. On that
page, the number 9 refers to A50. Turning to the KEY TO
REFERENCES, we find the Key Letter "A" on page 339.
Opposite this Key Letter is the name of the book, on page
50 of which you will find the reference desired.

337

APPENDIX

KEY TO REFERENCES

A. Montgomery, R. H., Auditing Theory and Practice (Text Edition),

1915, The Ronald Press Company, New York.

B. Bennett, R. J., Corporation Accounting, 1917, The Ronald Press Com-

pany, New York.

C. Castenholz, W. B., Auditing Procedure, 1918, La Salle Extension Uni-

versity, Chicago, 111.

D. Dickenson, A. L., Accounting Practice and Procedure, 1913, The Ron-

ald Press Company, New York.

E. Esquerre, P. J., The Applied Theory of Accounts, 1914, The Ronald

Press Company, New York.

F. Bentley, H. C, The Science of Accounts, 1911, The Ronald Press Com-

pany, New York.

G. Oilman, S., Principles of Accounting, 1916, La Salle Extension Uni-

versity, Chicago, 111.
H. Hatfield, H. R., Modern Accounting, Its Principles and Some of Its

Problems, 1909, D. Appleton and Company, New York.
I. Hodge (A. C.) and McKinsey (J. O.), Principles of Accounting, 1920,

The University of Chicago Press, Chicago, 111.
J. Klein, J. J., Elements of Accounting Theory and Practice, 1913,

D. Appleton and Company, New York.
K. Kester, R. B., Accounting Theory and Practice, Vol. 2, 1918, The

Ronald Press Company, New York.
L. Greendlinger, L., Financial and Business Statements, 1917, Alexander

Hamilton Institute, New York.
M. Madden, J. T., Accounting Practice and Auditing, 1917, Alexander

Hamilton Institute, New York.
N. Willis, H. P., The Principles of Accounting, 1911, La Salle Extension

University, Chicago, 111.
0. Chase, W. A., Auditing and Cost Accounting, 1911, La Salle Extension

University, Chicago, 111.
P. Paton (W. A.) and Stevenson (R. A.), Principles of Accounting, 1918,

Tlie Macmillan Company, New York.
Q. Day, C. M., Accounting Practice, 1908, D. Appleton and Company,

New York.

340 C. P. A. ACCOUNTING

R. Racine, S. F., Accounting Principles, 1913, The Western Institute of
Accountancy, Connnerce and Finance, Seattle, Wash.

S. Scovell, C. H., Cost Accounting and Burden Ajiplication, 1916, D.
Appleton and Company, New York.

T. Sprague (C. E.) and Perrine (L. L.), The Accountancy of Invest-
ments, 1914, The Ronald Press Company, New York.

U. Wildman, J. R., Principles of Auditing, 1916, The William G. Hewitt
Press, Brooklyn, N. Y.

V. Walton, S., Auditing, 1911, Alexander Hamilton Institute, New Y'^ork.

W. Wildman, J. R., Principles of Accounting, 1913, The William G.
Hewitt Press, Brooklyn, N. Y.

X, Hardeastle, J., Accounts of Executors and Trustees, 1903, New York
University School of Commerce, Accounts and Finance, New York.

Y. Rcnn, G. B., Renn's Piactical Auditing, 1905, George B. Renn, Chi-
cago, III.

Z. Spear, R H., Scientific Auditing, 1912, Commercial World Publishing
Company, Detroit, Mich.

AA. Dicksee, L. R., Auditing, 1905 (Authorized American Edition), Rob-
ert H. Montgomery, New Y^ork.

BB. Sprague, C. E., The Philosophy of Accounts, 1907, The Ronald Press
Company, New York.

CC. Cox, H. C, Classitied C. P. A. Problems and Solutions— 1915 (1916
Edition), The Ronald Press Companj', New York.

DD. How to Audit, 1919, The McArdle Press, Inc., New Y^ork City.

EE. Saliei-s, E. A., Accounts in Theory and Practice, Principles, 1920,
McGraw-Hill Book Company, New York.

FF. 1914 C. P. A. Problems and Solutions, Vol. 1, 1914, The Ronald Press
Company, New York.

GG. 1914 C. P. A. Problems and Solutions, Vol. 2, 1914, The Ronald Press
Company, New York.

HH. C. P. A. Problems and Solutions— 1915, Vol. 1, 1915, The Ronald
Press Company, New York.

II. C. P. A. Problems and Solutions— 1915, Vol. 2, 1916, The Ronald
Press Company, New York.

JJ. Cole, W. M., Accounting and Auditing, 1910, Cree Publishing Com-
pany, Minneapolis.

KK. Greendlinger, L., Accountancy Problems Avith Solutions, Vol. 1, 1910,
Business Book Bureau, New York City.

LL. Greendlinger, L., Accountancy Problems with Solutions, Vol. 2, 1911,
Key Publishing Company, New York.

MM. Saliers, E. A., Principles of Depreciation, 1915, The Ronald Press
Company, New York.

KEY TO REFERENCES 341

NN. Cole, W. M., Accounts, Their Construction and Interpretation, 1908,

Houghton, Mifflin and Company, Boston.
00. Nicholson. J. L., Cost Accounting, Theory and Practice, 1913, The

Ronald Press Company, New York.
PP. Nicholson (J. L.) and Rohrbach (J. F. D.), Cost Accounting, 1919,

The Ronald Press Company, New York.
QQ. Baugh, F. H., Principles and Practice of Cost Accounting, 1915,

F. H. Baugh, Baltimore, Md.
RR. Kester, R. B., Accounting Theory and Practice, Vol. 1, 1917, The

Ronald Press Company, New York.
SS. Mitchell, T. W., Accounting Principles, 1917, Alexander Hamilton

Institute, New York.
TT. Klein, J. J., Bookkeeping and Accounting, 1917, D. Appleton and

Company, New York.
UU. Miner (G. W.) and Elwell (F. H.), Principles of Bookkeeping, 1912,

Ginn and Company, Boston.
W. Rowe, H. M., Rowe's Bookkeeping and Accountancy, 1910, The H. M.

Rowe Company, Baltimore, Md.
WW. Baker, J. W., 20th Century Bookkeping and Accounting, 1912, South-
western Publishing Company, Cincinnati, 0.
XX. McKinsey, J. 0., Bookkeeping and Accounting, 1920, South-Western

Publishing Company, Cincinnati, O.
YY. Finney, H. A., Introduction to Actuarial Science, 1920, American

Institute of Accountants, New York.
ZZ. Rittenhouse (C. F.) and Clapp (P. F.), Accounting Theory and

Practice, Unit I, 1918, McGraw-Hill Book Company, Inc., New

York.

AAA. MacP^arland (G. A.) and Rossheim (I. D.), A First Year in
Bookkeeping and Accounting, 1913, D. Appleton and Com-
pany, New York.

15BB. Approved Methods for the Preparation of Balance Sheet State-
ments, 1917, Government Printing Office, Washington, D. C.

CCC. Webner, F. E., Factory Accounting, 1918, La Salle Extension
University, Chicago, 111.

DDD. Sherwood, J. F., Public Accounting and Auditing, 1920, South-
western Publishing Company, Cincinnati, 0.

EEE. Gilman, S. W., Cost Accounts, 1911, Alexander Hamilton Insti-
tute, New York.

FFF. Rittenhouse (C. F.) and Clapp (P. F.), Accounting Theory and
Practice, Unit II, 1918, McGraw-Hill Book Company, Inc.,
New York.

G(JG. Reynolds (W. B.) and Thoiiilon (F. W.), Dudes of the Junior
Accountant, 1918-1919, The Endowment Fund of (he American
Institute of Accountants, New York.

342

C. P. A. ACCOUNTING

HHH, * Greeley, H. D., Business Accounting, Vol. I, Theory of Accounts,

1920, The Ronald Press Company, New York.
III. Cox, H. C, Business Accounting, Vol. IV, Advanced and Ana-

lytical Accounting, 1920, The Ronald Press Company, New

York.
J J J. Rittenhouse (C. F.) and Greeley (H. D.), Business Accounting,

Vol. V, Illustrative Accounting Problems, 1920, The Ronald

Press Company, New York.
KKK. 1917 Year Book of the American Institute of Accountants, 1917,

American Institute of Accountants, New York.
LLL. Goodyear, S. H., American Bookkeeping Series, Unit 7D, 1915,

Goodyear-Marshall Publishing Company, Cedar Rapids, Iowa.
MMM. Bennett, R. J., Key to Bookkeeping and Accounting Exercises,

Part I, 1912, American Book Company, New York.
NNN. Joi-dan (J. P.) and Harris (G. L.), Cost Accounting Principles

and Practice, 1920, The Ronald Press Company, New York.
000. Tipson, F. S., The Theory of Accounts, 1902, Isaac Mendoza Book

Company, New York.
PPP. Tipson, F. S., Auditing, 1904, Fiederick S. Tipson, New York.

QQQ. Bennett, G. E., Business Accounting, Vol. II, Constructive Ac-
counting, A Manual of System Building, 1920, The Ronald Press
Company, New York.

RRR. Bennett (R. J.) and Morton (F. W.), C.P.A. Questions and
Answers, 1914, International Accountants' Society, Detroit,
Mich.

SSS. Wildman, J. R., Elementary Accounting Problems, 1914, The
William G. Hewitt Press, Brooklyn, N. Y.

TTT. Mcintosh, R. J., Reference Book of Accounts for Manufacturing
and Mercantile Companies, 1914, R. J. Mcintosh and Com-
pany, Toledo, Ohio.

UUU. Eggleston, D. C, Business Accounting, Vol. Ill, Cost Account-
ing, 1920, The Ronald Press Company, New York.

VVV, Greendlinger (L.) and Schultze (J. W.), Modern Business, Vol.
VI, Accounting Practice, 1914, Alexander Hamilton Institute,
New York.

AVWW. Bennett, G. E., Accounting Principles and Practice, 1920, Biddle,
New York.

XXX. Vinal, E. R., Mathematics for the Accountant, 1920, Biddle, New
York.

YYY. Russell (T. H.) and Jackson (W. J.), Bookkeeping, Accounting,
and Auditing, 1911, National Institute of Business.

ZZZ. Goodyear, L. E., Principles — Rules and Definitions for Bookkeep-
ing, 1916, Goodyear-Marshall Publishing Company, Cedar
Rapids, Iowa.

KEY TO REFERENCES

343

A AAA. Journal of Accountancy, Volume 1, The Accountancy Publish-
ing Company, New York.

BBBB. Journal of Accountancy, Volume 2, The Accountancy Publish-
ing Company, New York.

CCCC. Journal of Accountancy, Volume 3, The Accountancy Publish-
ing Company, New York.

DDDD. Journal of Accountancy, Volume 4, The Accountancy Publish-
ing Company, New Y^'ork.

EEEE. Journal of Accountancy, Volume 5, The Accountancy Publish-
ing Company, New York.

FFFF. Journal of Accountancy, Volume 6, The Accountancy Publish-
ing Companjf, New York,

GGGGr. Journal of Accountancy, Volume 7, The Accountancy Publish-
ing Company, New Y'ork.

IIHHH. Journal of Accountancy, Volume 8, The Accountancy Publish-
ing Company, New York.

nil. Journal of Accountancy, Volume 9, The Accountancy Publish-

ing Company, New York.

JJJJ. Journal of Accountancy, Volume 10, The Accountancy Publish-

ing Company, New York.

KKKK. Journal of Accountancy, Volume 11, The Accountancy Publish-
ing Company, New Y''ork.

LLLL. Journal of Accountancy, Volume 12, The Accountancy Publish-

ing Company, New York.

MMMM. Journal of Accountancy, Volume 13, The Accountancy Publish-
ing Company, New York.

NNNN. Journal of Accountancy, Volume 14, The Ronald Press Com-
pany, New York.

0000. Journal of Accountancy, Volume 15, The Ronald Press Com-
pany, New York.

PPPP. Journal of Accountancy, Volume 16, The Ronald Press Com-

pany, New York.

QQQQ. Journal of Accountancy, Volume 17, The Ronald Press Com-
pany, New York.

RRRR. Journal of Accountancy, Volume 18, The Ronald Press Com-
pany, New Y'ork.

SSSS. Journal of Accountancy, Volume 19, The Ronald Press Com-

pany, New York.

TTTT. Journal of Accountancy, Volume 20, The Ronald Press Com-

pany, New York.

UUUU. Journal of Accountancy, Volume 21, The Ronald Press Com-
pany, New York.

WW. Journal of Accountancj^, Volume 22, The Ronald Press Com
pany. New York.

344 C. P. A. ACCOUNTING

WWWW. Journal of Accountancy, Volume 23, The Ronald Press Com-
pany, New York.

XXXX. Journal of Accountancy, Volume 24, The Ronald Press Com-
pany, New York.

YYYY. Journal of Accountancy, Volume 25, The Ronald Press Com-
pany, New York.

ZZZZ. Journal of Accountancy, Volume 26, The Ronald Press Com-

pany, New York.

AAAAA. Journal of Accountancy, Volume 27, The Ronald Press Com-
pany, New York.

BBBBB. Journal of Accountancy, Volume 28, The Ronald Press Com-
pany, New York.

CCCCC. Journal of Accountancy, Volume 29, The Ronald Press Com-
pany, New York.

DDDDD. Journal of Accountancy, ^'olume 30, The Ronald Press Com-
pany, New York.

EEEEE. Income Tax Rulings, Bulletin No. 32, 1920—1920 Govern-
ment Printing Office, Washington, D. C.

FFFFF. Baugh (F. H.) and Schmeisser (W. C), Theory and Practice
of Estate Accounting, 1910, M. Curlander, Baltimore.

GGGGG. Administration, Volume 1, The Ronald Press Company, New
York.

HHHHH. Journal of Accountancy, Volume 31, The Ronald Press Com-
pany, New York, and The Journal of Accountancy, Incorpor-
ated, New York.

REFERENCES FOR CHAPTERS

345

REFERENCES FOR CHAPTER I.

J17; N4; Rl; VVl;

SS8;

34.

V206.

WW5; AAAl.

35.

M322; AA276.

ZZZ201.

36.

V171.

E54; J68-9; Rl; V17;

W43;

37.

V171.

AAA5.

38.

A 33; V172-3.

P31; R2; V23; GG4; KK187;

39.

C328; M263; U162-3; V173

AAA22; ZZZ182.

Y19.

Wl; CC390; WW5; DDD242;

40.

V173; AA261.

ZZZ165.

41.

M263; V173.

R17; HH113; RR258;

SS8.

42.

A440; M272; V183.

J352.

43.

A440; M272; V183.

U2.

44.

A442; M272; V185.

A50

45.

A438-9; M272; VI 84.

10.

A12; J323; 05-6; R8; V8;

46.

V185.

Y15; ZIO; AA22; JJ398-9-

47.

A439-40.

LL219; DDD6; 00088;

48.

A439.

PPP5; QQQ6.

49.

V183.

11.

V8.

50.

V183.

12.

All.

51.

V184.

13.

K79; W287; DDD8.

52.

V186.

14.

J323-4.

53.

V186.

15.

A16; DDD7.

54.

V186.

16.

Y15.

55.

A53; O70; FF283; III381.

17.

VI5.

56.

J332; O70; P648; RR501.

18.

A17; V12; Y15.

57.

A53; AA54.

19.

068-9; V13; RR212;

DDD7.

58.

A53; 021; RR50L

20.

V12-3.

59.

A. 53; R209; AA54.

21.

A17.

60.

A53.

22.

V14; DDD114.

61.

A53; D25; R210.

23.

A12; AA23.

62.

A54; N189; 064; AA54.

24.

A13.

63.

A54.

25.

VlO-1.

64.

A 56-7.

26.

CC46.

65.

A56-7; Y142; AA37.

27.

A7; AA276-7; CC44.

66.

A57; V142; AA37.

28.

AA277.

67.

A55; II90.

29.

AA274.

68.

II9I.

30.

AA272-3.

69.

A 55; HH56; II90.

31.

A6.

70.

A55; II91.

32.

V205.

71.

A55-6.

33.

A439-40.

72.

A56.

146

C. P.

A. ACCOUNTING

73.

A5(j.

77. A57; J351.

74.

A56;

Ky.S; N71.

78. A57; J334; TIOS; 00181

75.

A 55;

E9U: N71.

II36; DUD98; 0000281.

7G.

A56.

REFERENCES FOR CHAPTER II

R2; V23; JJ30-1.

34.

K556.

G3; HI; RR15.

35.

K556-7.

G4-11; H3-5; RR15.

36.

R165.

F16; J175;R17; W46

;NN21:

37.

K556.

RR5G; YV3; DDD241.

38.

K559; R226; WWW164.

RR57.

39.

K559;R226.

RR69; HHH176.

40.

K559.

RR62-3.

41.

RR267; XX98; 00034.

D14; E131; R20;

W51 ;

42.

RR267-8; XX98.

FP149; RR248;

SS103;

43.

RR268; WW139; 00035.

VY5; WW9; VYV112.

44.

RR268.

R22; W51; FF149;

SS103 ;

45.

P27; P62.

DDD248.

46.

K568-9.

10.

E131.

47.

1344-5; XX417-9.

11.

E131; R22; EE18; FF149.

48.

K565-6.

12.

E131; RR248

49.

K567; FF178-80.

13.

R22; EE19; FF80;
WW9; AAA22.

LL212;

50.

F20; J7-8; P64; SS84;
AAA23; ZZZ191.

14.

R55.

51.

V23.

15.

FF149.

52.

P60; V29.

16.

R52.

53.

E209; J9; KK119; NN33.

17.

R52.

54.

P60-1 ; V29.

18.

R54; W64; CC405-6;

55.

RR234; WW67.

DDD253; ZZZ204.

56.

A366; V214; AA39.

19.

R55.

57.

A 366; C22; V214.

20.

R54; SS106.

58.

A366; C22.

21.

E126; R220; GGIO;

SS106;

59.

A298-9; M293.

ZZZ177.

60.

A308; C192; AA30.

22.

J31.

61.

A 301; V216.

23.

H5; W50.

62.

A301; PPP7: BBBBB226

24.

W50.

CCCCC70.

25.

E73; W51.

63.

A308; V216.

26.

RR414; SS106.

64.

A 308-9.

27.

E129; R220; RR420.

65.

A 301.

28.

R224; JJ178; RR422;

SS115.

66.

A 303.

29.

RR423; SS12L

67.

A 301.

30.

RR414.

68.

A303.

31.

A301; U107.

69.

M294; U89.

32.

A302-3; C20; JJ177.

70.

A310.

33.

A310-n.

71.

A307.

REFERENCES FOR CHAPTERS

347

72.

AA32.

90.

WW269.

73.

E396; H35; J5; K62; N165;

91.

K36; SS257.

P152; V23; FF282; GG8;

92.

K32; V137.

JJ140; SS152.

93.

K34.

74.

J160; P153; V12; FF282;

94.

K37.

JJ146; KK187; NN37.

95.

K37.

75.

J160; NN39; SS154; AAA36.

96.

K47-8; R259; II209;

76.

SS154; SS157.

FFF127.

77.

J161; FF146; GG8; NN53.

97.

K48; R259; II209; FFF127-9,

78.

E116; G82-3; K590-1; R227;

98.

K41.

EE139-40; SSlll-12;

99.

K41.

VVV137.

100.

K42.

79.

G82-3; R227; EE139-40;

101.

K42.

SSlll-2; VVV137.

102.

V136; ZZZ207.

80.

R27.

103.

HH55; PPP16; BBBBB226.

81.

P96; R27-8.

104.

HH55; PPP16.

82.

E113; R31; JJ204; NN392;

105.

J338; V213; AA34; HH56;

SS260-1; QQQ251;

PPP16.

VVV140.

106.

HH55-7; PPP15-6.

83.

R31 ; NN392.

107.

HH56-7; PPP16.

84.

K28; W41; JJ205; DDD254;

108.

A366; D29; HH56; PPP16.

ZZZ207.

109.

KK95.

85.

K29.

110.

GGllO; III413.

86.

K29.

111.

KK96.

87.

D26; K32; R259-61.

112.

III413.

88.

En8-20; K34-5; P94-6.

113.

CC392.

89.

E119; K35; P95.

REFERENCES FOR CHAPTER III

F55; H41-3; K65-6; V144;
AA208; FF72-3; SS244;

10.

AVWW286-7.

11.

F50; N166; 0266; W286;

CC392; HH44; SS168-9;

12.

ZZZ169.

K63; R246.

13.

G141 ; H39 ; J331 ; K63 ; P202 ;
R246; JJ173; KK188;
SS244.

14.

RR142.

15.

N173; R248; W286; KK188.

16.

T.33-4; K63-, P202-3; W286;

17.

WWW309.

18.

K75; RR240.

19.

F55; H42; J263; K65;

AA207-8.

20.

H54; J169; R250; W289;

RR241.
D34-5; E407-8; F254-5;

HHH126.
A249-50; B339-40; K75-6;

RR240.
D34; D38.
1325; SS227; WW153;

XX394; III286-7; JJJ205;

TTT226; VVV238.
J169; III287.
F52-3; K76; SS226.
F52; JJJ52-3.
A250; FFFl 09-10.
1325; WW153; XX394;

ITI286-7; JJJ205; VVV238.
SS227; TTT226; WWW314.

348

C. P. A. ACCOUNTING

21.

E410; H48; O105; R104;

52.

LL212; RR29.

FF75-6.

53.

W55; CC395; DDD247;

22.

E410; H48; O105; R104.

QQQQ385.

23.

E410; H48; O105; R104.

54.

K344; R155; CC394; FF284;

24.

K96-7; R86; V217.

GG202; HH166.

25.

C31; K226; R71; AA212.

55.

J165-6; WWIO; HHH66.

26.

D31; G147; K97-8; HHH125;

56.

L180; R85.

WWW308.

57.

L180.

27.

K97-8; V152.

58.

L180.

28.

K85-6.

59.

L180; CCC59; ZZZ170.

29.

K79; AV287; DDD8.

60.

E299; K249.

30.

P205; W295; SS231.

61.

E300; K249-50.

31.

K693; RR411.

62.

G133; PI 55; JJ281-2.

32.

K693; W289-91; RR411-2.

63.

AAA142.

33.

J231; CC65-6; HH22;

64.

FF79; HHfi3; WW146.

II248-9; KK48-9; LL35;

65.

C76-77; K396; FF79.

NNllO; RR36; SS55;

66.

C59; F56; 1310.

XX471; JJJ94-5;

67.

E306; K343; L186-7; P320;

WWW26-7.

Hn217-8.

34.

B340-3; F273; 1354; P588;

68.

E366.

JJ330.

69.

G200.

35.

CC66; HH23; II250; SR5G.

70.

A210; K403; III36.

36.

CC66-7; II250-1; SS57.

71.

J30; RR323.

37.

E136.

72.

J31; HH166; RR324.

38.

E136.

73.

HH47.

39.

LL212.

74.

C141; D146-7; F58; K352;

40.

r22; G157-8; H81; J163;

rF153; HH47; LL211.

K71; N169; O103-4; Pill;

75.

C19-20; J30; RR323.

W53; FF280; ZZZ168.

76.

II16.

41.

G158; J165; K71; W53.

77.

D147-8; F58; FF154; HH48;

42.

DD54-6; BBB25; DDD40.

II16; LL211.

43.

r22; G157; H81; J163; N169;

78.

C140; FF154; HH47.

01 03; Pill; R99; W53;

79.

D148.

rF281; GG263; II53;

80.

G200-2.

JJ316; WW9; CCC59;

81.

C19; G200-2; FF154; RR325.

ZZZ168.

82.

0141.

44.

FF283.

83.

C141-2.

45.

GG107.

84.

A178-9; C142; XXXX228-9;

46.

K118.

BBBBB234.

47.

TTH166.

85.

018; Z26; DD14; HH255;

48.

LL212.

JJ435-6; DDD67.

49.

G158; 1310; J165; M92;

86.

0142.

N160; W54; CCC59;

87.

0142.

QQQQ384.

88.

F34; J254; N41; W18; EE23;

50.

W52; ZZZ192.

LL212; DDD245; HHH22;

51.

F23; J103; LI 79; N170;

00015.

W55; FF281-. KK185;

89.

F79; K475; GG263.

WWIO; CCC60.

90.

0310-3.

REFERENCES FOR CHAPTERS

34=)

91.

H179; NN222.

100.

P23.

!»2.

HUG; H208.

101.

M5.

!)3.

WIS.

102.

B359; F254-5; G143; J169;

94.

ZZZ179-80.

K76; L191; W289; CC39;

95.

L8(); ZZZ18().

DD65; LL69; SS227;

96.

J258; ZZZ180.

ZZ153; FFF68; HHH103;

97.

W20.

III287; JJJ134; SSS82.

98.

W20.

103.

P23-4.

99.

Q312; Y81; rF192;

HH286:

104.

P23.

JJ330; NNllO;

JJJ193.

REFERENCES FOR CHAPTER IV

ZZ4; DDD249; ZZZ188.

31.

F80; K87.

W6-7.

32.

F26; M22; L49; N176; R85;

L48; W225; W304; UU367.

CC403; KK197; 00015;

W58.

PPP65.

D63; F82.

33.

FGO; F80; K87; L49; W231;

K478.

III296.

A207; NN226.

34.

UU317.

K388; II17; SS23-5.

35.

K403; GG271; 000113.

D67; K390; SS32.

36.

K87; R84; CC393; HH45;

10.

W7; SS32.

IT103; KK197.

11.

W6.

37.

HH45; JJ312; NN226;

12.

F26; K482; R71 ; W209;

DDD248; 00041; ZZZ185.

FF280.

38.

HH45; NN226; DDD248;

13.

A205; F26; FF280.

00041; ZZZ185.

14.

K405; HH45; 11X34.

39.

00041.

15.

HH45.

40.

L74-5; HH45.

16.

D217; G216.

41.

K478.

17.

D107; K399; V151; AA170.

42.

H276-7; J212-4; W2; EE193.

18.

E229; K404.

43.

A274-5; B343-9; D64-5;

19.

H224; K399-400.

E433-7; F265; G236-7;

20.

A209.

L192-4; P195; RR47-8.

21.

A209; K400.

44.

J223-5; M96-8; R239-43.

22.

K400.

45.

1324; DD57; EE196; RR48;

23.

D106; K401; AA171-2.

XX289; WW217; FFF66;

24.

K402; AA171-2.

JJJ238; VVV63; YYYY70.

25.

K402.

46.

HH12; UU416; TTTT466.

26.

K402.

47.

J227; EE196; RR48; FFF67.

27.

A210; A214-15; A331; K403.

48.

K479.

28.

A213.

49.

D64-5; K485-6.

29.

M22; R85; CC403; HH45;

50.

BBB24.

00015; VVV422.

51.

K489.

30.

F80; K87; M21; CC392;

52.

RR509.

HH45; UU317; DDD245;

53.

G119; RR.388-9; SS170;

00015.

WW212.

350

C. P. A. ACCOUNTINa

54. G122-3; P216-7; II42-3.

55. RR388-90.

56. G122-3; J347; P216-7; II42-3.

57. RR388-9.

58. E402-4; U5G-7; GG144.

REFERENCES FOR CHAPTER V

E20; F31; AV23; GG82;

27.

HH196; KKl; RR271;

28.

AAA113; FFFl; HHH18.

29.

E20.

G218; P255; FF307.

30.

HH85; KK214.

31.

HH85.

32.

E20; RR275.

33.

E21-2; P256; W25-6; KK216;
LL240-1; RR275;

34.

VVV217-8.

35.

E21; P256; RR277; VVV218;

36.

ZZZ201.

37.

P256; KK213; RR277;

38.

VVV218.

39.

10.

E22; P256; RR276.

40.

11.

KK213; RR276; VVV218.

41.

12.

J86; GG186; RR20.

42.

13.

GG186; RR20-1.

14.

E21; P256-7; RR275.

43.

15.

E21; F31; G218; P256; W25;

44.

GG84; HH197; LL235;

45.

RR21; AAA114.

46.

IG.

GG84; HH197; RR20.

47.

17.

E26-7.

48.

18.

E27.

49.

19.

E27; GG85.

50.

20.

E27.

51.

21.

E20; W25; GG83; HH199;

52.

RR272.

53.

22.

GG83.

54.

23.

A186-90; E22; G276; J88-9;

55.

M44-6; Y117; FF151-2;

56.

KK4; NN354; RR274;

57.

UU128; WW98; XX254;

AAA113-4; FFFl;

58.

VVY222; XXXX135.

59.

24.

E24.

60.

25.

E25; FFF2; VVV229;
XXXX140.

61.

26.

E25; FFF2; HHH348;
XXXX143.

62.

E25.

E25; M75.

E25; G219; J94; GG137;

RR280; FFF9; XXXX139.
E25; RR280-1; FFF2.
E25.

E380; F23; HIO; Ml.
E381.
E381-2; F187-8; G214; NN55;

RR80.
M47-8; R21.
M47-8.

VV22; WWIOI.
E382; M6; ZZll.
A385.
E382.
RR48.
FF206; HH36; II233; KK57;

RR30.
F261; KK76.
HH218-9; FFF68.
M74; P257; RR347.
E382; M74-5-, RR 353-4.
M80.

E25; M77; RR353; TTTT321.
E24: M75; FF137.
NN353.
M47-8.
M48.
J92.

J93; H317-8.
G278; H320; M49.
J105; RR358; FFF4.
G280; H320; J106; EEIOO;

II141; RR286.
G278; H319-20-, J106-7; M53.
H319; M53.

G280; P260; EEIOO; RR286.
G279; H319; J106; M51;

P261 ; EEIOO.
G279; H319; M51; P261;

EEIOO; RR362;FFF5.

REFERENCES TOR CHAPTERS

351

63. G280; EEIOO; RR286;

FFF4; JJJ187.

64. JJJ186-7.

65. G280; H318; M52; FFF4.

66. A24; M250; U5.

67. A25; M250.

68. A185; J336-7; UG3.

69. M270.

70. E23.

71. P257; W28; FF307; RR276.

72. LL240.

73. W29;LL268-9.

74. W29; LL241; KR276.

75. P257; W29;LL240-1;RR276.

76. LL240.

REFERENCES FOR CHAPTER VI

9.
10.
11.
12.
13.
14.
15.
16.
17.
18.

E25; J94; M53; RR280.
J94; M58; HHH344.
J94; M58.
J94; M54; KK27; RR281;

HHH345-6.
M59; HHH344.
J95-6 ; M50-7 ; KK27 ; RR281 ;

XXXX138.
M56-7; 11*^1282-3; HHH346;

XXXX138.
M56; RR283; XXXX138.
M56; XXXX138.
M59; HHH344.
M58-9 ; RR280.
M61-3.
J97; LLlll.
LLlll.

H323; JJ378; KK44.
J97-8; HHH349; JJJ29.
G281; M64.
H323; J98; M66-7; P264;

EE95.

19.

KK45.

20.

R243; KK155; RR349;

FFFll; QQQQ462;

RRRR69.

21.

M65; RR374.

22.

M65; RRRR69.

23.

G283; H324-7; M65;

RRRR69.

24.

P264.

25.

E25; M46; RR372; FFF2.

26.

M73.

27.

M74.

28.

J90; LL212; RRRR68;

XXXX145.

29.

P265; RR371.

30.

E20; RR280-1; FFF2.

31.

M97; LL212; XXXX144.

32.

KK155; RR370.

33.

RR374.

34.

x\I61-3; KK145; KK160.

REFERENCES FOR CHAPTER VII

1. E22; EE91; HH196; RR393;

FFFll.

2. A188; E22-3.

3. KK9; RR394.

4. RR394.

5. M70; GGlfiS; RFi395.

6. RR395.

7. M78; RR395.
S. RR395.

9. RK395.

10. M78; RR395.

11. GG168.

12. RR395.

13. A480; R71; AA322.

14. A480; A482; AA322.

15. FF48.

16. M76; P267; V160; EE91;

FF309; KK7; RR396;
FFF12.

17. M77; M1G4; P2fi7-8; V160;

RR396.

352

C. V. A. ACCOUNTING

18.

M77-8; V160-1.

,30.

B192-4; J140; M197-9;

19.

CC356-7-, HH259.

P277-8; EE164; RR459;

20.

G284; H327-9; M78; V162;

FFF94; JJJ57; TTT210-1;

RK395; JJJ36; KRR62-3.

VVV247-51.

21.

JlOl.

31.

B194; J140; M199; P278;

22.

JlOl.

p]E164-5; RR460; FFF94;

23.
24.
25.
26.

J102.

H328-9; RR399.

H328; RR398.

RR4()0; FFF94; JJJ59.

32.
33.

JJJ58; VVV247-51.
M82.
K652; M82-3; V162;

LL169-70; NN353;

RR399-400; HHH356.

27.

B193; RR400.

34.

K654; LL168-9; NN353;

28.

M70; GG168; RR395.

FFF13; JJJ40.

29.

R 145-6.

35.

K654; LL168-9; JJJ40.

REFERENCES FOR CHAPTER VIII

1. \V29; FF306; KK211.

2. B2; FF63.

3. Kl; KK214; LL239;

DDD198.

4. LL239.

o. B2-3; E28; K2; W19-20;

W29-30; KK214; DDD198;
FFF72-3.

6. K3.

7. K2-3; EE148.

8. BIO; J128; K3; EE147-8.

9. B4; K2; FFF73.

10. K2.

11. B13; C131; J115; K3;

GG186; LL234-5; RR439;
FFF73-4; AAAA2V23I.

12. B14; GG186-7; RR440;

FFF74; AAAAA232.

13. B5; F33; J115-6; W30;

KK211; LL230; RR441-2;
VV193.

14. B5; P270; KK211; RR442-3;

VV193.

15. B6; F33-4; J136-7; W31 ;

FF63; RR441-2.

16. B6.

17. E39.

18. B6; E39.

19. U62.

20. E41; GG87.

21.

22.
23.
24.

25.
26.
27.

28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.

Bll; E41; F43; GG87;

HH201. ^
BIO; F43-4'!
r44; HH89.
H45; E41; GG87; HH89;

HH201; II71; KK213;

LL237.
GG87; HH201.
E:41; GG87; HH202; LL232.
Br2; J118; GG88; HH202;

KK213;FFF75.
B12; B36-7; GG88; HH202.
B33; KK213.
11143.

B13; F32; EE151.
B113; E41-2; F175.
E32; K299.
F175; G310.
HH87;LL237.
E40; II70.
E40.

E40; II70.
E40.

B113; D127; E40; J132.
E40-1; FF55.
E41.
A138.
II70.

B47; E46.
B47; M178.

REFERENCES FOR CHAPTERS

353

47.

B48; J119; K24; YlOl.

87.

48.

B48; E44; K24; YlOl;
KK207.

88.

49.

B48.

50.

B48; E44; J119; K24; YlOl;

KK207.

89.

51.

A179-80; C142; U62-3;

90.

XXXX228-9; BBBBB234.

91.

52.

A179; C144.

53.

K3.

92.

54.

E42.

55.

E42-3; G296; U62; W15;
RR444; VV194.

93.

5G.

IvK212.

94.

57.

F33.

95.

58.

B8; J118; HH87.

59.

E33-4.

96.

60.

F36.

97.

01.

E29-30; HH87.

98.

62.

B16.

99.

63.

E29; F34;G220; J118;

100.

RR450.

101.

G4.

G221; J118; RR450.

102.

65.

DDD195; BBBBB249.

66.

B17; KIO.

103.

67.

B17-8; M16.

104.

68.

B17; M15; DDD195;

105.

BBBBB247.

106.

69.

B91;.BBBBB391-2.

107.

70.

B91; M16; CCCCC232.

108.

71.

B91; M16; CCCCC232.

72.

M16; BBBBB252.

109.

73.

BBBBB390.

74.

Ml 5-6; HHH422; III200;
BBBBB252.

75.

B90; DDD197; III201;-
BBBBB253.

76.

B89-90; III201.

110.

77.

BBBBB389.

78.

UUUU297; BBBBB390.

111.

79.

DDD197; BBBBB253.

80.

DDD197; BBBBB253.

81.

BBBBB389.

112.

82.

KIO; BBBBB250.

113.

83.

BBBBB248.

84.

KIO; BBBBB388.

85.

D128-9.

86.

J129.

B19; E329.

B21; G303; J129; KlO-11 ;

L173; V117; HH91;

VV194; DDD202; FFF76;

HHH371; III201.
B19.

CC174; II188
E30; J118; K4; HH90;

KK186.
E30-1; J118; K5; HH91;

KK186; RR451.
B26; K6; CC174; II138;

DDD201.
B26; K7.
B25; K5; HH91; KK186;

rFF75;DDD200.
K7.

K7-8; DDD201.
B27; K7; DDD201.
K9; DDD201-2.
K8.

K8; DDD202.
B27; KIO; DDD202; FFF76;

00067; ZZZ207.
K12;DDD202.
K13; DDD202.
DDD202.

G310; H176; K15-6.
II149; VVVV233.
B359; J130; M201; TT326;

RRR88.
C132; E329; F37; G304;

K384; M188-9; P285;

CC39; DD56; GG222;

KK80; LL105; WW215;

FFFSO; III193; JJJ298;

SSS98; TTT27; VVV269.
B22; C132; F173; L173;

W197.
A133-4; B369; C132; F87;

DD54; LL83; RRR109;

SSS120; TTT26; VVV279.
B369.
D132; K248; P290; Y81;

WW215; BBB25; DDD41;

FFF81; HHH406; III209;

JJJ178; TTTT236;

DDDDD225.

354

C. P. A. ACCOUNTING

114.

B61; E46-7; F40; J120;

151.

P293.

152.

115.

B62; r41; F46.

153.

116.

B62; E47.

154.

117.

E47; F46.

155.

118.

E47; F46.

156.

119.

B64; E47; F41-2; J120;

157.

M181.

158.

120.

F46; P293; V114; Z41;

159.

XXXX231.

160.

121.

Z41; XXXX231.

161.

322.

B72; F47.

123.

B73; E48; F47; J120; K22;

162.

M180; P292;LL237;

163.

NN400; VVV264.

164.

124.

B72; E48; P291; Z41;

165.

00031; PPP74.

166.

125.

B105; M189; RR453; 11X192;

167.

SSS94-5.

168.

126.

M190; RRR77.

169.

127.

E31; W33; YYY171.

170.

128.

A82-3; F171-2; H147; J153;

171.

TT326; YYYY263.

172.

129.

LL105; JJJ154; RRR133.

130.

B369.

173.

131.

E45; RR446.

174.

132.

E45.

133.

P290-1;RR446.

134.

E48; M183; P293.

175.

135.

E53; M183.

176.

136.

E53; K23.

177.

137.

B68; E51; M179; VVV262.

178.

138.

B66-7; F47.

139.

B67.

MO.

B108; G309; J124; EE158;
JJ215-6; RR456; III194.

179.

Ml.

B57; J119-20; M181.

M2.

M181.

180.

143.

M180; JJ218; NN399;

VVV265.

181.

144.

B57-8.

145.

P291.

146.

B54-5; Jl 19-20; M181;

182.

RR447.

183.

147.

B54.

184.

M8.

B54; J124; M181; RR447.

185.

M9.

B55.

150.

1^55.

186.

E32.

J124; K12; III210.

K12.

GG168.

B175; SSS96.

H222-3; K19; III211.

K20; R168; III211.

K19.

AA194.

K19-20; III211.

J122; K19-20; DDD204;

III211.
B117-8.

J130; V113; DDD204.
G307-8;RR458.
B164; J152-3; M202.
V113.
RR455.
RR455.
L166;R102.
E332; K379.

B113; J133; L166; TTTT393.
D128; 1339; YYYY264;

AAAAA322.
B115; G303; K379; JJ294.
A194; A375; B115; G303;

H156; K379; R167;

TTTT394.
A194; C114; E331; R167.
E332; FF93; III203.
F175; G312; H177; LI 74.
B120; F175; 6312; H176;

J126; L174; W197; II145;

NN405; III203; TTT206.
B120-1; F176; G312; J128;

H177; LI 75; AV197;

NN405; III203; TTT207.
B120-2; F176; G312; H178-9;

L175-6; W197-8; III203.
B123; G312-3; P287; W198;

CC380; IIH42; III205;

YYY175.
B124-5.

K16; SSS118-9.
F175; J127.
B125; LL24; 111209;

YYY176-7.
K17-8.

187.
188.
189.
190.
191.
192.
193.
194.
195.

196.
197.
198.
199.

200.

201.
202.
203.
204.
205.

206.

207.

208.
209.
210.

211.
212.
213.

REFERENCES FOR CHAPTERS

214

215.

355

B125; K16-17; III209.

E40; K381.

B473 ; E33 ; K381.

E33; M205.

H160 ; K381-2.

D129; H159-60; K381-2. 216.

A192; C132; M318-9; Q42. 217.

Q42.

A388; C131; M319; V113-4; 218.

BBB21.
A388; CC161. 219.

V114.

V114. 220.

A193; C132; CC161; DD41;

JJ436; DDD204; 221.

XXXX229. 222.

A388; C132; V113; DD41; 223.

DDD204; XXXX229. 224.

C132.

DD42; BBB21; DDD204. 225.

A192-3; C133. 226.

A193. 227.

A193; DD42; BBB21; 228.

DDD204. 229.

CC162. 230.

A345; E316-7; H76; K330;

FF289.
K330. 231.

K330; TTT26.
B93; F178; AA191; GG50;

III17; DDDDD314. 232.

A345; C66-7. 233.

FrF135. 234.

B357; CC18; RRR259;

NNNN174.

WWW296; YYYY71;

DDDDD314.
B129; C38; D51 ; DI)54;

BBB25; DDD230; III288;

JJJ297.
C38; E262; K241.
D34; W294; DD24; BBBIO;

VVV40.
C38; D38; K259; L141;

DD24.
A99; P577; W294; DD24;

BBBIO; VVV40.
C39; D117; G189; K242;

L143; 0121; VVV41.
A102.

A131; L143.
K243.
C39; D117-8; K243; W281;

DD25; DDD75.
E283.

C40; K260;L239;R92.
W230.
D84.

A323; DD25; DDD75.
C38; M302; Q40; CC42;

DD25; FF217; BBBIO;

DDD74; GGG53; PPP9.
C38-9; Q40; CC42; DD24;

HH162; BBBIO; DDD74;

GGG53;PPP9.
C38; DD25; BBBIO; DDD74.
C38.
C40; M303; Q25; DD25;

BBBlO-11; DDD75.

REFERENCES FOR CHAPTER IX

1. R58; RR320.

2. AAA153.

3. F133; R58; W251; NN25;

NN159; AAA53.

4. AAA53.

5. R58; RR320-1.

6. W254; RR551.

7. P355; RR551.

8. F133.

9. NN25; RR551.

10. P350;RR543-4.

11. F133;FF78;RR252; WW94.

12. RR253; WW94.

13. C62; F133.

14. RR223-4.

15. F137; H97; L152; P189;

V103; JJ68; RR118.

16. F137; P189; RR119.

356

C. P. A. ACCOUNTING

17.
18.
19.
20.
21.
22.
23.

24.
25.
26.
27.

28.

29.

30.
31.

32.

33.
34.

35.

36.
37.

38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48:
49.
50.

51.
52.

B256; W254; III142.

W130; WW151; XX381.

L152.

G231; P189; AA59; RR255.

W252.

G231; 1325; L62; RR255.

B357; P:E197; FF256;

VV244; AAA178; RRR99.
W251; RR199.
RR198.

RR199; UU119; AAA56.
W252; RR199.
M135; RR550; YYY89;

VVVV316; BBBBB397-8.
RR549; YYY89; VVVV316;

BBBBB397.
GG49-50.
C175.
A384; V97; XXXX229-30;

YYYY151; AAAAA75.
A 324-5.
S98; JJ356; NN279; 0033;

PP139; EEE374;

UUU241-2.
A95; D206; K472; L233; W9;

II13; BBB14; NNN443;

CCCCC155.
S97-8.
K470; L234; S116; CC202;

II13; 0041; CCCCC156.
K470; 0041.
K470.

K470; CC202; II13.
K471; CC202; II13-4; 0041.
S104; S116; S118.
S123-4.
S123.

L235; OO40.
PP140.

PP140; NNN434.
PP140; NNN434.
P349.
K272; CC391; NN166;

SS285; YY13; DDD244;

III146; RRR47; SSSS40G.
T120; CC401; SS281-2; YY3.
P352; T121; NN420; SS282;

YY5; XXX48; SSSS407.

53. B286; H271; P361; Tr22;

CClll; NN42G; QQ58;
SS288; YY15; III147-8;
XXX61; SS8408;
YYYY77; AAAAA245.

54. B287; G341; H271: P372;

T122; CClll; NN428;
YY21; III152; RRR52;
XXX76; PPPP361;
SSSS413; AAAAA247-8.

55. P359; T121; NN421; QQ56;

SS285; YY12;XXX52.

56. K272; P367; T122; LL65;

NN427; QQ56; SS289;
YY31; III149-50; XXX66;
YYYY77; AAAAA245;
CCCCC314.

57.

P375; T122; NN428; YY40.

58.

H95-6; K273-4; T122; LL64;

NN168; YY46; VVV320;

AAAAA246.

59.

T122; YY49-50.

60.

T108; NN200.

61.

T108.

62.

T104-6.

63.

T106.

64.

A130; K269.

65.

K269.

66.

K270.

67.

K270; P383; T89; CC119;

LL65; NN171; YY48;

JJJ150; BBBB45;

VVVV321.

68.

K270; P381; T90; NN172:

YY52; DDDDD217.

69.

T95; Nm79; YY52-3;

XXX107-8.

70.

T96.

71.

SSSS419.

72.

YY54-5.

73.

NN201; YY56-7.

74.

YY28.

75.

TlOO; YY58-60; 0000338-9;

YVVY322; DDDDD216.

76.

YY29; CCCCC470-2.

77.

YY24-5.

78.

P363.

79.

YY36.

REFERENCES FOR CHAPTERS

357

80. P368.

81. T63; YY37; XXX70-,

ZZZnd; SSSS406.

82. yY38; XXX70.

83. T64; XXX70.

84. T62; YY18; III147; XXX68.

85. YY19; XXX69.

86. T63; XXX68.

87. SSSS419.

88. YY34; XXX70.

89. T63; XXX70; DDDDD215.

REFERENCES FOR CHAPTER X

1. A181; D149; G329; K411;

R171.

2. K411.

3. C103; M17; HHG4.

4. E373; F54; G329; K411 ;

WW9.

5. B331; p]408; W182.

6. C103; DISO; F53-4; G334;

R173; K411; nH84;
RR252-3.

7. B434; G186; Dl)];); BBB15-,

DDD135.

8. E252; K322; W278; III259.

9. B332.

10. C33;K228.

11. C33.

12. L223.

13. E373.

14. K415; M17; P311;

XXXX476.

15. K413.

16. K413.

17. K415.

18. K415-6.

19. C99; F161; R166.

20. F140; K305; R117; R182.

21. K416.

22. E374; G221 ; K416; P310;

FF83; XXXX476.

23. B325; C116; F151; G342;

R183.

24. B326; D151; E377; F151;

G342; L208; 0147; R183;
V119; KK189; 0000298.

25. B326; G342: L209; 0147;

R184; V119; KK189;
0000298.

26. K418.

27.

28.

29.
30.
31.
32.
33.
34.
35.

30.
37.
38.
39.

40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.

51.
52.
53.

54,

55,
56,

A143; C119; F151; G342;

K419; R184; II60.
D152; G342; K419; L201);

R184.
B326; L210.
K420.

G343; K420.
K420; L210; R184.
G221; K417; HH45; HH64.
G330.
A 197; C114; G334; M18;

W174; HH64.
A196; L219; M18.
E369; G330; W56.
K461; CC113; EE187.
K463; L219; W185; EE187;

CC114.
B289; L220; V108; GG260.
B336; G335; V108.
E292; G335.
E292.
E292.
R194.

B324; HH64; DDD252.
B289; L220; V108; GG260.
E369; G330; L220.
B324; E293; G335-6.
B204; B279; B324; K448;

R190; V104; PIH64;

ITI143;PPP106;ZZZ201.
B280; G336-7; K448; R190.
B280; B289; L218.
B280; E294; R190.
B324-5; D148; E376; L218;

L220; FFFF395;

KKKK263.
M307.
A128; M307.

358

C. P. A. ACCOUNTING

57. A 128; M307.

58. A128; B294; B302.

59. B203; B302; K458; HH65.

60. A128; B302; 0141; P327;

HH65.

61. A128; P327; JJJ154.

62. K458; G211; H192; DDD73.

63. B292.

64. B292; K4G1; L222; R195;

DDD73; III158; SSSS392;
WWWW203; XXXX478.

65. B297; DDD73.

66. K460; FF115; SSSS390;

WAVWW202; XXXX478.

67. B299.

68. K462; L218; DDD73; III160.

69.

70.
71.
72.
73.

74.
75.
76.
77.

78.

L218; II86; DDD73;

III159-60.
K4G2; DDD73; III161.
II86; III159.
B299; D148; L218.
F179; K459; P306; CC113;

EE187; II86; DDD72;

III157.
B299; 111157; PPP106.
B300-1.

K461; PPP106.
K462.
B308; F179; K463; L219;

P308; W181; CC114;

EE187; II86; NX126;

DDD74; III161; PPP106.

REFERENCES FOR CHAPTER XI

1. E34; P323; W114; W169;

ZZZ170.

2. B208; E37; V99; W170;

II103; NN242; DDD180;
IIII276.

3. B217; E37; W170; II103-4;

Kia96; DDD180.

4. B217; B245; DDD181.

5. B217; B245; E35; P325;

NN242. ^

6. B248-9; E35; P325; NN243.

7. E36.

8. E36.

9. E36-7.

10. B209.

11. B220; E37; DDD181.

12. B218; E38; DDD181.

13. B218; E38.

14. B217; E37; P325; W170;

III 03-4; KK196; DDD180.

15. B216-7; DDD182.

16. B211; U149.

17. B231; m48; DDD182.

18. B213; K360; DDD182.

19. B214; B313; P325; CC404;

DDD182.

20. B215; E37-8; U148; DDD182.

21. B213;E38; P325;DDD182.

22.

P327.

23.

RRR87.

24.

B242; G211; K369; V99;

DDD184; SSS186;

VVV273.

25.

R157.

26.

H191.

27.

E339; G211.

28.

K370.

29.

K370; 0142; FF78.

30.

B241-2; K364; R157; III140.

31.

B242; K364; R157; III139.

32.

K364-5; R157.

33.

B244; DDD184.

34.

B268-9; E341-2; K365;

NN199.

35.

NN199.

36.

C59; D35; F91; G205; CCIO;

FF93; II82; FFF87;

JJJ155.

37.

B96; D45; G207; FF93;

LL69; FFF87; YYYY68.

38.

P577.

39.

B268; DDD185.

40.

J134.

41.

B268; F91; CC117; II287;

DDD185; DDDDD313.

42.

J134; TTTT235.

REFERENCES FOR CHAPTERS

359

43.

B247.

63.

44.

B249.

64.

45.

B250-1.

65.

46.

B252.

66.

47.

B254; K366; U150; W173.

67.

48.

B259-60.

68.

49.

B261.

69.

50.

B261.

51.

B262; E37; W170; II103-4;
KK196; DDD180.

70.

52.

B262.

71.

53.

B269; D134; K367;,DDD185.

72.

54.

B269; D134; DDD185.

73.

55.

A374-5; B270; D134; E305;
R166-7; NN199-200;
DDD185.

74.

5(3.

V102; DDD185.

75.

57.

B270; P407; FF123; NN199;
DDD186.

58.

B231; F182.

76.

59.

B232-4; F182-3.

60.

B237; B253; F183; U150.

77.

61.

A 158; A388; C122-3; M316;

V98-9; DD40; BBB20;

78.

DDD188.

79.

62.

Q42.

A388.

A388; C123.

M316.

A388.

A388; C123; U149.

C124; U149-50.

C124; U150; DD40; HH152;

JJ435; BBB20; DDD188.
A389; M316; DD40; BBB20;

DDD188.
V99.
D118.

T152; W113.
M302; C38; Q40; FF217;

DD25; BBBIO; DDD74;

PPP9.
C38; Q40; CC42; DD24;

FF122; GG204; HH161;

BBBIO; DDD74; PPP9.
A323; DD25; BBBll;

DDD75.
C38; DD25; JJ435; BBBIO;

DDD74.
M303; Q25.
DD25; BBBll; DDD75.

REFERENCES FOR CHAPTER XII

E30; E355; J136; K428;

14.

L212; EE183; RR461.

15.

L213; P301-2.

16.

B142; P302; K436; III72.

17.

B153; K436; L211; V160.

18.

B151; E361; K439; L211 ;

P303; V157.

19.

B152; K438; III72.

20.

B144; K438; L216; P303;

21.

V156; III72.

22.

B145-6; III86-7.

23.

A230-1; F45; K433; L213;

24.

V156.

25.

10.

L105; P233; FF160; 11157;
YYY211.

26.

11.

K446.

27.

12.

D74; K406.

28.

13.

E358-9; G184; HH69; 1161.

29.

K379; CC235.

D70; H208.

D73.

K433; L216.

B133; F45; J118; V156;

K429; L212; RR461.
K431; V157.
K432.

E361; J137; V159.
B135; K432; 11163.
B136; K432.

B136; E356-7; K434; III66.
E357.
F174; L173; I1I69;

VVVV66; XXXX410.
K434; L212-3; ITI66.
B142; K442;L212; JJ213.
K349; L213; AAAAA76.

360

C. P. A. ACCOUNTING

30.

B153; E362; K349; JJ437.

53.

31.

E362; K349.

54.

32.

B142-3; E362; G199; K442;

55.

JJ213; KK77; RR462;

56.

III82.

33.

B143; E362; F181; G199;

57.

K442;P301;V159;GG329;

58.

RR463; III83.

34.

L212.

59.

35.

RR460-1.

60.

36.

B142; G326; J136-7; P301-2;

61.

JJ213; III82-3.

62.

37.

B153; K436; L211; V160;

63.

III92.

04.

38.

B153;L211.

65.

39.

III92.

06.

40.

B151; EE184; QQll ; II 191.

U7.

41.

B144; K438; P303; III85.

42.

B152-3; III92.

C8.

43.

B144-5; B152-3; 0328;

69.

III85-6; III92; YYY179.

70.

44.

B145; III86.

73.

45.

B149; K434;III87.

72.

46.

B149; III89.

73.

47.

B150; III90-1.

74.

48.

B150; III91.

75.

49.

A198; C133; R156; W196:
CC21; DD42; GG198;

76.

HH47; JJ438; BBB21 ;

77.

DDD204; JJJ241;

78.

000151.

79.

50.

B76-8; B138-41; r48; V150;

III80-1; ZZZ181.

80.

51.

Q25; JJ423.

52.

AA48.

025; AA48-9; JJ423.

Z42; AA49; JJ437.

B145-6.

B334; F180-1; J136; L195;

P299 ; VV167.
B335; L207; III97-8.
1279; J118; K407; P294;

HH45; SS106; 00019.
G302; L196.
L196.

B334; G221; K407.
G303; L207; JJ223-4; III96.
B335-6; G312; K408; AA47.
L196; JJ302; III96.
L208.

K408; L196; III95.
A194; A375; B15; G303;

K379; R167.
1280; JJ224.
K426; GG211.
K408; JJ302.
P550; DD57; III292.
K426; 1 1 1292.
K426.

I35G; K426-7; P198; III306.
C133.
DD42; GG320; BBB21;

DDD209.
Q42.
SS106.
EE220; JJ330; LL19; III94;

SSS186.
B462; D47: F53; 6.301;

DD56; BBB25;DDD41;

RRRIOO.

REFERENCES FOR CHAPTER XIII

1. E165; CC399; DDD250;

ZZZ194.

2. E167; R56-7; RR88.

3. F118; G35.

4. F117-8; R57; GG12; 118.

5. F117; V126; GG12; HH115;

118; RR88-91.

6. G172.

7. G175.

8. A54-5; G175; 1 190.

9. II91.

10. A55; G175; II90.

n. A55; II90-1.

12. C193; J341.

13. A338; m04.

14. A338-9; C156.

15. U104-5; AA90; FF294.

16. A 151; AA174-5.

REFERENCES FOR CHAPTERS

361

17.

C156; 029; FF294.

57.

J173; J181; Y28; EE278;

18.

U105.

ZZZ206.

19.

A301.

58.

A455; W213; EE278;

20.

A301; U106.

DDD99.

21.

A301.

59.

A455; L66; W213; RR65-6;

22.

D147; FF234.

DDD99; ITT396;

23.

A151-2.

WWWW190.

24.

C91; L310; ]{70; DD21;

60.

Flll-2; C20; K230; R67;

RR381; BBB17; DDD102.

V57; W124-5; CC296;

25.

A56.

NN297.

26.

A56.

61.

K230; F112; W124-5;

27.

A315; C150.

CC296; NN297.

28.

P91; RR343.

62.

K230; NN297; VV.142.

29.

A301.

63.

K230.

30.

A303.

64.

C26; K230.

31.

C152-3.

65.

D104-5; K230.

32.

RR344.

66.

W204-5.

33.

RR344.

67.

J213; WW217.

34.

C261.

68.

WW191.

35.

FF94; XX403; QQQ182.

69.

146; XX418.

36.

XX403.

70.

K230.

37.

DDDDD74.

71.

C149; V127; W201-2.

38.

EEEEE12.

72.

F92; J213; VV85; WW194.

39.

R68; RR343.

73.

L55.

40.

A210; A214-5; A332; K403;

74.

RR243; VV87; WW192.

V130; AA172; III36;

75.

F92; J213; L70; FF180;

VVVV401.

XX417.

41.

V130; AA172.

76.

A357.

42.

A332; C71-2; D102-3; K403;

77.

C70;L71; ^YW193.

RR343; VVVV401.

78.

A456-7; C7(); L172; 0119;

43.

RR382.

II89; SS181.

44.

V128; RR341.

79.

F88; WWII; 111307;

45.

K530.

NNNN174.

46.

R214; V128; RR341.

80.

C172; G252.

47.

L49; M298; R68; W167;

81.

1324; J172; RR243; VV142;

RR341; QQQ178.

WW217; XX289; JJJ49.

48.

F217; L52; NN142.

82.

E88; N71.

49.

RR141; JJJ99.

83.

GG54; PPP97.

50.

RR425.

84.

C189.

51.

RR141.

85.

HH56-7.

52.

M298; R68; L49; 032;

86.

W201.

RR482; QQQ180.

87.

L69; V126; VV142; XX289.

53.

RR483.

88.

L71-2.

54.

RR483.

89.

JJJ226.

55.

L50; M298; R214; RR484;

90.

1324; V126; W201; IT45;

QQQ181.

RR243; VV142; WW217;

56.

R67-8; KK112.

XX289; JJJ49.

362

C. P. A. ACCOUNTING

91.

W202.

113.

A90; C27; CC292; DD22;

92.

1324; W205; RR243; VV142;

BBB13; DDD103.

WW217; XX289; JJJ49.

114.

A91; C27; C36; DD17; II49;

93.

U106-7.

II155; JJ430; BBB13;

94.

A36r)-, C173.

DDD103; 000138;

95.

D108; K353-4.

PPPIO; XXXX236.

96.

CC315.

115.

A91; C27; CC292; GG331;

97.

CC315.

1148; II155.

98.

G34; CC398; VV53;

116.

A91; C26-7; CC292-3; DD21;

DDD249; ZZZ190.

FF227; GG318; II49;

99.

DUO; G171; K240; U108.

II160; BBB12; DDD103.

100.

D109; E171; F116; G171-2;

117.

A91; C28; CC293; DD23;

K238-9; U108; GG180-1;

FF228; BBB13; DDD104.

DDD245.

118.

A84; A99; C27; UllO; DD22;

101.

A395; U108; W120; GG181;

GG50; II154; VV53;

DDD98.

BBB12; DDD103; PPP65.

102.

A395; DUO; UIOS.

119.

C32-3; L156-7; W124.

103.

DUO.

120.

GG191; HHH205; III272-3.

104.

A88; C25; CC290; DD20;

121.

J327; R72; GG63; HH165;

GG331; 1148; BBBll;

000146.

DDDIOI.

122.

CC302; HH231.

105.

A88; C25; Z37; CC290;

123.

E155; VI 34; RR299;

DD17; FF228; GG50;

ZZZ205.

II160; JJ430; BBBll;

124.

A227; L51; AA189; CC296;

DDDlOl; PPPIO;

DDD82; PPP28.

LLLL356.

125.

H288;L50; W202; DD56;

106.

A88; C25; L308; Q41 ; Z37;

T.L97.

CC290; DD20; GG318;

126.

W207; LL97.

II48; BBRll; DDDlOl ;

127.

A 325-6; DDD83.

PPnO; LLLL356.

128.

Y135-6.

107.

A88-9; C25; L308; Q41 ; Z37;
CC290 ; DD20 ; GG318 ;

129.

V134-5; AA59.

II48; BBBll: DDDlOl;

130.

P72; S35; GG231; KK113;

PPPIO; LLLL356.

LL12; VV142; WW217;

108.

A89; C25; C36; CC291;

AAA157; EEE272;

DD20; FF228; GG181;

RRR123.

II155: BBBll; DDD102.

131.

B348; E436; F59; G250;

109.

A89; C2f); CC291-2; DD21;

T325; J172; L62; R242;

FF227; III 55; BBBr2;

U186; W230; CC19; DD57;

DDD102; PPPf.5.

IvK87; QQ6; RR255;

110.

A89; C26; CC292; DD21;

IJU386; XX289; ZZ113;

FF227; II49; II160;

III308; JJJ49; NNN314;

BBB12; DDD102.

SSS55; TTT225;

111.

A89-90; C20; CC292: DD21 ;

WWW181 ; YYYY70.

BBB12;DDD102.

132.

V135.

112.

A 90; C27; Z37; CC292;

133.

J172; P72; GG232; 1 145;

DD22; JJ430; BBB13;

KK113;LL12; VV142;

DDD103.

WW217; AAA157.

REFERENCES FOR CHAPTERS

363

134. B367; EE197; HH12;

RRR124.

135. B348; E436; F59; G250;

1342; R242; U186; W232;
CC18;DD57; RR255;
UU386; XX289; ZZ114;
III308; JJJ49; NNN314;
SSS55; TTT225;
WWW185; YYYY70;
CCCCC148.

136. A317.

137. A317-8.

138. P654; JJ289-90; NN342;

SS144-6.

139. RR308-9.

140. P654.

141. K414-5; WWW231.

142. C116; R176.

143. F135; DD54; KK46; SS388;

BBB25; DDD40; 111288;
WWW231; DDDDD224.

144. JJJ240.

145. CC260; RRR276.

146. SS388.

147. F136 ; AA189.

REFERENCES FOR CHAPTER XIV

A363;L78; W263;RR117.

25.

E309; F128; K571; W155-6;
W264-5.

A363; E309-10; W155-6;

W265.

26.

K580; QQQQ465.

27.

C60; W264; VV95.

28.

C60; F129; 1311; W264;
WWr24; XX372; QQQ344.

29.

C60; 1311; W264; WW125;
XX373.

30.

C60.

H259; P308; R178-9;
KK161; EEEE198.

31.

10.

R179; W268; XXXX475.

11.

H260; XXXX475.

12.

P309; R179.

32.

13.

L223-4; R192; W180;

KK161.

33.

14.

C50-1; C62;U46; CC265;

34.

II322-3.

35.

15.

C50-1; C61.

36.

16.

C51; DD31; BBB16.

37.

17.

C61-2; CC266;II322.

38.

18.

A362; DD48.

30.

19.

C61; Q41; GCt318.

20.

CC266; II322.

40.

21.

K575; U132; W266-7.

41.

22.

K575.

42.

23.

K576.

43.

24.

K578.

44.

K579; NN93; 111273,

JJJ195; WWW253;

QQQQ466; AAAAA229;

CCCCC311.
K579.

1263; K579; JJJ195.
K579.
R72; G063; HH165;

000146.
W262; CC312; GG184-5;

FFF14; JJJ118;

RRRR150; VVVV229.
CC312; GG184-5; FFF14;

JJJ118; RRRR150;

UUUU298; VVVV229;

YYYY154.
RRRR150; UUUU298;

VVVV231; YYYY354.
S164; NNN277.
W269.
A163-4.

AAA178; TTT30.
C98.

A161 ; C98.
A75; DD17; BBB9;

DDD84-5.
A 354; J313; U66.
E105; F202; J313.
A354; F202.
V141-2.
E104.

^1)4

C. P. A. ACCOUNTING

45.

A359; C168.

57.

YYYY71; AAAAA230.

46.

FF228; 11161; ZZZZ143.

58.

C313; CC18; ZZ16; JJJ106

47.

C166.

NNNN174.

48.

A354.

59.

W234; FFF135; RKR132.

49.

C167; II161.

60.

CCCCC74.

50.

C170; GG318.

61.

1341; W230; XX4]5;

51.

A359-60; GG318.

NNN314; WWWISI.

52.

O20; Z40; II162; XXXX220.

AA63.

53.

C314; F129; S76; DD57;

63.

CC361.

GG231; JJ356; KK45;

64.

A102; A364.

NN278; 0026; PP17;

65.

C316; W224.

QQ14; RR255; VV201;

66.

YYYY71 ; ZZZZ225.

WW276; AAA177;

67.

W223.

EEE269; NNN233-5;

68.

RR109.

TTT29;UUU111.

69.

J17; UU36-7; ZZ39.

54.

B348; E436; G231; W235;

70.

J176-8; SS-243; RRR122-3.

CC339; HH40; SSS55;

71.

1326-8; RR 235-7.

WWW184-5.

72.

AVW156-7.

55.

CCCCC23.

73.

RR234; WW67.

5G.

PP524; NNN256;

74.

RR234.

AAAAA230.

75.

PPP8.

REFERENCES FOR CHAPTER XV

1. R114; R127-8; W236; CC218;

HH43; SS297; DDD143;
CCCCIOI.

2. G346; Hr21; MM62;

UU319.

3. K113; MM61; SS298.

4. K115; MM63.

5. G347; K137; CC218; JJ295;

MM124; NN209;
WWW224; DDDDD315.

6. DD30.

7. A404; E371; G350; K121;

CC220-1; QQ47; SS305-6;
UU319; AAA136; DDD146;
WWW223; TTTT165-6.

8. K121; SS306.

9. K123; MM29.

10. K124; EE69.

11. G352; K125.

12. P106; V65; EE69.

13.
14.
15.
16.
17.
18.
19.
20.
21.

22.
23.

24.

25.
26.

A225; E372.

A225; G352; TTTT150.

K129.

K311.

G183.

K104.

K115; MM63.

MM63-4.

G349; R117; MM25;

HHH326.
R118.
H126; CC218; EE74; Hn43;

AAA13S-9; DDD151-2;

PPP119.
K187; N90; R176; DD30;

AAA138-9; DDD151.
E408; HH232.
B359; L191; W289; CC260;

HH284; LL134; 00325;

SS233; FFr60: RRRIOO;

SSS56.

REFERFCNCES FOR CHAPTERS

365

27. IVm); G14fi; H126-7; 134;

J218; 014:^; H25(); CCfj?;
DDSf); EETfr. FF 197
aG221; HHl.l; I J 233
KK32; lAMU; KIt253
SS388; UU384; VV152;
W\V215; XX230; BBB25;
1)1)1)40; EEP:2G8;
FFF109; IIHH134;
lH28fi; JJJ52; TTT2G;
1)DDDD224.

28. R120.

29. N89; P497; MM55; DDD153.

30. P499; MM5f).

31. NN113.

32. MM50-1; DDD152.

33. MM 50.

34. MM57; DDD152.

35. H126; CC218; EE74; HH43;

AAA138-9; DDD151-2;
PPP119.

36. R120.

37. A421;A424;H142; 0129-30;

PP146.

38. G353-4; R225; MM39;

PP391.

39. G354; K192; MM40; ITI180;

TTTT169.

40. G355; K193; MM42;

TTTT169.

41. G354; MM46-7; TTTT169.

42. K146.

43. K150; K152; K157; K161;

K169.

44. G358 ; K152 ; P511 ; HHH322.

45. D167; H128; J186; K152

O130; P511; R119; W243
CC219; GG179; II200
MM134; QQ49; DDD148
HHH322; III171; JJJ168
VVV409; WWW227;
EEEE192; HHHH407;
DDDDD310.

46. K175.

47. H128; J187; P512; MM123;

DDD148; HHH322;
111171; VVV410.

48.

49.
50.
51.
52.
53.
54.
55.
56.

57.

58.
59.

60.
61.
62.
63.

64.

65.

66.

67.
68.
69.
70.
71.

72.
73.

P512; MM123; DDD149;

111111322.
G363; J187; V67; DDD151.
1II171.

H128; DDD151; VVV410.
G363; K154; QQ48; III172.
K177.

G363; III172.
G363.
K155; CC230; MM23;

III177.
G368; CC229-30; JJJ169.
K199.
G364; K150; CC220;

DDD150-1; III172;

CCCCC71.
K178.
G364.
CCCCC71.
A406; D167-8; J188; K157;

O130; R119; CC219;

GG179; II200-1; JJ271;

MM139 ; QQ49-50 ; DDD149 ;

HHH322; I1I173; PPP118;

VVV410; EEEE192;

HHHH407.
H129; J 188; K157; MM141;

NN430; VVV411;

WWW228; XXX85;

MMMM247; XXXX319;

DDDDD310.
J189; G361; K179; R121;

W243; HHH323; III174-,

PPP118-9; VVV411;

WWW227-8; EEEE192.
G360; K179; W243; JJ272;

DDD149; VVV411.
H131; DDD149.
K179.

DDD149; VVV412.
HHH324.
G362; K159; CC229; JJ272;

SS322; JJJ169; SSS.S487;

DDDDD311.
K179; JJ272.
K179.

366

C. P. A. ACCOUNTING

74.

P515; W244; AA180;

90.

K182; MM129; SS316.

JJ268-9; MM145-6; QQ50;

91.

YY61.

SS312-3; YY63; HHH324;

92.

G364-5; O130; IIII353.

III175; EEEE193.

93.

G365.

75.

G366-7; P516-7; HHH325.

94.

H134; DDD151.

76.

K161; W243; MM129;

95.

G369; K169.

SS312; III177.

96,

K182.

77.

K161.

97.

K169; III167.

78.

P513; SS313.

98.

K183.

79.

D168-9; G367; K181;

99.

III167.

MM146; SS.313; III176.

100.

K183.

80.

MM130.

101.

K170; K183.

81.

A407.

102.

K183.

82.

P517.

103.

K170; 0131; R119; HH119;

83.

D167; CC219; GG180; II201;

QQ49; SS325; III166.

DDD149.

104.

K183.

84.

G364;K163; XXXX322.

105.

K184; NN321; SS325; III166.

85.

K163; MM152; QQ57; YY61;

106.

G362.

VVV412; HHHH407;

107.

R121.

EEEE193.

108.

K184.

88.

DDDDD312.

109.

K170; MM77.

87.

K165.

110.

K185.

88.

SS315-6; YY62; XXXX320;

111.

K184.

DDDDD312.

112.

P510.

89.

K181.

REFERENCES FOR CHAPTER XVI

1. F222; HH48; YV202;

EEE219; ZZZ177.

2. HH48.

3. D195; H293-5; J317; II194;

VV209-10; WW235; UUU5.

4. F225; H305; J295; SIO;

NN270; 0022; YY200;
WW236; CCCl-2; DDD99;
EEE274; NNN20; TTT176;
UUU16.

5. H296; J295; CC199; II201;

PP19-20.

6. PP17.

7. F225-6; P615; W203; 0024;

EEE274.

8. F226; P616; W203; 0025;

EEE274; NNN22.

9. G246; H296; J215; Q90;
W203; NN270; 0032;
PP19; 000113; RRR33;
TTT176; UUU16; YY V344.
JO. H301; 0026; PP17; YY201;
WW239; EEE371-2.

11. NNN3; ZZZ177.

12. 0021; PP5.

13. C177; EEE240; EEE249.

14. 00127-8; PP308-9.

15. GG46; 00123-4; PP315.

16. GG203; PP306; YY224.

17. EEE222; EEE236; NNN64.

18. VV251; WW282.

19. 0046; PP29-30; TTT189;

ruui2.

20. F228-9; 0046; PP24-5;

WW235; TTT186-7;
UUU13.

REFERENCES FOR CHAPTERS

367

21.

F224; 0046.

48.

22.

0046.

23.

0046.

24.

E183-4; 0047.

49.

25.

H301; P617; 0061-2;

50.

VV219-20.

51.

26.

H300; VV220; \YW275.

27.

H302.

28.

EE261; 0066-7; VV217.

29.

0047-8.

30.

F249-50; PP29.

31.

R223; EEE320; EEE334.

32.

G176; II34; VV236.

33.

H311; J309; R223-4; GG273;
PP246; QQ17; EEE334.

52.

54.

J311; R223; VV225;
EEE386.

53.

35.

G176; S31; P122; GG273;
II34; EEE320.

36.

PP86.

37.

H312; PP83; VV255;

NNN135; TTT178; UUU34.

54.

38.

J312; EEE222; EEE235-6.

39.

E177; H311.

40.

GG203; WW250.

41.

E177; GG273; PP79; QQ19;
VV256.

42.

C25; G172; S31-2; GG273;

r jT

TTT177; DDDDD70.

oD.

43.

S49-50; WW262.

44.

CC389; 0071-2; PP99;
VV212; WW237;QQQ305;
TTT179; UUU196-7;
KKKK423-4.

tJyJt

45.

CC389; 0072-4; PPIOO;
VV212; WW237; QQQ305;

TTT179; UUU197-8;

57.

KKKK424-5.

58.

46.

CC389; 0074-5; PP103;

59.

VV212; CCC295; QQQ305;

60.

TTT179; UUU200-1;

61.

KKKK427.

47.

CC389; 0075; PP104;

62.

VV212; CCC295;

63.

EEE297-8; QQQ305;

64.

TTT180;UUU202;

65.

KKKK425-6.

66.

CC389; 0075-6; PP104;

VV212; QQQ305; TTT180;

KKKK426.
0077-8; PP105.
IIII328.
E182; F231; H297; J316;

0193; S62-3; CC205-6;

EE258; FF285; HH50;

JJ352; 0055-6; PP169-71;

VV214; WW239; CCC305;

EEE373; NNN224;

TTT183-4; UUU272-5;

GGGG365-6.
11297; J315-6; EE258-9;

FF285; UUU281.
F232; H297; J316; S63;

CC205-6; EE259; HH50;

0058; PP166-9;

VV214-5; EEE373;

TTT185; UUU281;

GGGG365.
F231-2; H297; 0193; S64;

CC205-6; EE258;HH50;

JJ353; 0056-7; PP171-3

VV^214; WW240; CCC310;

EEE373;NNN223;

TTT184-5; UUU275-7;

GGGG366; GGGG367.
H297; 0192-3; HH50;

EEE372-3; GGGG364-5.
E183; F232-3; H297; 0192;

S65-6; CC205-6; EE260;

HH50; JJ358; 0059-67;

PP173-7; VV215; WW241;

EEE373-4; NNN224;

TTT185; UUU277-9;

GGGG367.
FF283; LL214.
F216.

F216-7; L52.
F217; L52.
F240; L53; WW285;

NNN345.
L157; CC204; GG205.
CC203-4; GG205; DDD99.
C33.

A92; HHHH413.
A92; C37.

UNIVERSITY OF CALIFORNIA LIBRARY

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Form L9-32m-8,'58(5876s4)444

Library'
Graduate Sch )0l of Business Adrainistratiofl
University of California
, . Los Angeles 24, California

A 000 177 614

SOUTHERN BRANGrt;

UNIVIRSIIY Of CALIFORNIA

. LIBRARY,
llJDS ANGELES, CALIF.

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