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This text was originally intended for the use of students in the 
various courses in Accounting in the University of Michigan. It 
attempts to place before the student in the form of problems the 
more important types of concrete situations which present the neces- 
sity for accounting analysis. 


Problems in Accounting 



Classify the following transactions into debit and credit items : 

(a) The book-keeper's salary is paid in cash, $20. 

(b) Coal to the amount of $60 is purchased. 

(c) A customer pays his account, $75. 

(d) The firm buys goods, $400, on a 6oday note. 

(e) The firm borrows $500 from a bank on a 6o-day note. 

(f) The firm settles an open account of $200 with a note. 

(g) The property of the firm is mortgaged for $4,000. 
(h) Interest is paid for capital-service rendered, $100. 

(i) Finished goods to the amount of $600 are sold on account to 
various parties. 

(j) The accounts mentioned in (i) are paid in cash. 

(k) Goods are damaged by fire, $200. 

(1) The plant depreciates in value, $600. 

(m) Fuel is consumed, $100. 

(n) The machinery is repaired, $50. 

(o) Cash, $200, is paid for labor services. 

(p) An insurance premium of $100 is paid in cash. 

(q) Taxes are paid, '$75. 

(r) Capital stock to the amount of $25,000 is issued for cash. 

(s) $10,000 of the above stock is exchanged for $10,000 in 
first mortgage bonds. 

(t) The bonds mentioned in (s) are paid with cash, $10,000. 

(u) Miscellaneous services are purchased with cash, $100. 

(v) Miscellaneous services are consumed, $100. 

(w) The firm gives $100 in cash to charities. 

(x) Dividends are paid in cash, $500. 

(y) $400 is received for rent of a portion of the factory. 

(z) The firm receives $30 in interest on its bank deposits. 


Journalize the following transactions. Open the proper ledger 
accounts and post. 


(a) R. A. Taylor begins business with a capital (all in cash) of 

(b) Mr. Taylor rents a store building, paying 3 months' rent 
($180) in advance. 

(c) Merchandise is purchased, $3,000. Terms: $1,500 cash, 
and a 6o-day note for the balance. 

(d) Second-hand fixtures are purchased for $500 in cash. 

(e) Stock and fixtures are insured for one year; premium, $25. 

(f) Cash sales are made, $300. 

(g) Merchandise is sold on acount to J. R. Walters for $250. 
(h) Cash is paid for advertising, $10. 

(i) The clerk's salary is paid, $15. 

(j) Merchandise is purchased on account from E. P. Smith Co. 
to the amount of $500. 

(k) Merchandise is sold for cash, $350. 

(1) Miscellaneous services are purchased with cash, $40. 

(m) J. R. Walters returns $50 of merchandise as unsatisfactory. 

(n) Merchandise is sold on account to F. A. Talbot, $600. 

(o) Mr. Taylor draws $300 jinpash for his personal use. 

(p) The note mentioned in (c) is paid and interest for 20 days, 


(q) Merchandise is stolen, $200. 

(r) Interest is received on bank deposit, $15. 

(s) Mr. Taylor buys the building he has been renting for $10,- 
ooo. Payment is made as follows: Cash, $3,000; the former own- 
er of the building assumes F. A. Talbot's account, $600; a mort- 
gage for $6,280 is given on building, stock, and fixtures ; two months 
prepaid rent, $120, is allowed as part payment. 

Bought from Howard Houck drugs invoiced at $430. In pay- 
ment we transferred to him an account which we held against 
G. Reed $115, gave him our (So-day note for $100, and paid him the 
balance in cash. Journalize. 


T. R. McCracken owed me $1200. I offered a discount of 2 l / 2 % 
for cash. Not having the ready money he discounted his note at the 
bank for sixty days at the rate of 6%, the note producing the sum 
required to discount my claim. Give the entries as they would appear 
on McCracken's books. 



Mr. X called at my office today and presented a note signed by 
me for $187.50. This note had been sold to Mr. X by Mr. Y, in 
whose favor it had been originally drawn. After satisfying myself 
that the note was properly indorsed, and was due today, I gave Mr. X 
my check for the amount. Entries on my books? 


A merchant draws a draft of $1,000 at four months on a cus- 
tomer who owes him on open account, and the draft is accepted on 
February 2, 1909. On March 13, 1909, he discounts the draft at a 
bank at 6% per annum. What entries should be made on the mer- 
chant's books properly to record the transactions ? 


A owed B $1,000 and B draws on him for the account at 60 days. 
The draft is accepted by A, whereupon B takes it to the bank for 
discount. The bank discounts the paper 57 days before maturity, at 
6% per annum. Show the entries you would make on the books 
of B. 


Smith & Company draw on Jones & Company for an account of 
$1,500, allowing i% discount. At maturity the acceptors borrow 
from the drawers $500 to assist them in meeting the draft, which is, 
however, finally allowed to be returned. Jones & Company repay 
$300 of the loan of $500. 

Show the ledger account on the books of Smith & Company after 
the transactions are completed. 


A has exhausted his credit with B. He needs further accommo- 
dation to the extent of $2,500, to obtain which he gives B a three 
months draft on C for $2,500. This is $1,000 more than C owes A. 
To adjust this difference C draws on A at four months for $1,000. 
Assuming that the drafts have been accepted by the various parties, 
state what the journal entries would be on the books of each. 


The Dayton Plumbing Company has called our attention to an 
error in our bill of September 22, in which we charged them $1.95 
each for six cast iron steel sinks. On September 16 we had quoted 
this concern these sinks at $1.45 each. The bookkeeper is accord- 
ingly instructed to send a credit memorandum for the amount of the 
over-charge. Make the proper journal entries. 



On March 28 we purchased from the Standard Sanitary Manu- 
facturing Company 6 Class "A" Enameled Iron Bath Tubs at $23.50 
each. These tubs were shipped to the Morgantown Supply Company 
on April 8 and billed to them at $28.00 each. A few days later we 
received a letter from our customer stating that two of the tubs 
which we had sent were Class "B" instead of Class "A." They stated 
that they were willing to keep the tubs if proper allowance in price 
were made. A letter from our salesman in this territory corroborated 
the customer's statement, and we accordingly sent a credit memor- 
andum for $20.00 to correct the price of the tubs. The matter was 
also taken up with the manufacturers and we received their credit 
memorandum for $8.00. Prepare the proper journal entries on our 


A carload of coal purchased for cash from the Consolidated Coal 
Company proved of inferior quality. We received a check for $31.65 
as a rebate. Journalize. 

What entries should an executor make on taking charge of a 
property which shows on the books of the deceased, and is appraised 
at the same figures, as follows : 

Real Estate (bequeathed to widow) ....... , . .$50,000 

Accrued rentals on real estate .............. 100 

Bonds owned .............................. J/^o 

Accrued interest on bonds .................. 185 

Bills Receivable ........................... 7,000 

Tradesman's bills .................... ...... 450 

Household goods, etc ....................... 5,ooo 

What entries should be made on collecting rental amounting to 
$200 and interest amounting to $235 ? 


(a) What is the distinction between "Interest and Discount" 
and "Mdse Discount" accounts? What is Trade Discount? 

(b) A bill of goods sold by A. A. Co. to T. Jones is listed at 
$1,000 with trade discount of 30% allowed. The terms offered on 
bill are 2% off if paid in 10 days, net if paid in 30 days. Supposing 
bill to be paid at once, give journal entries on the books of the seller 
for the transaction. 


(c) Suppose instead that bill is settled at end of 30 days with a 
6o-day non-interest-bearing note which is at once discounted at the 
bank at 5%. Give journal entries on the books of the seller. 

I buy a house and lot of R. M. Brown, paying cash $3,500, and 
assuming a mortgage of $1,200, with interest at 5^2%, 4 months ac- 
crued. The premises are rented at $300 per year, payable semi-an- 
nually, of which 3 months' rent has accrued. My entries at the time 
of buying, of receiving rent at the end of 3 months from date, and 
paying interest in 2 months? Show interest and rent accounts as 
they appear four months from date, assuming no other transactions. 


On January I we sent George Young our check for $142.56, in 
payment of our note of $125 and accrued interest. It is now found 
that a mistake was made in computing the interest and that we 
should have paid but $13.44 interest. Today we receive Mr. Young's 
check for the difference. Journalize. 

A owed B for goods purchased amounting to $500, subject to a 
discount of 10%. B draws on A at 30 days sight for the amount of 
the bill, less 12^2% discount, and A accepted the draft. At maturity 
A sends B his check for the amount of the acceptance. Two weeks 
later B discovers the mistake and sends A a debit memorandum for 
the difference. A sends B his check for the amount. Give the 
journal entries (i) on A's books and (2) on B's books. 


We have donated supplies to the estimated value of $100 to the 
Belgian Relief Fund. Journalize. 


On December 20 we sold and delivered to the Fort Pitt Supply 
Company 200 boxes of cigars at $7.50 per box. These cigars we 
inadvertently charged to T. R. Goldstick & Bro., who sent us their 
check for the amount, not noticing the mistake. The mistake is dis- 
covered two months later, and rectified. Give the proper correcting 



We have sold to T. R. Burton io shares of Pennsylvania Railroad 
stock at 112. He pays us $800 cash and gives us his 60 day note for 
the balance. Our bookkeeper made the following entry, which was 
posted : 

Cash, 800 

Investments 320 

T. R. Burton 800 

Bills Pay. 320 

Make the proper correcting entries. 


One of our delivery trucks, valued at $1600, has been stolen. On 
the truck at the time there was general merchandise to the value of 
$117. What entry shall we make ? 


We have deposited at the First National Bank for credit, coupons 
for the quarterly interest on the $20^000 Union Pacific First and 
Refunding 5*3 which our firm owns. "Cash to Investments" is the 
way our bookkeeper records the transaction. What should the entry 
have been ? 


A check for $26.50 is received today from the Reading Railroad 
Company for losses sustained by us in a recent shipment of oranges. 


The Dime Savings Bank holds our note for $2,000, maturing 
today. We take up the note, with accrued interest amounting to 
$200, and give a new note at sixty days for the entire amount. Jour- 


The June salary of our stenographer, amounting to $75, is paid 
with an order on the Field Company for Merchandise to the value of 
$25.00 and our check for the balance. Journalize. 


On the books of the A. B. C. Corporation no separate account has 
heretofore been kept for postage. The amount of postage already 


charged in the Expense account is found to be $65.30. In order to- 
transfer the account the bookkeeper makes the following entry : 
Expense 65.30 

Postage 65.30 

Is this entry correct? If not, make a journalization which will 
make the desired correction. 


The Milligan-Dible Company award a contract for an apartment 
house, the contract price being $125,000, payable in five installments 
of $25,000 each. The first installment is to be paid before work 
begins, the second installment when one-fifth of the job is completed 
and accepted, the third installment when the roof has been put on, 
the fourth installment when the plastering has been finished and the 
fifth and last installment when the job has been completed and the 
building accepted. The owners wish to record the interest lost on 
these advances as a part of the cost of the building. The following 
entry is made : 

Interest, $1,000 

Bellefield Apartments $1,000 

If this entry is not correct, what journalization will correct the 


In April you sell three hundred customers bills of goods amount- 
ing to $30,000, and none pay immediate cash. You collect bills 
amounting to $25,000 from two hundred seventy customers, of whom 
two hundred fifty take $750 discounts offered for early payment. 
You buy bills of goods, amounting to $15,000, of fifteen creditors 
paying none in immediate cash, you pay nineteen creditors cash, 
amounting to $19,000, and take a discount in each case, amounting in- 
all to $600. You make forty cash payments for expenses, amounting 
to $4000. 

Into what book should you enter each class of transaction indi- 
cated above, and how many postings should be made from each 

Supposing you have subordinate ledgers for customers and for 
creditors, what would your general ledger show for the items above 
(show a rough posting for each item posted to the general ledger) ? 


Rule and title five columns of a petty cash book in addition to 
the descriptive column, and make an illustrative entry for and in 
each distribution column. 



State fully how the disbursements entered in a petty cash book 
should be carried to the controlling account in the general ledger and 
to the detail accounts in the expense ledger. 


What is a controlling account ? Give three examples. How are 
postings made to controlling accounts? With what must the bal- 
ance of a controlling account coincide ? 


A customer says that a bill which he has received from you repre- 
sents goods for which he does not owe. He fails to state whether 
the goods were never purchased, were purchased but returned, or 
were purchased and paid for. What process should you go through, 
(i. e., what books should you consult, naming them in order, and 
what should you look for) to determine the facts? 


Enter the following transactions in a journal having special 
columns for cash received and paid, post to ledger. 

Feb. i. R. M. Jones invested in business $2500.00 in cash. 

Feb. i. Paid cash for February rent, $75. 

Feb. 2. Bought from J. N. Price on account merchandise in- 
voicing at $560. 

Feb. 3. Sold merchandise for cash, $56.50. 

Feb. 5. Issued our note for $150 due in 30 days at 6% in 
favor of J. N. Price, to be applied on account. 

Feb. 6. Sold to R. B. Rodman on account goods billed at 


Feb. 8. Bought furniture and fixtures, including glass show- 
case for store, $750. Paid cash. 

Feb. 9. Paid J. N. Price $125 in cash, on account. 

Feb. 10. R. B. Rodman paid $45 on account, in cash. 

Feb. ii. R. M. Jones took $25 in cash to pay a personal bill. 

Feb. 12. Sold to T. R. Martin merchandise, $165.50, for cash. 

Feb. 12. Paid in cash for 750 two-cent stamps. 

Feb. 16. Sold three glass showcases, second-hand, to T. J. 
Murray for $110. He paid cash. 


Feb. 1 8. Accommodated a friend with 100 two cent stamps, for 
which he paid cash. 

Feb. 19. R. M. Jones invested $2,000 more in cash in the bus- 

Feb. 20. Sold to B. M. Miller on account, goods invoiced at 


Enter the following transactions in the cash book and the journal. 
Make special columns in the journal for merchandise debits and 

Oct. i. J. B. Preston, proprietor, invested in business $5,000- 
in cash. 

Oct. i. Paid rent for October in cash, $70. 

Oct. 2. Sold to Jno. R. Thompson, on account, bill of goods 
for $65.50. 

Oct. 2. Bought merchandise from the Sterling Furniture Co. r 
for cash, $276.60. 

Oct. 3. Sold merchandise to Gus E. Ericson, on account,. 

Oct. 4. Bought merchandise for cash, Palmer & Anderson's 
invoice, $364.20. 

Oct. 5. Received cash from Jno. R. Thompson, on account,. 

Oct. 6. Sold to Harry K. Feldman, on his lo-day note at 6% 
merchandise, $126.50. 

Oct. 6. Paid the bookkeeper's salary for the week ending 
today in cash, $18. 

Oct. 8. J. B. Preston withdrew for his personal use $25 in 

Oct. 9. Sold to Geo. W. Chambers, on account, $123.75 worth 
of merchandise. 

Oct. 10. Received cash from Gus E. Ericson, on account, $25, 

Oct. ii. Sold merchandise to Jno. R. Thompson, on account,. 

Oct. 13. Paid the bookkeeper's salary in cash, as on Oct. 6. 

Oct. 16. Received from Harry K. Feldman his check for 
$126.71 to redeem his note of Oct. 6, $126.50, and interest for 10 
days at 6%, $.21. 

Oct. 17. Sold to Gus E. Ericson, on account, merchandise, 

Oct. 1 8. Paid for office stationery and envelopes in cash, $7.80. 


Oct. 19. Sold to Geo. W. Chambers, on account, merchandise, 

Oct. 19. Received cash from Jno. R. Thompson, to apply on ac- 
count, $15.50. 

Oct. 19. Bought merchandise for cash from the Hoffman Co., 
their invoice, $225.60. 

Oct. 20. Paid the bookkeeper's salary in cash, as on Oct. 6. 

Oct. 22. Sold to F. N. Wright on his 3O-day note at 6%, bill 
of goods, $150.65. 

Oct. 24. Sold to Jno. R. Thompson, on account, $137.75, 

Oct. 25. Received from Gus. E. Ericson cash to complete the 
payment of bill against him of Oct. 3, $22.50. 


Enter the following transactions in the journal, cash book, 
purchase book or sales book. Post, and take a trail balance. 

May I. Begin a general grocery business today, investing 
cash, $4,000. 

May 2. Pay store rent in cash, one month, $60. 

May 3. Buy for cash, 200 bu. potatoes at $.80 ; 400 Ibs. butter 
at $.25. 

May 4. Buy of John Smith, on account, 60 bbls. flour at $4; 
20 bbls. salt at $1.50; 175 Ibs. lard at $.10. 

May 5. Sell Albert Mullin for cash, 10 bbls. flour at $4.50; 45 
bu. potatoes at $.80; 2 bbls. salt at $1.75. 

May 6. Sell J. B. Allen, on account, 100 Ibs. lard at $.12; 
1 10 Ibs. butter at $.30 ; 10 bbls. flour at $4.50. 

May 8. Buy for cash a set of books for office use, $15. 

May 9. Pay John Smith cash, on account, $56.40. 

May 10. Receive cash of J. B. Allen, on account, $50. 

May ii. Buy of James Witt, on account, 5 bbls. flour at $3.50; 
600 Ibs. of lard at $.08; 500 Ibs. butter at $.20; 250 bu. potatoes at 

May 12. Sell John Reed, on account, 12 bbls. flour at $4; 100 
Ibs. lard at $.10; 100 Ibs. butter at $.22. 

May 13. Sell J. B. Allen, on account, 70 bu. potatoes at $.75 ; 
6 bbls. salt at $1.70; 100 Ibs. lard at $.12. 

May 15. Receive cash of John Reed, on account, $52.50; pay 
James Witt cash, on account, $195. 


May 1 6. Buy of John Smith, on account, 40 bbls. flour at $3.50. 

May 17. Sell J. B. Allen, on account, 16 bbls. flour at $4; 
loo Ibs. lard at $.11. 

May 1 8. Give John Smith your note for goods bought on the 
i6th; sell Robert Lewis for cash, 20 bbls. flour at $4.10; 212 Ibs. but- 
ter at $.20 ; 60 bu. potatoes at $.77. 

May 20. Sell John Reed, on account 10 bbls. flour at $3.98; 100 
Ibs. lard at $.11 ; 100 Ibs. butter at $.20 ; 10 bbls. salt at $1.68. 

May 22. Sell George Maine for cash, 100 Ibs. lard at $.10; sell 
for cash, 20 bu. potatoes at $.75. 

May 26. John Reed settles his bill of the 2Oth ; pay your note in 
favor of John Randolph. 

May 28. Pay clerk for one month, cash, $40. 



After some correspondence and an interview, you buy from 
Watts & Gushing, Jan. I, 1914, a jobbing business in canned goods 
and dried fruits, to be conducted in Rochester, N. Y. You pay 
therefor on the same day $6,756.25 for stock on hand, $243.75 f r 
furniture and fixtures and $1,000 for the goodwill of the business. 
(Treat goodwill as an asset.) The payments are made as follows: 
your promissory note indorsed by Peter Martin at six months, for 
$3,000 with interest, and the remainder in cash, which constitutes 
your entire capital. 

Make, in proper form, the record of the above transactions and 
of those that follow. Use journal, cashbook, invoice book and sales 
book. No postings of cash or merchandise are to be made from the 
journal. A double page cashbook should be used, having four money 
columns on each page, for convenience in handling Merchandise Dis- 
count, Merchandise Sales to casual customers, and Expense, and for 
the purpose of saving labor in posting. Keep no "Cash Account" in 

Jan. I. Cash sales to sundry persons $29.60. 

Jan. 2. Cash sales to sundry persons $34. Bought office books 
and stationery $14.25. 

Jan. 4. Sold H. B. Eldredge, Syracuse, "rush order," 100 cases 
perfection blackberries @ $1.32. Terms, 3/10, n/6o ($% off if paid 
in 10 days, net 60 days). Shipped by express, charges prepaid by 
special request $22.30 (to be entered on bill but not subject to dis- 

Jan. 5. Bought of Excelsior Canning Co., Buffalo, 300 cases 
perf. blk. @ $1.10. Terms, 2/10, n/6o. Sold Lawson & Co., Elmira, 
50 cases perf. com @ $1.20; 75 cases of perf. peas @ $1.62. Terms, 
3/10 n/6o. 

Jan. 6. Sold Winthrop & Co., Binghamton, 100 cases standard 
cherries @ $1.32; 50 cases perf. peaches @ $1.98; 100 cases perf. 
tomatoes @ $1.08; 25 cases straw, jam @ $2.24. Terms, 3/10 n/6o. 

Jan. 7. Sold E. A. Sanford, Troy, 8 boxes, 4Oolb diamond 
apples @ 8c ; 10 bx. 50000 diamond peaches @ o/r ; 100 cases perf. 
corn @ $1.20. Terms, draft at 15 days date. Cash sales $46.85. 


Jan. 9. Had draft on Sanford discounted at Commercial Na- 
tional Bank. (Charge the deduction from face of draft to Interest, 
not to "Interest and Discount," which is misleading.) Bought of 
Excelsior Canning Co. 200 cases perf. corn @ $i ; 100 cases green 
beans at $1.15. Terms, 2/10 n/6o. Cash sales $115.40. 

Jan. 13. H. B. Eldredge remits draft of Salt City National 
Bank, John Mason, cashier, on Astor National Bank, N. Y. in pay- 
ment of bill of Jan. 4, according to terms of sale, and includes express 
charges prepaid on shipment. 

Jan. 14. Paid insurance premium on stock $16.50. Bought for 
cash 10 tons coal @ $5.75 for heating store. Sent Excelsior Canning 
Co. my check on Commercial National Bank in payment of invoice of 
Jan. 5. Lawson & Co. remit N. Y. draft for bill of Jan. 5. 

Jan. 15. Winthrop & Co. remit N. Y. draft for bill of Jan. 5. 
Cash sales $146.70. 

Jan. 16. Sold H. B. Eldredge 200 cases perf. corn @ $1.20. 
Terms, 3/10 n/6o. Cash sales $43.50. 

Jan. 1 8. Sent Excelsior Canning Co. N. Y. draft in payment of 
invoice of Jan. 9. Cash sales $78.50. 

Jan. 21. Sold Jones & Baker, Clean, 50 cases standard corn @ 
8oc; 50 cases stan. peas @ $i. Cash sales $94.65. 

Jan. 25. Commercial National Bank returns, unpaid and pro- 
tested, the accepted draft on E. A. Sanford, protest fees $1.52. [See 
transactions of Jan. 7 and Jan. 9.] Cash sales $69.30. 

Jan. 29. You are convinced by correspondence with E. A. San- 
ford and others, that owing to a recent misfortune it is not possible 
for Sanford to pay his obligation in full, and you accept his promis- 
sory note at 30 days for $100, indorsed by Truman Wakeley, in full 
settlement of the account. 

Jan. 30. Paid rent of store for January $45 ; clerk's salary 
$50; printing $12.50; telegrams and postage $6.75. Cash sales 

Having made all the original entries, post the accounts and make 
trial balance. Show through Loss and Gain account your net capital, 
using the following resource inventories : merchandise $5869.45 ; 
expense (for coal on hand) $45. "Furniture and fixtures" and 
"Goodwill" stand unchanged. 




Jan. 4 $20.50 Jan. 10 $48.50 

8 14-63 21 12.16 

17 8.60 31 Inventory 9-44 

28 13.24 

31 Inventory 4.80 

Loss and Gain. . . 8.33 

$70.10 $70.10 

Close the above account and 

(a) Bring down the proper amounts for Feb. i. 

(b) State which, if any, of the above figures would appear on 
the Income Sheet for January ; and which ones, if any, would appear 
on the Balance Sheet of Jan. 31, and, whether on asset or liability 
side, being careful to give reason for your decision in each instance. 

If not corrected how would the following errors in bookkep- 
ing affect (i) the Expense and Revenue Account, (2) the Balance 
Sheet : 

(a) A sum of $125 for freight paid for John Jones on 
goods purchased by him posted wrongly to Purchases Ac- 

(b) A sale of goods for $500 posted to the debit of Freight 
Account instead of to the debit of the purchaser. 

(c) A sum of $250 received from a customer entered as a 
Cash Sale of $250? 


What would be the significance of a change in the trial balance, 
between one month and the next, of a total increase of $30,000 
on each side, if the changes on the debit side were in property ac- 
counts and the changes on the credit side were in proprietorship ac- 
counts ? 

What if the changes on the debit side were in expense accounts, 
and on the credit side were in liability accounts? 

What if the changes on both sides were in property and liability 
accounts ? 



State how the following differ: a trial balance; and a balance 


The following trial balance is handed you, with the request that 
you prepare an expense and revenue account and a balance sheet : 

A B's capital $20,000.00 

A B's personal account $ 1,000.00 

Bank of North America 600.00 

Cash in hand 90.00 

Merchandise account 8,600.00 

Repair account &7-5 

Bills receivable 6,400.00 

Bills payable 4,000.00 

Real estate 1,350.00 

Bank stock 1,566.00 

General expenses 1,860.00 

Freight 1,000.00 

Accounts receivable 8,000.00 

Accounts payable 10,000.00 

Profit and loss 3,446.50 

$34,000.00 $34,000.00 

If all the information required is not presented in this trial bal- 
ance, supply what is wanting and submit the statements called for. 


Being requested by a merchant to prepare a statement for cred- 
itors, you find his accounts to be as follows: real estate $25,000, 
mortgaged for $10,000, interest due $750; goods on hand $18,000; 
fixtures $1,250; merchandise in warehouse $10,000, on which the 
merchant has borrowed $3,000; accounts receivable deemed good 
$10,500, doubtful $1,500; known to be bad $2,000; bills receivable 
(held by bank as collaterial for an advance of $5,000) $6,800; cash 
$2,500. In addition to the above secured claims you will find the fol- 
lowing: accrued rent $500; taxes $750; wages $1,250. The merchant 
also owes A $6,000, B $3,500, C $13,500, D $6,850, E $1,800, F 
$2,650, G $1,225, H $1,400 and there is an unsecured disputed claim 
of K for $1,300. Submit the statement required. 



Construct seven column statement from the following Trial Bal- 
ance and inventories. 

DR. CR. 

Cash $ 12,300 

Notes Receivable 32,700 

Accounts Receivable 47,000 

Furniture and Fixtures 3,ooo 

Building 13,000 

Real Estate 50,000 

Notes Payable 30,000 

Accts. Payable 13,100 

Advertising 2,600 

Commission 3,050 

Supplies 12,900 

Salary 9,300 

Insurance 625 

Postage fv^y?^. . . 1,650 

Discount 550 

Exchange 25 

Interest 175 

Discount 375 

Thos. Greene, Prop 85,000 

Drawing Accounts, (Prop.) 4,300 

Mdse 64,350 

$193,000 $193,000 


Furniture and Fixtures $ 2,500 

Buildings 12,500 

Real Estate 47,ooo 

Advertising 300 

Supplies 500 

Salary 300 

Insurance 150 

Postage 400 

Interest (Asset) 25 

Mdse 5,365 



Prepare a seven column statement from a ledger which contained 
the following open accounts after 15 days of business: 

Cash .$8,418.76 $2,363.86 

Peter B. Burns, Partner 9,000.00 

Alfred E. Paine, Partner 3,000.00 

Furniture and Fixtures 450.00 

Bills Receivable 1,000.00 

Interest .25 

Commission 27.25 

Mdse. discount 11.49 30.30 

Supplies 169.85 

James Addington ^S 1 ^ 

Mdse 7,060.00 3,040.50 

Accounts Receivable 1,269.50 1,069.50 

Inventories: Mdse., $4,474.07; supplies, $58. Net income is 
shared by the partners in proportion to their investment. Furniture 
and fixtures remains unchanged. 


The general ledger balances of The Wilson & Wood Company 
are as follows: Cash, $20,000; Bills Receivable, $5,000; Bills Pay- 
able, $8,000; Accounts Payable, $7,000; Accounts Receivable, $14,- 
ooo ; Mdse. Dr., $80,000; Cr., $95,000; Real Estate, $7,500; Expense, 
$3,000; Interest and Discount, Cr., $500; Loss and Gain, Dr., $31,- 
ooo ; Capital Stock $50,000. 

There remain unsold Mdse., $36,000; the Real Estate on hand is 
valued at $6,000; items charged to expense and not yet used, $1,200; 
5% of the accounts receivable are doubtful; wages due and not 
paid, $300. 

Prepare seven column statement. 

4 6. 

Messrs. Hawley & Wood are partners in business, sharing gains 
and losses equally. On the basis of the following trial balance of 
their double entry ledger at the close of the fiscal year you are 
required to make a statement showing the expense and revenue, and 
also the net capital of each partner : 

W. H. Hawley, investment $ 8,405.26 

E. K. Wood, investment 8,405.28 



Cash . $ 9,017.33 

Merchandise 3,224.89 

Bills Receivable 12,000.00 

Bills Payable 8,350.00 

Miscellaneous Supplies 576.00 

Interest 129.74 

Loss and Gain 450.00 

Sundry book accounts receivable 3,566.00 

Sundry book accounts payable 3,803.42 

Totals $28,963.96 $28,963.96 

Inventory of merchandise on hand, $8,000. 
Supplies, $85.50. 


The trial balance of the Y. Co., is found to be as follows : 

Real estate and buildings $ 32,500 

Plant and machinery 40,000 

Capital Stock, Preferred. . ... . . . 100,000 

Capital Stock, Common ^TT^. .\. . . . 100,000 

Patents and goodwill 80,000 

Inventory, July 1 29,000 

Purchases 82,500 

Sales 2I 9 I 75 

Labor 88,000 

Coal 6,000 

Salaries general 11,000 

Salaries management 5,ooo 

Insurance 875 

Allowances 6,250 

Freight 1,500 

Discount and interest 750 

Cash in bank 8,000 

Investments 15,500 

Notes payable 26,000 

Accounts Payable 14,000 

Miscellaneous expense 4,300 

Book debts 42,000 

Preferred stock in treasury 5,ooo 

Repairs 1,000 

$459,175 $459,175 


Merchandise on hand, $26,500. Prepare expense and revenue 
statement and balance sheet, giving effect in accounts to depreci- 
ation at the rate of 7*^% a year on plant and machinery, and mak- 
ing an allowance of 5% on the book debts to provide for bad debts. 

4 8. 

In closing a set of books state how you would treat the following 
on ledger and financial statements : 

Depreciation on machinery $1,500 

Expenses prepaid 500 

Discounts on customers' accounts 1,080 

Salaries and wages accrued 675 


A trial balance of a manufacturing firm taken Dec. 31, 1910, con- 
tains the following accounts : 

Plant and machinery. . .$ 35,000 Capital A $ 40,000 

Stock Raw Material Jan. Capital B 20,000 

i, 1910 15,000 Creditor's Accounts. . . . 4,000 

Accounts Receivable. . . 25,000 Sales 95,ooo 

Cash 200 Bank Overdraft 5,ooo 

Loan Account 7,000 Rent of Steam Power. . 1,500 

Purchases Material .... 38,000 

Labor 24,000 

Traveling Expenses .... 2,500 

Salaries General 6,000 

Interest 600 

Stationery and Printing 1,200 

Rents and Taxes 3>5oo 

Discounts and Allow- 
ances 1,250 

Fuel 3,ooo 

[nsurance (Plant) one 

year from July i, 1910 1,150 

Freight Inward 1,500 

General Expenses 600 

Total $165,500 Total $165,500 

Stock on hand Dec. 31, 1910, $23,000; each partner to be credited 
6 per cent on his capital for one year before profits are ascertained ; 
3 per cent to be written off book debts for discount ; 10 per cent to 
be written off machinery and plant for depreciation ; unexpired insur- 


ance to be taken into account; net profits to be divided 2-3 to A, 
1-3 to B. Draft Journal entries for closing the books and prepare 
seven column statement. 


Prepare a six-column statement. Allow 5% depreciation on plant 
and machinery for the year. Allow 2% for Reserve for Bad Debts 
on Accounts and Notes Receivable for the year. 

Trial Balance, Dec. 31, 1911. 

Capital Stock $250,000.00 

Surplus, Jan. i, 1911 142,000.00 

Reserve for Depreciation on 

Plant and Machinery, 

Jan. i, 191 1 20,000.00 

Reserve for Bad Debts, Jan. 

i, 191 1 9,600.00 

Inventory, finished g o o Lpp\ 

Jan. i, 1911 $ 32,000.00 

Inventory, Raw Material, 

Jan. i, 191 1 45,000.00 

Purchases 135,000.00 

Sales 379,680.00 

Discounts on Purchases 1,730.00 

Discounts on Sales 2,500.00 

Goods Returned 3,650.00 

Wages 135,500.00 

Power, heat and light 17,000.00 

Repairs for Machinery 2,800.00 

Factory Expense 9,500.00 

Insurance Expense 2,200.00 

Plant and Machinery 125,000.00 

Salaries 37,000.00 

Notes and Accounts Rec. ... 200,000.00 

Notes and Accounts Pay 30,000.00 

Furniture and Fixtures 4,000.00 

Cash 75,500.00 

Taxes 960.00 

Advertising 5,400.00 

$833,010.00 $833,010.00 


Inventories on Dec. 31, 1911 : 

Finished Goods $16,000.00 

Raw Material 10,700.00 

Furniture and Fixtures 3,580.00 


From the following trial balance and inventories prepare a seven- 
column statement. 


Capital $ 75,000 

Land $ 5,ooo 

Buildings 21,500 

Tools and Machinery 6,575 

Horse and Wagon 1,205 

Furniture and Fixtures 393 

Patents 5,250 

Notes Receivable 15,820 

Accounts Receivable 86,981 

Insurance 1,205 

Notes Payable 21,000 

Accounts Payable 25,180 

Expense 830 

Salaries 6,675 

Advertising 2,620 

Freight 2,200 

Stationery 875 

Interest 175 

Discount 225 

Merchandise 35,^99 

$157,304 $157,304 

Land $ 4,500 . 

Buildings 20,000 

Tools and Machinery 6,200 

Horse and Wagon 1,000 

Furniture and Fixtures 350 

Patents 5,ooo 

Insurance 200 

Advertising 550 

Stationery 400 

Interest Payable 25 

Merchandise 5,76o 



From the following trial balance and inventories prepare a seven 
column statement. 


Capital $ 45,000 

Furniture and Fixtures $ 3,930 

Horse and Wagon 2,750 

Land 3,650 

Machinery 25,750 

Buildings 18,650 

Notes Payable 32,350 

Notes Receivable 4,757 

Accounts Payable 4,736 

Accounts Receivable 32,450 

Cash 3,433 

Advertising .^ . . 2,570 

Salary .^ \. . 8,750 

Commission 3,650 

Expense 5,74O 

Insurance 3,400 

Postage 865 

Interest 375 

Discount 450 

Merchandise Inventory, Jan I . . . 5,650 

Merchandise Purchases 37,650 

Merchandise Sales 81,484 

$164,020 $164,020 


Furniture and Fixtures $ 3,600 

Horse and Wagon 2,500 

Land 3400 

Machinery 22,500 

Buildings 18,150 

Advertising 400 

Insurance 515 

Postage 125 

Merchandise 755 



From the following information prepare a seven column state- 


A Capital Acount $82,000 

Notes Payable 10,000 

Accounts Payable 9,000 

Notes Receivable 25,000 

Acounts Receivable 22,000 

Mortgage Payable 25,000 

Real Estate 45,ooo 

Merchandise ("Credit) 7,000 

Interest (Debit) 1,000 

Labor 30,000 

Expense 10,000 


Real Estate $42,600 

Merchandise 45> oo 

Interest Due the Firm 500 

Wages Accrued 800 

Taxes Accrued 600 


A grain dealer charges his customers 150 apiece for sacks that 
cost him loc. He agrees to receive back any sacks returned in good 
condition at I2c each, calculating that they would be worth 7^/2 c 
each. How should these transactions be treated on the dealer's 
books ? 


What are the advantages of a seven-column statement? Why is 
it that the difference between the expenses and revenues is always 
exactly the same as the difference between the resources and liabil- 


Describe the expense and revenue account. Show how this ac- 
count is made up. What does the balance of this account represent, 
and how should such a balance be finally treated? 



The fiscal year of a Manufacturing Company ends June 30, 1908 
and the bookkeeper presents a statement to the Directors made up in 
the following form : 

Gross Sales $285,000 

Increase of Inventory 15,000 $300,000 

Cost of sales : 

Operating expenses, material 

and supplies 257,000 

Plant Expense 12,000 

Freight on returned goods .... 600 
Sundry purchases finished 

goods 10,400 280,000 

Manufacturing Profit. . . . 20,000 

Other Income : 

Miscellaneous earnings. . .<r\. . 1,500 

Profit on contracts \ . 6,500 

Discount on purchases 500 8,500 

$ 28,500 

Discount on sales 2 &75 

Rebates and allowances 1,125 4,000 

Net Plant Profit $ 24,500 


General expenses 5, 500 

Interest 1,500 7,000 

Net Profit $ 17,500 

You are required to make up an Expense and Revenue statement 
in seven-column form, using such of the above figures as may be 
necessary, together with these following: Inventory June 30, 1907: 
Materials, $115,000; Supplies, $35,000; Finished Goods, $45,000. 
Inventory June 30, 1908: Material, $140,000; Supplies, $10,000; 
Finished Goods, $60,000. Materials used in factory during the year, 
$75,000; Wages, $122,500; Fuel, $2,500; Repairs and Renewals, $2,- 
ooo; other operating expenses $55,000, which includes $25,000 sup- 
plies used. 



In closing the ledger at the end of a fiscal period, into what 
account are the balances of accounts that show expense and revenue 
merged? Give the reason for this and state how the net loss or gain 
is finally disposed of in the case of (i) an individual or partnership 
business, and (2) in a corporation. 


The trial balance of a corporation shows Dec. 31, 1912, a credit to- 
capital stock account of $74,176. The authorized capital of the com- 
pany is $150,000. There is $50,000 stock in the treasury of the cor- 
poration. These figures in the trial balance were occasioned by the 
fact that the bookkeeper, not understanding corporation bookkeeping, 
had charged the capital stock account with losses as follows : 1908, 
$13,884.50; 1909, $9,897.50; 1910, $32,507.50; and credited the same 
account with gains as follows: 1911, $4,319.15; 1912, $26,146.35. 
(a) Make the necessary entries to adjust the books so as to show the 
true condition December 31, 1912. (b) Give a clear and concise 
explanation of the nature of the bookkeeper's error and of the 
changes which are necessary. 


At the beginning of the year, January I, the capital stock of 
a corporation was $100,000, and it is known to represent good assets ; 
the surplus was $24,000, the outside liabilities were $17,000. The 
net earnings since January I, have been $16,000, and nothing has 
been paid in dividends. What is the present excess of assets over 
outside liabilities? 


The American Gas Light Company had operated a gas plant since 
the beginning of the year 1896. For the purpose of acquiring this 
industry, the National Gas Company was organized April I, 1899, 
with a capital of $100,000, and after purchasing all of the capital 
stock of the American Company, issued $100,000 of first mortgage 
6% gold bonds, dated April I, 1899, due April I, 1929, interest pay- 
able January i and July I of each year. 


June 30, 1899, the two companies were united by a certificate of 
merger, and new books were opened. 

The accounts of the American Gas Light Company had not been 
closed at any time during that company's existence, and at the date 
of the merger, stood as follows : 

Land, buildings, ma- Capital $ 50,000.00 

chinery, mains and Bills payable 5,000.00 

franchises $ 82,360.73 Accounts payable 2,679.81 

Materials and tools .. 1,856.30 Gas account !57,683.33 

.Coal (including Coke account 6,210.69 

freight) 47,540.45 Tar account 4,500.54 

Labor 50,668.73 

Repairs 13,872.46 

Water and other sup- 
plies 3,869.39 

Superintendence .... 3,500.00 

Salaries (clerks and 

collectors) 5,600.00 r^ 

Office expenses 2,100.00 

Insurance 1,435.00 

Taxes 4,237.10 

Interest 1,450.40 

Cash 2,251.47 

-Consumer's accounts. 3,210.44 

Other accounts 

receivable 2,121.90 

$226,074.37 $226,074.37 

The inventory was as follows : 

Coal $400 

Coke 150 

Tar . loo $650 

In acquiring the stock of the American Company, paying organi- 
zation expenses, etc., the National Company used all its capital stock 
.and $90,000 first mortgage bonds, holding in reserve $10,000 of 
bonds for improvements. 

Make the necessary journal entries to open the books of the new 
company, and prepare a balance sheet dated June 30, 1899. 



We own loo shares of the stock of the Bellevue Land and Im- 
provement Company, par value 100. A stock dividend of 10% is 
declared. The market value of the stock in 90. Make the proper 
journal entries. 

6 3 . 

Messrs. Sharp & Flat, partners, engaged in manufacturing, decide 
to form a business corporation under the laws of New York, under 
the name of The Sharp & Flat Manufacturing Company, having an 
authorized capital of $100,000. The corporation, in consideration of 
the entire issue of capital stock, purchased all of the assets and 
assumed all of the liabilities of the partnership as shown by the 
following balance sheet dated May 31, 1900. Sharp & Flat take all 
the stock except five shares, par value $100 each, issued to incor- 
porators for cash subscriptions. 



Plant and machinery $35,000 

Stock on hand per inventory 20,525 

Accounts receivable 22,750 

Bills receivable 1,500 

Cash 5,225 

Total assets $85,000 


Sharp's capital .$42,500 

Flat's capital 36,300 

Accounts payable 5> 2 5O 

Bills payable 700 

Wages due and unpaid 250 

Total liabilities $85,000 

During the first year of the corporation's existence, the books 
were kept in the same manner as during the partnership. Soon after 
the end of the first fiscal year however a certified public accountant 
was presented with the following trial balance showing the condition 
of the books May 31, 1901, and was requested to open a new set of 


books for the corporation, covering the operations of the business 
during the past year, and to prepare therefrom an expense and 
revenue account and balance sheet : 

TRIAL B ALA NGE; MAY 31, 1901 

Sharp's capital $ 42,500 

Flat's capital 36,300 

Plant and machinery $ 37,500 

Stock on hand per inventory May 

3 1 * J 900 20,525 

Sales I3M05 

Purchases: materials and supplies 48,000 

Labor 34,5oo 

Office salaries 7,000 

Traveling expenses 2,400 

Interest 600 

Stationery and printing 175 

Rent and taxes 4,200 

Discounts and allowances. . . ./*. . . . 2,250 

Fuel ^7:..\... 4,600 

Insurance 175 

Freight (inward) I 75O 

Commission 6,375 

Advertising 500 

Bills receivable 6,115 

Bills payable 1,100 

Accounts receivable 36,115 

Accounts payable 7*850 

Cash 6,375 

$219,155 $219,155 

Draft the opening journal entries necessary to give effect to the 
above, prepare an income and profit and loss account and a balance 
sheet as at May 31, 1901. 

(a) depreciation $% on plant and machinery, (b) unexpired in- 
surance $75, (c) bad debts $325, (d) inventory, stock on hand May 
31, 1901, $19.605. 


The Elite Amusement Company was organized on January I, 
1912, with an authorized capital stock of $1,000,000. The stock 
was all subscribed for at 90, to be paid in three annual installments. 
The first two installments were duly called for and paid in full with 


the exception of one block of ten shares on which the subscriber 
defaulted after paying the first installment. It was decided to hold 
these shares in the treasury. 

Make journal entries necessary to record correctly each of the 
above named steps. 


The third installment of the subscriptions for the stock of The 
Elite Amusement Company, mentioned in Problem 168, was due on 
January i, 1915. Because of the large profits, however, it was 
decided not to call this third installment, but instead a dividend was 
declared just equal to the amount subscribers still owed for this in- 
stallment, and "fully paid" stock certificates were then issued to the 
subscribers. What entries are necessary to properly record these 
facts ? 


A corporation has outstanding $1,000,000 of fully paid stock. Its 
accumulated surplus is $140,000. The profits for the current year are 
$100,000. The directors declare a cash dividend of 6% and a stock 
dividend of 25%. 

(a) Make Journal entries to record these last two transactions. 

(b) Prepare Balance Sheet after the dividends are declared. 


A corporation earns in 1912 net $50,000.00 on a capital of $250,- 
ooo.oo. Business has increased and the stock on hand has increased 
$50,000.00, leaving the cash balance sufficient only for the current 
needs of the business. 

Several large stockholders are women who need some return on 
their investment, (a) Should the directors borrow money and pay a 
dividend? If so, how much should they pay? 

(b) Show the journal entries that would be made as a result of 
the course of action that you advise. 

(c) Prepare four imaginary balance sheets one for Dec. 31, 
1911 ; one for Dec. 31, 1912; one for Jan. 5, after borrowing money 
and declaring a dividend of 8% but before the dividend has been 
paid ; one after paying the dividend.' 


What is meant by the term "stock-dividends?" Are they legiti- 
mate at any time? Would you consider it justifiable at any time to 
pay a dividend with borrowed money ? Explain carefully. 


"A stock-dividend is really not a dividend at all." Defend this 



"Treasury stock or bonds are merely so many legalized pieces of 
paper, and cannot in any sense be considered as assets of the corpora- 
tion creating and issuing them" (Dickinson). Defend. 

A company has purchased 1,000 shares of its own stock at $96.50 
a share, the par value being $100 per share. Its balance sheet shows 
"Treasury Stock, $96,500." Is this correct? Give reason. If not 
correct, state how you would adjust the books. 


Q A corporation is organized with an authorized capital stock of 

$50,000, of which only $40,000 is sold and stock certificates issued 
therefor. Two conflicting methods of recording the capital stock on 
the books of the company are urged by rival accountants as follows : 
(i) treasury stock to capital stock $50,000; cash and properties to 
treasury stock ,$40,000; (2) cash and properties to capital stock 

Which method is the better, f and why ? 


Smith & Jones are partners, drawing equal amounts for services, 
and sharing profits according to capital invested, after allowing 5% 
on capital. They require additional capital and arrange to admit the 
manager to the firm, he to acquire a one-quarter interest in the busi- 
ness. According to the balance sheet Smith has $12,000 and Jones 
$6,000 invested, and goodwill is valued at $6,000. What sum must 
the manager contribute ? How will the partnership accounts appear 
after payment into the firm of the new capital ? How will profits be 
divided in the future ? Show accounts in skeleton form. 


A, B and C were partners in business for several years. A died 
December 31, 1903. The articles of copartnership provided that on 
any change in the firm the goodwill should be taken into account and 
its value divided one-half to A and one-quarter each to B and C. The 
balance sheet at the date of A's death was as follows : 

Assets Liabilities 

Cash $ 1,5.00 Sundry accounts payable. $ 8,500 

Mdse. on hand 12,000 A's net investment 10,000 

Bills and Accts. Rec 15,000 B's net investment 5,ooo 

C's net investment 5,ooo 

$28,500 $28,500 



In January, 1904, B and C arranged with D to come into the firm 
with $5,000. The goodwill is, by agreement, to be valued at $3,000. 
The new firm, consisting of B, C, and D takes over the business and 
goodwill in equal shares, subject to an allowance of 2 l / 2 % on the Bills 
and Accounts Receivable. It pays the estate of A $5,000, with the 
understanding the balance due A's estate shall remain as a loan at 
the rate of 5% interest. 

Prepare the balance sheet and the capital accounts of B, C, and D 
as they should appear at the beginning of the new business, writing 
off the goodwill in equal proportions to amount of capital invested. 


A and B, each carrying on a similar business, agree to form a 
partnership, the new firm to take over the assets and assume the lia- 
bilities of each. The following trial balances, representing the book 
accounts, were presented : 


Capital $ 40,000 

Machinery and Fixtures $ 30,000 

Cash 2,000 

Bills Receivable 5,ooo 

Accounts Receivable 30,000 

Inventory Merchandise 25,000 

Wages 7,000 

Wages due 250 

Expense 10,000 

Bills payable ' . . . 10,000 

Merchandise Account 40,000 

Accounts Payable 20,000 

Repairs 1,250 

$110,250 $110,250 

Capital $ 50,000 

Machinery and Fixtures $ 30,000 

Cash 4,000 

Bills Receivable 8,000 

Accounts Receivable 40,000 

Wages 9,000 

Wages due 500 

General Expense 15,000 

Bills Payable 15,000 

Merchandise Account 50,000 

Inventory 32,000 


Repairs Account ................ 2,500 

Accounts Payable ............... 25,000 

$140,500 $140,500 

Each partner is to draw half the profits. Formulate opening 
entries for the new firm. At the end of the year a profit is made of 
$30,000.00. Create a trial balance and inventory, using your own 
figures to produce that result ; divide the profits between the partners 
and make statement of assets and liabilities. 

Two partners named Wilson and Peters find at the end of the 
first year's business the Balance Sheet shows that Wilson's interest is 
worth $18,000.00 and Peters' $9,000.00. 

The good will of the firm is worth $3,000.00. Each draws profits 
in proportion to his investment. 

They conclude to take in another partner, and he is to have a one- 
quarter interest in the new firm. 

What sum must the new partner contribute ? How will the part- 
nership accounts appear after the payment of the additional cap- 

How will the profits be divided? Give skeleton form of accounts. 


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. 
Profits are to be divided equally between the parties. The profits for 
the first two years (after charging interest on capital) were: 

ist year ................................... $6,000 

2nd year ................................... 7,5o 

and the drawings of the partners (in excess of salaries) were : 

X ............... $1,500 first year, $1,750 second year 

Y ...... ......... 1,200 first year, 1,500 second year 

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 excess of salary 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 of each at the end of the third year. 



A, B, and C engage in business, A contributing $10,000 capital, 
B $5,000, and C undertakes to take the active management at a salary 
of $3,000 a year, to be paid to him monthly. After providing 5 per 
cent, interest on capital they are to divide the net results in the pro- 
portions of 5, 3, and 2. At the end of 18 months they ascertain the 
position to be unfavorable and decide to wind up. The assets are 
agreed to be worth $12,500, of which A takes $10,000, and B $2,500. 
There are no liabilities except for the capital and simple Interest 
thereon, and one month's salary due C. State the position of the 
three partners to each other. 


A, B, and C were partners and contributed the following capital : 
A, $8,000 ; B, $6,000, and C, $4,000. Profits and losses were to be 
borne equally. At the end of the first year each partner had drawn 
$1,000. The assets were then disposed of for $3,000, the purchaser 
discharging all liabilities of the firm. How should this sum of $3,000 
be apportioned among the partners and would any of them have to 
advance any further sum? If so, state which partner and how much 
and make up the necessary accounts to show the results. 


Bilsom and Marley are partners, sharing profits and losses equally. 
The partnership is dissolved December 31, 1907, at which time Bil- 
som's capital investment is $10,000, and Marley's $2,500. The total 
liabilities of the firm are $25,000, which includes $5,000 due Bilsom 
on loan account and $2,500 due Marley on loan account. The whole 
of the assets of the firm are disposed of for $30,000 cash on May I, 
19x38. Prepare accounts closing the partnership and show the posi- 
tion in which the partners stand with each other. No allowance for 
interest is required. 

A, the party of the first part, enters, March 31, on the perform- 
ance of a contract for $50,000, payable in two installments of $25,- 
ooo each, the first of which is due on completion of a specific part 
of the work, but subject to 10% to be retained by the party of the 
second part as security for the continuation of the undertaking ; the 
second, together with the security retained as aforesaid, is to be 
paid on final acceptance of the completed work. 


A has a capital of $4,000 available for payment of labor, which 
proves insufficient. He therefore takes in as associates on April I, 
B, who contributes $3,000, and C, who contributes $1,000, B and C 
to share profits in proportion of Y*. and Y% respectively and to re- 
ceive interest on capital at 6% per annum. 

The first installment of the contract falls due and Is pafd on 
May i, at which time there had been expended by the contractors 
for labor and incidentals $7,502, and obligations for materials and 
supplies furnished on credit had been incurred and were outstanding 
to the amount of $13,900, of which all 'but $1,500 are forthwith 
settled from the installment money. 

On receipt of the first installment B and C withdraw their capital 
and realize the profits earned at the completion of the first stage 
of the work, leaving A to continue alone, it being carefully estimated 
and mutually conceded that a further outlay of $26,158 will be suf- 
ficient to finish the work and cover all reasonable contingencies. 

Show by skeleton ledger accounts the cash payable by A to B and 
C respectively on their withdrawal /from the partnership, and state 
the resources and obligations that remain to A on entering upon the 
second part of the work. 


A firm whose resources and liabilities are stated below is con- 
verted into a corporation: 

Assets Liabilities 

Real estate and improve- Accounts payable $ 7,800 

ments $64,500 Bills payable 25,200 

Merchandise 15,900 Partners' accts 55>ooo 

Accounts receivable 5 ,000 

Cash . 2,600 

$88,000 $88,000 

The corporation receives all the assets except the casn, and as- 
sumes payment of the accounts payable but not of the bills payable. 
The real estate and improvements are taken over at a value of $100,- 
ooo, and the good will is considered worth $20,000. The purchase 
price is to be as follows : $33,100 in cash, $50,000 in bonds and $50,- 
ooo in capital stock of the corporation. 

What entries are necessary to close the books of the firm and to 
open the books of the corporation? 




A and B were partners, trading* under the name of A, B & Co. 
June 30, 1908, the following balances appear on their ledger: 

A, Capital Account $70,000.00 

B, Capital Account 50,000.00 

Real Estate 22,000.00 

Buildings 20,000.00 

Machinery and Tools 44,000.00 

Furniture and Fixtures 2,000.00 

Accounts Receivable 50,000.00 

Cash 7,000.00 

Materials and Merchandise 53,000.00 

Accounts Payable 35,000.00 

Bills Payable 48,000.00 

Bills Receivable 5,000.00 

On June 30, 1908, the business is incorporated as the X Company, 
on the following plan : 

1. Capital stock, $150,000.00. 

2. X Company takes over the entire assets and liabilities of A, 
B & Co. at the book figures as above, except (a) real estate of the 
book value of $5,000, which is retained by A, B & Co. ; (b) the ac- 
counts receivable, which are taken over at $48,000, and (c) the cap- 
ital accounts of the partners. 

3. X Company pay A, B & Co. $30,000 for the good will of the 

4. Payments to A, B & Co. are made as follows, viz. : $50,000 
in first mortgage bonds, and the balance in capital stock of the X 

5. After paying off A, B & Co. the remainder of the capital 
stock is sold for cash to sundry persons. 

The real estate which is retained by A, B & Co. is bought from 
A, B & Co. by A, for $7,000, and is charged to A's capital account. 

After the conclusion of the foregoing described transactions A 
and B dissolve partnership. 

You are required : 

(a) To prepare closing entries for the books of A, B & Co. 

(b) A statement setting forth the partners' accounts down to 
their final closing, beginning with the balances shown by the books 
on June 30, 1908. 

(c) Opening entries for the X Company. 



How do the accounts of a corporation and of a partnership differ 
in the statement of 

(a) Investments. 

(b) Operation of business and determination of profits. 

(c) Division and distribution of profits. 


Distinguish between the following: 

(a) Capital stock authorized. 

(b) Treasury stock. 

(c) Donated stock. 

(d) Stock outstanding. 

On which side of the balance sheet will each appear? 


The Domestic Manufacturing Company, organized with a Capital 
Stock of $5,000,000, half preferred and half common, sells five shares 
of common stock at par for cash. It issues to John Jones $1,500,000 
preferred stock and $1,000,000 common stock in consideration of the 
assignment by him of certain rights, patents, and contracts. Later 
Jones agrees to surrender for valuable consideration to the treasurer 
of the Domestic Manufacturing Company $1,000,000 common stock 
and $500,000 preferred stock. Still later Jones agrees to surrender 
to the Domestic Manufacturing Company $1,000,000 preferred stock 
and take in lieu thereof $1,000,000 common stock. Jones makes a 
further agreement with the company to deliver to it all the stock in 
the Blank Manufacturing Company, appraised at $350,000, and to 
pay the Domestic Manufacturing Company $150,000, for which he is 
to receive $500,000 in preferred stock of the Domestic Manufactur- 
ing Company. 

Illustrate by journal entries the necessary accounts to be opened 
on the books of the Domestic Manufacturing Company to show each 
step in the foregoing agreement. 

8 7 . 

It is proposed to organize for conducting a small manufacturing 
business a corporation based on certain rights and franchises owned 
by one of the proposed stockholders. The amount of the capital 
stock is to be $100,000. The owner of the rights and franchises 
agrees to transfer them to the corporation in consideration of $50,000 
of the capital stock, though he believes them to be worth much more 


than that amount. The remainder of the stock is to be sold to pro- 
vide working capital. Certain capitalists are to be approached for 
cash subscriptions to the capital stock, but it is uncertain what opinion 
they will hold concerning the enterprise, and it is desired to have the 
stock in the treasury in such form that it can be sold below par if 
necessary. What method would you suggest for accomplishing the 
end in view? Formulate the journal entries for opening the books 
of the corporation in accordance with your suggestion. 


The Elk Run Tanning Company has been organized under the 
laws of Pennsylvania with an authorized capitalization of $500,000, 
all common stock, par value $100. The five incorporators subscribe 
and pay cash for fifty shares each at face value. F. W. Coulter pur- 
chases the tannery now being operated by Thos. Keck & Son, paying 
for the complete plant $475,000, and transfers the same to the newly 
incorporated company for the remaining common stock and $100,- 
ooo of first mortgage 5% bonds. 

Make the opening journal entries. 

8 9 . 

A, B and C constitute a firm engaged in a manufacturing busi- 
ness, which they have decided to change into a stock company with 
a capital of $100,000, equally divided into common and preferred 
stock, par value $100 for each share. Each partner is to take stock 
to the amount of his net investment in the business, on the basis 
of 75 per cent preferred and 25 per cent common stock and the re- 
maining shares authorized are to be offered for sale. 

On taking over the business the books of the firm show assets 
as follows: real estate, $25,000; machinery and tools, $10,000; mer- 
chandise, $15,000; materials and supplies, $8,000; cash, $5,000; 
notes receivable, $3,000; accounts receivable, $9,000. The liabilities 
are: notes payable, $10,000; accounts payable, $5,000; A, $25,000; 
B, $20,000, and C $15,000. 

Formulate the necessary entries to close the books of the firm 
and to open the books of the new corporation. 


The Great Northern Manufacturing Company was incorporated 
under the laws of the state of New Jersey, February I, 1899, with a 


capital stock of $10,000,000, consisting of $4,500,000 (45,000 shares 
of $100 each) preferred 7% non-cumulative stock, and $5,500,000 
(55,000 shares of $100 each) of common stock. On the same date 
$2,000 of the common stock was subscribed for at par as follows : 

By John Smith, 2 shares $ 200 

" Henry Brown, 4 shares 400 

" John Doe, 4 shares 400 

" Henry Rodman, 3 shares 300 

' Wm. Rodman, 7 shares 700 

Total $2,000 

On February 4, 1899, these subscribers paid in to the company 
the amount of their subscriptions, and stock was issued to them. 
February 15, the balance of the authorized capital stock of the com- 
pany, both preferred and common, was issued by resolution of the 
board of directors, to John M. Scott, for and in consideration of 
$750,000 in cash and 12 manufacturing plants. An inventory of the 
property purchased, made by authorized representatives of the com- 
pany, resulted in the following appraised valuations on the various 
plants and the stocks on hand : 

$ 98,000 

Totals $2,448,000 $526,000 $2,090,000 $279,500 $664,000 

Open the accounts of the company so that the result of the opera- 
tion of each factory will be known at the end of the company's fiscal 
year. The books of the company are not to show the appraised valua- 
tion placed on the real estate, buildings, tools, machinery, etc., by 

Buildings 1 

R.eal Estate 



A .... 

$ 430,000 

$ 95,000 

$ 195,000 

$ 20,000 

B .... 





C .... 





D .... 





E .... 





F .... 





G . . . . 





H .... 





I .... 





T .... 





K .... 





L .... 






factories, but in one amount only ; and it is desired that the account 
include any expenditure incurred by the company for good-will, etc. 
Make opening entries in cash-book, journal and ledger, covering 
in full the above transactions. 


A and B buy merchandise to the amount of $4,000, A contributing 
$2,500 and B $1,500. They sell to C a Vz interest in the business for 
$2,000. How much of the $2,000 will A and B receive respectively, 
in order to make A, B and C equally interested ? 

92- *>i 

Three brothers, A, B, and C, own all the capital stock (each Vz] 
of a certain corporation X. They own also, but not equally, 55% 
of the capital stock of a kindred corporation Y, which is capitalized 
for $100,000, the par value of the shares being $10. The holdings of 
each in the Y corporation are as follows : A, 2,222 shares ; B, 2,222- 
shares; C, 1,056 shares. 

The three brothers, acting as the corporation X, purchase out of 
corporate funds the remaining 45% interest in the corporation Y,. 
paying $100,000 therefor. Without further cost to X they now wish 
to merge the two corporations under the corporate name X and to 
dissolve Y. 

C proposes to make compensation to A and B individually for an 
equal interest in the 5,500 shares upon the same basis as the 45% 
interest was acquired, so that all may share equally in the merged 

1 i ) How much should C pay to each of the other stockholders ? 

(2) Outline the entries necessary to record all the above stated 
transactions on the books of X and Y. 

93- *H V 

A corporation agrees to purchase a mine, issuing $500,000 full 
paid stock in payment. The stock is issued to the owner of the mine, 
with the agreement that he donate to the company $200,000 of the 
stock to provide working capital. $60,000 of this stock is sold at 50% 
of par ; 100,000 at 60% ; and 40,000 at 70%. 

(a) Make all entries necessary to show these transactions, all 
subscriptions being paid in cash. 

(b) Show the balance sheet as it will stand after these trans- 



On December 31, 1910, the balance sheet of the Wrigley Supply 
Company was as follows : 

Real Estate and Build- Capital Stock $ 60,000 

ings $ 50,000 Bills and Accts. Pay. . . . 25,000 

Machinery 5,ooo Surplus 15,000 

Furniture and Fixtures . 5,000 

Merchandise Inventory. 25,000 

Bills and Accts. Rec .... 10,000 

Cash 5,ooo 

$100,000 $100,000 

The Wrigley Supply Company now sells all its assets with the 
exception of its Cash to The Interurban Supply Company. The sell- 
ing price is $120,000 ; $60,000 being payable in cash and $60,000 in 
the 6% cumulative preferred stock of The Interurban Supply Com- 

After the sale has been consummated The Wrigley Supply Com- 
pany pays off its outstanding liabilities and then distributes its 
remaining assets pro rata among its stockholders and dissolves. 

State how much cash and how much stock of The Interurban 
Company each share of The Wrigley Supply Company is entitled to 
receive in the final distribution. Make all the journal entries neces- 
sary for the books of The Wrigley Supply Company. 

A. B., desiring to incorporate his business, secures a charter under 
the laws of Pennsylvania, on December 28, 1910, the A. B. Company 
being organized for the purpose of manufacturing chemicals and for 
the sale of the products of such manufacture. The capital stock of 
the company consists of 3,000 shares of the par value of $100 each, 
the subscribers being as follows : 

A. B 2,996 shares 

C. D i share 

E. F i " 

G. H i " 

J. K i " 

A. B. advances from his own funds the minimum amount of cash 
required by law. The balance of the subscription is to be paid for in 
Formulae, Trade Marks, and Patents belonging to A. B. to the 



amount of $150,000, and a sufficient amount of the tangible assets of 
A. B.'s business, a Balance Sheet of which at January I, 1911, is as 
follows : 

Real Estate $ 25,000 Bills Payable $ 2,000 

Machinery 30,000 Accts. Payable 3^43 

Fixtures 15,600 Capital of A. B : . . 152,279 

Manufactured Product. 15,220 

Materials 28,650 

Coal 578 

Prepaid Insurance 1,856 

Cash 12,106 

Accts. Receivable. . , . . . 28,412 

$157,422 $157422 

(a) Prepare entries for opening the books of the A. B. Com- 

(b) Prepare appropriate entries for the books of A. B. 

Two manufacturers of steel castings with their plants located in 
the same city decide to eliminate local competition by consolidating. 
A company is incorporated with $250,000 preferred and $250,000 
common stock, to take over the assets and business of both plants. 
The new corporation buys the two plants, subject to a payment of 
$10,000, giving therefor its capital stock to the full amount author- 
ized. Twenty per cent of both common and preferred stock is 
donated to the new corporation's treasury in order to provide work- 
ing capital. The corporation sells three-fourths of the donated pre- 
ferred at 95, giving a 50% bonus in donated common stock. Exten- 
sions and betterments are considered desirable, and the corporation 
issues $100,000 6% ist mortgage bonds, which bonds are sold at par 
with a bonus of 10% preferred and 30% common. 

Prepare all the journal entries necessitated by the above trans- 


Several manufacturers consolidate their interests and organize 
the Consolidated Manufacturing Company, with an authorized capital 
stock of $1,000,000, divided into 5,000 shares of common stock and 
5,000 shares of preferred stock at $100 each par value. 

The manufacturers sell to the company all of their assets, subject 
to floating debts of $115,000, divided into notes payable $65,000, and 
accounts payable $50,000, for the sum of $1,000,000, payable $1,000 


in cash, $499,000 in common stock, and $500,000 in preferred stock. 
The company agrees to pay the debts of $115,000. The active assets 
acquired are inventoried by the Consolidated Manufacturing Com- 
pany as follows : Real estate $175,000, machinery $200,000, and mer- 
chandise $155,000. 

The patents and good will were inventoried at a sum equal to the 
difference between the net cost to the company of the assets acquired 
and the above valuation of the active assets. 

The company received $1,000 cash for 10 shares of common stock, 
and for the purpose of providing funds for working capital author- 
ized an issue of bonds amounting to $300,000, of which $200,000 
were immediately sold as follows: $100,000 for cash at 80%, and 
$100,000 for cash at par, with a bonus of common stock amounting 
to $100,000. 

For the purpose of providing common stock to be given as a 
bonus the manufacturers donated $200,000 of common stock to the 
treasury of the company. 

Prepare the journal and cash entries for the company, covering 
all of the above transactions, and prepare a balance sheet of the com- 


A corporation organizes under the laws of the state of New Jer- 
sey to conduct a manufacturing business, with an authorized capital 
stock of $1,000,000.00, divided equally between preferred and com- 
mon. Five incorporators each subscribe for 100 shares of the com- 
mon stock of a face value of $100.00 per share. John Jones pur- 
chases from three manufacturers their fully equipped plants for 
$950,000.00 in cash, and turns over the said three plants to the newly 
incorporated company for the $950,000.00 of preferred and common 
stock and $400,000.00 of first mortgage 5 per cent, bonds, out of a 
total issue of said bonds in the sum of $500,000.00, leaving $100,- 
ooo.oo of said bonds in the company's treasury. 

Prepare opening entries with necessary explanations of the trans- 
actions and a statement of the company's condition after having 
acquired the three plants. 


The Prosperous Company is organized under the laws of the State 
of New York to conduct a manufacturing business. The authorized 
capital is $500,000, divided into $250,000 common and $250,000 pre- 
ferred stock, par values of shares $100. Five incorporators subscribe 
each for one share of common stock at face value. John Peters, one 
of the incorporators, purchases from three manufacturing companies 



their complete plants for $499,500 and transfers said plants to the 
Prosperous Company for the remaining $499,500 of common and 
preferred stock and $100,000 of first mortgage 5 per cent, bonds out 
of a total issue of bonds amounting to $150,000, leaving $50,000 of 
bonds in the treasury. The incorporators then pay in cash for their 
respective subscriptions. 

The individual assets acquired are as follows : Land and build- 
ings, $75,000 ; plant and machinery, $200,000 ; tools, equipment and 
fixtures, $50,000; inventories, $100,000; accounts receivable good 
$28,000, doubtful $5,000; cash, $12,000. 

Prepare (a) opening entries for the books of the Prosperous 
Company; (b) initial balance sheet showing the company's financial 


The Smith Brewing Co. with $1,000,000 capital stock, the Young 
Brewing Co. with $500,000 capital stock, and the Star Brewing Co. 
with $400,000 capital stock, agreed to consolidate as the Universal 
Brewing corporation, the new company to buy all the properties of 
the old companies at a valuation to be fixed by appraisal, payment 
therefor to be made in full-paid stock of the new company, the old 
companies to pay off their own indebtedness. 

The appraised values of the old companies are as follows: 

Smith Young Star 

Real Estate and Buildings $ 680,000 $327,000 $126,000 

Plant 390,000 160,000 71,000 

Cash 15,000 3,000 1,000 

Bills Receivable 10,000 6,000 

Horses, Wagons and Harnesses 4,000 3,ooo 1,500 

Office Furniture 1,000 1,000 500 

Total $1,100,000 $500,000 $200,000 

Total Appraised Value $1,800,000 

On this valuation the Universal Brewing Corporation issued $2,- 
000,000 of stock, shares $100 each, which was divided pro rata among 
the old companies on the basis of their appraised value, no fractional 
shares of stock to be issued, odd amounts to be paid old companies in 

Give journal entries necessary to set up property accounts and 
credit old companies with their pro rata on the books of the new 


At the time of the consolidation the ledger accounts of the Star 
Brewing Company were as follows : 

Real Estate and Buildings $250,000 

Plant 247,000 

Cash 1,000 

Horses, Wagons and Harness 1,800 

Office Furniture. . 1,200 


Capital Stock $400,000 

Bills Payable 50,000 

Accounts Payable 51,000 


Make the proper journal entries to liquidate in stock of the new 
company the liabilities other than capital stock, to apportion the re- 
maining stock and cash, and to close the books of the Star Brewing 


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, giving fully the titles of the books 
wherein the facts are registered and stating how the books are 
opened and operated. 


The Royal Manufacturing Company has been organized with an 
authorized capitalization of $500,000 (All Common Stock). $420,- 
ooo of the stock has been subscribed for, of which $120,000 was 
paid in cash and $200,000 in property. The remainder is to be 
paid in four equal installments. The first installment has been 
called for and collected. Make the original entries covering the 
above transactions. 


The following are subscriptions for stock in the Red Jacket Min- 
ing Co. : George C. Goodwin, 500 shares ; S. V. Burnett, 250 shares ; 
T. A. Mulholland, 1,000 shares; O. D. Hodgdon, 750 shares, and 
Charles Bridges, 1,500 shares. 

The first, second and third installments of 25% each have been 
called and paid. The stock certificates are issued to subscribers on 
payment of the first installment, each installment being recorded on 
the back of the certificate. 


Jan. i. Mulholland sells 100 shares to Bridges. 
Jan. 2. Hodgdon sells 200 shares to Bridges. 
Jan. 3. Burnett sells 250 shares to Goodwin. 
Jan. 4. Bridges donates 50 shares to the company to be sold 
for the purpose of acquiring additional working capital. 

Show all necessary entries on the books of the company. 

Rule a Stock Ledger and enter the following transactions: 
The Jordan & Maher Co. is incorporated with an authorized 
capital stock of $15,000, all of which is issued and paid. The stock- 
holders are as follows : A. J. Bennett, 50 shares ; Cyrus Crafts, 35 
shares; J. O. Johnson, 30 shares; J. F. Connell, 25 shares, and E. 
B. Bosford, 10 shares. 

Crafts buys all of Bosford's shares; Johnson sells 10 shares to 
Bennett; Connell sells 15 shares to A. B. Freedman. 



The year's cash receipts of a corporation were $250,625.16, dis- 
bursements $110,328.28. Are the directors warranted in declaring a 
dividend on the presentation of these facts alone? Give reason for 
your answer. 


State the points of difference between a statement of receipts and 
disbursements and a statement of revenues and expenses. Under 
what conditions would they be alike ? 


"No dividends can be declared before the expenses of running the 
business are paid. These expenses include payment of Bills Payable 
that are due because a bill payable is merely written evidence of an 
account due. A bond is a promissory note and, therefore, of the 
same category as bills payable. Since a bond is equivalent to a bill 
payable, no dividend can be paid out before the bond is paid off." 

Examine critically the above statement. 


In closing the books of a firm it is found that the accounts receiv- 
able include $5,000 of worthless accounts and $10,000 of doubtful 
accounts. The firm decides to deduct from the gross profits $15,000 
for these items. What would you consider the best method of carry- 
ing these items on the ledger ? 


Define : Charging to Capital ; Charging to Revenue. What rule 
controls in determining whether certain payments belong to capital 
or to revenue? 


A Life Insurance Co. has issued $100,000 of stock all fully paid 
up in cash. During the first year preliminary expenses and ex- 
penditures for agency establishment and advertising amount to $15,- 

ooo. The liabilities exceed the tangible assets by $12,000 at the end 



of the year. Should the balance sheet be corrected by reducing the 
capital stock ? If not what item would you place on the asset side to 
offset the $12,000 excess of liabilities? 


A railway company leases the property of another railway com- 
pany for a period of 50 years and, as part consideration for the lease, . 
agrees to expend immediately $250,000 on the leased property, in or- 
der that it shall have a greater operating efficiency. At the termina- 
tion of the lease the property is to be returned to the lessor in the 
same condition as at the time of making the lease, subject to ordinary 
wear and tear. What entries, if any, would you make on the books of 
the lessor in respect to the expenditure of the $250,000, and why? 
What entries required on lessee company books? 


If a company, duly organized, acquires several plants that are 
found to be in a "run down" condition, and to require extensive out- 
lay for repairs and renewals to bring them to the required state of 
efficiency, should such outlay be charged against Capital or against 
Revenue ? 

us. 7 c 

Which of the following should be charged to Capital and which 
against Revenue: 

The purchase of good will; 
Loss by fire of uninsured property ; 
Promotion expenses ; 
The purchase of a lease ; 
Replacement of machinery ; 
Repairs to machinery ; 
Additional machinery. 


Expenditures are made by a corporation for items of each of the 
following classes: (a) taking down a machine in one part of a fac- 
tory, moving it and putting it up in another part, (b) expenses of in- 
corporating the company, including state charges and lawyer's serv- 
ices, (c) brokerage on purchase of a piece of property, (d) com- 
mission on an issue of debenture bonds, (e) costs attending a mort- 
gage, (f) furniture and fitting of a city office and salesroom, (g) 



costs of patents, including solicitor's charges and government fees. 
Which items should be charged to capital and which to revenue? 
State reasons for your answer in each case. 

In closing the books of a company at the end of its first fiscal 
year how would you treat : 

Organization expenses ; 

Advertising booklets on hand estimated to last another year ; 

Cash paid for patents ; 

Bonus paid to secure contracts having two years to run ; 

Pig iron on hand costing $20.00 per ton the market value at 

the closing date being $18.00. 


"The total income of a business during any given period is the 
excess of its net proprietorship at the end of that period over what 
it was at the beginning. Expenditure for labor and materials to be 
used upon the property are properly divided therefore, into two 

(a) What are the two classes mentioned above? 

(b) What is the basis of their separation ? 



A manufacturing concern having increased its capital and in- 
vested considerable money in new machinery and in the recon- 
struction of old machinery, removes to a new location and charges 
the cost of moving and the reconstruction of the old machinery to 
one account termed "Installation". Explain fully how this account 
should be treated in closing the books of the company, and give your 



A corporation manufacturing explosives is compelled to pay ex- 
orbitant rates for a very limited amount of insurance, and in con- 
sequence was obliged to install an automatic sprinkler system at a 
cost of $75,000. This additional fire protection enabled them to 
secure a full line of insurance, though in mutual companies, and 
at a much lower rate than was obtained 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 ac- 
count should the cost of the sprinkler system be charged and to 
what account should this dividend be credited? State your reasons 


A suburban traction company, after equipping its line at a very 
considerable expense for overhead trolley and operating same for 
several years, decides to adopt a third rail system. Extensive changes 
are necessary in changing power houses, re-arranging tracks, and 
altering cars, involving an expenditure of $25,000. In addition con- 
siderable machinery and rolling stock, the original cost of which 
had been treated as capital outlay and was carried on the books 
at a valuation of $25,000, is rendered obsolete and is disposed of for 
$3,500, showing a loss of $21,500. The profits from operation for 
the year are $18,000. 

State how you would recommend that the matter be dealt with 
in the company's accounts and whether the company can pay a divid- 
end. Give Journal entries. 


When provision is made for bad and doubtful debts and for 
possible discounts, how are the amounts determined, what entries 
are made in the books, and how do they appear in the Balance Sheet 
and Expense and Revenue Statement? 


A mining corporation has assets comprising, among others, 
leases, goodwill, rent and royalties paid in advance, and patents. 
How would you deal with them in the balance sheet and Expense 
and Revenue Statement? 


In preparing the balance sheet of a business at the close of a year, 
how should you treat each of the following items: 

(a) Bad and doubtful debts? 

(b) Premiums for fire insurance unexpired? 

(c) Interest paid in advance on notes payable discounted. 

(d) Discount on notes receivable. 

(e) Discount on accounts payable? 

(f) Actual depreciation of plant? 



On January I, 1915, the condition of a small trading company 
as determined by an examination of that date was as follows : 

Assets Liabilities 

Furniture and Fixtures. .$ 2,000 Capital Stock $ 5.000 

Cash 500 Notes Payable 3,000 

Notes receivable 3,ooo Accts. Payable 6,000 

Accounts receivable 5,ooo Surplus 500 

Merchandise on hand . . . 4,000 

Total $14,500 Total $14,500 

During the month of January the bookkeeper made all entries in 
the cash book and in the sales book, but made no journal entries and 
did not post his ledger. In addition to the entries appearing on the 
cash book and sales book the following transactions took place 
during January: Merchandise purchased on credit amounting to 
$6,000; notes payable amounting to $2,000 renewed; special allow- 
ances of $500 made to customers. 

The credit sales journal had two columns, one for the billed 
amounts and the other for the cost of the goods sold. The billed 
amount was $8,000 and the cost was $5,000. 

The following statement gives a summary of the cash receipts 
and disbursements for January : 

Cash Received 

Collected from customers $4,000 

Collected on notes receivable 2,000 

Collected on Mdse. sold and not entered in 

sales book (cost price $500) 600 

Total cash received $6,600 

Cash Payments 

Interest on notes payable $ 45 

Salaries 500 

Rent 200 

Sundry expenses 300 

Accounts payable 5,ooo 

Total disbursements $6,045 

Prepare balance sheet as of January 31, 1915, and a statement 
of profit and loss based on the book value of the merchandise. 




A and B of Colorado engaged as usual partners in a stock raising 
enterprise with a capital of $10,000 each contributing one-half. A 
received a salary of $200 per month. At the end of three years they 
decided to terminate the business and B, who handled all the money 
of the co-partnership and kept the books, reported the following 
receipts and payments. 

Receipts. Payments. 

A's investment $ 5,000 Purchases of cattle $57,000 

B's investment 5,ooo Loans repaid 14,000 

Sales of cattle 8o359 A's Salary 4,200 

Loans 15,000 Interest 1,000 

Expenses 9,000 

A's withdrawals 2,200 

B's withdrawals 1,800 

A round up and branding of the herd showed 328 head worth 
$5540. There remained with the bankers a balance of $15,150. 
Other assets included horses, $800; tools, etc., $100; supplies, $150; 
accounts receivable, $750. The firm owed the following bills, brand- 
ing irons, $40; salt, $100; loan at bank, $1,000; unpaid wages, $260. 
You are asked to prepare such statements as are necessary to show 

(a) the financial condition of the co-partnership at its termination; 

(b) the results of the three years' operations; and (c) the interest 
of each partner. 


A land company is incorporated with a capital of $50,000. It pur- 
chases a tract of 104 acres of land at $500 an acre, paying therefor 
$32,000 in cash and giving capital stock for the remainder of the 
consideration, and at the same time giving a mortgage to a title 
guarantee company to secure a loan of $35,000, which is to be satis- 
fied by partial payments as lots are sold and released. 

Obligations are incurred on book account as follows : for organi- 
zation expense, $619; for grading and paving, $23,400; for water 
mains (a separate enterprise to be reimbursed by service charges 
when ready for operation), $4,000. 

Direct expenditures of cash are made for organization expense, 
$537; for grading and paving, $11,060; for water mains, $1,020; for 
maps, $700; for advertising, $1,200; for salaries and expenses, 


$8,679. Settlements are made with creditors by cash $8,784 and by 
capital stock issue $10,000; the remaining capital stock is issued for 

Lots sold on purchase money mortgages, $24,857; installments 
collected, $9,442 ; cancellation of title company mortgage on lots sold, 
$8,050, and purchase money mortgages pledged for loan of $10,000. 

Interest paid to title company, $1,849; interest received on pur- 
chase money mortgages, $924. Inventory of lots unsold, including 
improvements at cost, $66,575, to which latter 10% is to be added for 
appreciation of value. Maps on hand, $500. 

Prepare (i) cash summary, (2) skeleton ledger accounts, (3) 
profit and loss account, (4) balance sheet, covering the transactions 
above stated. 


The trustees of an estate of $250,000 make the following invest- 
ments and collect the income : 


Feb. 2 loo shares D. Q. stock, par 100 each, at $109.50. 

Mar. 5 10 S. P. bonds, maturing 1950, $1,000 each, 6% Jan. i and 

July i, at $1010 and accrued interest. 
Apr. 10 Bond and mortgage for $5,000, maturing 1916; interest, 

5%, Apr. i and Oct. i. 
Oct. 6 10 S. P. bonds, maturing 1950, $1,000 each, 6% Jan. i and 

July i, at $1020 and accrued interest. 


Oct. 5 loo shares of D. Q. stock, par 100 each, at $110. 

The D. Q. stock pays quarterly dividends as follows: Apr. i, 
*M%; J^y r > !^%; Oct. i, 2%. These dividends are received 
respectively on April 3, July 5, and October 3. 

The interest on S. P. bonds is received July 2 and the interest on 
the bond and mortgage for 5 months and 20 days is received on the 
due date. 

On April 10 the trustees borrow from the bank $1,100 on col- 
lateral note and repay the loan October 10, with interest at 6% per 

Prepare cash account, principal and income accounts of each 
security, interest and dividend account, and trial balance as of 
October 10. 


I2 7- (n/\/ 



Water Rates $106,352.62 

City's Payment for Public Use 

of Water 17,549.10 

Plumbers' Licenses 150.00 

Miscellaneous 2,835.03 



Bonds Paid $ 25,700.00 

Interest on Bonds 18,049.00 

Salaries 17,371.90 

Repairs to Mains 460.21 

Repairs to Hydrants 1,082.61 

Tools and Utensils 495-33 

Supplies and Repairs to Sta- 
tions 5>5&3-3 2 

Fuel 12,319.77 

Barn expense 1,987.94 

Repairs to Service I >575-56 

Office expense 1,131.27 

Repairs to gates and valves. . 66.63 

Repairs to Meters 908.31 

Insurance 102.00 

Engineering 88.77 

Miscellaneous 1,327.46 

Special assessment 138.19 

Tax refunded at Lansing. ... 1.03 

Reconstruction 1,789.58 

Temporary loan paid and in- 
terest on the loan 2,542.50 

Meter settings, etc 689.55 

Pipe extensions 23,259.79 

Improvements to stations .... 7,650.03 


From the above data prepare Income Account for the Water 
Department, assuming that the value of the water furnished the city 
was $25,500.00. 



The city of Urban owns its water plant. The total cost of the 
plant and extensions, new, was $530,000. At the end of the year 
1912 the city treasurer makes the following report : 


Assessed Rates $33,967.36 

Metered Water 14,722.48 

Mason Work - 836.04 

Meter Rentals 172.44 

Miscellaneous 71-75 

Total $49,770.07 


Pumping Station expenses. $ 6,402.54 

Fuel 5,061.46 

Office and distribution expenses 10,072.88 

Rebate and stoppages 605.76 


Repairs to Distribution 607.35 

Repairs to Pumping Station 644.19 

Repairs to Meters 581.50 

Interest on Bonds and Sinking Fund 30,000.00 

New Extension 8,000.00 

Insurance 414.88 


On the basis of the above figures the City Treasurer reports that 
the water plant has been operated at a deficit of $12,620.49, and 
recommends that the water rates be raised. 

Assuming that the cost new of the depreciable property was 
$500,000, and that 1^/2% on cost new is a reasonable annual allow- 
ance for depreciation ; that the fire protection furnished free to the 
city by the maintenance of fire hydrants costs (including deprecia- 
tion and interest on investment) $12,000 per year; that the water 


furnished the public institutions of the city (public schools, jail, en- 
gine house, drinking fountains, etc.) would bring if paid for at 
meter rates $2,000; that of the $450,000 of 5% bonds originally 
issued to build the plant $300,000 are still outstanding while $150,000 
have been redeemed and cancelled. 

On the basis of these assumed figures and the statement of 
receipts and disbursements construct an income account for this 
water plant. 

What per cent of return is the plant yielding the city on its invest- 
ment assuming that the present value of the plant (cost new less 
depreciation) is $465,000? 


"Income must be accounted for, not when it is received in actual 
cash, but as it accrues to the corporation." Defend this statement, 
and illustrate. 

130. I ^ I 

The auditor of an incorporated company which has been accus- 
tomed to making investments in interest-paying securities, in making 
his statement to the directors presented a balance sheet showing a 
surplus of $65,000. After discussion, the directors determined that 
they did not wish to declare a dividend out of the surplus and gave 
their auditor the following order : "Decrease this surplus by invest- 
ing $50,000 in the bonds of the XYZ Railroad Co." Presuming there 
was an item in the aforesaid balance sheet of cash $75,000, what 
effect will the carrying out of the directors' order have upon the 
surplus of $65,000? 

Should fluctuation in the value of the permanent assets of a com- 
pany be allowed to affect the result of the loss and gain account? 
Give reasons for your answer. 

I32< ir^ 

In examining a business to determine and show separately the 
profits for the two years ending December 31, 1907, it is found that 
an item amounting to $500 had been omitted from the inventory of 
December 31, 1905, that an error had been made in the footing of 
the inventory of December 31, 1906, by which that inventory was 
overstated to the amount of $250 ; and that in pricing the inventory 


of December 31, 1907, an error was made by which that inventory 
was understated to the amount of $1,000. State fully the effect of 
these errors on the profit of each of the two years. 


The East and West Railroad Company hauled many tons of 
coal during the year to the various distributing points along its line 
for the use of the locomotives, and upon this Company coal $70,000 
freight was charged, such charge being made against the cost of fuel 
for locomotives, and credited to freight earnings. Was the above 
method of handling this freight item correct? In answering state 
your reasons fully. 


A construction company has a number of contracts partly com- 
pleted at the close of the fiscal year. Would you carry any portion 
of the anticipated profit on these contracts into Revenue account? 
If so, why? 


An examination of the minutes and other records of the books of 
a corporation, preceding an audit, discloses that a revaluation of its 
buildings, plant, and machinery had been made by expert appraisers 
called in for the purpose. The report of these appraisers states that 
the values as determined by them are greater than those shown on 
the books of the company. Should such increased value be entered 
on the books of the corporation? How would this increased value 
show, if at all, in the profits and loss account and the balance sheet ? 


In auditing the accounts of a corporation you find that the com- 
pany utilized its own materials and labor in the construction of 
extensive additions to its plant, and that it has charged up such work 
at regular trade prices sufficient to yield to it a substantial profit, 
which has been credited to the Expense and Revenue Account. Do 
you see any objection to this course? Explain fully the theory upon 
which your answer is based. 


A corporation purchases a tract of land for $25,000.00 and after 
holding it for 3 years sells half of it for $20,000.00, using the remain- 
der for an extension of its plant. 


The president of the company favors crediting Profit and Loss 
with $7,500, crediting Real Estate Account with $12,500.00. The 
directors ask your opinion. Write out the letter you would submit. 


The statement submitted by the treasurer of a corporation shows 
receipts of money greatly in excess of disbursements, leaving a bal- 
ance in hand of more than enough to pay to stockholders a dividend 
of 6%. The directors declare such dividend pursuant to the state- 
ment submitted without asking for any other further information. 
Was the act of the directors a prudent one under the circumstances ? 
Give reasons for your answer. 


A life insurance company has issued $100,000 of stock, all fully 
paid up in cash. During the first year preliminary expenses and 
expenditures for agency establishment and advertising amount to 
$15,000. The liabilities exceed the tangible assets by $12,000 at the 
end of the year. Should the balance sheet be corrected by reducing 
the capital stock ? 


A New York company sells its capital stock at a premium and the 
directors pass a resolution to declare a dividend out of the surplus 
thus paid in. Would you call attention to this action if asked to make 
up the accounts, and if so, why? 


"Premiums realized on capital stock are neither income, profits, 
nor an excess of capital obtained in exchange for a liability." 
(Esquerre.) Explain. 


What, in your opinion, would be the proper accounting record for 
a business corporation to make of an appropriation from its surplus 
profits for the amount of a permanent investment in property? 


The principal objects of a corporation were to buy, rent, and sell 
land. The articles of incorporation provided that dividends should 
be paid out of net earnings. In 1882 the company had a bad debt of 
$350,000 and they met this by writing up in the balance sheet of that 
year the value of their lands some $340,000 above cost price, and 


brought down such increased value into the credit side of the profit 
and loss account as a set-off against the bad debt, which was in this 
way treated as written off. Was this legitimate accounting? 


In 1885 the above company made a profit on their revenue 
accounts, out of which the payment of a dividend on preferred stock 
was proposed. A common shareholder brought suit to restrain the 
payment of the proposed dividend on the ground that some of the 
company's lands had, during the year 1885, much depreciated in 
value and that if such depreciation were debited to the profit and loss 
account there would be a considerable loss and no fund available for 
dividends. Was the ground for action a good one ? 


A banking firm with $200,000 of capital stock outstanding shows 
at the end of a certain year profits for that year amounting to $38,000. 
The directors write off $8,000 of Premium on Bonds purchased 
during the year, and $10,000 of the original cost of its fixtures, charg- 
ing both these amounts to the Undivided Profit account. The bonds 
had not fallen in market value, and 5% had already been charged to 
Expense for Depreciation on Fixtures. How would you describe the 
result of this action on the part of the directors ? 


Describe a sinking-fund. How should the account of such a fund 
be conducted in the case of a manufacturing corporation that bonds 
its works for $100,000, payable in 20 years, and wishes to accumulate 
during that period the sum necessary to retire the bonds at maturity ? 
What amount must be charged the first two years, assuming the in- 
terest rate to be 4% ? 


Draft journal entries showing how a sinking fund of $5,000 a 
year should be provided for retirement of an issue of bonds, the 
interest rate being 

(a) The Buffalo Forge Company has just issued $1,000,000 5% 
First Mortgage Bonds. By the terms of the Trust Agreement the 
Company is required to set aside each year $50,000 in order to pro- 
vide a fund for the ultimate redemption of the bonds. At the end 
of the first year the Company uses $50,000 of its profits to purchase 
securities of other corporations, which securities it turns over to the 
Trustee. Name the four accounts which will be affected and give 
the journal entries. 

(b) At the end of twenty years the bonds fall due. The sink- 
ing fund assets are sold for cash and the bonds retired. What are 
the three journal entries which should now be made on the books of 
the company. 


(c) When the sinking fund assets mentioned in (b) are sold 
$1,048,500 is realized, because of a rise in the market price of the 
securities. To what account would the above excess of $48,500 
naturally be transferred? Could it be legitimately used for the pay- 
ment of dividends ? 


A corporation with $200,000 common stock, $100,000 6% income 
bonds and $100,000 5% 1st mortgage bonds outstanding sets aside 
$10,000 a year out of profits as a sinking fund with which to retire 
the ist mortgage bond issue. During the last four years of the life 
of the bonds profits were large enough to provide interest and sink- 
ing fund on the bonds. After the sinking fund assets have been used 
to pay off the bonds, the income bondholders bring action to compel 
payment of the four unpaid dividends. 

Have they any reasonable ground for action? Explain fully the 
reason for your answer. 


Among the credits in the Profit and Loss account of a Corpora- 
tion for 1909 is the following item, "Profit on bonds repurchased for 
sinking fund, $16,500." 

(a) Explain the probable origin of this item. 

(b) The par value of the bonds repurchased during 1909 was 
$266,000. Give the entries made at the time of purchasing the 
bonds. What entries should have been made? 

The Virginia Coal Company was organized January I, 1906, began 
operations about January 7, 1906, and kept an ordinary double entry 
set of books but did not close their accounts at the end of any fiscal 
year. After an examination and verification of all accounts stated 
in the trial balance they are accepted as correct except that termed 
"Sinking Fund Payment" ($22,500). 

The mortgage, securing bonds to the amount of $100,000, con- 
tains a sinking fund clause providing that the company shall deposit 
semi-annually with the Sinking Fund Trustee 5c per ton of coal 
mined ; such payments shall be made to trustee during January and 
July of each year for the preceding six months' period. Money so 
deposited is to be applied, as soon as practicable, to purchase bonds at 
not exceeding 115 and accrued interest; compensation and expenses 
of trustee are also to be paid from the Sinking Fund. Bonds, when 


redeemed, cannot be canceled, but are to be held by trustee, who shall 
collect the semi-annual interest thereon and apply it to the same pur- 
poses as the 5c per ton payments. 

Bonds are dated January i, 1906, run for 20 years, and bear in- 
terest at 6% per annum, payable January I and July I of each year. 

Payments to Sinking Fund Trustees have been made as follows: 

July 27, 06 Payment for 6 mo. ending 6/30/06, 

5c per ton on 120,000 tons $ 6,000 

Jan. 24, '07 Payment for 6 mo. ending 12/31/06, 

5c per ton on 150,000 tons 7>S 

July 28, 07 Payment for 6 mo. ending 6/30/07, 

5c per ton on 180,000 tons 9,000 


On January 30, 1908 the Company paid to the Trustee $5,500 for 
Sinking Fund payment for the 6 mo. ending Dec. 31, 1907, being 50 
per ton on 110,000 tons. 

The Trustee submitted statements of receipts and disbursements 
for account of the Sinking Fund to date (January 31, 1908) as 
follows : 

Cash Received to Dec. 31, 1907 

July 27, 1906 S. F. deposit for 6 mo. ending June 31, 

1906, 120,000 tons at 5c $6,000 

Jan. 5, 1907 Jan. '07 coupons on 5 bonds 150 

Jan. 24, 1907 S. F. deposit for 6 mo. ending Dec. 31, 

1907, 150,000 tons at 5c 7,5 

July 3, 1907 July '07 coupons on 12 bonds 360 

July 28, 1907 S. F. deposit for 6 mo. ending June 30, 

1907, 180,000 tons at 5c 9,000 


Cash Disbursements to Dec. 31, 1907 

Aug. 16, 1906 Bonds redeemed 5,000 at no $5,500.00 

Commission at %% 12.50 

Accrued interest 37-5 

? 5,550 

Feb. 15, 1907 Bonds redeemed: 

4,000 at 108 $4,320 

2,000 at no 2,200 

1,000 at 112 1,150 


Commission I 7-5 

Accrued interest 52.50 

$ 7,710 


Aug. 12, 1907 Bonds redeemed : 

9,000 at 90 $8,100 

1,000 at par 1,000 


Commission 250 

Accrued interest 70 

$ 9>420 
Compensation of Trustee, $100; Advertising, $50 150 

Cash balance in hands of trustees, Dec. 31, 1907 $ 180 

Received in January 1908, viz : 

S. F. deposit for 6 mo. ending Dec. 31, 1907, 

110,000 at 5c $5,500 

Coupons on 22 bonds in S. F 660 

Interest allowed on balance to 12/31/08 100 6,260 


Prepare entries to state properly on the books of the Virginia 
Coal Co. all Sinking Fund transactions. 


A corporation issues 5% 2O-year bonds to the par value of 
$2,000,000, at 92. Seven years later the company provides for a 
new issue of 5% 3O-year bonds to be used partly in refunding the 
outstanding bonds and partly in raising new capital. The $2,000,000 
of old bonds are refunded by exchanging for them new bonds of 
the same par value and $140,000 ($7.00 per $100.00 bond) in cash. 

(a) What did the company realize on the $2,000,000 of new 
bonds ? 

(b) What entries would you make at the time of this refund- 
ing operation ? 


^ On January I, 1906, a corporation issued and sold 5% 2O-year 

bonds, interest payable July I and January i, to the par value of 
$1,000,000, for $900,000.00 cash. These bonds contained a sinking 
fund provision under which the corporation was obliged to call and 
cancel 2% of the original issue on January i, 1911, and each year 
thereafter until maturity. The bonds were callable at 105 and ac- 
crued interest. 


In conformity with these provisions the corporation called $20,- 
ooo of the bonds at 105 on January i, 1911, and each year since, and 
expects to continue the practice. 

(a) What was the original discount on these bonds at the time 
of issue? 

(b) What is the unextinguished bond discount on January 
i, 1916? 

(c) What entries would you have made when you paid the 
bonds which were called on January i, 1911 ? 

(d) What is the effective rate of interest on the capital which 
the corporation secured from the sale of these bonds? 


"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 
definition of interest. 


A. In 1910 a trustee buys for investment $10,000.00 (par value) 
Penna. R. R. 6% bonds due 1921 at 1 12. At the end of six months he 
receives $300.00. How much does a life tenant, who is entitled to all 
of the "income," receive? 

B. He buys 100 shares Penna. R. R. stock at 112. At the end 
of six months he receives a dividend of $300.00. How much does the 
life tenant receive? 


A corporation issues $100,000 of 7% 2O-year bonds at $111.56, 
giving a yield of 6%, and $100,000 of 4% lo-year bonds, at $76.89, 
giving a yield of 6%. At the end of a half-year they pay $5,500 in 
interest. Give entries made at time of issuing bonds and of paying 


To what should the discount on bonds sold for construction pur- 
poses and the expense of disposing of such bonds be charged? Give 


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. 



Buncombe & Company, Ltd., issued $500,000 5% Debenture 
Bonds in consideration of $1,080 for every $1,000 bond. The sub- 
scribers for these bonds were to pay as follows : 

On January i, $580.00 
On July i, 500.00 

All the amounts were received by the company on the due dates. 
Make the necessary Journal and Cash Book entries and post to the 

1 60. 

An insurance company buys $50,000 J% lo-year bonds at 116 for 
investment. The bonds will mature at the end of five years. 

1 i ) How should this purchase be entered on the balance sheet ? 

(2) Give the journal entry which would correctly record the 
facts upon the receipt of the first yearly interest payment. 

The Toledo Paper Company, finding that it can use to advantage 
additional capital, issues $100,000 ist Mortgage 2O-year Bonds bear- 
ing 5% interest. It sells these bonds at 96. Give the journal entry 
on the books of the corporation. 

J. M. Davidson buys $10,000 of the bonds of The Toledo Paper 
Company at the market price of 96. What journal entry will David- 
son make ? 


A corporation issues $100,000 of 5% bonds, payable in fifteen 
years, with interest payable semi-annually, and receives $105,411.33. 
This gives a 4^% basis. Six months later the corporation pays 
interest on the bonds amounting to $2,500. 

What entry should the holder of a $1,000 bond make in his books 
when he receives his first interest ? 

What entry should the corporation make when it pays its first 
interest, and how does that entry affect its income sheet, or its balance 
sheet, or both ? 


A and B are dealers in bonds and share profits in the proportion 
of 75% to A and 25% to B. They engage C to sell bonds, agreeing 
to pay him a salary equal to 25% of the net profits to be divided 
between the partners. 


During the continuance of C's contract the firm purchases 
$100,000 of Waterville Traction Company first mortgage $% bonds 
on a 4% basis. The bonds have eighteen months to run, interest pay- 
able semi-annually (three interest periods). 

(a) The firm holds the Waterville bonds till maturity. Prepare 
a statement of the Waterville bond accounts, showing cost, interest, 
and amortization. 

(b) The total profit for the first year of C's contract is $10,000. 
Show the division of this profit. 


Fill in the missing items in the following table and tell how you 
know what items to add : 

Market Int. Bond Int. Accumulation Book Value Par 

$98,558.06 $100,000 
$1,971.16 $1,500.00 

1,980.58 1,500.00 

1,990.20 1,500.00 

Could you fill in the accumulation column directly, without cal- 
culating or using the market interest, if you knew the market interest 
rate? If so, how? 


The theoretical book value of a 5% bond on January 1st is 
$10,136.47 (on a basis of 4%), and that is what you pay for it. The 
value on July i is $10,089.20. On July I you receive as interest on 
the bond $250, or at the rate of 5% a year. 

What should you credit on your books for that $250? 

On August i you buy another $10,000 of these bonds for $10,- 
122.83, which includes accrued interest. The theoretical book value 
of the bond for the subsequent Jan. i is $10,040.98. 

What will you debit at the time of purchase ? 

What should you credit when the $250 interest on the last pur- 
chase is received on January i ? 


A corporation issued $500,000 par value 2O-year bonds, interest 
at 4% payable semi-annually. These bonds were sold to yield 5%. 
After 5 years the corporation, needing more capital, issues $2,000,000 
par value, 6%, 2o-year bonds, interest payable semi-annually. Part 
of these are exchanged for the entire original issue of 4% bonds and 


the remainder are sold. The whole transaction is carried through on 
the basis of a 5% yield. The value of the 6% bonds on this basis was 
$2,251,028, while the value at the time of refunding of the 4% bonds 
was $447,674.25. 

Give the journal entries on the books of the corporation at the 
time of the exchange of the 6% bonds for the 4%'s. 

A bond (interest 6% payable semi-annually) whose par value is 
$1,000, has been purchased to yield 5%. The bond is due two years 
from the date of purchase. The purchase price is $1,018.81. What 
entries should be made on the books of the purchaser 

(a) When he acquires the bond? 

(b) At each interest payment? 

(c) At date of maturity? 
Give actual figures. 


You buy a bond on Jan. i for $10,449.13, which is its theoretical 
value on a 4% basis. On Mar. i you buy another like it and pay 
$10,518.79, which includes accrued interest. On July i you receive 
your semi-annual interest of $250 on each bond. The book value of 
the two bonds on July i is $20,816.22. 

What entry should you make on your books for the original pur- 
chase ? 

What for the March ist purchase? 

What for the interest received on July i ? 

The book value of the two bonds on the subsequent January i is 
$20,732.55. You sell them on October i for $21,030. 

How much do you make or lose on the sale ? 


You buy a bond on Jan. i, for $10,560, which is its value on a 4% 
basis. On Mar. I, you buy another like it and pay $10,665.50, which 
includes accrued interest. On July i, you receive your semi-annual 
interest of $300 on each bond. The book value of the bonds on July i 
is $20,942. What entry should you make on your books at the time 
of the original purchase ? What for the Mar. i purchase ? What for 
the interest received on July I ? 


The book value of the two bonds on the subsequent Jan i is 
$20,762. You sell them on Oct. I for $21,200. How much do you 
make or lose on the sale ? 

170 7-7 V 

A corporation has outstanding $20,000,000 first mortgage bonds, 
interest 7%, payable semi-annually on January ist and July i. These 
bonds fall due as follows : 

$5,000,000 on Jan. i, 1918 
5,000,000 on Jan. i, 1920 
5,000,000 on Jan. i, 1922 
5,000,000 on Jan. I, 1924 

This $20,000,000 issue is to be refunded as of January i, 1916 on 
a 3 l /2% basis. Allowance is to be made for the difference in interest 
for the remainder of the lives of the various bonds, and such differ- 
ence is to be paid in bonds. 

(a) What amount of bonds must be issued? 

(b) This same corporation has outstanding $10,000,000 of in- 
come bonds bearing 5% interest. The auditor decides that the Old 
Bond account should be debited $20,000,000, and the New Bond 
account credited the whole amount of the issue, the excess of the 
new over the old bonds being charged against income for 1914. The 
entries are made accordingly. 

As a result of this entry no net income was left to pay the interest 
on the income bonds. 

Have the income bondholders any redress in the matter ? 

(c) What will be the proper journal entries at the time of the 

(d) What will be the proper journal entries on July i, 1916 and 
on Jan. i, and July i, 1917 to 1924? 

There were purchased December 31, 1907, $100,000 of Altoona 
4^'s for $103,394.43 ex. interest. 

On June 30, 1909 half of the bonds were sold for $52,418.55 ex. 

Given that the bonds are semi-annual and that the price paid is 
such as to net the investor the nominal rate of 4% per annum, that is 
2% semi-annually, determine the profit made from the sale and the 
interest revenue for the two years ended December 31, 1909. Give 
an analysis of the Bond Ledger account as it would appear at the 
close of business December 31, 1909. 



A corporation authorizes an issue of $1,000,000 of bonds. The 
trust company issues and certifies $500,000 of these bonds to Decem- 
ber 31, 1914. On this date the company sells $200,000 of bonds, 
pledges $200,000 as collateral security for the payment of its notes, 
and has $100,000 of bonds in the treasury. How should this issue of 
bonds appear on the balance sheet of the corporation on December 


The payment made for building a bridge is $1,200,000 of the com- 
pany's 4% bonds. The same bridge could have been built for 
$1,080,000 in cash. Make the proper journal entries upon the com- 
pletion of this transaction. 


The following argument is presented by an official of the com- 
pany, in view of the facts stated in Problem 282 : "The bridge cannot 
be built without capital any mor^t|af\ it can be built without draw- 
ings. The discount on the bonds is a cost of acquiring the bridge 
just as much as the wages of the engineer who draws the plans, for 
the full face value of the bonds must be returned to the bond- 
holders. The bridge should stand on the books as costing $1,200,- 
ooo." Discuss this argument fully. 

The A. B. Banking Co. of New York borrows 20,000 from C. D. 
& Co., of London, for 60 days at 4%, money being at 6% in New 
York. The rate of exchange is 4.87^4 when the loan is made and 
4.88)4 when it is repaid. If brokerage is 1/32%, cable charges $15, 
how much is saved or lost by borrowing abroad? (Interest on basis 
of 360 days to the year.) 



A corporation's income sheet for 1912 showed a surplus for the 
year of $150,000. In 1913 the surplus appearing on the income sheet 
was $200,000. Are these figures consistent with the following items 
appearing on the liabilities side of the balance sheet for the years in 
question ? 

1911 1912 1913 

Reserve for Accrued Depreciation $120,000 $145,000 $175,000 

Reserve for Addition to Plant 100,000 150,000 200,000 

Contingent Reserve 100,000 150,000 

Surplus 75o,ooo 700,000 800,000 


The A. B. C. Co. started business January i, 1911. The follow- 
ing Balance Sheet is an accurate representation of the condition ot 
the business. 

Real Estate and 
Buildings $200,000.00 

Plant and Machinery 280,000.00 

Cash and other cur- 
rent assets 70,000.00 

Capital Stock $350,000.00 

Mortgage 150,000.00 

Bills Payable 50,000.00 



After operating three years, the Company shows the following 
Balance Sheet. What is the proprietorship as shown by this state- 

Real Estate and 
Buildings $200,000.00 

Plant and Machinery 300,000.00 

Cash and other cur- 
rent assets 157,000.00 

Profit and Loss 10,000.00 

Capital Stock $350,000.00 

Mortgage 150,000.00 

Bills Payable 60,000.00 

Accounts Payable . . . 50,000.00 
Reserve for Accrued 

Depreciation 57,000.00 




An examination of the accounts discloses that they are correct 
except for the following facts : In 1911, 23 machines were purchased 
at a cost of $25,000 to replace the same number of machines aband- 
oned whose original cost was $13,000; the entire $25,000 was charged 
to operating expenses as renewals. The allowance for depreciation 
iwas $18,000, while $12,000 would have been adequate. In 1912, 
$9,000, charged to Maintenance, was really improvement to build- 
ings. In this year, the allowance for depreciation was $20,000, while 
$13,500 would have been adequate. In 1913, 16 new machines, cost- 
ing $21,000, were purchased and charged to Operating Expense. 
These replaced 16 machines whose original cost was $12,500. De- 
preciation to the amount of $19,000 was charged when $14,000 would 
have been adequate. 

(a) Rewrite the Balance Sheet for January I, 1914 in the light 
of these discoveries. 

(b) What is the proprietorship as shown by the Balance Sheet 
as so reconstructed? 

A manufacturing corporation handling a patent device issued 
bonds aggregating $375,000, payable in installments of $25,000 an- 
nually for fifteen years. Having in mind possible competition and 
obsolescence of its property, it was provided that the sinking fund 
installments be charged against earnings. The president of the 
company had a contract under which he was to receive a bonus of 5% 
of the net profits in addition to his salary, but it was specifically pro- 
vided that as to him the charges against earnings should not include 
the sinking fund installments. In making up the first year's accounts 
the auditors decided that the depreciation reserve, as nearly as could 
be determined, should be stated as $25,000 and this amount was in- 
cluded among the operating expenses. When their report was sub- 
mitted to the directors, the president referred to his contract and 
stated that the sinking fund provision and depreciation were synony- 
mous and that he was entitled to 5% of the earnings before any de- 
duction was made for depreciation. The matter is referred to you 
as an accountant ; what is your opinion ? 


The secretary of a manufacturing corporation which has no sur- 
plus has undertaken to close the books. The balance to the credit of 
the profit and loss account is just sufficient to enable the directors to 
declare a small dividend, which they propose to do. At this juncture 
the services of an accountant are secured. He finds that no provision 


for depreciation has been made, and that all expenditures for repairs 
and renewals, amounting to more than the proposed dividend, have 
been charged direct to plant account. Show the nature of any cor- 
rective entries which should be made. What would be the effect on 
the balance sheet of such entries ? 


The State of New York requires telephone companies to main- 
tain a Depreciation Reserve to take care of the actual depreciation of 
tangible assets. The Treasurer of a certain telephone company re- 
ported Cash in Bank $15,000 among his assets. Among his liabili- 
ties he reported a loan from the same bank of $12,000. He was 
receiving 3% interest on the cash in bank and paying 6% interest 
on the loan from the bank. When asked why he did not use the 
cash in Bank instead of borrowing he replied: "Your requirement 
with respect to Depreciation Reserves prevents me from doing so." 
Write him a brief letter setting him right. Tell him how he should 
keep these accounts. 


When auditing the books and accounts of a concern operating 
a large machine shop you find that the machinery and tools have 
been regularly depreciated each year, that their value as shown by 
the books is considerably less than the value as shown by an inde- 
pendent appraisal, and that the firm has set up the higher values as 
shown by the appraisal on the books. To what account would you 
recommend the corresponding credit to go, and for what reasons ? 


Defend the statement that Maintenance should be charged not 
when the repairs are actually made, but should be spread on some 
uniform basis over the life of the particular item of plant involved. 

The actual cost of repairs in a certain plant for the years 1908- 
1913 inclusive was as follows : 

1908 $ 400,000 

1909 600,000 

1910 55 ' 000 

191 1 450,000 

1912 640,000 

1913 600,000 


7 6 


If Maintenance charges had been made on the basis of an even 
percentage of Gross Earnings, they would have been as follows : 

1908 $ 420,000 

1909 585,000 

1910 540,000 

I9H 495,000 

1912 630,000 


Assuming that the method suggested in 185 had been followed 
and the charges to Income for Maintenance had been on the even 
percentage basis here shown, what entries would have been made 
each year to provide for Maintenance ? 

A syndicate owning in fee large tracts of timber land makes a 
contract with a lumber company to sell 1,000,000,000 feet of stand- 
ing timber, at the rate of $3 per M feet. The lumber company agrees 
to cut and pay for this timber within a period of six years, and guar- 
antees that the following shall be the minimum amount to be cut and 
paid for in each of the six years, payments to be made in cash at 
the end of each six months : 

1st year ....... 80,000,000 feet $ 240,000 June 30 $ 120,000 

Dec. 31 120,000 








June 30 


Dec. 31 



June 30 


Dec. 31 



June 30 


Dec. 31 



June 30 


Dec. 31 



June 30 


Dec. 31 




The syndicate desiring to anticipate the payments under its con- 
tract, applies to its bankers for the cash value of the contract, offering 
as security the contract itself and a mortgage on the timber land. 
What is the present worth of the contract, calculated on a 6% basis? 



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 $150,000. It is decided (i), to provide, 
out of the above named profit and loss balance 7^2 per cent deprecia- 
tion on plant and machinery; (2) to write off as uncollectable $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; (3) to provide for the preferred stock dividend for 
the year; (4) to provide for a bonus of $7,500 to the employees; 
(5) to provide for a dividend on the common stock of 15 per cent 
for the year and (6) to carry the balance then remaining on the profit 
and loss account to undivided profit account. 

Draft the journal entries to give effect to the above. 


(a) Defend the statement that Maintenance should be charged 
not when the repairs to plant are actually made, but should be spread 
on some uniform basis over the life of the particular item of plant 

(b) The actual cost of repairs in a certain plant for the years 
1908-1913 inclusive was as follows : 

1908 .......................... $ 400,000 

1909 .......................... 600,000 

1910 .......................... 550,000 

1911 .......... .- ............... 450,000 

1912 .......................... 640,000 

1913 ........... . .............. 600,000 


If Maintenance charges had been made on the basis of an evert 
percentage of Gross Earnings, they would have been as follows : 

1908 .......................... $ 420,000 

1909 .......................... 585,000 

1910 .......................... 540,000 

1911 .......................... 495oo 

1912 .......................... 630,000 

1913 .......................... 


7 8 


Assuming that the method suggested in (a) has been followed, 
and the charges to Income for Maintenance had been on the even 
percentage basis here shown, what entries would have been made 
each year to provide for Maintenance ? 


The following is the Balance Sheet of the X. Y. Z. Co. on Dec. 
31, 1910. 

Capital Stock $500,000 

Bills Payable 100,000 

Accts. Payable 20,000 

Real Estate and Plant. .$420,000 

Bills Rec 60,000 

Accts. Rec 19,000 

Supplies Sy 

Cash 40,000 

Merchandise 96,000 

Profit and Loss 20,000 

$640,000 $640,000 

(a) An investigation shows -that a decrease in the value of the 
real estate of $12,000 has been written off the real estate account and 
debited to Profit and Loss; also that improvements in the plant 
amounting to $16,000 have been charged to expense. Make the cor- 
rected Balance Sheet. 

(b) Suppose the investigation had shown an appreciation in 
the value of the Real Estate of $20,000 which had been carried to 
Profit and Loss, and that repairs and replacements to the amount of 
$18,000 had been charged to expense. Correct the Balance Sheets 
and the above valuation of the active assets. 

1 88. 

Product by year. 

1900 12 

1901 ii 

1902 ii 

1903 ii 

1904 5 

1905 10 

1906 10 

1907 9 

1908 9 

1909 12 

Present value of 
output at 5%. 





The above table gives, in the first column, the net earnings, by 
years, for a certain machine, before deducting depreciation. In the 
second column is shown the present value of these future earnings, 
at the beginning of each of the years, computed on a 5% basis. 

(a) From the data above presented compute (i) the deprecia- 
tion by years, on the basis of declining value (2) the annual profit. 

(b) Construct a table showing the depreciation by years on the 
basis of an even charge, and, also, the profit by years. 

(c) Which of the above methods of writing off depreciation 
gives greatest uniformity as regards (i) annual profit; (2) rate of 
return on the investment; (3) cost per unit of product? Explain 


What do you understand by the term "depreciation," and how 
should it be provided for on the books of a manufacturing company 
owning its plant and equipment? Wherein does the charge for 
depreciation differ from the charge for repairs and renewals? Can 
the charges for depreciation be avoided through any system of book- 
keeping ? 

I9 ' 

Describe two methods of treating the allowance for depreciation 
of machinery on both the books and the balance sheet. 

What are the various methods of determining the amount to be 
written off the cost of a lease for a term of years? Explain which 
method you prefer and give your reasons. 


A mercantile company buys the leasehold to a site for $10,000. n 
The leasehold has 5 years to run. How would you treat this transac- 
tion in the accounts (a) at the time of purchase, (b) each year dur- 
ing the remaining life of the leasehold? Give entries. 


A company leases for a term of fifty years certain unimproved 
property for factory purposes, paying a ground rent therefor of 
$1,000 a year. The company erects certain buildings at a cost of 
$40,000, which are to pass to the owner of the fee at the termina- 
tion of the lease. Without going into the mathematics of the matter 
state how you would treat this proposition in the books of account. 



A public service corporation that regularly sets aside from its 
profits a sufficient amount to provide for depreciation and credits 
the amount to Depreciation Reserve, 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 and the excess of cost of old 
plant over scrap be treated in the accounts of the company? Give 


The following statistics are taken from the books of a corpora- 

Capital Stock ............................. $400,000 

Merchandise Inventory .................... 954OO 

Machinery .............................. 125,000 

Undivided Profits ........................ 800 

Surplus (Credit) ......... . r ............... 32,900 

To cover actual depreciation suffered during past years but which 
has not been written off before, the directors decide to set aside a 
machine depreciation reserve of 10% ; they also decide to pay a 
dividend of 5%. What entries are necessary? 


A factory cost $100,000.00. Depreciation amounting to $40,000.00 
has been charged. An engineer's appraisal shows, actual value ot 
$80,000.00. Should there be any adjustment of the plant account, 
and how would the matter of depreciation or appreciation affect the 
current year's profit and loss account ? 

You find in the journal of a corporation's books the following 
entries : 

Depreciation ....................... $12,000 

To Plant ........................ $12,000 

Undivided Profits ................... 10,000 

To Depr. Reserve ................. 10,000 

Depr. Res. Fund .................... 10,000 

To Cash ........................ 10,000 

(a) Interpret these entries. 

(b) What effect have these entries on the asset side and on the 
liability side of the balance sheet ? 

(c) What effect have these entries on the amount of profits 
available for dividends? 



"The method that should be adopted to ascertain the net earnings 
of a street railway company, is to deduct from the gross earnings, 

(a) Operating Expenses, and maintenance; 

(b) Interest upon the bonded indebtedness; 

(c) Depreciation ; and 

(d) Where the city franchise or ordinance operated under is of 
limited duration, then a sinking fund necessary to retire 
bonds, when the franchise expires, for then the business 

The above extract is from an "Argument for the Establishment of 
Rules and Principles That Should Guide the Board of Public Works 
in Assessing Street Railway Property." 

You, as City Auditor, are asked to write an opinion on the cor- 
rectness of the principles above set forth, especially (d). 


A gas company with a capital of $5,000,000 and a surplus of 
$1,000,000 had made no provision for the depreciation of its property 
till the directors reviewed the valuation of the property accounts and 
decided to write off $2,000,000, thus creating an apparent deficit of 
$1,000,000. The net earnings during the year following the writing 
down of the assets amounted to $1,250,000 before any depreciation 
was charged, and the directors proposed to pay out as dividends 
$1,000,000. What opinion would you express as to this proposition, 
if called on by the board before final action was taken ? 


The company referred to in the last problem, five years subse- 
quent to the time of writing down its assets, reconsidered the action 
taken at that time and instructed its accounting officer to write back 
the valuation of the assets and thus apparently add $2,000,000 to its 
surplus, (i) What entries would be required? (2) If you were 
auditing the accounts of a corporation which owned practically all 
of the capital stock of this gas company, how would you regard both 
the writing down and the writing up of the assets of the subsidiary 
company on the accounts of the company you were auditing? 


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 
sinking fund is to be provided for the gradual retirement of the de- 
benture 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 theory that the capital stock 
issued to the vendor was in the nature of a bonus and did not repre- 
sent any real value. State your views regarding the two proposi- 


Below is a table of locomotives abandoned by the A. B. R. R. 
during the years 1907-1912. From the data given compute a depre- 
ciation rate for locomotives on this railroad. 


$ 9,900.00 






j, 500.00 
























































































































504.5 1 





























































In making up the accounts the master allowed deductions from 
profits for bad debts, for rents, for interest paid debiting to rents 
and interest received ; he allowed for the market value of the mate- 
rials on hand when the infringement began, for the cost of those 
acquired afterwards to carry on the business and for the usual sal- 
aries of the managing officers. He refused to allow the extraordin- 
ary salaries which it appeared by the books had been paid, being 
satisfied they were dividends of profit. He refused to allow the 
value at the time they were issued, of materials bought for purposes 
of infringement. The market was a rising one. 

He refused to allow manufacture's profit and interest on the 
capital stock. 

Discuss the propriety of the accounting. 


The following figures are taken from the locomotive records of a 
railroad company. 


Inventory Acquisitions Retirements Depreciation 
at cost at cost at cost 

1908 12,868,491 o 103,106 

1909 373.766 435,172 

1910 1,442,765 368,381 

1911 1,401,316 214,075 

1912 o 289,365 

Complete the fourth column in the above statement, using a 
straight line depreciation rate on original cost for locomotives of 


A manufacturing corporation has been operating five years and 
has among other accounts the following, viz. : Plant account, $600,- 
ooo; Reserve for Depreciation, $150,000; Surplus, $100,000. The 
officers ask you as accountant to certify a statement embracing the 
above items in the following form: "Plant," $600,000; Surplus and 
reserve accounts, $250,000. State (a) whether you approve same 
and (b) the reasons supporting your answer. 


A manufacturer is desirious of securing a partner and furnishes a 
statement covering five years' operations as follows : 

Assets Liabilities 

Buildings $ 20,000.00 Accounts and Bills 

Machinery and Fix- Payable $ 30,000.00 

tures 75,000.00 Sales average per 

Inventory Mdse. and year 500,000.00 

Supplies 50,000.00 Wages paid per year. 170,000.00 

Cash 5,000.00 Expense, Selling and 

Accounts Receivable. 40,000.00 General, per year. . 35,000.00 

Material Purchased . . 260,000.00 

Buildings are on leased ground, lease expires in ten years, annual 
land rental $1,000.00. Buildings revert to owner at expiration of 

New machinery when installed ten years ago cost $50,000.00. 
Additional since cost $25,000.00; no depreciation has been charged 
off. All repairs and replacements charged to expense. 

What, in your opinion, would be a fair price to be contributed for 
a half interest? Explain fully. 



The accounts of a certain manufacturing corporation for the year 
ending Dec. 31 showed a profit of $85,000 and the directors proposed 
to pay $75,000 in dividends on preferred stock. The holders of 
common stock brought action, alleging that the value of the property 
had depreciated, and a large part of the capital of the company lost 
and that there could not be any profits applicable to the payment of a 
dividend until such loss and depreciation had been made good. 


A certain public service corporation with all its property in one 
state is incorporated in another state. It has outstanding $32,000,000 
of securities while the appraised value of its property is $25,000,000. 
In making application for a charter in the state in which its property 
is located this corporation claims that in addition to the $25,000,000 
appraised value of its properties it has a "going value" or "going 
concern value" of an additional $7,000,000, thus bringing its total 
property up to the amount of its outstanding securities. 

(a) State what you understand by "going" value, pointing out 
the difference, if any, between this and good-will. 

(b) Suppose you are delegated by the State to ascertain the 
propriety of the corporation's claim of $7,000,000 going value. State 
what steps you would take to verify or disprove the claim. 



(a) Explain the meaning of the term "good-will." (b) When 
may it properly appear upon the books of a company as a valuable 
asset? (c) What factors should be taken into consideration in plac- 
ing a valuation on good-will? ^ ., 


$50,000 of stock is issued for a "going concern" whose property 
accounts showed it to have a net worth of $45,000. Nothing was 
said about good will when the contracts were made between the 
owners and the new company. How would you treat the $5>ooo 
difference ? 


Is there a reason why the goodwill carried as an asset on the 
books of a prosperous and growing manufacturing concern should 
be depreciated, amortized or otherwise written off, and if so what 
would be the effect of such a depreciation, amortization or writing 





In auditing the books of a corporation capitalized at $250,000 
you find that three years previously they acquired the business of 
a co-partnership included in which was an asset called "goodwill" 
valued at that time at $25,000, since which time the same has not 
been written down. The average profits of the corporation for the 
three years have been 9% on the capitalization. How would you 
treat the item goodwill ? Give reasons. 


A corporation capitalized at $100,000.00 carries as an asset $50,- 
ooo.oo for goodwill. During the year it earns net $25,000.00 and 
pays a 10% dividend. What disposition would you advise being 
made of the remaining $15,000? Give reasons. 

Comparative Balance Sheet. r 

Assets 1913 1912 

Plants, patents, goodwill .............. $71,060,813 $70,685,722 

Investments ......................... 1,768,045 1,635,958 

Treasury stock ...................... 2,058,700 2,227,117 

Inventory .......................... 12,614,926 16,226,639 

Accounts receivable ................... 5,477,195 6,370,890 

Bills receivable ....................... 586,274 606,944 

Cash ^ . . ............................ 723,053 803,225 

Prepaid insurance, taxes ............... 222,950 229,619 

Total Assets ................... $94,511,956 $98,786,114 


Common stock ....................... $60,000,000 $60,000,000 

Preferred stock ...................... 30,000,000 30,000,000 

Bills payable ........................ 2,799,736 6,479,411 

Accounts payable ..................... 489,031 653,185 

Accrued liabilities .................... 217,206 547,283 

Contingent reserve ................... 300,000 300,000 

Surplus ............................ 705.983 806,235 

Total Liabilities ............... $94,511,956 $98,786,114 

In the capital asset item, real estate, buildings, machinery, etc., 
are listed at $12,679,151 ; patents at $583,650 and goodwill at $57,- 


The income account for the year 1913, shows the following facts 

Net Sales $39,509.346 

Expenses 36,451,233 

Balance 3,058,113 

Misc. Income 491,316 

Total Income $ 3,549,429 

Treasury Stock reduced from Cost to par 

value $ 168,417 

Depreciation 54 1 >359 

Interest on Bills Payable 239,906 

Net Profit $ 2,599,747 

Preferred Dividends 2,100,000 

Common Dividends 600,000 

Deficit for year $ 100,253 

"Profits for the B. F. Goodrich (rubber) Company and sub- 
sidiary companies in the year ended Dec. 31, 1913, applicable to 
dividends was $2,599,747." The Chicago Record-Herald, Feb. 24, 

(a) Comment on the above statement assuming that the figures 
in the Company's financial statements are correct. 

(b) What would you say as to the value of the goodwill item 
appearing in the balance sheet? 



The following accounts are found on the books of a corporation : 
reserve fund; depreciation on furniture; bad debt reserve; bond 
redemption account ; bills receivable ; rents of properties owned ; 
dividend on preferred stock. State which would enter the profit and 
loss account and balance sheet, and which would show debit and 
which credit balances. 


"A balance sheet can only be an approximation to facts, the degree 
of approximation depending upon the skill and accuracy with which 
the estimates ure made." (Dickinson, Accounting Practice and Pro- 
cedure.) Explain. 


For each of the businesses whose figures are shown below, 
indicate whether there is a discrepancy, a deficit, or neither of 
these. The figures are for the balance sheet. (Show your figures 
in the form of a Balance Sheet) 

Partners $65,000 Capital Stock $65,000 

Merchandise on hand .... 34,000 Merchandise on hand .... 34,000 

Accounts Rec 35,ooo Accounts Rec 45,000 

Accounts Pay 15,000 Accounts Pay 15,000 

Cash 12,000 Cash 13,000 

Real Estate 45,000 Real Estate 35,ooo 

Bills Pay 47,000 Bills Pay 49,000 

Profit and Loss 2,000 


On the basis of the following balance sheets show what has be- 
come of the profits earned, no dividend having been declared : 


1913 1914 

Real Estate $ 50,000 $ 52,000 

Plant and Machinery 85,000 76,500 

Patents and good- will 20,500 20,500 



Horses and Wagons 15,000 12,750 

Inventory 49,000 65,000 

Accounts Receivable 35,ooo 33,000 

Cash 22,000 21,150 

Agency Investments 15,000 

Total $276,500 $295,900 


Capital Stock $200,000 $200,000 

Creditors, open accounts 16,000 17,000 

Bills Payable 30,000 

Mortgage 25,000 

Profit and Loss 30,500 53,900 

Total $276,500 $295,900 



1912 1913 

Real Estate $ 55,000 $ 57,000 

Plant 95,ooo 85,500 

Accts. Rec 45>5 43>5 

Mdse. (Invy.) 59,ooo 73,75 

Cash 12,000 11,150 

Investments 10,000 

Total $266,500 $280,900 


Capital Stock .$200,000 $200,000 

Accts. Pay 20,000 12,000 

Bills Pay 26,000 

Surplus 20,500 28,900 

Mortgage 20,000 

Contingent 10,000 

Reserve 10,000 

Total $266,500 $280,900 

What were the profits for the year? Prepare tabulation show- 
ing what has been done with these profits. 





Real Estate and Plant $ 60,000 

Machinery 10,000 

Merchandise 39,3 21 

Accounts Receivable 30,219 

Loans to Directors 10,000 

Cash 10,600 


$ 57,000 

44,77 J 


Total $160,140 $159,140 


Capital Stock $100,000 

Notes Payable 20,000 

Accounts Payable 30,140 

Surplus ^ . . 10,000 




Total $160,140 $159,140 

Assume that you are the Cashier of a local bank and a request 
is made by the corporation whose balance sheets are shown above 
for a loan of $20,000. State whether or not you would grant the 
accommodation and give your reasons fully. 


A concern owns a parcel of real estate which cost it $500,000. 
There is a purchase money mortgage on it for $350,000. You are 
asked to enter the same in the balance sheet at $150,000 net. Would 
you comply with this request? Give reasons. 


Dartmouth Manufacturing Corporation. 

General Balance Sheet, October i. 
Assets 1907 

Real Estate $ 458,709 

Machinery 616,675 

New Construction 

Merchandise 393,57 

Cash & Debts Receiv 653,681 



$ 473,553 

$ 466,614 








Totals $2,122,635 $2,300,769 $3,213,375 



Liabilities 1907 

Common Stock $ 600,000 

Preferred Stock 

Funded Debt 450,000 

Bills Payable 

Accounts Payable 20,529 

Reserve for Bonds 150,000 

Reserve for Depreciation 100,000 

Profit and Loss 802,106 

$ 600,000 










Totals $2,122,635 $2,300,769 $3,213,375 

(a) What were the profits for the year ending Oct. I, 1909. 
assuming that no cash dividends have been paid and that the increase 
in common stock outstanding represents a stock dividend. 

(b) Where did they get the money to make the extensions added 
in 1908-09? Why didn't they use the surplus to make these ex- 
tensions ? 


The Canavan Mining Company is organized under the laws of 
Arizona to buy and develop certain silver mines near the Mexican 
border. The Capital Stock, fully paid in cash at par, is $500,000.00. 
At the end of the third year of operation the Company has the fol- 
lowing assets : 

Mining lands $496,712.18 

Buildings and Improvements 53,287.82 

Cash 33,244.20 

Machinery 31,000.00 

Merchandise and Supplies 8,614.38 

Bills and Accounts Receivable 11,385.62 

Silver Bullion 69,000.00 

The Company owes $20,000 on open account and has accrued 
liabilities amounting to $2,244.20. (a) Set up the balance sheet and 
determine the total profits for the three years, assuming the above 
to be the values of the assets after proper allowances have been made 
for depreciation, and that no dividends have been paid the first year 
and 8% in each of the other two years, (b) Answer the same ques- 
tions as in (a) on the assumption that the values given above rep- 


resent original cost and that a reserve for depreciation for mining 
lands amounting to $180,000 has been set up, and another for de- 
preciation of buildings, improvements, and machinery amounting to 
$20,000 ; and that no dividends have been paid. 


A company authorizes its officers to borrow $100,000 for its 
account and give as security $200,000 of the first mortgage bonds 
of the company. How should this transaction be treated on the 
balance sheet? 


Below is shown the liability side of a corporate balance sheet for 
the year ending Dec. 31, 1912. There are also shown various assumed 
balance sheets for the year ending Dec. 31, 1913. Give the history of 
the business during the year 191 as shown by the assumed balance 
sheets (a) to (g). 

Liabilities Dec. 31, 1913 

Dec. 31, 



Capital Stock ...... $ 800,000 $ 800,000 $1,200,000 

Bonds ............ 500,000 

Bills Payable ...... 960,000 

Accounts Payable. . 320,000 

Surplus .......... 30,000 










$ 8OO,OOO 


Total $2,610,000 $2,610,000 $2,610,000 $2,390,000 

Liabilities 1913 

(d) (e) ' (f) 

Capital Stock $1,000,000 $1,000,000 $1,200,000 

Bonds 600,000 750,000 300,000 

Bills Payable 960,000 800,000 600,000 

Accounts Payable. . 320,000 320,000 400,000 

Surplus 30,000 80,000 




Total $2,910,000 $2,950,000 $2,500,000 $2,430,000 

* A deficit of $20,000 appears on the asset side of the balance 



The following is a comparative balance sheet at December 31,. 
1910, and December 31, 1911, presented to the directors of the West- 
ern Company at their meeting of January 5, 1912 : 

Assets 1910 1911 

Land $ 20,000 $ 25,000* 

Buildings 45,ooo 45,ooo 

Machinery and Tools 86,000 89,000 

Horse, Wagon and Harness 10,500 10,500 

Patents 6,000 6,000 

Good-will 25,000 25,000 

Cash 28,300 10,300 

Accounts Receivable 29,600 26,550 

Investments Bonds 15,000 

Inventory of Goods in Process. . 10,800 14,690 

Inventory of Materials and Sup. 6,750 10,300 

Agency Investment 3,68o 

$267,950 $281,020 

Capital Stock: 

Preferred $150,000 $150,000 

Common 50,000 50,000 

Bond and Mortgage Payable. . . 20,000 

Notes Payable 35,ooo 2,000 

Accounts Payable 16,400 I 9>3S 

Reserves for Depreciation 2,500 6,750 

Prerhium on Bonds 1,000 

Surplus 14,050 31,920 

$267,950 $281,020 

*Increase due to appraisal based on rise in values of factory sites 
in the immediate vicinity. 

Together with the above balance sheet there was submitted to the 
Board of Directors a statement of income and profit and loss show- 
ing the profits of the year 1911 to have been $22,120. The directors 
state to the auditors that, in view of the decrease of cash and of the 
increase of capital liabilities, they are unable to ascertain what has 
become of the increased profits of the year. The auditor prepares 
and submits to the directors, before the meeting is adjourned, an 


account properly named, which is so arranged as to show clearly how 
the Western Company has applied such resources of the year 1910 as 
have been lost in 1911, and the resources and profits of the year 1911. 
Prepare the account rendered by the auditor. 


Condensed General Balance Sheets The Chemical Co., 

December 31. 

Assets 1907 1908 1909 

Manufacturing Investment, at 

c st $14,320,656 $14,334,087 $14,491,886 

Investments in other Corpor- 
ations 2,971,290 2,962,757 3,008,613 

Merchandise on hand, at Fac- 
tory cost 2,179,734 1,981,011 1,905,153 

Receivables as follows : 

Customers' accounts 1,147,346 1,027,383 1,007,959 

Due from Corporations 

controlled 1,39^960 i,4O9,5 J 3 ^9 2 5^55 

Loans 40,99 2 37.S 66 2,581 

Cash 572,866 679,946 2,063,290 

Reserved Fund for Fire In- 
surance (Cash and Securi- 
ties at Market Values) . . . 329,902 389,206 436,512 
Miscellaneous Assets 76,384 83,742 88,358 

Totals $23,031,130 $22,905,211 $24,930,007 


Preferred Stock $11,000,000 $11,000,000 $12,500,000 

Common Stock 7,410,300 7,410,300 7,410,300 

Accounts payable but not due 522,023 401,687 314,499 

Loans 450,000 350,000 

Profit Sharing Fund 109,346 

Funded Reserve for Fire In- 
surance (Contra) 329,902 389,206 436,512 

Reserve for U. S. Corporation 

Tax 15,000 

Dividend Payable January. . . 165,000 165,000 187,500 

Surplus 3> I 53>905 3,189,018 3,956,850 

Totals $23,031,130 $22,905,211 $24,930,007 



(a) What were the profits for the years 1908 and 1909 as 
nearly as may be determined from the above balance sheets, assum- 
ing that the dividend rate is i l /2% quarterly on preferred stock. No 
dividends have been paid on common. 

(b) Give the journal entries made in 1909 affecting the accounts 
"Reserved Fund for Fire Insurance" and "Funded Reserve for Fire 

(c) Is the "Profit Sharing Fund" a valuation account, a surplus 
account, or a liability account ? 

(d) Give a history of the business as shown by the balance 
sheets for the two years. 


For the years ending December 31, 1913 and 1914, the balance 
sheets of The Acme Specialty Company are as follows : 

Assets 1913 1914 

Real Estate and Plant $300,000.00 $280,000.00 

Machinery and Tools 100,000.00 90,000.00 

Raw Materials and Goods 

in Process 46,313.00 37,642.00 

Finished Products 53,687.00 62,358.00 

Bills and Accounts Receiv- 
able 71,600.00 60,084.00 

Sinking Fund 28,400.00 33,916.00 

Depreciation Fund 30,000.00 

Cash 5,049.66 14,128.87 

Totals $605,049.66 $608,128.87 


Common Stock $200,000.00 $200,000.00 

6% Preferred Stock 100,000.00 100,000.00 

$% Bonds, ist Mortgage. . 100,000.00 100,000.00 

Bills and Accts. Payable. . 84,011.44 78,128.72 

Accrued Liabilities 3>99-56 6,084.28 

Sinking Fund 28,400.00 33,916.00 

Reserve for Bad Debts 4,499.00 3,999-87 

Reserve for Depreciation. . 25,000.00 25,000.00 

Surplus 60,039.66 61,000.00 

Totals $605,049.66 $608,128.87 


No machinery or real estate has been sold during the year. 

At the end of 1914 the company paid a dividend of 6% on the 
Preferred Stock and 3% on the Common. What were the total profits 
for the year? How was depreciation provided for? 


A company owns all the capital stock of another company. This 
company has outstanding an issue of bonds not guaranteed by the 
company holding the stock. The assets of this subsidiary company 
are deemed insufficient to cover the bonds, so that the capital stock 
has no value. The owning company desires the auditor to pre- 
pare its balance sheet, setting up the assets of this subsidiary com- 
pany along with other assets directly owned and the bonds as liabil- 
ities. Is it proper for him to do so under the circumstances ? Give 
reasons for your answer. 


r^-w . 

Comparative General Balance Sheet and Income Accounts of 
General Railway Signal Company, December 31. 

Assets 1908 1909 

Patents, including Youngs' system $3,269,350 $3,332,089 

Factory bldg., land and improvements 717,828 729.349 

Machinery, tools and fixtures 635,731 655,794 

Material in stock 902,236 893,595 

Bonds owned (Century Tel. Con. Co.) &5,55 85,550 

Cash 60,541 54,267 

Bills and accts. receivable 262,115 325,315 

Deposit 6,923 

Bond discount and tax 53,664 51,048 

Prepaid items 7,982 4,937 

Deficit 6,088 

Totals $5.994,997 $6,144,955 


Common stock $3,000,000 $3,000,000 

Preferred stock 2,000,000 2,000,000 

Funded debt, 

Pneumatic Signal Co., bonds 110,000 88,000 

General Railway Signal Co., bonds 515,000 529,000 

Bills and accts. payable 350,169 526,195 


Accrued interest on bonds 



Totals '.$5,994,997 $6,144,955 

Gross Net Interest 

Profit Expenses Earnings (paid) Balance Deprec'n Balance 

1906 $510,427 $230,286 $260,141 $ 38,063 $242,078 

1907 453,073 240,200 212,873: 52,113 160,760 156,898* 3,862 


260,663 213,319 
233,434 182,869 

47,344 47,333 
50,565 43,818 



8,307 def . 

* Made up as follows : depreciation, $50,345 ; reserve account, 
$15,000, and moving and extraordinary expenses, $89,465 total, 

(a) Give the history of the business for the year 1909. 

(b) The preferred stock is entitled to 6% cumulative dividends. 
In case of dissolution, the preferred stockholders get the amount 
of their stock and unpaid dividends before payment can be made 
on common stock. Dividends have accumulated to io l /2%. Assum- 
ing that the patents are worth So% of the stated figure, how much 
would the common stock holders receive in case of dissolution ? 


Criticize the following balance sheet from both the auditor's 
standpoint and that of the company's financial position. Assume 
that the bond indebtedness outstanding is $200,000. 


Real Estate, Buildings, Plants, Machinery, Equipment, and other per- 
manent Investment, including Good Will $1,000,000 

Investment in Stocks and Bonds at Cost (Market Value, $60,000) . . . 100,000 

Current Assets 

Raw Materials $ 170,000 

Finished Stock at Selling Prices, less S% Discount 100,000 

Consignments (Selling Value) 50,000 

Supplies (Estimated) 200,000 

Accts. and Bills Rec. including advances to employees 125,000 
Stocks in Treasury (Unissued) 

Preferred 150,000 

Common 137,225 

Investments in Subsidiary Companies 225,500 

Cash and Miscellaneous Items 50,500 $1,208,225 


9 8 


Capital Stock: LIABILITIES. 

Preferred 500,000 

Common 750,000 

Bonds and Bankers' Loans 575,ooo 

Current Liabilities : 

'Accounts Payable $ 15,225 

Other Indebtedness 231,000 

Accrued Items 2,000 

Reserves : 248,225 

For Depreciation $ 50,000 

Less Renewal Expenditures, written off 65,000 

Balance (Debit) 15,000 

For Bad Debts 20,000 

Other Contingencies 5,ooo 


Surplus (less Dividends Paid) including\ appreciation in Real Es- 
tate 'and other Capital Assets and Profit on Inventorying Raw 
(Materials at Market Prices 225,000 


The following is a comparative Balance Sheet of the Arban Seed 
and Oil Co. for the dates given. 


Current Assets: Jan. i, 1913 Jan. i, 1912 

Cash $ 33,450.74 $ 27,830.81 

Bill's Receivable 1,499.11 1,221.10 

Accounts Receivable 139,222.73 108,437.79 

Merchandise on 'hand and in process 458,890.79 561,726.14 

Thomas Jones 7,264.09 9,370.79 

Railroad Claims 8,878.68 7,241.42 

Car. M'ileage 91.09 1.94 

Plant Assets : 

Land 15,513-52 15,513-52 

Buildings and Plant 107,033.43 101,652.30 

Machinery and Equipment 249,603.68 232,673.85 

New Process 27,480.33 26,140.00 

Pumping and Station Equipment 12,498.90 12,498.90 

Tank Cars 30,739-59 3,739-59 

Furniture and Fixtures 11,317.06 10,274.80 

Tools 8,934.76 7,983-24 



Deferred Charges to operation; Interest on Bills 

Payable prepaid 123.00 

Insurance Prepaid 4,673.00 

Profit and Loss 188,000.00 169,000.00 

Total $1,305,214.50 $1,323,718.49 


Common Stock $ 350,000.00 $ 350,000.00 

Preferred Stock 350,000.00 350,000.00 

Bills Payable 590,000.00 600,000.00 

Accounts Payable 8,186.60 17,278.79 

Accrued Interest 723.40 634.00 

Accrued Wages 2,724.50 2,845.70 

Accrued Taxes 3,580.00 2,960.00 

Total $1,305,214.50 $1,323,718.49 

In addition to the information conveyed by the above statement, 
you have the following facts. First, the item of Accts. Receivable 
contains an overdue account for $50,000.00 of the Ebenezer Manfg. 
Co. This account is now in litigation and there is no liklihood that 
the Arban Oil and Seed Co. will realize anything on it. Second, 
the plant has been running six years, during which time no depre- 
ciation has been charged on plant, equipment, or machinery, some 
machinery, together with its foundations, has been wrecked and 
replaced by new machinery on newly constructed foundations with- 
out any credits to plant and machinery. Third, the company paid, 
in 1912, a six per cent dividend on the preferred stock. Fourth, the 
profits for the current year will not be any larger than they were in 
1912. Fifth, the asset item "Thos. Jones" represents an overdraft 
by him while an officer of the corporation, and is not collectible. 

(a) A man who owns $150,000 preferred and $150,000 common 
stock of this corporation dies with liabilities amounting to $220,000. 
His executor presents the above statements, together with the 
additional information, to you and asks you whether or not the 
estate is insolvent. Give him your answer supported by the analysis 
of the corporation's affairs on which that answer is based. 

(b) What were the profits for the year? 

(c) Make a comparative statement showing where the money 
used to pay dividends was obtained. 




Harbison- Walker Refractories Co. Comparative General Balance 
Sheet, September 30. 

Assets 1908 1909 

Property Account $28,755,434 $28,716,152 

Betterments completed 1,118,409 1,136,196 

Betterments uncompleted 76,299 237,809 

*Def erred Charges 310,907 288,787 

Inventories at cost 1,335,862 1,578,317 

Accounts Receivable 891,775 1,227,864 

Bills Receivable 36,018 33,009 

Cash 703,822 566,526 

Investment Securities: 

Investment of Reserves 182,000 182,000 

Co.'s bonds purchased, held in T^eas.. 312,000 267,000 

Other Securities 61,559 247,390 

Totals $33784o85 $34481,050 


Common Stock $18,000,000 $18,000,000 

Preferred Stock 9,600,000 9,600,000 

Bonds (Total issue $3,500,000 purchased 
cancelled as per sinking fund require- 
ments) 2,440,000 2,205,000 

Bond interest and taxes not due 44,446 50,897 

Reserve to cover premium at redemption 

of bonds 13,020 9, I 3 I 

Clay and Coal Depletion Fund 111,529 125,706 

Accounts Payable 123,442 362,608 

Pay Rolls 45,523 62,099 

Sundry Reserves 236,163 213,620 

Surplus 3,169,962 3.851,989 

Total $33,784,085 $34,481,050 

* Including clay and coal outfits (1909, $217,986), advanced 
royalties, stripping, prospecting, uncompleted extraordinary repairs, 


(a) State the facts exhibited by the above balance sheet for 
1909 in narrative form, showing the net proprietorship and earnings 
for the year Sept. 30, 1908, to Sept. 30, 1909, as far as these can be 
determined from the balance sheet ; and discuss their accounting 

(b) What was the sinking fund installment for the year? 


In the preparation of a manufacturing and trading account and 
a balance sheet, state on what basis the following assets should 
be valued: (i) raw materials, (2) product in process of manufacture, 
(3) manufactured product, (4) bills receivable, and (5) accounts 
receivable. Give fully your reasons. 


The following figures are shown on a balance sheet for January 
i, 1912. 

Real Estate $100,000 Capital stock $400,000 

Machinery 500,000 Funded Debt 200,000 

Merchandise 150,000 Bills Payable 50,000 

Accounts Receivable. . . 50,000 Accounts Payable 75,ooo 

Cash 50,000 Surplus 125,000 

$850,000 $850,000 

The following is the income sheet for the year 1911 : 

Sales $1,000,000 

Goods in process, Jan. i, 1912. . . 30,000 
Stores on hand, Jan. i, 1912. . . . 20,000 
Merchandise, Jan. I, 1912 100,000 

Less selling costs 250,000 $900,000 

Goods in process, Jan. i, 1911. . .$ 20,000 

Stores on hand, Jan. i, 1911 15,000 

Merchandise on hand, Jan. I, 1911 80,000 

Supplies purchased 175,000 

Wages paid 320,000 


Wages due and unpaid 30,000 

General manufacturing expenses 200,000 

Cost of product $840,000 

Net profit $ 60,000 

Dividends declared, but not yet paid 32,000 

Surplus for the year $ 28,000 

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 com- 
binations or cancellations of accounts, and then correct the balance 

Show the trial balance as it stood before the books were closed for 
December 31. 


The balance sheet, on January I, 1911, of the corporation whose 
balance sheet for January i, 1912, was given in Problem 235, was as 
follows : 

Real Estate. $100,000 Capital Stock $400,000 

Machinery 500,000 Funded Debt 200,000 

Goods in Process 20,000 Bills Payable 40,000 

Finished Goods 80,000 * Accounts Payable 60,000 

Stores 15,000 Surplus 97,000 

Accounts Receivable. . . 75,000 Dividends 28,000 

Cash 35.000 

$825,000 $825,000 

What more can you now tell about the business for the year 1911 
than you could tell from the figures given in Question 235. 












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In 1907 there was written off against surplus for reduction in value o! 
pine lands and stumpage $703,497. For reduction in patents, rights, trade 
marks, etc., $917,371. 

(a) On the basis of the figures presented above explain the changes 
in surplus for each year. 

(b) What was the surplus appearing on the balance sheet for Dec. 
31, 1906? 

(c) Give a history of the business for the years 1907 to 1911, as shown 
by the figures presented. 



The Holmes Realty Company was organized January I, 1913, to 
own and sell suburban lots, and is operated by a manager under an 
agreement of which the following is a digest : 

"The company is to furnish and maintain offices at New 
York and at the site of the company's property in the 
suburbs of Philadelphia, and also to pay salaries of 
clerks and salesmen. The manager is to receive 5% 
commission on the sales. 

"The property is to be reappraised at the beginning of 
each year by adding to the account 4% on the book fig- 
ure of the property unsold at the beginning of the pre- 
ceding year, and by adding the amount of any losses 
which may have occurred in the preceding year, such 
additions for losses to be canceled in subsequent years 
if they are made up by profits. The figures so added 
shall be pro-rated over the remaining lots for sale, and 
the manager is bound not to sell any property at less 
than the book figure." 

The books have been kept for two years without adjusting and 
closing entries, and the accounts show the following figures at 
December 31, 1915: 

Property account (original purchases of 

1000 lots of equal value) $400,000.00 

Capital stock 400,000.00 

New York office expense 3,085.00 

Philadelphia office expense 5,178.32 

Salesmen's salaries 17,500.00 

Sales 220 lots for 1 1 1,425.00 

Deposits on account of sales not yet closed 215.00 

Mortgages held on property sold 38,000.00 

Cash 49,096.43 

Creditors' accounts (for office supplies) . . . 643.75 
Interest on mortgages received 576.00 

There is also an amount of $125 interest due and not yet received 
and $235 accrued interest on mortgages at Dec. 31, 1907. 

These figures for expenses and sales appear up to Dec. 31, 1906: 

New York office expense $ 1,435.00 

Salaries of salesmen 8,500.00 


Philadelphia office expense 2,647.82 

Sales 60 lots for 29,000.00 

Prepare a detailed exhibit of operations, also balance sheet as at 
the beginning of the third year with exhibit of the Property Account. 


The bookkeeper of a manufacturing concern could produce only 
the following statement from its records on January i, 1907: 

Manufacturing expense $ 4,622.89 

Capital Stock 10,000.00 

Plant and equipment 17,500.00 

Cash 832.14 

Gross sales 8,469.10 

First Mortgage Bonds (due 12/31/07) 15,000.00 

Materials and supplies (inventory) 4,289.34 

Notes payable 5,000.00 

Accounts payable 5,423.23 

Interest on bonds (7 mos.) 393-75 

Interest on notes and accounts payable 282.40 

On January I, 1907, the management is changed and you are later 
retained as a public accountant to conduct an examination and pre- 
pare a balance sheet as of January I, 1908. 

You find that during the preceding year the directors have sub- 
scribed in cash to $7,500 additional capital stock and have retired all 
the notes and accounts payable and that no interest was paid on these 
accounts for the year. You also find that the plant and equipment 
was revalued at $15,000 and 5% of this amount was charged off to 
provide for depreciation, while an additional 2^/2% was ordered 
placed in Reserve Account to cover repairs and renewals, the entire 
7/^% being charged directly to Profit and Loss. The bonds out- 
standing fell due on December 31, 1907, and were paid, principal and 
interest, in cash. 

An inventory of materials and supplies places their value at 
$2,328.19, the practice being to charge all purchases directly to Manu- 
facturing expense 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 I, 1907, $4,968.18 was col- 
lected 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 ex- 
penses were $3,720.52, all paid in cash, the total manufacturing 
expenses being 31% of the gross sales for the year ending January i, 
1908. Of these 91.3% was collected in cash and the balance, all of 
which is considered good, remains on the books in accounts receiv- 

Produce a comparative balance sheet of January i, 1907-08, and 
state the amount of gross sales for the year. 


At the close of the year 1907 the books of a manufacturing com- 
pany show a credit balance in the profit and loss account of $20,000, 
and a merchandise account, based on appraisement of inventory at 
selling prices of $36,000, but an appraisement of the same inventory 
at cost prices would amount to $27,000. 

The trading, income, and profi^and loss accounts for the year 
1908 show the following balancesT^ 

Sales $100,000 

Discount on sales 1,500 

Returns and allowances 500 

Purchases 75,ooo 

Freight on purchases 3,ooo 

Discount on purchases 600 

Shipping expenses 2,000 

Selling expenses 5,ooo 

Office and general expenses 10,000 

Insurance 300 

Taxes 200 

Depreciation of machinery, fittings and fur- 
niture 1,000 

Accounts written off as uncollectible 300 

Interest on notes and accounts receivable 1,900 

Interest on notes and accounts payable 700 

At the end of the year 1908 the books were closed on the basis of 
an inventory, appraised at selling prices, amounting to $40,000. If 
this inventory had been appraised at cost prices it would have 
amounted to $30,000. 

Prepare from these items one statement showing the correct trad- 
ing and income results for the year, and another statement of Profit 
and Loss Account opened with the credit balance shown by the books 
at the beginning of the year. 




On Dec. 3! 1912, the trial balance of the M company was as 
follows : 

Real Estate $ 


Discount earned. . .$ 



i 58,000.00 

Accounts payable. . 


Equipment .... 


Depreciation Re- 


50 oou oo 





Common stock .... 

i ,000,000.00 

Discount Allowed. . 
[nterest General. . . 


3. 3OO.2O 

Preferred stock .... 


Insurance paid in 
advance on plant 

3 O3O 80 

Taxes accrued (est) 
Bills Payable 


Accounts Receivable 
Inventory of raw 


Accrued interest on 
bills payable 


material and work 
in progress Dec. 

31 IQII 

l84 ^67 3Q 

First Mortgage 
bonds (4%) 
Surplus . . . 


Operating, mainte- 
nance, manufac- 
turing and gen- 
eral expenses .... 

* \) ~ / \J */ 

6Q I O8^ 47 

Bond interest (one- 
half year to June 
30. 1012") . , 


Total . . .to 

!. 1 83.47S.60 

Total . . .$ 


The inventory of raw materials and work in progress on Dec. 31, 
1912, is valued at $309,062.05. Before the books are finally closed it 
is determined to (i) make a reserve of one-half of one per cent on 
$140,000 of the accounts receivable to provide for possible bad and 
doubtful accounts; (2) add $1,000 to the taxes accrued (estimated) 
account; (3) carry to depreciation reserve account a further sum of 
$5,000. Interest on bonds to Dec. 3ist is also to be provided for. 

It is found that bona fide renewals of equipment, costing $17,500, 
have been charged to operating expenses ; that repairs to equipment, 
amounting to $6,000, have been charged to equipment account ; that 
$1,500, proceeds of old machinery sold, have been credited to the 
sales account; and that a bill of $1,560.25 for raw material received 
and used, has not been entered on the books. These items are to be 


taken into account before the books are closed. Three per cent of 
the net profits for the year is then to be reserved for special compen- 
sation to the management. 

Make journal entries to give effect to the various adjustments 
above described and to close the books, creating (i) a combined 
Manufacturing and Trading Account, (2) a Profit and Loss Account 
and (3) a Balance Sheet. 


What are secret reserves ? Show at least two instances, illustrat- 
ing the reasons for their creation and the methods of establishing 


(1) A corporation has set aside out of profits $250,000 and has 
invested the same in government securities at par. Will this affect 
the Assets side, or the Liabilities side of the balance sheet, or both ? 
Make up a simple balance sheet after these profits have been so 

(2) How should the fund and investment appear on the bal- 
ance sheet if the value of the securities should rise? 

(3) If the securities should fall in price? 


Real Estate $ 2,347,816 

Plant and Machinery 7,500,000 

Inventory 4,869,509 

Notes Receivable 1,000,000 

Accounts Receivable 935>34 

Bond Discount I39>796 

Sinking Fund 1,700,000 

(Redeemed Bonds 6% Convert.) 

Cash 1,465,625 

Profit and Loss 779,9^ 


Capital Stock $10,000,000 

6% Convertible Debentures 2,000,000 

5% Income Bonds 1,500,000 

Mortgage to secure purchase price of Real 
Estate i ,07797 


Notes and Accounts Payable 340,30x3 

Interest and Taxes Accrued 107,336 

Sinking Fund Reserve 1,700,000 

Reserve for Accrued Depreciation on Plant 

and Machinery 2,800,000 

Reserves for Additions to Plant 1,213,235 


(a) Rearrange the above Balance Sheet in more intelligible 

(b) State the facts exhibited by the above Balance Sheet in 
narrative form. 

(c) What is the net proprietorship ? 

(d) Assume that after three years the 6% Convertible Deben- 
ture Bonds are all redeemed with Sinking Fund accruals. The 
Reserve for Accrued Depreciation to Plant has been increased to 
$1,500,000, and the Profit and Loss item on the asset side is $600,000. 
The Capital Stock remains at $10,000,000. What will the proprietor- 
ship be at that time ? 

(e) What entries would you make to simplify the Balance Sheet 
at that time? 

(f) Assume that the proposed additions to plant are made and 
cost $1,300,000 in cash. What is the proprietorship? 

(g) What entries would you make now to simplify Balance 


Assets Liabilities 

Land and Buildings. . . .$500,000 Capital Stock $300,000 

Machinery & Tools 150,000 Bonds 500,000 

Raw Materials 43,6oo Bills and Accts. Pay 60,000 

Goods in Process 50,700 Accrued Items 12,000 

Finished Product 25,700 Surplus 18,000 

Bills & Accts. Rec 85,000 

Furniture & Fixtures. . 5,000 

Investments 18,000 

Cash 12,000 

$890,000 $890,000 

(a) Assuming that the figures on the above balance sheet rep- 
resent actual market values, how much would the stockholders re- 
ceive in case of dissolution? 



(b) Assume that the above balance sheet represents the true 
condition of a corporation on January i, 1895 ; that the bonds, which 
have just been issued, are 2o-year 5% First Mortgage Bonds ; that 
the company has agreed to set aside in a Sinking Fund, out of profits, 
a sum which will be sufficient to retire the bonds at maturity; that 
the company has faithfully carried out this agreement and on January 
i, 1915, the funds which it has set aside are sufficient to retire the 
bonds. You are required to reconstruct the above balance sheet as 
of January i, 1915, (i) before the bonds are actually retired, and 
(2) after retirement. 

(c) What journal entries are required each year for the setting 
aside of the sum agreed upon? 

General Balance Sheet, X. Y. Z. Co., December 31. 

ASjSet&rx 1911 1910 

Plant, machinery, patents, goodwill, etc $ 6,978,288 $ 6,922,185 

Securities owned * 1,121,670 1,121,670 

Treasury securities 237,000 237,000 

Cash 92,385 241,966 

Accts. and Bills Rec 1,143,211 1,116,893 

Sinking fund assets 182,906 200,787 

Inventories 1,405,138 1,109,835 

$11,160,598 $10,950,336 


Capital stock $ 6,485,800 $ 6,485,800 

Bonded debt 2,000,000 2,100,000 

Interest on bonds 122,213 122,388 

Accounts and bills payable 196,740 119,717 

Reserve for taxes, etc 9,002 12,495 

Sinking fund 682,906 600,787 

Surplus 1,663,937 i,509,H9 

$11,160,598 $10,950,336 

(a) What is the origin of the sinking fund of $682,906 appear- 
ing on the liability side? 

(b) How has the sinking fund been invested? 

(c) In 1911 the corporation paid a dividend of 4%. What were 
the profits for the year? 



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In the case of a company which has issued cumulative preferred 
stock, but has not earned enough to pay such dividends in full for 
several years, how would you deal with the arrears of dividends due,. 
if at all, on the company's balance sheet ? Give reasons. 


The Metropolitan Investment & Brokerage Company declares a 
dividend of 5%. On going over their records it is found that the 
directors have written up the value of some of the securities owned, 
which they contend is in harmony with current market values. The 
accounts show that the dividend proposed to be paid has not been 
earned unless the increment in value referred to is included as a 
profit. What is your view of the action of the directors ? State your 
reasons fully. 

250. Debits Credits 

Land and Buildings ..... f^y-V $ 

Furniture and Fixtures ....... I . . 20,000 

Merchandise 1/1/13 ............. 12,000 

Advertising .................... 5,ooo 

Sales .......................... $ 95,000 

Proprietor A. D. Lydic ......... 80,034 

Delivery Equipment ............. 1,200 

Rent .......................... 1,500 60 

Salaries accrued .... ............. 50 

Bad Debts ...................... 35o 

Cash .......................... 25,162 

Notes Payable .................. 5,ooo 

Salaries ....................... 2,500 

Accrued Interest on Notes Rec .... 275 

Commissions ................... 7,000 

Purchase allowances ............. 240 

Interest Accrued on Notes Payable 275 

Interest on Notes Receivable ..... 275 

Commission accrued ............. 400 

Accounts Payable ............... 12,473 

Purchase Returns ............... 180 

Interest on Notes Payable ........ 350 

Accounts Receivable ............. 35>7o 

Sales allowances ................ 750 

Prepaid Rent ................... 250 

Sales returns ................... 200 

Notes Receivable ................ 10,000 

Insurance ...................... 300 


Purchases 60,000 

Office Expense 1,800 

Reserve for Bad Debts 3>5oo 

$197,487 $197487 

Merchandise Inventory, 12/31/14, $16,000. Estimated value of 
goodwill, $5,000. Unexpired insurance, $38. 

(a) Prepare a six-column statement. 

(b) Mr. Lydic enters into a partnership agreement with J. P. 
Thomas whereby the latter agrees to purchase a half-interest m the 
business for $63,000. Frame the journal entries to close the books 
of A. D. Lydic and to open the books of the new firm, Lydic & 


A corporation is organized with an authorized capital stock of 
$100,000, of which $50,000 is paid in cash immediately. Subscrip- 
tions are received for an additional $25,000 payable in four install- 
ments at semi-annual intervals, at no. 

Six per cent bonds for a par value of $50,000 are issued at 90. 

For the first year the income sheet is as follows: 

Gross profits on merchandise ................ $40,000 

Operating expenses ........................ 20,000 

Net earnings .............................. $20,000 

Bond interest .................. ........... 3,ooo 

Net income ............................... $17,000 

Dividends .............................. .. i 

Surplus for the year ....................... $ 2,000 

The balance sheet is as follows : 

Stock Subscriptions ---- $ 13,750 Capital stock .......... $ 50,000 

Unissued unsubscribed Capital stock subscribed, 

stock .............. 25,000 unissued ........... 25,000 

Bond Discount ........ 5,ooo Capital stock unsubscrib- 

Cash, and other assets .. 130,750 ed, unissued ......... 25,000 

Bonds ............... 50,000 

Accounts Payable and 

other debts .......... 20,000 

Premium ............ 2,500 

Surplus from operation 2,000 

$174,500 $174,500 


Aside from brevity (or combination of unlike assets and debts) 
are the income sheet and the balance sheet satisfactory? 
Interpret the items. 


A corporation charges all new machinery purchased to "New 
Machinery" account. This is merely a suspense account. At the 
end of the year, a portion of this account, equal to the cost of old 
machinery abandoned during the year, is credited out and charged 
to operating expenses, as Replacements. The remainder is credited 
out and charged to Machinery, a property account. 

In 1913 the company issued bonds to the par value of $1,000,- 
ooo, which sold at a permium of 12%. The following entries were 

Cash $1,120,000 

To Bonds _ $1,000,000 

To New Machinery ^^.. .\ 120,000 

What is the effect of these entries on the balance sheet ? 


A company insures the life of its manager for its own benefit in 
the ,sum of $50,000, the annual premium being $1,250. Explain the 
method you would adopt of treating the disbursement at the annual 
accounting during the period the policy was in force. 


A corporation has on its books $210,000 of accounts receivable, of 
which $49,000 are long overdue and apparently worthless. The 
inventory of finished goods, taken at contract price less 5%, amounts 
to $124,000, and from this sum has been deducted $45,000 "to pro- 
vide for any losses." How would you deal with this state of affairs 
in reporting to the Bank Commissioner on the condition of the cor- 
poration for savings bank loans ? 



F. G. Waite and H. R. Wilcox, partners sharing equally in busi- 
ness, have determined to change their system of bookkeeping from 
purely single entry to double entry, continuing the use of the old 
ledger. The following statement shows the footings of the open ac- 
counts in their ledger : 

Dr. Cr. 

F. G. Waite (Partner) $ 250.25 $5,000.75 

H. R. Wilcox (Partner) 1,360.00 6,000.00 

A. M. Sanderson ; . . 320.00 150.25 

Martin Chever 841.60 541.60 

Hendricks & Co 1,120.00 

Smith & Robbins 482.50 2,200.00 

E. R. Bender 500.00 640.40 

The inventories are: Mdse. $6,135 ; Traders' National Bank stock, 
(10 shares) $1,000; cash on hand and in bank, $3,924.82 ; .bills re- 
ceivable as per bill book, $5,320.43 ; bills payable as per bill book, 

Formulate a journal entry thatj when posted, will change the 
ledger to double entry form, checking in the journal such items as do 
not need to be posted. Give all the figures by which the result is 


T. F. Curry and W. J. Schmitt are partners in business, sharing 
equally in gains and losses. Their books have been kept by single 
entry, but they desire to change them to the double entry method. 
The following is an abstract of their affairs at this date: 

Assets and Liabilities as per Ledger: T. F. Curry, investment, 
$12,500; withdrawals, $2,500; W. J. Schmitt, investment, $12,500; 
withdrawals, $2,000; sundry accounts receivable, $8,500; sundry 
accounts payable, $6,000. 

Other assets and liabilities not in ledger: Merchandise as per 
inventory, $18,000; cash in bank, $5,500; bills receivable, $2,300; 
bills payable, $2,000 ; bank stock, $2,000 ; real estate $5,000. 

Determine the amount of gain and loss of each partner at this 
date, and formulate proper journal entry for conversion of single 
entry ledger into a double entry ledger. 



A. B., a retailer, whose books have been kept by single entry 
requests you to install a double entry system. The ledger contains 
the following accounts: Expense, $900; A. B.'s drawings, $3,000; 
customers' accounts, $15,000; creditors, $4,000. Upon inquiry you 
find A. B. has cash, $4,000; merchandise, $8,000; factory property 
worth $15,000, subject to a mortgage of $10,000. Make the journal 
entries necessary to change his accounts from single to double entry. 
You are to use the ledger containing the above named accounts. 

The YCX Co. takes a large number of notes (bills receivable) 
from its customers, and when in need of funds discounts or sells 
them; how may the accounts be managed so as to show the com- 
pany's liability as indorser on the paper discounted ? 


A promoter secures options lX ttpon\ the plants of three competing 
companies, A, B and C. He proposes to organize the Doe Co. with 
an authorized capital of $700,000, of which $300,000 is common and 
$400,000 is preferred stock each having a par value of $100 a share. 
His plan includes $150,000 of 4% first mortgage bonds convertible 
at the holders option into preferred stock at 105 or redeemable at 
the company's option at no plus accrued interest. The companies 
A, B and C have the following status respectively, excluding cash: 

Assets Liabilities Surplus Deficit Capital 

A $171,000 $56,000 $15,000 $100,000 

B 165,000 80,000 $5,ooo 90,000 

C 108,000 47,000 6,000 55,ooo 

The promoter's options provide that these companies are to sell 
their properties on the basis of $125,000 to A, $100,000 to B, and 
$75,000 to C, payable Y^. in cash, y 2 in preferred stock and ^ m 
bonds of any company that may be formed to take over these prop- 
erties. It is also agreed that if the promoter elects to exercise his 
options and acquire the properties covered, the liabilities of each 
company are to be assumed by the purchasing company. 

M, N and O incorporate the Doe Co. as outlined above, each 
subscribing for 10 shares of common stock, paying 50% in cash so 
as to qualify as incorporators and directors. At the first director's 
meeting the bonds are authorized and the Doe Co. through its 
directors agrees with the promoter to take over his options, issuing 


in payment thereof to him $250,000 in common stock of the company. 
It is also agreed in consideration of such stock that the promoter 
is to furnish $100,000 in cash. To provide additional working 
capital and to assist in its financing the promoter donates to the com- 
pany $75,000 in common stock. The Doe Co. takes over the prop- 
erty and liabilities of the other corporations. $100,000 of the pre- 
ferred stock is underwritten by bankers at no in cash with a bonus 
of one share of common with every four shares of preferred. To be 
able to fund a part of its assumed liabilities the Doe Co. sells the 
balance of its bonds at 90 giving a bonus to the purchaser of 20% 
in common stock and applies the proceeds to pay off the liabilities 
assumed. As the result of various bargains other creditors agree to 
take $75,000 of the common stock available for issue and sale at an 
average price considering the various stock bonuses given of 80. 
All common stock has been issued. $50,000 of the bonds are con- 
verted after issuance into preferred stock at 105, the holder paying 
the premium in cash to the company. The directors then exercise 
their option and retire and cancel $25,000 of the company's bonds 
at no paying the premium in cash, balance in preferred stock 
(Neglect accrued interest.) 

Draft Journal entries to give effect to the above facts upon the 
books of the Doe Co. and present a properly drawn Balance sheet 
showing the position of the company, after these entries have been 


A corporation is organized to conduct a manufacturing business 
with an authorized capital of $20,000 divided into 200 shares of the 
par value of $100, of which 150 shares shall be preferred and 50 
shares common stock. The corporation purposes to issue $5,000 in 
consolidated mortgage bonds to be used toward the purchase of 
sundry properties. The amount of the paid up capital with which 
the corporation begins business is $500, being the proceeds of sub- 
scription of 5 shares preferred stock. 

To carry out the purpose of said corporation, the real estate, 
water power, machinery, goodwill, etc., of certain existing corpora- 
tions has been purchased at an appraised value of $20,000, viz. Star 
Mfg. Co., $2,000; Earl Mfg. Co., $3,000; Ajax Mfg. Co., $5,000; 
Acme Mfg. Co., $6,000; Coe Mfg. Co., $4,000. In payment full paid 
stock and bonds have been issued at par on a basis of 60 per cent 
in preferred stock, 20 per cent in common stock and 20 per cent 
in bonds. 


Material and supplies are to be paid for in cash when their value 
is determined. 

Formulate the entries necessary to open the books of the new 


What proportion of $15,000 commission paid for negotiating a 
sale of bonds whose par value was $1,000,000 interest 5% and 
which were sold at 90 to run 10 years should be treated as an asset 
at the end of the first year ? Give reasons. 


B began business a year ago keeping only single entry books. 
He started with the following assets and liabilities : 

Cash $50,000 Mortgages (Land) $50,000 

Land 20,000 Accounts Payable 500 

Patents 10,000 Bills Payable 2,000 

Notes Receivable 10,000 

Bonds 5,ooo 

Accounts Receivable. . . . 1,000 

Today his assets and liabilities are as follows: 

Cash $ 5,000 Bonds $10,000 

Land and Buildings 30,000 Accounts Payable 2,000 

Patents 8,000 Accrued Wages 500 

Trade Marks 5,000 Note. 

Notes Receivable 15,000 (B's drawings, $1,000.) 

Accounts Receivable. . . . 20,000 

Material and Supplies. . . 12,000 

Finished Goods 10,000 

Prepare a tabulation showing what the profits were and what 
became of them. 


The balance sheet of a firm is summarized as follows : 


Cash, stock, and accounts receivable $67,500 

Manufacturing Plant I5>o 

Total $82,500 



Notes and accounts payable $49,500 

Capital 37>5oo 

Total $87,000 

Would you consider this firm insolvent? Give reasons for your 


The New York Steamship Company issued income debentures 
for $500,000, the deed of trust providing that an amount equal to 
5% of the total issue be set aside out of the earnings of the com- 
pany each year for the retirement of the bonds. 

December 31, 1900, the assets of the company amounted to 
$1,200,000, the capital stock of $500,000, other liabilities $100,000, 
profits for the year $70,000. 

The company received $30,000 from the government for trans- 
portation of troops during time of war, which amount did not appear 
on the books as an asset, the cost of transporting the troops having 
been charged to profit and loss account in prior years. 

Explain by journal entries (a) how the redemption fund for the 
retirement of the income debentures should be treated, (b) how the 
income of $30,000 for transportation should be treated. 


A manufacturer makes extensive investments in stocks and bonds, 
buying and selling from time to time as the market conditions war- 
rant and clearing all such transactions through his regular books of 
account. How should such transactions be isolated from his manu- 
facturing operations and what books and accounts should he employ 
to record the details of the principal and income from such invest- 
ments ? 


Draw up a form for the record of household accounts that may be 
used as a combined cashbook, journal and ledger. Give the headings 
and provide five distribution columns for expenditures, and also col- 
umns for controlling accounts for both accounts payable and accounts 


An inventory of a going concern, taken under your supervision 
and direction and requiring two weeks to complete, is commenced one 


week prior to the close of the fiscal year. How would you instruct 

(a) as to the general care and custody of stock under inventory and 

(b) as to the recording of incoming and outgoing goods during 
stock taking ? 


You are asked the following question : 

"It costs $15.00 per thousand to manufacture a certain article 
laid down in the stock room. This cost includes labor, material and 
manufacturing, overhead. The sales, advertising, and shipping 
expense is 15% of sales, what is the relation between cost of manu- 
facture and cost of sales ?" 

(a) What is your answer ? 

(b) Prepare a formula for the computation of the relation be- 
tween cost of manufacture and cost of sales. 

What entry should be made on the books of a company of goods 
sent out on consignment? When the goods have been sold and the 
consignee sends in his account sales, what entries should be made ? 


A company manufacturing a proprietary article offers certain 
premiums to its customers on the return of its wrappers, the premium 
offers being indicated in a published schedule. At the time of mak- 
ing out the annual balance sheet only a few of the premiums have 
been distributed. How should this matter be treated in the balance 


The ledger of a corporation has an account entitled "First Mtg. 
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? 


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 receives certificate for $75 for 
loo shares full paid. 


May 3, 1901. James Williamson requests a transfer to George 
T. Jenkins of 30 of his 100 shares. 

Outline a form of stockholders' ledger and properly enter the 
above items therein. 


The Iron City Nut & Bolt Company is financially embarrassed. 
At a meeting of the stockholders it is decided to raise additional cap- 
ital by the issue of 5,000 shares of 6% Preferred Stock, par $100. 
This stock is sold on the open market at an average price of 103. 
Give the journal entries. 


Three manufacturers, each having an independent business and 
wishing to effect a consolidation of their respective interests, organize 
the United States Manufacturing Company, a corporation with an 
authorized capital stock of $1,500,000, half common and half pre- 
ferred. They sell to the new corporation all of their real estate, 
buildings, machinery, tools, fixtures, merchandise and supplies, in 
consideration of $1,500,000, and agree to accept in payment $750,000 
preferred and $750,000 common stock of the new corporation. The 
three vendors then donate to the treasury of the corporation $150,000 
of preferred and $150,000 of common stock to provide for working 
capital. The company sells $100,000 of its preferred stock in the 
treasury for 80% cash, giving a bonus to the purchaser of 20% in 
common stock. 

For the purpose of raising additional funds for improvements and 
additions to plant, the corporation mortgages its real estate and 
buildings as security for an issue of bonds amounting to $250,000. 
These bonds the company sells to bankers at 90%, giving as a bonus 
10% of preferred stock and 20% of common stock. 

Draft entries to express correctly the above transactions on the 
books of the corporation, and prepare a statement of assets and lia- 
bilities of the company. 


A corporation issues $300,000 of stock in exchange for a manu- 
facturing plant and supplies, with the understanding that one-half of 
the stock is to be donated back to the corporation. After the con- 
summation of this agreement $100,000 of the stock is sold at 80 for 
cash. Next, $50,000 of the stock issued to the original owners of the 
plant is repurchased at 70 and held for future sale. Show the bal- 
ance sheet after these transactions. 



A corporation receives subscriptions for stock to the amount of 
$100,000 at 120. The amount is paid in cash. What entries should 
be made for these transactions ? 

Another $100,000 is subscribed, to be paid in five instalments, at 
120. When two of the instalments have been paid, what entries 
should have been made for the transactions of this subscription? 

A financial panic occurs and the last instalment is defaulted by the 
subscribers to the amount of one-twentieth of the total subscription, 
a default of $1,200 (thus forfeiting $4,000 of par value and $800 of 
premium already paid in by them in instalments), but the other sub- 
scriptions are paid and the stock is issued. What entries should 
record all these events ? 

Show the final trial balance for the result of all these entries. 

A village makes the following appropriations for the year 1915 
and levies a tax therefor: 

Bond redemption $2,000 

Bond interest 800 

Salaries 2,700 

Contingent expenses 5 

Police 1,600 

Poor , 750 

Care of streets 1,200 

Lighting 950 

Education 3,000 

(1) Outline an entry that will properly open the village books. 

(2) How will collection of taxes be recorded? 

(3) How will disbursements against appropriations be 
recorded ? 

(4) WTiat will the balance of the accounts at any date show ? 


A municipality sells improvement bonds, the proceeds forming 
a fund out of which is defrayed the cost of certain improvements, 
the total expense of these improvements being .assessed on the 
property benefited. Bond redemptions are to be made out of assess- 
ments collected. What accounts would be required for recording the 
foregoing transaction, and for what items would these accounts 
be debited or credited? 



Highland county undertakes two public improvements, viz. : a 
road estimated to cost $50,000, and a sewer estimated to cost $40,- 
ooo. The work is to be paid for out of proceeds of county bonds 
falling due at various dates and redeemable from assessments levied 
against property presumably benefitted, to the amount of the actual 
cost of the work and incidental charges when these are determined. 

Bonds to the above amounts are accordingly sold, realizing a 
premium of i%, which is to be added to the respective funds; the 
cost of the two undertakings when completed is $50,000 and $40,500 
respectively, for which assessments are accordingly levied. 

Assessments are subsequently collected as follows: For roads 
$30,200, with accrued interest of $1,310; for sewers, $29,400, with 
accrued interest of $1,250. The interest in each case goes into 
the related funds. Road bonds of the par value of $20,000 and 
sewer bonds of the par value of $15,000 mature and are redeemed. 

Frame journal entries, post to ledger accounts, and prepare a 
trial balance from which the status of the county debt and of 
the funds and assessments at the conclusion of the above transac- 
tions can be ascertained and determined. 

The books of a manufacturing concern, operating under a sys- 
tem of cost accounts, shows the following conditions at the opening 
of the fiscal year: Raw materials in storeroom, $15,621.42; factory 
pay roll, applied and distributed but not paid, 2 days, $831.78; 
partly manufactured goods at prime cost, $63,888.44, and the further 
value of $8,037.17, to cover factory burden, also $12,074.92 to cover 
management charges; finished wares in stock at total cost of $21,- 

The financial operations during the ensuing year include: Pur- 
chases of raw materials $80,416.45; factory pay rolls $125,793.90; 
factory expense, including wages not applied to cost accounts, $24,- 
846; management expenses, $38,100; interest paid on loans $1,200;. 
income from investments, $5,004. 

The manufacturing operations during the same year comprehend: 
Raw materials issued on requisition for consumption, $79,820.34; 
wages, applied and distributed to manufacturing cost, $120,250.40; 
and to factory expenses $5,959.39, included in the sum stated irr 
the preceding paragraph. 


Finished goods transferred from factory to warerooms, at prime 
cost, covering materials $78,542.58, and labor $118,333.75. 

The trading operations during the same year comprehend: Cost 
of goods sold $251,949.90; proceeds from goods sold $302,339.88. 

At the close of the year the partly completed goods included, in 
addition to prime cost, the further elements of value to cover factory 
and management expenses in the amounts respectively of $8,439.02 
and $12,678.66, and the factory pay roll for three days, amounting 
to $1,247.67, which has been applied and distributed, though not 
-due till the close of the current work. 

The basis of the apportionment of On Cost or Overhead Charges 
was as follows : Factory expense, 20% to materials and So% 
to labor; management expenses, 30% to materials and 70% to 

The transactions of the pervious year in round amounts were 
used in calculating the current year's apportionments, viz : Materials, 
-$75,000; labor, $115,000; factory expense, $24,000; management ex- 
pense, $36,000. 

Open the general ledger accounts that control the cost accounts ; 
show the operation of each and the net profits resulting; also cal- 
culate the percentage to be added to each $i of material and of 
labor to give the total cost. 


A manufacturing company after erecting and equipping its 
factory, placing orders for materials and hiring a working force of 
skilled mechanics, commences operations. In addition to the finan- 
cial accounts, arrangements have been made to conduct cost ac- 
counts from the outset, and the current details thereof grouped under 
Account Titles and collated upon "forms" show the following ac- 
tivities : 
Form I Receiving Sheet. 

Raw materials received into storeroom $ 7,701.37 

Form II Consumption Sheet Materials 

Raw materials consumed 6,651.69 

Form III Consumption Sheet Manufacturing 

Partly made goods consumed, combining values of 

materials 3,225.82 

and of labor 3,106.26 

Previously expended, and to which further material and 
labor were added. 



Form IV Production Sheet. 

Manufactured product, combining values of material. . 9,877.51 

and of labor 13,127.13. 

As per manufacturing reports, discharging requisitions 
collated on forms II and III. 

Form V Cost Sheet. 

Finished wares transferred from factory to warehouse, 

carrying prime cost of materials 5,890.69 

and of labor 8,875.04 

Adding further to the materials cost $353.44 and 
$828.69, and to the labor cost $1,331.26 and $1,775 f r 
factory expenses and management expenses respec- 
tively in each instance. 

Form VI Disposition Sheet. 

Total cost of finished wares sold 14,827.84 

Proceeds of sales 17,145.40 

The register of manufacturing reports shows total application 
of direct labor to cost in the amount of $10,020.87, and the payrolls 
show expenditure for labor in the amount of $10,466.16. 

Only requisitions discharged by manufacturing reports collated 
on the Consumption Sheets for credit to accounts in the Materials 
and Manufacturing Ledgers. 

The medium for posting the charges to finished wares accounts 
and the offsetting credits to manufacturing accounts is the Cost 

All materials, manufacturing and finished wares accounts carry 
units and price in each specific account, but only aggregates or 
controlling accounts are here dealt with. 

Frame Consumption Journal and Cost Journal entries. Show 
the subjects and the amounts of charges and credits to the .several 
ledgers in the cost system, also the charges and credits to General 
Ledger accounts from data developed by the Cost records. 


How would you proceed to ascertain the net sales, purchases, 
expenses and net profits of a business for a given period when the 
ledgers, sales books, purchase books and supporting documents have 
been destroyed by fire, and the only records available are the cash- 
book, bank pass book and book of monthly balances, the latter con- 
taining all the ledger balances and annual balance sheets ? It is to be 
understood that no unusual transactions had taken place.) 



A fire in the office of a firm of traders partly destroyed its 
books of account that had been fully posted in anticipation of prov- 
ing their correctness. The following ledger accounts were found 
to be legible: 

Purchases net $23,000 

Cash discounts lost 320 

Cash discounts gained 1,150 

vSales net 18,000 

Bills receivable n,ooo 

Upon inquiry the bank balance was ascertained 43,000 
Bills receivable had been discounted at the 

bank, amounting to 15,000 

An inspection of the checks paid by the bank 
showed amount paid creditors, including 
$20,000 notes payable 33,ooo 

A balance sheet prepared at the last closing of the books and 
containing the following items was produced by one of the partners : 

Cash $20,000 Accts. Pay 10,000 

Accounts Rec 42,000 Notes Pay 20,000 

Loans Rec 8,000 Mortg. Pay 12,000 

Real Estate 30,000 Capital 84,000 

Notes Rec 14,000 

Inventory 12,000 

The firm stated that the real estate, loans receivable, and mort- 
gages payable remained as shown in the balance sheet. 

An inventory of goods in storage amounted to $15,000. 

With this information open a new set of books showing the 
position of the firm at the time of the fire. 


A fire insurance company began business with a capital of 
$400,000 and a surplus of $400,000 paid in cash. At the end of the 
year its books show the following: 

Income: gross premiums $707,135.84 less re-insurance rebates 
and return premiums $94,971.27; interest on mortgage loans, re- 
ceived in cash $6,803.65 and interest accrued and due $1,349.87; in- 
terest on collateral loans, received in cash $1,014.44 and accrued 
and due $4,228.32; interest on bonds and dividends on stocks, re- 
ceived in cash $16,841.65 and accrued and due $186; profit on sale 
of assets $4,204.52. 


Outgo: Gross amount paid for losses $115,048.22, less salvages 
$14,900; gross claims for losses in process of adjustment $32,263.83 ; 
gross claims for losses resisted $8,618.50, less due and accrued for re- 
insurance $11,412.71 ; commissions or brokerage paid in cash $123,- 
544.19, and due or to become due $9,519.24; salaries, fees, and all 
other charges of officers, clerks and other employees paid $24,755.68; 
rents paid $4,224.93 ; taxes, licenses, insurance department fees paid 
$9,764.99; all other expenses paid $20,820.12; due and accrued ex- 
penses $621.29; due and accrued return premiums $9,597.36; due and 
accrued re-insurance premiums $6,856.48. The market value of 
securities owned was $20,625 I GSS than their cost. 

The risks in force at the end of the year carried premiums of 
$580,867.07, of which sum $424,747.65 was the aggregate premiums 
on risks running one year or less, and $156,119.42 was on risks run- 
ning more than one year, the unearned premiums on which amounted 
to $111,950.46. 

Set up the income accounts, making due allowance for unearned 


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 business, June 3Oth : 

Robert Adams $ 600.00 $ 5,45O-OO 

William Stevens 600.00 745 - 00 

Cash 3,309.00 

Fixtures 1,500.00 

Merchandise Purchases 32,600.00 

Merchandise Sales 24,800.00 

Notes Receivable 1,000.00 

Notes Payable 4,000.00 

Interest 120.00 50.00 

Expense 780.00 

Customers 4,500.00 

Creditors 3> 2 59- 

$45,009.00 $45,009.00 

The property is fully covered by insurance. The insurance com- 
pany, for the purpose of estimating the value of the merchandise 
destroyed, has agreed to allow 35 per cent, as the average gross gain 


on the sales and to pay 66^3 per cent, on the value of the fixtures as 
shown by the ledger. On the basis of this agreement, state the result 
of the business and the capital of each partner. 

The Richardson Engraving and Printing Company has an 
authorized capital stock of $50,000.00, owned by William Richard- 
son, $10,000.00; Silas Johnson, $15,000.00 and Thomas Acton, 

The plant was destroyed by fire September 23, 1908. All the 
books and records were saved except the sales records, which were 
not written up for September. The insurance companies paid $28,- 
ooo.oo on the plant and $7,000.00 on the stock, which was distributed 
to the stockholders as received in proportion to their holdings. Cash 
was received from September sales amounting to $13,500.00. On 
September 30 the trial balance disclosed the following condition : 

Capital Stock ........ (v^/TX $ 50,000.00 

Stock on Hand June I, 1908.$ 8,750.00 
Plant .................... 30,000.00 

Accounts Receivable ....... 19,640.00 

Accounts Payable .......... 12,590.00 

Reserve for Bad Debts ...... 1,250.00 

Insurance Adjustment ...... 28,000.00 

Cash ..................... 3,900.00 

Engraving ................ 77,600.00 

Printing .................. 99,350.00 

Merchandise Purchases ..... 58,800.00 

September Sales, not allocated 24,175.00 

Wages ................... 130,180.00 

Rent ................. ---- 1,800.00 

Salaries .................. 5,750.00 

Profit and Loss Surplus ..... 855.00 

William Richardson ........ 7,000.00 

Silas Johnson ............. 10,500.00 

Thomas Acton ............ 17,500.00 

$293,820.00 $293,820.00 

The accounts receivable realized $18,320.00, and the liquidation 
expenses were $1,850.00. The stockholders turned in their stock for 
cancellation and received their proportionate amount of cash. Pre- 
pare journal entries closing the books of the corporation and a profit 
and loss account. 


286. 4 

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 insured, contains two items for 600 
cloaks, $12,000, and silk, 1,000 yards, $1,500. 

An inventory of stock on hand, consisting of cloaks, cloth and 
silk, had been taken January i, amounting to $118,500, the particulars 
of which have been lost or destroyed. 

An analysis of the firm's books produced the following informa- 

Purchases of cloth, 37,500 yards at $i ; 
Purchases of silk, 10,000 yards at $2 ; 

6,000 cloaks were manufactured, consuming 40,000 yards of cloth 
and 10,000 yards of silk. 9,000 cloaks were sold 'between January I 
and September 10. 

Cost of sales, per cloak, for material ............. $10 

Cost of sales, per cloak, for labor and sundries ---- 7 

Inventory, September n : 2,500 cloaks at $17. 

12,500 yards cloth at $i. 
5,000 yards silk at $2. 

Prepare a report proving or disproving the claim. 


Three months after the close of a fiscal year you are requested 
to audit a set of books to the end of the fiscal year. How do you 
ascertain if the cash called for by the books was actually on hand 
and in the bank? 


You are asked to test the correctness of a set of books kept by 
single entry by applying the double entry system to the entries made. 
What would you do, without writing a new set of books. Take as a 
basis the following ledger accounts : 

Dr. John Doe Cr. 

1913 J 9i3 

Jan. 2 Balance ......... $1,000 Feb. 2 Cash ............ $ 600 

20 Mdse ............ 500 Discount ........ 12 

Returns ......... 400 


Richard Roe 

Jan. 25 Freight charges,. .$ 200 Jan. 20 Mdse $1,000 

Feb. 2 Acceptances 1,500 

2 Mdse. returned-. 300 


The "balance of cash on hand at the date of audit according to the 
cashbook and ledger is $15,906.27; the bank passbook on the .same 
date shows a balance of $16,527.02. Which amount should appear on 
the balance sheet ? Why ? 


Given the following reconciliation of cash at the close of an audit, 
state categorically how it may be verified : 

June 30, cash on hand as per cash book $8,549.17 

Balance as per bank book at close of business. .$16,549.72 
Add check of J. B. Jones, not deposited 1,450.00 

Deduct checks drawn, not presented 10,154.29 

Cash in drawer 703.74 8,549.17 

, 291. 

You are called in to examine the books of a firm whose book- 
keeper and cashier has absconded. He is known to be an embezzler 
to the amount of at least $2,000. The books have been kept by 
double entry and are apparently correct. How would you proceed to 
determine the total amount of the embezzlement ? Mention the dif- 
ferent methods that the embezzler might have used to hide his steal- 


A, the party of the first part, enters, March i, on the perform- 
ance of a contract for $50,000, payable in two installments of $25,000 
each, the first of which is due on completion of a specific part of the 
work, but subject to 10% to be retained by the party of the second 
part as security for the continuation of the undertaking ; the second, 
together with the security retained as aforesaid, is to be paid on 
final acceptance of the completed work. 


A has a capital of $4,000 available for the payment of labor, 
which proves insufficient. He therefore takes in as associates on 
April i B, who contributes $3,000, and C who contributes $1,000, 
B and C to share profits in the proportion of ^ and ^ respectively, 
and to receive interest on capital at 6 per cent per annum. 

The first installment of the contract falls due and is paid on May 
i, at which date there had been expended by the contractors for 
labor and incidentals $7,502 and obligations for material and supplies 
furnished on credit had been incurred and were outstanding to the 
account of $13,900, of which all but $1,500 are forthwith settled 
from the installment money. 

On receipt of the first installment, B and C withdraw their capi- 
tal and realize the profits earned at the completion of the first stage 
of the work, leaving A to continue alone, it being carefully estimated 
and mutually conceded that a further outlay of $26,158 will be suffi- 
cient to finish the work and cover all reasonable contingencies. 

Show by skeleton ledger accounts the cash payable by A to B 
and C respectively on their withdrawal from the partnership, and 
state the resources and obligations that remain to A on entering on 
the second part of the work. 

A and B are partners trading under the name A, B & Co. On 
June 30, 1910, the following balances appear upon their ledger: 

A capital account $7,000 

B capital account 5,ooo 

Real estate 2,200 

Buildings 2,000 

Machinery and tools 4,400 

Furniture and fixtures 200 

Accounts receivable 5,ooo 

Cash 700 

Materials and merchandise 5>3OO 

Accounts payable 3>5o 

Bills payable 4,800 

Bills receivable '. 500 

On this date the business is incorporated as the S Co., on the 
following plan: 

(1) Capital Stock, 150 shares, $15,000, $5,000 preferred, $10,- 
ooo common. 

(2) S Co. takes over the assets and liabilities of A, B & Co. at 
the book figures as above, except (a) real estate of the book value 


of $500, which is retained by A, B & Co. ; (b) the accounts receivable 
which are taken over at $4,800. 

(3) S Co. pays A, B & Co. $3,000 for the good will of the 

(4) Payments to A, B & Co. are made as follows : $5,000 in 
first mortgage bonds and the balance in common stock. 

(5) Stock not issued to A, B & Co. is sold for cash to sundry 
persons at par. 

(6) Real estate retained by A, B & Co. is taken by A from 
the firm at a valuation of $700 and is to be charged to his capital 

After the completion of these transactions A and B dissolve 

You are asked to prepare (i) closing entries for the books of A, 
B & Co., (2) opening entries for the S Co. 


Some proprietors keep a private ledger of their business, to which 
bookkeepers and clerks have no access. Explain the purpose of such 
a book, and show what accounts it usually contains and how it is 
made to agree with the general ledger. 


The machinery used by a firm has been purchased on the instal- 
ment plan, with monthly payments, and under the stipulation that the 
title shall pass only when the last payment has been made. At the 
close of the fiscal year there are yet several payments to be made. 
The firm also pays a royalty on the output of some of the machines 
secured on this plan. How should the auditor in his annual state- 
ment deal with the machinery, the instalments paid, and the royalty ? 


A company issues annually over 10,000 checks on three separate 
banks, recording each one on the check stub and then transcribing 
each check in detail on the general cash book. Suggest a change in 
method which would facilitate the work and point out advantages 


In auditing an account the auditor finds that Robert Brown had 
bought a bill of goods amounting to $500, payable on August 10, less 
2%. He had, however, made payments thereon as follows: 



June 2 $100 

June 15 100 

July 3 loo 

On what date would he be required to make payment of the 
remaining $200 to entitle him to the 2% discount under the original 
terms of sale ? 


A firm, having several branches, maintains an account with each 
branch in the ledger and charges all such accounts with goods sent 
the agents for stock. When the inventory of stock is taken, the bal- 
ance of each 'branch account is treated as an ordinary Accounts 
Receivable and is included in the general debts owing to the firm. If 
you see any objection to this method say how you would deal with the 


A retail book-store 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 method of 
keeping the accounts, so that results may be readily shown. 

399. 3 1 

One of the early experiences of the firm of Gardner & Kestin, 
Certified Public Accountants, was to make an investigation of the 
books and accounts of Evans, Smart & By ford (which firm had be- 
come involved in business difficulties and was compelled to stop 
payment) and to prepare from the following data a statement of 
affairs, accompanied by a deficiency account: Unsecured creditors, 
A $35,000, B $27,500, C $26,000, D $24,500, E $17,500. F $15*000 
and G $2,000; creditors for rent, salaries, etc. $1,250, of which $750 
was preferential; debtors $42,500, of which $37,500 was good, $1,825 
doubtful (estimated to produce $625) and $3,125 bad; bills receiv- 
able, H $3,000, J $4,250, K $2,500 and L $1,500; land and buildings 
$25,000, plant and machinery $8,500, stock on hand $5,000, furniture 
and fixtures $1,500, cash on hand $15,000, sundry profits $37,500, 
sundry losses $30,000, trading expenses $17,500. Evans' capital 
account was $5,000, Smart's $3,750, Byford's $3,750; Evans' draw- 
ings were $10,000, Smart's $15,000, Byford's $17,500. 

Show how you would have prepared the statements required had 
you been employed to do the work. 



John Thompson exhibits the following 'balance sheet of his busi- 
ness, dated June 30, 1900: 

Cash $ 750 Sundry creditors $ 6,000 

Book debts 9,500 Bills payable 7>5o 

Stock on hand 6,500 Bank (overdraft) 3,ooo 

Fixtures, etc 1,750 Balance 2,000 

Total $18,500 Total $18,500 

On questioning Thompson it was found that he had omitted the 
following from his balance sheet: $250 owing for rent; $75 owing 
for taxes; $2,500 borrowed at 5% from his wife three years ago, no 
payment having been made on account of either principal or interest ; 
a draft for $500 accepted by a firm without consideration, falling due 
in 30 days. His private and household debts amounted to $600. 

The item entered on his balance^ x sheet as cash included his per- 
sonal I. O. U.'s for $600. 

Of the book debts about $3,500 might be considered bad and the 
rest good. The stock was good except $1,000 which would not pro- 
duce more than $100. The fixtures, if sold, would not realize more 
than $250. The only other assets were household furniture worth 
about $1,250 and residence valued at $7,500 subject to a first mort- 
gage for $5,000 at 4%, and also a second mortgage held by his bank 
as security for overdraft. 

Prepare a statement of affairs. 


Wallace Hopkins, while perfectly solvent and doing a profitable 
manufacturing business, had so tied up his capital in plant and mate- 
rials that he was unable to pay his debts and was on the point of 
suspending for want of funds to pay for labor, and his creditors were 
preparing to commence legal proceedings to enforce a settlement. 
The condition of his affairs at this time was as follows : 

Assets Liabilities 

Plant $25,198 Creditors $20,230 

Cash 212 Capital 50,000 

Materials, raw and partly Surplus 4,900 

finished 40,400 

Finished goods 6,070 

Accts. Rec 3,250 

$75.130 $75,130 



At a meeting of the creditors he said that while his plant was 
entirely efficient, it was all of special character and would realize on 
forced sale only the value of scrap, that the unfinished goods would 
require the employment of skill and processes known only to him, 
and that while forced suspension would yield to his creditors not 
over 50%, it would ruin him absolutely. 

The creditors decided to advance him a loan of $5,000 to continue 
operations and allow him additional credit for materials and expenses. 
A trustee was appointed to see that the proceeds were used solely for 
recuperation of the business. 

The subsequent operations of the trustee were as follows. Pur- 
chases on book account, charged to materials $5,100, to expense 
$12,100; sales on book account $57,802; losses on bad debts $300; 
cash receipts (loan from creditors) $5,000; settlement from debtors 
$58,100; cash payments for labor $12,500; for expense $4,350; for 
plant $600. Creditors, $42,030; Wallace Hopkins, personal draw- 
ings, $3,000. 

There remained raw materials $4,000 ; finished goods, $22,388. 

Prepare (i) realization and liquidation account, (2) trustee's 
cash account, (3) balance sheet of the estate as restored to Wallace 


In the valuation of a certain Gas Light & Coke Company for 
rate purposes, the appraiser takes cost-new as the value of the 
physical property for rate purposes rather than cost-of-reproduction- 
less-depreciation. He found the cost-new of the physical property 
to be $49,023,947 and the existing depreciation to be $6,786,538. 
The company had a specific reserve of $1,617,095 for depreciation. 
The appraiser states that while this amount is inadequate, still the 
specific reserve allotted to depreciation is largely a bookkeeping 
transaction and as it possessed other funds from which amounts 
could be transferred by book entry to depreciation reserve when 
occasion required, the company should be assumed to have a fund 
adequate to meet existing depreciation and that therefore, the value- 
new rather than the depreciated value should be used. The appraiser 

"The difference between the reproduction cost new of the phy- 
sical property and its present value is $6,786,538, which represents 
the estimated depreciations through wear and tear and obsolescence. 
The rate of return to which the investor is entitled should be applied 
on the fair present value of the property. If the property has depre- 
ciated, and no allowance has been made to restore the capital so 



consumed, the rate of return must apply on the depreciated value of 
the plant instead of on the cost new. The company in this case has 
charged operating expenses annually with an amount which it 
deemed sufficient to offset the depreciation. The reserve for depre- 
ciation on December 31, 1909, as shown by the company's books, was 
$1,617,095. In some respects, the amount shown to the credit of 
such a specific reserve is largely a bookkeeping transaction, the 
important consideration in each instance being, whether the com- 
pany actually possesses property which, if not set aside for specific 
depreciation purposes, could be set aside without doing violence to 
any other obligation. This is believed to be the situation here. Its 
earnings have exceeded, by a liberal margin, all necessary require- 
ments, but instead of creating a reserve for depreciation sufficiently 
large to represent the estimated depreciation of the property, such 
surplus earnings have been placed to the credit of other accounts 
from which they may be transferred by book entry to the deprecia- 
tion reserve when occasion requires/ s Since such assets are ample in 
amount, the value of the physical property through the addition of 
these amounts is considered on the basis of its cost new." 

The following are the balance sheets of this corporation about 
the time of this appraisal : 

Assets 1910 1909 
Real estate, franchise tunnels, 

street mains, meters, serv. 

etc $82,699,338 $79,086,611 

Materials 1,468,1 13 1,433,648 

- ( . Securities 128,459 200,71 1 

Accounts receivable 1,010,087 1,320,434 

Deposits with Agencies 295,155 286,735 

Gas Bills Receivable 990,993 922,565 

Bills Receivable 52,227 52,227 

Cash 4,819,934 3,546,428 

Total $91,464,306 $86,849.359 

Liabilities 1910 1909 

Capital stock $35,000,000 $35,000,000 

Bonded debt 40,096,000 37,096,000 

Deposits, security for gas bills 259,615 265,837 

Accounts payable 1,271,536 9 2I >547 

Coupons past due 295,155 286,735 


Bond interest accrued 389*525 339>5 2 5 

Depreciation and Reserves. . 2,029,195 1,520,767 

Profit and loss 12,123,280 11,418,948 

Total $91,464,306 $86,849,359 

The above illustrates a common misunderstanding as to the 
nature of the Depreciation Reserve. 

(a) Explain fully, (b) Show how this error with respect to the 
Depreciation Reserve invalidates the conclusion that in this case 
Cost new is the proper basis for rates. 


A real estate company buys a tract of land for $9,500.00 and 
divides it into 74 lots. After spending $5,300.00 in improvements 
the property is estimated to be worth $25,000.00 in excess of the 
expense of selling it. Four corner lots are actually sold on this basis 
for a lump sum of $1,800. Allowing $60 for the expense of selling 
them, what profit is to be written up for the sale ? 


"Where an ordinary bond is bought at a premium, this is a lump 
sum to offset the receipts from future interest payments whose rate 
is higher than the market rate." Explain and illustrate fully. 


(a) "The cost of bonds bought at discount differs from that of 
bonds bought at a premium in that there is not the same cer- 
tainty of the discount being eventually earned as of the premium 
being lost." 

(b) In commenting on the above statement, Dr. Sprague says, 
" 'Earned' and 'lost' are not happy expressions here. The premium 
is not lost at maturity, but has gradually been refunded to us; and the 
discount is not earned, but gradually withheld from us" 

Illustrate and explain fully the italicised sentence. 


What is the cost per square foot per annum of a station site 
which cost $60 per square foot, allowing 5% interest and taxes at 
the rate of $15.00 per thousand of actual value? 


Suppose by going 4 blocks out you can get land at $5 per square 
foot. The station occupies 20,000 square feet. What is the differ- 
ence in cost per annum between the two sites ? 


Machine No. n. 
Cost $4,000. 

Scrap only sufficient to cover the cost of removal and restoring 
floor conditions. 

Estimated life, 10 years. 

Interest rate 5%. 

Insurance rate 5% for a period of 10 years. 

Repairs and maintenance $40 per year. 

What is the machine rate per hour for the above costs ? 

"The relation of overhead charges to direct labor costs is in no 
sense a measure of the efficiency of a plant." (Evans.) 

1. Prove and illustrate the above quotation. 

2. Show that in the light of the above quotation the productive 
process in the form of the job should be taken as the unit in cost 


"Two main principles have emerged, 

"i. The reduction of non-productive work to different classes 
of 'service' rendered to actual production ; and 

"2. The grouping of all indirect expense into these natural 
classes instead of into purely accountancy classifications such as the 
consolidation of all charges for depreciation, for rent, for interest, 
for repairs, etc., irrespective of the purposes for which these charges 
were incurred." (Church "Production Factors," p. 113.) 



"If low shop expense percentage is the aim, it is easily accom- 
plished by not spending money to bring the tool equipment up to a 
proper standard." (Evans, p. 92.) 

Explain and illustrate the above statement. 

How would the inefficiency of poor tool equipment be disclosed 
by a cost system on the production factor plan ? 


A certain factory employs 259 men. The total number of direct 
labor hours for the month of April is 48,000 hours and the amount 
of wages is $12,250. The total burden for the month amounts to 

Job No. 45 is the construction of a heavy machine. The direct 
labor spent on it amounted to 3,000 hours with a direct wage of $950. 
The material entering into the machine cost $1,128. 

(a) What will be the total factory cost of the job according to 
the hourly burden plan and the percentage of wages plan? 

(b) Suppose the job required the use of three machines on 
which the rates are as follows : 

A 1,000 hours, rate $0.124 per hour. 
B 400 " " 0.152 " 

,200 " " 

What would be the total factory cost according to this plan ? 

(Give reasons for the differences in the costs according to these 
three methods of distributing burden.) 

What possible conditions in the shop would account for these 
differences ? 


A concern is engaged in manufacturing steel ranges. 
Cost of Steel Range, Style A93. 
Foundry Department. 

Process A. 
Labor ......................... $5.50 

Material ....................... 8.00 

Other Expenses ................. 6.00 

Capital used $7,500 2 days. Market price $23.50. 

Process B. Process B 1 . 

Labor .................. $1.80 $0.90 

Material ................ 1.50 1.60 

Other Expenses .......... 3.20 3.50 

Capital $3,000 i l A days. $5,4OO one day. 



Process C. Process C 1 . 

Labor $0.70 $0.40 

Material 1.30 1.30 

Other Expenses 1.20 1.46 

Capital $900 H da. $2,400 % da. 

Sales Expense $4.25 Selling Price $61.50 

(a) Would it be better to continue producing the castings made 
by process A or to buy them ? 

(b) The concern can use for the second process either Process 
EorB 1 . Which is preferable? 

(c) For the third operation, which is preferable, C or C 1 ? 

(d) Work out the cost of each process and the cost of the fin- 
ished article according to all the different combinations of processes 


A certain railroad, being about to be foreclosed under a consoli- 
dated deed of trust, a committee of the consolidated bondholders, the 
members of which were large holders of stock and prior bonds, 
drafted "a plan for purchase and reorganization," effective Jan. I, 
1880. This provided that the old stock should be deposited, and that 
the new company should issue (i) first mortgage 6% bonds to be 
used to find the past due and maturing interest on the prior bonds 
and for permanent construction and improvement; (2) preferred 
7% stock to represent the par value of outstanding consolidated 
bonds; and (3) common stock to represent the outstanding common 
stock. Holders of the common stock were not to be entitled to 
.shares or to vote until preferred stock had paid five successive an- 
nual dividends of 7%. A reincorporation was effected on this basis. 
At the end of five years the common stockholders brought action, 
setting forth that earnings and income which had been wrongfully 
converted to pay for improvements and extensions, would, if applied 
to dividends, have been sufficient to pay for five successive dividends 
of 7% each on the preferred stock, and that the common stock- 
holders were therefore, entitled to representation. 

The net earnings as reported by the company were as follows : 

Net earnings for 1880 $133,084.69 

" 1881 244,037.94 

" 1882 438,989.89 

" 1883 488,799-13 

" 1884 400,303.40 

" 1885 272,451.77 


In 1 88 1 steel rails were laid. The cost of this, less the value of 
old rails removed was $133,779.03, all of which sum was charged to 
operating expenses. In 1882 a similar charge was made to the 
amount of $31,224.56. In 1883, of $65,000.00; in 1884, $10,000.00; 
in 1885, $9,996.35. 

In 1881 new sidings and spurs were charged to operating 
expenses to the amount of $45,430.00. In 1882 the amount so 
charged was $9,640.00; in 1883, $16,960.00; in 1884, $11,640.00; in 
1885, $5,400.00. 

In 1883 two steamers owned by the company were enlarged and 
made more efficient, at a cost of $40,286.44, which was paid out of 
and charged to earnings. 

In the spring of 1884, $142,000 was expended for 8 new freight 
engines and 200 coal cars. The funds for this purchase were raised 
by loan, which was paid off by the company at the rate of $3,000.00 
per month and the sum so paid in addition to interest on the loan was 
charged to operating expenses and withdrawn from earnings. 
$15,000.00 was thus charged in 1884 and $36,000.00 in 1885. 

The amount of preferred stock on which the 7% was to be paid 
annually was $6,500,000. Make out a statement showing whether or 
not the common shareholders were entitled to representation on 
Jan. i, 1886. 




DEC 34 1937 


LD 21-95m-7,'37 

C 24512