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THE LIBRARY

OF

THE UNIVERSITY
OF CALIFORNIA

LOS ANGELES




his b*-' " r



SOUTHERN BRANCH,

UNIVERSITY OF CALIFORNIA,

LIBRARY,

^-ES, CALIF. -



Angeles 24, California



THEORY, QUESTIONS, AND PROBLEMS



BY



GEORGE HILLIS NEWLOVE, Ph.D., C.P.A. u, : ,,)

IM.S1DENT AUDITOR, INCOME TAX UNIT, BUREAU OP INTERNAL REVENUE ;
DEAN, WASHINGTON SCHOOL OP ACCOUNTANCY; MEMBER, NATIONAL
T. M. C. A. ACCOUNTANCY STANDARDIZATION COMMITTEE;
-M EMBER, AMERICAN ASSOCIATION OP UNIVERSITY
INSTRUCTORS OP ACCOUNTING; LIEU-
TENANT (j. G.), PAY CORPS, U. S.
N. R. P. (INACTIVE).



VOLUME II




ASSOCIATION PRJESS

XK\V YORK: 347 MADISON AVENUE
1921



COPYRIGHT, 1921, BY

THE INTERNATIONAL COMMITTEE OF

YOUNG MEN'S CHRISTIAN ASSOCIATIONS

{Printed in the United States of America)

All Rights Reserved



HP
566!



FOREWORD

V

The past school year 1920-1921 closed the first decade of the study
> of Accountancy in Y. M. C. A. Schools, with an enrolment of approxi-



ly 10,000 students. It is, therefore, quite in line with the progressive
^ policy of the United Y. M. C. A. Schools to begin the second decade
of Association Accountancy instruction by furnishing, for advanced stu-
vjfdents, these two volumes on "C. P. A. ACCOUNTING THEORY, QUESTIONS,
' AXH PROBLEMS," by George Hillis Xewlove, Ph. D., C. P. A.

For two years the standard Accountancy Commission of the United

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

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

/standard four- year curriculum that would be of maximum service to

.flhe student, not only in giving him sound instruction, but in equipping

s him to pass his state examination.

These books by Dr. Xewlove are admirably planned to furnish the
instruction and equipment referred to, for they are the outgrowth of
'his own experiences as instructor and Dean of the Washington, D. C.,

,-, School of Accountancv.
v

It will be observed that there are more problems in the books than

(p can be solved within class periods. In order to relieve the instructor
and to aid the student, model solutions for all problems have been pro-
vided, in mimeograph form. These may be secured, at slight cost, from
ithe Educational Director of the local Association, by resident students,
/after they have solved the problems required by the instructor. Those
who are using these books, but are not in Association classes, may secure
the model problem solutions from Association Press, 347 Madison Avenue,
New York City.

The Accountancy Commission, to which full credit is due for its
earnest and practical work in fonnulating curricula, consists of D. S.
Sylvester, B. C. S., LL. B.. Dean, School of Commerce and Finance,
Northeastern College, Boston, Mass. ; H. C. Daines, A. B., B. C. S., Edu-
cational Director, Chicago; Ralph B. Mayo, President of R. B. Mayo
& Co., Denver; G. H. Xewlove, Ph. D., C. P. A., Dean, Washington School
of Accountancy, Washington, D. C. ; F. L. Roth, Dean, School of Business
Administration, Cleveland; and C. A. Wesp, Dean, School of Commerce.
Philadelphia.



PREFACE

This volume completes the classification of all the general accounting
theory and auditing questions given in 335 C.P.A. examinations. A list
of the available C.P.A. examination papers is given in the preface of
Volume I. The asterisk has been used after references using the questions
in a slightly different form. The theory and auditing questions and the
practical problems have been arranged so that all three aspects of the
subjects are studied simultaneously.

As in Volume I the lectures presuppose at least two years' study of
accounting. It is not claimed that the bibliography is complete, three
references on undisputed points and as many references as possible on
disputed points being the desired goal.

In addition to the persons mentioned in the preface of Volume I, the
undersigned owes a debt of gratitude to Mr. C. V. Imlay, Washington,
D. C., for his assistance on the legal aspects of receiverships.

G. H. NEWLOVE.



CONTENTS



('HAI'TER I Cash.



Cash Book; Cash Receipts; Cash Disbursements; Statement of Receipts
and Disbursements; Bank Balance; Cash Account; Cash on Hand; Petty
Cash ; Fraud in Cash.



CHAPTER II Notes, Mortgages, and Liens 30

Terminology; Relation of Notes to Open Accounts; Notes Receivable
Discounted; Dishonored Notes; Loss on Notes Receivable; Notes Out as
Collateral; Audit of Notes Receivable; Valuation of Notes Receivable;
Notes Registers ; Postdated Checks ; Classification of Notes Payable ;
Audit of Notes Payable; Drafts; Mortgages and Liens; Coupons and
Tickets; Foreign Exchange.



CHAPTER IN Personal Accounts 50

Terminology; Aging Personal Accounts; Valuation of Customers' Ac-
counts; Audit of Customers' Accounts; Suspense Accounts; Loss on
Bad Debts; Reserve for Bad Debts; Hypothecated Accounts; Accounts
Payable; Average Due Dates.



(Ml AFTER IV Plant and Equipment 67

Valuation of Plant and Equipment; Depreciation of Fixed Assets; Re-
arrangement of Machinery; Donated Land; Land Bought for Resale;
Sale of Fixed Assets ; Appreciation ; Hire-Purchase Agreement ; Wasting
Assets; Cash Discounts on Capital Expenditures; Maintenance; Repairs,
Renewals, Replacements, Additions, and Betterments; Audit of Fixed
Assets,

vii



viii C. P. A. ACCOUNTING

CHAPTER V Intangible Assets !>3

Nature of Goodwill; Creation of Goodwill; Valuation of Goodwill; Audit
of Goodwill; Booking of Patents; Depi-eciation of Patents; Royalties;
Copyrights and Trade Marks; Trade Secrets; Franchises and Licenses;
Leases ; Audit of Intangible Assets.



CHAPTER VI Mergers and Consolidations 109

Methods of Amalgamation: Advantages of Combinations; Investigations
Preliminary to Consolidations; Capitalization of Amalgamations; Pay-
ment for Amalgamated Interests; Closing Entities for Amalgamated
Companies; Opening Entries for Amalgamated Companies.



CHAPTER VII Holding Companies 123

Holding Companies; Consolidated Balance Sheets; Illustrative Problem;
Personal Accounts; Notes Accounts; Inventories; Treasury Stock;
Subsidiary Stock Owned; Sinking Fund Investments; Construction
Work; Bonds Payable; Reserves; Outstanding Subsidiary Stocks; Sur-
plus; Dividends; Solution; Consolidated Profit and Loss Statements.



CHAPTER VIII Receiverships 143

Receiverships; Receiverships in Equity; Receiverships under the Statute;
Receiverships under the Federal Courts; Assignments; Receivers;
Receivers in Bankruptcy; Bankruptcy; Trustees in Bankruptcy; Re-
ceiver's Liability; Receiver's Accounts; Audit of Receiverships.



CHAPTER IX Statement of Affairs and Deficiency Account 158

Relation of Statement of Affairs to Balance Sheet ; Valuation in Statement
of Affairs; Valuation Reserves; Capital Accounts; Partners' Outside
Property ; Unexpired Insurance ; Taxes ; Accrued Interest ; Notes Re-
ceivable Discounted; Work in Process; Hire-Purchase Agreements;
Right of Set-Off; Classification of Accounts; Illustrative Problem;
Solution Procedure; Other Forms,



CONTENTS ix

CHAPTER X Realisation and Liquidation Account 176

Underlying Theory; Illustrative Problem; Summary Journal Entries;
Working Sheet ; Solution.



CHAPTER XI Executors, Administrators, and Trustees 190

Duties; Legal Status; Accounting Records, Life Estates, and Remainder-
men; Principal and Income; Assets; Liabilities; Proprietorship Ac-
counts; Executor's Accounts; Illustrative Problem; Executor's Report;
Working Sheet ; Audit of Executor's Accounts.



CHAPTER XII Scope of Audit 210

Detailed Audit ; Balance Sheet Audit ; Completed Audit ; Continuous
Audit; Auditor's Responsibility; Investigations; Cash Audit; Investiga-
tions for Prospective Purchasers ; Investigations on Retirement of Part-
ners; Investigations Preliminary to Consolidations; Investigations
Preliminary to Reorganizations; Investigations for Creditors.



CHAPTER XIII Auditing Procedure 230

Prior to the Audit; Audit Program; Procedure Where Previous Audits
Have Been Made; Analysis of Accounts; Calling Back Postings; Ab-
stracting the Ledger ; Analysis of Ledger ; Blocking the Ledger ; Care of
Papers and Books ; Employee's Bonds ; Correction of Errors ; Auditor's
Working Papers.



CHAPTER XIV Auditor's Reports and Certificates.



Content of Report; Presentation; Certificates; Comments; Statements;
Use of Charts and Graphs; Preparation of Charts; Percentages.



CHAPTER XV Consignments, Contracts, and Ventures 274

Legal Status of Consignments; Illustrative Entries on Consignor's and
Consignee's Books; Variations in Consignor's Books; Variations in



x C. P. A. ACCOUNTING

Consignee's Books; Contractor's Accounts; Contracts on Client's Books;
Joint Ventures; Entries for Joint Venhuv-.

CHAPTER XVI Single-Entry Bookkeeping 29G

Definition; Journalizing; Books Required; Proprietor's Account; Proof of
Posting; Statements of Condition; Statements of Progress; Audit of
Single-Entry Books ; Advantages and Disadvantages ; Where Applicable ;
Changing from Single-Entry to Double-Entry.



C. P. A. ACCOUNTING



xii C. P. A. ACCOUNTING

APPENDIX

KMY TO KKFKKKNCKS

PAGE

A to Q :;o<>

R to Z 310

AA to MM 310

NN to ZZ 311

AAA to GGG 311

HHH to ZZZ ..312

AAAA to VVVV 313

WWWW to ZZZZ 314

AA AAA to HHHHH .511

INFERENCES FOR CHAPTERS

CHAPTER I 315

CHAPTER II 31G

CHAPTER III 318

CHAPTER IV 310

CHAPTER V 320

CHAPTER VI 321

CHAPTER VII 322

CHAPTER VIII ! 322

CHAPTER IX 324

CHAPTER X 325

CHAPTER XI 320

CHAPTER XII 327

CHAPTER XIII 328

CHAPTER XIV 329

CHAPTER XV 330

CHAPTER XVI 330



CHAPTER I

CASH

Cash Book There are four kinds of cash books, viz.: (a) petty cash
book, which shows the amounts placed in the petty cash fund and the
detailed expenditure thereof; 1 (b) general cash book, which records all
cash transactions as they occur except the petty cash transactions;* (c)
journal-cash book, which records both cash and non-cash transactions, and
which, carried to its logical extreme, becomes both a journal and a ledger,
as it may have a debit and a credit column for each ledger account; 3 and
(d) private cash book, which records all the transactions incident to the
financing of the enterprise when a private ledger is maintained. 4

Unless all receipts have been deposited in the bank and all payments
have been made by check, the net cash and discount columns on both sides
of the cash book must be footed. 5 Some auditors add only every third or
fourth page of the cash disbursements if the payments can not be checked
by the bank account," but the special columns on the receipt side must be
footed, if the cashier has access to the receipts.' Whenever receipts are
deposited intact in the bank and all payments are made by checks, the
footings in the general cash book need not be verified, if the disbursements
are vouched and the bank account is reconciled, 8 for the footings can be
verified by the following tables :*

"Deposits per bank statements $

Deduct Deposits credited by bank at beginning of period
entered on books prior thereto



Add:

Deposits entered on books during period (near

end) credited by banks subsequently. . . .

Canceled checks written back into receipts

as offsets to disbursements but not issued

or else not used by payee

Total receipts record footings



Disbursements per bank statements

Deduct Checks issued prior to beginning of period (out-
standing at that time) cashed by bank during period
(hence included in bank's statement of checks with-
drawn)



'For explanation of superior figures see page 307.

1



C. P. A. ACCOUNTING

Add:

Checks issued toward end of period (out-
standing) not cashed by bank during
period but entered in check register J

Checks written but canceled prior to presen-
tation to bank. .



Total check register footings



Cash Receipts A system of internal check requires that a clerk other
than the cashier or bookkeeper shall make a list on a blotter of all in-
coming remittances before turning them over to the cashier. 10 When the
deposit is ready for the bank, this clerk records on his blotter the cash
sales as recorded in the cash register, compares the total receipts with the
deposit slip, and verifies the entry in the pass-book when it is returned
from the bank. u Receipts from cash sales should be verified daily against
the sales tickets." If it is necessary for the bookkeeper to receive the
cash, the proprietor should keep under lock and key a duplicate copy of
his itemized records of cash, until they are audited. 13 Checks, whether
issued by the firm itself or not, should be deposited if cashed out of
receipt funds."

In verifying the cash receipts, the cash sales should be checked against
the cash register slips or daily records taken therefrom, duplicate sales
slips, and detailed memorandum books. 15 The remittances from customers
are very unsatisfactory items to verify, for the auditor must content him-
self with checking the amounts against the customers' accounts with the
hope that the balances of the accounts can be confirmed before the com-
pletion of the audit. 19 As the clients frequently object to having their
customers circularized and as the customers frequently fail to reply when
they have been circularized, this is a very poor check. In this regard an
auditor can do a real service by pointing out the advantage of a system of
internal check. Carbon copies of itemized deposit slips are sometimes
advocated as vouchers for cash receipts, but they are nearly valueless
since there is no proof that they are copies of the slips actually used in
making the deposit. 1 ' As to other receipts, the auditor must watch for all
possible sources of income such as investments, leased property, etc. In-
terest on bonds can be easily ascertained from the securities, and dividends
may be checked through financial journals. 18

Cash Disbursements The cash payments should be checked with the
regular vouchers, 18 which should be marked so that they can not be used the
second time during the audit. 20 Cash payments should be made by checks, 21
but, as checks in themselves do not show the reason or authority for the
payments, the disbursements should be supported by duly authorized
vouchers. 12 Checks are frequently recorded in books called check registers,
which usually give the date, check number, payee, amount, and voucher
number. 23 Where there are more than one depositary, a check register
should be kept for each.* 4 Checks are numbered, and, after the checks
which have been paid and returned by the bank have been used to verify



CASH 3

tlie bank account, they should be arranged in numerical order and the
missing numbers accounted for. 25 All outstanding checks should be listed. 88
Canceled checks should be pasted on the stubs when canceled, 27 and paid
checks should also be pasted on the stubs when returned by the bank. 88
Under general circumstances the auditor need not examine the endorsements
on returned checks, except those drawn to the order of cash. 29 Drawn
checks do not affect the accounts until they have been delivered. 30

Statement of Receipts and Disbursements A statement of receipts and
disbursements is a report showing respectively with regard to cash, the
balance at the beginning of a period, the classified receipts and disburse-
ments during the period, and the balance remaining at the end of the
period. 31 Some accountants do not classify the receipts and disburse-
ments, 33 while other accountants classify them." 3 If it is desired to classify
the receipts and disbursements, a procedure which seems advisable, head-
ings somewhat like the following can be used : M

RECEIPTS :

(a) From the Collection of Current Assets.

(b) From the Sale of Working Assets.

(c) From the Incurrence of Liabilities.

(d) From Miscellaneous Sources.

DISBURSEMENTS :

(a) For Liabilities Liquidated.

(b) For Interest on Indebtedness.

(c) For Reduction of Credit Accounts of Officers.

(d) For Pre-Process Cost of Goods Manufactured.

(e) For Factory Overhead Expenses.

(f) For Selling Expenses.

(g) For General and Administrative Expenses.

Care should be taken not to confuse statements of income and expenses
with statements of receipts and disbursements; the former contain all
expenses and income whether paid in cash or not, while the latter contain
merely a formal rearrangement of the information recorded in the cash
book. 36

Bank Balance When receipts are deposited and payments made by
checks, the cash book will show only net cash on both sides, thus eliminat-
ing the need of any extra column for the bank record 30 or of having a bank
account in the ledger. However, the bank balance at any one time may
vary from the balance of the cash book." The two can be reconciled by
making four tables: (a) We debit, bank does not credit; (b) we credit,
bank does not debit; (c) bank debits, we do not credit; and (d) bank
credits, we do not debit. 38 The sum of the bank's balance and (a) and
(c) should equal the sum of the cash book balance and (b) and (d). 39 A
list of outstanding checks at the end of the period should be prepared 40



C. T. A. ACCOI NTINfi



and specially scrutinized." Outstanding checks at the beginning of the
period should be examined and traced into the cash book. c

When separate records are maintained in the cash book, check book,
and pass book, the receipts and disbursements can be reconciled by adapt-
ing the following tables to meet the conditions:"

RECONCILIATION OF RECEIPTS



Cash Book Check Book Pass Book



Recorded receipts

Receipts not deposited

Deposit of previous period's receipts .
Interest on bank balances. . .



$23.000.00



$23,390.00
100.00



$23, 400 00
100.00



490.00
10.00



10.00



$23,500.00



$23,500.00



$23,500.00



RECONCILIATION OF DISBURSEMENTS



.


Cash Book


Check Book


Pass Book


Recorded disbursements


$21.000.00


$20,950 00


$20,750 00


Currency items




50 00


50 00


Checks outstanding






i 200 00


Checks of previous period


995 00


995 00




Exchange charged by bank


5.00


5 00














$22,000.00


$22,000.00


$22.000.00



Cash Account There is some difference of opinion as to whether an
account for cash should be opened in the general ledger. Some accountants
open such account in order to make the ledger self-balancing, 44 while
others prefer to do the extra work of looking up the balance in the cash
book when a trial balance is being taken in order to save the work of
posting to the ledger account. In point of strict theory there ought to be
a cash account in the ledger.

When a cashier is over or short a slight amount at the end of the day,
this amount can be recorded in a cash over-and-short account, which
account would be closed into profit and loss at the end of the period, if the
cashier is not held liable therefor. 48

Cash on Hand When notice of the auditor's coming has not been given
to the client's staff, the cash should be balanced immediately. 4 ' 1 If ex-
pected, the auditor should verify the cash when it will cause the least
trouble to the client's staff, which time is usually the first thing in the
morning when the cash book is written up and the footings are shown, 47



CASH 5

or at the close of business on the first day of the audit. 4 * The bank
balances should be independently verified by the auditor.** Where more
than one depositary is used, care must be taken to see that all of the
different balances are verified simultaneously. 80 If the period to be audited
is only a short time previous to the date of audit, the transactions since the
close of the period should be scrutinized and the footings checked in order
to prove the cash balance at the close of the period." However, if con-
siderable time has elapsed since close of the period, bank balances as of the
closing date should be obtained from the bank and reconciled with t.h.'
books on the assumption that the outstanding checks shown by the books
are correct."

In counting the cash, a list shoAving the bills, gold, and silver by de-
nominations, with sub-totals for each, should be prepared. 33 Any I. 0. U.'s,
checks, due-bills, etc., should be listed with full particulars." The practice
of having due-bills in the cash is vicious, and such items ought to be taken
out of the cash account and recorded in the proper accounts. 55 If cash is
in transit when the cash is counted, it should be verified immediately on
arrival. 1 " 1 Overdrafts on the bank at the date of the balance sheet should
be recorded among the current liabilities" as a loan, as cash should never
l)o shown with a credit balance." 8

Pettji Cash The petty cash fund, sometimes called petty cash account
(r imprest cash account, 59 is an amount of money set aside for the payment
of petty expenses." Expenditures too small to be made by check may be
paid in currency (a) without the use of a special fund," (b) from a fund
t lie balance of which fluctuates/' 2 and (c) from a fund the balance of
\vhich is constant. 83

The payment of small expenditures from the current cash receipts is a
vicious practice in that it greatly Aveakens the system of internal check and
enhances the difficulty of auditing the cash. 01 Under such a method, the
petty cash book is merely a memorandum. 05

When petty payments are made out of a fluctuating fund, the petty
cash book may be an independent journal from Avhich posting may be
done.'" When the fund is created, the petty cash account is debited and
ca-h account credited in the general cash book." 7 and, when small payments
are made, the proper expense accounts are debited and petty cash account
credited in the petty cash book." 8 When the amount of the petty cash is
diminished below a set figure, another check is drawn in favor of petty
cash, and recorded in the general cash book as a debit to petty cash ac-
count and a credit to cash account. If it is desired not to post from the
petty cash book, the expenditures are recorded as charges to the various
accounts and credits to the petty cash account in the journal.'

When petty payments are made from a non-fluctuating fund, a general
cash book entry is made at the creation o the fund. 71 Under this system
petty payments are recorded in the petty cash book, and Avhen the fund is
IOAV, the petty cash book is ruled and presented together witlrthe vouchers
to the general cashier, who draws a check in favor of petty cash for the
exact amount of these expenses and records the checks in his general cash



G C. P. A. ACCOUNTING

book as debits to the various expense accounts and credits to cash ac-
count." The fluctuating fund is less desirable than the nou-fluctiiating
fund, because it makes necessary the ascertaining of how much has been
paid into the fund before the balance can be checked. 73 The non-fluctuat-
ing fund is easier to audit than the fluctuating fund. 7 *

There is a great need for standardizing the petty cash vouchers for the
purpose of safeguarding the petty cash fund and of removing temptation
from junior clerks." As the petty cash is relatively unimportant auditors
frequently have some responsible person scrutinize the payments and
initial each page or month in the petty cash book. 7 " If the auditor wishes
to test the payments himself, he should verify either all payments for a
certain period or all payments exceeding a certain sum for the entire
period." In auditing the petty cash book, the distribution of any largo
items should be checked, the total column footed, cross-footings proved, and
the postings of totals verified. 78

Fraud in Cash The kinds of fraud an auditor must guard against are

(a) raising checks after they have been paid and returned by the bank,

(b) entering less than amount received and forcing footings to make the
cash balance when the correct amount is posted, (c) recording fictitious
allowances for damaged goods, (d) padding the payroll, (e) purloining
receipts from an unrecorded sale, (f ) making false petty cash vouchers,
(g) understating discounts on purchases, (h) overstating discounts on
sales, (i) "lapping," (j) "kiting," and (k) forging the signature on
checks which were drawn for the purpose of paying oft' creditors/"

"Lapping" is extracting the amount of a remittance from a customer,
then recording the credit to the customer the next day and holding back the
credit on one or more of the remittances received that day."' 1 Except, for
the day in which the theft is made, the total amount in dollars of the
receipts is deposited, but the credits are not made to the accounts of the



Online LibraryGeorge Hillis NewloveC. P. A. accounting; theory, questions, and problems (Volume 2) → online text (page 1 of 32)