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TRIAL BALANCE
Firm of A, B, and C
Year Ended February 28,



1914



Expenses

Wages

Salaries

Rent

Purchases

Commissions paid on sales.

Bad debts

Discounts on purchases

Loan from C

Drawings, A

Drawings, B

Drawings, C

Sales

Plant and tools

Stores

Cash

Furniture

Accounts receivable

Accounts payable

Capital account, A

Capital account, B

Capital account, C



550.00

1,250.00

175.00

145.00

8,350.00

78.00

35.00



570.00
400.00
304.00

1,550.00
1,630.00
1,513.00
200.00
2,750.00



$19,500.00



$ 20.00
1,000.00



12,110.00



1,670.00
2,000.00
1,500.00
1,200.00



$19,500.00



STATEMENT OF INCOME AND EXPENDITURE

Firm of A, B, and C

Year Ended February 28, 1914

Income



Sales for year




$12,110.00


Expenditures






Stores on hand at beginning


$1,630.00




Purchases $8,350.00






Less discounts 20.00






$8,330.00






Less inventory at closing 1,903.00


6,427.00




Cost of sales


$8,057.00




Trade expenses $ 550.00






Wages 1,283.00






Salaries 175.00






Rent 145.00






Commissions 78.00






Bad debts 35.00






Accrued expenses 50.00






Depreciation on furniture and fixtures 20.00


2,336.00




Total expenditure




10,393.00


Net profit from operations




$ 1,717.00



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§ 42 C. P. A. gUESTIONS AND ANSWERS

STATEMENT OF RECEIPTS AND DISBURSEMENTS

Firm of A, B, and C

Year Ended February 28, 1914

Receipts of Cash



Cash invested at March 1,


1913




$1,520.00


From accounts receivable




$9,325.00




Loan from C




1,000.00


10,325.00


Total receipts






$11,845.00


Disbursements of Cash






Expenses




$ 450.00




Wages




1,000.00




Salaries




175.00


'


Rent




145.00




Purchases


$8,350.00






Accounts payable


$1,670






Wages and expenses


350 1,320.00
$7,030.00






Discount


20.00


7,010.00




Office furniture




200.00




Commissions paid on sales




78.00




Drawings, A's account




570.00




Drawings, B's account




400.00




Drawings, C's account




304.00




Total disbursements






10,332.00



Cash balance, February 28, 1914 $ 1,513.00



PROFIT-AND-LOSS ACCOUNT

Firm of A, B, and C

Year Ended February 28, 1914

Net profit from operations $1,717.00

From which deduct
Interest on capital

A, 5 per cent, on $2,000.00 $100.00

B, 5 per cent, on $1 ,500.00 75.00

C, 5 per cent, on $1,200.00 60.00
Interest on loan from C

5 per cent, on $1,000.00 50.00 285.00

Net balance for division $1,432.00

Division of Profits

A, one-third $ 477.34

B, one-third 477.33

C, one-third 477.33

$1,432.00

Note — The interest on the loan from C is shown in the division of profits, but
there is no objection to including it in the expenditures.



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C. p. A. QUESTIONS AND ANSWERS



§42



BALANCE SHEET

Firm of A, B, and C

Year Ended February 28, 1914



Assets



LiabiUtiee and Capital



Cash $1,513.00

Accounts receivable 2,750.00

Stores 1,903.00

Office fixtures 180.00

Plant and tools 1,550.00



$7,896.00



Accounts payable
Wages due
Wages accrued
Expenses due
Ejyenses accrued

Ldto from C

Liabilities
A's capita]
B's capital
C*s capital

Net worth of firm



$250.00

33.00

100.00

- 50.00



$1,320.00



$2,007.34
1,652.33
1,483.33



433.00

1,000.00

$2,753.00



5,143.00
$7,896.00



CAPITAL ACCOUNTS OF PARTNERS

Year Ended February 28, 1914

A's Account



Drawings
Balance


$ 570.00
2,007.34


Investment

Interest

Profit

Balance


$2,000.00
100.00
477.34




$2,577.34


$2,577.34
$2,007.34



B*s Account



Drawings
Balance


$ 400.00
1,652.33-


Investment

Interest

Profit

Balance


$1,500.00

75.00

477.33




$2,052.33


$2,052.33
$1,652.33



C*s Account



Drawings
Balance


$ 304.00
1,483.33


Investment
Intferest

Interest on loan
Profit

Balance


$1,200.00

60.00

50.00

4X7.33




$1,787.33


$1,787.33
$1,483.33



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§ 42 C. P. A. QUESTIONS AND ANSWERS 7

6. Question 2. — ^From the following trial balance and
notations prepare a manufactiiring-and-trading account, profit-
and-loss account, and balance sheet as at December 31, 1914,

TRIAL BALANCE
Globe Manufacturing Company
Year Ended December 31, 1914



Cash

Land

Buildings

Machinery

Tools and implements

Horses, wagons, and harness

Office furniture

Bills receivable •

Accounts receivable

Investments

Salesmen's accounts, advances on salaries . .
Organization expenses $15,000, less 2 per

cent

Good-will

Bills payable

Accounts payable

Special accounts, officers and clerks

Reserve for ba.d debts, less accounts

written off

Reserve for depreciation, buildings 2} per

cent

Reserve for depreciation, machinery 6 per

cent

Reserve for depreciation, horses, wagons,

etc. 10 per cent

Capital stock, 10,000 shares at $100

Sales, less returns and allowances

Rent of part of business premises

Inventoiy, December 31, 1913

Purchases, including freight and cartage. . .

Labor, factory pay rolls

Salaries of officers, clerical force

Salari^ of salesmen

Advertising.

Taxes

Insurance

Interest and discount.^

Expense, stable

Expenses, office, legal, and unclassified

Maintenance, repairs, buildings, etc

Profit and loss, 1913 surplus



25,324.00
100,000.00
200,000.00
300,000.00

40,430.00

30,000.00
5,201.00

25,812.00
163,374.00

20,000.00
1,960.00

14,700.00
200,000.00



104,621.00

395,662.00

600,400.00

75,120.00

60,440.00

50,300.00

4,020.00

2,600.00

6,500.00

4,000.00

25,750.00

26,942.00



$2,483,156.00



$ 42,000.00
98,511.00
15,363.00

112.00

6,000.00

18,000.00

3,000.00

1,000,000.00

1,240,600.00

500.00



60.070.00



$2,483,156.00



Memoranda. — Inventories, December 31, 1914, merchandise, finished
and unfinished, $270,560; factory pay rolls, accrued but not paid, $5,750;
unexpired insurance, $912; interest accrued on investments, $1,000.

1 L T 234—21



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8 C. P. A. QUESTIONS AND ANSWERS § 42

which is the end of the second' fiscal year of the company's
operations. Make the same reserves for depreciation as were
made at the end of the preceding year. Write off 10 per cent,
from balance of organization expenses. Allow 2 per cent, of
bills and accounts receivable as a provision against possible
losses. Show the per cent, of gross profit and net profit. Show,
as a final balance at the credit of undivided-profits accoimt, the
profits available for distribution.

7. Answer to Question 2. — ^This question is a fair sample
of the kind of work the accoimtant is called on to do, though
the information given in it is very brief, compared with the
quantity of details that is to be found in an actual set of books.
When the accountant has access to all accounts, etc. of the con-
cern being examined, he- can verify inventories, list properties
on hand, and make a personal inspection of all details. When
preparing revenue and financial statements, the accoimtant
should remember that they are made to show results, and there-
fore should be arranged in the simplest manner possible without
sacrificing clearness. There is no set rule to follow, however,
so that the accountant is at liberty to follow the arrangement
best suited to his individual needs.

6» The statements that follow are given as fair samples of
the kind required by the question itself. In making analyses
of accounts, accoimtants generally use working sheets or papers
containing from six to fwenty or more columns. This enables
them to analyze and separate the various accoimts into the
columns under their respective classifications.

The items in the comparative percentage statement are
taken to the nearest decimal of one place and illustrate the
method of determining percentages. The turnover means the
cost of goods sold $958,963 ; but as the exact cost of goods manu-
factured is so hard to determine, the sales are frequently used
as a basis for percentage exhibits. Comparative statements
are usually varied to meet the requirements of the management,
and in some cases contain a considerable amoimt of information
pertaining to the business of the current month and year as
compared with last year.



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10



C. p. A. QUESTIONS AND ANSWERS § 42



PROFIT-AND-LOSS ACCOUNT
Globe Manufacturing Company
Year Ended December 31, 1914



Debits


Credits


General expenses








Salaries, Office


$ 75,120.00


Gross profit for trading




Advertising


50,300.00


account


$281,637.00


Interest and discount


6,500.00


Rent of part of prem-




Expenses, office and




ises


500.00


legal


25,750.00


Interest accrued on




Reserve for bad




investments


1,000.00


debts, 2 per cent.


3,784.00






Organization expen-








ses 10 per cent.


1,470.00






Total expenses


$162,924.00






Net profit carried down


120,213.00
$283,137.00




,




$283,137.00


Balance of profits'avail-




Net profit brought




able for dividends


$180,283.00


down
Surplus profit from


$120,213.00






1913


60,070.00




$180,283.00


$180,283,0a



BALANCE SHEET
Globe Manufacturing Company
Year Ended December 31, 1914



$ 25,324.00

189,186.00

270,560.00

20,000.00

1,000.00

1.960.00

$ 508,030.00



Assets

Current assets
Cash on hand

Bills receivable $ 25,812.00

Accounts receivable , 163,374.00

Merchandise, finished and unfinished
Investments
Interest accrued
Salesmen, advances
Total current assets

Fixed assets

Land $100,000.00

Buildings 200,000.00

Machinery 300,000.00

Tools and implements 40,430.00

Horses, wagons, etc. 30,000.00

Office furniture 5,201 iX)

Total fixed assets

Good-will

Insurance unexpired

Organization expenses $ 14,700.00

Less 10 per cent. * 1,470.00



675,631.00

200,000.00

912.00

13,230.00
$1,397,803.00



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§42



C. P. A. QUESTIONS AND ANSWERS



11



Liabilities

Current liabilities

Bills payable

Accounts payable
Special accounts

Office and clerks

Wages accrued, factory pay roll
Total current liabilities
Reserve accounts

For bad debts

Depreciation of building

Depreciation of machinery

D^reciation of horses and wagons
Total liabilities
Capital stock
Undivided profits



$42,000.00
98,511.00 $ 140,511.00

15,363.00
5,750.00



$ 161,624.00



$ 3,896.00

10,000.00

36,000.00

6,000.00



55,896.00

$ 217,520.00

1,000,000.00

180,283.00

$1,397,803.00



COMPARATIVE PERCENTAGE STATEMENT
Globe Manufacturing Company





Based on Sales


Based on Turnover




1914


1913


Increase

(Black)

Decrease

(Red)


1914


1913


Increase
Decrease


Gross profit •.


22.7

9.7

48.8

13.13


19.8

8.5

36.4

11.43


2.9
1.2
2.4
1.7


29.4
12.5
63.2
17.0






Net profit




Labor, $606,150

Expenses, $162,924. . . .





9. Question 3. — ^The Davison Company and the Lewis
Company amalgamate under the name of The Davison-Lewis
Company, with an authorized capital of $500,000, of which
$200,000 is 7 per cent, preferred stock and the remaining
$300,000 common stock. It is agreed that $100,000 preferred
stock and $200,000 common stock shall be given for the Davison
Company's business and $75,000 preferred stock and $75,000
common stock for the Lewis Company's business. It is also
agreed that $3,000 common stock is to be allotted to A. Davison
in consideration of his services in connection with the amalgama-
tion. From the following balance sheets make the required
entries in the books of the new company.



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12



C. P. A. QUESTIONS AND ANSWERS



§42



BALANCE SHEET
The Davison Company



Assets


Liabilities


Cash

Book debts
Bills receivable
Goods on hand
Machinery, etc. .
Real estate


$ 3,000.00 Bills payable
5,000.00 Mortgage payable
20,000.00 Accounts payable
80,000.00 Capital stock
60,000.00
104,000.00
$272,000.00

The Lewis Company


$ 8,000.00

12,000.00

2,000.00

250,000.00




$272,000.00


Assets


LiabUities


Cash

Book debts
Bills receivable
Machinery, etc.
Goods on hand


$ 2,000.00

5,000.00

15,000.00

56,000.00

30,000.00

$108,000.00


Bills payable
Capital stock


$ 8,000.00
100,000.00




$108,000.00



10. Answer to Question 3. — ^The net assets of the
Davison Company, as shown by its balance sheet, amount to
$250,000. They are to transfer these assets for $300,000 in
stock, consisting of $100,000 preferred and $200,000 common.
The extra $50,000 stock issued in excess of the net assets must
be charged to good-will. . The complete entry will therefore be
as follows:



Cash $ 3,000.00




Book debts 5,000.00




Bills receivable 20,000.00




Merchandise 80,000.00




Machinery 60,000.00




Real estate 104,000.00




Good-will 50,000.00




Bills payable


$ 8,000.00


Mortgage payable


12,000.00


Accounts payable
Davison Company


2,000.00


300,000.00


Assets and liabilities of the Davison Company taken




over as per agreement of January 15, 1914.




Davison Company $300,000.00




Capital stock, preferred


$100,000.00


Capital stock, common


200,000.00


Stock issued to stockholders of Davison Company.





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§ 42 C. P. A. QUESTIONS AND ANSWERS 13

It will be noticed that the Capital-Stock Accoimt must be
divided in such a way as to keep preferred stock and common
stock separate. Similarly, in the share ledger, separate accoimts
must be opened for preferred stockholders as distinguished from
holders of common stock.

11. To bring the Lewis Company's net assets into the busi-
ness the following entry must be made:



Cash


$ 2,000.00




Book debts


5,000.00




Bills receivable


15,000.00




Machinery


56,000.00




Goods


30,000.00




Good-will


50,000.00




Bills payable




$ 8,000.00


Lewis Company




150,000.00


Assets and liabilities of Lewis Company taken over




as per agreement. •






Lewis Company


$150,000.00




Capital stock, preferred




$ 75,000.00


Capital stock, common




75,000.00


Stock issued to stockholders of Lewis Company in




accordance with agreement.







12. Common stock amoimting to $3,000 is issued to
A. Davison in consideration of his services in bringing about the
amalgamation. The preliminary expense should be charged
with this and it may be carried temporarily as an asset, but
if this is done it should be written down gradually so as to
disappear entirely by the end of from 3 to 5 years. It may be
entered as follows :

Preliminary expense $3,000.00

Capital stock, common $3,000.00

After all of the foregoing entries have been posted i the
accounts opened for the Davison Company knd the Lewis Com-
pany should balance. Stock certificates of the new company
will be issued to the shareholders of these respective concerns
in proportion to their interests in the same, in place of the shares
previously held by them, which are now surrendered. The
opening balance sheet of the Davison-Lewis Company will be
as follows:



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14 C. P. A. QXJESTIONS AND ANSWERS § 42

BALANCE SHEET
The Davison-Lewis Company



Assets


Liabilities


Cash


$ 5,000.00


Bills payable $ 16,000.00


Book debts


10,000.00


Mortgage payable 12,000.00


Bills receivable


35,000.00


Accounts payable ' 2,000.00


Merchandise


110,000.00


Capital stock, pre-
ferred 175.000.00


Machinery


116,000.00


Real estate


104,000.00


Capital stock, common 278,000.00


Good-will


100,000.00




PreUminary expenses


3,000.00
$483,000.00






$483,000.00



13# Question 4. — ^A manufacturing company requires a
statement showing the outcome of 7 months' operations. It
appears that by reason of nfianufacturing having been com-
menced while the plant and the power development were
incomplete, frequent stoppages took place, so that the produc-
tion was much below capacity, while the costs of production
were abnormally high. Assuming actual running time at
4J months net, what weight should be attached to these cir-
cumstances, the directors having asked that they be taken into
accoimt in determining the disposition of the following items:



Materials


$140,000.00


Pay roll, operatives


37,300.00


Pav roll, non-productive labor


18,250.00


Bond interest accrued


14,500.00


Salaries


7,205.00


Insurance


3,080.00


General expenses


1,150.00


Saks for period


182.400.00


Inventories of manufactured goods, at cost to




produce


12,400.00



14. Answer to Question 4. — ^According to the question
the company's output was actually manufactured in 4J months
of running time, although 7 months* wages and expenses were
paid. If the auditor is satisfied as to the truth of the informa-
tion given him in this respect, he is justified in preparing a
statement that will show the normal profit in contrast with the
actual profit. The gross expenses for the period outside of
material were $81,545; of this amount only nine-fourteenths, or



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§42



C. P. A. QUESTIONS AND ANSWERS



15



$52,421.76, is the normal charge against the output for this
period; the diflference, $29,123.24, is the loss due to stoppages.
The figiu-es given in the statement as per question, show a loss
of $26,745 ; the difference between these two loss amoimts shows
a profit for the period of $2,378.24, without taking into considera-
tion the fact that imder normal conditions the output would
have been larger and the profit proportionately increased.
With the proportionate increase of output, there would be for
the 7 months a net profit of $3,699.42, as shown by the following
statement:

In brief the points to be allowed for are (1) decrease of running expenses
to a basis of 4 J months* time, which will give the net profit for 4 J months,
or (2) the increase of output from the amoimt given in the question to the
amount that would have been produced under normal conditions in
7 months. A simple calculation will show that the sales, instead of being
$182,400, for 4j months, or $40,533.33 for 1 month, would be $283,-
733.31 for 7 months, and that the inventories, instead of being $12,400,
would have been $10,288.89. This would of necessity increase the cost
of the material from $140,000 to $217,777.78. The first statement shown
below is based upon the supposed normal conditions and show the normal
net brofit.

MANUFACTURING ACCOUNT



Debits


Credits


Material $217,777.78
Total expenses as per

question 81,545.00
$299,322.78

Net profit 3,699.42


Sales •
Inventories




$283,733.31
19,288.89


$303,022.20


$303,022.20



The statement constructed in such a way as to show the actual results
for the period would appear as follows:





MANUFACTURING ACCOUNT




Debits


, Credits


Material
Total expense




$140,000.00
81,545.00


Sales
Inventories

Net loss




$182,400.00
12,400.00

$194,800.00
26,745.00




$221,545.00


$221,545.00



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16 C. P. A. QUESTIONS AND ANSWERS § 42

15. Question 6. — On August 1, 1912, a loan company
lends $4,000 at 6 per cent, per annum, compound interest, to
be repaid in three equal annual instalments. The instalments
are received on August 1, 1913, 1914, and 1915, respectively.
Pass the necessary bookkeeping entries for the above through
the loan company's journal and post to the ledger.

16. Answer to Question 6. — ^The compoimd amount of
$4,000 at 6 per cent, per annum for 3 years is $4,764.06. To
find the amoimt of each annual payment, the amotmt of the
loan and the compoimd interest on it for the 3 years, $4,764.06,
must be divided by the sum of the values of $1, paid at each
stated time, plus the compoxmd interest on that $1 from the
date of payment to the due date of the loan and interest.

Each $1 paid at the end of the first year, with compoimd
interest to the due date, which is 2 years away, will at that date
amoimt to $1.1236. Each $1 paid at the end of the second year
with interest to the due date will amount to $1.06. Each $1
paid at the due date is due then and cannot accumulate interest,
so is worth $1. $1.1236+$1.06+$1.00 = $3.1836. $4,764.06
-^ $3. 1836 = $1,496.44, the sum of each annual payment.

It is a comparatively easy matter to determine what part of
each payment is interest and what part is principal. The
interest on the entire loan at 6 per cent, for 1 year is $240;
therefore, the first instalment of $1,496.44 consists of $240 inter-
est and $1,256.44 principal, and a journal entry to correspond
with these amounts must be made. There remains at the end
of the first year $2,743.56 principal unpaid; the interest on this
at 6 per cent, gives. $164.61, which is the interest for the second
year. Deducting this interest from the $1,496.44, which is the
annual payment, gives $1,331.83, which is the amoimt paid on
the principal the second year. There is now $1,411.73 of the
original loan unpaid; the interest on this at 6 per cent, amounts
to $84.71 ; together they make up the payment for the last year,
thus proving the accuracy of the calculations.

17. Another proof can be made as follows: As the loan
and interest is to be paid in three annual instalments there will



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§ 42 C. P. A. QUESTIONS AND ANSWERS 17

be a saving to the payer, in that the interest will not amount
to so much as it would if the entire loan were allowed to run the
3 full years. $4,000 compoimded at 6 per cent, for 3 years
amoimts to $4,764.06. By making three annual payments of
$1,496.44, the $4,000 is returned with $489.32 interest, saving
the payer $274.74 in interest. The first payment consists of
$1,253.43 principal and $240 interest; the second of $1,328.64
principal and $164.79 interest; the third of $1,417.93 principal
and $85.17 interest. If the first payment of $1,496.44 were
kept the remaining 2 years, it would earn $184.95 in interest.
If the second payment of $1,496.44 had been kept the remaining
year, it would have earned $89.79 interest. $184.95 +$89.79
= $274.74, the amotmt shown as saved by the payer.

18. The journal entries must be made in such a way as will
credit Interest Accotmt for the amotmt of interest accruing due
each year, otherwise the proper interest earnings on the com-
pany cannot be shown. After charging up the accotmt repre-
senting the original loan with the $4,000 cash, an entry should
be made charging it with the $240 due at the end of the first
year. When payment is made, the Loan Account is credited
for the amoimt of same; this process is continued throughout
the 3 years. The entries are shown below :



JOURNAL ENTRIES




Loan account *


$4,000.00




Cash




$4,000.00


When loan is made






Loan account


240.00




Interest




240.00


Interest due at end oi first year






Cash


1,496.44




Loan account




1,496.44


First annual payment '






Loan account


164.61




Interest




164.61


Interest due at end of second year






Cash


1,496.44




Loan account




1,496.44


Second annual payment






Loan account


84.71




Interest




84.71


Interest due at end of third year






Cash


1,496.44




Loan account




1,496.44



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18



C. P. A. QUESTIONS AND ANSWERS § 42



19. A glance at the ledger entries, given below, will show
that the net restdt of the whole transaction is that the loan
company's cash accotint is $489.32 greater, which amount has
been paid as interest on the loan.

LEDGER ENTRIES
Loan Account



Debits




Credits




Cash
Iftterest
Interest
Interest




$4,000.00

240.00

164.61

84.71

$4,489.32


Cash
Cash
Cash




$1,496.44
1,496.44
1,496.44




$4,489.32



Interest



Debits


Credits


Balance


V


$489.32


Loan account
Loan account
Loan account

Balance




$240.00

164.61

84.71




$489.32


$489.32
$489.32



Cash



Debits


. Credits


Loan account
Loan account
Loan account




$1,496.44
1,496.44
1,496.44


Loan account
Balance


$4,000.00
489.32



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