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Balance


$4,489.32*
$ 489.32


$4,489.32



20. Question 6. — D. Hamilton and W. Jackson purchased
a hotel business for $40,000,. the former investing $16,000 and
the latter the remainder, and agreed to share profits and losses
in these proportions. The business has two distinct branches,
one of which is taken charge of by Hamilton and the other by
Jackson. Each keeps separate accotmt of his receipts and dis-
bursements for the term of the partnership. Hamilton's total
receipts were $40,910.15, and Jackson's $37,201.19; Hamilton's
disbursements were $50,912.24, and Jackson's $29,870.15. At
the end of the period the business was sold for $53,700, of which
$30,000 was received in cash and banked to their joint credit.



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§ 42 C. P. A. QUESTIONS AND ANSWERS 19

A note of $23,700 was taken for the balance and then afterwards
transferred to Hamilton at a discotint of 10 per cent, on its face.
A final settlement is then made, and each received a check for his
share of the $30,000. Find the amount of the respective checks.

~21. Answer to Question 6. — Make the following entry

to credit each partner for his investment :

Cash $40,000.00

D. Hamilton $16,000.00

W. Jackson 24,000.00

The purchase of the business for $40,000, at the time it was
done, doubtless required a number of entries, but for the pur-
pose of this question the following entry is sufficient :

Business $40,000.00

Cash $40,000.00

As each partner personally controls and is responsible for the
receipts and disbursements of a certain part of the business from
its commencement tmtil the date of settlement, each must be
debited for the cash receipts retained by him and credited for
the disbursements made by him, and as these receipts and dis-
bursements are on account of the business itself they must go
to the credit and debit, respectively, of business account.

D. Hamilton $40,910.15

Business $40,910.15

Business 50,912.24

D. Hamilton 50,912.24

W. Jackson 37,201.19

Business 37,201.19

Business 29,870.15

W. Jackson 29,870.15

The business was sold for $53,700, of which $30,000 was

received in cash and a note of $23,700 for the balance, therefore

the following entry is necessary:

Cash $30,000.00

Bills receivable 23,700.00

Business $53,700.00

As the note is disposed of to Hamilton at a discount of 10 per

cent.. Business Accoimt should be charged with the $2,370 and

D. Hamilton for the balance as follows:

Business $ 2,370.00

D. Hamilton 21,330.00

Bills receivable $23,700.00



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20 C. P. A. QUESTIONS AND ANSWERS §42

The foregoing entries when posted will produce, without
including the investment entries, the following statement:

Dr. Or.

D. Hamilton $ 11,327.91

W. Jackson 7,331 04

Business 83,152.39 $131,811.34

Cash 30,0 00.00

$131,811.34 $131,811.34

The foregoing shows that the business has produced $48,658.95 ,
of which sixteen-f ortieths or two-fifths must go to the credit of
Hamilton and the remainder to the credit of Jackson as follows :
Business $48,658.95

D. Hamilton $19,463.58

W. Jackson 29,195.37

This when posted will leave Hamilton's account with a net

credit of $8,135.67 and Jackson's with a net credit of $21,864.33.

It will be noticed that these amounts represent the net capital

of each partner and exist in the form of $30,000 cash. Each one

is of course entitled to his net capital, the entry required being

as follows:

D. Hamilton $ 8,135.67

W.Jackson 21,864.33

Cash $30,000.00

Jackson $24,000.00

Hamilton 16,000.00

Business . $40,000.00

This entry when posted will balance all of the accounts.

22. Question 7 . — ^A is the owner of a business, the balance
sheet of which is here shown. B and C are admitted as equal
partners with A upon each putting into the business $30,000
cash and each paying A personally $18,000 cash. Show the
balance sheet of the new firm on commencing business.

BALANCE SHEET



Assets




Liabilities


Stock in trade
Cash
Building
Book debts


$50,000.00

12,000.00

15,000.00

3,000.00

$80,000.00


Creditors
A, capital




$10,000.00
70,000.00




$80,000.00



23. Answer to Question 7. — The balance sheet shows
A's net capital to be $70,000, but as B and C put into the con-



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§42



C. P. A. QUESTIONS AND ANSWERS



21



cem $30,000 each, the tangible net assets of the business are
raised to $130,000, of which one-third, or $43,333.33i belongs to
each partner. Provided the firm does not wish to raise a good-
will accotint, the $36,000 cash paid to A personally will not affect
the question and the new balance sheet will appear as follows :

BALANCE SHEET



Assets


Liabilities


Stock in trade
Cash •
Building
Book debts,




$-50,000.00

72,000.00

15,000.00

3,000.00

$140,000.00


Creditors

A, capital

B, capital

C, capital


$ 10,000.00
43,333.331
43,333.33*
43,333.331
$140,000.00



24. Under the circtimstances, however, the new firm will
be justified in opening a good-will account. Each of the new
partners has paid $48,000 in cash for a one-third interest in the
new business. It is plain, therefore, that on the same basis
of valuation the whole business is worth $144,000, of which
$130,000 consists of the tangible net assets that represented the
aggregate of the capital accotmts in the foregoing balance sheet.
The other $14,000 is the value of the good-will, and an accoimt
may accordingly be opened for it. The good-will valuation may
also be obtained by comparing the amoimt paid for a one-third
interest in the business; namely $48,000, with the $43,333.33^
shown in the foregoing balance sheet to be each one*s share in
the business. The difference, $4,666f , is evidently the amount
paid by the purchaser for his share in the good-will. The total
value of good-will will, therefore, be three times this amount,
or $14,000. Under these circtimstances the balance sheet will
appear as follows:

BALANCE SHEET



Assets


Liabilities


Stock in trade
Cash
Building
Book debts
Good-will




$ 50,000.00

72,000.00

15,000.00

3,000.00

14,000.00

$154,000.00


Creditors

A, capital

B, capital

C, capital




$ 10,000.00
'48,000.0G
48,000.00
48,000.00




$154,000.00



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

26. Question 8. — ^The ledger of the firm of Cutter &
Fitler, retail dealers in men's clothing and furnishings, showed
the following balances on December 31, 1912:





Dr.


Or.


Cash


$ 2,896.14




Accounts receivable


28,226.06




Bills receivable


1,650.00




Furniture and fixtures


6,344.92




Accounts payable
Bills payable




$ 12,518.30




5,598.66


Inventory, January 1, 1912






Qothing department


12,689.54


1


Shoe department


5,219.78





Haberdashery department


4,711.44




Purchases






Qothing department


36,148.83




Shoe department


15,291.34




Haberdashery department
Sales
Qothing department


12,680.27






54,723.57


Shoe department




23,107.82


Haberdashery department




18.560.26


Wages






Qothing department


2,867.50




Shoe department


1,324.80




Haberdashery department


987.65




General expenses


1,834.19




Office salaries


1,450.00




Rent


3.000.00




Taxes


782.96




Insurance


387.39




Bad debts


463.28




Amos Cutter, capital account




20,000.00


Hiram Fitler, capital account




10,000.00


Amos Cutter, withdrawal account


3,701.68




Hiram Fitler, withdrawal account


1,850.84





$144,508.61 $144,508.61

Inventories on December 31, 1912, are as follows:

Clothing department $14,466.23

Shoe department 4,913.62

Haberdashery department 5,028.96

Prepayments on that date are:

Taxes $168.22

Insurance 57.30

There are no accrued liabilities. Depreciation of 10 per cent,
is to be written off from furniture and fixtures. Each partner
is to be credited with 6 per cent, interest on his capital. No
interest is to be charged on partners' withdrawals. Net profit



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§42



C. P. A. QUESTIONS AND ANSWERS



23



or loss is to be divided in the proportion: Cutter, two-thirds;
Fitler, one-third. Prepare the following: Trading account for
each department, profit-and-loss account, capital account of
each partner, balance sheet.

26. First Answer to Question 8. — There is no
established method of keeping departmental accounts, as each
store is likely to use the plan suited to its own particular needs
or in accordance with the ideas of the managers. It seems
desirable, to say the least, to keep the accotmts in such a way
as will exhibit the income and expenses of each department
and the net profit resulting from trading; especially is this true
if the entire store is entirely subdivided into departments. To
provide this information requires, of course, that the general
and overhead expenses shall be apportioned to the different
departments in some equitable manner; for example, in propor-
tion to floor space, to the gross sales, to the wages paid, to the
gross profit, or according to some other prearranged plan.
APPORTIONMENT OF PROFITS



Debits


Credits


Cutter


Net profit


$20,552.52


Interest on cap-






ital $ 1,200.00






Net profit, two-






thirds 12,501.68 $13,701.68






J^'itler






Interest on cap-






ital $ 600.00






Net profit, one-






third 6,250.84 6,850.84






$20,552.52


$20,552.52



Another plan is^to disregard the apportionment of expenses to
departments and to use only the direct charges, as purchases;
freight inbotmd and wages; these would be set up against the
sales and the resulting balance after deducting inventories
would exhibit the gross departmental profit. The gross profits
are then carried to the credit of the general profit-and-loss
account, and the profit-and-loss accotmt is then charged with
all of the general and administrative expenses. The resulting
balance must, of course, be the net profit or net loss. This

1 L T 234-!22



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24



C. P. A. QUESTIONS AND ANSWERS §42



seems to be the plan reqtiired by the problem imder considera-
tion, but for illustrative purposes both plans are shown. The
manner of showing interest on capital should be noted; it has
been regarded as part of the profits and not an operating expense.

CAPITAL ACCOUNTS
Cutter's Account



Debits


Credits


Withdrawals
Balance, net wortb


$ 3,701.68
30,000.00


Investment
Interest on capital
Two-thirds net profit

Balance, net worth
Account


$20,000.00

1,200.00

12,501.68




$33,701.68
Fitler's


$33,701.68
$30,000.00


Debits


Credits


Withdrawals
Balance, net worth


$ 1,850.84
15,000.00


Investment
Interest on capital
One-third net profit

Balance, net worth


$10,000.00

600.00

6,250.84




$16,850.84


$16,850.84
$15,000.00



BALANCE SHEET

Cutter & Fitler

At Close of Business, December 31, 1912

Assets*



Cash




$ 2,896.14


Bills receivable




1,650.00


Accounts receivable




28,226.06


Prepaid taxes .




168.22


Prepaid insurance




57.30


Furniture and fixtures


$ 6,344.92




Less 10-per-cent. depreciation


634.49


, 5,710.43


Inventories






Clothing department


$14,466.23




Shoe department


4,913.62




Haberdashery department


5,028.96


24,408.81


Total assets




$63,116.96


Liabilities and Capital




Accounts payable




$12,518.30


Bills payable




5,598.66


Total liabilities
Capital

Amos Cutter




$18,116.96


$30,000.00




Hiram Fitler


15,000.00




Net worth of firm


45,000.00






$63,116.96



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§ 42 C. P. A. QUESTIONS AND ANSWERS



25



27. The capital accotints of the partners after placing
therein the withdrawals and profits are as here shown. Some-
times the withdrawals and profits are contained only in the
proprietcKr's account, in which case the capital accoimt contains
only the investment and remains imtouched.

28. Second Answer to Question 8. — ^The following plan
is very much along the line already explained, apportioning
expenses to the various departments. This method is interest—
ing and represents another idea of apportioning expenses and
general charges. The bad debts and depreciation might have
been apportioned also to departments, but then there wotdd
have been no use for a profit-and-loss account, which is required
by the question. The interest on capital is regarded as a general
expense. The balance-sheet and capital accounts are practically
the same as the ones already shown, and therefore need not be
given again.

DEPARTMENT TRADING ACCOUNTS

Cutter & Fitler

For Year Ended December 31, 1912

Clothing Department



Inventory, January 1,

1912
Purchases
Wages
Balance, gross profit



$12,689.54

36,148.83

2,867.50

17,483. 93

$69,189.80



Sales

Inventory,
31, 1912



December



$54,723.57
14,466.23



$69,189.80



Shoe Department



Inventory, January 1,

1912
Purchases
Wages
Balance, gross profit



$ 5,219.78

15,291.34

1,324.80

6,185. 52

$28,021.44



Sales

Inventory, December
31. 1912



$23,107.82
4,913.62

$28,021.44



Haberdashery Department



Inventory, January 1,

1912
Purchases



Balance, gross profit



$ 4,711.44

12,680.27

987.65

5,209.86

$23,589.22



Sales

Inventory, December
31, 1912



$18,560.26
5,028.96

$23,589.22



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26



C. P. A. QUESTIONS AND ANSWERS



§42



PROFIT-AND-LOSS ACCOUNT

Cutter & Fitler

For Year Ended December 31, 1912



Debits


Credits


General expenses


$ 1,834.19


Gross profit from




Office salaries


1,450.00


Clothing department


$17,483.93


Rent


3,000.00


Shoe department


6,185.52


Taxes, net


614.74


Haberdashery depart-




Insurance, net


330.09


ment


5,209.86


Bad debts written off


463.28






Depreciation of furni-








ture and fixtures


634.49






Total \


$ 8,326.79






Net profit


20.552.52
$28,879.31








$28,879.31



29. This question calls for a trading account for each
department. But as the salaries, expenses, rents, and taxes
are given as a whole, without reference to the amount that
is to be charged to each department, it is necessary to assume
that the expenses shall be apportioned in the ratio *of the
business as a whole that the volume of business bears to the
total expense. It is therefore probable that a just division
of the expense given should be shown as follows: Clothing
department, one-half; shoe department, one-third; haber-
dashery department, one-sixth. The amoimts as shown on
the ledger are as follows:



Amounts
Prepaid



Taxes

$782.96

168.22

$614774



Insurance
$387.39
57.30
$330.09



Expense
$1,834.19



Salaries
$1,450.00



Rents
$3,000.00



$1,834.19 $1,450.00 $3,000.00



A proportionate part of this charged to each department is
as follows:

DEPARTMENTS



Taxes

Insurance

Expenses

Salaries

Rents



Clothing

$ 307.37

165.04

917.11

725.00

1.500.00


Shoe ]

$ 204.91

110.03

611.39

483.34

1,000.00

$2,409.67


Haberdash

$ 102.46

55.02

305.69

241.66

500.00


$3,614.52


$1,204.83



$ 614.74

330.09

1,834.19

1,450.00

3,000.00

$7,229.02



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§ 42 C. P. A. QUESTIONS AND ANSWERS



27





RECAPITULATION


Amounts




Apportionment


Taxes

Insurance

Expenses

Salaries

Rents


$ 614.74

330.09

1,834.19

1,450.00

3,000.00


Clothing department,

one-half $3,614.52

Shoe department, one-
third 2,409.67

Haberdashery depart-
ment, one-sixth 1,204.83




$7,229^


$7,229.02



DEPARTMENT TRADING ACCOUNTS

Cutter & Fitler
For Year Ended December 31, 1912

Clothing Department
Section 1



Inventory, January 1,




Sales $54,723.57


1912


$12,689.54


Inventory, December


Purchases


36,148.83


31, 1912 14,466.23


Wages


2,867.50




Balance, gross profit


17,483.93
$69,189.80






$69,189.80



Section 2



Expenses

Salaries

Taxes

Insurance

Rents

Balance, net profit



$ 917.11

725.00

307.37

165.04

1,500.00

13,869.41

$17,483.93



Shoe Department
Section 1



Gross profit



$17,483.93



$17,483.93



Inventory, January 1,

1912
Purchases
Wages
Balance, gross profit



$ 5,219.78

15,291.34

1,324.80

6,185.52

$28,021.44



Sales $23,107.82

Inventory, December
31, 1912 4,913.62



$28,021.44



Section 2



Expenses

Salaries

Taxes

Insurance

Rents

Balance, net profit



$ 611.39

483.34

204.91

110.03

1,000.00

3,775.85

$6,185.52



Gross profit



$6,185.52



$6,185.62



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28



C. P. A. QUESTIONS AND ANSWERS § 42



Haberdashery Department
Section 1



Inventory, January 1,

1912
Purchases
Wages
Balance, gross profit



$ 4,711.44

12,680.27

987.65

5,209.86

$23,589.22



Sales $18,560.26

Inventory, December
31, 1912 5,028.96



$23,589.22





Section 2




Eraenses
Salaries


$ 305.69


Gross profit


$5,209.86


. 241.66






Taxes


102.46






Insurance


55.02






Rents


500.00






Balance, net profits


4,005.03
$5,209.86






\


$5,209.86



PROPIT-AND-LOSS ACCOUNT

Cutter & Fitler
January 1 to December 31, 1912



Bad debts written oflf $ 463.28

Interest on $20,000; 6
per cent. Cutter's cap-
ital 1,200.00

Interest on $10,000; 6
per cent. Fitler's cap-
ital 600.00

10 per cent, deprecia-
tion, $6,344.92, furni-
ture and fixtures 634.49

Balance, net profit for

distribution 18,752.52

$21,650.29



Net profit from trading
accounts
Clothing department $13,869.41
Shoe department 3,775.85

Haberdashery depart-
ment 4,005.03



$21,650.29



30. Question 9. — ^A single-entry set of books for 1912 is
sent to you with an order to state a profit-and-loss account for
the year and a balance sheet at December 31. The starting
capital was $34,500.

Accounts receivable, January 1, $26,500.00; December 31, $44,000.00
Accounts payable, January 1, 7,500.00; December 31, 9,750.00

Merchandise, January 1, 8,500.00; December 31, 9,500.00

Plant and machinery, January 1, 10,000.00; December 31, 10,000.00
Furniture and fixtures, January 1, 700.00; December 31, 700.00



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§42 C. P. A. QUESTIONS AND ANSWERS 29

A summary of the cash book for the year shows as follows:



Received

Accounts receivable


$30,000.00


Capital paid in


2,500.00


Disbursed




Bank overdraft, January 1


3,700.00


Accounts payable .


12,500.00


General expense


5,000.00


Wages


7,750.00


Personal account


1,500.00


Leaving a bank account of $2,000, and currency


on hand $50.



Provide 5 per cent, interest on capital disregarding additions
during the year and personal drafts, deducting 10 per cent, for
plant and machinery depreciation, 5 per cent, for fumittu-e and
fixttu*es, and 5 per cent, for bad-debts reserve.

31. Answer to Question 9. — ^At first glance this problem
may seem to be very simple, but a close study will show that it
is not. Many concerns are still using a single-entry system,
or one that is so called, because it requires less work than the
double entry. The purely single-entry set of books keeps
record only of personal accounts, but the desire for more details
has gradually broadened the bookkeeping system into a com-
promise between the single- and the double-entry system, and
is neither one nor the other.

Even without the trial balance, certain nominal accoimts
may be kept very accurately, so that required details may be
available for use in financial statements. All accotuits may or
may not be kept in the general ledger, but if not they can usually
be compiled from the cash-book entries and from other sources.
In the example under consideratiorv the assets and liabilities
at beginning and ending are stated, so that the net worth at each
period can be readily determined. This is illustrated in the ±wo
balance sheets shown herewith. The net capital on January 1,
1912, was $34,500 and on December 31, it was increased to
$53,265. The business is evidently that of aii individual trader,
and interest on investment is seldom considered imless there
are two or more partners to share in the division of profits.
Following are the balance sheets just referred to, the latter
containing an analysis of the capital account.



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30 C. P. A. QUESTIONS AND ANSWERS

BALANCE SHEETS
Beginning of Year, January 1, 1912



§42



Assets


Liabilities


Accounts receivable

Merchandise

Plant and machinery

Furniture and fixtures


$26,500.00

8,500.00

10,000.00

700.00

$45,700.00


Accounts payable
Bank overdraft
Capital


$ 7,500.00

3,700.00

34,500.00




$45,700.00



End


OF Year, December 31, 1912






Assets


Liabilities


Accounts receivable


$44,000


Accounts payable
Reserves for




$ 9,750


Merchandise


9,500






Plant and machinery


10,000


Depreciation


$ 1,035




Furniture and fixtures


700


Bad debts


2,200


3,235


Cash


2,050


Capital

Balance, Jan. 1










$34,500








Additional in-










vestment


2,500








Interest on










capital


1.725








Net profit


16,040








Total


$54,765








Less drawings


1,500


53,265




$66,250


$66,250



In order to prepare a statement of assets and liabilities
(balance sheet is not a desirable term to use in connection with a
single-entry system), it is necessary to take inventories and to
compile from various soiu*ces all of the assets and liabilities of
the .concern. When this has been done, the net worth can
readily be determined and the net profit for a given period can
be obtained by a comparison of the net capital at the beginning
and the end thereof, as is shown in the statements given here-
with. Then by a consideration of drawings, additional invest-
ments, etc., the actual net profit can be stated.

32. The question asks for a profit-and-loss accqimt, but as
many of the expense items are given it remains to determine the
purchases and sales on the plan here illustrated. If there have
been cash purchases and sales during the year, they can be
obtained by an inspection of the cash book.



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§42



C. P. A. QUESTIONS AND ANSWERS



31



Determining the Sales for 1912

Accounts receivable, December 31, 1912 $44,000.00

Collections during year 30,000.00

Total $74,000.00

Less accounts receivable, as on January 1, 1912 26,500.00

Balance, sales for year $47,500.00

Determining the Purchases for 1912
Accounts payable, end of year $ 9,750.00

Payments on accoimt during year 12,500.00

Total $22,250.00

Less accounts payable, January 1, 1912 7,500.00

Balance, purchases for year $14,750.00

When the purchases and sales are known, the profit-and-loss
accoimt can readily be compiled from data submitted by the
examiners. It is here stated in three divisions, but one or two
divisions would no doubt have served the purpose. Attention is
called to the fact that interest on capital is considered as a part

PROFIT-AND-LOSS ACCOUNT
For Year Ended December 31, 1912



Debits


Credits


Inventory, January 1,

1912
Purchases for year


$ 8,500.00
14,750.00


Sales for year $47,500.00


Less inventory, Decem-
ber 31


$23,250.00
9,500.00




Cost of sales
Gross profit carried
down


$13,750.00

33,750.00
$47,500.00






$47,500.00


General expense

Wages

Depreciation of
Plant and machinery
Furniture and fixtures
Reserve for bad debts


$ 5,000.00
7,750.00

1,000.00

35.00

2,200.00


Gross profit brought
down $33,750.00


Net profit


$15,985.00

17,765.00

$33,750.00






$33,750.00


Profits apportioned
Interest on capital
Balance on net profit
for division


$ 1,725.00

16,040.00
$17,765.00


Net profit brought down
for apportionment $17,765.00




$17,765.00



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

of the profits and not as an expense of the business. A cash
accoiint for the year can now be compiled easily from the details
given. The profit-and-loss account called for in the question
is shown on page 31.

^3. Question 10. — ^A manufacturing company, owning
many patents and constantly acquiring new ones, some by way
of outright purchase and about an equal number being taken out
as the result of the efforts of its own experimental department,
asks you to outline the best method of dealing with this account,



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