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direct provision in the partnership agreement relative to losses?

2. Answer to Question 14. — The following capital
accounts and profit-and-loss accoimts are clear enough with-
out additional comment. C's salary of $2,500 for the half year
is credited as per contract, and his drawings are assumed to
have included this amount.

COPYRIOHTED BY INTERNATIONAL TEXTBOOK COMPANY. ALL RIGHTS RESERVEQ

§43



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C. p. A. QUESTIONS AND ANSWERS



§43



In the event of a loss of $75,000, as suggested in the ques-
tion, this amount plus interest on capital aggregating, $83,250
would be charged in equal proportions to the three partners,
giving to each $27,750. This is on the assumption that no





PARTNERS'


ACCOUNTS






A's Account




1914




1914




.une30, Cash
. une 30, Balance


$ 12,500.00


Jan. 1, Balance
June 30, Interest


$150,000.00


170,916.67


4,500.00






June 30, Gain


15,000.00






Gain


13,916.67




$183,416.67


$183,416.67






July 1, Balance


$170,916.67




B's Account




1914




1914




.une 30, Cash


$ 10,000.00


Jan. 1, Balance


$100,000.00


. une 30, Balance


116,916.67


June 30, Interest
June 30, Gain


3,000.00






10,000.00






Gain


13,916.67




$126,916.67




$126,916.67






July 1, Balance


$116,916.67




C's Account




1914




1914




Tune 30, Cash


$ 3,750.00


Jan. 1, Cash


$25,000.00


June 30, Balance


38,416.66


June 30, Salary
June 30, Interest


2,500.00






750.00






June 30, Gain


13,916.66




$42,166.66




$42,166.66






July 1, Balance


$38,416.66


DISTRIBUTIOI


s[ OF PROFITS






June 3


0, 1914




Profits for distribution






$75,000.00


Less interest on capital






Interest due A




$ 4,500.00




Interest due B




3,000.00




Interest due C




750.00


8,250.00
$66,750.00


Balance for distribution




66,750.00


Deduct amounts due A and B






Due A, three-fifths of $25,000


$15,000.00




Due B, two-fifths


of $25,000


10,000.00


25,000.00


Balance for equal division




$41,750.00


A's one-third share


$13,916.67




B's one- third share


13,916.67




C's one-third share


13,916.66


$41,750.00



direct provision has been made in reference to losses. Each
partner would of course be credited with interest on capital
per agreement. With reference to the assumed loss, if the



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43



C. P. A. QUESTIONS AND ANSWERS



existing agreement between the partners implied a similar
application in case of losses, then the matter of apportioning
said losses would provide an interesting problem.

3. Question 15. — The Zebley Garment Company who
were burned out on the night of September 16, 1912, filed with
the insurance companies a claim for $95,436.70, which it is
necessary to verify or disprove. The following balance sheet
was fotmd as of August 1, 1912:

BALANCE SHEET
August 1, 1912



Assets




Liabilities




Cash


$ 9,224.67


Accounts payable
Bills payable


$ 59,611.46


Accounts receivable


88,669.43


42,183.24


Bills receivable


2,473.62


Capital stock


50,000.00


Merchandise inventory


42,618.97


Surplus


14,203.16


Machinery


20,419.04






Furniture and fixtures


2,000.00






Prepaid taxes and in-








surance


592.13
$165,997.86


Total




Total


$165,997.86



At the close of business September 16, their ledger showed
the following balances:

LEDGER ACCOUNT
September 16, 1912



Capital stock




$ 50,000.00


Surplus




14,203.16


Cash


$ 5,418.22




Accounts receivable


118,871.14




Bills receivable


6,217.24




Accounts payable
Bills payable




72,898.66




63,114.02


Machinery


21,619.34




Furniture and fixtures


2,147.30




Inventory, August 1, 1912


42,618.97




Dividends


6,000.00




Sales




162,917.31


Merchandise purchases


103,430.22




Labor


37,619.14




Power, light, and heat


3,716.47




Factory expense


7,119.11




Office salaries


2,250.00




Office expenses


319.54




Selling expenses


4,716.92




Insurance


318.16




Taxes


751.38






$363,133.15


$363^133X5



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4 C. P. A. QUESTIONS AND ANSWERS § 43

The company*s gross profits on sales has been very uniform,
averaging 20 per cent, ever since the business was started;
10 per cent, for depreciation has been written off every year
from machinery and furniture and fixtures. Insurance policies
covering merchandise, machinery, furniture, and fixtures aggre-
gate $100,000 and all contain the 80 per cent, coinsurance
clause. The merchandise and furniture and fixtures were a
total loss. The salvage in machinery is valued at $2,500, at
which value the insured decided to retain it. Prepare state-
ment of claims against the insurance companies:

4. Answer to Question 16. — ^The question asks only for
a statement of claim against the insurance companies, but this
necessitates the determining of values at the time of the fire.
To do this requires an analysis of the figtu*es presented and
the establishment of an equitable valuation of the properties
destroyed. In a manufacturing business, the direct manu-
facturing charges form a part of the cost of goods destroyed
and should be included; this is particularly the case with goods
in the process of manufacture. The direct costs shown in
the question, however, are applicable to goods that have been
completed and sold, as well as to those still in process; there-
fore, these goods must be considered in the aggregate instead
of separately. In the manufacturing costs are included labor,
power, light, and heat, and factory expenses, as is shown by
the accompanying statement. It would be proper, no doubt,
to add a portion of the insurance and taxes also if the portion
applicable to the 1| months of operation could be determined.
Depreciation of machinery for IJ months would be a proper
charge if considered; it is included, however, in the inventory
valuation itself, so it is inadvisable to write off further depre-
ciation. The fact that 10 per cent, has been written off annually
does not mean that the book figtu*es present a true valuation;
it may be worth considering more than the amoimt shown.
The inventory of furniture and fixtures is admitted at book
value, though it is prudent to write it down. In an extraor-
dinary case such as this, it would seem advisable to include
in the cost of manufactured goods a portion of the general and



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§ 43 C. P. A. QUESTIONS AND ANSWERS 5

administrative expenses. No doubt a portion, at least, would
be directly applicable thereto in the same manner as labor
and direct factory expenses.

5. The matter of doubt in the consideration of a case like
this suggests to the accotmtant the desirability of a conser-
vative decision in making up the claim for goods destroyed.
It might even be claimed by the manufacturer that the goods
were worth more than the bare ntianufacturing cost, on the
assumption that if purchased elsewhere a higher price would
have to be paid. It is evident that the company's claim for

. $95,436.70 contains either estimated profits or considerably
more loading than we have admitted, as it seems impossible
to. reconcile it with the information submitted. No doubt
the accotmtant after investigation determined that the gross
profit for the past years averaged 20 per cent., while the com-
pany's officials were estimating differently. The gross profit
on sales would have to be estimated at about 35 per cent, to
result in a claim such, as the one presented by the company.
The 20-per-cent. gross profit is taken on the cost of sales and
not on the selling price, as is so frequently done in trading con-
cerns. Where costs are well established, as in a manufacturing
business, percentages may be based on the cost price instead
of on the sales. In arranging the gross profit, however, con-
siderable care should be exercised to see that the elements of
cost are maintained tmiformly from year to year. The adjust-
ers are therefore asked to determine or estimate the amotmt of
loss. The insured, on the other hand, is not bound to accept
the damage claim decided upon by the adjuster, in which case
some other expediency must be resorted to. Possibly accoimt-
ants and appraisers may have to be employed or some equitable
plan of settlement decided upon. Sometimes the courts are
resorted to for decisions.

6. Insurance companies usually reserve the right to replace
or rebuild damaged property in case reasonable cash settle-
ments cannot be made. The companies are interested in pre-
venting loss by fire, and therefore maintain in large cities what



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6 C. P. A. QUESTIONS AND ANSWERS § 43

are known as fire patrol, underwriters' patrol, salvage corps,
etc. It is their duty to visit the scene of the fire and to save
as much property as possible. The expense of maintenance
is met by the different companies, and their equipment is in
every way adapted to salvage duty. Salvage has reference
to the goods saved from loss by fire; in this example, it amounts
to $2,500. It is presumed, of course, that the books and records
have all been secured.

The aggregate insurance carried is $100,000, which is con-
siderably above the value of property owned at the time of the
fire. Sometimes a blanket or open policy not to exceed a

STATEMENT OF CLAIM FOR LOSS BY FIRE
September 16, 1912



Value of merchandise inventory, August 1, 1912


$ 42,618.97


Merchandise purchases between August 1, 1912,




and September 16, 1912


103,430.22


Total merchandise


$146,049.19


Add manufacturing charges




Labor paid $37,619.14




Power, light, and heat 3,716.47




Factory expense 7,119.11


48.454.72


Total cost of merchandise


$194,503.91


Deduct cost of goods sold


135.764.43


Sales $162,917.31-^120




The gross profit has been uniform for several




years at 20 per cent.




Value of merchandise destroyed


$ 58,739.48


Add value of properties destroyed




Machinery, book value




August 1, 1912 $20,419.04




Additions between




August 1 and Sep-




tember 16 1,200.30 $21,619.34




Less salvage retained 2,500.00


19,119.34


Furniture and fixtures, value August




1, 1912 $ 2,000.00




Additions between August 1 and Sep-




tember 15 147.30


2,147.30



Total damage claim $ 80,006.12

Certificate

I hereby certify that the above statement of
claims is in accordance with the books, and that in
my judgment it represents a fair basis for settle-
ment.

R. J. Bennett, Certified Public Accountant

September 18, 1912



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§43



C. P. A. QUESTIONS AND ANSWERS



specified amount is made out to cover the value of goods on
hand at any time. This is desirable where goods are not main-
tained at any fixed amount or quantity, and in case of fire the
amount of loss must be determined. It seems evident that
the case imder consideration includes the open policy, though
it is probable that an ordinary policy had been taken out on
machinery and fixtures.



7. The problem calls for only a statement of fire claim
against the insurance companies, which is presented herewith,
but a profit-and-loss statement and balance sheet have been
added, as they will increase the value of the answer as a lesson
in accountancy. The statement of claim would no doubt be
accompanied by the accoimtant's letter to the client who
engaged his services.

BALANCE SHEET ^

As ON September 16, 1912, After Adjustment of Fire Loss With

THE Insurance



Assets


Liabilities


Cash

Accounts receivable
Bills receivable
Machinery, salvage

valuation
Claims for fire loss
. a'g a i n s t insuramie

companies


$ .5,418.22

118,871.14

6,217.24

2,500.00

80,006.12
$213,012.72


Accounts payable
Bills payable

Total liabilities
Present net capital
of company


$ 72,898.66
63,114.02


Total assets


$136,012.68

$ 77,000.04
$213,012.72



ANALYSIS OF CAPITAL ACCOUNT-



Capital stock paid up
Surplus, August 1, 1912
Less dividends paid

Net profit for li months
Present capital



$14,203.16
6,000.00



$50,000.00

8,203.16

1 8,796.88

$77,000.04



The books should be adjusted to agree with the results here
shown.



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8 C. P. A. QUESTIONS AND ANSWERS § 43

OPERATING AND PROFIT- AN D-LOSS ACCOUNTS
From August 1, 1912, to September 16, 1912
Credits

Sales for 1 J months $162,917.31
Fire claim appraised by insurance companies

for goods destroyed 58,739.48

Fire claim for machinery, appraised 19,119.34

Fire claim furniture and fixtures, appraised 2,147.30

Total credits $242,923.43
Charges

Merchandise inventory, August 1, 1912 $ 42,618.97

Merchandise purchases 103,430.22

Labor 37,619.14

Power, light, and heat 3,716.47

Factory expense 7,119.11

Cost of merchandise $194,503.91

Office salaries 2,250.00

Office expenses 319.54

Selling expenses 4,716.92

Insurance 318.16

Taxes 751.38

Fire loss, furniture and fixtures 2,147.30

Fire loss, machinery 19,119 .34

Total charges $224,126.55

Net profit • $ 18,796.88

8. Question 16. — ^The following is abstracted from an
agreement of merger and consolidation made December 31,
1912, between the Imperial Iron Company and the Central
Iron Company. Both companies were organized imder the
laws of Pennsylvania and agreed to merge and consolidate into
a single corporation. The name of the corporation formed by
said consolidation was the Imperial Iron Company.

The amount of capital stock of the new corporation is
$100,000, all of which shall be common stock, divided into
1,000 shares of a par value of $100. The manner of distributing
capital stock shall be as follows: The capital stock of the
Imperial Iron Company shall be exchangeable for capital stock
of the new corporation share for share, and the balance of the
capital stock of the new corporation hereby formed shall be
distributed to the stockholders of the Central Iron Company,
in proportion to their present holdings.

The Imperial Iron Company was incorporated shortly before
the date of the merger, and had transacted no business except
the issuance of ten shares capital stock, $100 each, for which
payment of $1,000 had been received, and which was in the



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§ 43 C. P. A. QUESTIONS AND ANSWERS 9

treastiry of the company on the date of the merger. Directly
after the merger this sttm was transferred to the bank-desposit
account of the consolidated company and credited to an accoimt
called "Suspense."

The Central Iron Company had for a number of years been
actively engaged in business. Its fiscal year ended Septem-
ber 30, 1912, at which time an inventory was taken and its
accoimts had been properly closed. At the date of the merger
the following trial balance was drawn from the books;

TRIAL BALANCE

December 31, 1912
Cash $ 20,000.00

Accounts receivable 15.000.00

Merchandise inventory, September 30, 1912 130,000.00

Merchandise purchases 250,000.00

Expenses 25,000.00

Accounts payable .$ 10,000.00

Sales 300,000.00

Capital stock 30,000.00

Undivided profits, balance September 30, 1912 100,000.00

$440,000.00 $440,000.00

The accoimt books of this concern were not closed at the date
of the merger and no inventory was taken. Although the
exchange of capital stock was effected and all business, after
December 31, 1912, was transacted imder the name of the
Imperial Iron Company, it was not until March 31, 1913, that an
accotmtant was asked to state the accotmts of the new company
from the date of consolidation. On March 31, 1913, before the
accotmtant had commenced his work, an inventory was taken
which showed the value of merchandise on hand as at that date
to be $216,250. The following is the trial balance of that date :

TRIAL BALANCE
March 31, 1913
Cash $ 26,000.00

Accounts receivable 10,000.00

Merchandise inventory, September 30, 1912 130,000.00

Merchandise purchased 600,000.00

Expenses 60,000.00

Accounts payable $ 10,000.00

Sales ^ 685,000.00

Suspense 1,000.00

Capital stock 30,000.00

Undivided profits 100,000.00

$826,000.00 $826,000.00



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10 C. p. A. QUESTIONS AND ANSWERS § 43

Prepare a balance sheet of the consolidated company, as at
March 31, 1913, and a profit-and-loss account arranged to
show the profits of the consolidated company for the 3 months
ended March 31; and of the Central Iron Company for the
3 months ended December 31; also statement showing the dis-
position of profits taken over by the new company. State
what basis was used in determining the approximate value of
merchandise on hand December 31.

9. Answer to Question 16. — In this question the require-
ments are a balance sheet of the consolidated company on
March 31, 1913; a profit-and-loss accotint for the consolidated
company for the 3 months ended March 31, 1913; a profit-
and-loss account of the Central Iron Company for the 3 months
ended December 31, 1912; a statement showing disposition of
profits taken over by the new company; and the basis of deter-
mining the approximate value of merchandise on hand Decem-
ber 31, 1912. Adjusting journal entries might also be of advan-
tage in providing a clearer exhibit of the necessary adjustments.

The Imperial Iron Company had just been incorporated and
had not begun operations. Its authorized capital stock is not
given, but $1,000 has been subscribed and paid in, and is still in
the treasury; this amount is to be turned over to the new com-
pany and credited to a suspense accoimt, and an equal amount
of the new company's stock received. It is credited to this
account temporarily and a proper adjustment will be made later.

The Central Iron Company is an established company, and
its fiscal year ended September 30, 1912. It has a capital stock
of $30,000, and a surplus of $100,000, making a total capital
of $130,000. On December 31, 1912, the consolidation took
place, the exchange having been effected on the basis of accotmts
shown by the trial balance of that date without closing the
ledger. By the terms of the amalgamation, the stockholders
of this company are to have all of the stock but $1,000 and will
receive certificates for $99,000 in exchange for $30,000 of the
stock of the old company; this is an increase of $69,000.

10. The capital and surplus of the Central Iron Company
increase from $130,000, on September 30, to $180,000 on Decem-



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§43 C. P. A. QUESTIONS AND ANSWERS 11

ber 31. The increase of capital from $30,000 to $99,000 may
be adjusted into surplus, as shown in the accompanying state-
ments, or the $69,000 may. be charged to good-will 'accoimt.
If the latter plan is followed, the surplus on January 1, 1913,
will show a credit of $150,000, and on April 1, $211,250. Either
plan may be followed. In the first plan, the Central Iron Com-
pany turns over a surplus of $81,000 over and above the amoimt
of stock received. This is now owned by the consolidated com-
pany, but as the stockholders in the former company own practi-
cally all of the stock of the new and amalgamated company
they are not losing anything by making the liberal donation
of surplus profits. Except for the piapose of reorganizing and
increasing its capital stock, or possibly for the piapose of
changing its name, no gain will accrue to the Central Iron Com-
pany by the so-called merger and consolidation. It could have
declared a special stock dividend payable out of surplus profits
and have provided for same by an increase of capital stock.

11. The question asks for an approximate valuation of
inventory as on December 31, 1912. The first step, as shown
by the merchandise account, is to determine the gross gain
for the entire 6 months ended March 31, 1913, which amoimts
to $171,250. It will be noted that this gain is just one-fotuth
of the sales or one-third of the cost of goods sold; therefore, the
gains for the first 3 months may be considered as having been
in the same proportion. The sales for the 3 months ended
December 31, 1912, were $300,000; and if one-fourth of this
amoimt represents profits, the cost of goods sold must have
been $225,000. Deducting this amount from $380,000, the
cost of all goods to that date gives $155,000 as the value of
merchandise on hand. By adding together the gross gain in
trading and profit-and-loss accotmts it will be foimd that they
equal the amoimt shown by the merchandise account, $171,250.

The surplus account is included for the purpose of showing
the disposition of profits taken over from the Central Iron
Company. It is presumed that the books formerly used by
the Central Iron Company are continued; the adjusting
entries that follow are made on this presumption. The

ILT 234—24



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12



C. P. A. QUESTIONS AND ANSWERS



§43



various official steps required in the consolidation of the
two corporations, the transfer of assets and liabilities, etc.,
must be* carried out to the letter. These steps wiU not
vary to any great extent from those required in the amalga-
mation of two unincorporated concerns into one corporation.
The adjusting entries are made on the dates indicated but the
usual routine entries have been omitted.

ADJUSTING ENTRIES
December 31, 1912
Cash $ 1,000.00-

Suspense $ 1,000.00

For amount of cash turned over by
Imperial Company, per agree-
ment this day.
Profit and loss 50,000.00

Surplus 50,000.00

Transfer of profits of Imperial Iron
Company.
Surplus 69,000.00

Capital stock 69,000.00

For transfer of surplus profits to
capital account for account of
Imperial Iron Company, per
agreement.
Suspense , 1,000.00

Capital stock 1,000.00

For transfer of amount credited to
suspense account.

March 31, 1913
Profit and loss 62,250.00

Surplus 62,250.00

For transfer of net gain for 3 months
to surplus account.



MERCHANDISE ACCOUNT




March 31. 1913




Debits


Credits


Inventory, September

30. 1912 $130,000.00
Purchases 600,000.00


Total sales for
months


6
$685,000.00


Total $730,000.00
Less inventory, March
31, 1913 216,250.00






Cost of sales $513,750.00
Gross gain 171,250.00






$685,000 00


$685,000.00




Balance, gross gain


$171,250.00



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§ 43 C. P. A. QUESTIONS AND ANSWERS



13



TRADING AND PROFIT-AND-LOSS ACCOUNTS

Central Iron Company

December 31, 1912



Debits



Inventory, September
30, 1912

Purchases
Total

Less inventory, Decem-
ber 31, 1912

Cost of goods sold

Gross gain



Expenses
Net gain
C^ried to suspense
account



$130,000.00

250,000.00

$380,000.00

155,000.00

$225,000.00

75,000.00

$300,000.00

$ 25,000.00
50,000.00

$ 75,000.00



Credits



Sales for 3 months $300,000.00



$300,000.00



Gross gain brought
down $ 75,000.00

$ 75,000.00



BALANCE SHEET

Central Iron Company

December 31, 1912



Assets


Liabilities


Cash on hand ^ $ 20,000.00
Accounts receivable 15,000.00
Goods on hand 155,000.00


Accounts payable $ 10,000.00

Capital stock 30,000.00

Surplus, Sep-
tember 30,
1912 $100,000

Add net gain 50,000 150.000.00


$190,000.00


$190,000.00



This exhibit shows the condition of the company at the
time of consolidation. The capital and surplus of $180,000
is given in exchange for $99,000 of stock of the new company.
This does not change the actual total value back of the
shares, although it does change the book value of- each share.
On a basis of equal earnings during any period there would be
the same amotint to distribute in dividends. This distribution
would return the same amount in doUars to each shareholder
but the per cent, on the total face value of the shares held
wotdd be less; there being now shares held to the value of
$99,000 in place of $30,000.



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14



C. P. A. QUESTIONS AND ANSWERS

TRADING AND PROFIT-AND-LOSS ACCOUNTS

lupERiAi. Iron Company

Three Months Ended March 31, 1913



43



Debits


Credits


Inventory, January 1,

1913
Purchases

Less inventory, Marcb

31, 1913
Cost of goods sold
Gross gain


$155,000.00

350,000.00

$505,000.00

216,250.00

$288,750.00

96,250.00

$385,000.00

$ 35,000.00

61,250.00

$ 96,250.00


Sales for 3 months

Gross gain brought
down


$385,000.00


Expenses
Net gain
Carried to surolus


$385,000.00

$ 96,250.00
$ 96,250.00



The net gain is carried to surplus account where it will
await the disposition to be made of it by the directors. If



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