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the fiscal year" is to remain as before, the period has arrived
for the semi-annual dividend.

CONSOLIDATED BALANCE SHEET

Imperial Iron Company

March 31, 1913



Assets


Liabilities


Cash on hand
Goods on hand
Accounts receivable


$ 26,000.00

216,250.00

10,000.00


Accounts paya
Capital stock
Imperial

Iron Co.
Central Iron
Co.
Surplus
Acquired
Earned


ble $ 10,000.00
100,000.00

$ 1,000

99,000

$142,250.00
$81,000
61.250





$252,250.00


$252,250.00



If good-will had been considered for the increase of stock
of the Central Iron Company, then good-will $69,000 would
appear among the assets and siuplus would be increased to
$211,250.



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§43



C. P. A. QUESTIONS AND ANSWERS



15



SURPLUS ACCOUNTS



To capital per adjust-
ment, December 31,
1912

Balance



$ 69,000.00
142,250.00

$211,250.00



Balance, September 30,

1912 $100,000.00

Added, December 31.

1912 50,000.00

Added, March 31, 1913 61,25 0.00

$211,25006



The term undivided profits, as used in the question, may be
used instead of surplus. If good-will had been considered,
the present balance to surplus account would be increased by
$69,000.

12. Question 17. — ^The following figures are' taken from
the books of the Browning Stove Company on December 31 :



Inventory of finished goods, January 1

Inventory of raw materials, January 1

Purchase of raw materials

Sales

Wages

Rent

Discounts received on purchases

Discovmts allowed on sales

Power, light, and heat

Light and heat for office

Repairs

Packing

Factory expense

Gener^ expense

Factory insurance

General insurance

Machinery and plant

Tools

Commissions

Office salaries

Interest on loans

Salesmen's salaries

Loans payable

Discount lost '

Notes receivable

Notes receivable discounted

Notes payable

Accoimts receivable

Accoimts payable

Office furniture

Furniture and fixtures

Cash on hand

Cash in banks

Returned sales

Capital

Reserve for depreciation



$ 3,684.57

11,392.70

62,619.85

217,387.42

109,317.88

19,500.00

375.60

186.36

8,710.64

168.00

1,090.00

2,017.00

3,270.00

5,230.00

1,050.00

750.00

12,350.00

2.600.00

7,642.00

9,700.00

8,930.00

440.00

22,000.00

120.00

130.000.00

8,000.00

19,500.00

101,026.00

30,020.00

1,100.00

1,950.00

1,825.00

26,467.00

276.00

200,000.00

3,236.98



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16 C. P. A. QUESTIONS AND ANSWERS § 43

Reserve for bad debts $ 5,727.00

Freight and cartage inwards 727.00

Stable expenses 2,750.00

Horses, wagons, and harnesses 8,500.00

Postage and expressage 1,250.00

Superintendence 3,500.00

Taxes 250.00

Good-will 10,000.00

Stationery and printing 1,080.00

Advertising 8,630.00

Surplus, previous year 63,753.00

Prepare from these a trial balance, arranged in systematic
order as to balance-sheet accounts, assets and liabilities, and
profit-and-loss accounts, expenses and revenues, the expenses
divided between commercial and manufacturing, so as to facili-
tate the preparation of financial or business statements. Draft
journal entries for closing books. Prepare manufacturing,
trading, and profit-and-loss accoimts, and verify the results
here shown by a balance sheet. The following inventories
and adjustments are to be taken into consideration before
preparing the statements asked for:

Raw material $16,250.00

Finished goods , 9,386.00

Tools 2,000.00

Office furniture 1,000.00

Furniture and fixtures 1,500.00

Stationery and printing 300.00

Allow for depreciation: on machinery and plant, 5 per cent. ;
on horses, wagons, and harnesses, 10 per cent. ; reserve for bad
debts, 3 per cent, on accoimts receivable only. The item of
rent $19,500 is to be apportioned as follows: 53 per cent, for
factory, 22 per cent, for salesrooms, and 25 per cent, for office.
The item of superintendence $3,500 is to be divided three-
fifths to factory, and two-fifths to general expense.

13. -Answer to Question 17. — This question presents
many interesting points, and no doubt, was designed to test the
applicant's ability in charting and planning the ledger accounts,
as well as in setting forth the required information in suitable
business statements. There is usually too much disregard on
the part of bookkeepers, for the systematic arrangement of
ledger accoimts, and in many cases the ledger represents
a jumbled mass of accoimts opened on ledger pages regardless



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

of location, space required, classification, or logicaL division.
Before the ledger is opened, care should be taken in planning
the order in which the accounts should be shown therein, and
the number of pages to be allotted to each. Accounts that are
.likely to require two or more pages during the life of the ledger,
should be given sufficient space to accommodate the records
of said accoimts without having to be transferred to another
part of the ledger.

The arrangement of accoimts as shown in the trial balance,
is so conveniently planned that the usual statements can be
made up with very little effort. The location of accoimts may
not be satisfactory to some accountants, and the division may
not please in all cases, but that is immaterial as long as the
object is reached and satisfactory results attained. This order
or arrangement, however, has considerable merit and is worthy
of adoption, though any other convenient plan may suit just
as well.

14. The ledger accounts begin with the assets, arranged
in the order shown herein, and listed according to availability
in case of realization. Cash is first because it is available and
ready for use at any time. Accounts and notes of customers
come next, as they are most readily converted into cash. The
liabilities follow, and are arranged in the order in which they
will rank in the matter of payment or liquidation; notes and
accoimts are usually first demands, and capital stock the very
last. Following these are the expense accounts, which are
divided as among manufacturing, selling, and general. These
divisions will greatly facilitate the preparation of business and
financial statements and are advisable where a great number
of accounts are required. The expense accounts may be
arranged in alphabetical order, as shown under section of general
expenses.

As a rule, several pages are left blank ii^ each section for any
additional accounts that may be required during the course of
business. For instance, cash will appear on page 1 and good-
will on page 20; then skipping a few pages, notes payable
will follow on page 31. The expense or operating accounts



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18



C. P. A. QUESTIONS AND ANSWERS



43



TRIAL BALANCE, December 31
Assets
Cash on hand $ 1,825.00

Cash in bank 26,467.00

Notes receivable, per schedule 130,000.00

Accounts receivable, per schedule 101,026.00

Inventory of finished goods, January 1 3,684.67

Inventory of raw material, January 1 11,392.70

Tools • 2,600.00

Furniture and fixtures 1,950.00

Office furniture , 1,100.00

Horses, wagons, and harnesses ' 8,500.00

Machinery and plant 12,350.00

Good-will 10,000.00

Liabilities
Notes payable, per schedule
Notes receivable, discounted, per schedule
Accounts payable, per schedule
Loans payable, per schedule
Reserve for depreciation
Reserve for bad debts
Surplus, previous year
Capital

Revenues
Sales
Discounts received on purchases

Manufacturing Expenses
Purchases, raw material $ 62,519.85



Freight and cartage inwards

Wages

Power, Ught, and heat

Factory expenses

Factory "insurance

Superintendence, factory

Repairs

Rent of factory



Commercial Expenses



Advertising
Salesmen's salaries
Commissions
Returned sales
Discount on sales
Packing

Rent of salesrooms
Stable expenses

Discount lost
General expense
General insurance
Interest on loans
Light and heat, office
Office salaries
Postage and expressage
Rent for office
Superintendence, general
Stationery and printing
Taxes



General Expenses



727.00
109,317.88
8,710.64
3,270.00
1,050.00
2,100.00
1,090.00
10,335.00

8,630.00
8,930.00
7,642.00
276.00
186.36
2,017.00
4,290.00
2,750.00

120.00

5,230.00

750.00

440.00

168.00

9,700.00

1,250.00

4,875.00

1,400.00

1,080.00

250.00



$ 19,500.00

8,000.00

30,020.00

22,000.00

3,236.98

5,727.00

63,753.00

200,000.00

217,387.42
375.60



$570,000.00 $570,000.00



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§ 43 C. P. A. QUESTIONS AND ANSWERS



19



may then begin on page 51, and so on. For convenience,
the sections are often given 100 pages each, in which case

JOURNAL ENTRIES



Manufacturing account


$ 62,519.85




Purchases




$ 62,519.85


Manufacturing account


137,818.02




Freight inwards




727.00


Wages




109,317.88


Power, light, heat




8,710.64


Factory e:^)enses




3,270.00


Factory insurance




1,050.00


Superintendence




2,100.00


Rent, factory




10,335.00


Repairs




1,090.00


Reserve for depreciation




617.50


Tools account




600.00


Trading account


195,480.57




Manufacturing account




195,480.57


Sales account


276.00




Returned sales




276.00


Sales account


217,111.42




Trading account




217,111.42


Trading account


35,295.36




Advertising




8,630.00


Salesmen's salaries




8,930.00


Commissions




7,642.00


Discount on sales




186.36


Packing

Rent of salesrooms




2,017.00




4,290.00


Stable expenses
Reserve for depreciation




2,750.00




850.00


Profit and loss


7,963.08




Trading account




7,963.08


Discount on purchases


375.60




Ma:nufacturing accoimt




375.60


Profit and loss


28,543.78




Discount lost




120.00


General expense




5,230.00


General insurance




750.00


Interest on loans




440.00


Light and heat
Office salaries




168.00




9,700.00


Postage and expressage




1,250.00


Rent




4,875.00


Superintendence




1,400.00


Stationery and printing




780.00


Taxes




250.00


Office furniture




100.00


Furniture and fixtures




450.00


Reserve for bad debts




3.030.78


Surplus account


36,131.26




Profit and loss




36,131.26



Note. — ^To save space, explanations are omitted, also entries dealing with inventories.



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20



C. P. A. QUESTIONS AND ANSWERS § 43



the manufactiiring account shown herein will be on page 51
or 101, according to the plan followed. In the use of modem
loose-leaf and card ledgers of course these suggestions msy be
disregarded.

15. It will be noticed that the information contained in
the balance sheet is subdivided imder appropriate headings;,
this plan might be followed in the revenue statements also if
thought advisable. In many cases such divisions are to be
recommended, as they enable the unskilled person to compre-
hend the statements more readily without being required to
analyze for himself. This matter of subdividing statements,
however, may easily be overdone, and therefore subdivisions
should not be used too freely nor ^here imnecessary.



MANUFACTURING ACCOUNT
December 31



Debits


Credits


Inventory raw mate-




Cost of goods manufac-


rial January 1


$11,392.70


tured carried to trad-


Purchases raw material


62,519.85


ding account $195,104.97


Freight inwards


727.00
$74,639.65




Deduct






Discount






on pur- ,






chases $ 375.60






Raw ma-






terial on






hand 16,250.00


16,625.60




Material consumed


$ 58,013.95




Wages*


109,317.88




Power, light, and heat


8,710.64




Factory expenses


3,270.00




Factory insurance


1,050.00




Superintendence, fac-






tory


2,100.00




Rent of factory


10,335.00




Repairs


1,090.00




Depreciation






On machinery and






plant, 5 per cent.


617.50




On tools


600.00
$195,104.97






$195,104.97



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§ 43 C. P. A. QUESTIONS AND ANSWERS



21



TRADING ACCOUNT



V Debits


«


Credits


Inventory, finished




Sales for year $217,387.42


goods, January 1


$ 3,684.67


Less returns 276.00


Manufactured during




Net sales $217,111.42


year


195,104.97


Balance, loss, carried


Total


$198,789.64


to profit-and-loss ac-


Deduct




count 7,687.48


Finished goods on






hand


9,386.00




Cost of goods sold


$189,403.64




Advertising


8,630.00




Salesmen's salaries


8,930.00




Commissions


7,642.00




Discounts on sales


186.36




Packing

Rent of salesrooms


2,017.00




4,290.00




Stable expenses


2,760.00




Depreciation






Horses, wagons, and






harness


850.00
$224,698.90






$224,698.90



PROFIT-AND-LOSS ACCOUNT



Debits


Credits


Loss from trading, as




Balance, net loss carried


shown by trading ac-




to the debit of surplus


count


$ 7,687.48


account $36,131.26


Discount lost


120.00




General expense


6,230.00




General insurance


760.00




Interest on loans


440.00




Light and heat, office


168.00




Office salaries


9,700.00




Postage and expressage


1,260.00




Rent for office


4,876.00




Superintendence, gen-






eral


1,400.00




Stationery and






printing $1,080.00






Less invent






tory 300.00


780.00




i'axes


260.00




Depreciation of office






furniture


100.00




Furniture and fixtures


460.00




Reserve for bad debts.






3 per cent, on ac-






counts receivable


3,030.78
$36,131.26






$36,131.26



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22 C. P. A. QUESTIONS AND ANSWERS § 43

BALANCE SHEET

December 31
Current Assess

Cash on hand , $ 1,826.00

Cash in bank 26,467.00 $ 28,292.00

Notes receivable $130,000.00

Less notes under discount 8,000.00

$122,000.00

Accounts receivable, per schedule 101,026.00 223,026.00

Raw material on hand $ 16,250.00

Finished goods on hand 9,386.00 25,636.00

Personal Property

Tools in factory $ 2,600.00

Less depreciation 600.00 $ 2,000.00

Furniture and fixtures $ 1,950.00

Less depreciation 450.00 1,500.00

Office furniture $ 1,100.00

Less depreciation 100.00 1,000.00

Stationery and supplies 300.00

Fixed Assets

Horses, wagons, and harness $ 8,500.00

Machinery and plant 12,350.00

Total tangible assets $302,604.00

Good-will 10,000.00

$312,604.00

Current Liabilities

Notes payable, per schedule $19,500.00

Accounts payable, per schedule 30,020.00 $ 49,520.00

Loans payable * 22,000.00

Reserve Accounts

For depreciation $ 3,236.98

On horses, wagons, and harness, 10 per cent. 850.00

On machinery and plant, 5 per cent. 617.50 $ 4,704.48

For bad debts $ 5,727.00

On accounts receivable, 3 per cent. 3,030.78 8,757.78

Fixed Liabilities
Surplus $63,753.00

Less net loss 36,131.26 $ 27,621.74

Capital stock 200,000.00

$312,604.00

16. Question 18, — ^A proposition has been made for the
taking over of three corporations chartered by the state of
Pennsylvania by a fourth corporation to be chartered by the
same state. The following statement of affairs has been sub-
mitted by the three corporations proposed to be absorbed, and
f oimd to be correct :



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§ 43 C. P. A. QUESTIONS AND ANSWERS 23

Corporation No. 1 .



Capital stock, per value of shares $25


$1,000,000.00


Treasury stock


100,000.00


Bonded indebtedness


500,000.00


Treasury bonds


50,000.00


Accounts payable
Bills payable


80,000.00


50,000.00


Cash


50,000.00


Accounts receivable


180,000.00


Bills receivable


42,000.00


Supplies


18,000.00


Plant and franchise


1,250,000.00


Corporation No. 2




Capital stock, par value of shares $50


$1,000,000.00


Bonded indebtedness


500,000.00


Bills payable


10,000.00


Accounts payable


120,000.00


Cash


53,000.00


Accounts receivable


220,000.00


Bills receivable


80,000.00


Supplies


52,000.00


Plant and franchises


1,275,000.00


Corporation No. 3




Capital stock, par value of shares $25


$1,000.00



The proposition made to the three corporations is as follows:
Each corporation shall pay its own debts, and distribute among
its own stockholders whatever amount shall appear to the credit
of profit and loss in closing its books, treating the statements
rendered as being correct as to values. The remaining assets
are to be turned over to the promoters of the new corporation
on the following terms: The capital stock of corporations
Nos. 1 and 2 at 20 per cent, premiimi in cash, and $100,000 in
cash to be paid for the capital stock of corporation No. 3. The
bonds of the two corporations will be purchased at a premiimi
of 5 per cent. The proposition was accepted. Give closing
entries for the books of the old corporations. Organize the
new corporation with a capital of $1,000, and increase to such
an amoimt as may be deemed necessary, carrying the expenses
of incorporation through cash, including $5,000 counsel fees.
Provide for an issue of bonds sufficient to carry out this agree-
ment, said bonds to be sold at 10 per cent, discount, and also
provide for $150,000 bonds in treasury, and give a balance sheet
of the new corporation after the organization.



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24 C. P. A. QUESTIONS AND ANSWERS § 43

17. Answer to Question 18. — ^This proposition is an
excellent one for drawing out the candidate's ability in the
analysis of intricate corporate adjustments. Many inter-
esting facts are involved and some of them are hard to interpret.
For instance, what debts are to be paid by each company is
subject to conjecture, because there is not sufficient cash on
hand in either of the companies to carry out the agreement.
To. meet this requirement it is assumed that enough of the
accounts receivable have been collected to provide sufficient
funds for settlement of ciurent liabilities and for the distribu-
tion of surplus profits. If more of the accounts receivable
had been realized upon there would be an equivalent amount
of cash on hand to be turned over to the new company.

The bonded indebtedness of each of the first two companies
is given as $500,000, but as Corporation No. 1 has unsold bonds
of $50,000 it is assumed that only $450,000 has been sold. If
the term indebtedness is interpreted to mean outstanding, then
the amount must be increased to $500,000. On this basis, the
purchase price at 105 will be $525,000, instead of $475,260,
as shown in the solution.

The question says to reincorporate the new company for
such an amount as may be deemed necessary, and to issue bonds
sufficient to carry out this agreement. This is taken to mean
the amoimt required after the increase of capital stock to pro-
vide the funds needed to complete the purchase of stocks and
bonds contracted for, including treasury bonds, expenses, etc.
To complete the incorporation of the company the capital stock
is therefore increased from $1,000 to $2,000,000 and a .bond
issue provided for the same amoimt. The bonded debt might
well have been increased, but the valuation of plant, which con-
stitutes the security for bondholders, is not sufficient to justify.

Treasury Stock No. 1 has been taken as stock that had not
been issued, thus leaving a capital outstanding of $900,000.
Treasury bonds were treated in like manner, and interest
accrued on same not considered.

18« It is asstmied that the consolidation was brought about
by promoters through whom the transfers of securities and



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26



C. P. A. QUESTIONS AND ANSWERS § 43



assets would be made, and the adjusting entries have been made
accordingly. Other methods of adjustment may be assumed
as readily with similar results. Indeed, the promoters, by
means of good-will, might have greatly increased the value of
properties turned over to the new company. The bond dis-
count of the three companies has been charged to the separate
franchise accounts in proportion to* cost, but it would not be
wrong to open a separate accoimt for bond discount. In the
combined statements of the three companies, the cleared coltman
of each company shows the status of the accoimts turned over
to the promoters of the new company, the stock at 120, and the
bonds at 105. All outstanding debts have been paid, as agreed
on, but to do so part of the accounts receivable had to be
collected to provide sufficient cash as before explained. If
more had been realized from accoimts receivable, the cleared
columns would show cash on hand and an equivalent
reduction in accoimts receivable. Bonds outstanding of
Company No. 1 are taken as $450,000, on the presumption
that the amoimt authorized is $500,000. It will be seen
that Company No. 3 has no assets listed, and that the
surplus of Company No. 1 and Company No. 2 had been
paid to stockholders.



BOOKS OF CORPORATION NO. 1
Summary

The cash paid by the promoters did not go through the books of the
liquidating companies but to the individual holders of the stocks and
bonds in proportion to their holdings. The amounts to be divided are
as follows:

Paid by promoters
Purchase of bonds $ 450,000.00

Premium on bonds 22,500.00

Purchase of stock 900,000.00

Premium on stock 180,000.00

Total investment



$1,552,500.00



Cash Account



Balance

Accounts receivable



$ 50,000"".00
140,000.00



$190,000.00



Bills payable
Accounts payable
Surplus dividend to
stockholders



$ 50,000.00
80,000.00

60,000.000
$190,000.00



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§43



C. P. A. QUESTIONS AND ANSWERS



27



Adjusting Entries

Promoters of new company $1,350,000.00

Sundry assets

Plant and franchise 1,250.000.00

Supplies 18,000.00

Bills receivable 42,000.00

Accounts receivable 40,000.00



$1,350,000.00



Capital stock $ 900,000.00

Bonded indebtedness 450,000.00

Promoters of new company $1,350,000.00

For assets turned over to promoters of new company, per agreement,
for capital stock canceled and taken, and for assumption of bonded
indebtedness.

Capital stock $100,000.00

Treasury stock $100,000.00

Bond account 50,000.00

Treasury bonds 60,000.00

BOOKS OF CORPORATION NO. 2

Summary of Adjustments

The cash paid by promotors did not go through the books but to the
holders of the securities and treated as in No. 1, and as follows:



Cost to promoters
Purchase of bonds
Premiums on bonds
Ptu*chase of stock
Premium on stock
Total investment



$ 500,000.00

25,000.00

1,000,000.00

200,000.00

$1,725,000.00



Cash Account



Balance

Accounts receivable



$ 53,000.00
127,000.00



^180,000.00



Bills payable
Accounts payable
Surplus, dividend
stockholders



to



$ 10,000.00
120,000.00

50,000.00
$180,000.00



$1,500,000.00



Adjusting Entries

Promoters of new company $1,500,000.00

Sundry assets

Plant and franchise 1,275,000.00

Supplies 52,000.00

Bills receivable 80,000.00

Accounts receivable 93,000.00

Capital stock $1,000,000.00

Bonded indebtedness 500,000.00

Promoters of new company $1,500,000.00

For assets turned over per agreement, and for assimiption cf capital
and bonded indebtedness, both stocks and bonds having been purchased
by said promoters from the holders thereof.

I L T 234-25



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28 C. P. A: QUESTIONS AND ANSWERS § 43

BOOKS OF CORPORATION NO. 3

Evidently no books have been opened and no doubt the company has
recently been incorporated. There is a capital stock of $1,000 but no
assets listed. The promoters paid $100,000 to the stockholders for this
stock.

Adjusting ENXRms

Promoters of new company $1,000.00

Deficit, or assets withheld $1,000.00

Capital stock $1,000.00

Promoters of new company $1,000.00

For capital stock transferred as per
agreement.

Summary of Investment

Amount paid by promoters to three corporations by which the entire
ownership therein is acquired:

Cash Investment

Capital stock of Corporation No. 1 $ 900,000.00

Premium of 20 per cent. 180,000.00 $1,080,000.00

Capital stock in Corporation No. 2 $1,000,000.00

Premium of 20 per cent. 200,000.00 1,200,000.00

Bonds of Corporation No. 1 $ 450,000.00



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