Accounting theory and practice, Volume 1 (of 3)

Controlling Accounts

1. From the following data prepare controlling accounts. Indicate beside each entry its source book. Balance and close the accounts.

• Sales $10,000.
• Purchases returns and allowances $200.
• Credit given customers for cash received $5,000.
• Purchases $16,000.
• Sales discount $180.
• Notes payable issued to creditors $8,000.
• Customers’ notes dishonored $100.
• Credit received for cash paid to creditors $4,000.
• Notes received from customers $1,000.
• Purchase discount $80.
• Bad accounts charged off $100.
• Freight prepaid on sales $60.

2. Journalize the following transactions:

3. Draw up rough forms of a general journal, sales journal, sales returns and allowances journal, purchase journal, purchase returns and allowances journal, cash book, and note journals, as used in a controlling account system, and make entries of the following transactions therein:

Partnership—Formation

4. A has $5,000 invested in a business. He sells B a half-interest for $2,000, and places the money in the business. Make the entry.

5. X and Y bought merchandise to the amount of $12,000. X contributed $7,500; Y $4,500. They afterwards sold Z a one-third interest for $6,000. How much of this amount should X and Y receive respectively in order to make X, Y, and Z equal partners, assuming:

6. A and B carried on business in partnership and divided profits and losses in proportion to their capital, three-fifths and two-fifths, respectively. On January 1, 19—, A’s capital was $52,500, and B’s $35,000, as shown by a balance sheet of that date. They agreed to admit C as a partner from the same date on the following terms:

7. New, Knott, and Moore are partners, sharing profits in the proportion of their investments. On December 31, 1920, the balance sheet of the partnership is as follows:

Moore decides to retire from active business and agrees to sell his interest to the other two partners for $26,400, taking $14,400 in cash and the balance in three equal instalments payable July 2, 1921, January 2, 1922, and July 2, 1922, evidenced by notes payable.

The business is very prosperous, but it becomes increasingly evident that more capital is required, especially in view of the approaching maturity of the first note given to Moore. New and Knott decide to admit John Less as partner as of date July 1, 1921, at which time the current assets have increased by $16,000, accounts payable by $10,000, and the partners’ capital accounts by $6,000. They value the good-will at $12,000.

Less buys a one-third interest, but stipulates that all he pays must remain in the business and that the good-will shall not appear upon the books.

How much must he pay for the one-third interest? Present the balance sheet of the firm of New, Knott & Less as of July 1, 1921. (Ignore accrued interest on Moore notes.)

Partnership—Operation

8. A, B, and C are partners. A is to receive a salary of $2,000 per annum, B $2,500, and C $3,000. The balance of profits, after payment of salaries, is to be divided as to the first $20,000, 2/3 to A, and 1/6 each to B and C; and profits above $20,000 are to be divided equally among the three. A retires from active business, and gives up his right to salary for 19—. The profits for the year, before charging salaries, amount to $35,000. To what extent are A, B, and C, respectively, affected by A’s concession?

9. A and B, partners, finding themselves in want of further capital in their business, and both being possessed of real property, A deposited deed with the bankers of the firm as security for a loan of $2,000 to the firm. B arranged on some of his own property a mortgage for $1,500 with a private friend and paid the proceeds into the firm’s bank account. The bankers were eventually obliged to realize the security held by them which produced, after payment of all expenses, the sum of $2,850.

Prepare entries recording these transactions in the firm’s books.

10. In making an audit of the books of the partnership of A and B, you find that the agreed division of profits was to be on the basis of the capitals and of the time that they were left in the business.

The books show as follows: A’s account paid in January 1, $6,000; March 1, $2,000; June 1, $4,000; November 1, $1,000; withdrew April 1, $3,000; October 1, $2,000.

B’s account, paid in January 1, $4,000; February 1, $1,000; August 1, $3,000; withdrew May 1, $2,000; December 1, $1,000.

Prepare a statement showing method of arriving at correct profit distribution.

11. Bull and Bear entered into partnership, Bull contributing $100,000, and Bear $75,000. Profits and losses were to be divided, Bull 60% and Bear 40%, and interest was to be allowed on capital at the rate of 6% per annum. The profits for the first two years (after charging interest on capital) were $19,600 for the first year, $22,400 for the second; and the drawings of the partners in excess of their salaries were, Bull $1,800 first year, $2,000 second year; Bear $2,000 first year, $2,400 second year.

At the end of the second year, Peak was admitted to partnership, and put into the business capital equal to Bull’s capital at the time, on the same conditions as to interest. Profits were to be divided on the basis of capital.

The profits for the third year were $30,000, and the partners’ drawings in excess of salaries were: Bull $2,000, Bear $2,500, and Peak $1,500.

Set up the capital accounts of the partners for each of these years, showing balance of each at the end of the third year.

Partnership—Dissolution

12. A, B, and C are in partnership. A invested $11,000; B invested $5,000 and C invested $1,200. Their agreement provides that profits or losses shall be divided as follows: A, ⁴/₉; B, ³/₉; and C, ²/₉.

The partnership has become insolvent and has therefore decided to dissolve. The cash value of assets is $10,000. The deficit is, therefore, $7,200. How should the assets be divided and how much money will each partner receive?

13. A, B, and C engage in business. A contributes $10,000 capital; B contributes $5,000; while C in lieu of any capital contribution agrees to undertake the active management at a salary of $3,000 a year, to be paid monthly.

After allowing 5% interest on capital, they are to divide the net result in the proportions of 5, 3, and 2 respectively.

At the end of eighteen months they ascertain the position to be unfavorable and decide to wind up. The assets realize $12,500; there are no liabilities except for capital and interest thereon and one month’s salary, due to C.

Make up the partners’ accounts showing the amount to be received by each.

14. Thompson and Murray are partners, sharing profits and losses equally. The partnership is dissolved December 31, 19—, at which time Thompson’s capital investment is $20,000, and Murray’s $7,000. Total liabilities are $55,000, included in which is $5,000 due Wilson on open account, and $7,000 due Murray on account. The whole of the assets had been disposed of for $60,000 cash by July 1 of the next year. Close the partnership books.

Corporation Books

15. On June 1, 19—, the Home Manufacturing Company is incorporated under the laws of the state of New York to acquire and conduct the business of the firm of R. O. Browning and H. E. Johnson. The authorized capital stock of the company is $250,000, par value $100 per share. The company has agreed to take over the net assets of the partnership at the following valuation, and to issue in payment 1,000 shares of stock to each of the two partners: real estate $120,000; tools and equipment $60,000; raw materials $20,000. A bill of sale is executed and the stock duly issued. E. O. Kitchell and R. K. Taylor subscribe for 100 shares each. On June 10 the stock subscribed for by Kitchell and Taylor is paid for and issued. On June 14 Browning and Johnson each donate 100 shares of stock to the company to be sold for the purpose of securing additional working capital.

From the foregoing data, make: (a) the entries on the books of the partnership for the sale of the assets; (b) the opening entry of the new corporation.

16. A corporation is organized with an authorized capitalization of 5,000 shares at a par value of $100 each. One-half of the stock is subscribed for at 90 and paid for in two instalments. R. K. Reymer, in return for 1,000 shares of stock, transfers to the corporation his shipyard valued at $80,000. A. R. Paine receives 100 shares of stock for his services in organizing the corporation.

Make the necessary opening entries on the books of the corporation for the above.

17. F. H. Cole and R. D. Harris have patented an improved electric meter and have borrowed $1,500 on their note with which to complete the invention. They organize a corporation with a capital of $50,000, shares $100 each. Cole and Harris each receive $20,000 worth of stock in return for the patent rights transferred to the corporation. The corporation also assumes the payment of the $1,500 note. A. G. Emery, an attorney, is given five shares to pay for services in fulfilling the incorporation requirements. Cole and Harris each donate to the company $10,000 worth of stock to be sold in order to provide working capital; 160 shares of the donated stock are sold for cash at 50% of the par value.

Make the entries on the corporation books for the transactions given above.

18. The Bristol Manufacturing Company issued and sold on the 1st of January, 19—, to A and B (50 to each at the same price), first mortgage bonds of $500 each, bearing interest at 4% per annum, and received $48,000 in cash.

What records of the transactions should be made and in what books?

19. A corporation has an authorized capital stock of $100,000, of which $75,000 is outstanding.

This year’s profit and loss shows a profit of $4,125. The previous surplus balance is $20,150. They declare and pay an 8% dividend.

Show in journal form the entries covering the above.

20. A corporation’s profits for the year ended December 31, 19—, amount to $451,000. The by-laws require a reserve equal to 10% of any dividend paid to common stockholders, and any surplus remaining after such dividend has been paid is also to be applied to the reserve, until such reserve account amounts to $250,000. The reserve at December 31, one year before, was $156,020. The capital is $2,000,000, one-half cumulative preferred 6%, and one-half common, all fully paid. On December 31, 19—, the date first mentioned, the preferred dividend is two and one-half years in arrears. On December 31, one year before, the Profit and Loss account was in debt $202,000.

Set out your treatment of the profit for the year between these dates.

21. On April 1, 19—, the Healey Manufacturing Company is incorporated with an authorized capital of $100,000 common stock, and $50,000 preferred stock. The preferred stock is subscribed for and paid in full. One-half of the common stock is subscribed for, less 10% discount, the subscribers paying one-half in cash, the balance to be paid in two months. On June 1, the balance on the common stock subscribed for on April 1 is paid, and the remainder of the authorized common stock is sold for cash at 10% premium.

Make the entries required for the above transactions.

22. In auditing the accounts of a corporation for the current year, it was found that for the previous year the inventory had been undervalued $2,000; accrued wages $3,150, and rent receivable earned but not yet due $750, had not been taken into consideration. The surplus at that time, $25,000, is increased during the current period to $40,000. During the current year a piece of real estate owned by the corporation was sold at a profit of $5,000; a fire resulted in a loss of $10,000; accounts receivable that had been charged off as worthless were collected to the amount of $1,000. Dividends amounting to $15,000 were declared.

Bring the above transactions onto the books.

Cash and Petty Cash

23. On June 7, 19—, when balancing cash you found that you were over $153.75. Part of it was due to the following, which you corrected:

Duplicated an entry on the credit side for $12 paid for postage; an error of $10 in addition on the debit side, decreasing the total.

Not being able to locate any more errors, you make necessary entry to balance the cash book.

On June 15 you recalled a cash sale of merchandise $14.50 made on June 7 but not recorded.

On July 7 A. B. Potter returned your statement, saying he paid $75 on account June 7 which you had failed to credit him with.

Make the necessary adjusting entries.

24. (a) Show by journal entry the proper booking of the following transactions, indicating any items not to be posted:

• 1. Creation of a petty cash fund of $100.
• 2. Petty cash disbursements summarized:
• Office stationery and printing $35.
• Stamps and postage $30.
• Delivery expense $10.
• General expense $5.
• Repairs to furniture $15.
• 3. The petty cash fund is replenished.

(b) Set up the petty cash account in the ledger and show all postings to it.

25.  The following balances are found on the books of a trading concern at the end of its first fiscal year:

Total merchandise purchases as per invoices on file, less inventory, show the cost of merchandise sold to be 97% of sales. The cash at bank and in hand amounted to $1,302.14.

From the foregoing construct Cash account.

Notes and Drafts

26. Lang is in need of funds. Connelly, an associate of Lang, induces Moore to accommodate Lang. Accordingly, Connelly introduces Lang to Moore, for which Lang pays $500. Moore discounts for Lang a note for $15,000 due in three months and turns over to him $14,500.

Frame journal entries covering their interest.

27. X, a branch, buys from Y. Y draws on X for $2,000 at 60 days. The draft is accepted and is later discounted 40 days from maturity at 6% per annum. In addition to the above acceptances, Y holds a total of $15,000 acceptances from other customers; $12,000 of these are used as collateral for a loan of $10,000 at the bank.

State all necessary entries.

28. A corporation had discounted $25,000 of notes receivable that are not due until December 31, 19—. How should this be dealt with in preparing a balance sheet at November 30, 19—? One of the above notes for $5,000 was not paid at maturity but was protested, the protest fee amounting to $15. The company drew its check for the amount to take up the note.

State the entries required to be made on the books to record the transactions.

29. Previous to examining the accounts of a corporation at the end of its first fiscal year, you find that notes receivable stand in the financial statement prepared for the banker at $5,500.

Upon investigation it is disclosed that $20,000 of notes from customers were received during the period, and that $10,000 of these notes were duly paid in full by the customers to the company at maturity, and $5,000 of the notes were discounted at the bank. Of the notes discounted, a note for $500 given by Brown & Company was not paid when due, and has been charged back to the Notes Receivable account. Notes to the amount of $1,500 are not yet due at the bank.

Partial payments have been made to the company to the extent of $500 on notes still due, and these payments have been credited to an account called “Partial Payments on Notes Receivable.” This item is listed in the financial statement as a liability.

A customer’s note of $1,000 is found to have been given as collateral for the payment of a note of the company discounted at the bank.

A 30-day note given by an officer of the company for $200 is treated as a cash item. The note is 60 days past due.

You are asked to give the journal entry or entries for obtaining the proper account or accounts to record the above facts.

Depreciation

30. An engine installed in a factory December 31, 19—, at a cost of $1,000, is replaced four years later by one of larger capacity costing (second-hand) $2,800. The discarded machine was sold for $900. The cost of making the change was $200. It has been the practice of the company to charge off 10% depreciation annually (on the diminishing basis), carrying the credit to a Depreciation Reserve account.

Make the necessary journal entries.

31. A manufacturing concern has annually for the past six years made provision at the rate of 10% per annum for depreciation of its plant and machinery, crediting the amount of such depreciation to a suitable Reserve account. During the year an engine which cost originally $5,000, was replaced by an improved engine costing $6,800. The cost of the new engine was charged to Machinery account at time of purchase. $300 was realized from the salvage of the old engine, this amount being credited to “Scrap Sales,” when received, and later closed to Profit and Loss.

Draft the adjustment entries which you consider necessary and explain the principle upon which these entries are based.

Merchandise Inventories

32. The average gross profits on sales of the Blank Corporation for the past five years have been 50%. During 19— the sales were $60,000. Purchases during the period were $50,000. In-freight and cartage was $3,000; returned purchases amounted to $2,500. At the beginning of the year the inventory was $20,000. It is estimated that current market prices are 10% above those at time of purchase.

What will be the cost of replacing the amount of stock on hand at the end of the year?

33. In examining a business for the two years ending December 31, 19—, it is found that an item amounting to $750 had been omitted from the initial inventory of the first year; that an error had been made in the footing of the final inventory of that same year, by which that inventory was overstated to the amount of $1,250; and that in pricing the final inventory of the second year, an error was made by which that inventory was understated to the amount of $1,500.

State fully the effect of these errors on the profit of each of the two years.

34. A certain trading corporation desires to prepare its financial statement as of September 30, 19—, but takes no inventory at that date. It has no perpetual inventory records, but the management states that the ratio of gross profit to net sales has remained substantially the same for many years, namely, 25%, and that the rate will remain the same for 19—.

The following information is given and you are asked to prepare a statement showing estimated inventory on hand September 30, 19—:

• Inventory January 1, 19—, $6,100.
• Purchases $28,450.
• Freight-in $985.
• Freight-out $1,200.
• Allowances on sales $2,360.
• Sales $44,500.
• Discounts on purchases $960.
• Buying expenses $2,500.
• Sales salaries $3,000.
• General office expenses $4,000.

35. The ledger accounts of Henry James on December 31, 19—, showed: Accounts Payable $16,125; Accounts Receivable $13,188; Expense $2,450; Debit Balance Merchandise account $15,187. He started in business January 1, 19—, investing $45,000 cash. His total loss for the year was $8,074.50.

Prepare a statement of assets and liabilities and the profit and loss.

Consignments and
Joint Venture

36. Indicate by journal entries how the following transactions should be recorded upon (a) the books of the consignor, and (b) the books of the consignee:

37. On April 30, 1921, St. John & Company and Carpel Brothers enter into a joint venture agreement. They each contribute $4,000, with which they pay for goods that are shipped on May 1 to John Doe of San Francisco. St. John & Company advance $400 to defray freight and incidental expenses. John Doe, the consignee, is allowed 10% on the cost of the goods and is to sell them at whatever price he can obtain for them.

On June 1, 1922, on the strength of a report sent by wire, Carpel Brothers draw at sight on John Doe for $4,000 to the order of Carl Peter of New York. On July 1, 1922, St. John & Company receive from the consignee a check for $11,200, all the goods being sold; on the same day St. John & Company settle with Carpel Brothers. Interest at 6% is allowed on all transactions affecting the partners in the venture.

Prepare all the ledger accounts brought about by the above on the books of St. John & Company, including a joint venture account. (Construct your ledger accounts in such a manner that they will explain fully what took place and make a cross-reference possible.)

Single Entry

38. The books of the Butter, Egg & Cheese Company, with an authorized and outstanding capital stock issue of $25,000, are kept by single entry.

It annually inventories all its assets and liabilities and from such inventory prepares a financial statement. At December 31, 19—, this inventory is as follows:

From a comparison of the financial statements at the beginning and the end of the year, you find that the item of “Plant and Equipment” is stated in an amount less by $11,460 than it was at the beginning of the year, plus additions during the year.

The financial statement for the beginning of the year showed a surplus of $35,703.

From your analysis of the disbursements and unpaid accounts at the beginning and end of the year, you find total purchases amounting to $661,910, and expenses for salaries, wages, supplies, repairs, etc., amounting to $120,115.

The purchases, however, included $450 paid out for John Smith, an employee, for which he has not reimbursed the company; and the total expense of $120,115 included $250 in the hands of a buyer as a working fund.

The inventory of merchandise at the beginning of the year was $18,125 and of prepaid expense was $2,653.

There was canceled on the customers ledger during the year $3,206 of uncollectible accounts.

There was paid for interest and discount on notes payable $1,061, and for interest on mortgage $1,500.

A 10% dividend was declared but not paid.

From the foregoing prepare: (a) a balance sheet as at December 31, 19—; (b) a profit and loss statement exhibiting net sales, cost of sales, and gross and net profit for the year.

Interest, Discount, and Proportion

39. What single rate of discount is equivalent to the series 20%, 20%, and 15%? 50%, 25%, and 15%?

40. An invoice amounting to $1,000 reads: “Less 30%, 10%, and 5%. Terms 2/10, n/30.” It is dated January 19, 19— and paid January 28, 19—.

Explain and distinguish between these reductions of the list price. Give the amount of the check sent in payment of the invoice.

41. Keene owed Sharpe $2,000. Sharpe offered a discount of 5% cash. Not having the ready money, Keene discounted his note at the bank for 60 days at the rate of 6%, the note producing the sum required to discount Sharpe’s claim.

Calculate the amount of this note and make the necessary journal entries to take care of the entire transaction.

42. Equate the following account and find the cash balance due October 1, money being worth 7% per annum, 30 days to the month.

43. A note for $2,500 dated September 15, 1920, bearing interest at 6%, had payments indorsed as follows: November 28, 1920, $750; May 6, 1921, $500; August 12, 1921, $300; January 18, 1922, $600.

Find the amount due May 8, 1922.

44. In a manufacturing concern the total value of property subject to insurance was $500,000, distributed as follows: assembling station $100,000; finished goods warehouse $200,000; raw materials warehouse $100,000; and the remainder on building. The annual insurance premium amounts to $18,890 per year.

Find the insurance burden chargeable to each department if the assembling room rate is 2½ times the raw materials warehouse rate; the finished goods warehouse, 80% of the rate of the assembling room and the manufacturing building rate, three times the assembling room rate.