Accounting theory and practice, Volume 2 (of 3)

Partnership

1. A partnership on equal terms between A and B is dissolved July 1, 1917, the books on that date showing the following:

A’s capital paid in was $16,000, and his drawings were $3,500. B’s capital paid in was $2,000, and his drawings were $1,500. Goods purchased $50,000; sales $40,000; business expenses $1,800. A loss of $1,600 was made on a $5,000 consignment of goods to Liverpool. In the settlement A agrees to pay B an old debt of $3,500. Prepare requisite accounts, and show final balance payable by one partner to the other.

2. A and B are partners carrying on a business in Winnipeg. On January 1, 1918, after adding profits for the past half-year, A’s capital amounted to $150,000, and B’s to $100,000. On that date they take into partnership C, upon the following terms: viz.: he is to bring in capital amounting to $25,000, and each partner is to be credited with interest on his capital at 6% per annum. All profits (after debiting interest) up to $25,000 are to be shared by A and B exclusively in proportion to the amounts of their capital at January 1, 1918. All profits in excess of $25,000 are to be shared equally by the three partners. Accounts are to be prepared and profits and interest credited half-yearly. C is to be credited with a salary of $5,000 per annum. On June 30, 1918, the profits divisible after debiting C’s salary, which he has drawn, but before charging interest on partners’ capital, amounted to $75,000. The partners’ withdrawals which are not chargeable with interest were: A $12,500, B $10,000, and C $3,750. Draw up partners’ separate accounts as they should stand on July 1, 1918.

Assume that instead of a profit, a loss of $75,000 had occurred. How would you have treated it in the accounts in the absence of any direct provision in the partnership agreement relative to losses?

3. A, B, and C were partners in business for several years. A died December 31, 1917. The articles of copartnership provided that on any change in the firm the good-will should be taken into account and its value divided—one-half to A and one-quarter each to B and C. The balance sheet at the date of A’s death was as follows:

In January, 1918, B and C arranged with D to come into the firm with $5,000. The good-will is, by agreement, to be valued at $3,000. The new firm, consisting of B, C, and D, takes over the business and good-will in equal shares, subject to an allowance of 2½% on the notes and accounts receivable. It pays the estate of A $5,000, with the understanding that the balance due A’s estate shall remain as a loan at the rate of 5% interest.

Prepare the balance sheet and the capital accounts of B, C, and D as they should appear at the beginning of the new business, writing off the purchase of good-will in equal proportions to the amount of capital invested.

Corporation—Opening the Books

4. C, D, and E are partners sharing profits in accordance with capital investments. At end of the fiscal year, after all nominal accounts are closed, the books show the following:

The partners thereupon incorporate a company with an authorized capital of $250,000. The company so formed purchased the partnership assets and good-will, not including the cash, for $250,000, payable $200,000 in stock and $50,000 in cash, the last-mentioned cash being the proceeds of sale of stock to F.

It is the intention to divide the purchase-money stock among the vendors in proportion to their former capital and to adjust their accounts by the division of the cash shown in trial balance, which will then be placed to their credit as loans to the company at 6% interest and remain as working capital. The bills payable are to be settled by the partners. As the drawings of the partners are not in proportion to their respective shares in the profits, the partners are charged with the interest thereon in the following amounts, viz.: C $231, D $165, and E $132.

(a) Frame the necessary entries to close the partnership books and show the amount of cash received by each partner.

(b) Referring to question (a), frame the necessary entries to open the books of the company and prepare a balance sheet showing the condition of the company at the beginning of its operations.

5. The Frost Manufacturing Co. was incorporated April 10, 1918, with a capital stock of $200,000, divided into 2,000 shares of a par value of $100 each.

Payments were made on this date as indicated in the following subscription register:

April 12. Expenses of $1,200 incidental to the organization of the corporation were paid in cash.

April 15. The corporation purchased J. King’s entire plant valued at $170,000 and assumed his liabilities amounting to $70,000, giving in full payment 1,200 shares of stock at par.

April 20. S. Samson subscribed for 50 shares of stock and paid an instalment of $30 per share in cash.

April 22. To provide working capital, each of the following stockholders donated 1/10 of his shares of stock: Dunn, Ferris, Hall, and King.

April 25. Cash was received for 100 shares of donated stock sold at 85.

April 27. Samson gave his note due in six months for the balance due on his stock subscription.

April 28. The directors authorized an issue of $50,000 in bonds, with interest at 5%, to mature in 20 years.

April 30. Bonds having a par value of $30,000 were sold for $28,000 in cash.

(a) Write journal entries to record fully all the above information in the financial books of the corporation.

(b) Prepare the corporation balance sheet for April 30, 1918.

Manufacturing Statement

6. The Marine Equipment Co., a corporation, manufactures metal boats and deals in marine supplies. A trial balance of the general ledger, December 31, 1917, is given below:

Additional information to be considered:

Unexpired insurance $100.

Provide for Reserve for depreciation on: buildings, 5% on original value; machinery and tools, 10% on diminishing value; automobile trucks, 20% on diminishing value. Also provide a 2% reserve for bad debts. Write off depreciation of 10% on the original cost of furniture and fixtures. Patents expire 14 years from January 1, 1917. One-half of advertising is to be carried to the next period.

Distribute as follows:

From the trial balance and the additional information prepare:

• (a) Income statement.
• (b) Balance sheet.
• (c) Journal entries to record the additional information
• and close the ledger.

Consignments, Commissions, Joint Venture

7. December 1, 1917, a New York merchant ships goods of the value of $5,000 on consignment to a commission merchant at Rio de Janeiro, insuring them in the Atlantic Mutual against loss or damage in transit and prepaying freight and insurance amounting to $250. On arrival the goods are found to be in a partially damaged condition and the loss is adjusted at $1,000, the certificates for which the consignee transmits to the consignor together with an account sales for $3,000, dated March 1, 1918, and a final account sales for $2,000, dated April 1, 1918. A draft on New York for $4,300 accompanied this final account, being the balance due after deducting duty paid and commission earned.

Give expression to these transactions on the books of the consignor.

8. On November 15, 1917, Isaac Cohen & Co., Ltd. sent for sale on their account a consignment of goods valued at $5,000 to John Stimson & Sons, factors of Boston; sale to be on a 5% basis with 1% additional for guaranty of collection of accounts. Prepaid freight amounted to $25.40. December 26, an account sales from Stimson & Sons showed sales of $5,775.20, and expenses in connection therewith, exclusive of commission and guaranty, of $42.25. The net proceeds were placed to Cohen & Co.’s credit, subject to sight draft.

(a) Show the alternative treatment of all the accounts affected on Cohen & Co.’s books in order either to show the profit or loss on this consignment, or to include the profit or loss with their regular sales.

(b) Stimson & Sons’ fiscal year ended November 30. On November 25 they had sold one-fourth of the Cohen & Co. consignment for $1,500 and had incurred the expenses of $42.25 mentioned above but applicable to the whole consignment. Show Stimson & Son’s accounts affected properly closed.

(c) If Cohen & Co.’s fiscal year ends on November 30, what entries would be needed to make the record in accord with the additional data of question (b) above?

9. A, B & Co. and C, D & Co. enter a joint adventure to ship machinery to New Zealand. C, D & Co., October 5, 1917, handed A, B & Co. $600 in cash and granted them their acceptance at 6 months for $1,500. A, B & Co. were to provide balance of cash required, to manage the venture, to receive a commission of 2% on amount of invoice for machinery. Profits of venture to be divided equally.

On October 6, 1917, A, B & Co. paid J, K & Co. for machinery $2,500, and on the same date discounted acceptance of C, D & Co. for $1,500, paying $30 for discount thereon. On the following day A, B & Co. paid $210 for freight and $30 for insurance. On March 25, 1918, A, B & Co. received from New Zealand to account of proceeds of machinery a draft payable in London for $1,600, out of which, April 8, 1918, they paid $1,500 to retire bills for that amount.

On August 8, 1918, A, B & Co. received from New Zealand a draft for $1,550, being balance of proceeds for machinery, after deducting agent’s commission charges and duty. They thereupon closed the accounts and sent C, D & Co. check for balance due to them.

Make up an account showing result of venture, also C, D & Co.’s account with A, B & Co. Do not regard interest.

10. A B, a commission merchant, doing business on a 5% basis, hands you the following abstract of his ledger, showing his transactions for the year.

Furnish A B’s capital account, showing his original investment; also a balance sheet and a detailed cash account.

11. A and B, commission merchants, suspect their cashier of embezzlement. From the following data determine whether or not their suspicions are well founded, and produce a balance sheet and profit and loss statement to prove or disprove the suspicion.

Analysis of account sales ledger debits, duty $875, freight $1,560, dock charges $70, custom house charges $40.

Analysis by Comparison

12. The trading accounts of a company covering two years are herewith submitted.

Analyze the accounts and make a report to the company showing the reasons for the difference in results.

13. A corporation’s balance sheets for August, 1918, and September, 1918, were respectively as follows:

August, 1918

September, 1918

Analyze the differences in the corresponding accounts for the period and show disposition of increased resources.

14. The board of directors of the X, Y, Z Company removed their manager on April 30, 1918, on the general suspicion that his books misrepresented the true financial condition of the business. Prepare a statement showing the nature and the probable extent of the misrepresentation, also an approximate statement of income and profit and loss for the four months ending April 30, 1918, and a balance sheet as of April 30, 1918.

The following is a trial balance taken from the books April 30, 1918:

An analysis of the Purchases and Sales accounts revealed the following: purchases, year 1915, $122,000; sales, year 1915, $153,750; inventory, January 1, 1915, $101,000; purchases, year 1916, $123,000; sales, year 1916, $153,170; inventory, January 1, 1916, $100,000; purchases, year 1917, $121,000; sales, year 1917, $154,722; inventory, January 1, 1917, $102,000.

15. Robert Adams and William Stevens are equal partners. On the night of July 3, their stock and fixtures were destroyed by fire. A trial balance, which Adams had at his home, showed the following condition of the ledger at the close of business, June 30:

The property is fully covered by insurance. The insurance company, for the purpose of estimating the value of the merchandise destroyed has agreed to allow 35% as the average gross gain on the sales, and to pay 66⅔% on the value of the fixtures as shown by the ledger.

On the basis of this agreement, state the result of the business and the capital of each partner.

Statement of Affairs

16. C. C. Carter and A. D. Walker were unable to meet their obligations. From the books of the firm and additional information you ascertained the following:

Prepare statement of affairs and deficiency account as of September 30, 1918.

17. On December 1, 1918, the following particulars are furnished of the position of John Mapleton, insolvent: factory equipment cost $15,000, estimated to realize $10,000; stock of finished goods $10,000, estimated worth $7,500; material and supplies $2,500, estimated worth $1,000; furniture and fixtures $900, estimated worth $200; investments valued at $25,275, of which $15,000 is held by bankers as security for loan of $12,000; accounts receivable $6,250, of which $2,500 are good, $1,250 bad, and $2,500 estimated to realize $1,500; cash $575, of which $25 represents petty expense items not charged up, and $50 an I O U of a former employee which is worthless; accounts payable $28,500; bills payable $25,000, of which $12,000 is due bankers; wages due $500; rent due and past due $1,000; capital on January 1, 1918, as shown by the books, $15,000; loss by sale of investment May 1, 1918, $5,000; loss in trading account January 1, 1918, to December 1, 1918, $3,500; drawings charged personal account of John Mapleton $1,000.

Make up a statement of affairs and a deficiency account as on December 1, 1918.

18. John Thompson exhibits the following balance sheet of his business dated June 30, 1918:

On questioning Thompson it was found that he had omitted the following from his balance sheet: $250 owing for rent; $75 owing for taxes; $2,500 borrowed at 5% from his wife three years ago, no payment having been made on account of either principal or interest; a draft for $500 accepted by a firm without consideration, falling due in 30 days. His private and household debts amounted to $600.

The item entered on his balance sheet as cash included his personal I O U’s for $600.

Of the book debts about $3,500 might be considered bad and the rest good. The stock was good except $1,000, which would not produce more than $100. The fixtures, if sold, would not realize more than $250. The only other assets were household furniture worth about $1,250 and residence valued at $7,500, subject to a first mortgage for $5,000 at 4%, and also a second mortgage held by his bank as security for overdraft.

Prepare a statement of affairs and deficiency account.

19. June 30, 1918, as a result of careless management, the firm of Howard, Mason & Co. finds itself in a critical financial condition.

The following trial balance shows the accounts as they appear on the books after closing the ledger.

Post-Closing Trial Balance, June 30, 1918

There is dissatisfaction among the partners and they finally agree to dissolve partnership. Preparatory to dissolving they appraise the assets and rank the liabilities on a liquidating basis.

It has been found that the buildings had been damaged by fire to the extent of $3,000 but that no adjustment had been made in the buildings account. The delivery equipment is estimated to produce $4,800. Furniture and fixtures have a value of $3,600. The land has increased in value $6,000.

Of the notes payable, $5,000 has been partially secured by all the F. D. Co. Stock, which is expected to yield 80% of its book value. Collateral in the form of good notes receivable of $4,500 has been given to creditors whose claims amount to $3,700.

Among the cash there are I O U’s in the amount of $180 that cannot be considered as worth more than $50. The accounts receivable are classified as worthless $3,000; doubtful $2,000, which are expected to produce $1,400; the balance are good. Both inventories of merchandise were reduced by 10%.

The accrued taxes and labor are claims preferred by law. Prepaid insurance, miscellaneous office supplies, and good-will were assumed to have no value in case of liquidation.

From the information at hand: