Accounting theory and practice, Volume 2 (of 3)

Realization and Liquidation

20. It has been mutually agreed that Joseph Mason shall act as liquidating partner with full authority to sell all property, pay all debts and distribute liquidating dividends among the partners. Mason’s fee as liquidator shall be 5% commission on the converted value of all the assets and is to be paid at each dividend date.

Interest is to be allowed on the loan accounts, and profits and losses are to be shared ½ by Howe, and ¼ each by Mason and Bartlett, during the period of liquidation.

Settlements are to be made on the last day of each month.

Based on the post-closing trial balance in the preceding problem and the information given below:

During the month ended July 31, 1918, delivery equipment having a book value of $3,300 was sold for $3,000 in cash; accounts receivable in the amount of $4,000 were collected and $980 in bad debts were charged off. A sale of the land and buildings granted the use of the premises during the liquidation. The land was sold for $17,000 and the buildings for $31,500, the mortgage (with accrued interest to July 3) being assumed by the purchaser as part payment. The partially secured creditors accepted the F. D. Co. Stock held as collateral at 90% of its book value and the balance of their claim was paid in cash. Incidental expenses of $350 and the liquidating fees were paid in cash. From the goods in the inventories there were sold bags of a book value of $1,200 for $1,120, and trunks, book value $2,530, for $2,280. There was paid to holders of unsecured notes payable $2,000 and interest of $100. The accrued labor was paid and $10,000 in unsecured accounts payable were settled. The balance of the cash was applied in paying off partners’ loans and capital as a liquidating dividend.

The next month the delivery equipment was sold for $1,850. Furniture and fixtures having a book value of $2,100 were sold for $1,700. Of the I O U’s $70 was collected; the balance proved worthless. The notes receivable as collateral in the hands of fully secured creditors were settled in full and our equity was paid to us in cash, also accrued interest of $120. Bags having a book value of $2,500 were sold for $2,100, and trunks at book $3,700 brought $3,200. Mason accepted $4,200 in settlement of $5,000 in accounts receivable.

Legal fees of $150; sundry expenses of $460; all the existing debts and the liquidating fees were paid in cash. The cash remaining was distributed as a liquidating dividend.

In the course of the last month the remaining furniture and fixtures were sold for $1,900. The good-will went to the same purchaser for $1,000 additional.

The prepaid insurance is without value. Office supplies yielded $20. The notes receivable, together with the balance of accrued interest were collected in full. There was lost in bad debts $740. The bags were sold at a 10% reduction. The partners divided the trunks among themselves one-third to each, taking them at book value.

Sundry expenses of $340 and the liquidating fees were paid in cash, after which the cash on hand was distributed.

Note: Converted value means the value at which any asset is disposed of, whether for cash or in the cancellation of any claim.

21. Show on the books of the firm of Howard, Mason & Co. all the entries necessary to carry into effect the liquidation of the business under the conditions set forth in the foregoing problem.

22. The firm of Norton & Brown decided to liquidate at a time when their condition, as shown by the balance sheet given below, was still solvent.

Balance Sheet, March 31, 1918

Profits and losses were shared three-fourths by Norton and one-fourth by Brown. Interest was allowed on the loan accounts but not on the capital accounts. At the end of the first month, April 30, it was found that material inventoried at $5,000 had produced $3,600; accounts receivable to the amount of $15,000 had been collected in cash and $2,800 in bad debts charged off; notes receivable collected in cash $2,000; expenses of $600 had been paid in cash; equipment valued at $4,000 produced $3,000. Interest on partner’s loan accounts was not entered this month.

During the month ended May 31, office furniture valued at $1,600 was sold for $1,000. Material costing $4,000 produced $3,200 and the balance of material was divided equally between the partners at cost. Plant equipment listed at $6,000 was sold for $6,200. A $200 note proved worthless and was charged off. Accounts receivable to the amount of $6,065 and notes receivable of $2,000 were collected in cash. Bad debts charged off $435. Expenses paid in cash $300. Interest was credited on Norton’s loan account $40 and Brown’s loan account $25.

Arrange your solution to show:

23. Walter Hopkins, while perfectly solvent and doing a profitable manufacturing business, had so tied up his capital in plant and materials that he was on the point of suspending for want of funds to pay for labor, and his creditors were preparing to commence legal proceedings to enforce a settlement. The condition of his affairs at this time was as follows:

Balance Sheet

At a meeting of creditors he said that while his plant was entirely efficient, it was all of special character and would realize on forced sale only the value of scrap, that the unfinished goods would require the employment of skill and processes known to him only, and that while forced suspension would yield to his creditors not over 50%, it would ruin him absolutely.

The creditors decided to advance him a loan of $5,000 to continue operations and allow him additional credit for materials and expenses. A trustee was appointed to see that the proceeds were used solely for recuperation of the business.

The subsequent operations under the supervision of the trustee were as follows:

Purchases on book account, charged to materials $5,100, to expense $12,100; sales on book account $57,802; losses on bad debts $300; cash receipts (loan from creditors) $5,000; settlement from debtors $58,100; cash payments for labor $12,500, for expense $4,350; for plant $600; creditors $42,030; Walter Hopkins’ personal drawings $3,000.

There remained raw materials $4,000, finished goods $22,388.

Prepare:

• (a) Realization and liquidation account.
• (b) Trustee’s cash account.
• (c) Balance sheet of the estate as restored to Walter Hopkins.

24. X, Y, and Z, foundrymen, unable to meet their obligations, suspended payment January 1, 1918, and appointed a trustee to realize and liquidate for the benefit of their creditors. The books showed the following assets and liabilities:

The trustee’s cash receipts and payments during the year 1918 were as follows:

Other transactions were as follows:

The trust terminated at the end of the year and the business was turned back to the owners.

Prepare realization and liquidation account; also a balance sheet showing the financial condition of the business at the termination of the trust. Accrued taxes for the year in the usual manner, i.e., on the basis of the charge for previous year.

Branches

25. The trial balance of Jones & Smith, Chicago branch, shows December 31, 1918, the following:

Inventory $1,000.

Draft the necessary journal entries to close the accounts on the branch books, and the entries to be made in the home office to make the books agree.

26. A branch office business was started at the first of the year, the head office advancing $5,000 cash. During the first year merchandise was shipped to branch, invoiced at $75,000.

An auditor checking up the business at the close of the year finds the following: Merchandise sales were $60,000, with selling price of goods 20% advance on invoice. Proper vouchers were on file duly receipted for following payments: rebates and allowances on damaged goods $1,500; salaries and other expenses $4,500; freights $2,500.

The books also showed: remittances to head office $35,000; uncollected accounts $15,000. The balance of the sales having been realized in cash, less rebates and allowances as noted.

The cash on hand and inventory of unsold goods, together with the foregoing records, properly accounts for everything.

Prepare statement, such as an auditor would make in reporting to the head office, balancing the business of the branch house.

27. The condition of the Atlantic Co. at the close of business December 31, 1918, is reported by them as follows:

The company has a branch to which it sells its goods at 20% over inventory prices and carries this account, together with other branch assets, as a receivable. The statement of the branch on the same date was:

(a) What was the inventoried value of the branch merchandise?

(b) Prepare a corrected statement of the Atlantic Co.

Sinking Fund

28. A corporation issues 10-year bonds to the amount of $50,000, securing same by a mortgage on its property, which is placed in the hands of a trust company.

The trust deed provides for the establishment of a sinking fund to retire the bonds at maturity and that equal annual payments be made on the first of January in each year. Give the amount of this annual payment, interest compounded at 6%.

29. The United Manufacturing Co., on January 1, 1918, placed in service a piece of machinery which would depreciate, according to its chief engineer, at the rate of 15% per annum. The original cost of this machinery was $84,000 and the board of directors agreed to set aside annually a sinking fund which, together with interest thereon, will amount to the original cost at the end of the prospective life of the machinery.

This sinking fund is to be deposited with a trust company on December 31 of each year, and a proportionate amount at the end of the last partial year of the life of the machine. Interest is to be credited by the trust company at each of these dates at the rate of 4% per annum.

Show how the amount of the annual sinking fund payments may be arrived at, and prepare a detailed statement for the board of directors proving that the amount so obtained is correct.

Consolidations, Mergers,
and Reorganizations

30. Three manufacturers, each having an independent business and wishing to effect a consolidation of their respective interests, organize the United States Manufacturing Corporation, with an authorized capital stock of $1,500,000, consisting of 7,500 shares of preferred stock and 7,500 shares of common stock, of $100 each. They sell to the new company all of their real estate, buildings, machinery, tools, fixtures, merchandise, and supplies, in consideration of $1,500,000, and agree to accept in payment $750,000 of preferred and $750,000 of common stock of the United States Manufacturing Corporation at par. The vendors donate to the treasury of the company $150,000 of preferred stock and $150,000 of common stock to provide for working capital. The company sells $100,000 of its preferred stock in the treasury for 80% cash, giving a bonus to the purchaser of 20% in common stock.

For the purpose of raising additional funds for improvements and additions to plants, the company mortgages its real estate and buildings, as security for an issue of bonds amounting to $250,000. These bonds the company sells to bankers at 90%, giving as a bonus 10% of preferred stock and 20% of common stock.

Draft entries to express correctly the above transaction on the books of the corporation, and prepare a statement of assets and liabilities of the company.

31. It is proposed to organize a corporation for the purpose of acquiring the stock and controlling three existing corporations, A, B, and C, two of which latter, A and B, have been in operation for five and three years, respectively, while C has been newly organized. The assets and liabilities of the several existing companies and the dividends paid are as follows:

For the purpose of the issuance of stock in the new company to the holders of stock in the three existing companies, it is proposed to capitalize the latter upon the following basis:

Money assets at double their value; plant at 80% of book values; material at 70% of book values; annual net earnings at 8%; and the liabilities at par.

The new company will be organized with a capital stock of $2,200,000, all of which is to be used in acquiring the stock of the existing companies.

32. The Smith Brewing Co. with $1,000,000 capital stock, the Young Brewing Co. with $500,000 capital stock, and the Star Brewery with $400,000 capital stock, agree to consolidate as the Universal Brewing Corporation, the new company to buy all the properties of the old companies at a valuation to be fixed by appraisal, payment therefor to be made in full-paid stock of the new company, the old companies to pay off their own indebtedness.

The appraised values of the old companies are as follows:

On this valuation, the Universal Brewing Corporation issued $2,000,000 of stock, shares $100 each, which was divided pro rata among the old companies on the basis of their appraised value, no fractional shares of stock to be issued, odd amounts to be paid old companies in cash.

Give journal entries necessary to set up property accounts and credit old companies with their pro rata on books of the new company.

At the time of the consolidation the ledger accounts of the Star Brewery were as follows:

Make the proper journal entries to liquidate in stock of the new company the liabilities other than capital stock, to apportion the remaining stock and cash, and to close the books of the Star Brewery.

33. The Elton Manufacturing Co. and the Star Manufacturing Co. were engaged in manufacturing the same kind of goods. To avoid the losses due to competition, the two companies decided to combine their plants into one corporation under the name of the Union Manufacturing Co. and finally agreed upon the following plan for the merger:

The assets received from, and the liabilities assumed for, the separate companies were taken at the values given in the respective balance sheets, subject to the following adjustments: the buildings, machinery, and patents at 90% of their stated value; delivery equipment, and furniture and fixtures at 80% of their value. A reserve of 2% on accounts receivable was established by the Star Manufacturing Co.

Elton Manufacturing Co.
Balance Sheet, June 30, 1918

Star Manufacturing Co.
Balance Sheet, June 30, 1918

After making the adjustments and allowing interest at 6% on the invested capital, the excess earnings were capitalized on a basis of 10% to obtain the amount of the good-will.

Average net profits for a period of three years: Elton Manufacturing Co. $17,000; Star Manufacturing Co. $10,800.

The Union Manufacturing Co. was capitalized at an amount equal to the net assets (after adjustments) and the good-will of the two merged companies.

34. The following is abstracted from an agreement of merger and consolidation made December 31, 1917, between the Pennsylvania Tool Co., party of the first part, and the Keystone Tool Co., party of the second part. Said parties of both parts being corporations duly organized and existing under the laws of the State of Pennsylvania, by this agreement merge and consolidate into a single corporation.

The name of the corporation hereby formed by said consolidation shall be the Pennsylvania Tool Co.

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 Pennsylvania Tool Co., party of the first part, 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 Keystone Tool Co., in proportion to their present holdings.

The Pennsylvania Tool Co., party of the first part, was incorporated shortly before the date of the merger, and had transacted no business other than the issuance of ten shares of capital stock, $100 each, for which payment of $1,000 had been received, and which was on hand in the treasury of the company on the date of the merger, and directly after the merger transferred to the bank deposit account of the consolidated company and credited to an account called “Suspense.”

The Keystone Tool Co. had for a number of years been actively engaged in business. Its fiscal year ended September 30, 1917, at which time an inventory was taken and its accounts had been properly closed. At the date of the merger the following trial balance was drawn from the books:

The account 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 also all business after December 31, 1917, was transacted under the name of the Pennsylvania Tool Co., and it was not until March 31, 1918, that an accountant was asked to state the accounts of the new company from the date of the consolidation.

At March 31, 1918, before the accountant had commenced his work, an inventory was taken which showed the value of merchandise on hand as at that date, to be $216,250, and the following trial balance was abstracted from the books:

Trial Balance, March 31, 1918

Prepare:

Miscellaneous

35. A manufacturer is desirous of selling his business, and furnishes a statement showing the condition of affairs for the past five years as follows:

What report would you make as to a fair valuation of this business? Explain fully your reasons for same.

36. The factory of an automobile company assembles its cars only on receipt of orders from the main office. A summary of the factory operations for a certain period is as follows:

Prepare a technical trial balance of the cost ledger and an inventory of the stock room.

37. John Doe commenced business with a cash capital of $15,000. At the close of his fiscal period the ledger accounts were: accounts receivable $4,312.50; merchandise debit balance $5,062.50; accounts payable $5,375; expense $900. Doe’s total loss was $2,775.

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

38. John Adams lost his stock of merchandise May 1, 1918, through a flood in the Mississippi River.

Adams applied to the local Mutual Flood Insurance Society for reimbursements, claiming a loss of $5,886.35 on merchandise stock. From the following data ascertain his merchandise inventory:

Net profits May 1, 1918, $4,452.91; drawings $1,598; legal expenses $17.50; interest debit $313; advertising $14; commissions debit $961.01; insurance $196.23; sales $81,688.04; inventory, December, 1917, $1,568.62; purchases $55,415.82; labor, productive $19,499.58; telephone $416.06; sundry factory expenses $3,201.92; repairs $16; surplus May 1, 1918, $2,854.91.

39. The directors of a manufacturing company, before the closing and auditing of the books for the half-year ending December 31, declared out of the net earnings of the company a dividend for the half-year of 4% on the preferred stock of $100,000 and 3% on the common stock of $100,000. There has been brought forward from the last half-year, an undivided balance of profit of $4,000, and after the audit of the books the trial balance is found to be as follows:

Trial Balance, December 31

Stock on hand $26,500.

From the above prepare profit and loss and income statement and balance sheet, giving effect in accounts to depreciation at the rate of 7½% a year, on plant and machinery, and making an allowance of 5% on the book debts to provide for bad debts; also create a liability in the balance sheet for dividend as stated.

40. Wm. Bates commenced business June 1, 1917, with a capital consisting of cash $60,000, and a building and lot worth $85,000, subject to a mortgage of $25,000, dated June 1, 1917, bearing interest at 6%.

One year later, June 1, 1918, an abstract of his books disclosed the following accounts: purchases $78,000; sales $85,000; sinking fund $8,000; cash drawings $6,000; goods returned to creditors $5,000; expenses paid in cash $9,000; profit and loss, debit $3,500; contingent fund $3,000; due to creditors $49,000; reserve for bad debts $4,250; due from customers $32,620; discounts allowed customers on accounts paid $755; returned sales $4,520; discounts on accounts paid to creditors $650. No goods were sold to creditors or purchased from customers. Unsold goods June 1, 1918, $9,500.

From the above data, prepare a trial balance, income statement, and balance sheet.

Note: Two items affecting accounts in the trial balance are missing and must be supplied.

41. In taking off a trial balance a bookkeeper finds that his debit footings exceed the credit by $131.56, which he carried to a suspense account. Later, he discovers that a purchase amounting to $417.50 has been debited to a creditor as $192.94; that $312.50 for depreciation of furniture has not been posted to depreciation account; that $500 withdrawn by the proprietor has been charged against wages account; that a discount of $76.13 allowed to a customer has been credited to him as $71.13, and that the total of sales returned was footed $5 short. Give detailed entries showing how you would remedy these errors, and starting with the original difference prepare a supplemental trial balance showing whether the books balance or not.

42. A and B are partners owning two retail stores, one in Paterson and the other in Newark. They agree to dissolve partnership as of July 1, 1918. The two stores are valued July 1, 1918, as follows: Paterson $4,573.50; Newark $3,600. On this basis B contemplates purchasing A’s interest. On being furnished with the following data, B requests you to inform him if the inventory of the Paterson store, January 1, 1918, was correct as A claims:

Prepare a statement proving whether or not the inventory of the Paterson store, January 1, 1918, was correct as stated.

43. On paper ruled as for a stock ledger, make entry of the following stock transactions of William Henderson, closing the account as of October 31, 1918, and carrying down the balance:

100 shares (par value $100) originally issued, full paid at par to William Henderson by certificate No. 5. August 16, 1918.

William Henderson sells 50 shares of the original 100 to Charles Gibbons at $120, September 14, 1918, receiving certificate No. 37 for shares retained.

October 28, 1918, William Henderson purchases from John Hogan 25 shares at $115 and receives certificate No. 78.

44. Stockholders of the Deep Canal Company donated 400 shares of stock of a par value of $100 per share for the purpose of providing working capital.

Three hundred shares of the treasury stock were sold by agents at 90. A commission of 10% and expenses of $516 was allowed the agents for selling. The 300 shares of treasury stock were sold on the instalment plan, 10% down and 10% a month for the balance. Certificates of stock not to be issued until paid in full.

Six months later you are to enter the total amount of cash paid on instalments, excluding the initial payment which was made at the time of subscription.

At the end of eight months 100 subscribers defaulted on their subscription contracts. Their subscriptions were canceled and the payments they had made declared forfeited.

The balance of all subscription accounts except those canceled by default have been paid in full and stock certificates therefor duly issued.