Practice Data

The results for the year proving very unsatisfactory in comparison with the volume of business transacted, N. G. Goodman was retained to make an audit of the year’s operations in an effort to locate the trouble. In his report covering the audit, he called attention to the following items:

(a) In the Trade Debtors are included two charges, viz., advances to salesmen $500, and New Method Manufacturing Co. for purchases $2,500, which are in no sense charges to customers.

(b) In the Notes Receivable is included Noble’s note given in payment of the balance on his subscription to capital stock $1,000 but now reduced to $600 through the application of his March dividend as a partial payment. This does not belong in Notes Receivable account.

(c) There is on the books no record of the Boston Office Co. consignment received on June 15, 1916. Investigation showed that on July 2, a sale of $4,500 was made from the consignment and the balance was included in the Sundry Office Supplies Inventory, being there valued at $1,000. It was ascertained that the freight and cartage paid on the incoming consigned goods amounted to $25.12, and had been charged to the In-freight and Cartage account.

(d) The inadequacy of the purchases system was shown. Perhaps due to the fact that during the year the main stock was withdrawn from the store and the immediate supervision of the responsible head and placed in the warehouse, the stock had been allowed to run down so that it amounted at the close of the year to only $9,662.37—correct value being $8,662.37 when allowance for the inclusion of the Boston Office Co. consigned goods was made—as compared with $42,282.27 on hand at the beginning. Suggestion for the installation of a distinct purchasing department and the introduction of a stock record was made in order to keep track of the condition of the stock.

(e) The depreciation of good-will is to be reversed.

(f) The discount on capital stock, charged to Factory Building, is to be taken out and shown as a separate item under its own name.

(g) An analysis of the sales developed that: on desks and tables sales gross profit was 47%, and rate of turnover was 9+; on bookcases and filing cabinets gross profit was 38% and turnover 6.4+; and on sundry office supplies a gross loss of 17+% was sustained and the turnover was only 3+. Taken as a whole, the selling expense was too high, very probably due to salesmen’s abnormal traveling expenses and commissions. The present commissions policy was severely condemned as tending to an increase of sales without regard to the financial standing of the customer. For the purpose of establishing a consistent policy of passing on credits and following up collections, the installation of a department of credits and collections was advised.

(h) It was advised that the petty cash be taken out of the bookkeeper’s control.

(i) Of the 1915 taxes charged to Surplus, one-third should have been charged to Profit and Loss.

Make all of the entries necessary to adjust the books in accordance with the auditor’s suggestions. Post, close, and draw up corrected statements, including the adjustments to Surplus. Supporting schedules may be omitted; the condensed statements will be sufficient.

Instructions

Study carefully all the suggestions made by Goodman and determine the proper correcting entries. All necessary accounts have already been set up on the books.

The principles involved in suggestions (a) and (b) are covered in Chapter XII. For (c) see Volume I, Chapter L, and Volume II, Chapter XIII. Take cognizance of the accrued commission. For (e) see Chapter XVIII, and for (f) see Chapter XXI. For the surplus statement to show all adjustments made through it, see Chapter XXIII.

XIX

Practice Data

September 2, 1916, the remainder of the Boston Office Co. consignment was sold for $1,250 cash and our check sent for the balance due them. Desks and tables $575, and filing cabinets $250, were taken from stock for use in the factory. Additional benching and racks were bought for $450 cash. Shop and hand tools cost $875.25 cash.

September 10, 1916 a one-year fire insurance policy covering factory building and equipment was bought from the Northwestern Fire Insurance Co. for $584.68.

At a meeting of the directors and stockholders for the purpose of reviewing Goodman’s report and forecasting a policy for the coming year, the following items were thoroughly considered:

(a) In order to pursue a vigorous sales policy such as would now be necessary and along the lines suggested by Goodman, immediate purchases in large amounts would have to be made.

(b) The company’s credit, at the present time, with more than $70,000 of current payables outstanding, would not bear further expansion. Ready funds of at least $20,000 would have to be provided within the next month to take up outstanding notes and the more pressing bills, to say nothing of the amount needed to take advantage of all discounts offered on new purchases.

(c) The contracts entered into for purchases of machinery and raw materials would soon have to be fulfilled, requiring an additional sum of $20,000 to $25,000.

(d) In view of the policy previously determined to close out the division of sundry office supplies on October 31 and push with vigor the new Knoxfraud, a widespread advertising campaign was decided upon for the next six months in order fully to present the need for the new device and its merits. It was estimated that $15,000 or $20,000 would be required for this.

(e) The absolute necessity for additional capital was apparent. Before the company could hope successfully to secure subscriptions to a new issue of stock, not only would that stock have to be made attractive, but the company’s condition as to surplus would have to be improved. Accordingly, it was voted to donate 10% of the capital stock into the treasury and offer it for sale first to the present stockholders and then to the public at not less than 90. Then it was ordered that the capital stock be increased by the issuance of $50,000 of first preferred 6% cumulative, and $25,000 of second preferred 8% non-cumulative, both classes of stock to have further participation on the following basis:

In the event of dividends in excess of the requirements for the preferred stock and 6% on the common, the first preferred should share ⅓ and the common ⅔ of such excess for an additional dividend until they should have received in all an 8% dividend and so be placed on an equality with the second preferred. Of all further dividends the common was to share ¾ of the amount of such excess dividends, and the two preferred classes the other ¼ distributable between them in the ratio which the amount of each outstanding bore to the total of both classes outstanding. It was decided, at the time of the application for an increase of capitalization, to change the name of the corporation to the Knox-Davis Manufacturing Company.

The necessary legal requirements for increasing their capital having been met, the present stockholders took all the treasury stock at 90, and the two classes of preferred were entirely subscribed for at par, payable ½ down and the remainder subject to two equal calls at the end of 4 and 8 months respectively. Cash was received for treasury stock in full and for the preferred as indicated, i.e., for the ½ down in cash at the date of subscription. Permission was granted to change the name of the corporation as requested.

Make the entries to record the above data under date of October 25, 1916. (Charge the discount on stock against the surplus received from donation.) Transfer the cash balance in the Building Fund into the General Cash, there being no longer any need of the separation.

Instructions

September 2. Make careful calculation of the balance due Boston Office Co. Record in the general journal the stock drawn for factory furniture and fixtures, as a credit to proper sales account.

October 25. Transfer of the balance of Building Fund cash back to General Cash is effected in the same way as the original creation of the fund. Issue certificates of stock to new holders.

XX

Practice Data

By October 31, 1916, all of the sundry office supplies had been closed out for $2,000 cash.

The raw materials contracted and partially paid for on August 25, were received, and on November 10 a check for the balance due less 2% discount on the contract, was sent to the New Method Manufacturing Co. (Be sure to book the proper charge to Raw Materials.) Materials were insured for one year at a cost of $175 cash.

On November 30, the last of the machinery was received from the Harvey Machine Manufacturing Co. and installed. The invoice cost was $15,000, of which $12,000 was paid in cash and the company’s note secured by mortgage on the machinery was given for the balance. In-freight and delivery on the machinery amounted to $675.40, and placement expense (not including concrete platforms and piers which had been charged to the building at a cost of $750) amounted to $225, all of which were paid in cash. Noble’s salary for the three months while passing upon and superintending the placing and erection of machinery is to be charged $400 to Machinery and $200 to Power Equipment. The additional expenditure of connecting the machinery with the power—including shafting, belting, labor, etc.—amounted to $550.50 cash.

On December 2 an insurance policy for one year covering machinery was purchased for $275.40 cash from the New Jersey Mutual.

Full factory operations were commenced on December 1, 1916, and orders were taken for Knoxfrauds for delivery beginning with the first of the year.

It was determined to extend the current fiscal period and not close the books until December 31, 1917.

Call No. 1 on unpaid subscriptions to capital stock for one-half the outstanding was made on February 25, 1917.

The advertising campaign was producing results so that to fill orders the factory had to work two shifts of men beginning with March 1, 1917. As a result of seeming prosperity and a discontent engendered by labor leaders who had recently unionized the works, a demand for a 15% increase in wages was made and refused, resulting in a walk-out on March 30. A patrol against strike-breakers was established on April 2, after about one-third of the full complement of workers needed for operation had been secured. Some of these defected and the rest were quartered in the shops to prevent violence. After three weeks of partial operation at an increased expense of $1,500 directly attributed to the strike, one of the boilers exploded damaging the building and equipment, the resulting fire consuming supplies and damaging raw materials. An investigation placed the blame on a half-crazed workman whose sympathies were with the strikers. Hospital fees for injured workmen amounted to $500. (Record these two items as cash expenditures for the purposes named under date of April 20.) The insurance companies settled the losses as follows: the building and the power equipment on which the estimated damage was $3,500 were placed in complete repair; the estimated damage on materials, determined after an inventory and comparison with stock records, amounted to $4,000 and was covered by $3,200 insurance which was paid. In making the estimate, scrap value of damaged goods was placed at $1,000 but only realized $750 when sold; machinery costing $3,500 on November 30, with a scrap value of $500, realized on sale by the company $650, the insurance received being $2,000. (Depreciation on the machinery at the rate of 8⅓% annually on cost value is to be taken into account, and the portion of the unexpired insurance—roughly estimated at $150—now canceled by the payment of the insurance on both raw materials and machinery is to be considered in making charges to the Fire Loss account.) Additional loss and expense due to decreased production and cancellation of orders because of not being able to deliver goods when promised was estimated at $7,500. The strike was finally settled by granting a 5% increase in wages.

The directors had under consideration the incorporation with the Knoxfraud of a patent listing and adding device owned by J. Q. Osgood. In view of the need of some additional capital anyway due to the strike losses, it was decided to incorporate the new device now, since it would be easier to make the needed changes at this time than after operations had been resumed. Accordingly, a rearrangement of the machinery was necessary to make room for the new machinery and place it for proper routing of the product. This entailed a cash expenditure of $750 for the rearrangement, and $5,500 for new machines to replace those disposed of and to manufacture the new device. (Make the record as of April 30.) The contract entered into with Osgood was on a royalty basis per unit turned out by the machines and for one year’s time beginning May 1, 1917. The directors decided on a continuation of the advertising campaign. To provide funds for these purposes a bond issue was determined upon—$20,000 20-year 6%, interest coupons redeemable November 1, and May 1,—secured by mortgage on the factory and its equipment. The trust agreement provided for the payment at the close of each fiscal year of $750 out of profits into the hands of the Guaranty Trust Co. for investment in securities until a sinking fund sufficient to retire the bonds at their maturity shall have been established. $15,000 of the bonds were offered for sale and were purchased at 95 for cash except one purchase on a note for $950. The remaining $5,000 were held in the treasury until needed.

Record the above transactions as of the dates given—the bond transactions took place on May 1.

Instructions

October 31. The columns in sales journal, sales returns and allowances journal, and voucher register headed “Sundry Office Supplies,” will now be given the headings “Knoxfraud” for the first two journals, and “Raw Materials” for the voucher register.

November 10. A part of the charge to Raw Materials must be made in the general journal. “Prepayment on Purchases” account will be closed.

November 30. Record the note payable secured by mortgage under the title “Purchase Money Mortgage on Machinery.” Voucher the cash portion of this purchase of machinery. Transfer the cost of concrete platforms from Buildings to Machinery account. This had previously been charged to Buildings and is merely a transfer entry here. Run Noble’s salary through the voucher register as a cash transaction, making the proper distribution of it. The payment of $550.50 for connecting power is to be charged to Power Equipment.

April 20. Charge these two items as cash expenditures to Strike Costs. In accounting for the fire losses, clear the accounts of their original values by transfer to Fire Loss account (Raw Materials Purchases $5,000, and Machinery $3,500 less depreciation for 4⅔ months, i.e., from November 30 to April 20). Credit Fire Loss from the cash book with the insurance received and with the cash received from sale of scrap. Charge Fire Loss also with the canceled insurance premiums. Record all of this under date of April 20. (The student is referred to Chapter XXXII for a full treatment of fire loss adjustments.)

XXI

Practice Data

The remaining data for the 16 months ending December 31, 1917, have been summarized in most instances and were as follows: (In making record, use the dates given or December 31, where none are given.)

June 1. A dynamo costing $525 on August 31, 1916, was sold for $415 and a larger one purchased from the General Electric Co. at a cost of $975.50 installed. (Take into account depreciation at 12½% per annum.) Additional motor trucks were purchased from the New Model Truck Co. for $1,790. (Entry was made at $1,740, taking into account a special discount of $50 for payment within 10 days. Through oversight the voucher was not paid till July 1, thus losing the discount.)

June 25. Call No. 2 was made for the balance of unpaid subscriptions to capital stock.

Voucher Register—Bought desks and tables $200,431.95, bookcases and filing cabinets $149,878.79, raw materials $62,749.63. Purchases discount was $4,290.89; in-freight and delivery $8,650; pay-roll, direct labor $99,475.50, indirect labor $11,900.17; engineers and firemen’s wages $5,125.67; building maintenance and repairs $200; machinery repairs $193.50; receiving and shipping clerks $1,550.20; assembling and setting up labor $500.80; salesmen’s salaries $173,790.25; traveling expense $91,475.89; salesmen’s commissions $79,612.40; delivery men $3,500; office salaries $15,900; patterns $1,250; factory work benches $75; experimental laboratory $2,500. Materials purchased for building maintenance and repairs $326.40, for machinery repairs $85, for patterns $550. Coal and water cost $11,193.40; sundry light, heat, and power expense $1,062.60; packing and shipping supplies $4,469.70; delivery expense, including motor-truck repairs and maintenance, $12,989.14; taxes for 1916 $585.43; factory supplies $1,124.17; sundry factory expense $750.28; royalties $875; insurance, including employers’ liability insurance for factory workmen, $2,277.45; warehouse expense $540; warehouse rent $850; sundry selling expense $2,196.40; rent $7,500; stationery and printing $2,310.17; telephone, telegraph, and postage $1,092.15; sundry office expense; $1,312.43; collection expense $1,025.43; interest and discount $902.20; bond interest $450; materials for laboratory $1,500; legal expense in defending patents $175; street and sewer improvement tax on factory site $525.60; advertising $123,470.10; notes payable paid $25,261.75; notes receivable discounted but protested and charged back, $1,260.50; advances to salesmen $1,500.

Sales Journal—Sales to sundry customers: desks and tables $290,721.15; bookcases and filing cabinets $204,422.20, Knoxfrauds $351,622.50. Cash sales were: desks and tables $91,213.10, bookcases and filing cabinets $71,253.20, Knoxfrauds $124,121.25. Sales returns and allowances were: desks and tables $10,192.50; bookcases and filing cabinets $8,269.10, Knoxfrauds $21,569.65.

Cash Book—Received: from cash sales as above; from Sundry Customers $624,736.74 less sales discount of $15,962.14; from interest $750; from notes receivable discounted $19,260.25 less bank discount of $210.25; from notes receivable $10,192.60; from rent income $160—the sub-lease on the warehouse was canceled because the room was needed for increased stock; from first call on outstanding subscriptions to capital stock $18,250, from second call $18,000. Disbursed: for vouchers payable $1,005,833.95.

Journal—Received notes from Sundry Customers $59,370.50. Gave notes to Sundry Creditors $45,000. Notes receivable discounted were paid by makers at maturity $12,379.60. Trade debts proved uncollectible from bankruptcy or other cause to the amount of $3,572.40.

Instructions

June 1. Charge the loss on sale of dynamo to Loss from Sale of Power Equipment. Accrued depreciation for 9 months must be taken into account. Run the neglected discount item through on a new voucher, making cross-reference to the original. Be sure to make proper distribution of it.

June 25. Call No. 2 is for $18,750.

Voucher Register. Make careful distribution of all items—particularly as between capital and revenue charges. Discounted notes receivable protested will be charged to Sundry Customers.

Journal. Make here also the entry necessary to complete the record of the discounted notes which went to protest, as indicated by the voucher register entry above.

XXII

Practice Data

Summarize and post the books and take a trial balance as of December 31, 1917. Record the trial balance in the usual place.

XXIII

Problem

A trial balance taken from the general ledger of the Metal Bed Manufacturing Co. for December 31, 1917, showed as follows:

The company conducts a factory for the manufacture of metal beds. It deals also in mattresses, springs, bed furnishings, etc., which it buys ready-made and sells to the retail trade. Its two classes of sales, beds and accessories are kept distinct.

Draw up a balance sheet and profit and loss statement for the year, taking into account the following inventories and other adjustments:

The leasehold was originally for 99 years of which 25 years have now expired. Bad debts are calculated as 2% of the accounts and notes outstanding. Tools now on hand amount to $4,800.25. In-freight and drayage is to be charged 55% to Factory and 45% to Selling. Light, heat, and power charge 90% to Factory, 9% to Selling, and 1% to Office. Rent, charge 60% to Factory, 35% to Selling, and 5% to Office. Insurance on buildings and equipment distribute according to the values invested, separating buildings’ values on the same basis as rent. Dividends No. 26 for 3% on preferred and No. 38 for 6% on the common are declared and paid.

Instructions

The leasehold was purchased for a lump sum with provision for the payment of a small annual rental in addition. The rent item on the books covers this charge. $1,000 a year is the amortization charge on the leasehold.

Insurance on buildings and equipment covers buildings, machinery, tools, patterns, and office, salesroom, and factory furniture and fixtures. Be careful to distribute this among the manufacturing, selling, and office sections of the profit and loss summary. Separate the asset values of these items, which show investment in the factory, the selling section, and the office section of the plant, and distribute the insurance on the basis of the investment shown.

Depreciation on buildings will be distributed also on the same basis as rent.

Dividends 25 and 37 have evidently been paid but not yet charged against Surplus. This is sometimes done when it is desired to charge an interim dividend against profits of the current year. In drawing up the balance sheet take cognizance of the fact that dividends 26 and 38 have also been declared and paid though not yet booked.

Support the balance sheet and profit and loss statement with the customary schedules. The “Cost of Goods Sold” schedule must in turn be supported by a schedule showing the “Cost to Manufacture.” As explained in Chapter III, in the cost of goods sold schedule the cost of goods manufactured—shown by the cost to manufacture schedule—takes the place of the item “Net Purchases” in a trading business. A typical form of manufacturing statement is shown below.

Exhibit B—Schedule 1
Cogswell & Sons, Manufacturers
Cost to Manufacture, for the Year Ending December 31, 1917

As stated above, this “Cost of Finished Cookers” is carried to Schedule 2, “Cost of Goods Sold,” where it is combined with its initial and final inventories to develop the cost of the cookers sold during the period. With the exception noted, this schedule, for a departmental business, follows the forms already shown and will not be repeated here. The same thing is true of the other supporting schedules.

XXIV

Problem

Using the information of Problem XXIII and the statements drawn up there, prepare adjusting and closing journal entries covering just the manufacturing activities of the business.

Instructions

It is desired here to give the student practice with the group of entries with which he is not yet familiar. The adjusting and closing entries covering the other activities of the business follow the methods already explained. In summarizing the manufacturing group of entries, the process is the same, in the main, as other summary entries. The exact entries necessary depend, of course, on the accounts carried and the way in which they are used. This applies particularly to the use of one or several different inventory accounts and the Goods in Process account.

To bring the goods in process inventory on the books requires a debit to Manufacturing and a credit to Goods in Process to clear it—i.e., Goods in Process—of the initial inventory, and then a debit to Goods in Process and a credit to Manufacturing to set up the present inventory. This secures the proper charge or credit, for the excess of the one inventory over the other, necessary to develop the correct cost to manufacture.

Where a Finished Goods account is carried, it is sometimes used as an inventory account, in which case the method of handling it is similar to that of Goods in Process excepting that the Finished Goods account is used in connection with the Profit and Loss (or Trading) account instead of the Manufacturing account. When Finished Goods account is used in this way, the balance of the Manufacturing account, i.e., the cost of goods manufactured, is transferred in toto to the Profit and Loss account in which the cost of the manufactured goods sold is developed. Where other commodities are dealt in, in addition to the manufactured product, this may result in an awkward and inconsistent method of developing the costs of the different commodities sold. This has sometimes led to the use of the Finished Goods account somewhat on the lines of a purchases account. To it the balance of the Manufacturing account is transferred, and the cost of finished goods sold is developed in it by bringing the two inventories into this account. This necessitates the use of a Finished Goods Inventory account in addition to Finished Goods account—or finished goods inventory may be set up in Merchandise Inventory account, where only one inventory account is carried. The cost of manufactured goods sold is then transferred from Finished Goods account to Profit and Loss account, where, together with the costs of the other commodities sold, it helps to effect the closing of the books.

In this problem use the Finished Beds account as an inventory account.

XXV-XXVI

Practice Data

Prepare a condensed balance sheet and profit and loss statement as of December 31, 1917, taking account of the following adjustments and inventories. Also draw up a statement of surplus for the 16 months of the current fiscal period.

Calculate depreciation at the yearly rates given below. The balance in the account is to be used as the basis, reckoning for 16 months.

Allocate the following charges as indicated:

Insurance: $2,196.43 to Factory and $519.24 to Selling.

Taxes: $1,012.24 to Factory and $411.23 to Selling.

Receiving and shipping: ¾ to Shipping and ¼ to Receiving, of which 40% to Desks and Tables, 35% to Bookcases and Filing Cabinets, 25% to Raw Materials.

In-freight and delivery: $4,400 to Desks and Tables, $3,500 to Bookcases and Filing Cabinets, $750 to Raw Materials.

Rent: $6,400 to Selling, $1,500 to Office.

Light, heat, and power: 92% to Factory, 6% to Selling, 2% to Office.

Create a reserve for doubtful accounts of ½% of all gross sales for the period. It is decided to take into account as an additional expense chargeable to this period 1¼% of outstanding trade debtors for sales discounts that will probably still be taken advantage of.

Close Loss on Sale of Dynamo against Surplus.

Close Fire Loss and Strike Costs to Surplus.

In closing, bond discount is to be amortized on a straight line basis, i.e., ¹/₄₀ each half-year. Take account of accrued amortization for the two-month period since November 1.

The experimental laboratory has succeeded in securing a patent for a listing and adding device for use with the Knoxfraud, of much simpler operation and cheaper to manufacture, than the one on which royalty is being paid. Hence, when the royalty contract expires it will not be renewed. Capitalize the laboratory expense to date.

A very careful analysis of the advertising costs shows an expenditure of $78,445.25 above normal. It is decided to transfer this to Good-Will.

Claims for damage have been filed against the railways amounting to $1,025.10. (Bring this on to the books with an offsetting reserve of the same amount.)

A dividend of 12½% on the common is declared payable January 20, 1918.

Take into consideration the sinking fund requirements of the bond mortgage.

Instructions

On the condensed balance sheet, show all receivables (other than the claims against customers on note and open account) under the title “Other Accounts Receivable,” immediately following but separate from the current asset group. Carry all inventories under one title “Inventories.” All fixed assets, except the intangibles, show under the title “Plant and Equipment,” from which show deducted the total of the various depreciation reserves. List the intangible assets individually. Set up supporting schedules for all condensations effected. The profit and loss statement must have supporting schedules, also.

Although some inaccuracies result from using the bases indicated for the calculation of depreciation, they are insignificant. Note that the basis for writing down patents has been changed since the last period. This indicates a policy of intention to secure patented improvements on the various devices owned. (See Chapter XVIII for discussion of this point.)

Declaration of a dividend on common stock means, of course, that the required dividends on both issues of preferred have also been authorized. The student is required to calculate the rates on these.

XXVII-XXVIII

Practice Data

Adjust and close the books in accordance with the data given in assignments XXV-XXVI.

Treat the account “Knoxfrauds Manufactured” as a purchase account as explained in assignment XXIV.

Handle the estimate of 1¼% of trade debtors for expected sales discounts, as an accrued item in Sales Discount account.

There is no accrual on sinking fund provisions, inasmuch as the trust deed requires that payment out of profits be made at the close of the fiscal period and not at the time bond interest falls due.

The Knox-Davis blanks, with all statements, are due at the time of the last class period and must be turned in whether completed or not, if credit is desired for the course.