THE LAW OF CONTRACTS (Continued) Contracts are not always valid. They may be illegal, void, voidable or unenforceable. The validity of a contract depends upon the law of the state in which it is executed. In case of a suit to enforce a contract, the laws of the state in which the suit is brought govern the remedy. If a contract is executed in one state and is delivered in another state, the laws of the state in which it is delivered govern the delivery.

Illegal Contracts are always void and have no standing whatever in the eyes of the law. Agreements to do anything contrary to law or agreements against the public policy are illegal and void.

A Voidable Contract is one in which one of the parties may legally refuse to carry out the agreement, but at the same time, if the injured party desires, the other party can be compelled to carry out the agreement. It will be seen that the law is protecting one of the parties, but not the other. An example is a contract made with a minor, an alien, an insane person, or an intoxicated person.

An Unenforceable Contract will not be enforced by courts if either party objects to its terms. Suppose A agrees to sell B his house and lot for $5,000.00 and B agrees, orally to buy. The contract is unenforceable because contracts to sell real estate must be made in writing, or at least there must be a memorandum in writing.

Mistakes. A Mistake of Fact exists when a mistake has been made as to whom one is contracting with, concerning the subject matter, or concerning the nature of the contract. When a mistake of fact exists the contract is void and cannot be enforced.

A Mistake of Law exists when a party misunderstands the legal effect of his word or acts. "Ignorance of the law excuses no one," therefore, a mistake of law is no cause for escape from a contract.

Fraud. Fraud is the wilful misrepresentation of material facts and if proven the contract becomes voidable.

Misrepresentation in the form of a mere expression of an opinion does not constitute fraud. When fraud is performed, the contract may be declared void at the option of the defrauded party, but can not be annulled by the one committing the fraud.

Alteration of a contract wrongfully, amounts to fraud and makes it voidable. This must not be misconstrued. If one were to be given a check properly signed and made out with the exception that the date was omitted, he would have the right of filling out what was understood to be the correct date. Likewise, if the amount was omitted, he might fill in an amount himself, and if he could show that it was the correct amount the check would be good. Do not sign contracts of any kind with any part of the terms blank. Be sure that they are properly filled in in detail.

A. THEORY QUESTIONS

1. What is the chief consideration in the arrangement of ledger accounts? C. P. A. Ind.

2. What is meant by Controlling Accounts? Give three illustrations of the use of such accounts. State the advantages of such accounts. C. P. A. Ohio.

3. Describe a method of keeping accounts so that the aggregate sums due from customers and due to creditors can be known without preparing a schedule of the accounts of such customers and creditors, and so that an independent balance of the ledger, containing only the real, nominal, special and controlling accounts, exclusive of the individual accounts of customers and creditors may be taken. C. P. A. N. Y.

Sheet?

Wherein does the Trial Balance differ from the Balance

5. Would you, or would you not, be satisfied with a list run off on an adding machine by some one connected with the institution under examination after you had compared the amount of each item with the listed figures? Give your reason. C. P. A. Del.

B. ACCOUNTING PROBLEMS

I. For the six months ending June 30, 1916, the balances appearing on the books of George Parker are as follows:

Prepare Trial Balance and Balance Sheet. (No merchandise

inventory).

2.

A manufacturer is desirous of securing a partner and furnishes a statement covering five years' operations as follows:

Buildings are on leased ground, lease expires in ten years, annual land rental, $1,000.00. Buildings revert to owner at expiration of lease.

New machinery when installed ten years ago cost $50,000.00. Additions since cost $25,000.00. No depreciation has been charged off. All repairs and replacements charged to expense.

What in your opinion would be a fair price to be contributed for a half interest? Explain fully. C. P. A., Mich.

(Note. In connection with this problem you may assume that upon investigation you ascertained the following facts:

(a) That the accounts receivable are guaranteed to be collectible, hence no reserve on account of doubtful accounts need be made.

(b) That the inventory of merchandise and supplies was priced at cost and that the accuracy of the items listed was tested and found to be accurate.

(c) That the buildings are so constructed that at the expiration of the lease they will have no residual or scrap value, hence a reserve for depreciation of 5% per annum for the past ten years should be calculated and a further reserve of 5% per annum should be set up during the remainder of the lease.

(d) That at least 5% depreciation per annum for ten years should be calculated on machinery costing $50,000.00, and the same rate per annum for a period of five years on new machinery costing $25,000.00. It is estimated that the machinery will continue to depreciate at a rate of 5% per annum. (e) That all the liabilities are stated and that there are no contingent liabilities.

(f) No valuation need be placed on good will.

Submit a statement showing how you arrived at the value of a half interest).

C. LEGAL QUESTIONS

1. Distinguish between a Mistake of Fact and a Mistake of Law.

2. What makes a contract illegal?

C. P. A. Mich.

3. What is the difference between fraud and misrepresentation? C. P. A. Ohio.

4. Define or describe, void, voidable and unenforceable contracts. Inst. Ex. 1917.

5. A contract executed and delivered in California is the subject matter of a suit in New York. What laws will govern the validity of the contract, and what laws will govern the remedy? State the rule in such cases. Inst. Ex. 1917.

Chapter Four

(NOTE. As a student of accounting, you will want to become familiar with the practical side of public accounting and auditing, and in order that you may best do this, the actual procedure of a Balance Sheet audit will be discussed in the following chapters. It will be taken up in such a manner that you will have an opportunity to observe the work of both junior and senior accountants).

The correspondence shows that the name of the client is The Blank Manufacturing Company. (See Engagement Blank, page 18, for details.) A firm of accountants has been employed by the Board of Directors to make a Balance Sheet audit as at the close of business December 31, 1918, principally for credit purposes, but also to establish whether there have been any errors of principle on the part of the chief accountant of the Company, who planned the system of accounts in use, and who heretofore has prepared all financial statements. Each accountant has been furnished with a letter of introduction and the usual auditor's equipment. The senior in charge is an experienced man who understands how to direct the work of a number of juniors and has full authority for deciding all questions relative to procedure and accounting principles. Two juniors are assigned to work with the senior. The juniors understand that when they are in doubt relative to any part of the work, or if they discover anything that is not clear to them, they are to report immediately to the senior for instructions. A full set of working papers must be kept by each accountant relative to the work completed by him. When the audit is completed the senior will arrange all working papers in order and make a report to the managing senior, who will prepare therefrom final reports which will be submitted to the client.

On reporting at the general office of The Blank Manufacturing Company on January 15, 1919, and being properly introduced to Mr. L. W. Shields, general manager, Mr. Harold Pond, chief accountant, and the heads of departments, the senior is given a Trial Balance taken from the general ledger, and other information as follows: