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The Machinery Account. The book value amounting to $100,000.00 represents the original cost price of all machinery, including installation. An item amounting to $215.00 was found to have been posted to Tools and Implements, but it should have been charged to the Machinery account, as it represented the cost of a new machine. A reserve for depreciation amounting to 6% has been set up annually.

After the Machinery account was adjusted it showed a debit footing of $100,215.oo. The Reserve for Depreciation of Machinery account shows a credit of $9,000.00. The original Machinery was purchased July 1, 1916. A new machine costing $215.00 was purchased July 1, 1918.

Tools and Implements Account. This account shows a debit balance of $20,215.00. $215.00 charged to this account represents an addition to machinery and was posted to this account through an error. It was adjusted. No reserve for depreciation account was set up. The practice has been to credit the account direct with the amount of the estimated depreciation which was arrived at after a physical inventory. On December 31, 1918, a physical inventory was taken under the supervision of the different foremen. Further investigation shows that the balance of the account represents the actual cost value of all tools considered new or unworn at that date and either in the hands of the workmen or undistributed. On December Io, 1918, there had been purchased $5,250.oo worth of new tools that had not yet been distributed. The amount, at cost price, of tools used up during the year had been charged to operating expense.

Horses, Wagons and Harness Account. The balance of this account shows a debit of $15,000.00. The practice has been to charge the cost of horses, wagons, and harness purchased to the account. The account is credited with the cost price of any items sold, exchanged, destroyed or discarded. The Reserve for Depreciation account shows a balance on the credit side of $1,500.00. This account is credited annually with Io9% of the cost as shown by the account at the beginning of the year. The equipment was purchased January 1, 1917, and no additions have been made since that time.

Office Furniture Account. This account was found to show a debit balance of $2,600.50. No reserve for depreciation has been set up, the practice being to credit the account annually with the estimated amount of depreciation. The depreciation has been calculated at Io9%.

Book Variations. Montgomery says: “Where an auditor cannot secure reliable information with respect to plant valuations he should state in his report that real estate, machinery, and similar assets are stated at book valuations. He should, however, attempt to ascertain whether these book valuations honestly reflect present conditions. His services are of little real value if such items are grossly overvalued and a net worth is shown which should be corrected by an intelligent use of evidence easily available by the auditor.

“The auditor is charged with the duty of attempting to analyze the fixed assets as shown by the books to ascertain the principles upon which they have been created.”


It is appropriate that we discuss the law in its relation to property at the same time we discuss fixed assets. Fixed assets, as has already been made clear, are to be classed among the real accounts. There is a distinction, however, between real accounts and real property. Real property has already been defined in the preceding chapter. Real property, including land, buildings, etc., is a fixed asset unless it represents the stock-in-trade of the concern. Naturally, if one's business is that of a dealer in real estate, such real estate becomes a current asset the same as any other stock-in-trade.

Personal property, however, may represent either a current or a fixed asset, for it includes both the stock-in-trade and all equipment which cannot be classed as real property. It will be seen from the above distinction that it is important that the accountant be able to distinguish between real and personal property. We can do no better than to quote from Peters' Commercial Law* with regard to the kinds of property.

“Personal property is movable in its nature, and includes every particular sort of property not possessing the nature of real property, such as promissory notes, merchandise, crops, furniture, mortgages, books, stocks and bonds, animals, patents, manufactured goods, and the like. Personal property may be changed into real property, as where one takes brick and mortar— all personal property— and constructs a house with them which is then considered real property; and if in the lapse of time that same house be razed to the ground and the building material sold as such they again acquire the characteristics of personal property.

Chattels. “The name ‘chattel' is frequently applied to personal property and is the term usually employed at the common law to denote personal property in general. It is a more extensive term than goods or effects and includes every kind of property except property in land. Its meaning is com

*By P. B. S. Peters, LL. B. Published by South-Western Publishing Company.


monly confined to things movable in their character, as animals, machinery, grain, or any article that can be handled and transported.

Ways of Acquiring Title to Personal Property. “The two general ways in which title to personal property may be obtained are: (1) by original acquisition; (2) by transfer.

(1) Acquisition. “Under original acquisition the first general method of acquiring title is by occupancy. This is brought about by taking into one's possession what previously belonged to no other person, or what was abandoned by a prior OWner.

“Wild animals belong to no one in particular until they are captured. Whoever captures such an animal has the exclusive right to it while in his possession, or until it has become so far domesticated that it has the habit of returning after wandering at large. If, however, it escapes and regains its natural freedom any other person may rightfully take it who captures or kills it. A mere temporary escape, as where a lion escapes from its cage, may not amount to regaining its natural liberty.

“The finder acquires title to personal property abandoned by the owner of property that has been lost but never reclaimed. But the former owner must have completely relinquished his ownership intending to give up all his rights in it before a perfect title will accrue to the finder.

Accession. “Title by accession is defined as the right to all which one's own property produces, either naturally or artificially. This includes the crops yielded by land; the increase of animals; the uniting of the property of one with the property of another, as when an artist paints a picture on the canvas of another, the whole belongs to the artist, but the other has a claim for the value of the materials. Also by the mixing or confusion of goods, which occurs when one person wilfully mingles his own goods with another that they cannot be distinguished from each other. If the mixing was by consent, each has a pro rata interest in the entire mass.

Intellectual Labor. “Authors, composers, and inventors have the exclusive use and control for a limited time in such personal property as owes its existence or value to their skill and labor. The general doctrine is that one has a proprietary right in the product of his intellectual labor and that this right should be protected by law for the purpose of promoting science, encouraging literature, and stimulating inventions.

“A copyright is a grant to authors of the exclusive right to possess, use and dispose of their intellectual productions. This gives the owner the right of making, publishing, and selling, or authorizing others to do so for a period of twentyeight years, with the privilege of a renewal and extension for a further term of twenty-eight years.

“A copyright may be secured for books, periodicals, lectures, sermons, addresses, dramatic and musical compositions, maps, works and reproductions of works of art, drawings, photographs, prints, pictorial illustrations, motion pictures, etc.

“A patent is a grant for the exclusive privilege of making, using, and vending, and authorizing others to make, use and vend an invention for a period of seventeen years. The invention must be a new and useful art, machine, or composition of matter, not before known and used.

Transfer of Property. “Title to personal property may be acquired by transfer in two general ways: (1) by act of law; (2) by act of the parties.

“Transfer of title to personal property by act of law occurs (a) by forfeiture, (b) judgment, (c) intestacy, and (d) insolvency.

“(1) Forfeiture is a loss of title by the owner as a punishment for a crime, a penalty for the violation of law, or a breach of contract. Title by forfeiture is practically obsolete at the present time as a punishment for crime. However, there may be a forfeiture of goods for the evasion of revenue laws, or of shares in a corporation for a failure to pay assessments when due.

“(2) A judgment is a decision or sentence of law pronounced by a court or other competent tribunal having authority as the result of proceedings instituted for the redress of an injury or the settlement of a controversy. Title to personal property occurs as a result of a decree entered in an action whereby a person becomes entitled to take property belonging to another.

“(3) Intestacy is the state or condition of a person dying without having made a will, leaving personal property undisposed of. The title is vested in the administrator as a trustee for the purpose of settling the estate, and the property is distributed in accordance with the statute laws of the state where the deceased person resided.

“(4) A bankrupt's property is transferred by operation of law to an assignee or trustee who has authority to administer the same for the benefit of the creditors.


“Transfer of title to personal property by act of the parties occurs in a contract of sale which is a transfer of the property in a thing for a money consideration called a price. The transfer may be by an exchange of property, whereby the title in property passes to another in consideration of the receipt by him of other property. Again, it may be in the form of a gift which is the actual, voluntary, and gratuitous transfer of property from one person to another. The gift must be accepted by the person to whom made, but the acceptance is presumed. Then again, the transfer may be in the form of a written instrument designated a will which provides for the disposition of property to take effect after the death of the person who made the will.”


I. Mention under what circumstances, if any, reconstruction or rehabilitation expenses of a street railway company may properly be charged to property accounts. C. P. A. Ind.

2. An alteration to existing equipment is made in a factory. State what you would do with the cost of such alteration. C. P. A. Ind.

3. Auditing the yearly results of a large engineering company you find that the machinery and tools, which had been regularly depreciated for a number of years, have, during the year under audit, been appraised by a reputable appraising company, and have been revalued at a larger sum than the debit balances in the books. How would you dispose of the increased value due to the appraisal? C. P. A. Ind.

4. A company purchased several machines and, in order to install them to the best advantage, old machines which are to remain in use were moved to make room for them. The machines were large and had to be taken apart before they could be moved. To what account would the cost of moving be charged and why? C. P. A. Pa.

5. You receive the following letter:

“We have never had our books audited but are contemplating an audit now. Two of our friends have recommended you to us. Both have businesses similar to ours but their advices as to the time required are very different. Do you carry out different kinds of audits? If so, what are the different kinds and under what circumstances do you recommend one kind and when another?”

Write reply. Inst. Ex. 1917.

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