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enforceable, are such as the providing of food or medicine in cases of emergency or for the performance of services under unavoidable physical conditions which would entail serious loss or injury if deferred. However, contracts made on Sunday and ratified on a “business” day or contracts delivered on a “business'' day and to take effect from delivery and not from execution are good and enforceable. Contracts or agreements are illegal which are entered into on Sunday to be performed on a week day, or which are entered into on a week day to be performed on a Sunday.

Contracts by Correspondence. An offer may be made by mail, or by telegraph, as well as in person or through an agent or representative. It may be accepted in the same manner unless the offer specifies the method of acceptance. An offer may be conditional and one of the conditions may relate to the method of acceptance in which case the condition must be complied with. In fact, all the conditions of an offer must be accepted before a contract is made. In other words, an acceptance must be unconditional.

A person who offers to contract is known as the offeror, and the person to whom an offer is made is known as the offeree. The offeror may specify the time in which an offer must be accepted, otherwise the offer must be accepted within a reasonable time. An offer made by letter or telegraph may be withdrawn by a subsequent communication provided it reaches the offeree before he has accepted.

As soon as the acceptance is placed in the hands of the telegraph company or mailed, a contract exists. That is, when the letter has been mailed, or has been dispatched by the telegraph company, and cannot be withdrawn. If the acceptance is not made by the same method as the offer, then the contract does not exist until acceptance is received. The carrier is the agent of the offeror and is responsible to him for the delivery of the acceptance.

A. THEORY QUESTIONS I. What is depreciation? What items in a business are subject to depreciation? How is it ascertained? C. P. A. Ark.

2. Name three methods of computing depreciation on machinery, buildings, etc. How should such depreciation be shown on the Balance Sheet?

C. P. A. Ohio 3. A corporation makes a practice of charging to expense and carrying to depreciation reserve account every half year, a certain percentage of the book value of its plant and machinery.

Should repairs and renewals be charged to Profit and Loss, or can they properly be charged to depreciation reserve accounts? Give reasons in full.

C. P. A. Mass.

4. How should a re-appraisal of capital assets be treated on the books of a going concern.

(a) When it involves an appreciation?

(b) When it involves a depreciation? Is such appreciation or depreciation a consideration which should be reflected in a return of net income to the federal authorities for income and excess profits tax purposes?

Inst. Ex. 1918. 5. Give some general principles which will guide you in determining whether too much or too little provision has been made for depreciation of buildings, machinery, tools, goodwill, patents, franchises, etc. Would a flat rate cover all these assets satisfactorily?

Inst. Ex. 1918. 6. You are asked by a client to discuss with him the question of reserves for depreciation and depletion of his various capital assets. State your position on this subject and enumerate the consideration you would advance in support thereof. Would you or would you not be guided by the rules laid down by the internal revenue authorities in deciding the_rates to be used?

Inst. Ex. 1918. 7. Explain the relationship between a sinking fund and an allowance for depreciation. It is claimed that in municipal enterprises the requirement that rates must be high enough to provide both for a sinking fund to pay off the bonds and also for a “Reserve for Depreciation” with which to replace the plant results in a double charge to consumers. Criticize or explain this theory.

Inst. Ex. 1917. 8. On pointing out the insufficiency of the provision for depreciation on machinery, which the directors admit, you are met with the argument, supported by evidence, that the realestate values have appreciated to an even greater extent than the entire depreciation of other assets. As this latter is not taken up on the books you are asked to allow the one to offset the other. Give reasons for your agreement or disagreement.

Inst. Ex. 1918. B. ACCOUNTING PROBLEMS 1. The officers of a company of which you are the auditor elected by the stockholders, submit to you for audit a Balance Sheet in which the following item appears:

Miscellaneous reserves (including premium on stock) $248, 000.00. On investigation you find the item is made up as fol. lows: General reserve....

.$86,000.00 Operating reserves..

6,000.00 Provision for plant depreciation.

46,000.00 Provision for amortization of leaseholds. 40,000.00 Provision for bad debts....

36,000.00 Premium on capital stock sold....

34,000.00 $248,000.00

What recommendation would you make to the officers and what course would you take if your recommendation were not followed?

Inst. Ex. 1917. 2. A machine costing $10,000.00 was estimated to have a life of ten years, with a residual value of $1,000.00. At the close of each year a charge of $900.00 was made and a similar amount credited to “reserve for depreciation.” Just prior to closing the books at the end of the tenth year the machine was discarded and sold, bringing $2,000.00, and a similar machine was bought costing $15,000.00. Give the journal entries that you would make to close the books at the end of the tenth year in order to cover these transactions and to make the necessary adjustments. Interest is not to be calculated.

Inst. Ex. 1917. 3. You are an auditor engaged by a corporation to audit their accounts. At the beginning of the period you are to cover, the following statement is drawn from the books: Capital....

$100,000.00 Surplus..

1,000.00 Accounts Receivable.

$10,000.00 Buildings after deducting $5,000.00 for depreciation...

35,000.00 Machinery after deducting $5,000.00 for depreciation..

55,000.00 Cash.....

500.00 Stock on hand....

500.00 $101,000.00 $100,000.00

During the period which you are auditing, you find buildings and machinery charged with $10,000.00 which was to cancel the entries of depreciation.

The entries were authorized according to the minute book, but not entered correctly in the general books. Formulate the necessary entries for the bookkeeper. Explain what method had been used in recording the depreciation previously charged off. Can you suggest a better method? Do you think that, under any circumstances, it is wise to charge the depreciation, previously charged off, back to the asset accounts? Explain fully.

C. P. A. Mich. In your examination of the Automobile Delivery Truck account of a company, you find the following entries:

4. In



1914 Jan. 1 Trucks 1, 2,

Aug. i Truck 2.

i Truck 2....$ 900.00 3, 4, @ $1200. $4,800.00 Sept. I Truck 4.. 750.00 July 1 Truck 5. .. .. 1,500.00

I Balance. ... 6,150.00 Aug. I Truck 6..... 1,500.00 $7,800.00

$7,800.00 The reserve for Depreciation for Automobile Delivery Truck account stood credited on January 1, 1914, with $1,800.00.

Upon analyzing the transactions represented by these items you find the following facts:

(a) Truck 5 purchased July I replaced Truck 1. The portion of the reserve for depreciation accumulated on January i for Truck I amounted to $900.00. Truck 5 was purchased on open account.

(b) Truck 2 was traded in for $850.00 on the purchase of Truck 6 costing $1,500.00. The difference was paid in cash. The reserve which had been accumulating for depreciation on Truck 2 on January 1, amounted to $300.00.

(c) Truck 4 was totally destroyed in an accident Sept. I. The reserve for depreciation on this truck amounted on January I to $300.00.

Assume the rate of depreciation to be 25% per year.

Give journal entries which would properly record the above facts and show the balances of all accounts affected, as of September 1, 1914.

C. P. A. Mich. (Note. You are not asked to make correcting entries for those already on the books but you are asked to make entries which will properly record the transactions.

Be sure to charge Operating Expense and credit the Reserve for Depreciation account for the amount of depreciation from Jan. 1, 1914, to the date of the transaction. This should be done before recording the transaction.

In order to determine the proper balance of the Reserve for Depreciation account on Sept. I, 1914, it will first be necessary to set up the depreciation on trucks 3, 5 and 6.)

C. LEGAL QUESTIONS (Note. The following questions are all taken from examinations held by the American Institute of Accountants and are, therefore, of the highest professional standard. They are given as a review.) 1. When can an offer to perform a contract be withdrawn?

What is a tender to perform a contract and what are its effects? 3. (a) Define mistake and give its effect on contracts.

(b) Define misrepresentation and state its effect. 4. When may a creditor enforce a contract with a minor?

5. A, in New York City, wrote B, in Buffalo, offering certain goods for sale at a certain price. Bwrote a letter to A accepting the offer and posted in Buffalo. Before A received the letter he received a telegram from B stating that he withdrew the acceptance. Was a valid contract made? Explain the principles involved.

Chapter Eleven


Liabilities are the financial obligations of a firm. They may be divided into two principal classes, Current and Fixed.

Current liabilities are those obligations that mature in a short period of time. They are usually undergoing a constant change. There should be sufficient current assets owned by a firm that may be realized upon quickly, if necessary, in order to liquidate the maturing current liabilities. It is in this connection, a banker is always concerned, when considering a request for a loan. The current liabilities may be divided into four classes—unsecured, secured, contingent and accrued liabilities.

A Balance Sheet audit for credit purposes is more concerned with the current liabilities than with the fixed liabilities. The banker does not extend credit to merchandising or trading concerns with the view of furnishing additional capital, but rather to enable them to carry a large stock-in-trade during a busy season, or to enable them to discount their accounts payable at a time when the company's quick assets are composed largely of stock-in-trade and accounts receivable.

Banks advance money on short time or call loans and, naturally, the current assets of the borrowing company must be such that it is apparent sufficient funds may be realized to liquidate all current liabilities.

Of course, the auditor must satisfy himself that all the fixed liabilities are properly stated, otherwise he could not certify as to the actual financial condition of the business.


Accounts payable appear in the Balance Sheet as current liabilities. Different terms are applied to these accounts, such as Purchases Ledger accounts, Creditors' accounts, Vouchers Payable, etc.

1. ACCOUNTING THEORY Accounts with Creditors. These accounts may be kept in the general ledger, but it is customary to keep only a controlling account in the general ledger and to keep the individual accounts in a subsidiary ledger, known as a purchases ledger or creditors' ledger.

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