Note Office Furniture is credited direct for amount of depreciation, no reserve being set up.

The Working Sheet on the following pages shows the Trial Balance, the posting of the preceding correcting and adjusting entries, and a proper classification of the nominal and real accounts as prepared by E. R. Stockman, senior accountant, from his working papers and those of the juniors, J. I. King and C. E. Shaw, his assistants.

A. THEORY QUESTIONS

I. Would you advise showing profits for prospectus purposes before or after deducting war profits and income taxes? State your reasons briefly. Inst. Ex. 1919.

2. (a) What items do you consider should be charged or credited direct to surplus?

(b) Would you regularly make small adjustments of subsequently discovered errors through this account?

(c) Is the balance at credit of surplus ever in any circumstances a liability, and, if so, to whom? Inst. Ex. 1918.

3. What would you consider satisfactory evidence of the correctness and propriety of expenditures of the following classes: Wages paid,

Land purchased,

Commission paid to bankers for sale of bonds,

Salary of president,

Expenses of president,

Pensions paid to ex-employes,

Directors' remuneration?

Inst. Ex. 1918.

4. There is a confusion in the minds of many people between statements of "revenue and expense" on the one hand and of "receipts and payments" on the other hand. Discuss the distinctive features of such statements showing wherein they differ. Inst. Ex. 1918.

B. ACCOUNTING PROBLEMS

I. Write a reply to the following letter and prepare a Balance Sheet as requested therein:

Dear Sir:

Our bank has asked us for a statement for credit purposes. Will you please prepare one for us?

Our plants stand at their cost price, which is $60,400. We have set up a reserve for a depreciation of $10,200. There is a mortgage for $20,000 on the plant and interest on the mortgage is at 6 per cent and is paid up to 3 months ago. We hold $10,000 of notes receivable and have discounted $25,000 of notes with the bank. Our accounts receivable, which we consider good, amount to $18,000, including $3,000 due from one of our employees on personal account. Our trade accounts receivable are subject to 5 per cent discount if paid at due date, and only $1,000 is now past due. Our accounts in suspense amount to $4,000. I believe these are 50 per cent good. We have ordered a new machine to cost $6,000, but it has not yet been delivered. We have endorsed a note for $6,000 for our friends, the A. B. Co., but I am confident they will take care of it when it is due. Our accounts payable amount to $4,200. Our insurance amounts to $400 a year and has six months to run. We have a note at the bank for $5,000, interest paid to date. We own 50 shares of stock in the company from which we buy raw material. They cost us $2,800 and are surely worth it, though we might have some difficulty in selling them in a hurry. Our inventory is taken at a low selling price, which is 10 per cent more than it cost us. The amount is $17,600. In addition we have a special contract for one of our customers. The contract price is $25,000. We have spent $12,000 on it and expect to have to spend $4,000 more, and we have received $10,000 on account. Our cash in bank is $4,800 and cash in hand $200.

I have told you all the facts I think you need. Perhaps some are not required, but I want to give the bankers all the information they ought to have in the way they expect to get it.

I do not, of course, expect you to accept any responsibility for the figures in the statement, but simply to prepare the statement in the best form you can from this letter. If you have any suggestions as to how I can better meet the bank's requirements let me have them.

(Signed) H. A. SMITH.

Inst. Ex. 1917.

2. You are asked to audit the books of the Michigan Manufacturing Company with a view to ascertaining their true financial position at the close of the year ending Dec. 31, 1918. The following Trial Balance is submitted: