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ACCOUNTING PROBLEMS 47

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

- ASSETS.

Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,000.00
Machinery and Fixtures. . . . . . . . . . . . . . . . . 75,000.00
Inventory, Mdse. and Supplies. . . . . . . . . . . 50,000.OO

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5,000.00
Accounts Receivable. . . . . . . . . . . . . . . . . . . . 40,000.OO

LIABILITIES.

Accounts and Bills Payable. . . . . . . . . . . . . . $ 30,000.00
Sales average per year... . . . . . . . . . . . . . . . . $500,000.00
Wages paid per year. . . . . . . . . . . . . . . . . . . . I7O,OOO.OO
Expense, Selling and General, per year. ... 35,000.00
Material purchased. . . . . . . . . . . . . . . . . . . . . 26O,OOO.OO

Buildings are on leased ground, lease expires in ten years, annual land rental, $1,000.o.o. 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.

ote. 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.oo, and the same rate per annum for a period of five years on new machinery costing $25,000.o.o. 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

I. 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:

Trial Balance, Dec. 31, 1918.

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,162.00
Cash deposited for dividend No. 9.... 2,050.oo
Cash deposited for bond interest..... 2,500.OO w
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . IOO,000.OO
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . I50,000.00
Machinery... . . . . . . . . . . . . . . . . . . . . . . IOO,OOO.OO
Tools and implements... . . . . . . . . . . . . 20,215.OO
Horses, wagons and harness.......... I5,OOO.OO
Office furniture... . . . . . . . . . . . . . . . . . . 2,600.50
Notes receivable... . . . . . . . . . . . . . . . . . I2,906.OO
Accounts receivable... . . . . . . . . . . . . . . 81,687.oo
Sinking fund... . . . . . . . . . . . . . . . . . . . . -I5,000.OO
Investment of surplus... . . . . . . . . . . . . IO,OOO.OO
Salary advances to salesmen. . . . . . . . . 980.00
Unapportioned organization expense... 7,350.oo
Bond discount unamortized... . . . . . . . 6,000.OO
Div. No. 9, 5% authorized 7–1–18.. 22,500.00
Good will... . . . . . . . . . . . . . . . . . . . . . . . 75,000.OO
Unsubscribed stock................. 50,000.OO
Notes payable. . . . . . . . . . . . . . . . . . . . . $ 21,000.00
First mortgage 5%, 20-yr. bonds. ... IOO,000.00
Accounts payable... . . . . . . . . . . . . . . . . 51,780.50
Due to officers and clerks... . . . . . . . . . 7,681.50
Bond interest coupons due... . . . . . . . . 2,500.OO
Div. No. 9, vouchers outstanding. ... 2,050.OO
Res. for baddebts, less $970 written off 56.00
Res. for depr. on buildings, 2%%.. 2,500.OO
Res. for depr. on machinery, 6%. . 9,000.00
Res. for dep. on horses and wagons, Io9% I,500.00
Capital stock, 5,000 shares at $100..... 500,000.00
Sinking fund reserve. . . . . . . . . . . . . . . . I5,000.00
Sales less returns and allowances...... 625,275.00
Rent of part of business premises..... 25O.OO

Inventory I2–31–17, raw material.... 37,310.50
Inventory 12–31–17, finished stock.... 15,ooo.oo

Purchases. . . . . . . . . . . . . . . . . . . . . . . . . I95,OOO.OO
Factory pay roll, labor. . . . . . . . . . . . . . 300,200.00
In-freight and cartage... . . . . . . . . . . . . 2,831.00
Office salaries and clerical force... . . . . 37,560.OO
Salaries of salesmen... . . . . . . . . . . . . . . 30,220.00
Advertising... . . . . . . . . . . . . . . . . . . . . . 25, 15O.OO
Taxes paid. . . . . . . . . . . . . . . . . . . . . . . . 2,OIO.OO
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . I,3OO.OO
Bond interest. . . . . . . . . . . . . . . . . . . . . . 5,000.OO
Interest and discount. . . . . . . . . . . . . . . 3,250.OO
Stable expense. . . . . . . . . . . . . . . . . . . . . 2,000.OO
Office and other expense............. I2,875.00
Maintenance and repairs. . . . . . . . . . . . I3,47 I.OO
Surplus, 12-31-17. . . . . . . . . . . . . . . . . . 38,535.00

$1.377.1.28.oo $1.377. 128.oo

CASH - 51

Inventory, Dec. 31, 1918:

Finished stock... . . . . . . . . . . . . . . . . . . . . . . . . $80,000.00 Materials and stock in process... . . . . . . . . . . 55,000.00 Factory pay roll accrued but not paid. . . . . . . . . . 2,875.00 Unexpired insurance. . . . . . . . . . . . . . . . . . . . . . . . . 456.OO Interest accrued on invested surplus. . . . . . . . . . . I26.32 Interest accrued on sinking fund.... . . . . . . . . . . . 875.34

The senior ascertained from the general manager and the chief accountant the following additional information:

I. It is desired to set aside the same reserve for depreciation as at the end of the previous year. 2. The practice of the Company has been to charge off Io9% of the balance of organization expense annually and they prefer to continue this policy. 3. The account with bond discounts is being charged off at the rate of 5% annually. 4. It is estimated that 2% of notes and accounts receivable will prove to be worthless. 5. An appropriation of $15,000 is to be made to the sinking fund and the cash from same to be placed in the hands of a trustee at the completion of this audit. 6. The balance of profits available for distribution is to be shown as a credit to undivided profits or surplus.

The chief accountant furnishes the senior upon request with a list of the books of account as follows:

Books of Original Entry:

(a) General journal. (e) Sales returns book.
(b) Purchases book. (f) Cash receipts book.
(c) Purchases returns book. (g) Cash payments book.
(d) Sales book. (h) Notes receivable book.

(i) Notes payable book.

Ledgers. In addition to the general ledger, there is kept subsidiary ledgers with customers and with creditors.

CASH

The senior having prepared an audit program, directs one of the juniors to proceed with the count of cash and the verifying of the cash and bank balances.

1. ACCOUNTING THEORY

The Theory of the Cash Account. This account is usually kept with more care than any other account, though it is difficult to understand why a business man should safeguard his cash with any greater degree of care than other assets representing money's worth or cash value. If as great precaution were used in the keeping of accounts with merchandise as is used with cash, there would be much less temptation for

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