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be formal; it may be merely a note, a letter, a telegram, a receipt or miscellaneous papers connected in some way so as to make an intelligent contract.

There are two exceptions to the above: First, in case the buyer has paid part of the purchase price; second, in case the buyer has accepted and actually received part of the goods. Hence, a part payment will bind a bargain to sell goods, but it is a poor substitute for a written contract. Likewise, if a purchaser has accepted all or part of the goods the contract will be binding, but at the same time, the purchaser might still dispute the prices, warranties and other terms of the agreement. WRITTEN CONTRACTS ARE THE ONLY DEPENDABLE MEANS FOR PROVING AGREEMENTS.

Warranties. A warranty is defined in Webster's dictionary as "an assurance or undertaking by the seller of property, expressed or implied, that the property is or shall be as it is represented, or promised to be as to quantity, quality or title."

An expressed warranty is a statement made by the seller concerning the quality, durability, working ability, etc., of the article sold in order to induce the buyer to purchase. In the case of a sale the warranty may be either oral or written, but in the case of a contract to sell goods over a certain sum in value, then it should be in writing. These statements must be definite and not qualified. It is often difficult to determine the difference between statements of fact and expressions of opinion. The buyer must be on the lookout to detect mere expressions of opinion. "Get-rich-quick” schemes are unloaded on an unsuspecting public because they do not note the difference between a statement of fact and misrepresentation or an expression of opinion.

In every sale there are certain implied warranties. The seller warrants by the mere act of selling goods (a) that he has the right to sell, or in the case of a contract sale that he will have the right to sell when the time for the sale arrives; (b) that the buyer shall not be disturbed by claims made by others against the goods he has purchased; (c) that the goods are free from claims, charges or incumbrances at the time of sale.

Remedies. The seller has certain defined remedies for wrongful acts of the buyer. The buyer also has certain remedies in case of breach of contract or breach of warranty by the seller.

Under certain conditions the seller may recover the sale price and under other conditions he may recover damages. If the seller contracts to sell and tenders the goods covered by the contract and the buyer refuses to receive the goods without just cause, he may recover the sale price, or he may elect to retain the goods and recover damages. Usually the amount of damages will be the difference between the market price of the goods and the contract price.

There are so many exceptions to the general rules concerning contracts to sell and sales that all can not be enumerated here. In actual practice, specific cases involving a knowledge of the statutes will often occur, but the accountant or auditor will always be able to look up the statutes in question before making decisions.

Auction Sales. Auction sales are made in accordance with the terms printed on the hand bills advertising it. Deposits may be required before one is entitled to bid, or deposits may be required after the bid is made. All bids below a certain sum may be refused, but it is customary to sell to the highest bidder. Before bidding on goods offered at auction sale, one should acquaint himself with the terms of sale.


1. Explain in full your method of arriving at a correct allowance for bad debts.

C. P. A. Mich. 2. Differentiate between the following discounts, viz: 2% 10 days, 30 days net; and 5% on settlement. C. P. A. Ind.

3. A corporation has a controlling account in the general ledger for accounts receivable. The balance of the controlling account is $80,000. The debit balances of the individual accounts total $100,000, and the credit balances total $20,000. Is a statement correct which uses the controlling account balance as an asset? If not, what would you do? Give reasons. C. P. A. Mich.

4. Mention three classes of transactions which a debit item may represent in a customer's account.

Inst. Ex. 1918. 5. Indicate what would guide you in examining and criticising accounts receivable carried on the branch office books of a business. What would you require before

(a) accepting the debits as good or
(b) writing off those you were told were bad?

Inst. Ex. 1918.


When auditing the books of a company which are not in balance, the following errors are discovered:

(1) A check drawn for $110 is entered in the cash book as a collection of $100 and posted to the debit of the creditor's account as $110.

(2) A customer's credit memo of $25 is included as a sale and posted to the credit of the customer's account as $20.

(3) The debit side of the cash book is underfooted $100, and a check drawn for $100 in payment of a creditor's account is not entered in the cash book.

(4) Discounts received of $250 are posted as discounts allowed.

To correct the foregoing errors, prepare journal entries for accounts in the general ledger and subsidiary ledgers which are controlled by accounts in the general ledger.

C. P. A. Kans. and Mo. (Note. When errors are found in an audit of the accounts, adjusting entries are necessary. These are usually made in the general journal and posted to the accounts affected. The first item is not quite clear, but you may assume that through the use of controlling columns the following entry was made in the cash book: Cash...

.$100.00 Customer's controlling account.

$100.00 The above entry was posted as a debit of $110 to the correct individual creditor's account.

The other items should be easily understood and there should be no difficulty experienced in framing an adjusting entry for each.)

2. The Trial Balance of a manufacturing firm taken January 1, 1897, is as follows: Capital A..

$40,000 Capital B..

20,000 Plant and Machinery.

$35,000 Purchases...

38,000 Sales...

95,000 Stock on hand January 1, 1896.... 15,000 Labor..

24,000 Salaries..

6,000 Traveling Expenses.

2,500 Interest.....

600 Stationery and Printing.

1,200 Rents and Taxes....

3,500 Discounts and Allowances..

1,250 Fuel......

3,000 Insurance (one year from July 1, 1896)

1,150 Freight..

1,500 General Expenses.

600 Bank Overdraft.

5,000 Creditors..

4,000 Accounts Receivable.

25,000 Rent of Steam Power.

1,500 Cash on hand....

200 Loan Account...

7,000 $165,500 $165,500

Stock on hand January 1, 1897, $23,000; each partner to be credited 6% on his capital for one year before profits are ascertained; 3% to be written off accounts with creditors for discount; 10% to be written off machinery and plant for depreciation; unexpired insurance to be taken into account; net profit to be divided 2–3 to A and 1-3 to B. Draft adjusting and closing entries. Prepare final Trial Balance and a Balance Sheet. You need not set up ledger accounts as a part of your solution.

C. P. A. N. Y.

(Note. Do not misinterpret the item "3% to be written off accounts with creditors for discount.”. It appears that there is a trade discount of 3% that was not deducted from the invoices before they were entered on the books; therefore, an adjusting entry is necessary. The following entry is the proper adjustment:

Trade Discounts.

$120.00 Purchases.

$120.00 To write off a trade discount of 3% on purchases, same not having been deducted from the invoices before they were entered on the books.

The amount of the reserve for trade discounts should be deducted from the sum of accounts payable in the Balance Sheet.)

3. The following figures are taken from the books of A. B. Mills as at December 31, 1906. You are requested to. prepare from them a Trial Balance and a Balance Sheet. The period is one year. Yarn (used)..

$25,000 Sales...

81,250 Wages..

22,500 Discounts Received ...

2,500 Dyeing..

12,500 Power, Light and Heat.

3,125 Boxes and Cases...

1,250 Repairs...

685 Sundry Expenses (Mills)..

1,060 Insurance..

155 Salaries..

2,500 Taxes..

310 Depreciation.

425 Advertising..

1,250 Traveling Expenses.

1,125 Returns...

1,000 Commissions.

1,875 Discounts Allowed...

440 Interest on Loans..

410 Cash at Bank and on hand..

14,065 Bills Payable....

37,500 Sundry Debtors..

22,500 Sundry Creditors.

6,250 (Concluded on page 90)

Fixtures, Fittings, Office...

4,750 Capital..

93,750 Machinery and Plant.

65,925 Bills Receivable..

38,400 (Note. The above problem is taken from the final examination of the Society of Accountants and Auditors in London, England, June, 1907.)


1. (a) What does a seller impliedly warrant in the sale of a chattel? (b) State all the legal requisites of a valid sale.

Inst. Ex.

2. Define a sale. What is the difference between a sale and an exchange or barter?

C. P. A. Ind. 3. Can a merchant sell articles that he is to manufacture next season?

C. P. A. Ind.

4. What is an account stated?

C. P. A. Mich.

5. Answer briefly:

(a) What is a debt and what can a creditor demand in payment of a debt?

(b) When a creditor accepts in satisfaction payment of less than the full amount of a debt, how can the debtor guard against further demands?

(c) When, where and to whom must payment of a debt be made?

(d) Is the debtor legally entitled to a receipt?

(e) Which has the prior right to apply a payment against any one of several debts, the debtor or the creditor?

(f) When a partial payment is made on a debt bearing interest, in what manner is it applied? C. P. A. N. Y.

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