+ $78.03
+
+![]() A table showing interest calculations for D.E. Draper and H.M. Monroe.
+
+30
+ILLUSTRATIVE PROBLEMS
+
+
+
+ | H. M. Monroe, Current Account |
+ 181.00 |
+
+
+ | Interest on Capital |
+ 181.00 |
+
+
+ | Interest on drawings at 6% as follows: |
+
+
+ | $1,800 for 5 days |
+ $ 56.00 |
+
+
+ | 500 " 9 " 30 " |
+ 82.00 |
+
+
+ | $,000 " 3 " 30 " |
+ 40.00 |
+
+
+ |
+ $121.00 |
+
+
+
+The balance of the Interest on Capital account as brought on the books by the above entries is $1,360.53, of which Draper is charged with two-thirds and Monroe with one-third. The net result is a debit in Draper's account and a credit in Monroe's, amounting to $89.42.
+
+The analysis of each account, so far as the interest entries are concerned, follows:
+
+DRAPER, CAPITAL ACCOUNT
+
+
+
+ | Debits: |
+ |
+
+
+ | Interest on Drawings |
+ 878.63 |
+
+
+ | Two-thirds of debit balance of Interest Account |
+ 907.02 |
+
+
+ | Total |
+ 895.05 |
+
+
+ | Credit: |
+ |
+
+
+ | Interest on Capital |
+ 925.63 |
+
+
+ | Net debit |
+ 839.42 |
+
+
+
+MONROE, CAPITAL ACCOUNT
+
+
+
+ | Credit: |
+ |
+
+
+ | Interest on Capital: |
+ $653.93 |
+
+
+ | Debits: |
+ |
+
+
+ | Interest on Drawings: |
+ $181.00 |
+
+
+ | One-third of debit balance of Interest Account: |
+ 455.51 |
+
+
+ | Total |
+ 274.51 |
+
+
+ | Net credit |
+ 859.42 |
+
+
+
+ILLUSTRATIVE PROBLEMS 31
+
+(b)
+
+Monroe would have suffered if the agreement had contained no interest clause, because his investment is more than one-third of the total capital, whereas he is entitled to only one-third of the profits.
+
+Points Illustrated in Problem 15
+
+(a) Interest on Capital. The nature of interest on capital and the correct methods of recording it are outlined in Volume I, Chapter XXXI, §§ 9-11.
+(b) Interest on Drawings. The connection between interest on capital and interest on drawings is pointed out in Volume I, Chapter XXXI, § 10. As this matter is commonly misunderstood, it is suggested that this reference be examined with considerable care.
+
+---
+
+Problem 16
+
+A and B form a partnership, A investing $30,000 and B $50,000. They agree to share profits and losses equally. They further agree to and do leave their original investments intact. At the end of the first year, the profits from the operation of the business amount to $30,000, against which A has drawn in twelve equal monthly instalments on the last day of each month an aggregate amount of $9,000; B has drawn against his profits on the last day of each quarter the total sum of $2,500.
+
+Prepare journal entries adjusting interest at 8% per annum in respect to both investments and drawings;
+
+32
+ILLUSTRATIVE PROBLEMS
+
+and render statements showing what each partner has in the business at the end of the year.
+
+**Solution to Problem 16**
+
+
+
+ | Interest on Capital |
+ $4,000.00 |
+
+
+ | A. Capital |
+ $1,500.00 |
+
+
+ | B. Capital |
+ 2,500.00 |
+
+
+
+To credit each partner with interest on his capital at 5%:
+
+
+
+ | A. Capital |
+ $06.85 |
+
+
+ | Interest on Capital |
+ 206.85 |
+
+
+
+To charge A with interest on drawings at 5% as follows: $750 for the first month, $750 for the last day of each month amount to a monthly drawing of $750; the first drawing would be charged interest for 11 months, the second, 10 months, etc., making an interest charge on $750 for a total of 66 months or 5½ years, or $496.45.
+
+
+
+ | B. Capital |
+ 187.50 |
+
+
+ | Interest on Capital |
+ 187.50 |
+
+
+
+As B drew $2,500 on the last day of each quarter, he would be charged interest on the first drawing for 9 months, on the second for 8 months, on the third for 7 months, making a total of 18 months' interest charge on $2,500 at 5% or $197.20.
+
+The account with Interest on Capital would be closed into Profit and Loss, reducing the balance of such account to $26,393.75, which would be closed out by the following entry:
+
+
+
+ | Profit and Loss |
+ $26,393.75 |
+
+
+ | A. Capital |
+ $13,196.87 |
+
+
+ | B. Capital |
+ 13,196.88 |
+
+
+
+The following statements show each partner's interest in the business at the end of the year.
+
+ILLUSTRATIVE PROBLEMS
+33
+
+A
+
+
+
+ | Investment |
+ $80,000.00 |
+
+
+ | Less—Drawings |
+ 5,000.00 |
+
+
+ | Net Investment |
+ $75,000.00 |
+
+
+
+Add:
+Interest on Capital 8 $1,500.00
+One-half Net Profit 13,196.88 $14,696.87
+Less—Interest on Drawings 106.85 14,490.62
+Net Capital, December 31. $85,490.62
+
+B
+
+
+
+ | Investment |
+ $50,000.00 |
+
+
+ | Less—Drawings |
+ 10,000.00 |
+
+
+ | Net Investment |
+ $40,000.00 |
+
+
+
+Add:
+Interest on Capital 8 $2,500.00
+One-half Net Profit 13,196.88 $13,696.88
+Less—Interest on Drawings 187.50 15,569.38
+Net Capital, December 31. $85,569.38
+
+Points Illustrated in Problem 16
+
+(a) Basis of Profit Distribution. In this problem profits and losses are shared equally by agreement between the partners. The various bases upon which profits are usually divided and the law which governs in case no provision is made are discussed in Volume I, Chapter XXXI, §§ 6 and 7.
+
+(b) Interest on Capital. The net effect of the interest on capital in this problem was to increase B's capital by $509.38, with a corresponding reduction in A's capital. This provides extra compensation to B for his excess capital contribution. This matter is discussed in Volume I, Chapter XXXI, § 11.
+
+I
+
+34
+ILLUSTRATIVE PROBLEMS
+
+**Problem 17**
+
+Wilson and Lawson are partners, sharing profits and losses equally. The partnership is dissolved December 31, 1919, at which time Wilson's capital investment was $10,000, and Lawson's $8,500. The total liabilities of the firm are $25,000 which includes $5,000 due Wilson on loan account and $2,500 due Lawson on loan account. The assets of the firm are disposed of for $830,-000 on May 1, 1920. Prepare accounts closing the partnership and showing the position in which the partners stand to each other. No allowance for interest is required.
+
+**Solution to Problem 17**
+
+BALANCE SHEET OF WILSON AND LAWSON
+December 31, 1919
+
+
+
+ | Cash |
+ $30,000.00 |
+ Wilson Capital |
+ $10,000.00 |
+
+
+ | Profit and Loss |
+ 7,500.00 |
+ Lawson Capital |
+ 8,500.00 |
+
+
+ |
+ |
+ Trade Creditors |
+ 17,500.00 |
+
+
+ |
+ |
+ Wilson's Loan Account |
+ 5,000.00 |
+
+
+ |
+ |
+ Lawson's Loan Account |
+ 8,500.00 |
+
+
+ |
+ $37,500.00 |
+ |
+ $37,500.00 |
+
+
+
+The net loss of $7,500 is divided equally between Wilson and Lawson, leaving Wilson's account with a credit of $6,250, and Lawson's account with a debit of $1,250.
+
+The amount due outside creditors is paid, after which Wilson's loan of $5,000 is paid, leaving a cash balance of $7,500. Inasmuch as Lawson's capital
+
+ILLUSTRATIVE PROBLEMS 35
+
+account has been overdrawn $1,250, Wilson should insist that $1,250 of the amount due Lawson on his loan should be withheld to cancel his deficit. Wilson would take $6,250 of the remaining cash balance, and Lawson, $1,250, closing all the accounts.
+
+**Points Illustrated in Problem 17**
+
+(a) Distribution of Loss. The loss in this case was distributed between partners on their profit and loss sharing basis. This is in accordance with principles explained in Volume I, Chapter XXXII, § 6.
+
+(b) Distribution of Assets. The asset cash was distributed between partners in the amounts called for by their capital accounts. The reason for this is stated in Volume I, Chapter XXXII, § 6.
+
+(c) Offsetting Losses and Deficit. As explained in Volume I, Chapter XXXII, § 9, the deficit in one partner's account should be offset by his credit for loans.
+
+---
+
+**Problem 18**
+
+Brown, Smith, and Jones are partners sharing profits and losses equally, their original investments being $20,000, $3,000, and $45,000 respectively. Upon agreement to dissolve partnership, the debts are liquidated and the remaining assets converted into cash, realizing $22,000. How should the cash be divided?
+
+**Solution to Problem 18**
+
+Setting up a balance sheet, will give us the following:
+
+
+
+ | Assets |
+ Liabilities |
+ Equity |
+
+
+ | $22,000 (cash) |
+ $18,750 (debts) |
+ $33,750 (equity) |
+
+
+
+36
+
+ILLUSTRATIVE PROBLEMS
+
+BALANCE SHEET OF BROWN, SMITH, AND JONES
+
+
+
+ | Cash |
+ $82,000.00 |
+ Brown |
+ $99,000.00 |
+
+
+ | Deficit |
+ 48,000.00 |
+ Smith |
+ 5,000.00 |
+
+
+ |
+ |
+ Jones |
+ 45,000.00 |
+
+
+ |
+ $79,000.00 |
+ |
+ $79,000.00 |
+
+
+
+Dividing the deficit of $48,000 equally leaves Brown's account with a credit of $4,000, Smith's with a debit of $11,000, and Jones' with a credit of $29,000.
+
+Brown and Jones thus have a claim against Smith for $11,000, which when paid increases the cash to $83,000, this being shared by Brown and Jones in accordance with their capital interests: Brown $4,000; Jones $29,000.
+
+If the claim against Smith is uncollectible, there would be a loss of $11,000 to be borne equally by Brown and Jones, leaving Brown's capital account with a debit of $1,500, and Jones' with a credit balance of $23,500. Jones would then take the cash of $22,500 and have a claim against Brown for $1,500.
+
+Points Illustrated in Problem 18
+
+(a) Distribution of Deficit and of Assets. As explained in Volume I, Chapter XXXII, § 6, the deficit should be distributed on the profit and loss sharing basis, whereas the cash should be distributed according to the amounts called for by the capital accounts.
+
+(b) Loss on Partner's Account. Where one partner has a debit balance which is uncollectible by the other partners, the latter share this loss in the ratio of their profit and loss sharing percentages. This matter is discussed in Volume I, Chapter XXXII, § 9. In this connection the partnership law (Chapter XXXIX of the Consolidated Laws),
+
+ILLUSTRATIVE PROBLEMS 37
+
+passed in New York State on May 5, 1919, provides in Section 71, "If any, but not all, of the partners are insolvent, or, not being subject to process, refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the relative proportions in which they share the profits, the additional amount necessary to pay the liabilities."
+
+**Problem 19**
+
+If the liquidation of a partnership consumes some time, it may be desired, in settlement, to pay off the partners in instalments as the assets are converted into cash.
+
+To illustrate the procedure in such a case, we will consider the case of a partnership consisting of R, G, and L, each with a credit to his capital account of $80,000. Profits and losses are divided, 50% to R, 30% to G, and 20% to L. The firm suffers a loss of $10,000, leaving assets of $50,000. The partners proceed to convert the assets into cash and later have cash to the amount of $20,000 to distribute.
+
+(a) How should the first instalment be divided?
+
+(b) The next instalment for distribution is $16,000 and the final instalment is $12,000. How should each of the last two instalments be divided?
+
+**Solution to Problem 19**
+
+(a) Dividing the loss of $10,000 among R, G, and L in the proportions stated above, leaves R with a
+
+38
+
+ILLUSTRATIVE PROBLEMS
+
+capital balance of $15,000, G with $17,000, and L with $18,000.
+
+To make an equitable division of the first instalment, we should treat the unliquidated assets as a potential loss to be divided in proper proportions. This potential loss amounts to $80,000, the partners' shares being $15,000, $9,000, and $6,000 respectively. This leaves the capital accounts as follows: R none; G $8,000; L $12,000. On the first instalment, R therefore would receive nothing, G would receive $8,000, and L $12,000. R would then have a capital of $15,000, G $8,000, and L $6,000, which accounts now stand in the same ratio as that by which profits and losses are shared in accordance with the contract.
+
+(b) The second instalment of $16,000 would be shared in the proportion of 50, 30, and 20, R receiving $8,000, G $4,800, and L $3,200. The capital accounts would then show R $7,000, G $4,200, and L $2,800, or a total of $14,000.
+
+As the final instalment is only $12,900, a loss of $2,000 in liquidation has been sustained, which pro-rated leaves R with a capital of $6,900; C $3,600; and L $2,400. This is the basis on which the $12,900 would be divided.
+
+Points Illustrated in Problem 19
+
+(a) Preventing Overpayment of Partner. The principal point in this problem concerns the method of distributing assets in partial payments upon dissolution of a firm in such a way as to prevent the overpayment of any one partner. This very important matter is fully discussed in Volume I, Chapter XXXII., § 8.
+
+ILLUSTRATIVE PROBLEMS 39
+
+**Problem 20**
+
+Three partners contribute capital as follows: X $80,000, Y $45,000, Z $15,000. They share profits in the proportion of X 30%, Y 30%, and Z 20%. X's salary is $5,000, Y's salary is $3,000, Z's salary is $2,000. At the end of their fiscal period Z dies. The books are closed and the net assets ascertained to be $152,500, X and Y liquidate the firm's affairs and distribute the surplus assets quarterly as follows:
+
+
+
+ | First quarter |
+ $62,410.00 |
+
+
+ | Second quarter |
+ 74,622.30 |
+
+
+ | Third quarter |
+ 31,987.30 |
+
+
+
+$149,000.00
+
+Prepare a statement of the partners' accounts, showing how the distribution of assets should be made, together with the apportionment of the loss.
+
+(NY C.P.A. Examination.)
+
+**Solution to Problem 20**
+
+
+
+ | Capital contributed |
+ $150,000.00 |
+
+
+ | Salary credited to partners |
+ 10,000.00 |
+
+
+ | Accountability to partners |
+ 160,000.00 |
+
+
+
+As there are net assets of only $152,500, there is a loss of $7,500 to be distributed: $3,750 to X, $8,250 to Y, $1,500 to Z.
+
+The assets are distributed in cash instalments as they are liquidated. In such a case, the basis of distribution must anticipate any shrinkage in assets in order that no partner shall be overpaid. The method is as follows:
+
+When the first instalment is ready for distribution,
+
+40
+
+**ILLUSTRATIVE PROBLEMS**
+
+treat the remaining assets as a potential loss, and see what balances would remain to the credit of each partner if such a loss were to be divided in the proportion agreed upon. The credit balances resulting in such a case would be the basis for distribution of the first instalment.
+
+Proceeding in accordance with the method outlined we find that if the first instalment of $42,410.20 was all that would ever be realized from the assets, there would be a shrinkage of $11,069.80, which divided would show X's share to be $55,044.90, Y's $83,026.94, Z's $82,017.96. If these were charged against the partners, the resulting balances to the accounts would be: X, credit, $36,205.10; Y, credit, $12,723.06; and Z, debit, $6,517.96.
+
+Therefore, Z's debit must be treated as an additional potential loss to be borne by X and Y in the proportion of $\frac{2}{5}$ and $\frac{3}{5}$. X's share being $4,073.75$ and Y's $82,444.23$. Deducting these losses from the balances above, gives X a credit balance of $392,131.37$ and Y $810,278.83$, the basis for the division of the first instalment.
+
+This does not yet leave the accounts standing in the ratio of 30, 30, and 20, Z's account being proportionately less; since the purpose is to establish the above ratio as soon as possible, the second instalment is treated the same as the first. After it is ready for distribution the remaining assets of $35,467.50 are treated as a potential loss shared, X $17,733.75, Y $10,640.25, and Z $7,093.50, leaving X a credit balance of $41,384.88, Y $24,830.92, and Z $88,406.50, which is the basis for distribution of second instalment.
+
+![]() A pie chart showing the distribution of assets among three partners.
+
+ILLUSTRATIVE PROBLEMS 41
+
+The accounts of X, Y, and Z now show credit balances in the ratio of 50, 30, and 20, the same as the basis for sharing of profits. The third instalment is distributed in this proportion. As nothing then remains, there is a final loss in liquidation of $3,500, which is borne in the agreed ratio and in accordance with the capital accounts as they then stand.
+
+Following are skeleton ledger accounts with each partner.
+
+
+
+ | X |
+ |
+ |
+ |
+
+
+ | 50% Net Loss |
+ $ 3,750.00 |
+ Investment |
+ $90,000.00 |
+
+
+ | First Instalment |
+ 38,131.87 |
+ Salary |
+ 5,000.00 |
+
+
+ | Second |
+ 41,384.88 |
+ |
+ |
+
+
+ | Third |
+ (30%) |
+ 15,983.75 |
+ |
+
+
+ | 50% Net Loss |
+ |
+ 1,256.09 |
+ |
+
+
+ |
+ |
+ |
+ $95,000.00 |
+
+
+
+
+
+ | Y |
+ |
+ |
+ |
+
+
+ | 50% Net Loss |
+ $ 255.00 |
+ Investment |
+ $45,000.00 |
+
+
+ | First Instalment |
+ 10,478.83 |
+ Salary |
+ 3,000.00 |
+
+
+ | Second |
+ 44,839.92 |
+ |
+ |
+
+
+ | Third |
+ (30%) |
+ 9,596.85 |
+ |
+
+
+ | 50% Net Loss |
+ |
+ 1,165.09 |
+ |
+
+
+ |
+ |
+ |
+ $48,000.00 |
+
+
+
+
+
+
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+Z
+
+
+
+ | 2/10 Net Loss | $775.00 | Salary due
Balance
|
|---|
+
+
+
+Balance
|
+
+$8259.69
|
|---|
+
+Balance
|
+
+$283.99
|
|---|
+
+Balance
|
+
+$873.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
+
+$923.99
|
|---|
+
+Balance
|
|---|
+
+After crediting interest on capital and distributing the net loss, A's capital account shows a credit of
+
+44
+ILLUSTRATIVE PROBLEMS
+
+$8,812.50; B's a credit of $4,212.50; and C's a debit of $525. A and B should insist that the $250 salary due A be treated as a set-off against the debit balance in his account. This being the case, his remaining balance of $525 could be regarded as a potential loss to be shared by A and B in the proportion in which they share losses, the $12,500 cash then being divided between them in accordance with their adjusted capital accounts. If the claim of $825 against C could be collected, there would be $13,025 in cash with which to pay off the amounts due A and B.
+
+Points Illustrated in Problem 21
+
+(a) Interest on Capital. The nature of interest on capital and the accounting means by which it is recorded are described in Volume I, Chapter XXXI, § 10.
+
+(b) Distribution of Loss and of Assets. As explained in Volume I, Chapter XXXII, § 6, the loss is distributed on the profit and loss account. The net cash is divided in accordance with the capital accounts after they have been adjusted.
+
+(c) Loss on Partner's Account. The distribution of such a loss among solvent partners is discussed in Volume I, Chapter XXXII, § 9. This point is covered also by the New York Partnership Law which is quoted in the points illustrated for Problem 18 to which reference should be made.
+
+(d) Salary of Partner. As explained in Volume I, Chapter XXXI, § 12, there can be, strictly speaking, no salary for any partner. The so-called salaries of partners which are chargeable against profits before the determination of the net amount divisible are discussed and explained in this reference. The New York Partnership Law passed May 3, 1919 (Chapter XXXIX of the Consolidated Laws)
+
+ILLUSTRATIVE PROBLEMS 45
+
+provides in Section 40: "No partner is entitled to remuneration for acting in the partnership business." This, how-ever, does not prevent the allowance of the so-called sal-a-ry in the way explained in Volume I, Chapter XXXI, § 12.
+
+---
+
+**Problem 22**
+
+**JONES AND ROSS**
+
+**TRIAL BALANCE**
+
+June 30, 1920
+
+
+
+ | Land (cost) |
+ 8 $5,000.00 |
+
+
+ | Building (cost) |
+ 37,200.00 |
+
+
+ | Furniture and Fixtures (cost) |
+ 5,880.00 |
+
+
+ | Cash |
+ 7,682.53 |
+
+
+ | Accounts Receivable |
+ 65,751.40 |
+
+
+ | Accounts Payable |
+ 701.99 |
+
+
+ | Inventory, December 31, 1919 (cost) |
+ $4,466.75 |
+
+
+ | Mortgage Payable |
+ $ 35,000.00 |
+
+
+ | Notes Payable |
+ 9,840.03 |
+
+
+ | Notes Payable |
+ 5,000.00 |
+
+
+ | C. R. Ross, Salary: |
+ -250.00 |
+
+
+ | Reserve for Depreciation of Building : |
+ 7,500.00 |
+
+
+ | Reserve for Depreciation of Furniture and Fixtures: |
+ 1,750.00 |
+
+
+ | Reserve for Loss on Bad Accounts and Notes Re-cieve-able: |
+ 109.89 |
+
+
+ | H. B. Jones, Capital: |
+ -60,000.00 |
+
+
+ | C. R. Ross, Drawings: |
+ 1,869.00 |
+
+
+ | C. R. Ross, Capital: |
+ -30,000.00 |
+
+
+ | C. R. Ross, Drawings: |
+ 4,763.05 |
+
+
+ | Purchases: |
+ 62,687.19 |
+
+
+ | Freight, Express, and Cartage Inward: |
+ 53,581.69 |
+
+
+ | Traveling Expenses: |
+ 1,984.54 |
+
+
+ | Taxation Expenses: |
+ 4,167.49 |
+
+
+ | Delivery Expenses: |
+ 3,866.72 |
+
+
+ | Office Expenses: |
+ 1,266.81 |
+
+
+
+
+C. R. Ross's share of net income for the year was $225.
+
+
+
+ | 46 |
+ ILLUSTRATIVE PROBLEMS |
+
+
+ | Insurance |
+ $35.00 |
+
+
+ | Interest on Notes Receivable |
+ 136.84 |
+
+
+ | Interest on Notes Payable |
+ $28.90 |
+
+
+ | Interest on Accounts Payable |
+ $75.00 |
+
+
+ | Cash Discounts on Purchases |
+ 486.72 |
+
+
+ | Cash Discounts on Sales |
+ 372.04 |
+
+
+ |
+ $829,880.57 |
+
+
+ | Cost of merchandise on hand June 30, 1920, $83,718.49. |
+
+
+
+The firm of Jones and Ross conducts a wholesale and retail hardware business, owning its own real estate.
+
+By the terms of the partnership agreement, profits and losses are shared two-thirds by Mr. Jones and one-third by Mr. Ross: Mr. Ross who acts as general manager, is allowed a salary of $250 a month, which is considered as an expense of operating the business; profits not withdrawn by partners are not considered a part of their capital investments, but are credited to the partners' drawings accounts, and may be withdrawn by the partners at their convenience. On December 31, 1919, Mr. Jones' drawings account contained a credit balance of $3,629.40. Mr. Ross' drawings account had no balance.
+
+The item of freight, express, and cartage inward on merchandise purchases is not considered a part of the cost of goods purchased. The stock is very varied, and to distribute properly the cost of freight and carting among the numerous commodities would be difficult and unsatisfactory.
+
+During the six months ending June 30, 1920, the Sales account has been credited for $86,108.89 representing gross sales, and debited for $3,421.70 representing sales returns and allowances; the Purchases account
+
+ILLUSTRATIVE PROBLEMS 47
+
+has been debited for $57,529.46 gross purchases, and credited for $4,207.86 purchase returns and allowances.
+
+In order that the results of the period may be correctly shown, the following items require adjustment:
+
+
+
+ | Unexpired insurance as of June 30 |
+ $60.00 |
+
+
+ | Taxes accrued to June 30 |
+ 102.50 |
+
+
+ | Interest accrued on interest-bearing notes receivable to June 30 |
+ 84.60 |
+
+
+ | Interest accrued on interest-bearing notes payable to June 30 |
+ 75.00 |
+
+
+ | Office supplies on hand which cost |
+ 150.89 |
+
+
+
+Depreciation on the building is figured at the rate of 2% per annum; on the furniture and fixtures, at 10% per annum. It is desired to set aside out of the profits for the period a further reserve for loss on bad accounts and notes receivable amounting to ½% of the net sales.
+
+Required:
+(a) Adjusting entries
+(b) Working sheet
+(c) Profit and loss statement
+(d) Balance sheet
+(e) Closing entries
+
+**Solution to Problem 22**
+
+**(a)**
+
+JONES AND ROSS
+
+ADJUSTING ENTRIES
+June 30, 1920
+
+
+
+ | Unexpired Insurance |
+ $60.00 |
+
+
+ | Insurance |
+ $60.00 |
+
+
+
+To bring onto the books the unexpired insurance as of this date.
+
+
+
+ | 48 ILLUSTRATIVE PROBLEMS |
+ |
+
+
+ | Taxes |
+ 102.50 |
+
+
+ | Taxes Accrued |
+ 102.50 |
+
+
+ | To bring onto the books the taxes accrued to date. |
+ |
+
+
+ | Accrued Interest on Notes Receivable |
+ 84.60 |
+
+
+ | Interest on Notes Receivable |
+ 84.60 |
+
+
+ | To bring onto the books the interest accrued to date on interest-bearing notes receivable: |
+ |
+
+
+ | J. A. Shore's note of October 15, 1919, $500, |
+ |
+
+
+ | 8 months, 1% per month, at 6% |
+ 841.25 |
+
+
+ | R. C. O'Neal's note of June 8, 1920, $500, 6 |
+ |
+
+
+ | months, 27 days at 6% |
+ 3.35 |
+
+
+ | Interest on Notes Payable |
+ 75.00 |
+
+
+ | Interest Accrued on Notes Payable |
+ 75.00 |
+
+
+ | To bring onto the books the interest accrued to date on interest-bearing notes payable: |
+ |
+
+
+ | Note of April 1, 1920, favor First National Bank, |
+ |
+
+
+ | $5,000, 90 days at 6% |
+ |
+
+
+ | Office Supplies on Hand |
+ 150.89 |
+
+
+ | Other Supplies on Hand |
+ 150.89 |
+
+
+ | To bring onto the books the cost of office supplies on hand as of this date. |
+ |
+
+
+ | Depreciation of Building |
+ 375.00 |
+
+
+ | Reserve for Depreciation of Building |
+ 375.00 |
+
+
+ | Estimated depreciation of building for the six months ending June 30, 1920. Figured on cost (875,500) at the rate of $2% per annum. |
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+ILLUSTRATIVE PROBLEMS
+49
+
+(c)
+JONES AND ROSS
+TRADING AND PROFIT AND LOSS STATEMENT
+For Six Months Ending June 30, 1920
+
+Net Sales:
+Gross Sales ..... $866,108.89
+Less Returns and Allowances ..... 5,411.70 $88,697.19
+Deduct—Cost of Sales ..... $44,260.75
+Goods on Hand January 1, 1920 ..... $44,260.75
+Net Purchases:
+Gross Purchases ..... 857,529.46
+Less Returns and Allowances ..... 4,407.86
+$532,160 $77,582.55
+Less—Goods on Hand June 30, 1920 ..... $21,710.40 $31,571.95
+Gross Trading Profit ..... $830,815.94
+
+Deduct—Operating Expenses:
+Freight, Express, and Cartage Forwarded ..... $1,993.34
+Express and Telegrams ..... $1,070.40
+Salaries and Wages ..... 5,300.78
+Delivery Expenses ..... 1,100.81
+Other Operating Expenses ..... 14,966.21
+Taxes ..... 106.50
+Insurance ..... 173.00
+Depreciation of Buildings ..... 372.00
+Depreciation of Furniture and Fixtures ..... 831.90 17,071.98
+Net Trading Profit ..... $815,743.82
+
+Add—Extraneous Income Items:
+Interest on Notes Receivable ..... 8 160.84
+Cash Discounts on Purchases ..... 498.72 647.56
+Total Income ..... $814,390.82
+
+Deduct—Extraneous Expense Items:
+Interest on Notes Payable ..... $315.90
+Interest on Mortgage Payable ..... 873.00
+Cash Discounts on Sales ..... 372.02
+Loss on Bad Debts and Accounts Receivable ..... 415.44 1,974.56
+Net Profit for Period: R H Jones-two-thirds ..... $8,877.64
+C H Ross-one-third ..... -4,138.86 $4,738.82
+
+
+
+
+ |
+ |
+ |
+
+
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+$814,390.82 |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+ |
+
+
+ |
+ |
+$814,390.82 |
+
+
+| R H Jones-two-thirds |
+$8,877.64 | $814,316.46 | | | | | | | | | | | | | | | | | | | | | | | | | |
+ | C H Ross-one-third
+ |
+ | ACCOUNTS |
+ TOTAL BALANCE FOR BOOKS |
+ ARGUMENTS |
+
+
+ |
+ Debits |
+ Credits |
+ Debits |
+ Credits |
+
+
+ | 1. Land... |
+ $ 34,000.00 |
+ |
+ |
+ |
+
+
+ | 2. Building... |
+ 22,000.00 |
+ |
+ |
+ |
+
+
+ | 3. Furniture and Fixtures... |
+ 3,850.00 |
+ |
+ |
+ |
+
+
+ | 4. Accounts Receivable... |
+ 6,771.40 |
+ |
+ |
+ |
+
+
+ | 5. Notes Receivable... |
+ 1,850.00 |
+ |
+ |
+ |
+
+
+ | 6. Inventory... |
+ 84,998.72 |
+ |
+ $15,000.00 |
+ |
+
+
+ | 7. Merchandise Putable... |
+ |
+ |
+ |
+ |
+
+
+ | 8. Accounts Payable... |
+ 9,245.00 |
+ |
+ |
+ |
+
+
+ | 9. Notes Payable... |
+ 1,850.00 |
+ | Description | Amount |
|---|
| Reserve for Depreciation of Building |
|---|
| Reserve for Depreciation of Furniture and Fixtures |
|---|
| Reserve for Less on Bad Accounts and Notes Receivable |
|---|
| H. B. Jones, Drawings |
|---|
| C. R. Jones, Drawings |
|---|
| Furniture and Fixtures |
|---|
| Merchandise Putable |
|---|
| Accounts Payable |
|---|
| Notes Payable |
|---|
| Reserve for Depreciation of Building |
|---|
| Reserve for Depreciation of Furniture and Fixtures |
|---|
| Reserve for Less on Bad Accounts and Notes Receivable |
|---|
| H. B. Jones, Drawings |
|---|
| C. R. Jones, Drawings |
|---|
| Furniture and Fixtures |
|---|
| Merchandise Putable |
|---|
| Accounts Payable |
|---|
| Notes Payable |
|---|
| Reserve for Depreciation of Building |
|---|
| Reserve for Depreciation of Furniture and Fixtures |
|---|
| Reserve for Less on Bad Accounts and Notes Receivable |
|---|
| H. B. Jones, Drawings |
|---|
| C. R. Jones, Drawings |
|---|
| Furniture and Fixtures |
|---|
| Merchandise Putable |
|---|
| Accounts Payable |
|---|
| Notes Payable |
|---|
| Reserve for Depreciation of Building |
|---|
| Reserve for Depreciation of Furniture and Fixtures |
|---|
| Reserve for Less on Bad Accounts and Notes Receivable |
|---|
| H. B. Jones, Drawings |
|---|
| C. R. Jones, Drawings |
|---|
| Furniture and Fixtures |
|---|
| Merchandise Putable |
|---|
+
+
+
+
+
+
+
+
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |
+
+ |