AMERICAN INSTITUTE OF ACCOUNTANTS BOARD OF EXAMINERS Examination for Admission as Associate Accounting Theory and Practice-Part II. JUNE 15, 1917, 1.30 P. M. TO 4.30 P. M. Candidates are required to answer six of the following questions but no more. 1. In the process of consolidating several competing establishments, Corporation A, the holding company, acquires $98,000, out of a total of $100,000, of the capital stock of Company B. At the time of the purchase the balance sheet of Company B showed surplus and undivided profits of $50,000. Company A bought the stock of B at 200%. Almost immediately after the purchase Company B paid a cash dividend of 25%. In what ways would the payment of this dividend affect (a) the balance sheet of B; (b) the balance sheet of A; (c) the consolidated balance sheet of A and its subsidiary companies? Give your reasons for your answer. 2. The balance sheet of a corporation shows the following credit balances: Reserve for depreciation Reserve for extension of plant Reserve for bad and doubtful debts Sinking fund reserve Insurance reserve Reserve for pensions Reserve for contingencies Reserve for taxes What would you assume to be the nature of each of these items? Can better terms be substituted for any of those used? In what circumstances would each of the above accounts be debited, and when debited what would be the corresponding credit? If the business were to be sold for the amount of its net worth as shown by the balance sheet which of these items would represent a proper addition to the capital stock in determining the selling price? 3. A machine costing $10,000 was estimated to have a life of ten years, with a residual value of $1,000. At the close of each year a charge of $900 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, and a similar machine was bought costing $15,000. 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 necessary adjustments. Interest is not to be calculated. 4. How should the following items be treated in the balance sheet: Notes receivable endorsed and discounted at a bank; Contracts for future delivery at a stated price, the work being Guarantee given that machinery sold will last five years? 5. A company is under obligations to pay $10,000 to sinking fund trustees "out of profits." The following transactions take place. 1914 Dec. 31 $10,000 cash paid to sinking fund trustees. 1915 Jan. 5 July 1 Trustees invest in $10,000 of the 5 per cent bonds of Jan. 1 Coupons collected. Jan. 10 $10,000 bonds bought at 101 and interest. Give the journal entries on the company's books for the above transactions. 6. A company which keeps no perpetual inventory records but takes an inventory annually on Dec. 31, suffers a fire loss on March 1. How would you proceed to compute the inventory on hand at that date? 7. In preparing a balance sheet of a corporation how would you classify or deal with securities (a) representing the entire ownership of a plant. (b) representing an interest in a competing company. (c) representing the investment of a sinking fund. (d) representing the investment of a temporary surplus of cash. (e) stocks or bonds issued by the company itself? 8. What are the main objects to be sought in arranging the distribution of the work of the treasury and accounting departments of a business? What general lines of distribution would you adopt to attain these objects? (Candidates are not expected to explain methods in detail or draw forms). Theory and Practice By HERBERT BECK, C. P. A. "He (Arnold) prided himself not upon telling the truth, but upon telling the unpopular half truth." G. K. Chesterton. Introduction to Matthew Arnold's Essays. A banker is a dealer in credit. When a panic impends it is the duty of the banker to extend rather than to contract his loans. Depositors in banks are entitled to government protection, determining the percentage of reserve that must be held against their deposits. The first sentence can be taken for our purpose to represent the theory; the second the practice of banking in the United States. In theory the banker does not deal in his customers' money, but in his own credit. The higher his credit the larger the funds that his customers commit to him to dispose; the better the protection his banking skill enables him to extend, the higher his credit becomes. Granted human perfection the theoretic arrangement is best for banker, client and general public. The need of protecting reserves arises not from the theory being bad, but from the human element in the banker. The necessity of regulation is moreover not an unmixed blessing. The maintenance of a fixed percentage of reserves to deposits curtails the power to extend credit in times of panic, and encourages stock and produce gambling through the concentration of call money in a limited number of centres. The remedy provided by the federal reserve banks for the evils of the old national bank act is one of degree only. The theory still holds good, however nearly the compromise may come to securing satisfactory results. The student of banking makes a grievous mistake if he starts with the idea that insistence on a fixed percentage of reserve is an elementary rule, just as the student of finance makes a grievous mistake if he imagines that a gold standard or any metallic standard is "per se" a requisite of exchange. Both are and must be recognized as compromises between the ideal and the immediately practical. To consider them otherwise is to substitute the yardstick for reasoning-a fault to which our generation is all too prone. The above paragraphs are but the text for a little dissertation on matters accounting. There appears to be a growing tendency to substitute the yardstick for reasoning; to overestimate both the potency and logic of the accountants' "non possumus." The old saying that the exception proves the rule does not apply to theoretical accounting or economics. If an exception can be demonstrated the rule does not hold, and if no absolute rule can be established a simpler expression of the problem must be sought before a rule is possible. As the Greeks of old apprehended, an unassailable foundation is the pre-requisite of an unassailable deduction. Two accounting examples will suffice to illustrate the difference between rules and dicta: (a) The treatment of discount on securities sold for (b) The necessity of providing a cash fund to take DISCOUNT We are told that discount on the sale of bonds is interest and that never, or only in exceptional cases, can it be capitalized with propriety. Both claims are too radical. While discount cannot be interest, it is true that in certain cases it is so nearly akin that there is no great harm, aside from a predilection for accuracy of statement, in calling it interest. That discount is not interest, or even akin to interest, in many cases can be logically demonstrated. Claims that discount is interest are therefore merely dicta and not the statement of a rule. A company, at its inception, issues five year bonds at 90 and at maturity refunds them by an issue of capital stock at par. Having written off 10 per cent. of the par value of the bonds, |