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The Journal of Accountancy

Official Organ of the American Institute of Accountants

Vol. 28

DECEMBER, 1919

No. 6

American Institute of Accountants

BOARD OF EXAMINERS

Examination in Auditing

NOVEMBER 13, 1919, 9 A. M. TO I P. M. Answer any ten questions and no more: 1. Outline in the case of a balance-sheet audit a programme of

instructions for verification of cash and bank balances. 2. Outline a system of internal check for a wholesale grocery

concern doing a business of $3,000,000 a year, with about 2,000 customers. The system should co-ordinate with an

annual audit by professional accountants. 3. A corporation owns nearly all of a block of land. The

remaining portion is purchased subject to an existing lease. The corporation sets aside out of surplus an amount believed to be sufficient to extend its plant over the entire block at the expiration of the lease. What ledger title should be given to the amount set aside, and

how should the amount be set up on the balance-sheet? 4. In making "detailed” audits some auditors verify all post

ings and footings of general and subsidiary ledgers, even though controlling accounts are kept. State reasons for

and against such procedure. 5. Describe three methods of calculating depreciation and sug

gests cases in which each might be feasible or desirable. 6. The federal reserve board stipulates that paper to be eligible

for re-discount must be supported by a statement of the
borrower showing a satisfactory excess of quick assets
over current liabilities.
(a) For such purpose what items are

1. Quick assets ? 2. Current liabilities?

(b) A man owns 100% of the stock of each of two cor

porations. The business of one corporation is leased to the other, so that the lessee corporation has title to all quick assets. What kind of a statement

should be submitted ? 7. In auditing the accounts of a corporation for the first time

you find that during prior years the federal income-tax returns (which had not been audited by the government) were, in your opinion, inaccurate and that a substantial additional amount of taxes is due to the government. Your client claims that the returns were correct, having been prepared under the advice of counsel. You believe that the client is acting in good faith. What, if anything, would you recommend? What bearing, if any, would the

facts have upon a balance-sheet to be certified by you? 8. Describe a proper arrangement of audit working papers:

(a) During the audit;

(b) When ready for filing. 9. In the audit of the accounts of an instalment house with

20,000 open accounts, where weekly payments are due and made in currency, how would you verify the out

standing balances ? 10. You ascertain that a client owes a substantial amount for

assessments against local benefits. No liability therefor appears on the books. How would you proceed to determine the amount due? How would you reflect such

amount on the balance-sheet? 11. On March 15, 1919, you received instructions to audit the

accounts of a large corporation whose fiscal year ended December 31, 1918. The corporation has subscribed for Liberty bonds through various banks and at December 31, 1918, certain subscriptions had been paid for in full and delivery of the bonds accepted, while in other cases part payments only had been made. Bonds have also been delivered to employees who have subscribed and paid for them in full. Describe how you would proceed to verify the asset shown on the balance-sheet at December 31, 1918, representing bonds on hand and part payments made on subscriptions, so that you can give an unqualified certificate to your clients as of December 31, 1918.

13. In making an audit of a trust estate you find the following

amounts treated as income:
(a) Profit on retirement of $10,000 bonds paid off at par

plus 5%.
(b) Dividend of $500 due prior to decedent's death.
(c) Interest on $10,000 note for half-year to June 30th

(testator having died on March 31st).
(d) Dividend of $1,000 for half-year to June 30th received

July 1st.
What criticism, if any, would you advance in regard to these

credits ?

Examination in Commercial Law
NOVEMBER 13, 1919, 2 P. M. TO 6 P. M.

Give reasons for all answers.

NEGOTIABLE INSTRUMENTS Answer three of the following four questions: 1. (a) A holds B's note for $5,000, which is drawn to the order

of A. How can A transfer the note to C and at the same

time avoid liability on it? (b) Mention the various kinds of endorsements and give an

example of each. 2. A received from B a negotiable promissory note for $2,500

payable on demand to the order of B and endorsed by B to the order of A. Six months later the maker of the note became insolvent. Has B any defense to an action

by A against him as endorser ? Explain fully. 3. A delivered his cheque to B for $150 in payment for a horse

and later gave notice to the bank on which it was drawn not to pay it. What are B's rights (a) against the bank

and (b) against A? 4. As an accommodation to B, A on June 1, 1919, endorsed B's

note for $1,000 payable to C's order on July 1, 1919. On July 2, 1919, C endorsed and delivered the note to D. What rights, if any, has D against A?

CONTRACTS Answer two of the following three questions: 5. A, having contracted on January 1, 1919, to sell B 100 bbls. of flour to be delivered on July 1, 1919, notified B on

February 1, 1919, that he would not perform the contract. What were B's rights upon the receipt of this

notice? 6. A, in New York, wrote B in Buffalo, offering certain goods

for sale at a certain price. B wrote a letter to A accepting the offer and posted it in Buffalo. Before A received the letter he received a telegram from B stating that he withdrew the acceptance. Was a valid contract made?

Explain the principles involved. 7. What are the rights of a vendor of personal property when the vendee wrongfully refuses to accept delivery thereof?

CORPORATIONS Answer both the following questions: 8. What is meant by issuing of stock, and in return for what

may stock lawfully be issued ? 9. From what funds may dividends be paid and who determines whether and when they shall be paid?

BANKRUPTCY Answer both the following questions: 10. Define and distinguish insolvency at common law and under

the federal bankruptcy act. 11. A commences a suit against B and obtains an attachment

of B's property. Thirty days thereafter A enters judgment. The next day a petition in bankruptcy is filed against B, and twenty days thereafter he is adjudged a bankrupt. What is the effect, if any, on A's attachment and judgment?

PARTNERSHIP 12. A and B were partners in business. A died and C was

appointed executor of his will. What are the rights, if any, of C, as executor, with respect to the partnership assets and business?

INCOME TAX Answer two of the following three questions: 13. To what extent are salaries of officers and bonuses given

to employees deductible in computing the net income of corporations under the federal income-tax law?

14. A New York corporation received during the year divi

dends amounting to $2,000 on stock of a Massachusetts corporation owned by it and $1,000 on stock of a British corporation owned by it. Do these dividends constitute taxable income of the New York corporation under the

federal income-tax law ? 15. A purchased a plot of vacant land in 1903 for $5,000. In

1919 he sold it still vacant for $7,500. How should this transaction be treated by A in preparing his income-tax return?

Examination in Accounting Theory and Practice

PART I
NOVEMBER 14, 1919, 9 A. M. TO I P. M.
Answer questions 1 and 3, and any three other questions:
1. Spark Plug and Auto Supply, Inc., is the manufacturer of a

patented spark plug and is also dealer in automobile sup-
plies. From the following trial balance (as of October
31, 1919), and information prepare balance-sheet and
profit and loss statements showing cost of manufacture of
spark plugs and gross and net profit on sales.
Advertising

$26,450 Accounts receivable

180,105 payable

$42,500 Bills receivable

35,000 payable trade creditors....

22,700 First National bank...

150,000 Bonds 5% 1st mortgage.

250,000 Building factory

225,000 Bad debts written off...

7,850 Capital stock:

Common fully paid
Authorized $250,000
Issued ....

100,000 6% Preferred. Authorized and issued....

300,000 Dividend preferred stock.

18,000 Delivery expenses

7,140 Delivery, equipment and trucks.

9,250 Directors' fees ....

2,500 Discount on sales

12,200 Freight: raw materials ....

12,050 automobile supplies

2,345

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