Problem;

              Bulletin HASKINS & SELLS 63
Problems
THERE are presented herewith two
problems taken from the 1918 ex­aminations
of the State Board of Account­ancy
of Wisconsin. The first is somewhat
easier than the second, and is designed to
interest some of the less experienced men
on the staff. The second problem will
perhaps appeal to some of those who are
more advanced.
PROBLEM NO. 1
In checking the inventory sheets and
ledger accounts dealing with materials you
found that the following error had oc­curred
:
Dec. 31, 1916. An item of $500 was
added to inventory sheet after totals had
been obtained and was not entered in
the ledger account.
Dec. 31, 1916. An error of $1,000
in adding the inventory extensions re­sulting
in an overstatement of the inven­tory
by this amount.
Dec. 31, 1917. An error is made in
valuing one lot of material, the result of
which is an overstatement of the inven­tory
value to the amount of $2,000.
Dec. 31, 1917. An error of $10,000
in footing the inventory extensions, re­sulting
in an understatement of the
ledger inventory value by this amount.
Dec. 31, 1917. An invoice of $4,000
for materials just received included in
Accounts Payable but the amount was
not included in the inventory.
You are asked to draft the necessary
journal entry or entries to correct these
errors, and to show the net effect of the
errors upon the profits of each of the two
years. Assume that the profits shown on
the ledger for 1916 were $20,000 and for
1917, $30,000.
PROBLEM NO. 2
The National Rubber Company of Chi­cago
is to have an audit of their accounts,
and your firm is awarded the work. Dur­ing
the time that the Chicago accounts are
being prepared you are assigned to take up
the accounts at the Oshkosh Plant and the
accounts of its selling company located at
the same place. When the assets and
liabilities of both companies at Oshkosh
were taken over on December 31, 1916,
no reserves in respect of discounts and
freight allowances to trade were on record.
The selling company known in the trade as
The Michigan Rubber Company under in­structions
from Chicago was to make a
net profit equal to one-half of 1 per cent of
its sales as invoiced.
The values established in the inter-com­pany
sales and purchases are based on the
sales of the selling company less its ex­penses
and a net profit of one-half of 1 per
cent of sales invoiced. The entire output
of the National Rubber Company is sold
by the Michigan Rubber Company.
Your analysis of the accounts showed
that the Michigan Rubber Company had
accounts receivable at the close of 1916
in the amount of $560,000, the discount to
the trade averaging 4.6 per cent which was
also the prevailing rate at the close of
1917. There was included in the freight
allowances of 1917 an amount of $8,400
on sales effected in 1916 and the probable
credits to present outstandings in this re­spect
were estimated at $11,500. You are
advised by officials that this should not dis­turb
the profits of the Michigan Rubber
Company ($3,750.00) although the re­serves
created are to be on the balance
sheet of that company.
With the following statements prepare
a combined Balance Sheet that can be
further combined with the accounts made
up in Chicago, and at the same time pre­pare
a combined Profit & Loss account
that will substantiate the profit for each
company shown in the combined Balance
Sheet remembering that the surplus of the
subsidiary company is to remain at $3,-
750.00, regardless of whatever adjust­ments
you make.