the statement in the best form you can from this letter. If you have any suggestions as to how I can better meet the bank's requirements let me have them.

Company D is organized for the purpose of consolidating the three companies whose balance sheets are given above, engaged in allied businesses. Company D is authorized to issue $2,000,000 preferred stock, and $350,000 common stock. It arranges to buy stock of the subsidiary companies on the following terms:

On these terms D acquires $290,000 of A stock, all the preferred stock of B, $100,000 of common stock of B, and $100,000 of C stock. The stock bought was obtained from individual holders, the stock of A and C held by B, as well as some stock held by non-consenting stockholders, not being acquired. The remaining preferred stock of D was held by the company. The rest of the common stock authorized was sold for cash at par. The expenses of organization amounted to $5,000 and were paid in cash.

Of the accounts receivable held by C, $20,000 were due from B. Of the sundry debtors on the books of B, $5,500 were due from A.

Company D also issues $500,000 bonds which it sells at 105 and pays $500,000 cash for a plant which it buys direct.

Prepare a consolidated balance sheet.

4. A, B and C were in partnership, A's capital being $90,000, B's $50,000, and C's $50,000. Their agreement is to share profits in the following ratio: A, 60%; B, 15%; C, 25%. During the year C withdrew $10,000. Net losses on the business during the year were $15,000, and it is decided to close out the business. It is uncertain how much the assets will ultimately yield, although none of them is known to be bad. The partners therefore mutually agree that as the assets are liquidated, distribution of cash on hand shall be made monthly in such a manner to avoid, so far as feasible, the possibility of paying to one partner cash which

he might later have to repay to another. Collections are made as follows: May, $15,000; June, $13,000; July, $52,000. After this no more can be collected. Show the partners' accounts, indicating how the cash is distributed in each instalment, the essential feature in the distribution being to observe the agreement given above.

5. A machine costing $81.00 is estimated to have a life of four years, with a residual value of $16.00. Prepare a statement showing the annual charge for depreciation according to each of the following methods:

(a) Straight line.

(b) Constant percentage of diminishing value.

(c) Annuity method.

(For convenience in arithmetical calculation assume the rate of interest to be 10 per cent.)

Discuss the significance of each of the methods.

AMERICAN INSTITUTE OF ACCOUNTANTS

BOARD OF EXAMINERS

Examination for Admission as Member

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. A corporation was formed which acquired several plants, issuing therefor $17,000,000 bonds and $24,000,000 stock. It was well known at the time that this capitalization exceeded the true value of the assets (including goodwill) acquired, to an extent of $11,000,000. In the first year, after paying expenses and interest on bonds, the business yielded considerable net income. May such net income be used to pay dividends, or must it be first applied towards making up the $11,000,000?

2. (a) Explain in full the theoretical difficulties in regard to each of three commonly used methods of distributing overhead burden in cost accounting.

(b) Show how the appropriateness of each system may be affected by the nature of the business in which it is employed.

(c) Give briefly your views on the proper treatment of "Idletime."

3. Discuss the propriety of writing off goodwill, giving your reasons in full.

4. What are organization expenses? How are they to be treated in accounts? At what point do expenses cease to be organization expenses and become operating expenses? Is the deficiency in the early years of a corporation's activities (whether an actual loss or a deficiency between the earn

ings and the normal rate of return) similar to organization expenses? How should such deficiencies be treated in the accounts? To what extent is such a deficiency similar to interest paid during construction? Should such deficiencies be carried on the balance sheet? If so, should they be written off, and how and when? May the deficiencies representing the difference between actual earnings and normal rate of return be capitalized, in the strict sense of having capital stock issued to a corresponding sum? State clearly just who is affected, and how, by the different methods of treating the items mentioned above.

5. Explain the relationship between a sinking fund and an allowance for depreciation. It is claimed that in municipal enterprises the requirement that rates must be high enough to provide both for a sinking fund to pay off the bonds and also for a "Reserve for Depreciation" with which to replace the plant results in a double charge to consumers. Criticize or explain this theory.

6. Argument has been strongly urged that aside from any question of possible mismanagement, or of the difficulty of making satisfactory investments to yield the same rate as is paid on the bonds, a sinking fund for bonds is more expensive than an arrangement for the serial repayment of bonds. This is illustrated by the case of $20,000 5% bonds. If these are paid off in a series, one each year, the total payment made will be principal $20,000, interest $10,500, total $30,500. The annual sinking fund to pay these bonds would on a 5% basis amount to $604.85, making in twenty years $12,097, and the interest paid on the bonds would be $20,000, total payments $32,097. The apparent excess burden is accordingly $1,597.

Discuss the above argument and show clearly just what the figures mean and in what the apparent saving actually consists.

7. When a corporation undertakes its own construction work on what basis is it permissible for it to make charges to prop