ILLUSTRATION OF THE APPLICATION OF ING PRINCIPLES 1. Organization of the Parker, Webb, Anderson Company.—The data contained in this chapter repre sents actual transaction with a change of names, of the quantities and values. In order to save space the month's operations are combined into a few large transactions.
Ralph Parker, Julius Webb and George Anderson have been conducting a foundry business under the firm name of Parker, Webb & Anderson. Parker was production manager with a salary of $200 a month, Webb was sales manager and credit man with a salary of $175 a month, while Anderson was office manager and chief accountant with a salary of $150 a month. All net income or loss after adjustment for salary allowances was divided in proportion to the partners' investments, due provision being made for the duration of the investments.
A trial balance of their ledger after closing out the operating accounts as of June 30, but before the divi sion of the net income among the partners, is here given. The partners' salaries have been regularly debited to the relevant expense accounts and credited to their respective drawing accounts, to the latter of which their several drawings were charged. Depre ciation of buildings, machinery et cetera has been taken into account by charging to the various operat ing expense accounts the cost of repairs made, and by additional allowances for obsolescence which were credited directly to the accounts with the assets them selves. The valuations as given are considered fair.
The existing plant was too small to accommodate the present volume of business which was increasing steadily. The partners decided to purchase adjacent land and erect additions to their plant. The funds needed for these additions were estimated at between $30,000 and $35,000. To finance this proposition the partners interested Frank P. Graves, H. M. Kane and Edgar F. Smith, each of whom agreed to put in $7,500 if the partners left $10,000 of their profits in the business and incorporated the business. By agreement the value of the good-will was fixed at $7,000.
Accordingly the Parker-Webb-Anderson Foundry Company was organized with an authorized capital stock of $200,000 consisting of 4,000 shares of a par value, $50 each. The partners adjusted their books to
represent the division of net income; and, Parker drew out $542.50, Webb $295 and Anderson $162.50, thus leaving $10,000 of their profit in the business.
A subscription book was opened and subscriptions to capital stock were received as follows : 2. The sales agreement.—The firm of Parker, Webb & Anderson then presented to the stockholders a proposition to sell to the Parker-Webb-Anderson Foundry Company, all the assets of their foundry business, including the good-will and agreed not to en gage in any other foundry business in that State for a period of ten years for a consideration of $125,000. The terms of sale were (1) that the corporation was to assume all the existing liabilities of the firm aggre gating $63,850, and (2) was to apply the purchase price as follows: $56,250 to the payment of Parker's subscription to capital stock, $37,500 to the payment of Webb's subscription and $31,250 to the payment of Anderson's subscription. The proposition was ap proved by the stockholders as recorded on page 3 of the Minute Book and accepted by the Board of Di rectors, consisting of Parker, Webb, Anderson, Graves, Kane and Smith as also recorded on the same page. The transfer was effected and Graves, Kane and Smith paid their subscriptions in full, in cash.
It would be interesting to show the entries neces sary to record the above sale on the books of the old firm and to close their books, but space considerations forbid. We proceed at once to the books of the in corporated business.
3. The opening entries.—For the entries required to open the books of the corporation and record the subscriptions to capital stock, the payment of these and the consummation of the purchase of the estab lished business from the old firm the reader is re ferred to the first page of the journal (see page 358) and the first two entries in the cash book (page 34:5). The explanations given in connection with these en tries explain them thoroly.