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annual rate has already been computed. The effective annual rate may be computed as follows:

1.039,136.23' – 1 = .079,804,1 or 7.980,41% A table of repayments has been computed and shows that at this rate the loan is completely repaid at the end of the term. One advantage of this method is that any error in any one of the approximations will not throw out the final result because it will be corrected in the subsequent approximations.

None of the calculations has been such as require a calculating machine, although such a thing is of course useful and time-saving. Logarithms have not been employed. However, it is essential that a large interest table, such as Archer's, be available because interpolation methods cannot be usefully employed when the tabular rates are more than 74% apart. Such a table as Archer's is a necessity in an accountant's office and together with Sprague's bond tables and Vega's logarithm table will enable the accountant to solve almost any actuarial problem not involving life contingencies. New York.

CHARLES JUDSON. The calculation of A at various rates follows:




(1 – K) + .0025 (azo — aje) and K = .05 X ago :g= .025

i Rate per cent.


374% 358% i


.03625 ago from tables .13.590,326,34 13.742,000,79 13.896,204,21 14.052,987,64 .05 X ago = K (a) .679,516,32 .687,100,04 .694,810,21 .702,649,38 1 - K

.320,483,68 .312,899,96 .305,189,79 .297,350,62 .025 (1 - K) .008,012,09 .007,822,49 .007,629,75 .007,433,76 .025 (1– K) • i (6) .200,302,30 .201,870,94 .203,459,85 .205,069,39 ago from tables .13.590,326,34 13.742,000,79 13.896,204,21 14.052,987,64 aze from tables 8.110,895,78 8.161,603,46 8.212,787,25 8.264,452,67

5.479,430,56 5.580,397,33 5.683,416,96 5.788,534,97 .0025 (azo — 21.) (c) .013,698,57 .013,950,99 .014,208,54 .014,471,33 A = a + b + c... .893,517,19 .902,921,97 .912,478,60 .922,190,10

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AGENCY SALES Editor, Students' Department:

Sir: I wish to thank you for the assistance rendered me by you in answer to my recent letter. However, I have one more question to ask. The above concern has two branches, i.e., two sales rooms. These branches receive shipments from us and are billed at the regular wholesale prices less a discount of seven per cent. Now at the end of each month I post the shipments in an aggregate as follows:

Cost of sales-New York.
To sales-factory.

I do not believe this is correct, since the shipments do not actually represent sales made by the factory. However, I am following the plan by which the books have been kept for years.

The sales made by the branches are reported to the factory and my entry is :

Accounts receivable-stores.
To sales-New York,

Will you kindly explain what would be the correct manner of showing these transactions on the books, and also how the allowance of seven per cent. should be shown?

Yours very truly, New York.

T. K. Unless there is some very good reason for billing the branch at wholesale price less seven per cent., it would be desirable to abandon the system and bill at cost to avoid the element of unrealized profit. Shipments to selling agencies are not sales, and the accounts should be kept in such a manner as to avoid taking up any profit before the agency sells the goods.

It is possible that the goods are billed to the agency at wholesale price less seven per cent. to keep the agency from knowing the cost of the goods. If this is the only reason, the accounts may be kept as follows, assuming the following facts for purposes of illustration:

Cost of manufacture: $70.00 each.
Wholesale price: $100.00 each.
Billed price: $93.00 each.
75 shipped to New York office.

Cost: $70.00 X 75 = $5,250.00.

Billed price: $93.00 X 75 = $6,975.00. 50 sold by New York office.

Cost : $70.00 X 50 $3,500.00
Billed price: $93.00 X 50 = $4,650.00.

Selling price: $100.00 X 50 = $5,000.00. 25 in final inventory at New York office.

Cost: $70.00 X 25 $1,750.00
Billed price: $93.00 X 25 $2,325.00.

N. Y. office mdse (instead of cost of sales)

.$6,975.00 Shipments to N. Y. office (instead of sales-factory)

$6,975.00 To record billed price of goods shipped ($93 X 75)

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Accounts receivable

Sales-New York
To record sales by agency ($100 X 50)




Sales-New York
Inventory-New York

Manufacturing account (or finished goods).
To charge sales with cost of goods sold ($70 X 50);
to set up inventory at agency at end of period ($70 X
25); and to relieve manufacturing account of cost of
goods manufactured and shipped to agency ($70 X 75)


Sales-New York ...

Profit and lossNew York Gross profit on sales ($30 X 50)


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Shipments to N. Y. office

4,650.00 N. Y. office mdse

4,650.00 To reverse memorandum entries to the extent of the billed price of the goods sold by the agency.

It should be noted that the two accounts in the last entry are purely memoranda. Their balances should always be offsetting, and they do not appear in either the profit and loss statement or the balance-sheet.

If the practice of billing at wholesale price less seven per cent is adopted because the agent is paid a commission based on the difference between this billed price and the actual selling price, the accounting could be modified as follows:

The first three entries and the fifth would be made as above. To reduce the balance of the sales account to the figure on which the commission is based, the following entry would be made : Sales-New York

1,150.00 Profit and loss, New York,

1,150.00 To charge sales account with the difference between cost of sales ($3,500.00) and billed price of sales ($4,650.00), thus reducing the balance of sales account to $350.00, the profit on which the agent is allowed a commission.



Sales-New York

Profit and loss—New York
To transfer to profit and loss the gross profit subject
to commission.

Profit and loss-New York

175.00 N. Y. agent's commission

175.00 To record commission, assuming a rate of 50% on the portion of profits subject to commissions.

At this point the profit and loss account of the agency on the homeoffice books would appear as follows:

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Agent's commission .$ 175.00 Gross profit not subject to



Gross profit subject to com. 350.00 Of course, if the agent always sells at the wholesale price existing at the time the goods are billed to him, the commission would be 50% (assumed rate) of 7% of the sales. The method of accounting described provides for computing and recording the commission in case the agent's selling price varies from the market wholesale at time of billing.


Sir: The writer will greatly appreciate your kindness_ if you will answer the following questions through your department in THE JOURNAL OF ACCOUNTANCY.

1. In a manufacturing business if it is desired to allow interest on the capital invested, should such interest charge be included in the cost of production or be handled outside of the manufacturing statement?

2. In what circumstances are boxes and crates considered as a part of the cost of goods sold rather than as a selling expense?

3. Suppose an asset (land, for instance) appreciated in value $10,000.00. Can the whole or any part of such appreciated value be carried to the regular capital (earned) surplus account before the land is sold and the increase actually realized ?

Yours very truly, Allston, Massachusetts.

R. H. B.

1. The accounting treatment of interest on capital would depend on the purpose for which the interest is allowed. When you say “interest on the capital invested" this implies interest on the total capital, and it is inconceivable that so much interest would be included in the cost of manufacture even by those who advocate including interest as part of the cost. In a partnership, interest is sometimes allowed on the capital as a form of division of profits. If that is the intention, the interest should be charged to profit and loss and credited to the partners as a first division of the profits in the capital ratio. It would not appear in the manufacturing account.

What you probably mean is that interest is allowed on that portion of the capital which is invested in manufacturing assets, and the object of allowing the interest is to determine the cost of production including a charge for the capital tied up in fixed assets. There has been a good deal of discussion as to whether interest should be included in the cost, and accountants are by no means agreed. If it is desired to include the interest as a cost of manufacture, the interest should be charged to manufacturing and credited to interest on manufacturing assets or some other account indicating that the interest credit does not represent an actual earning, but is merely a bookkeeping entry. At the end of the period, the interest included in the cost of goods still in the inventory should be left in the interest account as a reserve to reduce the inventory to the actual cost. The balance of the interest should be credited to profit and loss.

2. The proper treatment of boxes and crates is a difficult one to bring under general rules. Broadly speaking the test is: When does the process of manufacture end? In the case of canned goods, the cans are a cost of manufacture because the goods are not manufactured until they are canned. The crates are a selling expense because the goods do not have to be crated until they are sold, although it may be more convenient to crate them immediately. In general, the packages in which the goods are placed when manufactured are a part of the cost of manufacture; and the cases in which the packages are packed for shipment are a selling expense.

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3. There is no principle of accounting more firmly established than the one which prohibits taking a profit by writing up a fixed asset which is not being sold. For this reason the appreciation should not be credited to surplus.

I note that you speak of capital surplus as surplus from earnings.
Ordinarily capital surplus is used to convey just the opposite meaning.
I refer you to the answer to the next letter.

Editor, Students' Department:

Sir: A few days ago I noticed, in the answer to a C. P. A. question, an expressed opinion which seems so at variance with what I have read, heard, argued and been taught that I should like your opinion on it. The question is:

“How should substantial changes in the value of capital assets be treated in the accounts in respect to surplus ?”.

That part of the answer which is pertinent to the point raised in this discussion reads as follows:

"It is becoming more and more common to set up a special account called 'Capital Surplus,' 'Special Surplus' or something similar, to contain surplus that does not arise from earnings. This does no harm, though it seems rather useless. The reason given for such a course is usually that if unearned surplus is mingled with earned surplus, dividends may be declared therefrom; and it is a common notion that dividends should be declared only from earnings. But this is not the case either legally or logically. If a corporation has an actual surplus, whether it appears in one account or in several, it is proper and perfectly legal to declare a dividend; if it has plenty of cash, it is ordinarily prudent as well.”

In the west it is quite common to find timber and timber lands, as well as other landed property, appreciated on the books in accordance with appraisals and estimates. If the directors of a company find it desirable to increase the value of the fixed assets on the books and adopt a sound and conservative basis for establishing the value, what would be the wrong, notwithstanding the well-known prejudice among accountants against this practice?

But it has been my understanding that such increases in value are not income. They constitute merely an offsetting credit for the increased value added to the asset account. At best they might be called anticipated profits, but as such, according to accounting principles, could not properly be regarded as income subject to dividends.

It therefore seems to me that dividends paid in excess of earned surplus or surplus arising from premiums on the sale of capital stock or both would be simply a liquidation of original capital.

I shall appreciate very much your opinion as to the point involved, and your views regarding the answer quoted.

Yours truly,
Portland, Oregon.

R. F. R.
There is considerable difference of opinion among accountants as to
whether extraneous profits should go into the general surplus or into a
capital surplus account, but there can be no difference of opinion as to
the propriety of using an unrealized profit (such as that arising from an
appreciation in the value of a fixed asset or of timber lands, as disclosed
by an appraisal but not realized by a sale), for dividend purposes.
In my opinion a distinction should be made in the accounts as follows:

Realized profits from operations;
Realized profits of an extraneous nature;
Unrealized profits.

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