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fm.qxd 9/16/14 6:51 PM Page vi

PREFACE

Convergence with international accounting standards has In teaching consolidation concepts, a decision must be
played an important role in virtually every project entered made about the recording method that should be empha-
into by the Financial Accounting Standards Board (FASB) sized in presenting consolidated workpaper procedures. The
in recent years. Accounting for business combinations is no three major alternatives for recording investments in sub-
exception. In the Sixth Edition of Advanced Accounting, we sidiaries are the (1) cost method, (2) partial equity (or
compare and contrast U.S. standards and international prin- simple equity) method, and (3) complete equity (or sophis-
ciples throughout the book, drawing the readers’ attention to ticated equity) method. A brief description of each method
remaining differences with an IFRS icon. The reader is made follows.
aware of important changes, both present and forecasted. We
also incorporate the FASB’s codification system for refer- 1. Cost method. The investment in subsidiary is carried at
encing standards. its cost, with no adjustments made to the investment
This book is designed for advanced courses dealing account for subsidiary income or dividends. Divi-
with financial accounting and reporting in the following top- dends received by the parent company are recorded as
ical areas: business combinations, consolidated financial an increase in cash and as dividend income.
statements, international accounting, foreign currency trans- 2. Partial equity method. The investment account is ad-
actions, accounting for derivative instruments, translation of justed for the parent company’s share of the subsidiary’s
financial statements of foreign affiliates, segment reporting reported earnings or losses, and dividends received from
and interim reporting, partnerships, fund accounting and the subsidiary are deducted from the investment account.
accounting for governmental units, and accounting for non- Generally, no other adjustments are made to the invest-
government—nonbusiness organizations. The primary ment in subsidiary account.
objective of this book is to provide a comprehensive treat- 3. Complete equity method. This method is the same as the
ment of selected topics in a clear and understandable man- partial equity method except that additional adjustments
ner. The changes related to FASB ASC Topics 805 and 810 are made to the investment in subsidiary account to reflect
(SFAS No. 141R and 160) are integrated throughout the edi- the effects of (a) the elimination of unrealized intercom-
tion. As in previous editions, we strive to maintain maxi- pany profits, (b) the amortization (depreciation) of the
mum flexibility to the instructor in the selection and breadth difference between cost and book value, and (c) the addi-
of coverage for topics dealing with consolidated financial tional stockholders’ equity transactions undertaken by the
statements and other advanced topics. subsidiary that change the parent company’s share of the
We have further expanded the number and variety of subsidiary’s stockholders’ equity.
exercises and problem materials at the end of each chapter.
We include codification exercises that require the student to We continue to present all three methods, using generic
research the FASB’s Codification to determine the appropri- icons to distinguish among the three methods. The instructor
ate GAAP for a variety of issues. In addition, we include has the flexibility to teach all three methods, or to instruct
financial statement analysis exercises that relate to real com- the students to ignore one or two. If the student is interested
panies and practical applications in virtually every chapter. in learning all three methods, he can, even if the instructor
All chapters have been updated to reflect the most recent only focuses on one or two. Also, we believe this feature
pronouncements of the Financial Accounting Standards makes the book an excellent reference for the student to keep
Board and the Governmental Accounting Standards Board after graduation, so that he or she can adapt to any method
as of this writing. needed.

vi
fm.qxd 9/16/14 6:51 PM Page vii

Preface vii

WHAT’S NEW IN THE TEXT? 4. FASB’s conceptual framework is discussed as it relates

to Advanced Accounting in Chapter 1. We also include
• Author-created online videos explain some of the marginal references to Related Concepts throughout
critical concepts of advanced accounting and walk the book. The GASB’s conceptual framework is
students through how to solve selected problems discussed in Chapters 17 and 18.
throughout the book.
5. Questions or problems related to Business Ethics are
• A continuous consolidation problem is introduced in
included in the end-of chapter materials for every
Chapters 4 and 5. This allows students to build on con-
chapter.
cepts learned in prior chapters.
• The coverage of certain topics has been expanded (such 6. We include real-company annual reports or excerpts
as contingent consideration and bargain purchases) to from reports with related questions (Analyzing Finan-
incorporate information gleaned from the FASB’s Post- cial Statements) in the end-of-chapter materials and/or
Implementation Review of FASB Statement No. 141R online for most chapters excluding Chapters 15 and 16.
and to include more realistic real-world issues. 7. In Chapter 9 of the 6th edition, the homework material
• Chapter 11 on International Accounting has been updated includes the effective interest, in addition to the straight-
to reflect the current status of international financial line method for amortization of bond premiums and dis-
reporting standards (IFRS) around the world and the counts. The Sixth Edition also includes online appen-
SEC’s position with respect to U.S. adoption. In addition, dices on deferred taxes which are related to the topics in
we pay particular attention to the remaining major joint Chapter 6 & 7. (Go to www.wiley.com/college/jeter.)
projects of the two boards (FASB and IASB), which 8. The in-the-news boxes that appear throughout the book
include revenue recognition, accounting for leases, insur- reflect recent business and economic events relevant to
ance contracts, and financial instruments. the subject matter.
• The chapters on fund accounting and governmental 9. We have integrated goodwill impairment into some
accounting (Chapters 17 and 18) were updated to reflect illustrations in the body of Chapter 5, as well as in sev-
the latest GASB pronouncements, including changes in eral homework problems. We illustrate the goodwill
the classification of the fund balance. impairment test described in FASB ASC topic 350
• An appendix to Chapter 1 has been posted online at (SFAS No. 142), discussing its frequency, the steps laid
www.wiley.com/college/jeter. This appendix illustrates out in the standard, and some of the likely implementa-
a strategy or technique for analyzing a given company, tion problems. The simplification of these tests for
such as a potential acquisition target. This strategy may smaller companies is also discussed along with the role
be applied in some of the end-of-the-chapter Analyzing of qualitative factors for determining whether the steps
Financial Statements (AFS) problems. Several addi- are necessary. There are exercises on this topic in
tional online appendices (including coverage of Chapters 2 and 5.
deferred taxes, as they pertain to individual topics 10. At the beginning of Chapter 4 we discuss three methods
throughout the text) may also be found at www.wiley of accounting for investments, depending on the level of
.com/college/jeter. ownership and the presumption of influence or control.
We emphasize the importance of the complete equity
method for certain investments that are not consolidated,
OTHER HIGHLIGHTED FEATURES or in the parent-only statements. In addition, online
OF THE TEXT materials include an expanded discussion of the account-
ing for investments. (See www.wiley.com/college/jeter.)
1. We include a feature that requires students to research
the FASB Codification in order to locate the current 11. Learning objectives are included in the margins of the
standard that applies to various issues. These exercises chapters, and relevant learning objective numbers are
appear before the problems at the end of each chapter provided with end-of-chapter materials.
and often, but not always, relate to topics addressed 12. We continue the use of graphical illustrations, which
in that chapter. (Similar questions appear on the was introduced in prior editions.
CPA exam.) 13. A few short-answer questions (and solutions) are peri-
2. We include a discussion of international accounting odically provided throughout each chapter to enable
standards on each topic where such standards exist, and students to test their knowledge of the content before
compare and contrast U.S. GAAP and IFRS. An IFRS moving on.
icon appears in the margins where this discussion 14. The organization of the worksheets applies a format
occurs. that separates accounts to the income statement, the
3. A discussion of the joint projects of the FASB and the statement of retained earnings, and the balance sheet in
IASB is incorporated throughout the textbook where distinct sections. The worksheets are placed near the
appropriate, with an expanded discussion in Chapter 11. relevant text.
fm.qxd 9/16/14 6:51 PM Page viii

viii Preface

15. All illustrations are printed upright on the page and la- WileyPLUS
beled clearly for convenient study and reference.
WileyPLUS is an online learning and assessment environ-
16. Entries made on consolidated statements workpapers ment, where students test their understanding of concepts,
are presented in general journal form. These entries are get feedback on their answers, and access learning materi-
shaded in blue to distinguish them from book entries, to als like the eText and multimedia resources. Instructors can
facilitate exposition and study. To distinguish among automate assignments, create practice quizzes, assess stu-
parent company entries and workpaper entries in the dents’ progress, and intervene with those falling behind.
body of the text, we present parent entries in gray and
workpaper entries in blue.
17. Summaries appear at the end of each chapter, and a ACKNOWLEDGMENTS
glossary of key terms is provided at the end of the
book. We wish to thank the following individuals for their sug-
gestions and assistance in the preparation of this edition.
18. Chapters 17 through 19 reflect the latest GASB and
Thank you goes to Anthony Abongwa (Monroe Col-
FASB pronouncements related to fund accounting.
lege), Jonghyuk Bae Darius Fatemi (Northern Kentucky
University), Edward Julius (California Lutheran Univer-
Clearly there are more topics in this text than can be cov- sity), Ron Mano (Westminster College), Kevin Packard
ered adequately in a one semester or one-quarter course. (Brigham Young University – Idaho), Ashley Stark (Dick-
We believe that it is generally better for both students and inson State University), Denise Stefano (Mercy College),
instructors to cover a selected number of topics in depth Deborah Strawser (Grand Canyon University Online),
rather than to undertake a superficial coverage of a larger Joseph Wall (Carthage College), and Sheila Reed (State of
number of topics. Modules of material that an instructor Tennessee).
may consider for exclusion in any one semester or quarter Thank you also goes to Sheila Ammons (Austin Com-
include the following: munity College) for preparing the Power- Point slides, to
TBD for preparing the Study Guide, to TBD for preparing
• Chapters 7–9. An expanded analysis of problems in the the Test Bank, and to TBD for their helpful textbook, solu-
preparation of consolidated financial statements. tions manual, and test bank accuracy review comments.
• Chapter 10. Insolvency—liquidation and reorganiza- Finally we would like to acknowledge a few individu-
tion. als at Wiley who helped all this come together: Ellen Keo-
• Chapters 11–14. International accounting, foreign cur- hane, Mary O’Sullivan, Christina Volpe, Beth Pearson,
rency transactions and translation, and segment and in- Joel Hollenbeck, Tai Harris, Karolina Zarychta, Maddy
terim reporting. Lesure.
• Chapters 15 and 16. Partnership accounting.
• Chapters 17 through 19. Fund accounting, accounting
for governmental units, and accounting for nongovern-
ment–nonbusiness organizations (NNOs).

SUPPLEMENTS
The following supplements are available on the book com-
panion web site: Study Guide, Excel Templates, Power-
Point Slides, Instructors’ Manual, Solutions Manual, Test
Bank, and videos. These materials are accessible form
www.wiley.com/college/jeter.
fm.qxd 9/16/14 6:51 PM Page ix

CONTENTS

1 INTRODUCTION TO BUSINESS COMBINATIONS Questions 58

AND THE CONCEPTUAL FRAMEWORK 1 Analyzing Financial Statements 58
Exercises 64
Learning Objectives 1
ASC Exercises 70
1.1 Growth Through Mergers 1
Problems 71
1.2 Nature of the Combination 3
1.3 Business Combinations: Why? Why not? 4
1.4 Business Combinations: Historical Perspective 7 3 CONSOLIDATED FINANCIAL STATEMENTS—
1.5 Terminology and Types of Combinations 10 DATE OF ACQUISITION 75
1.6 Takeover Premiums 12 Learning Objectives 75
1.7 Avoiding the Pitfalls before the Deal 13 3.1 Definitions of Subsidiary and Control 77
1.8 Determining Price and Method of Payment 3.2 Requirements for the Inclusion of Subsidiaries in
in Business Combinations 14 the Consolidated Financial Statements 80
1.9 Alternative Concepts of Consolidated 3.3 Reasons for Subsidiary Companies 81
Financial Statements 18 3.4 Consolidated Financial Statements 81
1.10 FASB’s Conceptual Framework 22 3.5 Investments at the Date of Acquisition 82
1.11 FASB Codification (Source of GAAP) 27 3.6 Consolidated Balance Sheets: The Use of
Summary 31 Workpapers 83
Appendix 1A: Evaluating Firm Performance (Online only) 3.7 A Comprehensive Illustration—More than One
Questions 32 Subsidiary Company 97
Analyzing Financial Statements 33 3.8 Limitations of Consolidated Statements 100
Exercises 35 Summary 102
ASC Exercises 36 Appendix 3A: Deferred Taxes on the Date of Acquisition
(Online only)
Appendix 3B: Consolidation of Variable Interest Entities
2 ACCOUNTING FOR BUSINESS (Online only)
COMBINATIONS 37 Questions 103
Learning Objectives 37 Analyzing Financial Statements 104
2.1 Accounting Standards on Business Combinations: Exercises 105
Background 37 ASC Exercises 109
2.2 Pro Forma Statements and Disclosure Problems 109
Requirement 45
2.3 Explanation and Illustration of Acquisition
Accounting 47 4 CONSOLIDATED FINANCIAL STATEMENTS
2.4 The Measurement Period (and Measurement AFTER ACQUISITION 116
Period Adjustments) 50 Learning Objectives 116
2.5 Contingent Consideration in an Acquisition 51 4.1 Accounting for Investments by the Cost, Partial
2.6 Leveraged Buyouts 55 Equity, and Complete Equity Methods 117
2.7 IFRS versus U.S. GAAP 55 4.2 Consolidated Statements after Acquisition—Cost
Summary 57 Method 124
Appendix 2A: Deferred Taxes in Business Combinations 4.3 Recording Investments in Subsidiaries—Equity
(Online only) Method (Partial or Complete) 134

ix
fm.qxd 9/16/14 6:51 PM Page x

x Contents

4.4 Elimination of Intercompany Revenue and Expense Analyzing Financial Statements 238
Items 144 Exercises 240
4.5 Interim Acquisitions of Subsidiary Stock 144 ASC Exercises 245
4.6 Consolidated Statement of Cash Flows 149 Problems 245
4.7 Illustration of Preparation of a Consolidated
Statement of Cash Flows—Year of
Acquisition 153 6 ELIMINATION OF UNREALIZED PROFIT
4.8 Compare U.S. GAAP and IFRS Regarding Equity ON INTERCOMPANY SALES
Method 156 OF INVENTORY 263
Summary 157 Learning Objectives 263
Appendix 4A: Alternative Workpaper Format 6.1 Effects of Intercompany Sales of Merchandise
(Online only) on the Determination of Consolidated
Appendix 4B: Deferred Tax Consequences When Balances 264
Affiliates File Separate Income Tax Returns— 6.2 Cost Method: Consolidated Statements
Undistributed Income (Online only) Workpaper—Upstream Sales 272
Questions 159 6.3 Cost Method—Analysis of Consolidated Net
Analyzing Financial Statements 159 Income and Consolidated Retained
Exercises 161 Earnings 277
ASC Exercises 167 6.4 Consolidated Statements Workpaper—Partial
Equity Method 279
Problems 167
6.5 Partial Equity Method—Analysis of Consolidated
Net Income and Consolidated Retained
5 ALLOCATION AND DEPRECIATION Earnings 284
OF DIFFERENCES BETWEEN 6.6 Consolidated Statements Workpaper—Complete
IMPLIED AND BOOK VALUES 186 Equity Method 285
6.7 Complete Equity Method—Analysis of
Learning Objectives 186
Consolidated Net Income and Consolidated
5.1 Computation and Allocation of the Difference Retained Earnings 290
Between Implied and Book Values to Assets and
6.8 Summary of Workpaper Entries Relating to Inter-
Liabilities of Subsidiary—Acquisition Date 188
company Sales of Inventory 290
5.2 Effect of Differences Between Implied and Book
6.9 Intercompany Profit Prior To Parent–Subsidiary
Values on Consolidated Net Income—Year
Affiliation 290
Subsequent to Acquisition 194
Summary 291
5.3 Consolidated Statements Workpaper—Using the
Cost Method 196 Appendix 6A: Deferred Taxes and Intercompany Sales
of Inventory (Online only)
5.4 Controlling and Noncontrolling Interests in
Consolidated Net Income and Retained Questions 292
Earnings—Using the Cost Method 205 Analyzing Financial Statements 292
5.5 Consolidated Statements Workpaper—Using Exercises 294
Partial Equity Method 207 ASC Exercises 296
5.6 Controlling and Noncontrolling Interests in Problems 296
consolidated Net Income and Retained Earnings—
Using Partial Equity Method 214
5.7 Consolidated Statements Workpaper—Using
7 ELIMINATION OF UNREALIZED GAINS
Complete Equity Method 216 OR LOSSES ON INTERCOMPANY SALES
5.8 Controlling Interest in Consolidated Net Income
OF PROPERTY AND EQUIPMENT 309
and Retained Earnings—Using Complete Equity Learning Objectives 309
Method 223 7.1 Intercompany Sales of Land (Nondepreciable
5.9 Additional Considerations Relating to Treatment Property) 310
of Difference Between Implied and Book 7.2 Intercompany Sales of Depreciable
Values 223 Property (Machinery, Equipment, And
5.10 Push Down Accounting 231 Buildings) 312
5.11 IFRS vs U.S. GAAP on Research & Development 7.3 Consolidated Statements Workpaper—Cost and
Costs 236 Partial Equity Methods 319
Summary 236 7.4 Calculation of Consolidated Net Income and
Questions 237 Consolidated Retained Earnings 327
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Contents xi

7.5 Consolidated Statements Workpaper—Complete 9.9 Dividends from Preacquisition Earnings 413
Equity Method 330 9.10 Subsidiary with both Preferred and Common
7.6 Calculation and Allocation of Consolidated Net Stock Outstanding 414
Income; Consolidated Retained Earnings: Complete 9.11 Consolidating a Subsidiary with Preferred Stock
Equity Method 336 Outstanding 417
7.7 Summary of Workpaper Entries Relating to Summary 427
Intercompany Sales of Equipment 336 Questions 428
7.8 Intercompany Interest, Rents, and Service Analyzing Financial Statements 428
Fees 336
Exercises 430
Summary 339
ASC Exercises 433
Appendix 7A: Deferred Taxes Consequences Related to
Problems 433
Intercompany Sales of Equipment (Online only)
Questions 340
Analyzing Financial Statements 341 10 INSOLVENCY—LIQUIDATION
Exercises 341 AND REORGANIZATION 433
ASC Exercises 344 Learning Objectives 433
Problems 344 10.1 Contractual Agreements 444
10.2 Bankruptcy 446
8 CHANGES IN OWNERSHIP INTEREST 355 10.3 Liquidation (Chapter 7) 449
10.4 Reorganization Under the Reform Act
Learning Objectives 355
(Chapter 11) 450
8.1 Changes in Ownership 355
10.5 Trustee Accounting and Reporting 460
8.2 Parent Acquires Subsidiary Stock Through Several
10.6 Realization and Liquidation Account 462
Open-Market Purchases—Cost Method 357
Summary 467
8.3 Parent Sells Subsidiary Stock Investment on the
Open Market—Cost Method 360 Questions 468
8.4 Equity Method—Purchases and Sales of Subsidiary Analyzing Financial Statements 469
Stock by the Parent 363 Exercises 469
8.5 Parent Sells Subsidiary Stock Investment on the ASC Exercises 475
Open Market—Cost Method 367 Problems 475
8.6 Subsidiary Issues Stock 368
Summary 376
Questions 376
11 INTERNATIONAL FINANCIAL REPORTING
STANDARDS 481
Analyzing Financial Statements 377
Exercises 377 Learning Objectives 481
ASC Exercises 380 11.1 The Increasing Importance of International
Accounting Standards 481
Problems 380
11.2 Historical Perspective: The Road to
Convergence 482
9 INTERCOMPANY BOND HOLDINGS AND 11.3 Similarities and Differences Between U.S. GAAP
MISCELLANEOUS TOPICS—CONSOLIDATED and IFRS 486
FINANCIAL STATEMENTS 388 11.4 GAAP Hierarchy—U.S. versus IFRS 486
11.5 Convergence Projects—FASB and IASB 495
Learning Objectives 388
11.6 International Convergene Issues 500
9.1 Intercompany Bond Holdings 389
11.7 American Depository Receipts: An Overview 503
9.2 Accounting for Bonds—A Review 390
Summary 506
9.3 Constructive Gain or Loss on Intercompany Bond
Holdings 391 Appendix 11A: List of Current International Financial
Reporting Standards Issued by IASC and IASB(Online
9.4 Accounting for Intercompany Bonds I
only)
llustrated 393
Questions 506
9.5 Book Entry Related to Bond Investment 394
Analyzing Financial Statements 507
9.6 Interim Purchase of Intercompany Bonds 409
Exercises 509
9.7 Notes Receivable Discounted 410
ASC Exercises 510
9.8 Stock Dividends Issued by a Subsidiary
Company 410 Problems 511
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xii Contents

12 ACCOUNTING FOR FOREIGN CURRENCY Summary 612

TRANSACTIONS AND HEDGING FOREIGN Appendix 14A: GE Segmental Disclosures 2013 Annual
EXCHANGE RISK 514 Report (Online only)
Questions 613
Learning Objectives 514
Analyzing Financial Statement 613
12.1 Exchange Rates—Means of Translation 515
Exercises 615
12.2 Measured versus Denominated 518
ASC Exercises 618
12.3 Foreign Currency Transactions 518
Problems 619
12.4 Using Forward Contracts as a Hedge 526
Summary 541
Questions 542 15 PARTNERSHIPS: FORMATION, OPERATION,
Analyzing Financial Statements 543
AND OWNERSHIP CHANGES 623
Exercises 543 Learning Objectives 623
ASC Exercises 550 15.1 Partnership Defined 624
Problems 550 15.2 Reasons for Forming a Partnership 625
15.3 Characteristics of a Partnership 625
15.4 Partnership Agreement 627
13 TRANSLATION OF FINANCIAL STATEMENTS 15.5 Accounting for a Partnership 629
OF FOREIGN AFFILIATES 556
15.6 Special Problems in Allocation of
Learning Objectives 556 Income and Loss 636
13.1 Accounting for Operations in Foreign 15.7 Financial Statement Presentation 637
Countries 557 15.8 Changes in the Ownership of the
13.2 Translating Financial Statements of Foreign Partnership 638
Affiliates 557 15.9 Section A: Admission of a New Partner 640
13.3 Objectives of Translation 559 15.10 Section B: Withdrawal of a Partner 646
13.4 Translation Methods 559 Summary 649
13.5 Identifying the Functional Currency 561 Questions 650
13.6 Translation of Foreign Currency Financial Exercises 650
Statements 561 ASC Exercises 656
13.7 Translation of Foreign Financial Statements Problems 656
Illustrated 565
13.8 Financial Statement Disclosure 574
13.9 Historical Developments of Accounting 16 PARTNERSHIP LIQUIDATION 663
Standards 575 Learning Objectives 663
Summary 576 16.1 Steps in the Liquidation Process 664
Appendix 13A: Accounting for a Foreign Affiliate and 16.2 Priorities of Partnership and Personal
Preparation of Consolidated Statements Workpaper Creditors 665
Illustrated (Online only) 16.3 Simple Liquidation Illustrated 668
Questions 577 16.4 Installment Liquidation 669
Analyzing Financial Statements 578 16.5 Incorporation of a Partnership 676
Exercises 579 Summary 678
ASC Exercises 585 Questions 679
Problems 585 Exercises 679
ASC Exercises 684
14 REPORTING FOR SEGMENTS AND FOR Problems 684
INTERIM FINANCIAL PERIODS 593
Learning Objectives 593 17 INTRODUCTION TO FUND
14.1 Need for Disaggregatd Financial Data 594 ACCOUNTING 690
14.2 Standards of Financial Accounting and Learning Objectives 690
Reporting 594 17.1 Classifications of Nonbusiness
14.3 International Accounting Standards Board (IASB) Organizations 691
Position on Segment Reporting 604 17.2 Distinctions Between Nonbusiness Organizations
14.4 Interim Financial Reporting 605 and Profit-Oriented Enterprises 691
fm.qxd 9/16/14 6:51 PM Page xiii

Contents xiii

17.3 Financial Accounting and Reporting Standards for Exercises 775

Nonbusiness Organizations 692 ASC Exercises 781
17.4 Fund Accounting 695 Problems 782
17.5 Comprehensive Illustration—General Fund 709
17.6 Reporting Inventory and Prepayments in the
Financial Statements 718 19 ACCOUNTING FOR NONGOVERNMENT
Summary 719 NONBUSINESS ORGANIZATIONS: COLLEGES
Appendix 17A: City of Atlanta Partial Financial
AND UNIVERSITIES, HOSPITALS AND OTHER
Statements (Online only) HEALTH CARE ORGANIZATIONS 792
Questions 720 Learning Objectives 792
Analyzing Financial Statements 720 19.1 Sources of Generally Accepted Accounting
Exercises 721 Standards for Nongovernment Nonbusiness
ASC Exercises 725 Organizations 793
Problems 725 19.2 Fund Accounting 796
19.3 Accrual Basis of Accounting 797
19.4 Accounting for Current Funds 798
18 INTRODUCTION TO ACCOUNTING 19.5 Contributions 801
FOR STATE AND LOCAL GOVERNMENTAL 19.6 Accounting for Plant Funds 804
UNITS 732 19.7 Accounting for Endowment Funds 808
Learning Objectives 732 19.8 Accounting for Investments 810
18.1 The History of Generally Accepted Governmental 19.9 Accounting for Loan Funds 811
Accounting Standards 734 19.10 Accounting for Agency (Custodial) Funds 811
18.2 The Structure of Governmental Accounting 736 19.11 Accounting for Annuity and Life Income
18.3 Governmental Fund Entities 737 Funds 812
18.4 Proprietary Funds 754 19.12 Issues Relating to Colleges and
18.5 Fiduciary Funds 757 Universities 813
18.6 Capital Assets and Long-Term Debt 757 Appendix 19A: Sample Financial Statements for Private
18.7 External Reporting Requirements (GASB Educational Institutions (Online only)
Statement No. 34) 762 Summary 813
18.8 Government Fund-Based Reporting 762 Questions 815
18.9 Government-wide Reporting 765 Analyzing Financial Statement 815
18.10 Management’s Discussion and Analysis Exercises 816
(MD&A) 769 ASC Exercises 822
18.11 Interfund Activity 770 Problems 823
Appendix 18A: Government-wide Financial Statements
City of Atlanta (Online only) Glossary 831
Summary 772
Appendix PV: Tables of Present Value 837
Questions 774
Analyzing Financial Statements 774 Index 839
fm.qxd 9/16/14 6:51 PM Page xiv
c01.qxd 9/16/14 3:30 PM Page 1

1
INTRODUCTION TO BUSINESS
COMBINATIONS AND THE
CONCEPTUAL FRAMEWORK
CHAPTER CONTENTS LEARNING OBJECTIVES
1.1 GROWTH THROUGH MERGERS 1 Describe historical trends in types of business
1.2 NATURE OF THE COMBINATION combinations.
2 Identify the major reasons firms combine.
1.3 BUSINESS COMBINATIONS: WHY? WHY NOT?
3 Identify the factors that managers should consider in
1.4 BUSINESS COMBINATIONS: HISTORICAL PERSPECTIVE exercising due diligence in business combinations.
1.5 TERMINOLOGY AND TYPES OF COMBINATIONS 4 Identify defensive tactics used to attempt to block
business combinations.
1.6 TAKEOVER PREMIUMS
5 Distinguish between an asset and a stock
1.7 AVOIDING THE PITFALLS BEFORE THE DEAL acquisition.
1.8 DETERMINING PRICE AND METHOD OF PAYMENT IN 6 Indicate the factors used to determine the price and
BUSINESS COMBINATIONS the method of payment for a business combination.
1.9 ALTERNATIVE CONCEPTS OF CONSOLIDATED FINAN- 7 Calculate an estimate of the value of goodwill to be
CIAL STATEMENTS included in an offering price by discounting expected
future excess earnings over some period of years.
1.10 FASB’S CONCEPTUAL FRAMEWORK
8 Describe the two alternative views of consolidated
1.11 FASB CODIFICATION (SOURCE OF GAAP) financial statements: the economic entity and the
parent company concepts.
9 Discuss the Statements of Financial Accounting
Concepts (SFAC).
10 Describe some of the current joint projects of the
FASB and the International Accounting Standards
Board (IASB), and their primary objectives.

1.1 GROWTH THROUGH MERGERS

The merger between American Airlines and US Airways in 2013 has been the latest in a string
of acquisitions in an industry described by Warren Buffett a few years earlier as typifying the
“worst” sort of business. He went on to describe such a business as one that grows fast, earns
next to nothing, and takes large amounts of capital to engender growth. Twenty-nine
bankruptcies in 30 years support Buffett’s allegations. Still, the belief is growing that maybe
now, at last, airlines have finally cut capacity sufficiently to earn profits in the long run.1
Growth through mergers and acquisitions (M&A) has become a standard in business
not only in America but throughout the world. In the new millennium, the most recent in a
series of booms in merger activity was sparked by cheaper credit and by global competition,

1
WSJ, “Airlines Haven’t Reached Escape Velocity,” by Justin Lahart, 4/1/2013.

1
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2 Chapter 1 Introduction to Business Combinations and the Conceptual Framework

in addition to the usual growth-related incentives predominant during the boom of the
1990s. By the end of 2008, however, uncertainty in the commercial credit markets had led
to anxiety about whether merger transactions could continue to be achieved successfully in
the current environment, and by the middle of 2009 M&A activity had nearly come to a halt.
With plunging market values and tightened credit, the mix and nature of the financing com-
ponents were clearly in flux, and major adaptations needed to consummate any new deals.
As the markets began to recover in the second half of 2009, however, merger transac-
tions picked up once more. Banks made capital available for bigger companies, such as
Kraft, who looked to acquire Cadbury, and corporate debt offerings soared. By 2010, sev-
eral huge deals were in the works.
Merger activity has historically been highly correlated with the movement of the
stock market. Increased stock valuation increases a firm’s ability to use its shares to
acquire other companies and is often more appealing than issuing debt. During the
merger cycle of the 1990s, equity values fueled the merger wave. The slowing of merger
activity in the early years of the 21st century provided a dramatic contrast to this preced-
ing period. Beginning with the merger of Morgan Stanley and Dean Witter Discover and
ending with the biggest acquisition to that date—WorldCom’s bid for MCI—the year
1997 marked the third consecutive year of record mergers and acquisitions activity. The
pace accelerated still further in 1998 with unprecedented merger activity in the banking
industry, the auto industry, financial services, and telecommunications, among others.
This activity left experts wondering why and whether bigger was truly better. It also left
consumers asking what the impact would be on service. A wave of stock swaps was
undoubtedly sparked by record highs in the stock market, and stockholders reaped bene-
fits from the mergers in many cases, at least in the short run. Regulators voiced concern
about the dampening of competition, and consumers were quick to wonder where the real
benefits lay. Following the accounting scandals of 2001 (WorldCom, Enron, Tyco, etc.),
merger activity lulled for a few years.
Also in 2001, the Financial Accounting Standards Board (FASB) voted in two major
accounting changes related to business combinations. The first met with vehement protests
that economic activity would be further slowed as a result and the second with excitement
that it might instead be spurred. Both changes are detailed in Chapter 2.
By the middle of 2002, however, these hopes had been temporarily quelled. Instead of
increased earnings, many firms active in mergers during the 1990s were forced to report
large charges related to the diminished value of long-lived assets (mainly goodwill).
Merger activity slumped, suggesting that the frenzy had run its course. Market reaction to
the mergers that did occur during this period typified the market’s doubts. When Northrop
Grumman Corp. announced the acquisition of TRW Inc. for $7.8 billion, the deal was
praised but no market reaction was noted. In contrast, when Vivendi Universal admitted
merger-gone-wrong woes, investors scurried.
By the middle of the first decade of the 21st century, however, the frenzy was return-
ing with steady growth in merger activity from 2003 to 2006. In 2005, almost 18% of all
M&A (mergers & acquisitions) deals were in the services sector. In a one-week period in
June of 2006, $100 billion of acquisitions occurred, including Phelps Dodge’s $35.4 bil-
lion acquisition of Inco Ltd. and Falconbridge Ltd. In addition, because of the economic
rise in China and India, companies there were looking to increase their global foothold
and began acquiring European companies. Thus cross-border deals within Europe
accounted for a third of the global M&A deals.
However, by the end of 2008, a decline in overall merger activity was apparent as the
U.S. economy slid into a recession, and some forecasters were predicting the next chapter
in mergers and acquisitions to center around bankruptcy-related activity. Data from
Thomson Reuters revealed that in 2008, bankruptcy-related merger activity increased for
the first time in the last six years. For example, the number of Chapter 11 M&A purchases
rose from 136 for the entire year of 2007 to 167 for the first ten months of 2008, with more
to come. Overall mergers, on the other hand, decreased from $87 billion in the United
States ($277 billion globally) during October 2007 to $78 billion in the United States
($259 billion globally) during October 2008, based on the Reuters data.
c01.qxd 9/16/14 3:30 PM Page 3

Nature of the Combination 3

On December 4, 2007, FASB released two new standards, FASB Statement No. 141
“If we are
going to ride R, Business Combinations, and FASB Statement No. 160, Noncontrolling Interests in
IN
the IASB and Consolidated Financial Statements [ASC 805, “Business Combinations” and ASC 810,
THE
NEWS the IFRS “Consolidations,” based on FASB’s new codification system]. These standards have
[International altered the accounting for business combinations dramatically.
Financial Both statements became effective for years beginning after December 15, 2008, and
Reporting Standards] horse, we are intended to improve the relevance, comparability and transparency of financial infor-
want to make sure that it’s as mation related to business combinations, and to facilitate the convergence with interna
good as it can be. We want to tional standards. They represent the completion of the first major joint project of the
make sure that the IASB is FASB and the IASB (International Accounting Standards Board), according to one
strong, is independent, is well
FASB member, G. Michael Crooch. The FASB also believes the new standards will
resourced, and is properly
funded in a broad-based and
reduce the complexity of accounting for business combinations. These standards are inte-
secure way.”2 grated throughout this text.

Planning M&A in a Changing Environment and Under

CHANGING Accounting Requirements

“By 2006, the

1. The timing of deals is critical. The number of days between agreement or announce-
percentage ment and deal consummation can make a huge difference.
IN
THE of the 2. The effects on reporting may cause surprises. More purchases qualify as business
NEWS mergers and combinations than previously. Income tax provisions can trigger disclosures.
acquisitions 3. Assembling the needed skill and establishing the needed controls takes time. The
market
use of fair values is expanded, and more items will need remeasurement or monitor-
accounted for by private-equity
ing after the deal.
firms had increased to
approximately 15 percent from 4. The impact on earnings in the year of acquisition and subsequent years will differ
around 4 percent in 1990.”4 from that in past mergers, as will the effects on earnings of step purchases or sales.
5. Unforeseen effects on debt covenants or other legal arrangements may be lurking in
the background, as a result of the changes in key financial ratios.3
After several Growth is a major objective of many business organizations. Top management often
IN lean years, lists growth or expansion as one of its primary goals. A company may grow slowly, gradu-
THE U.S. M&A ally expanding its product lines, facilities, or services, or it may skyrocket almost overnight.
NEWS volume
Some managers consider growth so important that they say their companies must “grow or
reached $1
die.” In the past hundred years, many U.S. businesses have achieved their goal of expansion
trillion in
2013. Scott Barshay of Cravath,
through business combinations. A business combination occurs when the operations of two
Swaine, & Moore, a major law or more companies are brought under common control.
firm, claims that this growth
was caused by “a stronger
economy, . . . Congress 1.2 NATURE OF THE COMBINATION
behaving more responsibly,
and . . . all appearances of A business combination may be friendly or unfriendly. In a friendly combination, the
stability at the Fed.”5 boards of directors of the potential combining companies negotiate mutually agreeable
terms of a proposed combination. The proposal is then submitted to the stockholders of
the involved companies for approval. Normally, a two-thirds or three-fourths positive
vote is required by corporate bylaws to bind all stockholders to the combination.
An unfriendly (hostile) combination results when the board of directors of a com-
pany targeted for acquisition resists the combination. A formal tender offer enables the
acquiring firm to deal directly with individual shareholders. The tender offer, usually
published in a newspaper, typically provides a price higher than the current market price
for shares made available by a certain date. If a sufficient number of shares are not made

2
“Change Agent: Robert Hertz discusses FASB’s priorities, the road to convergence and changes ahead for
CPAs,” Journal of Accountancy, February 2008, p. 31.
3
BDO Seidman, LLP, “Client Advisory,” No. 2008-1, January 31, 2008.
4
The New York Post, “Money to Burn,” by Suzanne Kapner, March 28, 2006, p. 33.
5
“Markets Buoyant, Merger Activity Picks Up,” by David Gelles, The New York Times, DealBook, January 1, 2014.
c01.qxd 9/16/14 3:30 PM Page 4

4 Chapter 1 Introduction to Business Combinations and the Conceptual Framework

available, the acquiring firm may reserve the right to withdraw the offer. Because they are
Men’s
Wearhouse relatively quick and easily executed (often in about a month), tender offers are the pre-
IN
acquired all ferred means of acquiring public companies.
THE
NEWS the Although tender offers are the preferred method for presenting hostile bids, most ten-
outstanding der offers are friendly ones, done with the support of the target company’s management.
shares of Jos. Nonetheless, hostile takeovers have become sufficiently common that a number of mech-
A Bank with a per share offer anisms have emerged to resist takeover.
that represented a 56%
premium over Jos. A. Bank’s
closing share price. During a six Defense Tactics
month period, Jos. A. Bank
Resistance often involves various moves by the target company, generally with colorful
made several offers to acquire
Men’s Wearhouse. At the end
terms. Whether such defenses are ultimately beneficial to shareholders remains a contro-
of this six month period, Men’s versial issue. Academic research examining the price reaction to defensive actions has
Wearhouse, using a Pac Man produced mixed results, suggesting that the defenses are good for stockholders in some
strategy, made an offer to cases and bad in others. For example, when the defensive moves result in the bidder (or
acquire Jos. A Bank. No another bidder) offering an amount higher than initially offered, the stockholders benefit.
rebranding of the companies But when an offer of $40 a share is avoided and the target firm remains independent with
is expected and Men’s a price of $30, there is less evidence that the shareholders have benefited.
Wearhouse shareholders hope A certain amount of controversy surrounds the effectiveness, as well as the ultimate
to benefit from $100 to benefits, of the following defensive moves:
$150 million in synergies.6
1. Poison pill: Issuing stock rights to existing shareholders enabling them to purchase
additional shares at a price below market value, but exercisable only in the event of a
LO 4 Defensive tactics are used. potential takeover. This tactic has been effective in some instances, but bidders may
take managers to court and eliminate the defense. In other instances the original share-
holders benefit from the tactic. Chrysler Corp. announced that it was extending a
poison pill plan until February 23, 2008, under which the rights become exercisable if
anyone announces a tender offer for 15% or more, or acquires 15%, of Chrysler’s
outstanding common shares. Poison pills are rarely triggered, but their existence
serves as a preventative measure.
2. Greenmail: The purchase of any shares held by the would-be acquiring company at a
price substantially in excess of their fair value. The purchased shares are then held as
treasury stock or retired. This tactic is largely ineffective because it may result in an
expensive excise tax; further, from an accounting perspective, the excess of the price
paid over the market price is expensed.
3. White knight or white squire: Encouraging a third firm more acceptable to the target
company management to acquire or merge with the target company.
4. Pac-man defense: Attempting an unfriendly takeover of the would-be acquiring company.
5. Selling the crown jewels: The sale of valuable assets to others to make the firm less
attractive to the would-be acquirer. The negative aspect is that the firm, if it survives,
is left without some important assets.
6. Leveraged buyouts: The purchase of a controlling interest in the target firm by its
managers and third-party investors, who usually incur substantial debt in the process
and subsequently take the firm private. The bonds issued often take the form of high-
interest, high-risk “junk” bonds. Leveraged buyouts will be discussed in more detail
in Chapter 2.

1.3 BUSINESS COMBINATIONS: WHY? WHY NOT?

LO 2 Reasons firms combine. A company may expand in several ways. Some firms concentrate on internal expansion. A
firm may expand internally by engaging in product research and development. Hewlett-
Packard is an example of a company that relied for many years on new product

6
“Men’s Wearhouse Reaches $1.8 Billion Deal to Acquire Jos. A. Bank,” by Maggie McGrath, Forbes.com,
March 11, 2014.
c01.qxd 9/16/14 3:30 PM Page 5

Business Combinations: Why? Why Not? 5

development to maintain and expand its market share. A firm may choose instead to
emphasize marketing and promotional activities to obtain a greater share of a given market.
Although such efforts usually do not expand the total market, they may redistribute that
market by increasing the company’s share of it.
For other firms, external expansion is the goal; that is, they try to expand by acquiring
one or more other firms. This form of expansion, aimed at producing relatively rapid
growth, has exploded in frequency and magnitude in recent years. A company may achieve
significant cost savings as a result of external expansion, perhaps by acquiring one of its
major suppliers.
In addition to rapid expansion, the business combination method, or external expan-
sion, has several other potential advantages over internal expansion:
1. Operating synergies may take a variety of forms. Whether the merger is vertical
(a merger between a supplier and a customer) or horizontal (a merger between
competitors), combination with an existing company provides management of the
acquiring company with an established operating unit with its own experienced per-
sonnel, regular suppliers, productive facilities, and distribution channels. In the case of
Views on vertical mergers, synergies may result from the elimination of certain costs related to
IN whether negotiation, bargaining, and coordination between the parties. In the case of a horizon-
THE synergies are tal merger, potential synergies include the combination of sales forces, facilities, out-
NEWS real or simply
lets, and so on, and the elimination of unnecessary duplication in costs. When a private
a plug figure
to justify a
company is acquired, a plus may be the potential to eliminate not only duplication in
merger that shouldn’t happen costs but also unnecessary costs.
are diverse. Time Warner, for Management of the acquiring company can draw upon the operating history and
example, has fluctuated back the related historical database of the acquired company for planning purposes. A his-
and forth on this issue in recent tory of profitable operations by the acquired company may, of course, greatly reduce
years. President Jeffrey Bewkes the risk involved in the new undertaking. A careful examination of the acquired com-
recently was quoted as saying, pany’s expenses may reveal both expected and unexpected costs that can be eliminated.
“No division should subsidize On the more negative (or cautious) side, be aware that the term “synergies” is some-
another.” When queried about times used loosely. If there are truly expenses that can be eliminated, services that can
the message his predecessors
be combined, and excess capacity that can be reduced, the merger is more likely to
sent to shareholders, he said,
prove successful than if it is based on growth and “so-called synergies,” suggests
“It’s bull—”7
Michael Jensen, a professor of finance at the Harvard Business School.

GAINS FROM BULKING UP8

Industry Key Benefit of Consolidation

Antenna towers Frees up capital and management time for wireless
communications operators
Funeral homes Yields greater discounts on coffins, supplies, and
equipment
Health clubs Spreads regional marketing and advertising costs over
more facilities
Landfill sites Lets operators cope with the new environmental and
regulatory demands
Physician group practices Reduces overhead and costs of medical procedures

2. Combination may enable a company to compete more effectively in the international

marketplace. For example, an acquiring firm may diversify its operations rather
rapidly by entering new markets; alternatively, it may need to ensure its sources of sup-
ply or market outlets. Entry into new markets may also be undertaken to obtain cost sav-
ings realized by smoothing cyclical operations. Diminishing savings from cost-cutting

7
WSJ, “After Years of Pushing Synergy, Time Warner Inc. Says Enough,” by Matthew Karnitschnig,
6/2/06, p.A1.
8
Business Week, “Buy ’Em Out, Then Build ’Em Up,” by Eric Schine, 5/18/95, p. 84.
Exploring the Variety of Random
Documents with Different Content
 “Oh, don’t shout like a cheap skate,” answered Ned disgustedly.
“Go and fix yourself up, if you can, so I won’t be ashamed to go to
supper with you!”
Laurie glared, swallowed hard, and finally nodded. “Listen,” he
said slowly. “You don’t have to be seen with me if it offends your
delicate sensibilities. Get it? And, what’s more, I don’t want to be
seen with you. I’m particular, too, you big bluff. When you want to go
to supper, you go!”
Laurie grabbed wash-cloth and towel, strode across the room, and
slammed the door resoundingly behind him. Left alone, Ned
shrugged angrily. “Ugly-tempered brute,” he muttered.
When supper-time came he descended alone to the dining-hall.
Laurie had not returned to the room. Laurie arrived a few minutes
late, with Kewpie, and took the seat at Ned’s left in silence. He had
put talc powder over the abrasion on his cheek-bone, and at a little
distance it would not have been noticed. Nearer, however, the lump
was plainly visible and seemed to be still swelling. Ned caught a
glimpse of it from the corner of his eye, but his irritation still
continued, and he offered no comment.
After supper both boys returned to No. 16, although not together,
and for two hours occupied opposite sides of the table, and
crammed for their last examination, which was due at ten to-morrow.
Neither spoke once during the evening. At nine Laurie closed his
books and went out. Half an hour later Ned undressed and went to
bed. Sleep didn’t come readily, for there was to-day’s examination to
worry about, and to-morrow’s, too, for he hadn’t made much of that
two hours of preparation, he feared; and then there was this silly
quarrel with Laurie. He guessed he had been as much to blame as
his brother, but there was no sense in any one’s getting mad the way
Laurie had. When Laurie was ready to make friends, why, he’d be
ready, too, but that silly goop needn’t expect him to lick his shoes!
No, sir, if Laurie wanted to make up he could jolly well say so!
Sleep did come at last, and when he awoke it seemed hours later.
The room was in black darkness, but the squares of the wide open
windows were slightly grayer. What had awakened him he at first
didn’t know. Then his gaze caught a darker something against the
gray-black of the nearer casement opening, something that scuffled
on the stone ledge and grew larger as he wondered and watched.
He opened his mouth to speak, and then remembered that he and
Laurie were at outs. The form disappeared from sight, and footsteps
went softly across the boards, were muffled on the rug, and sounded
again by the door. The door was opened, and for a moment Ned
mentally pictured the boy peering anxiously out into the dim hall.
Then the door closed again, and after a short silence Laurie’s bed
creaked. To prove to the other that his return had not been made
unknown, Ned sat up in the blackness and thumped his pillow,
striving to express disapprobation in the thumps. Across the room
the faint stirrings ceased, and silence reigned again.
Ned smiled grimly. Laurie had probably thought that by being so
quiet he could get in without his brother’s knowing it, but he had
shown him! Then Ned’s satisfaction faded. What the dickens had
Laurie been doing out at this time of night? It must be twelve, or
even later! If he had been up to mischief—but of course he had; a
fellow didn’t climb into his room by the window unless he had
something to hide. Even being out after ten o’clock was a punishable
offense! Ned began to worry. Suppose some one had seen Laurie.
Why had Laurie gone to the door and listened unless he had
suspected some one of having seen him? The idiot! The chump! The
—
Over his head he heard a board creak. He listened. The sound
reached him again. In Elk Thurston’s room some one was up, too. Or
had he imagined it? All was quiet now. Was it possible that Laurie
and Elk had been settling their score? Surely not at this time of night.
And yet— From across the room came the unmistakable sounds of
deep and regular breathing. Laurie was asleep beyond a doubt! Ned
frowned disgustedly. Here he was worrying himself about a silly coot
that was fast asleep! He poked his head resolutely into his pillow. All
right! He guessed he could do that, too! And presently he did.
In the morning Ned waited for Laurie to break the ice, but Laurie
didn’t. Laurie went about his task of dressing in silence. There was a
sort of stern look in his face in place of the sullen expression of last
evening, and more than once Ned caught him looking across in an
oddly speculative way. The last time Ned caught him at it he began
to feel uneasy, and he wanted very much to ask what Laurie meant
by it. It was almost as if Laurie had caught him at something, instead
of its being just the other way about! But he was too stubborn to
speak first, and they went out of the room with the silence still
unbroken.
At breakfast, Mr. Brock, at whose table they sat, made the
disquieting announcement that Edward and Laurence Turner were
wanted at the Doctor’s study at 8:30. Involuntarily the gaze of the
two boys met swiftly. Each thought at once of examinations, although
further consideration told them that it was still too soon for any
shortcomings of theirs to reach the principal.
Although they had entered the dining-hall separately, now a
common uneasiness took them together to the Doctor’s, albeit in
silence. They were asked to be seated, which they accepted as a
favorable sign, but there was, nevertheless, something
unsympathetic in Dr. Hillman’s countenance. The latter swung
himself around in his chair and faced them, his head thrust forward a
little because of a near-sightedness not wholly corrected by his
spectacles. And then Laurie observed that the Doctor was gazing
intently at a point just under his left eye, and told himself that the
summons was explained. He was, though, still wondering why Ned
had been included in the party when the Doctor spoke.
“Laurence,” he asked, “how did you come by that contusion?”
Laurie hesitated, then answered, “I was having a—a little bout with
one of the fellows and he struck me, sir.”
“Who was the boy?”
“Thurston, sir.”
“Have you witnesses to prove that?”
“Yes, sir, several fellows were there. Pat—I mean Patton Browne,
and Proudtree and—”
“When did it take place, this—ah—bout?”
 “Yesterday afternoon, about half-past five.”
The Doctor mused a minute. Then, “Which of you boys entered
your room by the window last night at about a quarter before twelve
o’clock?” he asked. The question was so unexpected that Laurie’s
mouth fell open widely. Then, as neither boy answered, the Doctor
continued: “Was it you, Laurence?”
“N-no, sir!” blurted Laurie.
Then, ere the words were well out, he wished them back, and in a
sudden panic he added, “I mean—”
But the Doctor had turned to Ned. “Was it you, Edward?” he
asked.
Ned’s gaze dropped from the Doctor’s, and for an instant he made
no reply. Then he raised his eyes again, and, “I’d rather not say, sir,”
he announced respectfully but firmly.
There followed another brief silence. Laurie was trying hard not to
look at Ned. The Doctor was thoughtfully rolling a pencil across the
big blotter under the palm of one hand. Ned watched him and
waited. Then the Doctor looked up again.
“You are, of course,” he said not unkindly, “privileged to refuse to
answer, Edward, but when you do there is but one construction to be
placed on your refusal. I presume that you did climb into your room
by a window last night. I confess that I don’t understand it, for this is
the first time since you came to us that your conduct has been
questioned. If you are shielding another—” his glance swept to
Laurie and away again—“you are doing wrong. Punishment that falls
on an innocent party fails of its purpose. I am, therefore, going to ask
you to reconsider, Edward. It will be better for every one if you
answer ‘yes’ or ‘no’ to my question.”
Ned returned the principal’s gaze straightly. “I’d rather not, sir,” he
replied.
“Very well, but I warn you that your offense is a very serious one
and that it calls for a drastic penalty. Were you alone in the—ah—
escapade?”
 Ned looked puzzled. “Sir?” he asked.
“I asked you—But you need not answer that. I’ll put it another way.
There were two of you in the car according to an eye-witness. Who
was the other boy?”
“Car?” faltered Ned. “What car, sir?”
The Doctor frowned disapprovingly. “It is so futile, my boy,” he
said, “to act this way.” He turned to Laurie. “What do you know about
this, Laurence? You have said that you did not enter your room last
night by the window. At what time did you return to your room?
Where were you, for instance, at, say, a quarter to twelve?”
“I was in bed, sir.”
“What time did you go to bed?”
“About ten minutes past ten.”
“Where was Edward then?”
“In bed, sir, and asleep.”
“What? You are telling me the truth? Did you see him there?”
“Yes, sir.”
The Doctor frowned perplexedly. “Then you know nothing of any
one’s having entered your room by a window close to midnight?”
Laurie hesitated now. Then, “I went to sleep about ten minutes
after I got in bed, sir, and so I wouldn’t be likely—”
“Please answer my question,” interrupted the Doctor coldly.
“I’d rather not, sir,” said Laurie.
“One more question, then,” announced the inquisitor grimly. “Were
you in Mr. Wells’s automobile last evening when it collided with a
hydrant on Washington Street at approximately half-past eleven?”
“Why, no, sir! I didn’t know it had—had collided!”
Ned was looking rather white.
“You know nothing about the incident?”
 “No, sir!”
“And you, Edward?”
“No, sir.”
“But, if you deny the automobile part of it, why not deny the rest? I
see, though. You knew that Mr. Cornish had seen you climbing in at
the window. I’m afraid you won’t get anywhere that way, Edward. Mr.
Wells’s car was taken from the front of the school last evening and
driven out Washington Street six blocks, where it was in collision with
a hydrant. It was abandoned there. A reliable witness states
positively that there were two persons in the car just before the
accident. About ten or twelve minutes later Mr. Cornish saw some
one climb up the Washington Street side of East Hall and disappear
through your window. Those are the facts, Edward. The evidence
against you is so far circumstantial, but you must acknowledge that
the incident of the car and that of your—of some one’s entrance into
your room by the window look to be more than a mere coincidence.
In other words, whoever entered your room at midnight was in the
stolen car a quarter of an hour before. That’s a fair and very natural
assumption. If I were you, I’d think the matter over carefully and see
me again before eight o’clock this evening, at which time it will come
before the faculty conference. And now, Laurence, let me have those
names once more.” He drew a scratch-pad to him and poised a
pencil. “You say Elkins Thurston struck you and that Proudtree,
Browne, and—who else was there?”
“Lew Cooper and Gordon Simkins were there when—right
afterward, sir, and I guess they saw it.”
“Thank you. That is all, then. I shall have to ask both of you to
remain in bounds until this matter is—ah—settled. Good morning.”
“But—but, Doctor, I’m—I’m on the baseball team, sir!” exclaimed
Laurie in almost horrified accents. “We play this afternoon!”
“I’m sorry, Laurence,” was the reply, “but until you are more frank
in your answers I shall have to consider you under suspicion, also.”
“Well,” said Laurie bitterly, when they were outside, “you certainly
have made a mess of things!”
 “I!” exclaimed Ned incredulously, “I’ve made a mess of things?
What about you?”
“Me? What could I say?” countered Laurie hotly. “I did all I could!”
“All right,” said Ned wearily. “Let’s drop it. He won’t be able to pin
anything on you. You’ll get out of it all right.”
There was a trace of bitterness in Ned’s voice, and Laurie
scowled. “Well, he asked me so suddenly,” he muttered
apologetically, “I—I just said what came into my head. I’m sorry. I’d
have refused to answer if he hadn’t sprung it so quick.”
“It would have been rather more—rather less contemptible,”
answered Ned coldly.
Laurie flushed. “Thanks! I guess that’ll be about all from you, Ned.
When I want any more of your brotherly remarks I’ll let you know!”
He swung aside and left Ned to go on alone to No. 16.
The story of the purloining of the physical director’s blue roadster
was all over school by that time. Ned got the full details from Kewpie.
Mr. Wells had left the car in front of School Hall, as he very often did,
and was playing a game of chess with Mr. Pennington. Shortly after
half-past eleven he had looked for the car, had failed to find it, and
had hurried to the corner. There he had met a man coming down
Walnut Street who, when questioned, said that he had seen such a
car as Mr. Wells’s about five blocks east, where Washington and
Walnut Streets come together, not longer ago than five minutes.
There were two persons in it, and the car was not being driven more
than, possibly, twenty miles an hour. Mr. Wells had gone out Walnut
Street and found the car with one front wheel on the sidewalk, the
mud-guard on that side torn off, and the radiator stove in. There was
no one about. The car wasn’t very badly damaged, it was said, but
Mr. Wells was awfully mad about it. It was down in Plummer’s
Garage, and Ned could see it if he wanted to. Kewpie had seen it. It
looked fierce, but maybe it wouldn’t cost more than a hundred dollars
to fix it up again!
“Know who did it?” asked Ned.
 “Me? I’ll say I don’t!” Kewpie laughed relievedly. “I guess it was
professional automobile thieves, all right, though. They were
probably heading for Windsor. That’s a dark corner up there, and I
guess they lost the road and turned too quick. They must have lost
their nerve, for Mr. Wells drove the car down to the garage and it
went all right, they say. Guess they thought it was done for and didn’t
try to see if it would still go. Sort of a joke on them, wasn’t it?”
“I suppose,” said Ned carelessly, “none of our fellows are
suspected?”
“Of course not. Why, it happened after half-past eleven! Say, you
haven’t—haven’t heard anything?” Kewpie’s eyes grew round with
excitement. “Say, Ned, what is it?” But Ned shook his head wearily.
“I know no more of the business than you do, Kewpie. Now beat it,
will you? I’ve got an exam at ten.”
 CHAPTER XXIII
SUSPENDED

N ed didn’t get much studying done, though. Instead, he spent

most of the half-hour remaining before the examination in trying
to solve the mystery of the stolen car and Laurie’s part in the affair. It
wasn’t like Laurie to indulge in a prank so mischievous, and he could
scarcely believe that Laurie had taken part in the escapade. Still, he
had the evidence of his own senses. He had seen Laurie enter by
the window; and, too, he recalled the latter’s stated desire to drive
Mr. Wells’s car. At home in California Laurie was forever begging the
wheel away from his father and was never happier than when
steering the big car along the smooth roads about Santa Lucia. But,
if Laurie had taken Mr. Wells’s roadster, who had been with him? He
wished that Laurie hadn’t told a lie to the Doctor. That, too, was
something very unlike Laurie. Of course, as he had said afterward,
the question had been sudden and unexpected, and he had said the
first thing that came into his mind, but that didn’t excuse the lie.
Ned’s refusal to answer had been made in the effort to shift
suspicion from Laurie to himself, but he wondered now if it would not
have been as well to tell the truth. His self-sacrifice hadn’t helped his
brother much, after all, for Laurie was still suspected of complicity.
The affair would probably end in the suspension of them both,
perhaps in their expulsion. It was all a sorry mess, and Ned hadn’t
discovered any solution of it when ten o’clock came.
Rather to his surprise, he got through the examination, which
lasted until past twelve, very well. Then came dinner, at which
neither he nor Laurie displayed much of the exuberant spirit that
possessed their table companions. After the meal Ned went over to
the library for an hour. When he returned to No. 16 he found Laurie
standing at the window that looked southward toward the distant
ball-field, dejection in the droop of his shoulders. Ned felt very sorry
for the other just then, and he tried to find something to say but
couldn’t, though he cleared his throat twice and got as far as “Hm!”
You couldn’t see much of the baseball game from that window. The
diamond was at the far end of the field, and a corner of the football
stand hid most of it. Laurie found a book and read, and Ned began a
letter to his father. Somehow the afternoon wore away.
Kewpie burst in at a little before five, at once triumphant and
downcast. Hillman’s had won, 11 to 8, but Kewpie Proudtree had not
been allowed to pitch for even a part of an inning, and so his last
chance was gone, and if Pinky called that doing the square thing—
But Laurie broke in just then. “Can it,” he said gruffly. “You saw the
game, anyhow, and that’s more than I did!”
“That’s right,” said Kewpie, apologetically. “It’s a rotten shame,
Nod. What’s Johnny got on you, anyhow? You can tell me. I won’t
say a word.”
“He hasn’t got anything on me,” growled Laurie. “He just thinks he
has. Who pitched?”
“George started, but they got to him in the fourth—no, fifth, and
Nate finished out. Gee, they were three runs ahead of us in the
seventh!”
“Did Elk get in?”
“No, he’s got a sprained wrist or something. Pinky had Simpson, of
the scrubs, catch the last of the ninth. He dropped everything that
reached his hands, though.”
“Elk’s got a sprained wrist, you say? How’d he do it?”
“I don’t know. Maybe it isn’t a wrist. He’s got something wrong,
though, for I heard Dave Brewster talking about it.” After a minute
Kewpie returned to his grievance, and, since Laurie appeared busy
with his own thoughts, he was allowed to unburden himself to his
heart’s content. Ned condoled with him somewhat abstractedly.
When he had taken himself out Laurie broke the silence.
“With Elk out of the game,” he said bitterly, “I’d have had my
chance to-day, and then this had to happen!”
 Ned might have reminded Laurie that he had only himself to
blame, but he didn’t. He only said, “I’m sorry, old son.” There was
sincerity in his tone, and Laurie heard it. He made no answer,
however. But later, at supper, their feud was dead, and after supper,
in the room, they talked enough to make up for twenty-four hours of
silence. One subject, though, was not mentioned.
Sunday morning the blow fell. There was another visit to Dr.
Hillman’s study. Both boys were again questioned, but their answers
did not vary from those they had given on Saturday. The Doctor
showed genuine regret when he made known the decision of the
faculty. Laurie had been exonerated from lack of evidence against
him, although it was apparent that the Doctor considered him as
deserving of punishment as Ned. Ned was suspended. That meant
that he would not be passed in his examinations and would have to
return next year as a lower-middler again. He might, as the Doctor
reminded him, study during the summer and so make the upper-
middle class during the fall term, however. As the present term was
so nearly at an end, the Doctor continued, Ned would be permitted to
remain at school until Laurie was ready to accompany him home.
The Doctor ended the interview with the suggestion that it would be
a manly act on the part of the twins to reimburse Mr. Wells for the
damage done to his car. Ned opened his mouth as though to say
something then, but he changed his mind and closed it again very
tightly. A minute later they were outside.
“Gosh, Ned, I’m sorry!” said Laurie miserably.
Ned nodded. “Thanks. It’s all right. One of us had to get it.”
“One of us?” repeated Laurie a bit blankly. “Why, yes, I suppose
so, but—”
“Well, you’ve got your baseball to look after, and I haven’t
anything. So it’s better they picked on me, isn’t it?”
“We—ell,” began Laurie. Then he stopped and shook his head in a
puzzled way. Finally, “You’ll stick around until Thursday, won’t you?”
he asked anxiously.
 The other nodded. “Might as well,” he said. “I could get out now
and wait for you in New York, but I don’t see any reason why I should
spend all that money just to act haughty.”
The blow having fallen, Ned, who had already discounted it,
cheered up quite remarkably. After all, he told himself, he had saved
Laurie, and last autumn Laurie had saved him from something very
close to disgrace, and so this sacrifice only somewhat evened
accounts. He allowed himself to be persuaded to accompany the
others on the Sunday afternoon walk, only pledging Laurie to say
nothing of his suspension. It was not until Monday noon that the
news leaked out, and not until hours after that that the school began
to connect the incident of the wrecked automobile with Ned’s fate.
Even then most of those who knew Ned intimately refused to believe
that there could be any connection between the two things.
Questioned, Ned was very uncommunicative, and by Tuesday even
his closest friends began to waver in their faith.
Laurie went back to the baseball fold on Monday. Kewpie’s report
about Elk was true. Elk was nursing a lame wrist. He had, it seemed,
hurt it in wrestling with his room-mate. It had kept him out of the
game Saturday, and it prevented his doing any catching on Monday;
but on Tuesday the injured wrist appeared as good as ever, and
Laurie, who had been temporarily elevated to the position of first
substitute catcher, again dropped into third place. The Farview game
was due on Wednesday, which was likewise Class day and the final
day of the school term. On Monday Coach Mulford was very easy
with the first-string players but gave the substitutes a hard
afternoon’s work. Laurie caught four of the five innings that the
substitutes played against the scrub team. In the final inning he gave
place to Simkins and took that youth’s berth at first base. Tuesday
saw the whole squad hard at work in the final preparation for the
enemy, and no player, from Captain Dave Brewster down to the least
of the substitutes, had a minute’s respite. “You fellows can rest all
you want to after to-morrow,” said the coach. “You can spend all
summer resting if you like. To-day you’re going to work and work
hard.” Even Kewpie, who knew that Fate held nothing for him, was
subjected to almost cruel exertion. He pitched to Laurie until his arm
almost rebelled, and he was made to “dummy pitch” from the mound
and then field the balls that Pinky batted at him and to all sides of
him. And he ran bases, too, and Kewpie considered that the final
indignity and privately thought that the least Pinky could do was to
leave him in peace to his sorrow. But before Tuesday’s practice
began other things of more importance to our story happened. While
dressing Tuesday morning Laurie let fall a remark that led to the
clearing away of mistakes and misconceptions.
“You must have gone to bed with your clothes on the other night,”
he observed. “If you didn’t, you sure made a record!”
Ned stared. “What other night?” he asked.
Laurie floundered. Neither of them had referred to the matter since
Sunday. “Why—well, you know. The night you got in the window,”
Laurie explained apologetically.
“The night I got in the window! Are you crazy?”
“Oh, well,” muttered Laurie, “all right. I didn’t mean to make you
huffy.”
He went on with his dressing, but Ned still stared at him. After a
minute Ned asked: “Look here, old son, what made you say that?
About me getting in the window, I mean.”
“Why, nothing.” Laurie wanted peace in the family. “Nothing at all.”
“You had some reason,” Ned persisted, “so out with it.”
“Well, you were so blamed quick, Ned. You went to the door and
then I heard you get into bed about thirty seconds afterward. It don’t
seem to me that you had time to undress.”
“Let’s get this right,” said Ned with what was evidently forced calm.
“Sit down there a minute, Laurie. Why do you say it was I who came
through the window?”
It was Laurie’s turn to stare. “Why, why because I saw you! I
waked up just as your head came over the sill, you chump!”
“You saw my head come— Look here, are you in earnest or just
trying to be funny?”
 “Seems to me it’s you who are acting the silly ass,” answered
Laurie aggrievedly. “What’s the big idea, anyway?”
“But—but, great Scott, Laurie,” exclaimed Ned excitedly. “I saw
you come in the window!”
“Cut the comedy,” grinned Laurie. “I wasn’t out, and you know it.”
“Well, was I, you poor fish? Wasn’t I in bed and asleep when you
came in, as you told Johnny you did?”
“Sure, but— Say, do you mean to tell me I didn’t see—”
“Of course you didn’t! But—”
“Then who did I see?” asked Laurie a trifle wildly.
“Who did I see?” countered Ned. “You say it wasn’t you—”
“Me! Hang it, I went to bed at ten and wasn’t awake again until I
heard a noise and saw you—well some one coming in that window!
Look here, if it wasn’t you, why didn’t you tell Johnny so?”
“Because I thought it was you, you poor prune!”
“What! But I’d said—”
“Sure you had, but I’d seen you with my own eyes, hadn’t I?”
Laurie shook his head weakly. “This is too much for me,” he
sighed. “It wasn’t you and it wasn’t me but it was one of us! I pass!”
“But it wasn’t one of us,” exclaimed Ned. “That’s what I’m getting
at. Don’t you see what happened?” Laurie shook his head.
“Listen, then. We were both asleep, and we each heard the noise
and woke up. Some one came through the window, crossed the
room, opened the door, looked out to see that the coast was clear,
went out, and closed the door after him.”
“But I heard you get into bed!”
“No, you didn’t. You heard me sit up and punch my pillow. I wanted
you to know that you weren’t getting away with it. For that matter I
heard your bed creak and thought you were getting into it.”
 “I sat up, too,” said Laurie. “Gee, that’s a queer one! All this time I
thought it was you and could have kicked myself around the block for
yelling ‘No!’ when Johnny asked me that question! Then—then who
the dickens was it, Ned?”
“That,” answered Ned grimly, “is what we’ve got to find out. Just
now it’s up to us to get out of here before we miss our breakfasts!”
“Hang breakfast!” shouted Laurie. “This is better than a hundred
breakfasts! Why—why, it means that you—that you aren’t
suspended! It means—”
“Put your collar on, and make it snappy,” laughed Ned. “We’ve got
some work ahead of us this morning!”
After breakfast they hurried back to No. 16, barred the door
against intruders, especially Kewpie, sat down at opposite sides of
the study table, and faced the problem. They continued to face it
until nearly eleven. They examined the window-sill for clues, and
found none. They leaned out and studied the ivy by means of which
the mysterious visitor had reached the second story, and it told them
nothing, or so it seemed at the moment. As they turned back to the
room Ned said idly: “It’s lucky the fellow didn’t have to get to the third
floor, for I don’t believe he could have made it. That ivy sort of peters
out above our window.”
Laurie nodded uninterestedly and silence ensued, just as silence
had ensued so frequently before in the course of morning. Then,
several minutes later, Ned said suddenly, questioningly:
“Thurston!”
Laurie shook his head. “Not likely. Besides, what reason—”
“Wait a minute. I didn’t tell you. It didn’t seem important. After I’d
settled down again that night I heard the floor up-stairs creak twice. I
wasn’t just certain then, but now I am! Elk Thurston was moving
about up there, Laurie!”
“Well, what if he was? That doesn’t prove—” He stopped and
frowned intently. “Hold on, though, Ned! What about Elk’s wrist?”
“We’ve got it!” cried Ned.
 “Yes, maybe. Let’s go slow, though. You don’t happen to know
whether Elk can drive a car, do you?”
“No, but I’ll bet you anything you like that he tried to drive that one!
Look here, our window was open and it was easy to reach. He
couldn’t have made his own without chancing a fall. He trusted to our
being asleep. He—”
“What about the other fellow, though?” asked Laurie. “We didn’t
see—”
“No, but maybe he got in first. Maybe it was really he who awoke
us. Come to think of it, you said that when you woke up the fellow’s
head was just coming into sight. Well, in that case there wouldn’t
have been enough noise—”
“By jiminy, that’s so! Bet you that’s what happened. But who—
Say, maybe the other fellow was Jim Hallock!”
“Just what I was thinking,” agreed Ned. “I don’t see, though, how
we can prove anything against either of them. Look here, son, I
guess the best thing we can do is see Johnny and tell him all about
it. After that it will be up to the faculty. Come on!”
They had to wait some time for an audience, but finally they were
facing the Doctor, and Ned, as spokesman, was saying very
earnestly: “Neither Laurie nor I was out of our room after ten o’clock
Friday night, sir. Somebody did come in our window, though, and
woke us up. I thought it was Laurie and he thought it was me, and
that’s why I didn’t want to answer your question, sir.”
Now, nothing could have been clearer and simpler than that and
yet, when Ned had finished, the principal blinked behind his
spectacles, gazed a moment in silence, and then waved a hand.
“Sit down, boys,” he said. “Now, Edward I think you’d better say
that all over again.”
 CHAPTER XXIV
MR. GOUPIL CALLS

A fter practice that afternoon Laurie returned to the room to find

Ned engaged in sorting things out preparatory to packing up.
When Laurie entered, however, the other paused in his effort to stuff
more rubbish into an already overloaded waste-basket and
announced in triumph, “We had it right, partner!”
“Elk Thurston?”
“Elk and Jim Hallock. Elk’s just left here.”
“Left here? You mean he was in to see you?”
Ned nodded. “Yes. It was rather decent of him, I think. Take that
idiotic expression from your face and sit down. This is how Elk tells
it. He and Jim were looking out of their window that night and saw
the lights of Mr. Wells’s car on the other side of the hedge. One of
them said something about Mr. Wells always leaving his car around
and what a joke it would be if it wasn’t there when he came back for
it. Well, that idea sort of stuck, and after a while Elk suggested that
they sneak down and run the car off around the corner. Elk says that
Jim usually wouldn’t have gone in for anything like that on a bet, but
there’d been some tough exams that day, and Jim was sort of keyed
up. Anyhow, they sneaked down-stairs after a while and got out by
one of the windows in the recreation-room. They didn’t dare try the
front way, for Cornish had his study door open. They put the brakes
off and tried to push the car toward Washington Street, but it was
heavy, and after they’d got it a little ways they decided to start it and
run it around the corner. So they did, pretty sure that it was too far off
for Mr. Wells to hear. Elk took the wheel and they went to
Washington Street. Then, he says, the thing was working so pretty
they thought they’d go on further. When they got to where
Washington joins Walnut it was pretty dark, and he swung to the
right too soon.
“That’s when they hit the hydrant. Of course, they were scared
pink, and Elk shut the motor off and they beat it as fast as they
could. When they got back here they found that some one had been
prowling around and had locked the window. Then they saw our
windows open and decided to climb up by the ivy. Elk says they
hoped we’d be asleep. If we waked up they meant to tell us and ask
us to keep mum. Jim climbed up first and made it all right, but Elk
had hurt his wrist when the car struck the hydrant, and he had a hard
time of it. They didn’t either of them know that Cornish had seen
them. For that matter, he only saw one, I guess, and that one was
probably Elk, for he says it took him two or three minutes to get to
the window because his wrist hurt him so. Seems that Jim left the
hall door open after him, but the draft closed it, and that’s what woke
us up, I guess. Well, what Elk came for was to say that neither of
them knew they’d been seen and that they hadn’t meant to throw
suspicion on us. He says if they’d known that Cornish was prowling
around they wouldn’t have entered our window. He was very
particular about making that clear. Guess he thought you might think
he had done it on purpose to get even with you. And that’s that, old
son.”
Laurie nodded thoughtfully. “Kind of too bad,” he mused. “I
suppose they didn’t intend anything but a sort of joke on Mr. Wells.
Did he tell you what they were going to get?”
“Get? Oh, they’re suspended, he says. He seemed to feel worse
about Jim than about himself. Do you know, old son, after all Elk isn’t
such a bad sort. At least, that’s the way it strikes me after hearing his
spiel. He says he’s not coming back next year. He’s going to tutor
this summer and try and make college in the fall.”
“Yeah,” said Laurie abstractedly. “Well, I’m sort of sorry for him.
And of course he didn’t mean to get us in wrong.” He lapsed into
silence. Then, abruptly, “Cas Bennett split his finger with a foul tip
about half an hour ago,” he announced.
 “He did?” exclaimed Ned. “Gosh, that’s tough luck! Will it keep him
out of the game?”
“Yes,” replied Laurie.
“That is tough! Say, what are you looking so queer about?”
“Just thinking,” answered Laurie. “You try it.”
“Huh?”
“Use the old bean, son. Cas has split his finger, Elk’s suspended
—”
“Great jumpin’ Jehoshaphat! Why, then, you—you—”
“Correct,” said Laurie. “I’ll have to catch to-morrow, and—and at
the present moment, Ned, I’m scared to death!”

That had been a day of events, and it was not yet over. Attic
Society was giving its usual end-of-the-term blow-out that evening,
and both Ned and Laurie were invited. The affair began at eight, and
at half-past seven they were in No. 16 putting the finishing touches
to their toilets. Although it was a stag-party it called for best clothes
and polished shoes and carefully brushed hair, and Laurie was trying
hard to subdue a rebellious lock on the crown of his head when there
came a knock on the door. Both boys shouted “Come in!”
simultaneously. Then the door was opened, revealing Mr. Cornish,
the hall master, and a stranger. The boys grabbed for their coats,
Laurie dropping a military brush to the floor with a disconcerting
noise. Mr. Cornish ushered the stranger in but himself came no
further than the door-sill.
“Here is a gentleman to see you, Laurence,” said the instructor. “I
was quite certain you were in, and so I brought him up.”
Mr. Cornish smiled, nodded to the guest, who bowed impressively,
and departed, closing the door behind him.
“Very glad indeed—” began Laurie.
“Have a seat, won’t—” supplemented Ned.
 “Thank you.” The stranger again bowed and seated himself,
placing a cane across his immaculately clad legs and balancing a
somewhat square derby hat perilously atop. “I begin by offering you
my apologies for this intrusion,” he continued.
“Not necessary,” mumbled Laurie, his gaze busy with the guest.
The latter appeared to be about fifty, was under rather than over
average height, and was very broad and thick and, like his derby,
rather square of contour. He even had a distinctly square face which
began very high up, because of the disappearance of what hair may
have adorned the front of his head at one time, and ended in an
auxiliary chin. He wore a very black mustache whose ends were
waxed to sharp points. His eyes were quite as black and almost as
sharp as his mustache. He looked foreign, and, indeed spoke with
more than a trace of accent, but he was evidently a gentleman, and
he impressed the boys very favorably.
“With your permission,” he continued, “I will introduce myself.” He
regarded Laurie. “I have the honor of addressing Mr. Laurie Turner?”
Laurie nodded. The guest carefully secured hat and stick, arose, and
bowed deeply. “I,” he announced then, “am Mr. Goupil.”
For an instant silence ensued. Then, “Mister—I beg your pardon,”
said Laurie, “but did you say Goupil?”
“Goupil,” confirmed the gentleman, bowing again and smiling very
nicely.
“You mean,” stammered Laurie, “the Mr. Goupil? Of Sioux City?
Miss Comfort’s Mr. Goupil?”
“Surely.”
“Why—why, then,” exclaimed Laurie, “I’m mighty glad to meet you,
sir.” He stepped forward with outstretched hand, and Mr. Goupil
enfolded it in a far more capacious one. “And this is my brother Ned.”
Mr. Goupil then shook hands with the amazed Ned. After that they all
sat down. Mr. Goupil arranged stick and hat with precision, cleared
his throat, and began:
“My dear sister-in-law has told me of your most kind efforts in her
behalf, and I have presented myself to make explanation and to add
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