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 http://www.archive.org/details/cu31924013879063 
 
Corporation Accounting 
 
 '/ 
 
 R5 J; BENNETT, C.P.A. 
 
 Director, Bennett Accountancy Institute; Author, 
 "C. P. A. Questions and Answers," etc.; Member, 
 Institute of Chartered Accountants, Ontario; Member, 
 Pennsylvania Institute of Certified Public Account- 
 ants; Member, American Institute of Accountants. 
 
 I "txA^V<-<5^<>! QU<L^.^^ 
 
 THE RONALD PRESS COMPANY 
 
 NEW YORK 
 
C 7 15 4 
 
 Copyright, 1916, by 
 The Ronald Press Company 
 
 14 
 
Co jRp jHotfter. 
 
 The Late Ellen Bartley Bennett, 
 
 This Book Is Affectionately 
 
 Dedicated 
 
PREFACE 
 
 Corporation accounting does not differ in its essentials 
 from the accounting of any other form of business organi- 
 zation. There are, however, certain transactions, accounts, 
 and entries employed in it which are either peculiar to the 
 corporation or so seldom encountered elsewhere that they 
 may properly be termed distinctive. It is with these dis- 
 tinctive transactions and their accounting treatment that the 
 present volume concerns itself, and not with the general 
 problems of accountancy. 
 
 As companies are formed; as stocks of differing char- 
 acteristics are subscribed for, issued on varying terms, for- 
 feited, donated, resold or cancelled; as bonds of different 
 classes are issued, sold, purchased or redeemed at maturity ; 
 as sinking funds and reserves are set up for the protection 
 and redemption of these bonds; as dividends are declared 
 or assessments are levied; as companies are reorganized, 
 liquidated, or become insolvent, the accountant is confronted 
 with difficult problems — ^problems which frequently, because 
 of the magnitude of the amounts involved, or because of the 
 legal consequences of error, call for a care and accuracy of 
 treatment beyond the ordinary. 
 
 In all these matters the corporation accountant may 
 well profit by the experience of those who have already 
 grappled with and solved these problems, and it is the pur- 
 pose of this volume to present such solutions and to set 
 forth the established practice, wherever practice has been 
 established. In this the author trusts he has been successful. 
 
 It must be said, however, that in the treatment of many 
 corporate transactions, practice — and good practice — is not 
 
VI 
 
 PREFACE 
 
 uniform, though the final result is, of course, the same. 
 Where this is true, the author has endeavored to give all 
 the methods of treatment in good accounting use. 
 
 It may also be noted that most of the illustrative entries 
 in the present work are, for the sake of clearness and 
 simplicity, given in journal form even though many of 
 them are cash entries that in practice would appear only in 
 the cash book. 
 
 A considerable amount of space has been devoted to 
 those details of corporate organization, practice, and proce- 
 dure which more directly affect the work of the accountant. 
 This information is so essential to the proper understanding 
 and handling of the corporate accounts, that the author felt 
 that it should not be omitted. Much of this has been taken 
 from the works on corporate organization and management 
 by Mr. Thomas Conyngton, to whom the author extends his 
 sincere thanks. 
 
 The author also gratefully acknowledges the valuable 
 assistance given by corporation officials, bankers, corporation 
 accountants, public accountants and others, and especially 
 by brother members of the Pennsylvania Institute of Cer- 
 tified Public Accountants. 
 
 R. J. Bennett. 
 Philadelphia, Pa. 
 October i. 1916. 
 
CONTENTS 
 
 PART I— CORPORATION ORGANIZATION AND 
 PROCEDURE 
 
 Chapter 
 
 Page 
 
 I The 
 
 Corporate Form . . . . i 
 
 § I. 
 
 Business Organization 
 
 2. 
 
 The Corporation 
 
 3- 
 
 Kinds of Corporations 
 
 4- 
 
 Public Utility Corporations 
 
 5. 
 
 Corporations Created by and Subject to 
 
 
 State Laws 
 
 6. 
 
 Procedure for Incorporation 
 
 7. 
 
 Nature of the Corporation 
 
 8. 
 
 The Charter 
 
 9- 
 
 The By-Laws 
 
 10. 
 
 Management of the Corporation 
 
 II. 
 
 Capital Stock 
 
 12. 
 
 Shares of Stock 
 
 13. 
 
 Stockholders 
 
 14- 
 
 Certificates of Stock 
 
 IS. 
 
 Voting 
 
 16. 
 
 Advantages of the Corporate Form 
 
 17- 
 
 Disadvantages of the Corporate Form 
 
 18. 
 
 Summary of Taxes and Reports 
 
 19. 
 
 The Corporate Records 
 
 II Kinds of Stock 16 
 
 § 20. 
 
 Capitalization 
 
 21. 
 
 Capital Stock and Actual Capital 
 
 22. 
 
 Shares Without Par Value 
 
 23. 
 
 The Functions of Corporate Stock 
 
 24. 
 
 Nature of Stock 
 
 25. 
 
 Issued and Unissued Stock 
 
 26. 
 
 Full-Paid and Partly Paid Stock 
 
 27. 
 
 Treasury Stock— Donated Stock 
 
 Vll 
 
via 
 Chapter 
 
 CONTENTS 
 
 28. Common and Preferred Stock 
 
 29. Dividends on Preferred Stock 
 
 30. Convertible Stock 
 
 31. Guaranteed Stock 
 
 32. Watered Stock 
 
 Page 
 
 III Meetings; the Corporate Calendar . 
 § 33- The Annual Meeting 
 
 34. Time of Annual Meeting 
 
 35. Preliminary Arrangements for Annual 
 
 Meeting 
 
 36. Annual Meeting — Closing Transfer Books 
 
 37. " " — Stockholders' List; No- 
 
 tices ; Proxies 
 
 38. " " — Quorum 
 
 39. , '■ " — Opening Formalities 
 
 40. " " — Election of Directors 
 
 41. " " — Cumulative Voting 
 
 42. " " — Reports 
 
 43. " " — Minutes 
 
 44. Directors' Meetings 
 
 45. Special Meetings 
 
 46. The Corporate Calendar 
 
 47. Contents of Corporate Calendar 
 
 48. Form of Corporate Calendar 
 
 30 
 
 PART II— CORPORATION RECORDS AND 
 ACCOUNTS 
 
 IV The Books and Records of a Corpora- 
 tion 44 
 
 § 49. Books of Accounts 
 
 50. Requirements 
 
 51. Inspection of Corporate Records 
 
 52. Corporate Books of Record 
 
 53. The Minute Book 
 
 54. Stock Subscriptions 
 
 55. The Subscription Bqok or List. 
 
CONTENTS ix 
 
 Chapter Page 
 
 56. Instalment Receipts 
 
 57. Stock Scrip 
 
 58. The Instalment Book 
 
 V The Books and Records of a Corpora- 
 tion (Continued) 60 
 
 § 59. Treasurer's Receipt for Subscription Pay- 
 ment 
 
 60. Stock Certificate Book 
 
 61. Assignment of Stock Certificate 
 
 62. Stock Transfer Book 
 
 63. Register of Transfers 
 
 64. Stock Register 
 
 65. Stock Book or Stock Ledger 
 
 66. Form of Stock Book or Stock Ledger 
 
 67. Dividend Book 
 
 68. Dividend Order 
 
 VI Distinctive Corporate Accounts . . 80 
 
 § 69. Accounts Peculiar to Corporate Bookkeeping 
 
 70. Capital Stock — Common 
 
 71. Capital Stock — Preferred 
 
 72. Capital Stock Authorized 
 
 73. Unissued Stock 
 
 74. Subscriptions to Stock 
 
 75. Capital Stock Subscribed 
 
 76. Instalment Account 
 "JT. Treasury Stock 
 
 78. Donation Account 
 
 79. Premium on Capital Stock 
 
 80. Capital Stock Without Par Value 
 
 81. Organization Expenses 
 
 82. Surplus 
 
 83. Dividends 
 
 84. Bonds 
 
 85. Bond Premium 
 
 86. Bond Discount 
 
 87. Interest on Bonds 
 
 88. Accrued Interest on Bonds 
 
 89. Sinking Fund 
 
 90. Sinking Fund Reserve 
 
Chapter 
 
 
 CONTENTS 
 
 
 Page 
 
 91. 
 
 Sinking Fund Income 
 
 
 
 92. 
 
 Good-Will 
 
 
 
 93. 
 
 Investment in Stocks and 
 Companies 
 
 Bonds of 
 
 Other 
 
 PART III — SPECIAL ENTRIES RELATING TO 
 TRANSACTIONS IN STOCK AND DIVIDENDS 
 
 VII Stock of Original Issue .... loi 
 
 § 94. General Conditions 
 
 95. Pro Forma Statement 
 
 96. Opening Entries — Stock Full-Paid (Plani) 
 
 97. " " — " " ( " 2) 
 
 98. Stock Sold on Instalments (Plan i) 
 
 99. Stock Sold on Instalments (Plan i) — 
 
 Ledger Accounts 
 100. Stock Sold on Instalments (Plan 2) 
 loi. Sale of Stock After Organization 
 
 102. Stock Sold Below Par 
 
 103. Stock Sold Above Par 
 
 104. Stock Issued at a Premium to Create a 
 
 Surplus 
 IDS. Payment of Salaries in Stock 
 106. Payment of Commissions in Stock 
 
 VIII Treasury Stock and Stock of Other 
 
 Companies 119 
 
 Transactions in Treasury Stock 
 
 § 107. Donated Stock 
 108. " " — First Method of Entry 
 
 i09. " " — Second Method of Entry 
 
 no. Bonus Paid in Stock 
 
 111. Purchase and Sale of Corporation's Own 
 
 Stock 
 
 112. Entries for Purchase and Sale of Corpora- 
 
 tion's Own Stock 
 
CONTENTS xi 
 
 Chapter Page 
 
 Transactions in Stock of Other Corporations 
 
 113. Purchase and Sale of Stock of Other Cor- 
 
 porations 
 
 114. Entries for Purchase and Sale of Stock of 
 
 Other Corporations 
 
 115. Entries When Stock is Exchanged for 
 
 Stock of Other Corporations 
 
 IX Dividends and Their Entry . . -133 
 
 § 116. The Nature of Dividends 
 
 117. Directors' Powers as to Dividends 
 
 118. Informal Distribution of Corporate Profits 
 
 119. Surplus — Equalizing Dividends 
 
 120. Declaration of Dividends 
 
 121. Notice of Dividend 
 
 122. Ownership of Dividends 
 
 123. Payment of Dividends 
 
 124. Dividend Sheet or Book 
 
 125. Entries for Cash Dividends 
 
 126. Dividends Paid with Borrowed Money 
 
 127. Entries for Scrip Dividend 
 
 128. Entries for Special and Interim Dividends 
 
 X Dividends and Their Entry (Con- 
 tinued) .... . . 147 
 
 § 129. Entries for Dividends Applied to Stock 
 Subscriptions 
 
 130. Entries for Cumulative Dividends 
 
 131. Entries for Stock Dividends 
 
 132. Entries for Bond Dividends 
 
 133. Bank Dividends 
 
 134. Property Dividends 
 
 135. Unearned Dividends 
 
 XI Proprietorship Incorporated (New 
 
 York) 156 
 
 § 136. Organization Procedure 
 
 137. General Provisions 
 
 138. Financial Details of the Incorporation 
 
 139. Certificate of Incorporation 
 
xii CONTENTS 
 
 Chapter Page 
 
 140. Filing the Certificate of Incorporation 
 
 141. First Meeting of the Stockholders 
 
 142. Minutes of First Meeting of Stockholders ; 
 
 By-Laws 
 
 143. Minutes of First Meeting of Directors ; the 
 
 Stock Book 
 
 144. Journal Entries 
 
 145. Cash Book Entries 
 
 146. Other Entries 
 
 XII Manufacturing and Mining Corpora- 
 tions 166 
 
 Manufacturing Corporation 
 § 147. Details of Incorporation 
 
 148. Statutory Records 
 
 149. The Books of Account 
 
 150. Journal Entries 
 
 151. Cash Book Entries 
 
 152. The Ledger Accounts 
 
 Mining Corporation 
 
 153. Details of Incorporation 
 
 154. Opening Entries 
 
 l-SS. Entries for Donated Stock 
 
 156. Entries for Forfeited Subscription 
 
 XIII Partnerships Incorporated . . . 177 
 
 § IS7- Good-Will 
 
 158. Determination of the Value of Good-Will 
 
 159. Accounting Treatment of Good-Will 
 
 160. Conditions of the Incorporation 
 
 161. Agreement for Incorporation 
 
 162. Allotment of Stock 
 
 163. Underwriting Expenses 
 
 164. Balance Sheets of the Incorporating Firms 
 
 165. Statutory Requirements 
 
 166. Opening Entries 
 
 167. Closing the Partnership Books 
 
 168. Closing Entries on Books of Lowell, Ma- 
 
 son & Company 
 
 169. Closing the Books of Oliver & Dickson 
 
 170. Balance Sheet of New Company 
 
CONTENTS xiii 
 
 PART IV— CORPORATE BOND ISSUES 
 
 Chapter 
 
 
 Page 
 
 XIV 
 
 The Corporation Bond . . . .197 
 
 
 § 171. 
 
 Nature of the Bond 
 
 
 172. 
 
 Authorization of Bond Issues 
 
 
 1^3. 
 
 Constitutional and Statutory Provisions Af- 
 fecting Bond Issues 
 
 
 174. 
 
 Procedure in Issuing Bonds 
 
 
 175- 
 
 Preparation of Bonds 
 
 
 176. 
 
 Terms Used in Connection with Bonds 
 
 
 177. 
 
 Issued and Outstanding Bonds 
 
 
 178. 
 
 Sinking Funds 
 
 
 179. 
 
 Sale of Bonds 
 
 
 180. 
 
 Liabilities of Vendor 
 
 
 181. 
 
 Rights of Holders 
 
 XV Classification of Bonds .... 208 
 
 § 182. General Classification 
 
 183. Debentures 
 
 184. Mortgage Bonds 
 
 185. Coupon Bonds 
 
 186. Registered Bonds 
 
 187. Kinds of Bonds 
 
 188. First Mortgage, etc., Bonds 
 
 189. Junior Lien, etc.. Bonds 
 
 190. Gold, etc., Bonds 
 
 191. Convertible Bonds 
 
 192. Serial Bonds 
 
 193. Redeemable Bonds 
 
 194. Profit-Sharing, etc., Bonds 
 
 195. Income Bonds 
 
 196. Collateral Trust Bonds 
 
 197. Guaranteeed Bonds 
 
 198. Consolidated, etc.. Bonds 
 
 199. Interest Bonds 
 
 200. Terminal, etc.. Bonds 
 
 201. Car Trust Bonds 
 
 202. Purchase Money Bonds 
 •203. Short Term Notes 
 
 XVI Bond Forms 221 
 
 § 204. Form of Bond 
 
XIV 
 
 CONTENTS 
 
 Chapter 
 
 XVII 
 
 Page 
 
 205. Form and Nature of Coupon 
 
 206. Trustee's Certificate 
 
 207. Deed of Trust 
 
 208. Recitals of Deed of Trust 
 
 209. Duties of Trustee 
 
 210. Execution and Filing of Deed of Trust 
 
 211. The Bond Register 
 
 212. Form of Bond Register 
 
 213. Payment of Coupons 
 
 214. The Coupon Register 
 
 Bond Sales 
 
 § 215. Selling the Bonds 
 
 Bond Issue Regulations 
 First Mortgage Bonds Sold at Par 
 Entry on Sale of Bonds 
 Bonds Sold at Par and Accrued Interest 
 Bond Subscriptions Paid for in Instal- 
 ments 
 
 221. Guaranteed Bonds 
 
 222. Entries for Collateral Trust Bonds 
 
 223. Entries for Short Term Notes 
 
 224. Entries for Equipment Trust Serial Bonds 
 
 239 
 
 216. 
 217. 
 218. 
 219. 
 220. 
 
 XVIII Bond Interest 
 
 § 225. Paying Bond Interest 
 
 226. Method of Handling Interest Coupons 
 
 227. Interest on Registered Bonds 
 
 228. Bond Interest Accrued Monthly 
 
 229. Interest on Two or More Bond Issues 
 
 230. Interest on Treasury Bonds 
 
 231. Interest on Guaranteed Bonds 
 
 232. Interest on Income Bonds 
 
 233. Interest on Special Bond Issues 
 
 234. Interest Charged to Construction 
 
 235. Income from Investments 
 
 . 252 
 
 XIX Bond Discount and Premium . 
 
 § 236. Bonds Sold Above or Below Par 
 
 237. Bonds Sold Between Interest Dates 
 
 238. Expenses of Bond Issue 
 
 239. Entries for Bond Discount and Expense 
 
 266 
 
CONTENTS XV 
 
 Chapter Page 
 
 240. Entries for Bond Premium 
 
 241. Nature of Bond Premium and Discount 
 
 242. Treatment of Bond Premium and Discount 
 
 243. Eflfective Rate Method 
 
 244. Varying Conditions Affecting Annual Charge 
 24s. Methods of Determining Charge to Income 
 
 246. Operation of the Various Methods of De- 
 
 termining Annual Charge to Income 
 
 247. Determining Annual Charge when Pro- 
 
 portionate Discount Is Written Off 
 
 XX Sinking Funds 279 
 
 § 248. Function of the Sinking Fund 
 
 249. Creation of the Sinking Fund 
 
 250. Sinking Fund Created Out of Profits 
 
 251. Safeguarding the Sinking Fund 
 
 252. Adequacy of the Sinking Fund 
 
 253. Annuity Method for Sinking Funds 
 234. Calculating Fund Annuities 
 
 255. Sinking Fund to Retire Preferred Stock 
 
 XXI Sinking Funds (Continued) . . . 289 
 
 § 256. Sinking Fund Account 
 
 257. Entries for Sinking Fund Instalments 
 
 258. Entries. for Sinking Fund Interest 
 
 259. Entries for Sinking Fund Investments 
 
 260. Entries for Investment in Issuing Com- 
 
 pany's Bonds 
 
 261. Entries for Bonds Cancelled Through Sink- 
 
 ing Fund 
 
 262. Entries for Sinking Fund Reserve 
 
 263. The Sinking Fund on the Balance Sheet 
 
 264. Entries on Books of Sinking Fund Trustee 
 
 XXII Redemption of Bonds . • . .'^05 
 
 § 265. Plans for Redeeming Bonds 
 
 266. (i) Redemption of Bonds Through Sink- 
 
 ing Fund 
 
 267. (2) Bonds Drawn by Lot for Redemption 
 
 268. Entries for Bonds Called for Redemption 
 
 269. (3) Refunding Bonds 
 
 270. Entries for Refunding Bonds 
 
XVI 
 
 CONTENTS 
 
 Chap^cer 
 
 271. (4) Redemption of Serial Bonds 
 
 272. (s) Entries for Convertible Bonds 
 
 273. Redemption of Collateral Trust Bonds 
 
 274. Redemption of Short Term Notes 
 
 275. Redemption of Equipment Trust Bonds 
 
 276. Redemption of Guaranteed Bonds 
 ■2T]. Bonds in Default 
 
 278. Destroying Bonds 
 
 Page 
 
 PART A^— CORPORATION REPORTS AND 
 
 STATEMENTS 
 
 XXIII 
 
 XXIV 
 
 Closing the Books ; Reserve Funds and 
 
 Surplus 320 
 
 § 279. Closing the Books 
 
 280. Procedure in Closing the Books 
 
 281. Closing the Ledger 
 
 Reserve Funds 
 
 282. Reserve Accounts 
 
 283. Reserve Accounts and Reserve Funds 
 
 284. Secret and Hidden Reserves 
 28s. Depreciation 
 
 286. Methods of Handling Depreciation 
 
 287. Reserve for Depreciation 
 
 288. Operation of Reserve for Depreciation Ac- 
 
 count 
 
 289. Sinking Fund for Exhaustion of Mines 
 
 290. Insurance, Benefit, and Accident Funds 
 
 Surplus 
 
 291. Surplus or Undivided Profits Account 
 
 292. Contributed Surplus 
 
 293. Investments of Surplus 
 
 Forms of Statements .... 
 § 294. Corporate Reports 
 
 Necessity for Reports 
 
 Form of Statements 
 
 Balance Sheets 
 
 Statements of Income and Profit and Loss 
 
 Statement of Cash Receipts and Disburse- 
 ments 
 
 338 
 
 295- 
 296. 
 297. 
 298. 
 299. 
 
CONTENTS 
 
 xvu 
 
 Chapter 
 XXV 
 
 Page 
 
 XXVI 
 
 XXVII 
 
 Preparation of Statements — p- Manu- 
 facturing Corporation 
 § 300. Trial Balance 
 
 301. Manufacturing Account 
 
 302. Balance Sheet 
 
 303. Trading and Profit and Loss Account 
 
 304. Closing Entries in Journal 
 
 305. Comments on Closing of Lake Manufac- 
 
 turing Company's Books 
 
 Preparation of Statements — Trading 
 Corporation 
 
 § 306. Trial Balance 
 
 307. Trading and Profit and Loss Statement 
 
 308. Balance Sheet 
 
 309. Closing Journal Entries 
 
 310. Comments on Closing of Bryant-Chase 
 
 Company's Books 
 
 35^ 
 
 365 
 
 Corporate Reports 
 
 § 311. Special Reports 
 
 374 
 
 312. 
 313. 
 314. 
 
 3IS- 
 316. 
 317- 
 318. 
 319. 
 320. 
 321. 
 322. 
 323- 
 324- 
 
 Reports to Stockholders 
 Reports of Officers and Committees 
 Committee Reports 
 Auditor's Report 
 General Manager's Report 
 Treasurer's Report 
 President's Report 
 Statutory Corporation Reports 
 The Annual Report 
 Federal Corporation Report 
 Taxable Corporations 
 Exempted Corporations 
 Return Made for Either Calendar or Fiscal 
 Year 
 
 PART VI— CORPORATE COMBINATIONS 
 
 XXVIII Methods of Consolidation . . .39° 
 § 335. Purposes of Corporate Combination 
 
xviii CONTENTS 
 
 Chapter Page 
 
 326. Methods of Corporate Consolidation or 
 
 Control 
 
 327. Expert Investigations 
 
 Accounting Investigation Preliminary to 
 Consolidation 
 
 328. Scope of Investigation. 
 
 329. Report on Assets 
 
 330. Report on Liabilities 
 
 331. Revenue and Expense Accounts 
 
 332. Cost of Operation 
 
 333. Reports and Certificates 
 
 XXIX Consolidation by Merger . . . 403 
 
 § 334- General Procedure for Merger 
 
 335. General Conditions of the Merger 
 
 336. Statement of Concerns to be Merged 
 
 337. Terms of Merger 
 
 338. Requirements for the Consolidation 
 
 339. Procedure for Consolidation 
 
 340. Opening Entries on Books of New Cor- 
 
 poration 
 
 341. (i) Entries for Issuance of Stock and 
 
 Bonds 
 
 342. (2) Entries for Assets and Liabilities 
 
 Taken Over 
 343- (3) Entries for Retirement of Outstanding 
 Bonds and Mortgages of the Merging 
 Concerns 
 
 344. (4) Entries Relating to Sale of Securities 
 
 345. (s) Entry in Settlement of Intercompany- 
 
 Obligations 
 
 346. The Conduct of the Branches 
 
 347. Closing Entries for Long Company 
 
 348. Closing Entries for Vine Company ; Bell & 
 
 Davis 
 
 349. Closing Entries for Bain Company 
 
 350. Balance Sheet for Bain Branch 
 
 351. Consolidated Balance Sheet of New Cor- 
 
 poration 
 
 352. Consolidation by Purchase 
 
CONTENTS xix 
 
 Chapter Page 
 
 XXX Consolidation by Lease .... 429 
 
 § 353- Leases 
 
 354. Entries for Property Leased 
 
 355. Entries for Guarantees 
 
 356. Lease Terms 
 
 357. Entries for Lease of Mine 
 
 358. Entries for Lease of Railway 
 
 359. Entries for Improvements and Note Issue 
 
 360. Adjusting Entries at End of First Year 
 
 361. Entries for Union Mining Company 
 
 362. Balance Sheet of Union Mining Company 
 
 363. Entries for Wilson Transportation Com- 
 
 pany 
 
 XXXI Holding Companies 441 
 
 § 364. Classification of Holding Companies 
 
 365. Controlling Corporations 
 
 366. Status of the Subsidiary Company 
 
 367. Legality of Holding Companies 
 
 368. Accounting Procedure of Holding Company 
 ' 369. Accounting Requirements 
 
 370. Operating Company Purchasing Controlling 
 
 Interest 
 
 371. Entries on Books of Purchasing Company 
 
 372. Entries on Books of Selling Company 
 
 373. The Consolidated Balance Sheet 
 
 374. Parent Companies 
 
 XXXII Consolidated Balance Sheets . . 456 
 
 § 375- Purposes of Consolidated Balance Sheet 
 
 376. Contents of Consolidated Balance Sheet 
 
 377. Preparation of Consolidated Balance Sheet 
 
 378. Consolidated Balance Sheet with Inter- 
 
 company Details 
 
 379. Consolidated Balance Sheet without Inter- 
 
 company Details 
 
 380. Additional Illustrations of Consolidated 
 
 Balance Sheets 
 
 381. Consolidated Income Account 
 
XX 
 
 CONTENTS 
 
 PART VII— REORGANIZATIONS, RECEIVER- 
 SHIPS AND DISSOLUTIONS 
 Chapter Page 
 
 XXXIII Reorganization by Agreement . . 469 
 
 § 382. Definition of Reorganization 
 
 383. Methods of Reorganization 
 
 384. Reorganization by Reduction of Stock 
 
 385. Balance Sheet Before Reduction of Capital 
 
 Stock 
 
 386. Accounting Requirements 
 
 387. (a) Procedure 
 
 388. (b) Entries and Records 
 
 389. Conditions of Reorganization 
 
 390. Balance Sheet Before Adjustment 
 
 391. Plan of Adjustment Adopted 
 
 392. Accounting Requirements 
 
 XXXIV Receivership 
 
 § 393- Receivers 
 
 394. Appointment of Receivers 
 
 395. Powers of Receivers 
 
 396. Liability of Receivers 
 
 397. Receivers in Bankruptcy Cases 
 
 398. The Receiver's Accounts 
 
 399. The Company's Accounts During Receiver- 
 
 ship 
 
 481 
 
 XXXV Receivership and Reorganization 
 
 § 400. Preliminaries to a Receivership 
 
 401. Reorganization Agreement 
 
 402. Conditions Preceding Receivership 
 
 403. Statement of Affairs 
 
 404. The Receiver's Activities 
 
 405. Accounting Procedure 
 
 406. (i) Receiver's Records on Taking Charge 
 
 407. (2) Record of Receiver's Transactions 
 
 408. (3) Receiver's Closing Entries 
 
 409. (4) Receiver's Statement to the Court 
 
 410. (s) Adjustment of Company's Books on 
 
 Appointment of Receiver 
 
 487 
 
CONTENTS 
 
 XXI 
 
 Chapter 
 
 XXXVI 
 
 411. Entries to Adjust Inventories 
 
 412. (6) Entries on Termination of Receivership 
 
 Receivership and Sale .... 
 
 § 413. Introductory 
 
 414. Statement of Condition 
 
 415. (i) Receiver's Records on Taking Charge 
 
 416. (2) Entries to Record Receiver's Activities 
 417- (3) Receiver's Statement of Condition 
 418. (4) Entries for Sale and Dissolution 
 
 Page 
 
 508 
 
 XXXVII Dissolution of Corporations . 
 
 § 419. Voluntary Dissolution 
 
 420. Dissolution Through Bankruptcy 
 
 421. The Deficiency Account 
 
 422. Realization and Liquidation Account 
 
 423. Statement of Condition 
 
 424. (i) Statement of Affairs 
 
 425. (2) Deficiency Account 
 
 426. Trustee's Cash Account 
 
 427. (3) The Realization and Liquidation Ac- 
 
 count 
 
 517 
 
 Appendix — Incorporation Forms . . . . 
 
 1. New York Charter 
 
 2. By-Laws 
 
 3. Certification of By-Laws 
 
 4. Minutes of First Meeting of Stockholders 
 
 5. Proxy— First Stockholders' Meeting 
 
 6. Call and Waiver of Notice— First Meeting of Stock- 
 
 holders 
 
 7. Minutes of First Meeting of Directors 
 
 8. Call and Waiver of Notice— First Meeting of Directors 
 
 529 
 
Corporation Accounting 
 
 Part I — Corporation Organisation and Procedure 
 
 CHAPTER I 
 
 THE CORPORATE FORM 
 
 § I. Business Organization 
 
 There are three general forms under which business 
 activities are conducted, viz. : the single proprietorship, the 
 partnership, and the corporation. In a single proprietor- 
 ship the business is conducted by an individual on his own 
 account and for his own benefit. In a partnership the busi- 
 ness is owned by two or more individuals and is conducted 
 on a co-operative basis for mutual benefit, the partners 
 participating in its management and in its profits. Under 
 the corporate form, business is conducted for the benefit 
 of the stockholders of the corporation by a board of directors 
 elected by them. The corporation owns the business, and 
 the stockholders own the corporation ; so practically, though 
 not technically, the stockholders own the business. 
 
 § 2. The Corporation 
 
 A corporation is an association of individuals authorized 
 by law to act as a whole under a corporate name and for 
 some particular purpose or purposes. The word "company" 
 is used synonymously with "corporation," with reference to 
 business organizations. 
 
 I 
 
2 ORGANIZATION AND PROCEDURE 
 
 The stock corporation is one whose authorized capital, 
 or "capital stock," is divided into shares, each of which 
 represents a definite interest in the corporation, and, 
 ordinarily, entitles the owner of record to vote at corporate 
 meetings and to participate both in corporate profits and in 
 the assets of the corporation on its dissolution. The shares 
 are called "stock," and their owners "stockholders." 
 
 In many states, corporations formed to carry on mining, 
 manufacturing, or mercantile enterprises are called "busi- 
 ness corporations," to distinguish them from banking and 
 insurance companies, which are termed "moneyed or finan- 
 cial corporations," and from, railroad, telegraph, telephone, 
 ferry, and other like companies, which are called transporta- 
 tion or public utility corporations. While moneyed and 
 public utility corporations are usually subject to much 
 stricter regulations than "business corporations," they enjoy 
 more extensive powers. 
 
 § 3. Kinds of Corporations 
 
 Generally speaking, there are two kinds of corporations 
 — those conducted for profit, and those not conducted for 
 profit. Corporations for profit include railroad, banking, 
 insurance, public utility, manufacturing, and trading com- 
 panies. Corporations not for profit are conducted for 
 the benefit of the community, as municipalities, hospitals, 
 churches, and charitable, social, and literary societies. Under 
 the Pennsylvania statutes these latter are known as "cor- 
 porations of the first class," while those conducted for profit 
 are classified as "corporations of the second class." 
 
 Under the New York statutes the classification is as 
 follows : 
 
 1. Municipal corporations 
 
 2. Stock corporations 
 
 3. Non-stock corporations 
 
THE CORPORATE FORM 3 
 
 Class 1 includes towns, counties, cities, villages, school 
 districts, and other territorial divisions of the state which 
 are established by law with powers of local government. 
 Class 2 includes all corporations having a capital stock 
 divided into shares, and which are conducted for profit. 
 To Class 3 belong those which are conducted partly for the 
 well-being of their members, as churches, cemeteries, co- 
 operative organizations, boards of trade, and various 
 benevolent institutions. 
 
 § 4. Public Utility Corporations 
 
 Public utility corporations may be characterized as mixed 
 or quasi-public, inasmuch as they operate for the convenience 
 of the public as well as for profit to the management. They 
 include the various transportation organizations, such as 
 railroad, street-car, steamboat, and ferry companies; the 
 telegraph and telephone companies ; and the gas and electric 
 light companies. Such corporations are usually relieved 
 to some extent from competition, because this, it is thought, 
 will result in better service to the public. Their activities 
 are regulated by the terms of their franchises and by the 
 laws and ordinances of the municipalities in which they 
 operate. In many states they are subject to the supervision 
 of public utility or public service commissions. 
 
 § 5. Corporations Created by and Subject to State Laws 
 
 Corporations are a creation of the law, that is, the laws 
 of each state and of the District of Columbia prescribe the 
 manner in which corporations in such state or District shall 
 be formed, and they may be formed only in accordance 
 therewith — unless, as is sometimes done, they are authorized 
 by a special legislative act — and have only such legal 
 existence, rights and powers as are given them by such laws. 
 
 A corporation organized in one state (or in the District 
 
4 ORGANIZATION AND PROCEDURE 
 
 of Q»lumbia) may operate in other states, being known in 
 its own state as a "domestic" corporation, and in other states 
 as a "foreign" corporation. When a corporation carries on 
 business in another state, it must comply with the laws of 
 that state regulating "foreign" corporations. This is so 
 because the rights and powers conferred by the laws of its 
 own state exist for it in another state only as a matter of 
 comity and subject to any regulations imposed on "foreign" 
 corporations in that other state. 
 
 To state this more fully, "The corporations of one state 
 may exercise any or all of their powers in another state, 
 unless the latter state, by its statutes, decisions, or policy, 
 forbids. This right of a corporation to act and contract 
 in any state is due to the spirit of comity between the states. 
 It is constitutional, however, for a state to refuse to allow 
 that privilege, except as against corporations engaged in 
 interstate commerce. 
 
 "A state may require a foreign corporation to pay a 
 license fee before doing business within its borders. A 
 statute of a state prohibiting a foreign corporation from 
 doing business in the state, if such corporation is connected 
 with a trust, is constitutional."* 
 
 As the conditions of incorporation and the powers and 
 rights of corporations vary in the several states, the laws 
 of the particular state must be consulted when the procedure 
 for incorporation or the rights and powers of corporations 
 in any particular state are to be known. It may also be 
 noted that the laws with respect to the organization of public 
 utility and moneyed corporations usually differ from those 
 under which the ordinary business corporation is formed. 
 
 § 6. Procedure for Incorporation 
 
 The state laws governing incorporation usually require 
 
 *Cook on Corporations, § 696. 
 
THE CORPORATE FORM 5 
 
 that three or more persons — termed "incorporators" — must 
 take part in forming a corporation, and that all or a part of 
 these must be citizens of the United States. In some cases 
 it is required that one or more must be citizens of the state 
 in which the corporation is organized. 
 
 In all the states general laws have been passed pre- 
 scribing the method of incorporation, together with special 
 provisions in the case of financial and public utility 
 corporations. In most states there are special laws for 
 educational, benevolent, and other corporations of similar 
 character, as well as for corporations the nature of whose 
 business calls for special provision. 
 
 The general corporation laws usually provide that when 
 due and proper application is made, with payment of the 
 proper fees, the Secretary of State shall issue a charter in 
 accordance with the terms of the application; or, where 
 actual issuance of the charter is not required, the official 
 acceptance and filing of the application authorize, ipso facto, 
 the parties to organize as a corporation. In this case the 
 application as approved becomes the charter of the corpora- 
 tion. The persons authorized by the charter to organize, 
 usually meet shortly after its issuance or filing, to elect 
 directors, adopt by-laws, and make the necessary arrange- 
 ments for the conduct of the corporate business. The pro- 
 cedure for incorporation in the different states varies as to 
 details, and in some few states is materially different from 
 that described herein. In the great majority of states, 
 however, it follows substantially the outline given. 
 
 § 7. Nature of the Corporation 
 
 The corporation, when created, is for all practical pur- 
 poses an individual, having power in its corporate name to 
 carry on business, to make contracts, and to sue or be sued. 
 It is an entity entirely separate and distinct from its 
 
6 ' ORGANIZATION AND PROCEDURE 
 
 members, who may die or withdraw without affecting the 
 corporate existence. It is subject to the general laws of 
 the land as is an individual, and also to the special state 
 laws made for the regulation of corporations. It must also 
 conform strictly to the provisions of its charter. Its 
 members, called stockholders, may adopt by-laws for its 
 guidance ; but these are subordinate to the charter, and both 
 are subordinate to the laws of the state. 
 
 § 8. The Charter 
 
 The charter, or certificate of incorporation, is the 
 fundamental law of the corporation, corresponding to the 
 constitution of the state or nation. From it the corporation 
 derives its existence and its powers. All the important 
 features peculiar to a corporation, not secured by common 
 law or necessarily incident to incorporation, should appear 
 in its charter. These are usually the name, purposes, dura- 
 tion, location, capitalization, and the details thereof; also, 
 (in some states), the number of directors, the names of 
 those who are to act for the first year, and any special 
 provisions permissible by law which the incorporators desire 
 to make a permanent part of their organization. Temporary 
 or less important details may be left for by-law or other 
 regulation; but all matters of permanence or importance 
 should, as far as possible, be set forth in the charter. 
 
 § 9. The By-Laws 
 
 As already stated, a modern corporation is regulated, 
 first, by the general laws under which it operates ; second, 
 by the provisions of its charter; and third, by its by-laws. 
 The by-laws are the quasi-permanent rules of corporate 
 action, and are usually adopted at the first meeting of stock- 
 holders. Occasionally, when specially authorized by the 
 charter or by the laws of the state, the directors also have 
 power to pass by-laws. 
 
THE CORPORATE FORM 7 
 
 § 10. Management of the Corporation 
 
 The corporation is managed by a board of directors 
 elected by the stockholders, and subject to the provisions 
 of tbe corporation's charter and by-laws. The number of 
 directors is often prescribed within certain limits by the 
 state laws — as, not less than three nor more than thirteen 
 — and, within these limits, is fixed by the charter or by-laws. 
 The directors may act only in duly assembled meetings, and 
 their decisions or instructions, usually expressed in the 
 form of resolutions, are carried out by the officers of the 
 company or by special agents appointed by the board of 
 directors. 
 
 The officers usually elected by the board are a presi- 
 dent, one or more vice-presidents, secretary, treasurer, and 
 sometimes a general manager as well. In the larger cor- 
 porations assistants to these officers are also elected. The 
 duties of the officers are fixed in a general way by custom, 
 but are varied with the needs of the particular corporation. 
 The by-laws should state clearly the specific duties of each 
 officer. Occasionally, the statutes prescribe some of the 
 official duties, as in New Jersey where the statutes provide 
 that stock certificates must be signed by the president and 
 treasurer of the corporation. 
 
 The president of a corporation usually has charge of its 
 general business activities and usually presides at all meet- 
 ings of stockholders and directors. His powers and duties 
 should be explicitly set forth in the by-laws. The vice- 
 president performs the duties of the president in his absence. 
 Any special duties assigned him should be stated in the 
 by-laws. The secretary has charge of the corporate seal 
 and must affix and attest it when necessary ; he usually takes 
 charge of the corporate records and also of the issue and 
 recording of stock. The treasurer has charge of the cor- 
 porate finances. He signs all checks, sees to their proper 
 
8 ORGANIZATION AND PROCEDURE 
 
 countersigning, and usually participates in the execution of 
 all instruments pertaining to the financial transactions of 
 the company. If a general manager is chosen by the board, 
 he has charge of the general business, manufacturing, min- 
 ing or whatever it may be, but he is not usually accounted 
 an officer of the company. He is responsible to the directors 
 and usually reports to them. 
 
 The profits of the corporate business go to the stock- 
 holders in the form of dividends and in proportion to their 
 holdings of stock, at such times and in such amounts as the 
 directors may decide. 
 
 § II. Capital Stock 
 
 The capital stock of a corporation is the amount of 
 stock which the corporation is authorized to issue. Its 
 amount is fixed by the charter and may not be changed 
 except by amendment thereto. 
 
 The amount of capital stock as fixed by the incorporators 
 in the charter application may be based, (i) on the actual 
 cash value of property to be taken over by the corporation ; 
 (2) on the amount required for the development of the 
 undertaking; (3) on the earning power of the corporate 
 business; (4) on the speculative estimate of what these 
 earning powers will be when the business is developed ; or 
 ( 5 ) on some combination of these factors. 
 
 The statutory requirements as to issuance of capital 
 stock dififer in the various states; but some minimum is 
 usually fixed by law as the smallest amount with which the 
 corporation may begin business. Beyond any such required 
 amount, the capital stock need only be issued when it 
 is necessary to secure money or property for corporate 
 purposes. 
 
 In a conservative company, the capital stock issued at 
 the time of organization will usually represent dollar for 
 
THE CORPORATE FORM 
 
 9 
 
 dollar the amount of cash or its equivalent put into the 
 company; though naturally, thereafter the value of this 
 stock — which depends upon the value of the property 
 of the company — will vary as the corporate business is 
 profitable or otherwise. In a speculative company, on the 
 contrary, the capital stock is usually issued to a figure far 
 in excess of the existing value of any property owned. 
 Nevertheless, if the company is successful, the value of 
 its assets may reach or even greatly exceed its original 
 capitalization. 
 
 § 12. Shares of Stock 
 
 The capital stock of a corporation is divided into equal 
 parts called shares, the par value of which is usually $ioo, 
 though mining corporations are commonly organized with 
 shares of the par value of $i, and shares of the par value 
 of $io are frequently encountered. The object in issuing 
 these small shares is to encourage small investors. In some 
 states the par value of shares is restricted by law, but in 
 most states it may be fixed at any figure desired. Occa- 
 sionally shares are issued of the par value of $500 or even 
 $1,000 each ; but, unless there is good reason to the contrary, 
 a par value of $100 should be adhered to on account of its 
 common use and its convenience. 
 
 § 13. Stockholders 
 
 When a company is organized, its stock is supposed 
 to be issued only for money, property, or something else 
 of value contributed to the company; and the parties who 
 receive the stock in exchange for these values, and those 
 who thereafter acquire it, are the stockholders and compose 
 the company. The number of stockholders in a corporation 
 is rarely less than three. On the other hand, the stock- 
 holders may be very numerous; thus the capital stock of 
 
lO ORGANIZATION AND PROCEDURE 
 
 the Pennsylvania Railroad of the par value of $500,000,000, 
 is owned by over 94,000 different stockholders; and the 
 United States Steel Corporation, with its billion dollars of 
 stock capital, has more than 125,000 stockholders. 
 
 When all the stock of a corporation is controlled by one 
 person, it is frequently termed a "one-man company"; or 
 if controlled by a few persons, a "close corporation." Such 
 corporations are common. 
 
 The stock of a corporation may be freely transferred by 
 sale or otherwise. Such transfers do not, however, affect 
 the existence of the corporation, which continues until 
 terminated by, ('i) statutory limitations ; (2) the limitations 
 of the charter; (3) by consent of the stockholders; or (4) 
 by action of creditors. The stockholders of a corporation 
 are frequently in a continual state of change, old stock- 
 holders going out and new ones taking their places. The 
 ownership of the corporation is thus continually changing, 
 but the corporation itself is the same. As stated by Black- 
 stone, "A corporation is like to the river Thames, which is 
 still the same river though the parts composing it are 
 changing every instant." 
 
 § 14. Certificates of Stock 
 
 The interest of a stockholder in a corporation is fixed 
 by his holdings of its stock. This is evidenced by proper 
 entries on the corporate books and also by certificates signed 
 and sealed by the proper officials of the company, stating 
 the number of shares owned by the individual to whom the 
 certificates are issued. This individual is then the "owner 
 of record." If he sells his stock he assigns his certificates 
 to the buyer, who then surrenders these certificates to the 
 corporation and receives a new certificate in his own name, 
 proper entries being made on the corporate books (§61) 
 to show the new owner of record. 
 
THE CORPORATE FORM n 
 
 AH stockholders are entitled to certificates for the stock 
 owned by them, and can under proper conditions force the 
 issue of such certificates if withheld. They are also entitled, 
 within reasonable limits, to have their certificates broken 
 up and reissued if they so desire. To curb too great activity 
 in this direction, the corporate by-laws sometimes authorize 
 the secretary to charge a small fee for each certificate issued 
 by him. 
 
 While the stock certificate is the convenient and cus- 
 tomary evidence of stock ownership, its loss or destruction 
 does not affect this ownership. Such loss may, it is true, be 
 very embarrassing to the stockholder, just as would be the 
 loss of a deed to real estate; but he is still the "owner of 
 record" on the corporate books, and, though he cannot 
 produce his certificate, is a stockholder of the company, 
 entitled to receive his dividends and to be present and vote 
 at stockholders' meetings. There is, however, one exception 
 to this statement. When a purchaser receives a certificate 
 assigned to him by the seller, and has not yet surrendered 
 it in exchange for a new certificate issued to himself, its 
 loss is far more serious. The seller, and not the purchaser, 
 is then the owner of record, and the purchaser has no stock- 
 holder's rights. His only recourse in case of loss under 
 such circumstances is to appeal to the seller and to the cor- 
 poration for assistance in establishing his true status. This 
 is usually very difficult to establish. 
 
 When a stockholder who has lost his certificate wishes 
 to sell his stock, he must apply to the corporation for a 
 reissue; for, speaking generally, no one would buy stock 
 without a transfer of the certificate. The corporate by-laws 
 almost always provide for such reissues, but require the 
 party to whom a certificate is reissued to give bond to 
 protect the corporation in case the original certificate should 
 turn up to its injury. 
 
12 ORGANIZATION AND PROCEDURE 
 
 § 15. Voting 
 
 Each stockholder in a corporation is ordinarily entitled 
 to vote at every stockholders' meeting, and has one vote for 
 each share of stock standing in his name on the books. In 
 an election of directors, for example, he may, for each share 
 of stock owned by him, cast one vote for each director to 
 be elected. Under the plan known as "cumulative voting," 
 which the statutes of some states prescribe, and which in 
 many other states may be obtained by charter or by-law 
 provision, each share of stock still has its one vote for each 
 director to be elected ; but, instead of casting this one vote 
 for each candidate, the stockholder may "cumulate" all his 
 votes upon one or more of the candidates, as he sees fit. 
 Thus, if seven directors are to be elected, a stockholder 
 owning one share of stock may, under the cumulative system, 
 cast seven votes for one candidate, or three votes for one 
 candidate and four for another ; or may distribute his seven 
 votes among all the candidates as he sees fit. 
 
 This method of voting is frequently important to the 
 interests of minority stockholders. Under the ordinary plan 
 they cannot possibly secure representation on the board of 
 directors ; but with cumulative voting they can, if they hold 
 a fair proportion of the stock, elect one or more directors. 
 Having representation on the board, minority stockholders 
 are enabled to secure information as to what is being done, 
 and in a measure can protect their interests. (See § 41.) 
 
 § 16. Advantages of the Corporate Form 
 
 The corporation as a form of business organization is 
 superior to the partnership in several important respects. 
 A partnership may be formed by word of mouth, by simple 
 agreement, or it may exist by implication without the know- 
 ledge of the partners. It is conducted with the same easy 
 simplicity. Each member may act for and bind the partner- 
 
THE CORPORATE FORM 
 
 13 
 
 ship, and each member is liable for all the debts of the firm. 
 In suits or other legal proceedings the individual members 
 must be made parties, as the partnership cannot be sued 
 under its firm name. 
 
 A corporation, on the other hand, can be formed only 
 by voluntary, deliberate intention of the parties, acting in 
 accordance with statute laws. The management is vested 
 in directors, who must act as a body and in accordance with 
 the regulations of the charter and by-laws. After a stock- 
 holder has once paid for his stock, he is not, in most states, 
 liable further for the debts of the corporation. The corpora- 
 tion itself may sue and be sued, and act generally under its 
 own name as an individual. 
 
 The more material advantages of the corporate over the 
 partnership form of business organization may be sum- 
 marized as follows : 
 
 1. The limitation of stockholders' liabilities to the 
 
 amount of their stock (in most states). 
 
 2. The distinct legal entity of the corporation for all 
 
 business purposes. 
 
 3. The stability and permanence of the corporate or- 
 
 ganization. 
 
 4. Transferable shares of stock to represent owner- 
 
 ship in the corporation. 
 
 5. The management of the business by an elected board 
 
 of directors acting through officers and agents. 
 
 6. The greater ease of securing capital under the 
 
 corporate form because of its safety and its 
 convenient method of representing ownership 
 interests by stock. 
 
 § 17. Disadvantages of the Corporate Form 
 
 While the corporation is ' the best form of business 
 organization, generally speaking, it must not be supposed 
 
14 ORGANIZATION AND PROCEDURE 
 
 that it offers a cure for all business ills, or is a safeguard 
 against all loss. Nor should it be supposed that the partner- 
 ship form entails all the disadvantages to which business 
 organizations are subject. There are many instances of 
 partnership organizations of long standing under which 
 large and successful businesses have been built up. 
 
 P"urthermore, while the corporate organization possesses 
 many advantages, it has also its points of disadvantage, in 
 the restrictions and burdens placed upon it by federal and 
 state laws. These include limitations of activity, onerous 
 taxation, the filing of many reports, and the publicity of 
 corporate affairs. There is a strong tendency at present to 
 extend some of these burdens to every form of business 
 organization, but the corporate form is still distinctly handi- 
 capped in this respect. 
 
 § 18. Summary of Taxes and Reports 
 
 The following summary gives the more important taxes 
 and reports required of corporations. These are in addition 
 to the expenses of organization. Some of the taxes and 
 reports mentioned are not peculiar to the corporation, but 
 are given for the sake of completeness. 
 
 Taxes: 
 
 1. Organization taxes payable to the state for incor- 
 
 poration. 
 
 2. Annual franchise taxes paid to the state of incor- 
 
 poration. 
 
 3. Annual taxes on property. 
 
 4. Federal income tax. 
 
 5. Inheritance tax on stock (in most states), 
 
 6. Stock transfer tax (in New York State). 
 
 7. Taxes and license fees in each state — outside the 
 
 home state — in which the corporation does busi- 
 ness. 
 
THE CORPORATE FORM 
 
 15 
 
 Reports : 
 
 1. Local tax reports. 
 
 2. State tax reports. 
 
 3. Federal tax reports. 
 
 4. Annual and other reports required by the home 
 
 state. 
 
 5. Reports in each state — outside the home state — in 
 
 which the corporation does business. 
 
 § 19. The Corporate Records 
 
 The corporation is literally a creature of the law ; and, 
 while having no real personal existence, is, apart from its 
 membership, a distinct legal entity, with many of the powers, 
 rights, and privileges of a person. Since corporations are 
 creatures of the law, their business must be conducted in 
 compliance with the law ; and this, as well as their distinc- 
 tive form and method of action, necessitates various instru- 
 ments, records, and accounts not required by other forms 
 of business organization. 
 
 Thus, the proceedings at meetings, both of the stock- 
 holders and of the board of directors, must be recorded in 
 suitable minute books; stock certificates must be issued, 
 cancelled and reissued, and these transactions must be 
 recorded in stock certificate books and stock ledgers; the 
 distribution of profits in the form of dividends requires a 
 dividend book, and the issue of bonds requires a bond 
 register. 
 
 In addition to the special books and records incident to 
 the corporate form, corporations also require, as business 
 organizations, the usual accounting books and records. 
 
CHAPTER II 
 
 KINDS OF STOCK 
 
 § 20. Capitalization 
 
 The term "capitalization" ordinarily designates the 
 total capital stock of a corporation, whether common or 
 preferred, issued or unissued; but in economic discussions 
 of finance, this term is frequently extended to include not 
 only the authorized capital stock, but alsO' bonds and 
 similar corporate obligations. 
 
 § 21. Capital Stock and Actual Capital 
 
 Capital stock has already been defined (§ ii), but may 
 be further described as the nominal or slmre capital of a 
 corporation, as distinguished from its actual or property 
 capital. These two are radically different. The first is 
 fixed by the charter, while the second is the net value of 
 the corporate assets. The sole effect of the charter pro- 
 vision is to fix the amount of capital stock stated therein 
 as the authorized maximum capital stock; and, while 
 those in control of the new corporation may issue stock 
 up to this amount, they may not exceed it. The property 
 capital of a corporation on the other hand depends en- 
 tirely upon the corporate business and management. If 
 the corporation is prosperous and if dividends are not 
 declared too freely, its capital will increase; othenvise it 
 will stand still or diminish. 
 
 The actual capital of a corporation is usually secured 
 by the sale and issue of its capital stock. In most states 
 this stock may be issued only for cash, property, or labor, 
 
 i6 
 
KINDS OF STOCK I 7 
 
 equal at least to the nominal value of the issued stock. 
 Many heavily capitalized incorporations of the past decade 
 have, by various subterfuges, evaded actual compliance 
 with this requirement, but the present tendency towards 
 a stricter enforcement of the letter of the law is making 
 such evasion increasingly difficult. 
 
 When capital stock is issued at par for actual value, 
 it follows that at that tinr« the outstanding capital stock 
 and the capital secured by its issue are equal. For ex- 
 ample, if a corporation organizes with a capital stock of 
 $50,000, all of which is issued for money or property, such 
 money or property should represent a value of $50,000. 
 The capital stock, however, remains a fixed quantity 
 unless changed by formal charter amendment or by legis- 
 lative enactment, while the actual capital changes with 
 every variation of the corporate business. 
 
 The working capital of a corporation is usually under- 
 stood to include the actual, or property, capital and any 
 money borrowed for business purposes. 
 
 § 22. Shares Without Par Value 
 
 In 1912 a law was passed by the New York legislature 
 granting the right, where special application is made 
 therefor, to organize corporations with shares of unspeci- 
 fied value. In such cases, each share of unvalued stock 
 represents an equal interest in the corporation, and each 
 certificate is required to have written or printed thereon 
 the number of unvalued shares represented by it, as well 
 as the entire number of such shares authorized. 
 
 For example, if a corporation is organized under the 
 unvalued share law, say with 500 shares, each share would 
 represent a 1/500 interest in the corporate property and 
 business; and its dollars and cents value could be de- 
 termined after a valuation of the corporate property and 
 
1 8 ORGANIZATION AND PROCEDURE 
 
 business, by dividing such value by 500. Thus, if the 
 estimated value of capital and surplus owned by the cor- 
 poration were $45,500, each share would, in the absence of 
 other modifying conditions, be worth $91.* (See § 80.) 
 
 § 23. The Functions of Corporate Stock 
 
 The most important function of corporate stock is to 
 indicate the stockholders' interests in the corporation's 
 business. It does not give the individual owner, or stock- 
 holder, a right to any part of the corporate capital, except 
 in case of liquidation; but it represents his proportionate 
 part of any profits declared as dividends, and also shows 
 to what representation he is entitled in any meetings of 
 the stockholders. 
 
 The division of capital stock into shares enables the 
 interest of each stockholder to be indicated with accuracy, 
 and also permits the transfer of this interest with an ease 
 not found under any other system of business organization. 
 
 § 24. Nature of Stock 
 
 From the standpoint of the accountant, the capital 
 stock represents an indebtedness of the corporation, and 
 in practice is entered as a liability on the corporate books 
 and in all statements of corporate afifairs. There is, how- 
 ever, a clear distinction between the corporate liabiHty on 
 such things as notes, bonds, outstanding current indebted- 
 ness, etc., and the technical liability for corporate stock. 
 No interest is paid on capital stock, nor does the corpora- 
 tion undertake to "pay it out"; and its value, whether 
 face or actual, cannot be collected from the corporation 
 by legal procedure. Therefore it is not, from any point 
 of view, a legal corporate liability. It is only a technical 
 liability, and does not affect the solvency of the corpora- 
 
 *For further details see Conyngton*s "Corporate Organization." 
 
KINDS OF STOCK 
 
 19 
 
 tion in any way. A corporation may be not only solvent 
 but highly prosperous at a time when its actual assets are 
 materially less than the face value of its outstanding 
 stock. 
 
 The capital stock of a corporation, or the assets ob- 
 tained from its sale, are regarded in law as a trust fund 
 pledged for the payment of the corporate debts. It is the 
 foundation upon which the corporation's credit is based. 
 Hence, both the common and the statute law are insistent 
 that no dividends shall be declared which may impair the 
 capital stock or endanger the solvency of the corporation. 
 
 § 25. Issued and Unissued Stock 
 
 A corporation is under no obligation to issue the full 
 amount of its authorized capital stock. On the contrary, 
 after complying with any statutory requirements as to the 
 minimum issue, it may do whatever seems best with the 
 balance of its stock, allowing it to remain unissued or 
 issuing it from time to time as may be necessary or 
 expedient. All "issued stock" which has not in some way 
 come back into the possession of the corporation, is 
 termed "outstanding stock." 
 
 Any stock that has not been issued is termed "unissued 
 stock," or sometimes loosely and erroneously called 
 "treasury stock." (See § 2^!) Stock on its first issue by 
 the corporation at its organization or later, is termed an 
 "original issue" to distinguish it from stock issued on 
 transfers of certificates, or from treasury stock, etc. 
 Unissued stock has in itself no value, and can neither be 
 voted nor participate in dividends. It is nothing more 
 than a right to issue stock. 
 
 § 26. Full-Paid and Partly Paid Stock 
 
 A corporation may sell its stock for any fair price, and 
 
20 ORGANIZATION AND PROCEDURE 
 
 when this price is paid it has no further claim against the 
 purchaser. If, however, this agreed price is less than the 
 face value of the stock, such stock is not full-paid ; and 
 should the corporation later become insolvent, its creditors 
 could force the original purchasers of the stock — if it were 
 still in their hands — to pay the difference between the pur- 
 chase price and the par value, or so much thereof as might 
 be necessary to discharge the corporate obligations. Also, 
 if stock is sold at its full face value payable in instalments, 
 and these have not all been paid, the purchasers are liable 
 to the corporation or to its creditors for the balance due. 
 
 If, however, a corporation has once received value in 
 cash, property, or services, up to the face or par value of 
 the stock issued therefor, such stock is termed full-paid. 
 Then, barring the stock of institutions such as banks and 
 trust companies, which are subject to special liabilities, the 
 parties acquiring such stock are not further liable either to 
 the corporation or to the corporate creditors, even though 
 the former should fail and be unable to pay the amounts 
 due its creditors. 
 
 The question as to the full payment of stock frequently 
 comes up in connection with its issue for property. If the 
 value of property, or of other considerations given for stock, 
 is not equal to the face value of the stock, the stock is not 
 full-paid; and the corporate creditors may force payment 
 of the deficiency, provided the stock is still in the hands of 
 the original purchasers. 
 
 This disquieting liabiHty of partly paid stock is avoided 
 in conservative corporations by issuing stock only in ex- 
 change for its full par value in money, property, or labor; 
 while in speculative corporations this object is attained by 
 issuing the stock in exchange for more or less indeterminate 
 property values, optimistically estimated to be equal to the 
 face value of the stock. In former years, if there was any 
 
KINDS OF STOCK 21 
 
 colorable payment for stock the courts were inclined to hold 
 such stock full-paid; but now, owing to a change of senti- 
 ment, the payment for stock is scrutinized carefully, and 
 it must be of fairly equivalent value if liability is to be 
 escaped. 
 
 The liability on partly paid stock follows it into the 
 hands of subsequent purchasers if they take the stock with 
 knowledge of the conditions. However, if the stock is 
 marked "full-paid" and is sold to an innocent purchaser for 
 value, he is not further liable; nor, unless so provided by 
 statute, does any liability remain with the seller. 
 
 § 27. Treasury Stock — Donated Stock 
 
 The term "treasury stock" is often applied to unissued 
 stock (§ 25) on the assumption that such stock is held in 
 the treasury to be issued as required ; but the term is more 
 appropriately used to designate outstanding stock which 
 has, by purchase or otherwise, been acquired by the cor- 
 poration and is held subject to disposal by the directors. 
 
 In speculative corporations the entire capital stock is 
 usually issued for property, and becomes, technically at 
 least, "full-paid." This leaves the corporation without 
 working capital or any means of securing it. To meet this 
 condition, those to whom the stock is issued usually return 
 an agreed part of this stock to the corporation — ostensibly 
 as a donation — to be used for corporate purposes. This 
 "donated stock" then becomes treasury stock and may be 
 disposed of by the directors ; and, if the payment was one 
 which will stand legal scrutiny, it may be sold for less than 
 its par value without subjecting the purchaser to the liabili- 
 ties incident to partly paid stock. 
 
 When the preferred stock of a corporation is sold, it is 
 not uncommon to offer with it a bonus of common stock, 
 which, to be attractive, must be "full-paid and non-assess- 
 
22 ORGANIZATION AND PROCEDURE 
 
 able." The corporation must then have for this purpose a 
 supply of full-paid common stock, and this supply usually 
 consists of donated stock as already described. In the 
 ordinary corporation any full-paid stock is non-assessable. 
 
 From the accounting standpoint, treasury stock is an 
 asset of the corporation; although it differs from unissued 
 stock only in the fact that it has once been issued and may 
 be sold at less than par without involving the purchaser in 
 liability. 
 
 Stock so acquired, or acquired in any other way by a 
 corporation, is usually held in the corporate name, though 
 occasionally it is assigned to the treasurer or to a trustee. 
 When it is to be held in the corporate name, the incoming 
 certificates are cancelled, and the proper entries are made 
 in the stock book to show that the stock has been trans- 
 ferred to the corporation. It is not necessary, however, to 
 issue new certificates so long as such stock is held in the 
 treasury; but when sold, a new certificate is issued to the 
 purchaser. 
 
 When its own stock is owned or held by the corporation, 
 this stock can neither vote nor draw dividends. 
 
 § 28, Common and Preferred Stock 
 
 When all the stock of a corporation is on an absolute 
 eqijality, it is known as "common stock." No one stock- 
 holder then has any rights over any other stockholder, and 
 no one share of stock has any advantage over any other 
 share. 
 
 If, however, by proper procedure — usually by charter 
 provision — some of the stock has been given rights as to 
 dividends or assets not enjoyed by the other stock of the 
 corporation, such stock is "preferred stock" as opposed to 
 the remaining or "common stock." 
 
 Preferred stock can be created by proper procedure in 
 
KINDS OF STOCK 
 
 23 
 
 any state of the Union. In some states It is created by 
 charter provision; in others, through by-law enactment, or 
 by direct and unanimous action of the stockholders. 
 
 Speaking generally, preferred stock, in addition to its 
 preferential rights, has all the rights and liabilities of com- 
 mon stock. In other words, preferred stock loses none of 
 the rights of common stock by reason of its preference, un- 
 less such rights are expressly denied or restricted by the 
 same authority that created its preferential rights. The 
 entire trend of modern decisions involving preferred stock 
 is to consider it as merely common stock with certain speci- 
 fied additional privileges. 
 
 As already stated, stock is not a real but only a secondary 
 liability of the corporation; and unless otherwise expressly 
 provided by statute, this is equally true of preferred stock 
 and also of its preferred dividend. Such preferred dividend, 
 or interest as it is sometimes incorrectly called, may be paid 
 only out of profits, and is not a debt of the corporation until 
 such profits have been earned and declared as dividends. 
 
 As to the form of preferred stock, different classes may 
 be created by the same corporation; one class may receive 
 its dividends before the second, the second before the 
 third, and both these may receive their dividends in any 
 year before the common stock receives any dividend at all. 
 These several classes may have different dividend rights, 
 one receiving perhaps 5% and another 6%. Sometimes the 
 amount of preferred dividend will be made contingent upon 
 the amount of profits ; or the corporate income from particu- 
 lar sources may be designated for payment of preferred 
 dividends; or preferred stock may be given preference in 
 the distribution of assets, or other special redemption fea- 
 tures may be given, or it may be made convertible into 
 common stock under prescribed conditions. (See § 30.) 
 
 On the other hand, privileges or rights may be denied. 
 
24 ORGANIZATION AND PROCEDURE 
 
 Thus, preferred stock may be denied the voting right, or 
 else permitted to vote only under certain conditions. Divi- 
 dends may be made non-cumulative, or such stock may be 
 strictly limited to the preferential dividend. Preferred stock 
 is held to be cumulative as to dividends unless it is specified 
 that it shall be non-cumulative. ( See § 29. ) 
 
 The usual reason for the issue of preferred stock is to 
 provide a corporate security which can be sold more readily 
 than the common stock. Its numerous possible variations, 
 however, render it available for many different purposes. 
 Thus, preferred stock is frequently issued to represent or 
 pay for the actual property assets taken over by a new 
 corporation, while common stock is issued to represent the 
 good-will and other intangible assets. Or, when a partner- 
 ship is incorporated, the excess investment of one partner 
 is freqviently represented by an issue of non-voting preferred 
 stock, while the interest of the silent partner is conveniently 
 cared for by the same means. In a consolidation of proper- 
 ties, the interests of those concerned are equitably adjusted 
 with the help of preferred stock. 
 
 From the standpoint of the corporation, preferred stock 
 is usually more desirable than bonds as a means of raising 
 money. It does not become a debt either as to dividends or 
 principal. Unless the stock is redeemable, the principal is 
 never due. The dividend is paid if profits exist for its pay- 
 ment ; but, if the dividend is not paid in any year, it merely 
 passes over to succeeding years if cumulative, or expires if 
 non-cumulative. In any event, it is only a claim against 
 profits. Bonds, on the other hand, are an absolute obliga- 
 tion both as to interest and principal. If the interest is not 
 paid when due, it may be collected by legal proceedings, and 
 frequently default in interest has the effect of maturing the 
 bond and thereby rendering payment of both principal and 
 interest imperative. In any event, the bond must be paid at 
 
KINDS OF STOCK 25 
 
 maturity under penalty of foreclosure, regardless of the 
 condition of the corporate finances. 
 
 § 29. Dividends on Preferred Stock 
 
 Dividends on preferred stock are either cumulative or 
 non-cumulative. A cumulative dividend is one which, if not 
 paid in any year, becomes a charge against the future cor- 
 porate profits, and cumulates from year to year until paid. 
 A non-cumulative dividend is one which is a first charge on 
 any profits declared as dividends in that particular year, 
 but, if no dividends are paid in that year, does not continue 
 as a charge against the profits of following years. 
 
 Where cumulative preferred stock exists, no dividends 
 may be paid upon the common stock in any year until the 
 preferred dividend for that year has been paid in full, 
 together with any preferred dividends not paid in preceding 
 years. Thus, if preferred stock bears a 6% cumulative 
 dividend and no dividends are paid the first year, the com- 
 mon stock cannot receive any dividends in the second year 
 until the preferred stock has received a 12% dividend. If 
 no dividends are paid in the second year, the preferred stock 
 must receive a full 18% in the third year before the common 
 stock may receive any dividend. 
 
 It is obvious that a cumulative dividend is the more 
 advantageous to the holder of preferred stock. In fact, 
 non-cumulative preferred stock offers a temptation to the 
 directors interested in the common stock, to pass dividends. 
 Thus, if in any year sufficient profits exist from which the 
 preferred dividends might be paid, but the directors refuse 
 to declare dividends until the following year, the preferred 
 dividend that might have been paid in the preceding year is 
 lost absolutely to the preferred stockholders and its amount 
 is saved to the corporation and may be declared as dividends 
 the next year or at some later time at the discretion of th« 
 
3$ ORGANIZATION AND PROCEDURE 
 
 directors. In these dividends from held-over profits, the 
 preferred stock will participate only to the amount of its 
 preferred dividend for that single year, the entire remainder 
 of the dividends declared going to the common stock. 
 
 When it is not specified that preferred stock shall be 
 non-cumulative, it is held to be cumulative. 
 
 § 30. Convertible Stock 
 
 Preferred stock, in order to make it more salable, is 
 sometimes issued with the right of exchange for common 
 stock, either at some specified time or within a specified 
 period ; the terms of exchange being prescribed and usually 
 appearing upon the face of the certificate. When preferred 
 stock is non-participating, i.e., does not participate in profits 
 beyond its preferential dividends, the convertible privilege 
 adds materially to its attractiveness. Its preference as to 
 dividends — and as to assets if this also belongs to it — gives 
 it a safety and an assurance of annual returns that is not 
 characteristic of common stock, while the convertible fea- 
 ture gives an opportunity for an advantageous exchange for 
 common stock if the corporation is so prosperous as to make 
 this exchange desirable. In other words, the convertible 
 stock offers the safety of preferred stock with the speculative 
 possibilities of common stock. 
 
 Sometimes this convertible feature exists between pre- 
 ferred stock and bonds, as in the case of the United States 
 Steel Corporation's 7% preferred stock, which is exchange- 
 able for its 5% bonds. Any such exchange of stock for 
 bonds or agreement for such exchange would usually be 
 illegal. In effect it amounts to a corporation's borrowing 
 money to buy its own stock. The exchange in the case of 
 the United States Steel Corporation was made pursuant to 
 provisions of a special enactment of the New Jersey legis- 
 lature, and a large amount of preferred stock was replaced 
 
KINDS OF STOCK 2/ 
 
 by the bonds; the exchange converting a 7% cumulative 
 dividend into a 5 % interest obligation. 
 
 When preferred stock is convertible into common stock 
 the corporation must make provision for the exchange, re- 
 serving unissued stock, or purchasing its outstanding stock, 
 or perhaps increasing its capital stock sufficiently to meet 
 the requirements of the exchange. 
 
 § 31. Guaranteed Stock 
 
 The term "guaranteed stock" is sometimes applied to 
 preferred stock, and in such case usually designates a stock 
 on w^hich the dividends are guaranteed by the terms of the 
 creating provision. There is no special virtue in the ex- 
 pression or in the stock, as it is held ordinarily to be merely 
 cumulative preferred stock. In spite of the statement of 
 the creating provision that the dividend is guaranteed, such 
 dividend can be paid out of profits only, and if no profits 
 exist it is in no way a debt of the corporation. Any unpaid 
 dividends merely pass over and cumulate as a charge against 
 profits. 
 
 The usual and better application of the term "guaranteed 
 stock" is to stock which, as to dividend or principal, or both, 
 has been actually guaranteed by some person, concern, or 
 corporation other than the issuing corporation. Such stock 
 is frequently created when a railroad takes over a subsidiary 
 line, and guarantees either dividends or principal, or both, 
 on the stock of the absorbed road. The dividend on the 
 guaranteed stock then becomes an actual obligation of the 
 guaranteeing company, which must be met when due just 
 as in the case of any other interest or obligation. 
 
 § 32. Watered Stock 
 
 "Watered stock" is merely a term used to designate any 
 fictitiously paid-up stock ; that is, "stock which is issued as 
 
28 ORGANIZATION AND PROCEDURE 
 
 fully paid-up stock, when in fact the whole amount of the 
 par value thereof has not been paid in. All stock which has 
 been issued as paid-up stock, but the full par value of which 
 has not been paid into the corporation in money or money's 
 worth, is watered to the extent that the par value exceeds 
 the value actually paid in. Watered stock is, accordingly, 
 stock which purports to represent, but does not represent, in 
 good faith, money paid into the treasury of the company, 
 or money's worth actually contributed to the capital of the 
 concern."* 
 
 Watered- stock arises from many conditions. In specula- 
 tive corporations the stock is usually issued in exchange for 
 property at enormously inflated values. A railroad, the 
 issued stock of which is perhaps already in excess of the 
 real value of its property, finds its dividends so uncom- 
 fortably large as to attract public attention. Then, entirely 
 regardless of the real values behind its stock, it will add a 
 few millions to its capitalization and "cut a melon" for the 
 benefit of its stockholders. Or, in a combination of produc- 
 ing properties, preferred stock will be issued for the actual 
 property values, and common stock be issued in addition up 
 to the full measure of the earning power of the combina- 
 tion. Thus, if a combination is formed of properties of 
 the actual value of, say, $5,000,000, with estimated net 
 profits of $600,000, the combination can pay a 6% divi- 
 dend on a capitalization of $10,000,000. $5,000,000 face 
 value of preferred stock is then issued for the properties, 
 and an equal amount of common stock is issued against the 
 good-will or earning power of the corporation. This is 
 obviously watered stock. 
 
 The expression "watered stock" is usually a term of 
 reproach, but it is clear that under some circumstances such 
 stock is justifiable. A going concern may be incorporated. 
 
 *Cook on Corporations, § 2S. 
 
KINDS OF STOCK 2g 
 
 The value of its property is $50,000; and its record, based 
 on its earnings for a number of years, shows that it can pay 
 dividends on a capitalization of $75,000. $25,000 of stock 
 is therefore added to the property values, making the total 
 capitalization of the concern $75,000. The $25,000 of stock 
 issued in excess of the property value is technically watered 
 stock, but no one will contend that it is not a justifiable and 
 entirely proper issue. 
 
 Watered stock that is to be condemned is found when 
 capitalizations are increased far beyond the value of the 
 property and beyond any earning power possessed by the 
 corporation. 
 
CHAPTER III 
 
 MEETINGS; THE CORPORATE CALENDAR 
 
 § 33. The Annual Meeting 
 
 The annual meeting of stockholders is their only regular 
 meeting, i.e., one of which the date and the general nature 
 are fixed by the by-laws, and at which any ordinary cor- 
 porate business may be transacted without special mention 
 in the notice of the meeting. All other stockholders' meet- 
 ings are special meetings, assembled as the necessity arises 
 for the transaction of special business which must be speci- 
 fied in the notice of the meeting. 
 
 Certain matters relating to, or to be done at, the annual 
 meeting are prescribed by statute in many states ; and these 
 statutory requirements are, together with other matters of 
 procedure, usually set forth again in the by-laws of the com- 
 pany. The more common matters of statutory and by-law 
 regulation are: the place of meeting; requirements as to its 
 notice; the closing of the stock books; the preparation of 
 a list of stockholders for use at the meeting; the formalities 
 incident to the election of directors; the reports to be pre- 
 sented ; etc. 
 
 Considerable laxity in the formalities of the annual 
 meeting usually obtains in the smaller corporations. Not 
 infrequently, where the stockholders of the corporation are 
 few and all are officers of the corporation or are actively 
 engaged in its business, the election of directors and even 
 the annual meeting itself are dispensed with, the existing 
 board of directors continuing in office until a new board is 
 elected. Such laxness, while permissible where all the 
 
 30 
 
MEETINGS 31 
 
 stockholders concur, is to be deprecated. It is better that 
 everything pertaining to corporate management should be 
 carried out in strict accordance with the statutory, charter, 
 and by-law requirements. 
 
 § 34. Time of Annual Meeting 
 
 Corporations usually hold the annual stockholders' meet- 
 ing shortly after the close of their fiscal year, which may 
 or may not .coincide with the calendar year. Usually, it is 
 preferable to have the fiscal year close with the 31st of 
 December, but conditions sometimes exist which make it 
 advantageous to fix the date otherwise, as for instance at a 
 time when business is slack and the stock of goods low. It 
 is easier at such times to take inventories, close books, and 
 prepare reports; also plans and policies for the succeeding 
 year may be mapped out then without the serious interrup- 
 tions to the immediate business activities that would occur 
 if the fiscal year closed at a busier time. 
 
 The annual meeting should not be held too closely after 
 the end of the fiscal year. If the fiscal year ends December 
 31, the annual meeting of stockholders might be held during 
 the second or third week in January, so as to give ample 
 time to close and audit the books, prepare financial state- 
 ments, and compile the other data needed for the annual 
 reports. 
 
 The time of the annual meeting is prescribed in the 
 by-laws. 
 
 § 35. Preliminary Arrangements for Annual Meeting 
 
 In arranging for the annual meeting certain formalities, 
 usually prescribed by the by-laws, must be observed, such 
 as the due notification of stockholders, the closing of transfer 
 books, etc. Some of these are statutory requirements. It 
 is the secretary's duty to carry out most of these prehminary 
 
Z2 
 
 ORGANIZATION AND PROCEDURE 
 
 requirements of the meeting, and at the time of the meeting 
 to see that everything needed is ready and accessible. 
 
 § 36. Annual Meeting — Closing Transfer Books 
 
 The "closing" of the transfer books means nothing more 
 than that the officer in charge of the books in which the 
 transfers of stock are recorded refuses to make entries in 
 them during the period they are closed. Stock may be 
 bought and sold just as before, these transfers being 
 evidenced by the properly assigned certificates, but such 
 transfers cannot be recorded on the books of the corpora- 
 tion, nor will new certificates be issued until the books are 
 "opened" for transfers. 
 
 The by-laws of most corporations, especially of those 
 whose stocks are listed on exchanges, specify that the 
 transfer books shall be closed a stated number of days before 
 the annual meeting. Notice must be given by the secretary 
 before the time of closing. All stockholders of record, i.e., 
 those whose stock ownership is of record on the corpora- 
 tion's books on the date of closing, are entitled to participate 
 in and vote at the annual meeting. No other persons are so 
 privileged, unless they hold proxies from stockholders of 
 record. 
 
 The object of closing the books is to give the secretary 
 opportunity to give due notice of and make his preparations 
 for the meeting; also to prevent any sudden or unforeseen 
 transfer of stock with a view of controUing the election. In 
 small corporations, where the stock is not active, the closing 
 of the stock book before the annual meeting is not usual. 
 (See § 62.) 
 
 § 37. Annual Meeting — Stockholders' List; Notices; 
 Proxies 
 
 The statutes, and the by-laws as well, usually require 
 
MEETINGS 
 
 33 
 
 that an alphabetical list of stockholders be prepared for 
 inspection and for use at the annual meeting. This list is 
 prepared by the secretary after the transfer books are closed, 
 and shows the persons who are stockholders of record and 
 entitled to be present and vote at the meeting. Whether 
 required or not, it should be on hand for reference at the 
 meeting and should be open to the inspection of any stock- 
 holder. 
 
 Notice of the annual meeting should be given to all 
 stockholders of record, either by letter or by advertisement 
 in the newspapers. The by-laws usually prescribe the method 
 of notification and the number of days prior to the meeting 
 that notice shall be given, and, when the notice is by letter, 
 sometimes require that these letters shall be registered to 
 insure safe delivery. The notice of meeting gives the dates 
 for the closing and the opening of the transfer books. 
 Copies of papers in which the advertisement appears should 
 be carefully preserved by the secretary as a matter of 
 record. 
 
 The notices sent out to the stockholders usually contain 
 printed proxy forms. Stockholders unable to be present in 
 person are asked to sign and send in these proxies, which 
 authorize some person — usually the secretary of the com- 
 pany — ^to vote their shares. By this means a quorum — 
 which is necessary for the transaction of business — is some- 
 times secured when otherwise it could not be done. Also, 
 at times these proxies enable the directors in office to retain 
 their positions. (See Appendix, Form 5.) 
 
 § 38. Annual Meeting — Quorum 
 
 A quorum at a stockholders' meeting, i.e., the number 
 of shares of stock which must be represented in person or by 
 proxy before business can be legally transacted, is ordinarily 
 stated in and fixed by the by-laws. The usual requirement 
 
34 ORGANIZATION AND PROCEDURE 
 
 is a majority of the outstanding stock, except at tiiose meet 
 ings where some special action is to be taken or where for 
 other reasons the amount or proportion of stock to con- 
 stitute a quorum is fixed by the state statutes. Thus an 
 amendment of the charter usually requires the action of 
 more than a mere rhajority of the stock and in New York 
 the statutes contain the very unusual provision that what- 
 ever amount of stock is present at a properly assembled 
 annual meeting constitutes a quorum, and may elect directors 
 and transact any other business properly before the meeting. 
 The number of persons present at a meeting is of no im- 
 portance. One person may by ownership of stock or by 
 proxy, or both, represent a controlling interest or even the 
 entire stock; and such a meeting if properly conducted is 
 legal, though in England and Canada it has been held that 
 it 'takes at least two to hold a meeting. 
 
 It is the secretary's duty, in calling the roll, to note 
 whether or not a quorum is present and to report the fact 
 to the president. No business can be transacted if a quorum 
 is not present. If a quorum is present the fact should appear 
 in the minutes. 
 
 § 39. Annual Meeting — Opening Formalities 
 
 If the by-laws so provide, the president and secretary of 
 the company act in their official capacities at the annual 
 meeting; if not, the president must call the meeting to 
 order and the stockholders at once elect a chairman. A 
 secretary of the meeting is then either appointed by the 
 chairman or by vote of the members present. After the 
 chairman and secretary have been elected, the secretary, 
 upon request of the chairman, calls the roll. 
 
 After the roll call, a copy of the notice of the meeting 
 as sent to the stockholders, or a copy of the newspaper 
 containing the notice of the meeting, should be presented 
 
MEETINGS ,e 
 
 and read by the secretary, and a record of the same should 
 be made in the minutes. 
 
 The minutes of the previous annual meeting and usually 
 of any intervening special meetings, are read by the secre- 
 tary as the next order of business. If any changes in the 
 minutes are found necessary, they must be made by means 
 of motions duly seconded and passed. Such changes are 
 usually made by interlining — the amended material being 
 crossed out with red ink — or by marginal annotation; or, 
 if the new matter is too lengthy for this, it is brought in at 
 the end of the minutes, a note against the amended portion 
 telling where the amendment may be found. 
 
 § 40. Annual Meeting — Election of Directors 
 
 One of the most important matters coming before the 
 annual meeting of stockholders is the election of new 
 directors to serve for the ensuing year or term. If there 
 are many directors, the term of office may extend over a 
 number of years; and in this case the membership of the 
 board is so arranged that a majority always holds over. 
 For instance, in a board of fifteen directors it might be 
 arranged for the terms of five to expire each year, the new 
 directors being chosen to serve for the ensuing three years. 
 The advantage of this method is found in the fact that a 
 majority of the board will always consist of experienced 
 directors. 
 
 The election of directors is usually by ballot and is con- 
 ducted by judges or inspectors of election. These judges 
 or inspectors — generally two in number — may or may not 
 be stockholders unless fixed by statute or other authority. 
 In some states the statutes require that the inspectors be 
 sworn to the faithful discharge of their duties before a 
 notary or other person qualified to administer oaths. 
 
 In the absence of statutory requirements, the election of 
 
^S ORGANIZATION AND PROCEDURE 
 
 directors becomes a very simple matter. Nominations are 
 usually made in advance, and either the secretary or tellers 
 appointed for the purpose distribute, collect, and count the 
 ballots. The result of the election is then announced and 
 the successful candidates are formally declared elected. 
 
 § 41. Anrfual Meeting — Cumulative Voting 
 
 Cumulative voting is a method of voting for directors 
 which permits of such cumulation or concentration of votes 
 that the holders of less than a majority of the stock may 
 by proper combination elect one or more members of the 
 board ; this under the ordinary method of voting being im- 
 possible. Representation on the board is advantageous to 
 the minority stockholders because it enables them to keep 
 more fully informed as to the general affairs of the cor- 
 poration, and more particularly as to any official action 
 contemplated or taken by the board. If any such action 
 seems to them injurious or illegal, their prompt knowledge 
 of what is done gives them an opportunity to protest or to 
 take any legal action that may be necessary. 
 
 Cumulative voting is prescribed in some states by con- 
 stitutional or statutory provision. In most of the states it 
 may be secured, when desired, by charter or by-law 
 provision. 
 
 The cumulative method of voting is merely a modifica- 
 tion of the usual plan of voting. Ordinarily every share 
 standing in the name of a stockholder oh the books of the 
 corporation entitles him to one vote for each of as many 
 directors as are to be elected. For instance, if a board of 
 five directors is to be elected, the owner of one share may 
 cast one vote for each of five candidates; in other words, 
 he must divide his five votes among the five candidates, one 
 to each. Under the cumulative method, he still has his five 
 votes and may still divide these five votes among five can- 
 
MEETINGS 27 
 
 didates; but if he prefers, he may cast them all for one 
 candidate, or divide them among two or more as he sees fit. 
 
 To illustrate more fully, suppose a company with a 
 board of five directors has lOO shares of stock outstanding, 
 70 shares of- which are held by parties who vote together 
 and constitute a majority ; and 30 shares held by the minority 
 stockholders who likewise vote together. Under the ordinary 
 system of voting, the five candidates favored by the majority 
 would each receive 70 votes and be elected, while the 
 minority candidates could receive only 30 votes each and 
 would fail. Under the cumulative system, however, the 
 majority having 350 votes (70 X 5) could give five candi- 
 dates 70 votes each; while the minority having 150 votes 
 (30 X 5) at their disposal, could divide them between two 
 of their candidates and, if the majority voted in the manner 
 suggested, would elect both of them. The majority would 
 then have three members of the board, while the minority 
 had two. 
 
 In such a case, however, the majority would undoubtedly 
 divide their 350 votes among four candidates, giving, say, 
 two 87 votes and tw-o 88 votes, which would unfailingly 
 elect the four candidates; and the minority could elect but 
 one member of the board, but could not in any way be 
 prevented from electing this one member. 
 
 The number of votes available under the cumulative 
 system of voting is found by multiplying the number of 
 shares by the number of directors to be elected. 
 
 § 42. Annual Meeting — Reports 
 
 Reports of officers and committees as prescribed by the 
 by-laws are presented at the annual meeting. The usual 
 reports are the president's report of general conditions and 
 the treasurer's report of financial conditions. Any com- 
 mittees appointed by the stockholders at preceding meet- 
 
38 
 
 ORGANIZATION AND PROCEDURE 
 
 ings will, as a matter of course, report at the annual meeting, 
 and any other special reports covering matters of interest to 
 the stockholders might also be read at this meeting. (See 
 Part V, "Corporate Reports and Statements.") 
 
 § 43. Annual Meeting — Minutes 
 
 When there is no further business to come before the 
 meeting, it is adjourned. As soon as possible thereafter 
 the secretary should write up his minutes while the details 
 of the meeting are fresh in his mind. The minutes of the 
 annual meeting, as of any other meeting, should be a com- 
 plete and accurate statement of the procedure at the meet- 
 ing. They should give the place and date of meeting; copy 
 of the notice given; the name of the presiding and of the 
 recording officer; the attendance, i.e., the amount of stock 
 represented, and whether it constitutes a quorum; and 
 should follow this with a brief but accurate statement of 
 all business transacted at the meeting. When matters passed 
 upon are of but little importance, the exact wording of the 
 motion or resolution need not be brought into the minutes, 
 but merely a statement of the fact that such a motion was 
 made and carried or not carried, as the case may be. Where, 
 however, the matter is of importance, it is usually advisable 
 to embody in the minutes the exact wording of the motion 
 or resolution, with the names of the parties who respectively 
 introduced and seconded it. In matters of great importance 
 the names of those voting for and against are usually 
 recorded. 
 
 Any important reports or other matters presented to the 
 meeting should be noted, and if in writing should, when so 
 ordered by the meeting, be "spread on the minutes," i.e., 
 written out in full ; but otherwise it is quite sufficient merely 
 to refer to the matter in the minutes. The secretary will, 
 of course, in all cases preserve the reports or other papers. 
 
MEETINGS 3g 
 
 The minutes of any meeting should be signed by the 
 secretary and, if possible, by the presiding officer of the 
 meeting. (For forms of minutes, see Appendix, Forms 
 4 and 7.) 
 
 § 44. Directors' Meetings 
 
 Meetings of directors, as in the case of stockholders, 
 may be regular or special; regular meetings being usually 
 monthly or quarterly. The notice of all meetings of 
 directors, whether regular or special, is sent out by the 
 secretary, the requirements for such notice being prescribed 
 by the by-laws. 
 
 The president of the company is the presiding officer 
 at all board meetings unless otherwise specifically provided 
 in the by-laws. The secretary is the recording officer. 
 
 At a directors' meeting the quorum is fixed by the by- 
 laws and is not infrequently less than a majority of the 
 board. Absent members cannot be represented by proxy. 
 In other words, if a member of the board is unable to be 
 present, his vote is lost absolutely. This is because the 
 stockholders have elected the directors to represent them, 
 and these directors cannot pass this delegated power on to 
 someone else. 
 
 The general procedure at directors' meetings and the 
 duties of the secretary are much the same as in the case of 
 stockholders' meetings. The directors' minutes are some- 
 times kept in the same book as the stockholders' minutes, but 
 are frequently kept in a separate book. Where they are 
 kept in the same book, they either follow seriatim as the 
 different meetings are held, or one part of the book may 
 be kept for the minutes of the stockholders' meetings and 
 another part of the book for the minutes of the directors' 
 meetings ; the matter usually being left to the secretary to 
 decide. 
 
40 ORGANIZATION AND PROCEDURE 
 
 As soon as possible after the annual meeting of the stock- 
 holders the directors usually meet for the election of officers, 
 any newly elected directors participating in this meeting. 
 
 § 45. Special Meetings 
 
 Special meetings, as distinguished from regular meet- 
 ings, are meetings called to transact special business ai 
 required, and on such notice as is prescribed by the by-laws. 
 Calls for special meetings are sent out by the secretary, and 
 must be authorized as prescribed by the by-laws ; the authori- 
 zation is usually, in the case of special meetings of stock- 
 holders, by the board of directors, the president of the 
 company, or a certain proportion of the stockholders; or 
 for special meetings of the board, by the president or a 
 certain number of the directors. The secretary's call usually 
 states by what authority it is issued, and must announce the 
 time and place of the meeting and the matters to be con- 
 sidered at that meeting, and only such business may be 
 transacted as is stated in the call. If other business should 
 be transacted, any parties aggrieved thereby could, if the 
 injury were real, have such action of the meeting annulled. 
 
 The officers of a special meeting of stockholders and 
 the general procedure thereat are much the same as in the 
 case of a regular meeting. It may be noted, however, that 
 as the legality of a special meeting depends largely upon the 
 legality and proper form of the call and notice by which it 
 is assembled, this call and notice is of much greater im- 
 portance than the notice of a regular meeting; and the 
 particulars in regard to it, together with the call and notice 
 itself, should be entered in detail upon the minutes. 
 
 § 46. The Corporate Calendar 
 
 The corporate calendar is in effect a tickler, containing 
 memoranda of the important corporate events of the year, 
 
THE CORPORATE CALENDAR 41 
 
 arranged chronologically under the dates on which they 
 occur. By consulting his calendar the secretary can deter- 
 mine at any time what official details require attention on 
 that or any future date. ^ 
 
 This is particularly important for the secretary, because 
 on him devolves the responsibility for all notices and other 
 preparation for meetings, and usually for the reports re- 
 quired by state or local regulations and for other corporate 
 matters requiring attention on fixed dates. The calendar 
 may be arranged in order of dates on a convenient card, 
 or noted on an ordinary calendar. In either case it should 
 be hung in a conspicuous place for ready reference so that 
 no important detail shall be overlooked. All details recorded 
 on the calendar should, of course, be accurate. 
 
 § 47. Contents of Corporate Calendar 
 
 The corporation calendar which follows is that of a New 
 York corporation. As the matters to be attended to and the 
 dates on which they come up vary with the different states 
 and the different corporations, the calendar given can only 
 be regarded as suggestive. The secretary must determine 
 in each case what shall be recorded. The following matters, 
 among others, and the dates on which they require atten- 
 tion, should be carefully noted : 
 
 Closing of transfer books 
 
 Notice of annual meeting 
 
 Preparation of alphabetical list of stockholders 
 
 Annual meeting 
 
 Notice of directors' meetings 
 
 Directors' meetings 
 
 Dividend dates 
 
 Dates for paying bond interest 
 
 Dates for making reports 
 
 Dates for payment of taxes 
 
42 
 
 ORGANIZATION AND PROCEDURE 
 
 § 48. Form of Corporate Calendar 
 
 Corporate Calendar 
 
 OF THE 
 
 Hudson River Packing Company 
 OF New York City 
 1916 
 January 
 
 I Franchise Tax Payable. Must be paid before January 15. 
 (Based upon November report to State Comptroller. State- 
 ment of amount of tax is sent to Company by State Comp- 
 troller. Checks should be made payable to State Treasurer.) 
 Federal Income Tax Report. Must be prepared and filed with 
 Collector of District before March i (unless a date other than 
 December 31 has been designated as the close of the fiscal 
 year). 
 3 Notify Stockholders of annual meeting to be held January 13. 
 9 Notify Directors of meeting to be held January 14. (If direc- 
 tors are elected at annual meeting, January 13, this notice will 
 be vitiated as to all directors elected at such meeting and must 
 be replaced by waiver of notice signed after election by all the 
 newly elected directors.) 
 
 13 Annual Meeting of stockholders at 3 p.m. 
 
 14 Directors' Meeting at 4 p.m. (If directors were elected at 
 annual meeting, waiver of notice should be signed by each new 
 director.) 
 
 15 Last Day for payment of State Franchise Tax. 
 
 City Taxes. On this date unpaid city tax bills for personal 
 taxes may be sent to the City Marshall for collection. 
 17 Annual Report to State officials. Must be filed during Jan- 
 uary and not later than January 31 with Secretary of State. 
 (No filing fees. Blanks not supplied by officials. No penalty 
 incurred for omission of the report unless such filing is re- 
 quested by some stockholder or creditor of the company, and 
 not then if the report is filed within thirty days after the 
 request is made.) 
 31 Last Day for filing annual report. 
 March 
 
 I Last Day for filing Federal Income Tax Report 
 April 
 
 9 Notify Directors of meeting to be held April 14. 
 14 Directors' Meeting at 4 p.m. 
 
THE CORPORATE CALENDAR 43 
 
 June 
 
 1 Assessment of Federal Income Tax made. 
 30 Last Day to pay Federal Income Tax. 
 
 July 
 
 9 Notify Directors of meeting to be held July 14. 
 14 Directors' Meeting at 4 p.m. 
 October 
 
 2 City Assessments made for next year. Books open for correc- 
 tion till November 10 inclusive. (If notice of assessment is 
 not received in the early part of October, it should be sent 
 for. Tax Commissioners usually send notice but are under no 
 obligations to do so.) If assessment is unsatisfactory, sworn 
 statement of correct value of assets must be prepared and 
 filed. (See memo, for November 10.) 
 
 4 City Taxes Payable for current year. (Statement of amount 
 is usually sent to all corporations, but may be obtained from 
 Assessor's office if copy is not received.) 
 7 Notify Directors of meeting to be held October 13. 
 13 Directors' Meeting at 4 p.m. 
 November 
 
 I Comptroller's Report. Must be sent in on or before November 
 15. (Blanks furnished by, and report made to. State Comp- 
 troller. No filing fees. Penalty may be incurred by failure 
 to make this report.) 
 10 Statement and Application for revision of unsatisfactory city 
 assessments, if not already filed, should be sent in to the 
 Commissioner of Taxes and Assessments. Will not be re- 
 ceived after November 30 save for real estate. (Blanks fur- 
 nished by Commissioners. No filing fees.) 
 30 Last Day for filing application for revision of city assess- 
 ments, save on real estate, which may be revised at any time 
 before payment of the tax. 
 December 
 22 Close Transfer Books for annual meeting of January 11, 1917. 
 28 Publication Notice of Annual Meeting. Notice of meeting to 
 be held January 11, 1917, to be published in newspaper of 
 New York County once each week for two successive weeks 
 immediately preceding the annual meeting. 
 
Part II — Corporation Records and Accounts 
 
 CHAPTER IV 
 
 THE BOOKS AND RECORDS OF A 
 CORPORATION 
 
 § 49. Books of Account 
 
 The books of account for the ordinary corporation are 
 similar to any other books of account, save as to the entries 
 for distinctive corporate transactions. All the records and 
 accounts peculiar to corporations are discussed in the present 
 volume ; but for the character and use of the books relating 
 to the ordinary commercial transactions the reader is re- 
 ferred to any text on accounting. 
 
 § 50. Requirements 
 
 The general books of a corporation differ little from 
 those of a partnership or a single proprietorship conducting 
 a similar line of business. In a corporation, however, there 
 is, in addition to the financial books of account which record 
 the transactions of ordinary business, another class of books, 
 such as the minute book, stock book, dividend book, bond 
 record, etc., for recording the activities peculiar to the cor- 
 porate form. So necessary are these books that in many 
 states the laws specify that certain of them, as the minute 
 book, stock book, transfer book, etc., shall be kept. There 
 are, therefore, in corporate bookkeeping, books and accounts 
 not found in the records of the partnership or the single 
 proprietorship. 
 
 44 
 
BOOKS AND RECORDS 45 
 
 The distinctive books of record to be kept by a cor- 
 poration are frequently set forth in its by-laws; although 
 the books so enumerated would usually be kept as a matter 
 of course by any well-managed corporation. 
 
 Under these conditions the accountant, when devising an 
 accounting system for a corporation, must first consult the 
 statutes of the state to ascertain the legal requirements. 
 Frequently the statutes not only prescribe certain books, but 
 also specify where these books must be kept and what they 
 must contain. Next, he must consult the by-laws of the 
 corporation to ascertain their requirements as to books and 
 records. Then, in addition to the books required by the 
 laws and the corporation by-lav^rs, he must add such other 
 books as are needed to make a complete record of the finan- 
 cial transactions of the corporation. 
 
 § 51. Inspection of Corporate Records 
 
 Stockholders usually have, within limits, the right to 
 examine the corporate books. This right extends much 
 further as to official records, such as the stock ledger, etc., 
 than as to the books of account. The stockholder's right to 
 examine the latter is usually much restricted and in some 
 states denied entirely. In the State of New York, for 
 example, every corporation must keep* a stock book in pre- 
 scribed form, and this book must be open for inspection by 
 the stockholders at least three hours daily. A penalty of 
 $50 a day is imposed upon the corporation and upon the 
 particular official for failure to comply with this require- 
 ment. On the other hand, in this same state, the stock- 
 holders' right to inspect the books of account is practically 
 nil. A director, however, has the absolute right at any time 
 to examine the books of account as well as the other cor- 
 porate records, and this is true in practically all the states. 
 This is part of his duties as director. 
 
46 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 § 52. Corporate Books of Record 
 
 The distinctive corporate books include those in which 
 are entered the official acts and resolutions of the directors 
 and stockholders, and also those which contain detailed 
 records of transactions pertaining to stock and bond issues, 
 dividends, etc. The books of official record and the various 
 stock books are usually kept by the secretary. The financial 
 records relating to the sale of stock and bonds are usually 
 under the supervision of the treasurer or are kept in the 
 accounting department of the corporation, as are also the 
 bond register, the dividend book, and other records which 
 pertain more directly to the corporate finances. 
 
 The usual corporate records include : 
 
 Minute book (§53) 
 Subscription records (§55) 
 Instalment receipts (§§ 56, 57) 
 Instalment book (§58) 
 Stock certificate book ( § 60) 
 Stock transfer book (§62) 
 Register of transfers (§ 63) 
 Stock ledger (§§ 65, 66) 
 Dividend book (§67; Chapter IX) 
 Bond register (§ 211 ; Chapter XVI) 
 
 This number might be extended considerably, and sub- 
 divisions made, especially in the case of large corporations. 
 On the other hand, in the case of a small company some of 
 the enumerated books would be omitted entirely. Indeed, 
 in some companies, especially where the stock is held by a 
 few individuals, the bookkeeping is as informal as in a 
 partnership and but few of the distinctive corporate records 
 are kept. It is, however, a wise precaution always to pro- 
 vide for the proper record of all corporate transactions, no 
 matter how small the corporation or how closely its stock 
 
BOOKS AND RECORDS 47 
 
 may be held. If this is not done, trouble may result ; "an 
 ounce of prevention is worth a pound of cure." 
 
 All the books enumerated above are auxiliary books, i.e., 
 they are not used as posting mediums for the general books; 
 but are subordinate thereto. 
 
 A book known as a "combination record" is frequently 
 used by the smaller corporations for the distinctive corporate 
 records. This book is divided into parts, each of which 
 takes the place of the more important of the distinctive cor^ 
 porate records mentioned above. If the forms included in 
 it are good, the combination record will be found convenient 
 for the ordinary small corporation. For the larger corpora- 
 tion it is not suitable. 
 
 § 53. The Minute Book 
 
 The minute book is used to record the proceedings at 
 meetings of stockholders and directors. At the present time ■ 
 the usual form of minute book is a loose-leaf book, in which 
 the minutes may be entered with a typewriter. Under this 
 system, to guard against substitution of pages after the 
 minutes are written up, each separate sheet should be signed 
 by the secretary and, in the more expensive books, each 
 sheet is specially numbered on watermarked paper, so that 
 substitution is practically impossible. The convenience of 
 the loose-leaf minute book is obvious. 
 
 In large corporations separate books are kept for the 
 stockholders' and directors' minutes, but in the smaller cor- 
 porations the minutes of all meetings are usually entered in 
 one book. In such case, either the first part may be allotted 
 to the meetings of stockholders and the latter part to the 
 directors' meetings; or, as is done more frequently, the 
 minutes of the various meetings may be entered one after 
 the other as they occur. Under this arrangement, the first 
 minutes to appear in the book would in most cases be those 
 
48 CORPORATION RECORDS AND ACCOUNTS 
 
 of the first meeting of stockholders. These would be fol- 
 lowed by the minutes of the first meeting of directors ; and 
 thereafter the minutes would come in the order in which the 
 different meetings were held. As the stockholders usually 
 meet but once a year, and the directors much oftener, the 
 minutes of the stockholders' meetings will then be separated 
 by the more numerous minutes of the intervening directors' 
 meetings. 
 
 A copy of the charter of the corporation is often bound 
 into the minute book, forming its first pages; or, where this 
 is not convenient, the charter is copied or pasted on the 
 first pages of the minute book. Following the charter, a 
 page or more Is usually allowed for the entry of charter 
 amendments. Next, beginning at the top of a right-hand 
 page, the by-laws of the corporation are entered, the next 
 few pages being left blank for new by-laws or any amend- 
 inents too long to be interlined in the by-laws themselves. 
 Finally, in the body of the book come the minutes of the 
 various meetings. 
 
 Minutes should be entered in the minute book as soon 
 after the meeting as possible. The minutes of each meeting 
 should begin at the top of a new page; and the character of 
 the meeting, i.e., whether a stockholders' or directors' meet- 
 ing, and whether regular, special, or adjourned, should 
 appear clearly in the heading. The date also should appear 
 prominently. In the body of the minutes it should be stated 
 how the meeting was called ; whether a quorum was present ; 
 the names of the presiding and recording officers ; the time 
 at which the meeting convened, etc. 
 
 The minute book is one of the most important of the 
 corporate records. The minutes are the officers' authority 
 for many of their most important acts and from these same 
 minutes the accountant gets his data for many of his most 
 important entries. The necessity for complete, accurate 
 
BOOKS AND RECORDS 
 
 49 
 
 and properly evidenced minutes is obvious. Complete forms 
 of minutes will be found in the Appendix (Forms 4 and 7). 
 It is the duty of the secretary to keep the minutes of 
 meetings. 
 
 § 54. Stock Subscriptions 
 
 Subscriptions to stock are not binding upon the sub- 
 scribers until accepted by the corporation, or by an author- 
 ized representative or trustee of the corporation. Until such 
 acceptance, there is no second party, and under such circum- 
 stances a subscription is merely an offer to take stock, which 
 can be rescinded or revoked by the subscriber at any time. 
 Indeed, in some cases where subscriptions have been ac- 
 cepted by an organization committee, it has been held that 
 the subscriber might cancel his subscription at any time 
 before the actual incorporation. Where, however, an or- 
 ganization committee incurs some expense in connection 
 with a proposed incorporation, it is doubtful whether sub- 
 scribers who are fully aware of such expenditure can be 
 relieved from their proportion of these expenses by a 
 revocation of their subscriptions. 
 
 In some states, all the capital stock must be subscribed 
 before incorporation, and in some other states a specified 
 proportion or amount must be subscribed before the corpora- 
 tion may be organized. In such cases, subscriptions are 
 usually not payable until the amount required by the statute 
 has been subscribed. 
 
 Full-paid stock is sometimes issued in exchange for 
 services, for property, or for other considerations ; and it is 
 not uncommon for subscriptions to be paid by promissory 
 notes. In the State of New York, however, corporation 
 officials are prohibited under heavy penalties from accepting 
 notes in pa3mient of stock subscriptions ; but such pa)Tnents, 
 if in good faith, would be valid in most states. 
 
so 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 § 55. The Subscription Book or List 
 
 Subscription books are seldom used in this country, 
 except, perhaps, for collating and recording subscriptions 
 after the subscribed lists have been turned in. The sub- 
 scription list usually consists of a sheet or sheets of paper 
 with suitable headings, on which subscribers to the stock of 
 the company enter their subscriptions. At times, several 
 dififerent subscription lists are circulated simultaneously, and 
 in this case the sheet form is, of course, employed. Sub- 
 scription lists are seldom used in floating small corpora- 
 tions; but for larger ones, or where subscriptions are 
 solicited, they are necessary. 
 
 The following forms illustrate some of the subscription 
 blanks and agreements in ordinary use : 
 
 Subscription List 
 
 Davison Mercantile Company 
 
 To Be Incorporated Under the Laws of New York 
 
 Capital Stock $200,000 Shares $100 each 
 
 We, the undersigned, hereby severally subscribe for and agree to 
 take at their par value, the number of shares of the capital stock of 
 the Davison Mercantile Company set opposite our respective signatures, 
 said subscriptions to become due as soon as said Company is organized, 
 and to be then payable in cash on demand of the Treasurer of the 
 Company. 
 
 New York City, New, York, 
 April s, 1916. 
 
 Names 
 
 Addresses 
 
 Shares 
 
 Amounts 
 
 A. W. Davison 
 George H. Brandon 
 R. S. Cooke 
 James Robinson 
 
 23s West 8oth St., New York 
 846 York Ave., New York 
 164 King St., Brooklyn, N. Y. 
 Jersey City, N. J. 
 
 Subscription List 
 
 800 
 300 
 200 
 200 
 
 $80,000 
 30,000 
 20,000 
 20,000 
 
BOOKS AND RECORDS gi 
 
 This form is satisfactory when only a few persons 
 are concerned, and when the purposes of the company and 
 conditions of subscription are well known. In this case 
 subscriptions are not payable until the organization is com- 
 pleted. At the same time, it is obvious that money to pay 
 the incorporation fees must be raised before the charter can 
 be secured. To meet this emergency the incorporators 
 usually supply the initial funds required, this advance being 
 applied on their subscriptions, or repaid from the corporate 
 funds after organization. 
 
 It may be noted that, while as a rule subscriptions to 
 the stock of a new company prior to its organization require 
 formal acceptance by the board of directors, when these 
 latter are elected, to make such subscriptions binding and 
 legally enforcible, the incorporators, by signing the charter 
 application in which their subscriptions appear, make an 
 irrevocable subscription. 
 
 When subscriptions are payable on the instalment plan, 
 the terms should be set forth in the subscription agreement. 
 If the company is to issue both common and preferred stock, 
 the subscription agreement should explain the conditions, 
 unless separate blanks are provided for the different kinds 
 of stock. 
 
 It might be highly embarrassing to the incorporators to 
 have subscriptions revoked before acceptance by the com- 
 pany; and to avoid this possibility subscriptions may be 
 made through a committee, or a trustee appointed for that 
 purpose, as In the following subscription list. This pro- 
 vides the necessary second party to the contract and makes 
 the subscriptions binding before incorporation. Under such 
 an agreement the new corporation, when organized, may 
 bring suit to enforce payment of the subscriptidn. In a way, 
 however, the agreement is still one-sided, as no contract 
 is binding on the newly organized corporation until accepted 
 
52 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 by the corporation itself. This question, however, seldom 
 arises, as the acceptance of subscriptions by the new cor- 
 poration almost invariably follows. 
 
 Subscription List 
 Lancaster Cement Company 
 
 To be Incorporated under the Laws of the 
 
 State of Pennsylvania for the Manufacture 
 
 of Portland Cement 
 
 Capital Stock $1,000,000 
 
 Shares $100 each 
 
 We, the undersigned, hereby agree with Thomas G. Williams as 
 Trustee for the Lancaster Cement Company, to subscribe, and do 
 hereby severally subscribe, for the number of shares of the capital 
 stock of said Company set opposite our respective signatures, and 
 agree to pay the par value thereof as follows : 
 
 Ten per cent on demand of Thomas G. Williams as Trustee for 
 said Company, such payment, or so much thereof as may be necessary, 
 to be used for the preliminary and incorporating expenses of said 
 Company; thirty per cent to the Treasurer of the Company so soon as 
 said corporation is organized; twenty-five per cent on demand of the 
 Treasurer of the Company at any time after ninety days from the date 
 of incorporation, and the remainder at such times and in such instal- 
 ments as may be prescribed by the Board of Directors. 
 
 Lancaster, Pa., 
 May 2, 1916. 
 
 Names 
 
 Addresses 
 
 Shares 
 
 Amounts 
 
 Ronald Logan 
 
 627 Warren Ave., Lancaster 
 
 1,000 
 
 $100,000 
 
 Samuel Bennett 
 
 4425 Spruce St., Philadelphia 
 
 1,000 
 
 100,000 
 
 A. W. Thompson 
 
 Lancaster, Pa. 
 
 1,000 
 
 100,000 
 
 J. H. Connor 
 
 Harrisburg, Pa. 
 
 1,000 
 
 100,000 
 
 0. K. Ferguson 
 
 1420 Arch St., Philadelphia 
 
 1,000 
 
 100,000 
 
 Subscription List, Trustee's 
 
 The form illustrated on page 53 is brief and explicit, 
 and is in general use. It may be conveniently inclosed with 
 a prospectus or letter. It reserves to the incorporators 
 
BOOKS AND RECORDS 53 
 
 the right to reject or prorate subscriptions, thus enabling 
 them to exclude undesirable subscribers, and to reject or 
 prorate applications in case of over-subscription. It will 
 be seen, in this form, that the names of the incorporators 
 are brought in, but solely as a means of identifying more 
 clearly the proposed corporation. If there is any danger of 
 subscriptions being cancelled, trustees should be made parties 
 to the agreement. 
 
 The Rubberoid Tire Company 
 
 479 Springfield Avenue 
 
 Jersey City, N. J. 
 
 To be Incorporated under the Laws of New Jersey for the 
 
 Manufacture of Automobile Tires 
 
 By Frank Alston, John Stone, and Howard Cole 
 
 Capital Stock $500,000 Shares $10 each 
 
 I hereby subscribe for shares of the capital stock of The 
 
 Rubberoid Tire Company at the par value thereof, and agree to pay 
 twenty-five per cent of such subscription on demand of the Treasurer 
 so soon as said Company is incorporated, and twenty-five per cent on 
 demand of the Treasurer of the Company at any time after ninety 
 days from the incorporation of said Company; the remainder of said 
 subscription to be paid at such times and in such amounts, not exceed- 
 ing ten per cent of said subscriptions in any one month, as may be 
 required by the Board of Directors of said Company. 
 Dated 
 
 The right is reserved to reject or prorate any or all subscriptions. 
 Subscription Blank, Individual 
 
 § 56. Instalment Receipts 
 
 When subscriptions are payable in instalments, stock 
 certificates should not be issued until the full amount has 
 been paid — a rule that is frequently violated. In some cor- 
 porations special certificates closely resembling stock scrip 
 are issued upon payment of a prescribed fractional part of 
 the subscription, the certificate itself specifying the terms 
 
54 CORPORATION RECORDS AND ACCOUNTS 
 
 of payment and providing space on the back thereof for 
 the indorsement of future instalments. An examination of 
 such a certificate and its indorsements will at any time 
 indicate whether or not the stock is fully paid. 
 
 Another method of evidencing payments for stock sold 
 on the instalment plan is to give the subscriber a receipt for 
 each instalment paid. Such receipts are known as "instal- 
 ment receipts," or "instalment scrip." When the final instal- 
 ment is paid, the receipts are returned to the company, and 
 a stock certificate is issued for the total. number of shares. 
 The stockholder's account in the stockholders ledger will at 
 any time show the status of his account and the amount of 
 his stock holdings. 
 
 No. 1 15 Shares 
 
 Denton Manufacturing Corporation 
 
 Trustee's Certificate 
 $150.00 
 
 I hereby certify that Robert H. Craig, a subscriber for Fifteen Shares 
 of the Capital Stock of the Denton Manufacturing Corporation, at 
 its par value of One Hundred Dollars per share, has paid to me as 
 Trustee for said Corporation, on account of said subscription and in 
 accordance with its terms, the sum of One Hundred and Fifty Dollars. 
 
 This receipt will, upon the organization of the said Denton Manu- 
 facturing Corporation, be received and credited by the Treasurer 
 thereof to its full amount as a payment upon said subscription. 
 
 New York, Eldridge Lewis, 
 
 April IS, 1916 Trustee 
 
 Trustee's Receipt for Instalment Payment 
 
 The instalment receipt book may consist of an ordinary 
 receipt book from which the receipts are issued, though in 
 large companies special books are usually printed to meet 
 the requirements. The details of each receipt issued are 
 recorded on its stub, from which the proper entries may be 
 obtained for the stockholders ledger and also for the other 
 
BOOKS AND RECORDS 55 
 
 books. The receipt is usually signed by the treasurer and 
 perhaps by one other officer of the corporation. If it is 
 desired to sell or transfer the instalment receipt at any time 
 an assignment may be written on the back ; or to meet such 
 requirements a form of assignment is sometimes printed 
 on the back of the receipt. 
 
 Subscription payments before incorporation are made 
 to a designated trustee or bank, by whom receipts are given 
 for these payments. After incorporation they are made to 
 the treasurer of the company. 
 
 w 
 u 
 w 
 
 Pi 
 
 td 
 
 < 
 
 No. 5 $100 5 Shares 
 
 The Hudson Radiator Company 
 30 Broad Street 
 New York 
 
 Received of Edward H. Williamson the sum of One Hundred 
 Dollars, instalment payment No. S, of Twenty Per Cent upon his 
 subscription for Five Shares of the Capital Stock of the Hudson 
 Radiator Company. 
 
 New York City, J. H. Wilcox, 
 
 March 14, igi6 Treasurer 
 
 Treasurer's Receipt for Instalment Payment 
 
 § 57. Stock Scrip 
 
 Stock scrip, or instalment scrip, is practically a receipt 
 for instalments on account of stock subscriptions; but the 
 one instrument is so arranged as to evidence all the pay- 
 m.ents made. Stock scrip is usually prepared in more 
 elaborate style than the ordinary instalment receipt, and in 
 such form as to permit of its ready sale and transfer in the 
 same manner as a stock certificate. It is signed by the presi- 
 dent and treasurer, and may even bear the seal of the cor- 
 poration. Subsequent instalments are indorsed on the back 
 so that the scrip will exhibit at any time the payments made 
 upon the holder's subscription. 
 
56 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
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BOOKS AND RECORDS 
 
 57 
 
 Date 
 
 Number of 
 Instalment 
 
 Amount 
 Paid 
 
 Signature of Treasurer 
 
 May 3, 1916 
 June 2, 1916 
 
 2 
 3 
 
 $500.00 
 150.00 
 
 William H. Hansford 
 William H. Hansford 
 
 Instalment Form for Stock Scrip 
 
 Instalment scrip, or receipts, may as a rule be sold or 
 assigned at any time before they are called in for cancella- 
 tion upon final payment. A general form of assignment is : 
 
 For Value Received, I hereby sell, assign, and transfer unto John H. 
 Wardell of New York City, my subscription to Fifteen Shares of the 
 capital stock of the Lansford Manufacturing Corporation, together 
 with the payments made thereon, all as evidenced by the within cer- 
 tificate, and I do hereby authorize and instruct the proper officials of 
 said Corporation, upon completion of the conditions of my said sub- 
 scription, to issue said stock to the order of my said assignee. 
 
 New York, December 4, 1916 
 
 In the presence of Harold Thompson 
 
 Samuel H. Kennard 
 
 Assignment of Subscription and Instalments 
 
 § 58. The Instalment Book 
 
 The instalment book is used when an instalment falls 
 due, or when a call or assessment is decided upon by the 
 board of directors. As will be seen by reference to the 
 form which follows, it contains a list of the subscribers, the 
 number of shares subscribed by each, and the amount of the 
 instalment due, together with other information relating to 
 the particular instalment. A new page or sheet is made out 
 for each call or instalment. Instead of rewriting the names 
 for each of these, the same list may be utilized by ruling up 
 the page with groups of columns, each group adapted for 
 one instalment ; or by the use of short pages after the first. 
 This arrangement may cause some little inconvenience in 
 case subscription rights and instalments are transferred, 
 thereby necessitating changes of names. 
 
58 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
BOOKS AND RECORDS eg 
 
 The first column of the instalment book indicates the 
 folio of the stockholders ledger, in which the subscribers' 
 accounts are recorded, payments being posted from the 
 instalment book to the credit of the respective accounts. The 
 last column preceding the remarks column indicates the cash 
 book folio to which the payments may be carried in total 
 each day, these payments being credited to "Capital Stock," 
 "Capital Stock Subscribed," or "Subscribers," according to 
 the plan of opening entries used. Since instalments on sub- 
 scriptions are not necessarily paid on their due date, it is 
 advisable to carry the total of each day's receipts to the 
 cash book, instead of waiting until all are paid. It is obvious 
 that an account for "Subscribers" must be opened in the 
 general ledger and charged with the aggregate amount of 
 subscriptions due at that particular date. The same pro- 
 cedure is required for each succeeding instalment. 
 
 Occasionally, accounts are opened in the general ledger 
 for individual subscribers, debiting them for their subscrip- 
 tions and crediting them for their payments. If there are 
 many subscribers, this plan is objectionable as encumbering 
 the general ledger with a large number of stockholders' 
 accounts which should by right be contained only in a stock- 
 holders ledger (§§ 65, 66). 
 
 The instalment book is compiled from the various sub- 
 scription sheets or individual subscription blanks, and may 
 be either a bound or loose-leaf book. Loose sheets serve 
 the purpose nicely, since they can afterward 'be bound to- 
 gether for filing. 
 
 When subscribers to stock are few in number, the in- 
 stalment book may be dispensed with ; and cash received on 
 instalments may be entered directly in the cash book, and 
 thence posted to the respective subscribers' accounts in the 
 stockholders ledger and in total to the proper account in 
 the general ledger. 
 
CHAPTER V 
 
 THE BOOKS AND RECORDS OF A 
 CORPORATION— (Continued) 
 
 § 59. Treasurer's Receipt for Subscription Payment 
 
 When a subscription to stock is paid in full, it is 
 customary to issue the subscriber a stock certificate. If the 
 certificates are not ready for delivery, a receipt is given 
 or a temporary certificate is issued. In any such case, the 
 receipt or certificate must be turned in for cancellation 
 before it is replaced with a permanent certificate. The 
 following form of receipt is self-explanatory. It is ordinarily 
 provided with a stub on which the details of the transactions 
 are recorded. 
 
 No. so $1,000 10 Shares 
 
 Walton Publishing Company 
 
 No. 22s Atlantic Avenue 
 Brooklyn, N. Y. 
 
 This Is to Certify that Harry H. Wilson has paid into the 
 treasury of the Walton Publishing Company the sum of One 
 Thousand Dollars, payment in full of his subscription for Ten 
 Shares of its capital stock, duly executed certificates for which 
 will, upon surrender of this receipt, be issued to his order as 
 soon as said Certificates are ready for delivery. 
 
 June 14, 1916 Frank J. Ardwald, 
 
 Treasurer 
 
 Treasurer's Receipt for Stock — Full Payment 
 
 § 60. Stock Certificate Book 
 
 There is usually no legal requirement as to the size 
 form, or even the wording of a stock certificate, but it must 
 
 60 
 
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BOOKS AND RECORDS 6 1 
 
 show the corporate name, the state in which the corporation 
 is organized, the capitalization, the total number of shares, 
 the number of shares represented by the certificate, and 
 whether such stock is full-paid. The certificates are num- 
 bered and issued consecutively. Occasionally, ownership in 
 a corporation will be evidenced by a simple certificate 
 written on the typewriter or with pen and ink; and some- 
 times, where the ownership is vested in a few persons, nc 
 certificates are issued, the stock books of the corporation 
 forming the sole evidence of stock ownership. There is 
 no legal objection to either of these plans, but they are 
 obviously inconvenient and, for the more active corpora- 
 tions, inadequate. Their economy is their chief recom- 
 mendation. 
 
 Separate certificates for the different classes of stock — 
 common stock and preferred stock (as shown on pages 62, 
 63) — are usually prepared, though it is not unusual for a 
 small corporation to use the same general form of certificate 
 for both. In this case, the word "Preferred" should be 
 printed or stamped across the face of the preferred stock 
 certificate. ' Such a certificate is imperfect, however, as the 
 conditions under which preferred stock is issued should 
 appear on the face of the certificate. 
 
 Stock certificates are usually prepared in books of from 
 100 to 500 certificates, with a stub for each certificate. 
 Large corporations whose stockholders run up into the 
 thousands must, of course, use a number of these stock 
 certificate books. Separate books for common and pre- 
 ferred stock are generally used, though in small companies 
 both forms of certificates might be bound up in the one book. 
 
 In case of transfer of stock, a new certificate should not 
 be issued until the old certificate has been assigned and 
 returned for cancellation. It is customary to paste the 
 cancelled certificate to its original stub. 
 
62 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
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BOOKS AND RECORDS 
 
 63 
 
 No. 15 Incorporated under the Laws of 10 Shares 
 
 The State of New Jersey 
 
 The Ventnor Stove Company 
 
 Capital Stock' $150,000 
 
 Common Stock $100,000 Preferred Stock $50,000 
 
 Full-Paid and Non-Assessable 
 
 This Is to Certify, that George Bower is the owner of Ten Shares 
 of the Preferred Stock of The Ventnor Stove Company, transferable 
 only on the books of the Company by the said owner, in person or by 
 duly authorized attorney, upon surrender of this certificate properly 
 indorsed. 
 
 The holder of the preferred stock represented by this certificate is 
 entitled to an annual dividend of Six Per Cent (6%), payable out of 
 the net profits of the Company before any dividend is paid upon the 
 common stock. Should the net profits in any year be insufficient to 
 pay said preferred dividend, either in whole or in part, any unpaid 
 portion thereof shall become a charge against the net profits of the 
 Company, and shall be paid in full out of said net profits before any 
 dividends are paid upon the common stock. 
 
 In event of the dissolution of the corporation from any cause, 
 holders of preferred stock shall be paid from the assets to the par 
 value of their stock and all arrearages of dividends before anything 
 is paid to the holders of common stock. 
 
 Said preferred stock is subject to redemption at the option of the 
 Company at any time after Ten (10) Years from the first day of 
 August, 1916, upon payment of One Hundred and Five Dollars ($105) 
 per share and any accumulated dividends. 
 
 Said preferred stock is not entitled to vote at stockholders' meetings 
 of the Company, nor to participate in profits beyond its fixed, prefrr- 
 ential, cumulative, annual dividend of Six Per Cent. 
 
 Witness the Seal of the Company and the signatures 
 I CORPORATE I ^£ jjg jjjjjy authorized officers this second day of 
 
 April, 1916. 
 
 W. H. Wilkinson, Andrew W. Simpson, 
 
 Treasurer President 
 
 Shares, $100 each 
 
 Stock Certificate, Preferred — {Stub omitted) 
 
64 CORPORATION RECORDS AND ACCOUNTS 
 
 § 6i. Assignment of Stock Certificate 
 
 When stock is to be transferred, the form of assign- 
 ment which appears on the back of the certificate is. signed 
 by the transferor. It is then witnessed, and the certificate 
 is usually handed to the new ojvner with the remaining 
 blanks of the assignment unfilled. This is called an "assign- 
 ment in blank," and the equitable title to the stock then 
 vests in the holder of the certificate, as the name of an 
 assignee is not filled in. But since no transfer has been 
 made on the books of the corporation, the legal title remains 
 in the former owner, who is still the owner of record, i.e., 
 the owner as shown by the books of the corporation, and is 
 therefore technically entitled to exercise all the rights of 
 ownership. 
 
 For Value Received, I hereby sell, assign and transfer unto 
 
 of 
 
 shares of the capital stock represented by the 
 
 within certificate, and do hereby irrevocably constitute and appoint 
 
 my Attorney to transfer the said 
 
 stock on the books of the within-named Company, with full power of 
 substitution in the premises. 
 
 Joseph A. Longstreet 
 
 Dated 19 
 
 In presence of 
 
 Assignment of Stock Certificate 
 
 As long as the assignment on the certificate is left blank, 
 the certificate may be passed from hand to hand without 
 further formality as to assignment, and carries with it the 
 equitable title to the stock it represents. Whenever the 
 owner of the assigned certificate wishes to have the stock 
 transferred to himself on the books of the corporation, i.e., 
 put in his own name, he surrenders the certificate to the 
 proper officer of the corporation — usually the secretary — 
 
BOOKS AND RECORDS 
 
 65 
 
 with instructions as to reissue of the stock. He may, if he 
 wishes, fill in the blanks in the assignment on the back of 
 the certificate before surrendering it, but, if not, the blanks 
 are filled in by the officer of the corporation, usually with 
 his own name, and the attorney thus named in the assign- 
 ment signs the transfer book — if one is kept. After the 
 transfer has been recorded, a new certificate is issued to the 
 new owner of record in accordance with his instructions. 
 
 Frequently the holder of a certificate for a number of 
 shares desires to transfer part of them, in which case his 
 certificate is cancelled, a new one is made out to him for 
 the number of shares still remaining to his credit, and a 
 new certificate is also made out in favor of the transferee 
 for the number of shares transferred. Sometimes, on the 
 other hand, a stockholder desires to surrender a certificate 
 and take in exchange two or more certificates, each for a 
 smaller number of shares. This is called a "split." Or, 
 sometimes several certi^cates of smaller amounts are sur- 
 rendered in exchange for a single certificate. This also 
 is known as a "split." 
 
 In any of these cases, the certificates must be assigned 
 as required by the conditions, and the proper records must 
 be made in the transfer book, in the transfer register, and 
 in the stock certificate book; the cancelled certificates being 
 pasted back on their own stubs at the time the new issue 
 is made. In such cases, the stock assignment and the trans- 
 fer book state that the new stock certificates are to be made 
 
 out " to myself," or "to myself shares, and to 
 
 ...... ... ..,.., ,. .shares," as the case may be 
 
 Stock brokers often have continuing powers of attorney 
 from those for whom they act, to transfer the stocks which 
 come into the possession of these brokers in the course of 
 business. On the other hand, large corporations generally 
 appoint a special transfer agent or registrar, or both, to 
 
56 CORPORATION RECORDS AND ACCOUNTS 
 
 look after the transfer and issue of stock certificates. A 
 trust company is usually appointed to perform such duties. 
 In such case the trust company countersigns all certificates 
 issued, and supervises all other matters pertaining to the 
 company's stock. 
 
 § 62. Stock Transfer Book 
 
 The transfer book both authorizes and records the 
 transfers of shares of stock of the corporation. It is, as to 
 its wording, practically a duplication of the assignment 
 ordinarily appearing on the back of every stock certificate. 
 By many corporations the stock transfer book is not kept 
 at all, since the duly executed assignment on the back of 
 the certificate is regarded as sufficient authorization for the 
 transfer of the assigned stock. 
 
 The form of transfer book is usually about as follows : 
 
 Ledger Folio 29 Transfer No. 326 
 
 Goodwin Auto Car Company 
 
 For Value Received, I hereby sell, assign, and transfer unto James 
 W. Strong of Trenton, New Jersey, Fifty Shares of the Capital Stock 
 of the above-named Company, now standing in my name on the Com- 
 pany books and represented by surrendered Certificates Nos. 32, 37, 
 and 44. 
 
 Witness my hand and seal this 20th day of March, 1916. 
 
 Thomas L. Borden [l.s.] 
 By Henry Strong, 
 Attorney 
 New Certificate No. 196 
 Issued to James W. Strong 
 Ledger Folio No. 72 
 
 Stock Transfer Book 
 
 This form remains in the book and is evidence of 
 authority of transfer. A record of all transfers is thus 
 secured in one book, from which postings can be made and 
 to which reference may be had at any time. The book 
 
BOOKS AND RECORDS 
 
 67 
 
 usually contains from two to six transfer forms on each 
 page, one below the other. Transfer books are frequently- 
 prepared with stubs, but these stubs are not necessary and 
 may be left blank, as the transfers are not torn out. 
 
 It is usual to close the transfer books a certain number 
 of days before the annual meeting and before dividend days ; 
 and during these periods stock cannot be transferred on 
 the corporate records. This "closing of the transfer books" 
 merely amounts to a refusal of the officials in charge of the 
 stock books to register transfers of stock for the stated 
 number of days before the annual meeting or before the 
 day appointed for the payment of dividends. The registered 
 holder on the date when the transfer books are closed is 
 therefore the person who is technically entitled to vote at 
 the next stockholders' meeting or to participate in the 
 dividends, even though he may have sold his stock mean- 
 while. In any such case, the purchaser must look to the 
 seller for any voting and dividend rights to which he is 
 entitled because of the stock he purchased. (See § 36.) 
 
 § 63. Register of Transfers 
 
 Sometimes another book — ^the register of transfers — is 
 used in addition to the transfer record mentioned above. 
 In such case this book serves as a convenient medium 
 through which postings are made to the stock ledger. It 
 is apparent, of course, that for every stock certificate trans- 
 ferred, a debit must be made to the transferor and a credit 
 to the transferee. 
 
 A transfer register is required only in a large corpora- 
 tion where many transfers are being made. In a small 
 company where the stock is inactive, it is not necessary; and 
 postings may then be made from the transfer book or even 
 from the stock certificate book. The following is a simple 
 form of transfer register : 
 
68 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
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BOOKS AND RECORDS 
 
 69 
 
 When a trust company acts as transfer agent, it is 
 customary, as already stated, to have all certificates counter- 
 signed by the transfer agent after they have been signed by 
 the president and treasurer of the corporation which issues 
 the stock. The form of countersignature is about as follows : 
 
 'Countersigned this 21st day of May, 19 16. 
 
 Acme Trust Company of New York, 
 
 Transfer Agent 
 
 By Joseph H. Wilson, 
 Auditor 
 
 § 64. Stock Register 
 
 This book is used, in addition to the stock transfer book, 
 for the registration of stock in cases where a registrar of 
 stock is deemed necessary. The registrar is generally a 
 bank or trust company. By having the issue of all stock 
 supervised by the registrar, provision is made against 
 irregular issues or overissues of certificates. The number 
 of shares legally authorized to be issued is recorded on this 
 register and should exactly equal the number of outstanding 
 shares, plus any authorized shares not yet actually issued 
 by the corporation. 
 
 The rules of the New York Stock Exchg-nge require 
 every company whose shares are dealt in on the Exchange 
 to have an independent registrar approved by the Exchange. 
 
 Each new certificate issued, whether original or 
 transfer, must be countersigned by the registrar, about as 
 follows : 
 
 Registered this day of 191 . . 
 
 Business Trust Company, Registrar 
 
 By 
 
^o 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 THE VENTNOR STOVE COMPANY 
 
 Authorized Shares, Common 1.000 - Preferred 500 
 
 Capital Stock * 150,000 Shares *100 each. 
 
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BOOKS AND RECORDS 
 
 71 
 
 § 65. Stock Book or Stock Ledger 
 
 Some form of stock book, stock ledger, or share ledger 
 — which are practically one and' the same — must, in most 
 states, be kept as a matter of statutory requirement. The 
 stock ledger is primarily intended to show the stock acquired, 
 any transferred, and the number of shares held at the time 
 by each stockholder; but it is sometimes also used as a 
 stockholders ledger to show pa3TTients made on account of 
 subscriptions. This record is better kept in a separate 
 stockholders ledger. It is obvious that the great majority 
 of the stock ledger entries are transfers of stock in which 
 the corporation has no financial interest; and the fifiancial 
 side of the comparatively few original entries in which it is 
 interested should not be brought into this book. 
 
 The stock ledger is the proper legal evidence (§§ 14, 
 15) of the ownership of stock in a corporation. A stock 
 certificate may be lost or destroyed, or may, in case of fraud 
 or error, appear under a different name, but the stock book 
 still assures to the "stockholder of record" his corporate 
 rights and privileges. Stockholders have the right to inspect 
 the stock book at reasonable times and to take extracts there- 
 from if desired — a privilege which is manifestly liable to 
 abuse if not properly restricted. 
 
 The stock ledger records the name and address of each 
 stockholder, the number of shares issued to him, any shares 
 subsequently acquired, any shares transferred, and the bal- 
 ance of shares remaining to his credit. It also shows the 
 numbers of the certificates issued to the individual, the num- 
 bers transferred, and the date of each transaction. Postings 
 to the stock ledger are made from the subscription lists or 
 blanks, or, in the absence of these in the case of original 
 issues, from the stock certificate book. Transfers of stock 
 are posted from the transfer book, transfer register, or stock 
 certificate book, to the proper accounts in the stock ledger, 
 
72 
 
 CORPORATION RECOK-DS AND ACCOUNTS 
 
 Preferred stock should be recorded in a separate stock 
 book, or in its own section of the stock ledger; for it is 
 obvious that the attempt to keep a record of both kinds of 
 stock in one account would lead to confusion. 
 
 A capital stock account is sometimes opened on the front 
 page of the stock ledger, and debited with the aggregate 
 amount of shares credited to the stockholders' accounts. 
 This provides a double entry for the stock ledger, and 
 enables the secretary to tell at any time the amount of stock 
 outstanding. The stock ledger must, of course, agree as 
 to totals with the capital stock account in the general ledger ; 
 or, if the stock is not all issued, with the capital stock account 
 less all unissued stock. 
 
 § 66. Form of Stock Book or Stock Ledger 
 
 There is no generally accepted form of stock book, or 
 stock ledger, save in some few states (as New York) where 
 its form is prescribed by law. In most of the states, there- 
 fore, the secretary, or the accountant who has charge of the 
 corporate accounting system, must decide its form and the 
 method of entry. As a matter of fact, the accountant usually 
 uses the form available at the stationery store or supply 
 house with which he deals. 
 
 It must always be kept in mind that the great object of 
 the stock book is to show at any time the number of shares 
 then standing in the stockholder's name — not the amounts 
 paid on these shares, nor their par value, but the number 
 of shares. In practice there are two methods of keeping 
 this record. In some forms the stockholders' accounts are 
 debited for stock purchased, and credited for stock sold; 
 while in others the stockholders' accounts are credited when 
 stock is purchased, and debited when it is sold. As the 
 book is not part of the general accounting system, this 
 variation is not a matter of importance so long as the details 
 
BOOKS AND RECORDS 
 
 73 
 
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74 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 are correctly recorded and full information obtainable. The 
 important point is for the record to show at a glance the 
 balance of stock owned by each stockholder. 
 
 In many cases the stockholders' accounts are ruled in the 
 regular ledger form (as shown in the following form), 
 which serves the purpose very well so long as the stock is 
 fully paid and but few transfers are made. It is apparent, 
 however, that in large companies, where transfers are 
 numerous and the accounts of stockholders are constantly 
 changing, a more complete record is desirable and even 
 essential. 
 
 Ralph Mooee, 1439 Chestnut Street 
 
 1916 
 
 May 
 
 To John Kane, 
 20 shares 
 
 Balance, 70 
 shares 
 
 
 
 1916 
 
 
 
 
 May 
 
 I 
 
 $2,000 
 
 00 
 
 
 
 
 
 (( 
 
 2 
 
 7,000 
 
 00 
 00 
 
 
 
 $9,000 
 
 
 
 May 
 
 4 
 
 
 
 SO shares, orig- 
 inal 
 
 40 shares, orig- 
 inal 
 
 Balance, 70 
 shares 
 
 $5,000 
 4000 
 
 $9,000 
 
 $7,000 
 
 00 
 
 00 
 
 Stock Ledger Account 
 
 The stock book may be either bound, loose-leaf, or in 
 card form. The forms of stock book which follow are in 
 general use. 
 
 The form shown may be readily changed to meet any 
 special requirements. The leaves of the stock book are 
 indexed, usually as a matter of convenience, but in some 
 states to secure the alphabetical arrangement required by 
 statute. The name and address of the stockholder with 
 whom the particular account is kept appears at the head of 
 the page as in an ordinary ledger. On the right-hand side 
 of the page the party is credited with the stock he purchases 
 or otherwise acquires ; and on the left-hand side he is debited 
 
BOOKS AND RECORDS 
 
 
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•j^y CORPORATION RECORDS AND ACCOUNTS 
 
 with any stock disposed of. The difference between the 
 two sides shows at any time the amount of stock standing 
 to his credit. 
 
 Where a number of certificates are issued or cancelled 
 in a single transaction, the entry will vary according to the 
 conditions. If but a few certificate numbers are involved, 
 they may usually be entered in small figures on the line in 
 the proper column. If the numbers are too many to be 
 entered in this way, two or more lines may be devoted to 
 the transaction ; or the numbers may be noted at the bottom 
 of the page, reference to these numbers being inserted in 
 the column where the numbers ordinarily appear. How- 
 ever, if the certificates cancelled or issued are in different 
 names, one line must necessarily be given for each certificate. 
 
 In New York a special form of stock book has been 
 prescribed by the State Comptroller, acting under authority 
 given him by law. The use of this form by New York 
 corporations is obligatory. The forms on page 75 show, 
 respectively, stock book prescribed for the use of brokers, 
 and the stock book for corporations and transfer agents. 
 The only new feature in these prescribed forms is the intro- 
 duction of the special columns for the record of the stamp 
 tax paid on transfers. 
 
 § 67. Dividend Book 
 
 This book, used only when dividends are declared, con- 
 tains a list of the stockholders who are entitled to participate 
 in these dividends. It may be a bound book or simply loose 
 sheets fastened together in a binder. After the stock books 
 are closed for dividends, the registered holders of stock are 
 recorded in this book in alphabetical order with all the 
 necessary data against each name. 
 
 Most corporations pay dividends by check, and many 
 of them open special bank accounts for dividend purposes. 
 
BOOKS AND RECORDS 
 
 11 
 
 THE OLIVER MINING COMPANY 
 Capital Outstanding «400,000 
 Dividend No. 24 ' Sheet No. 48. 
 T i«,t of stockholders of this company as shown by the transfer books at the closing 
 thereof at six o'clock PM., February 15. 1916, and to whom the dividend of Ten Per Cent, de- 
 clared February 12. 1916. is payable on March 1. 1916. 
 Shares Outstanding 40.000 Rate of Dividend 10 % 
 
 NO. OF CHECK 
 ISSUED IN 
 PAYMENT 
 
 
 
 
 
 - 
 1 
 
 AMOUNT OF 
 
 DIVIDEND 
 
 PAID 
 
 
 
 
 
 
 
 
 
 
 
 NUMBER 
 
 OF 
 SHARES 
 
 
 
 
 
 \ 
 
 \ 
 
 u 
 
 < 
 
 z 
 < 
 
 1 
 
 
 
 
 
 // 
 
 TO V^/HOSE ORDEE 
 CHECK SHOULD BE 
 DRAWN IF DIFFERENT 
 FROM THAT OF STOCK- 
 HOLDER 
 
 
 
 
 
 =\\= 
 
 a. 
 
 \ 
 
 I 
 
 
 
 
 
 1 
 
 'S 
 
78 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 In this case, the total amount of the dividend to be paid 
 out is deposited, and specially printed checks are drawn 
 against it in favor of the stockholders for the dividends due. 
 Since these checks specify the number and date of the divi- 
 dend as well as the amount, they serve as vouchers and do 
 not require an acknowledgment. A convenient form of 
 dividend book is shown on page 'j']. A form of dividend 
 check and of the notice usually accompanying it are as 
 follows : 
 
 P 
 
 O 
 
 I— I 
 
 > 
 
 l-H 
 
 Q 
 
 u 2 
 o " 
 
 H d 
 w '^ 
 
 R 
 
 <A 
 •A 
 
 W 
 <A 
 
 Great Western Milling Company 
 
 Portland, Oregon, June S, 1916 No. 2438 
 
 First National Bank 
 of Portland, Oregon 
 
 Pay to the order of 
 
 James D. Moore $150.00 
 
 One Hundred and Fifty 00/100 Dollars 
 
 Countersigned: George H. Seymour, 
 
 Stock Transfer Department, Treasurer 
 
 John Fiske, Transfer Agent 
 
 Dividend Check 
 
 Great Western Milling Company 
 
 Portland, Oregon 
 
 June S. 1916 
 On May 6, 1916, the Directors declared quarterly dividend No. 10 
 of One and One-half Per Cent upon the Preferred Stock of the Com- 
 pany, payable this day to stockholders of record of May 16, 1916. 
 
 In accordance with permanent order on file, enclosed please find 
 check for above dividend on the Preferred Stock standing in your 
 name. No acknowledgment is necessary. 
 
 Kindly advise Charles E. Howe, Assistant Treasurer, 282 Wash- 
 ington Street, Portland, Oregon, of any change in your address, giving 
 your old address as well as the new. 
 
 George H. Seymour, 
 
 Treasurer 
 Dividend check enclosed which please cash immediately. 
 Notice Accompanying Dividend Check 
 
BOOKS AND RECORDS 
 
 79 
 
 § 68. Dividend Order 
 
 The larger corporations usually require their stock- 
 holders to file orders giving definite instructions as to the 
 payment of dividends. In most cases, dividends go to the 
 stockholder of record, but a stockholder sometimes desires 
 all or a part of the dividends upon his shares to be paid 
 to some other person, or to a bank or trust company. A 
 simple form of permanent dividend order frequently used 
 is as follows : 
 
 w :§ 
 
 p "> . 
 
 ^ °^ 
 
 O T3 S 
 
 ^ g.S 
 
 Q E S 
 
 H S-S 
 
 12; =3 .a 
 
 W 3 .a 
 
 <; ^ ^ 
 
 s -as 
 
 a, (u 
 
 Oh 
 
 (date heee) Ipl . . 
 
 TREASURER '.. 
 
 Until this order is revoked in writing, please remit 
 by mail, to the address as per margin, by check 
 drawn to order of 
 
 all dividends now due, or which may hereafter be 
 declared, on shares of the Capital Stock of your 
 Company now or hereafter standing in the name of 
 
 WITNESS : 
 
 (Give name exactly as it appears on stock certificate) 
 
 (Shareholder sign here) 
 
 When the check is to be made payable to another person, have 
 signature acknowledged before a notary public. 
 
CHAPTER VI 
 
 DISTINCTIVE CORPORATE ACCOUNTS 
 
 § 69. Accounts Peculiar to Corporate Bookkeeping 
 
 As has been stated, there are certain accounts peculiar 
 to corporation accounting, or so rarely used outside of it, 
 as to be distinctive. In the present chapter an analysis of 
 the more important of these accounts is given in ledger 
 form, with respective debits and credits appearing upon the 
 proper side of each account. The journal entries through 
 which the component parts of these accounts are brought 
 upon the books are more fully discussed in following 
 chapters. 
 
 It should be noted that there is some diversity of opinion 
 as to the accounts and entries that are best employed under 
 the varying conditions that confront the corporation ac- 
 countant. In any case, however, that plan seems best which 
 will provide all of the information desired with the fewest 
 possible repetitions. The present chapter is designed to cover 
 all the accounts used in ordinary corporation accounting. 
 
 § 70. Capital Stock — Common 
 
 Debit: 
 
 Credit: 
 
 With the par value of any 
 
 With the par value of com- 
 
 common shares retired. 
 
 mon shares issued; or 
 
 
 With the entire authorized 
 
 
 value in case an Unissued Stock 
 
 
 account is opened. 
 
 When no preferred stock is issued — in which case but 
 
 80 
 
DISTINCTIVE CORPORATE ACCOUNTS 
 
 8l 
 
 one kind of stock is issued — the foregoing account will be 
 known simply as "Capital Stock," to which the above rules 
 will apply without change. 
 
 If an Unissued Stock account is not opened, the balance 
 of the Capital Stock account represents the par value of 
 common stock issued and outstanding. The stock ledger 
 (§§ 65, 66) will also show the stock issued and outstand- 
 ing, though ordinarily in shares and not in value. If the 
 par value of the stock acquired by, and disposed of by the 
 stockholders is also entered in the stock ledger, it may then 
 be operated as a subsidiary record, the Capital Stock account 
 becoming the controlling account. 
 
 If an Unissued Stock account is opened, the balance of 
 the Capital Stock account shows the total authorized stock, 
 while the balance of the Unissued Stock account shows the 
 amount still unissued. 
 
 The Capital Stock accounts as above constituted show 
 the amoimt of capital invested in the corporation by the 
 stockholders (who are the real owners), very much as the 
 Capital accoxmt of a partnership or sole proprietorship busi- 
 ness shows the investment of the partners or proprietor. 
 The accounts represent a nominal liability to creditors and 
 to the stockholders, whose claims in the event of liquidation 
 are considered only after all secured and unsecured creditors 
 are satisfied. (See also Chapter VII, and §§ 144, 166.) 
 
 § 71. Capital Stock — Preferred 
 
 Debit : 
 
 With the par value of pre- 
 ferred shares retired. 
 
 Credit: 
 
 With the par value of pre- 
 ferred shares issued; or 
 
 With the entire authorized 
 value in case an Unissued Stock 
 account is opened for preferred 
 stock. 
 
82 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 The balance of this account represents the par value of 
 preferred stock issued and outstanding, or of the total pre- 
 ferred stock authorized, as the case may be. If the latter, 
 the Unissued Stock — Preferred account will show the 
 amount of preferred stock still unissued. 
 
 § 72. Capital Stock Authorized 
 
 Debit: 
 
 With the par value of shares 
 disposed of, the corresponding 
 credit being made to Capital 
 Stock or to Capital Stock Sub- 
 scribed. 
 
 Credit : 
 
 With the par value of shares 
 authorized, the corresponding 
 debit being made to Unissued 
 Stock. 
 
 This account when used shows a credit balance, indicat- 
 ing the par value of stock authorized and not yet disposed 
 of. It is sometimes opened in order to bring onto the books 
 at the time of organization the entire amount of capital 
 stock authorized by charter, regardless of whether or not 
 any portion thereof has been disposed of. A separate ac- 
 count should be opened for each class of stock, the corre- 
 sponding debit to Unissued Stock account having a like 
 classification. 
 
 This is a favorite account with many bookkeepers and 
 accountants, but so long as the Unissued Stock account in- 
 dicates the amount of stock authorized and unsold, there 
 seems little need of another account to exhibit the same 
 information. The account has some merit, however, 
 especially in affording a means of recording a neutral open- 
 ing entry in the corporate books, and in exhibiting by 
 ledger accounts the amounts of capital stock both sold and 
 unsold. (See also §§ 97, 154.) 
 
 Undoubtedly most accountants credit Capital Stock ac- 
 count at the beginning for either the entire authorized 
 
DISTINCTIVE CORPORATE ACCOUNTS 
 
 86 
 
 capital stock or for the amount issued, and in such case 
 the Capital Stock Authorized account would not be 
 required. 
 
 § 73. Unissued Stock* 
 
 Debit: 
 
 With the par value of shares 
 authorized, the offsetting credit 
 being made to Capital Stock or 
 to Capital Stock Authorized. 
 
 Credit : 
 
 With the par value of shares 
 subscribed, the offsetting debit 
 being made to Cash, to the 
 proper property account, or to 
 Subscriptions to Stock, as the 
 case may be. 
 
 This account, also known as Unsubscribed Stock, shows 
 at any time the par value of shares of a corporation author- 
 ized by charter but not yet subscribed and paid for. It 
 shows a debit balance indicating the amount of stock still 
 unissued, and is a negative to Capital Stock account, or 
 to Capital Stock Authorized account in case the latter is 
 opened. It must be borne in mind that instalment subscrip- 
 tions, until they are fully paid, are carried in Capital Stock 
 Subscribed account when that account is used, and do not 
 show in the Capital Stock account until they are fully 
 paid. 
 
 Many accountants prefer to credit Capital Stock with 
 only the par value of shares sold, in which case Unissued 
 Stock account is not needed; and yet the account has a 
 mission and is frequently used. On the balance sheet, how- 
 ever, the unissued stock is preferably deducted from the 
 authorized capital stock of the corporation and is not 
 shown among the assets. (See also Chapter VII, and 
 §§ 144, 166.) 
 
 *Separate account for each class of stock unissued. 
 
84 CORPORATION RECORDS AND ACCOUNTS 
 
 § 74. Subscriptions to Stock* 
 
 Debit: 
 
 With the amount of subscrip- 
 tions for capital stock. (At this 
 time credit Capital Stock Sub- 
 scribed, Unissued Stock, Treas- 
 ury Stock, or Capital Stock ac- 
 count, as the case may be. 
 
 Credit : 
 
 With all moneys received to 
 cover subscriptions, or with the 
 amount of each instalment due 
 by subscribers when an Instal- 
 ment account is maintained. 
 
 Subscriptions to Stock account shows a debit balance, if 
 any. Other names for this account are "Subscriptions," 
 "Stock Subscriptions," and "Subscribers." The balance is 
 an asset, and — save when an instalment account is opened — 
 represents the amount due and unpaid on subscriptions for 
 capital stock sold on the instalment plan. Debits to this 
 account are ofifset by credits to Unissued Stock, Capital 
 Stock Subscribed, or Treasury Stock account, as the case 
 may be, or even to Capital Stock account. Sometimes it is 
 opened to show the total amount of stock subscribed, even 
 though payment of part or all of these subscriptions is to 
 be made in full at once or in a short time. Subscriptions to 
 treasury stock should preferably be opened under another 
 heading, such as "Subscriptions to Treasury," to distinguish 
 them from subscriptions to unissued stock. 
 
 A subscription ledger should be kept as a subsidiary 
 record to the Subscriptions to Stock account, and an account 
 with each subscriber kept therein. The respective sub- 
 scribers' accounts should be debited separately with the 
 amounts of the subscriptions, and credited with the amounts 
 of the payments which they make on account of the sub- 
 scriptions. The results of a trial balance taken from this 
 subsidiary ledger should agree with the balance of the Sub- 
 scriptions to Stock account. (See also §§65, 66, 98-100, 
 150-) 
 
 *Separate account for each class of stock sold. 
 
DISTINCTIVE CORPORATE ACCOUNTS 85 
 
 § 75. Capital Stock Subscribed* 
 
 Credit : 
 
 With the par value of capital 
 stock sold on the instalment or 
 deferred payment plan. (At this 
 time debit Subscriptions to 
 Stock account.) 
 
 Debit: 
 
 With the par value of sub- 
 scriptions which have been fully 
 paid; at which time certificates 
 of stock should be issued, cover- 
 ing the number of shares sub- 
 scribed and paid for. (At this 
 time credit Capital Stock, Un- 
 issued Stock, or Treasury Stock, 
 as the case may be.) 
 
 Sometimes subscriptions to stock — especially when on 
 the instalment plan — fail after they are made. Stock certifi- 
 cates should not be issued to subscribers until their respec- 
 tive subscriptions have been paid in full. Capital Stock 
 Subscribed account is therefore opened as a suspense ac- 
 count in which subscriptions may be carried until they are 
 paid in full. 
 
 The balance of Capital Stock Subscribed account is a 
 nominal liability, and represents the par value of each sub- 
 scription until this subscription, has been fully paid — not the 
 amount due on these subscriptions, which is shown by Sub- 
 scriptions to Stock account, but the total original par value 
 of all unpaid subscriptions. When subscriptions are paid 
 in full and certificates are issued, the Capital Stock Sub- 
 scribed account is debited and Capital Stock account or Un- 
 issued Stock account, or perhaps Treasury Stock account, is 
 credited. Instead of opening this account, credits for stock 
 subscribed on the instalment plan are frequently made 
 directly to Capital Stock ; or it is omitted entirely in case a 
 Capital Stock Authorized account is opened. 
 
 The difference between the balance of Subscriptions to 
 Stock account and the balance of this account should agree 
 
 *§eparate account for each class of stock subscribed. 
 
86 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 with the amount of cash received on account of subscrip- 
 tions not fully paid. It will thus be seen that the balance 
 of this account is an offset to the cash received on account 
 of subscriptions not fully paid, and the remaining part of it 
 is an offset against the balance of the Subscriptions to Stock 
 account. (See also § 97.) 
 
 § 76. Instalment Account 
 
 Debit: 
 
 With the amount of instal- 
 ments due by subscribers to 
 shares of stock, the offsetting 
 credit being to Subscriptions to 
 Stock account, or Unissued 
 Stock account. 
 
 Credit : 
 
 With payments on account of 
 instalment subscriptions. 
 
 This account is employed only when a considerable 
 amount of stock has been subscribed — ^usually at the time 
 the corporation is organized — and payment therefor is to 
 be made in instalments in fixed amounts and at fixed times 
 or on call. 
 
 The account is opened afresh each time an instalment 
 falls due. As each instalment is due a credit is made to 
 Subscriptions to Stock and a debit to the particular instal-. 
 ment, as "Instalment No. i, 25%," "Instalment No. 2, 
 25%," and so on, as the case may be. It shows a debit 
 balance and remains open only until payments on the par- 
 ticular instalment are made. Sometimes an account for 
 "Subscribers" is opened in its place, and even an account 
 in the name of each individual subscriber when these are 
 not too numerous. The main object is to show the amounts 
 subscribed by individuals, when the instalments are due 
 and how much, and the amounts paid thereon. (See also 
 §§ 98-100, 150, 152.) 
 
DISTINCTIVE CORPORATE ACCOUNTS 
 § 77. Treasury Stock 
 
 87 
 
 Debit: 
 
 With the cost price of capital 
 stock issued by a corporation 
 and subsequently purchased by 
 it. 
 
 With the market value of 
 shares donated to the treasury. 
 If such stock has no positive 
 market value, the transaction 
 may be brought on the books by 
 debiting the account with the 
 par value of the shares donated. 
 Donation account being credited. 
 
 Credit: 
 
 With the cost, or realized 
 value, as the case may be, when 
 shares debited to this account 
 are disposed of ; in other words, 
 with the value at which the 
 shares disposed of were charged 
 to this account. If the price 
 actually realized was more or 
 less than that at which the 
 stock was charged to this ac- 
 count, the difference is credited 
 or debited, as the case may be, 
 to Donation account. 
 
 The balance of this account is an asset, and, save in the 
 case of donated stock, should represent the cost of treasury 
 shares owned. (See also Chapter VIII, and §§ 2y, 155, 
 166.) A separate account is sometimes opened for Donated 
 Stock instead of Treasury Stock. This caption is a good 
 one and easily understood. 
 
 § 78. Donation Account 
 
 Debit: 
 
 With the discount on donated 
 stock sold below the value at 
 which it was credited to this ac- 
 count, and with any expense in 
 connection with such sale. 
 
 With the amount transferred 
 at any time to Profit and Loss 
 or to Surplus, as a result of 
 stock donated. 
 
 Credit: 
 
 With the market or par value, 
 as the case may be, of corpora- 
 tion stock donated back to the 
 company for resale to provide 
 working funds, the offsetting 
 debit being to Treasury Stock 
 account. 
 
 With the excess when do- 
 nated stock is sold for more 
 than the value at which it was 
 credited to this account. 
 
88 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 The balance of this account — ^also known as Working 
 Capital Donated account — is always on the credit side and 
 is a nominal liability, being an offset to Treasury Stock 
 account. As stock is sold and profit made thereby, such 
 profit, after deducting any expenses connected therewith, 
 may be carried to Profit and Loss or to Surplus, or else be 
 permitted to remain in Donation account until all of the 
 donated stock is disposed of. It may then be closed off as 
 suggested, or be permitted to stand as a credit balance to 
 the account. It is a profit in any case, which should be kept 
 as a permanent reserve and not paid out in dividends. In 
 most cases, however, it eventually finds its way to Surplus 
 account. (See also Chapter VIII, and §§ 27, 155, 166.) 
 
 § 79. Premium on Capital Stock 
 
 Debit: 
 
 With any transfer from this 
 account by amortization or 
 otherwise, to Profit and Loss, 
 Surplus, or any other account. 
 
 Credit : 
 
 With the sale price of shares 
 over and above the par value 
 thereof. 
 
 The credit balance of this account, sometimes called 
 Capital Surplus, shows the amount of premium not yet 
 written off. It is a profit to the corporation, but not one 
 that should be used for the payment of dividends. The 
 preferable way is to amortize it over a term of five or ten 
 years by yearly or monthly credits to Profit and Loss. It 
 is frequently carried as a permanent credit to Surplus 
 account, especially in banks and other corporations where it 
 is the practice to sell stock at a premium even at the time 
 of organization. (See also §§ 103, 104.) 
 
 If stock should be sold at a discount — a dubious pro- 
 ceeding — an account called Stock Discount account may be 
 opened. (See § 102.) 
 
DISTINCTIVE CORPORATE ACCOUNTS 89 
 
 § 80. , Capital Stock Without Par Value 
 
 Debit: 
 
 With number of shares re- 
 tired, at the price at which they 
 were credited to this account 
 when sold. 
 
 Credit : 
 
 With number of shares is- 
 sued, at the sale price thereof. 
 The corresponding debit is to 
 Cash, to the proper property ac- 
 count, or to Subscriptions to 
 Stock, as the case may be. 
 
 With subsequent sales of 
 stock, at the sale price thereof. 
 
 This account shows a credit balance and is a nominal 
 liability representing the outstanding capital stock of the 
 corporation, provided there is no other kind of stock issued. 
 There being no par value to the shares of stock, each share 
 represents a fractional part of the net worth (composed of 
 capital and surplus), in proportion to the total number of 
 shares issued. The account is preferably credited with 
 shares at the sale price regardless of prices which preceded ; 
 though some advocate crediting the account at one price 
 for all sales of stock, and crediting any amount received in 
 excess thereof to Surplus or Stock Premium account. So 
 long as this is the only class of stock issued, however, it 
 matters little, so far as the book value of the shares is con- 
 cerned, whether such premium be credited to Capital or to 
 Surplus account ; and yet good practice favors the plan out- 
 lined above, so that only earned profits are permitted to 
 appear in the Surplus account. In any case, the share value 
 as between the shares would be the same, each being a 
 proportionate part of the net worth. 
 
 Certificates of stock without par value simply indicate 
 the undivided interest of the holder in the net worth of 
 the corporation, according to the number of shares held. 
 The balance sheet, in addition to stating the capital and 
 surplus of the concern, should state (either in the body 
 
90 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 thereof or as a footnote thereto) the number of shares and 
 perhaps the amount paid in on each of the shares outstand- 
 ing, thus giving a ready means for determining the sale 
 price and the book value of each unit of interest. 
 
 If there be more than one class of stock outstanding, 
 each class has its own status in relation to the entire capital 
 stock. Preferred stock, after receiving its required divi- 
 dend, may or may not be entitled to a share of any further 
 distribution of profits ; likewise, common stock both with 
 and without par value may be issued, so that the status of 
 each must be prescribed in the charter or the by-laws of the 
 corporation. 
 
 The following balance sheet indicates the distinction 
 between 7% cumulative preferred stock and common stock 
 without par value. 
 
 Balance Sheet 
 
 Condensed Balance Sheet of the Aetna Explosives Co., Inc., 
 
 AND Subsidiary Companies as of March 3,1, 1916 
 
 Assets 
 
 
 Liabilities 
 
 
 Commercial Plants and 
 
 
 Common Stock, no par 
 
 
 Properties 
 
 $2,970,522 
 
 value; on which has 
 
 
 Munition Plants and 
 
 
 been paid in in as- 
 
 
 Properties 
 
 12,732,568 
 
 sets* $ 
 
 12,578,580 
 
 Good-Will 
 
 3,391,476 
 
 Preferred Stock, par 
 $100 
 
 
 Securities Owned (book 
 
 
 5,495,900 
 
 values) 
 
 143.436 
 
 Capital Stock of Sub- 
 
 
 Inventory, Notes, and 
 
 
 si d i a r y Companies 
 
 
 Accounts Receivable 
 
 
 Not Held by Aetna 
 
 
 
 9,467.627 
 
 Explosives Co., Inc. . 
 Funded Debt 
 
 380,667 
 2,228,500 
 
 Special Deposits in Es- 
 
 crow and on Contract 
 
 
 Current Liabilities 
 
 5,386,824 
 
 Advances 
 
 3,395,183 
 
 Reserves and Advances 
 
 
 Deferred Charges 
 
 344,891 
 
 on Contracts 
 
 5,836,200 
 
 
 
 Surplus 
 
 Total 5 
 
 539,031 
 
 Total $32,445,702 
 
 32,445,702 
 
 
 
 
 *630,000 shares outstanding. 
 
DISTINCTIVE CORPORATE ACCOUNTS gi 
 
 It is advocated by some that when stock is issued with- 
 out par value and there is only one class of stock, all out- 
 standing, there is no necessity for making a division between 
 Capital Stock and Surplus accounts, since the net profits 
 each time, either before or after paying dividends, may be 
 credited to the Capital account or to Net Worth, as the case 
 may be. Whatever the name, the account selected under 
 this plan bears the credit of capital paid in and is credited 
 with the accumulation of profits, and debited with the dis- 
 tribution of dividends. In that case, the capital account 
 would change from year to year, or each time the books are 
 closed, like the capital of a partnership. The net amount 
 credited to Capital, divided by the total number of shares 
 outstanding, would give the book value per share. It is 
 preferable, however, in any case, to keep capital contribu- 
 tions and surplus profits in separate accounts. In case the 
 company issued both stock bearing a par value and stock 
 without par value, care must be taken to show the portion 
 of the profits belonging to each, though this division may 
 or may not be made on the balance sheet. 
 
 Impairment of capital by payment of excessive dividends 
 must be carefully guarded against in a company where the 
 stock has no par value. To prevent this, the amount per 
 share paid in on the stock should be stated in the balance 
 sheet and also in the ledger account itself, and profits be 
 kept entirely separated from the capital paid in to the 
 company. 
 
 Non-stock corporations, as clubs, societies, hospitals, 
 and other eleemosynary institutions, require a similar treat- 
 ment as to capital contributed and profits earned. In these 
 particular cases, however, as no stock is issued and no 
 profits are distributed, there is usually no individual interest 
 to be determined. Everything contributed is for the benefit 
 of the institution as such, and should therefore be credited 
 
92 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 to Capital account. Any profits earned are likewise cred- 
 ited to Capital account unless it is required that profits be 
 set forth separately, while appropriations for any specific 
 purpose are charged to the same account. There is no 
 objection, however, to crediting profits to a separate ac- 
 count, such as Surplus or Unappropriated Profits, and then 
 making transfers therefrom as needed either to increase the 
 Capital account or to be used in other ways. (See § 22.) 
 
 § 81. Organization Expenses 
 
 Debit : 
 
 With the cost of all organiza- 
 tion expenses, such as attorney's 
 and accountant's fees, incor- 
 porating expenses, promoters' 
 services, underwriting expenses, 
 etc. 
 
 Credit : 
 
 At the close of each month or 
 fiscal period, as the case may be 
 (depending on whether profits 
 are ascertained monthly or only 
 as often as a physical inventory 
 is made), with the proper pro- 
 portion of the debits to this ac- 
 count, based upon the number of 
 years over which the organiza- 
 tion expenses are to be spread. 
 
 The balance of this account is a deferred asset, and 
 represents the proportion of organization expenses which 
 are to be charged off over a given number of years to Profit 
 and Loss. 
 
 When the expenses of organization amounts to more 
 than, say, $500, it is hardly just to charge the entire amount 
 to Profit and Loss at any one time. Such expenses are ab- 
 solutely essential to the creation of the business, and the 
 first year receives no more benefit from the expenditure 
 than the fifth or sixth. It would therefore seem' more 
 equitable, so far as the statistical feature of bookkeeping is 
 concerned, to write such expenses off over such a period of 
 years as the management may elect. Probably five years 
 
DISTINCTIVE CORPORATE ACCOUNTS 
 
 93 
 
 would be sufficient for this purpose, in which case one-fifth 
 of the total amount should be charged ofif each year. (See 
 also §§ 154, 1 66.) 
 
 § 82. Surplus 
 
 Debit: 
 
 With the amount of dividends 
 declared (in case such amount 
 is not charged to Profit and 
 Loss). 
 
 With amounts reserved for 
 sinking fund or other similar 
 purposes (in case such amount 
 is not charged to Profit and 
 Loss). 
 
 With any adjustment during 
 the fiscal period which dimin- 
 ishes the profits of a previous 
 fiscal period. 
 
 At the close of each fiscal 
 period, with the net loss, if any, 
 as shown by the Profit and Loss 
 account. 
 
 Credit : 
 
 At the close of each fiscal 
 period, with the net profit, if 
 any, as shown by the Profit and 
 Loss account. 
 
 With any adjustments made 
 during a fiscal period which 
 should have been credited to 
 some profit and loss account 
 within a prior fiscal period; or 
 which increase the profits of a 
 prior fiscal period. 
 
 The balance of this account at the close of a fiscal period 
 represents the undivided profits. It should equal the dif- 
 ference between the assets and liabilities, less the balance 
 of the capital account, or accounts, as the case may be (i.e., 
 Capital Stock, Profit and Loss, etc.). Surplus is an incre- 
 ment of capital. When added to the balance of the capital 
 account (or accounts), the sum total should represent the 
 net worth of the business. Surplus account may even show 
 a debit balance as a result of business depression, heavy 
 losses, or payment of excessive dividends. In that case, 
 such deficit represents a loss and the capital impairment of 
 the company- 
 
94 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 Surplus account should represent the accumulation of 
 undivided profits. It may include items other than realized 
 profits, or it may be diminished by writing down assets 
 below their real value. When this is done, the process is 
 called "creating a secret reserve." When the credit side of 
 the Surplus account is increased by figures which do not 
 represent realized profits, the act is called "creating ficti- 
 tious assets," or "watering the assets." It may also be 
 credited with the amount paid for shares of stock in excess 
 of the par value — a practice that is followed by many new 
 corporations such as banks and insurance companies. 
 
 When an asset account is arbitrarily increased by a book 
 entry, the credit usually finds its way to Surplus. When a 
 business wishes to falsify the amount of its surplus, it 
 usually does so by inflating some fixed asset account. Con- 
 sequently, a report of an auditor is of no value unless he 
 analyzes all debits and credits to the Surplus account from 
 the beginning of business, and is willing to certify, with- 
 out qualification, to the correctness of the balance of the 
 Surplus account at the time his audit is made. (See also 
 Chapter XXIII.) 
 
 § 83. Dividends 
 
 Debit: 
 
 With dividends paid, whether 
 by cash or by an issue of stock 
 or otherwise. 
 
 Credit : 
 
 With the amount of dividends 
 declared by the board of di- 
 rectors, the corresponding debit 
 being made to Surplus account 
 or to Undivided Profits account. 
 
 The balance of this account represents dividends de- 
 clared but not paid. It is advisable, when crediting this 
 account, to number consecutively the dividends declared, as 
 "Dividend No. 20," or "Dividend No. 20, payable August i, 
 
DISTINCTIVE CORPORATE ACCOUNTS 
 
 95 
 
 1916." A new account need not be opened each time a 
 dividend is declared, though this is frequently done. (See 
 also Chapters IX, X.) 
 
 § 84. Bonds 
 
 
 Debit: 
 
 Credit: 
 
 With the par value of bonds 
 
 With the par value of bonds 
 
 retired. 
 
 issued or assumed ; or 
 
 
 With the par value of bonds 
 
 
 authorized for issue in case a 
 
 
 corresponding account is opened 
 
 
 for bonds not issued. 
 
 The balance of this account represents the par value of 
 bonds outstanding, and is a fixed liability. 
 
 Unissued bonds need not be shown on the books, though 
 there is no serious objection to doing so. It is well, how- 
 ever, to show as a parenthetical note at the top of the Bonds 
 account, the amount of the authorized issue. Accounts are 
 opened for different kinds of bonds, and the tenor of the 
 same clearly set forth in the title of these accounts, as "First 
 Mortgage 5% Bonds of 1940," "Collateral Trust 5% 
 Bonds," "First Mortgage Thirty- Year Sinking Fund Gold 
 Bonds," etc. (See aho Chapter XVII.) 
 
 § 85. Bond Premium 
 
 Debit: 
 
 With proportionate amounts 
 written off monthly or yearly to 
 Profit and Loss. 
 
 Credit : 
 
 With premium received on 
 bonds sold above par. 
 
 This account when it exists has a credit balance and 
 shows the amount of bond premium not yet written ofif. It 
 is a profit to the corporation but not one that should be used 
 
96 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 for the payment of dividends. The preferable way is to 
 amortize it over a term of five or ten years by j^early or 
 monthly credits to Profit and Loss. It might even be 
 credited to Bond Discount account in case such an account 
 exists on the books, especially in the case of industrial cor- 
 porations not controlled ,by commission regulations. On 
 the balance sheet the bond premium is usually carried among 
 the deferred credit items on the liability side (See also 
 Chapter XIX.) 
 
 § 86. Bond Discount 
 
 'Debit: 
 
 With the discount allowed to 
 bankers or underwriters on sale 
 of the company's bonds. 
 
 With other bond issue ex- 
 penses incurred at the date of 
 issue. 
 
 Credit : 
 
 With proportionate amounts 
 written off either monthly or 
 yearly to Profit and Loss ac- 
 count. 
 
 This account Is a nominal deferred asset which Is usually 
 spread over a term of years, but, if the profits will justify it, 
 may be all charged off during the first one or two years. It 
 is the practice to charge all expenses incident to a bond issue 
 to some account known as "Discount on Bonds," or "Bond 
 Discount and Expense," and then to amortize the amount 
 of this expense over a term of years or over the life of 
 the bonds by yearly or monthly charges to Profit and 
 Loss. (See also Chapter XIX, "Bond Discount and Prem- 
 ium.") 
 
 Bond discount and underwriting expenses are common 
 to nearly all corporate bond issues, and, while it is per- 
 missible to wipe such charge off during the life of the 
 bonds, frequently a shorter period is taken as a basis of 
 apportionment. 
 
DISTINCTIVE CORPORATE ACCOUNTS 
 § 87. Interest on Bonds 
 
 97 
 
 Debit: 
 
 At the close of each month, or 
 fiscal period if monthly profits 
 are not ascertainable, with the 
 amount of interest on bonds out- 
 standing applicable to the month 
 or fiscal period just ended, as 
 the case may be. The corre- 
 sponding credit is to Accrued 
 Interest on Bonds. 
 
 Credit : 
 
 Balance of this account con- 
 stitutes a fixed revenue charge, 
 and should be transferred to 
 Profit and Loss account when 
 the books are closed. 
 
 The above applies with equal force to interest on out- 
 standing mortgages. (See also Chapter XVIII.) 
 
 § 88. Accrued Interest on Bonds 
 
 Debit: 
 
 With payments of interest on 
 bonds outstanding. 
 
 Credit : 
 
 At the close of each month, 
 or fiscal period if monthly 
 profits are not ascertainable, 
 with the amount of interest ac- 
 crued on outstanding bonds dur- 
 ing the month or fiscal period 
 just ended, as the case may be. 
 The corresponding debit is to 
 Interest on Bonds. 
 
 The balance of this account is a liability, and represents 
 interest accrued and not due. (See also Chapter XVIII.) 
 
 The above applies with equal force to interest accrued 
 on outstanding mortgages. 
 
 Since in most large corporations it is the practice to 
 require monthly profit and loss statements and balance 
 sheets, accrued interest on bonds, mortgages, and other 
 obligations must be set up in the general ledger accounts. 
 
g8 CORPORATION RECORDS AND ACCOUNTS 
 
 § 89. Sinking Fund 
 
 Credit : 
 
 With amounts of money dis- 
 bursed for the purpose for 
 which the special fund was 
 created. 
 
 Debit: 
 
 With amount of moneys trans- 
 ferred from the general funds 
 of the business to a special 
 fund for the specific purpose of 
 meeting some fixed obligation 
 at a particular time, as a bond 
 issue, mortgage, or other debt. 
 
 With the income derived from 
 the investments of money set 
 aside as a sinking fund. (At 
 this time credit Sinking Fund 
 Income, account. ) 
 
 The balance of this account is an asset and should at any 
 time represent the accumulated value of the sinking- fund. 
 The moneys thus taken are usually handed over to a trustee 
 or board of trustees for safe-keeping and investment, the 
 duties of such trustee in respect of such funds being set 
 forth in the document creating the trust. (See also Chapter 
 XXI.) 
 
 § 90. Sinking Fund Reserve 
 
 Debit: 
 
 With any deductions. necessi- 
 tated by loss or return of 
 moneys credited. 
 
 With transfers or appropria- 
 tions therefrom for other pur- 
 poses or for the benefit of some 
 other reserve. 
 
 With the balance when trans- 
 ferred from this account to Sur- 
 plus account or to some other 
 permanent reserve. 
 
 Credit : 
 
 With the amount appropriated 
 out of profits at designated 
 periods for the creation of a 
 sinking fund, the corresponding 
 debit being made to Profit and 
 Loss account or to Surplus. 
 
 With all income derived from 
 the deposit or investment of 
 sinking fund moneys, as inter- 
 est or dividends. 
 With any profit on sales of 
 L securities belonging to the fund. 
 
DISTINCTIVE CORPORATE ACCOUNTS 
 
 99 
 
 This account shows a credit balance and represents a 
 nominal liability. As the bonds for which the reserve was 
 created mature and are paid off, this account should be 
 transferred to Surplus or to some such permanent account 
 as "Permanent Reserve" account, or "Surplus Not for 
 Dividend Purposes." 
 
 A sinking fund reserve is seldom created nowadays, 
 since its mission is taken care of by other means and by the 
 maintenance of an adequate surplus (§ 82.) (See also 
 Chapter XXI.) 
 
 § gi. Sinking Fund Income 
 
 Debit: 
 
 With the transfer of income, 
 monthly or yearly, to Profit and 
 Loss or to Sinking Fund Re- 
 serve account. 
 
 Credit : 
 
 With any income in the shape 
 of interest or dividends received 
 from investment or deposit of 
 sinking fund moneys, as re- 
 ported by the sinking fund com- 
 mittee or trustee in charge of 
 the sinking fund. 
 
 Income from sinking fund moneys, whether invested in 
 securities or on deposit in the savings bank, is a profit to the 
 corporation, and is usually credited to some representative 
 account, as Sinking Fund Income, or Interest on Sinking 
 Fund. This account is in turn closed into Profit and Loss, 
 or Reserve for Sinking Fund in case the latter account is 
 being carried. (See also Chapter XXI.) 
 
 § 92, Good-will 
 
 Debit: 
 
 With the cost of good-will 
 acquired. 
 
 Credit : 
 
 With any portion of good- 
 will subsequently written off. 
 
 The balance of this accou^itjs_an intangible fixed asset. 
 
lOO 
 
 CORPORATION RECORDS AND ACCOUNTS 
 
 which ordinarily remains unchanged. Of late years, how- 
 ever, there has been a tendency to reduce the good-will from 
 time to time by charges against Profit and Loss or Surplus. 
 Good-will is a thing to be acquired, and not created 
 arbitrarily by a book entry. But because of the wide- 
 spread practice of overcapitalizing which has grown up in 
 corporate organizations, the Good- Will account is almost 
 invariably the difference between the true value of the assets 
 taken over and the value placed upon them by the board of 
 directors, or acquiesced in by them. In other words, a 
 Good- Will account is commonly used in the book accounts 
 as an offset to overcapitalization of th^ tangible assets. It 
 is then the difference between the actual property value of 
 the issued stock of a corporation and the par value of that 
 stock and, where this is excessive, may well be written down 
 as the value of the tangible assets increases. (See also 
 §§ 157-159-) 
 
 § 93. Investment in Stocks and Bonds of Other Companies 
 
 'Debit: 
 
 With the cost value of stocks 
 or bonds of other corporations. 
 
 Credit : 
 
 With the sale of stocks 
 bonds previously debited. 
 
 The account shows a debit balance and is an asset. Such 
 investments are usually made either for the purpose of in- 
 vesting surplus funds, or with the object of securing a con- 
 trolHng interest in some competing concern. Where both 
 stocks and bonds are owned, it is advisable to open two 
 separate accounts, or even to open an account for each kind, 
 stating the name of the company in connection therewith, 
 as "Stock of American Bridge Company," "U. S. Steel 
 Bonds," etc. (See also Chapter VIII.) 
 
Part III — Special Entries Relating to Transactions 
 in Stock and Dividends 
 
 CHAPTER VII 
 STOCK OF ORIGINAL ISSUE 
 
 § 94. General Conditions 
 
 In a partnership the investment consists of the cash or 
 property contributed by the partners. In a corporation it 
 consists of the proceeds of the stock sold. The interests of 
 partners are represented by their capital accounts, while the 
 interests of stockholders are represented by their stock 
 holdings, or on the corporate books by their respective 
 accounts in the stock ledger. In a partnership the profits 
 are usually credited to the proprietors' accounts and remain 
 there until drawn out according to agreement. The profits 
 of a corporation are credited once a year or oftener either to 
 Surplus account or to Undivided Profits account, until, when 
 declared as dividends, they are credited to Dividend account, 
 and are paid out as soon as the dividend is due. 
 
 The opening entries on the books of a corporation are 
 determined by the conditions under which the stock is sold, 
 and it is important that such entries should be complete and 
 clear. They sometimes fail in this and are obscure because 
 of insufficient data in the journal entries. This may be due 
 to carelessness or ignorance, or occasionally to the desire 
 of the incorporators to withhold certain facts regarding the 
 
 lor 
 
I02 SPECIAL ENTRIES 
 
 company's organization that might be used later to their 
 disadvantage. As to this, it can only be repeated that all 
 entries should tell the truth clearly and unmistakably; and 
 it may be added that, no matter how cunningly such entries 
 are devised, a competent accountant can always discover 
 their true meaning. 
 
 Entries covering the various conditions of stock issues, 
 as given in the present and the succeeding chapter, include 
 the following: 
 
 1. Entries for original issues of stock sold under dififer- 
 
 ent conditions. 
 
 2. Entries relating to stock donated to the treasury. 
 
 3. Entries where an original issue of stock or treasury 
 
 stock is given in direct payment of corporate 
 obligations. 
 
 4. Entries relating to the purchase and sale by the cor- 
 
 poration of its own stock (not an original issue), 
 and of other stocks. 
 
 The entries given are intended merely to show the debits 
 and credits directly resulting from the transactions con- 
 sidered. In practice all cash entries are, of course, recorded 
 in the cash book and are thence posted to the proper ledger 
 accounts; but throughout the present volume, for the sake 
 of clearness the entire transaction is, in each case, expressed 
 in the form of a journal entry regardless of whether it 
 belongs in the cash book or journal, or should be divided 
 between the two books. In this connection reference to the 
 rules laid down in the preceding chapter should be made. 
 
 Many transactions encountered in opening corporate 
 books admit of dififerent treatment ; and accordingly, in the 
 following chapters it will be found that transactions identical 
 in nature have been variously handled for purposes of 
 exemplifying the different methods. 
 
STOCK OF ORIGINAL ISSUE 103 
 
 § 95. Pro Forma Statement 
 
 The Davison Mercantile Company has been organized 
 with a capital stock of $200,000, divided into 2,000 shares 
 of $100 each. 1,500 shares vi^ere subscribed for at par,* 
 as follows : 
 
 A. W. Davison. ,. . 800 shares 
 
 George H. Brandon. .,. . . .,. 300 " 
 
 R. S. Cooke. . ,. . 200 " 
 
 James Robinson. . 200 " 
 
 All subscriptions have been paid in cash, excepting that 
 of Davison, who turned over merchandise on his subscrip- 
 tion to the value of $50,000 and paid the balance, $30,000, 
 in cash. The total cash paid into the treasury of the com- 
 pany is therefore $100,000. 
 
 Two plans of opening the books of the Davison Mer- 
 cantile Company are shown on the following pages. It is 
 to be noticed that, in opening the journal of a new corpora- 
 tion under any plan, the first entry should be a reasonably 
 complete statement of the conditions under which the cor- 
 poration is organized, somewhat similar to that given in 
 the two preceding paragraphs. This is desirable in order 
 to bring together into one clear, concise statement, all the 
 details of the incorporation required by the accountant, and 
 to relieve the opening entries of the detail otherwise neces- 
 sary. Without this pro forma entry as a basis, the explana- 
 tion of the following journal entries would be too meager. 
 
 § 96. Opening Entries — Stock Full-Paid (Plan i) 
 
 Cash $100,000 
 
 Merchandise 50,000 
 
 To Capital Stock $150,000 
 
 Cash and property received by the Company 
 
 *See subscription list (§ 55). 
 
I04 SPECIAL ENTRIES 
 
 in full payment of subscriptions to its 
 capital stock, as follows : 
 
 A. W. Davison 800 shares 
 
 George H. Brandon 300 " 
 
 R. S. Cooke 200 " 
 
 James Robinson 200 " 
 
 Merchandise to amount of $50,000 was 
 turned in by A. W. Davison as part pay- 
 ment of his subscription, the balance being 
 paid in cash. 
 
 This opening entry is the simplest possible. Incoming 
 cash and merchandise receive their proper debits, and capital 
 stock is credited with the amount subscribed and paid for. 
 In this case the cash item is entered in both the journal and 
 the cash book, as is not uncommon in opening entries. To 
 meet this condition, the general ledger item in the cash 
 book entry is checked to indicate that it is not to be posted, 
 and the cash item in the journal entry is likewise checked 
 and not posted. 
 
 § 97. Opening Entries — Stock Full-Paid (Plan 2) 
 
 As capital stock is credited with the amount of stock 
 sold, the amount unissued may be readily determined under 
 the entries of Plan i, by subtracting the amount sold from 
 the total capital stock. If it is thought preferable to have 
 an account which shows the amount of stock unissued, 
 Capital Stock is credited with the entire amount authorized, 
 and the part not issued is debited to a separate account called 
 "Unsubscribed" or "Unissued" Stock. Whether this is 
 worth while is for the accountant to determine. Under this 
 plan the opening entries of the Davison Mercantile Company 
 would be as given below. Where there is more than one 
 kind of stock issued, it is necessary, of course, to open an 
 account for each. 
 
STOCK OF ORIGINAL ISSUE 105 
 
 First Entry 
 
 Subscribed Stock $150,000 
 
 Unissued Stock 50,000 
 
 To Capital Stock $200,000 
 
 The Davison Mercantile Company is or- 
 ganized with a capital stock of $200,000, 
 
 divided into 2,000 shares of $100 each. 
 
 1,500 shares were subscribed for at par 
 
 by the incorporators as follows : 
 
 A. W. Davison 800 shares 
 
 George H. Brandon 300 " 
 
 R. S. Cooke 200 " 
 
 James Robinson 200 " 
 
 Unissued Stock is debited, as shown, with the entire 
 balance of the unsubscribed stock, which remains there until 
 sold or otherwise disposed of. 
 
 Frequently the entire authorized capital stock is first 
 debited to Unissued Stock account and credited to Capital 
 Stock Authorized account, thereby establishing an opening 
 entry on the books. In that case, the above entry would be 
 modified by a debit to Subscribed Stock, or Subscriptions, 
 and a credit to Unissued Stock, for $150,000; and when 
 this amount is entirely paid, another entry would be made 
 transferring the $150,000 from Capital Stock Authorized 
 to Capital Stock. This plan is in common use and is both 
 simple and adequate for opening corporate entries. 
 
 Second Entry 
 
 Cash $100,000 
 
 To Subscribed Stock $100,000 
 
 Payment of incorporators' subscriptions to 
 stock as follows : 
 
 A. W. Davison $30,000 
 
 George H. Brandon 30,000 
 
 R. S. Cooke 20,000 
 
 James Robinson 20,000 
 
lo6 SPECIAL ENTRIES 
 
 Third Entry 
 
 Merchandise ; $50,000 
 
 To Subscribed Stock $50,000 
 
 Payment of balance of Davison's subscrip- 
 tion to stock, paid in merchandise as per 
 agreement. 
 
 As will be noted, "Subscribed Stock" is debited with the 
 full amount subscribed ; and this having been paid, is credited 
 with the same amount; the account then balancing and 
 thus showing that all stock subscribed has been paid. Where 
 subscriptions are not paid at once, or where they are paid 
 in instalments, subscribers' accounts are sometimes opened 
 in the general ledger; but in practice it is better to open 
 individual accounts in a subsidiary ledger, letting "Sub- 
 scribed Stock" account in the general ledger represent all 
 these as a controlling account. When the number of sub- 
 scribers is large, it is sometimes advisable to record them 
 collectively in the ledger under "Subscriptions" account, as 
 explained in § 74. 
 
 § 98. Stock Sold on Instalments (Plan i) 
 
 In accordance with the data furnished by the subscrip- 
 tion list,* the Lancaster Cement Company was organized 
 July I, 1916, with a capital stock of $1,000,000, one-half of 
 which was subscribed for as follows : 
 
 Ronald Logan. .,. . 1,000 shares 
 
 Samuel Bennett 1,000 " 
 
 A. W. Thompson 1,000 " 
 
 J. H. Connor. 1,000 " 
 
 Oliver Ferguson 1,000 " 
 
 The terms of subscription are 10% down, 30% on July 
 21, and the remainder in two instalments as shown by the 
 agreement. 
 
 'See § s^ 
 
STOCK OF ORIGINAL ISSUE 
 
 107 
 
 The instalment book* shows the method of recording 
 calls for instalments. The first call was made by the trustee 
 July I ; the second presumably upon final incorporation. 
 
 As one-half of the stock was subscribed at the time of 
 organization, this amount may at once be entered upon the 
 books as an asset, since it represents definite obligations due 
 the company. Occasionally the Subscription account is 
 omitted and no formal entry of the subscriptions made in 
 the ledger beyond a credit to Capital Stock as each instal- 
 ment is paid. In that case the entries given below would 
 be omitted and only cash entries made, Cash being debited 
 and Capital Stock credited. Sometimes the amount sub- 
 scribed is credited to Capital Stock Subscribed account and 
 when paid transferred to Capital Stock account. 
 
 First Entry j^j^ j_ j^jg 
 
 Subscriptions $500,000 
 
 Unissued Stock 500,000 
 
 To Capital Stock $i,ooo,ooc 
 
 The Lancaster Cement Company was or- 
 ganized on this date with capital stock 
 
 of $1,000,000, divided into 10,000 shares 
 
 of the par value of $100 each, one-half 
 
 of which has been subscribed as per the 
 
 following list. Terms of subscription 
 
 are 10% on July I, 1916, 30% on July 
 
 21, and the remainder in two instal- 
 ments as per agreement. 
 
 Ronald Logan 1,000 shares 
 
 Samuel Bennett 1,000 
 
 A. W. Thompson 1,000 " 
 
 J. H. Connor 1,000 " 
 
 Oliver Ferguson 1,000 " 
 
 5,000 " 
 
 Unissued 5.o°o " 
 
 Total 10,000 * 
 
 •See { 58. 
 
Io8 SPECIAL ENTRIES 
 
 The amount subscribed being now entered upon the 
 books, the next step is to make entries for the instalments 
 as they come due, the Instalment account being debited and 
 Subscriptions credited. The accounts of subscribers must 
 be shown either in the subscription ledger, the instalment 
 register, or the general ledger. Sometimes they are placed 
 in the back of the general ledger, but if they are numerous 
 it is advisable to place them in a separate book. Of course, 
 the total of the balances of these accounts must agree with 
 the balance of the Subscriptions account in the general 
 ledger, which is the controlling account. If the number 
 of subscriber? is large, an instalment sheet is made out, as 
 shown in § 58. 
 
 Second Entry j„,y j^ j^jg 
 
 Instalment No. i $50,000 
 
 To Subscriptions $50,000 
 
 First instalment for 10% of $500,000 subscrip- 
 tions, as per subscription list and instalment 
 book. 
 
 As the payments are made they are credited to the in- 
 dividual accounts and also to Subscriptions account in the 
 general ledger, or to the Instalment account when that is 
 used. The latter plan is shown below, though instead of 
 opening an account for each instalment, an account for 
 "Subscribers" might be opened each time an instalment is 
 due, as shown in § 74. 
 
 The following entries assume that all the subscribers 
 pay the instalment. If this is not the case, the actual amount 
 received will be entered, leaving a balance due in Instalment 
 No. I. 
 
 Third Entry j„,y ^^ j^^g 
 
 Cash $50,000 
 
 To Instalment No. I $50,000 
 
 For payment of first instalment of 10%. 
 
STOCK OF ORIGINAL ISSUE 
 
 109 
 
 Fourth Entry 
 
 July 21, 1916 
 
 Instalment No. 2 $150,000 
 
 To Subscriptions $150,000 
 
 For second call, 30% on total subscriptions 
 of $500,000. 
 
 Fifth Entry 
 
 July 21, 1916 
 
 Cash $150,000 
 
 To Instalment No. 2 $150,000 
 
 For payment of second instalment of 30%. 
 
 § 99. Stock Sold on Instalments (Plan i) — Ledger Accounts 
 
 The general ledger accounts resulting from the fore- 
 going entries are as follows : 
 
 Capital Stock 
 
 1916 
 
 July I Authorized.. $1,000,000.00 
 
 Subscriptions 
 
 1916 
 
 July I Capital Stock. . $500,000.00 
 
 1916 
 
 July I Instalment No. I $50,000.00 
 " 21 Instalment No. 2 150,000.00 
 
 Unissued Stock 
 
 1916 
 
 July I Capital Stock.. $500,000.00 
 
 Instalment No. i — 10% 
 
 1916 
 
 July I Subscriptions . . $50,000.00 
 
 1916 
 
 July I Cash $50,000.00 
 
 (If not all paid 
 
 a balance will 
 
 result.) 
 
no SPECIAL ENTRIES 
 
 Instalment No. 2 — 30% 
 
 1916 
 
 July 21 Subscriptions $150,000.00 
 
 1916 
 
 July 21 Cash $150,000.00 
 
 (If not all paid 
 
 a balance will 
 
 result.) 
 
 Cash 
 
 I9I6 
 
 July r Instalment No. i $50,000.00 
 " 21 Instalment No. 2 150,000.00 
 
 If the names are not too numerous or the instalments 
 too frequent, each instalment account might include on the 
 debit side the names of subscribers and the amount due from 
 each ; though this is not necessary, as all this information is 
 clearly set forth on the instalment sheet or book. 
 
 § 100. Stock Sold on Instalments (Plan 2) 
 
 In this case Capital Stock account exhibits only the 
 capital actually contributed, being increased for each instal- 
 ment paid in, and also for any subsequent sales of stock of 
 original issue. The entry of unissued stock is manifestly 
 out of the question under this plan of entry, since it is 
 neither an asset nor a liability. 
 
 First Entry — First Instalment 
 
 July I, 1916 
 
 Subscribers $50,000 
 
 To Capital Stock $50,000 
 
 The Lancaster Cement Company was or- 
 ganized on this date with capital stock 
 of $1,000,000, divided into 10,000 shares 
 of the par value of $100 each, one-half 
 of which has been subscribed as per the 
 list given below. Terms of subscription 
 are 10% on July i, 1916, 30% on July 
 
STOCK OF ORIGINAL ISSUE m 
 
 21, and the remainder in two instalments 
 as per agreement. First instalment, io% 
 on $500,000, now due. 
 
 (List of subscribers) 
 
 Second Entry 
 
 July I, 1916 
 
 Cash $50,000 
 
 To Subscribers $50,000 
 
 For payment of first instalment. 
 
 Third Entry — Second Instalment 
 
 July 21, 1916 
 
 Subscribers $150,000 
 
 To Capital Stock $150,000 
 
 For second call, 30% of $500,000. 
 
 Fourth Entry 
 
 July 21, 1916 
 
 Cash $150,000 
 
 To Subscribers . , $150,000 
 
 Payment of second instalment of 30%. 
 
 If thought advisable, the journal entries might be 
 omitted and, the Subscribers' account being eliminated, only 
 cash book entries be made, crediting Capital Stock ; but this 
 does not permit the full explanations which can be so con- 
 veniently placed in the journal. 
 
 § loi. Sale of Stock After Organization 
 
 The statutes of the various states usually require that 
 when a company is organized some portion of its stock 
 shall be issued, or at least subscribed for, before active 
 operations are begun. Some of the capital stock must, of 
 course, be sold before the company can exist as an active 
 business organization; but beyond these statutory require- 
 ments, the whole matter is one for the corporation itself to 
 
112 SPECIAL ENTRIES 
 
 decide, and the capital stoc]< may be all issued at the time 
 of organization or part be held for future use in case the 
 immediate needs of the company are provided for. This 
 unsubscribed or unissued stock is sometimes (though in- 
 appropriately) called "treasury stock" (§ 27). 
 
 Assuming that on August i, 1916, $100,000 of the un- 
 issued stock of the Lancaster Cement Company has been 
 sold at par to Frank K. Brennan, one-half for cash and one- 
 half in 30 days, the following entries would be required : 
 
 August I, 1916 
 
 Subscriptions (or Frank K. Brennan) $100,000 
 
 To Unissued Stock $100,000 
 
 The Lancaster Cement Company has this 
 day sold to Frank K. Brennan $100,000 
 of its unissued stock, one-half payable 
 in cash and the balance in 30 days. 
 
 August I, 1916 
 
 Cash $50,000 
 
 To Subscriptions (or Frank K. Brennan) $50,000 
 
 First payment of 50% on Brennan's stock 
 sabscription. 
 
 August 31, 1916 
 
 Cash $50,000 
 
 To Subscriptions (or Frank K. Brennan) $50,000 
 
 Final payment of 50% on Brennan's sub- 
 scription to $100,000 of stock. 
 
 It is apparent that th« method of recording entries in 
 this case will be governed by the original plan of opening 
 entries, as the various entries should, of course, harmonize. 
 
 § 102. Stock Sold Below Par 
 
 As already stated, when stock on its original issue is 
 aold below par, it may involve the ourchaser in liability for 
 
STOCK OF ORIGINAL ISSUE 113 
 
 the unpaid balance. (See § 26.) Occasionally, however, 
 stock is sold on original issue at less than par regardless of 
 this liability. This may be all right if not prohibited by the 
 state law ; but it is obvious that the liability for the unpaid 
 balance still attaches to such stock so long as it is in the 
 hands of the original purchasers or those who purchase 
 from them with knowledge of the conditions. 
 
 To illustrate the entries in such case, assume that on 
 August 15, 1916, $100,000 of the unissued stock of the 
 Lancaster Cement Company is sold to Henry Jones for 
 $80,000, payable $40,000 on date of purchase, and the 
 balance in one month. The entries are then as follows : 
 
 August 15, 1916 
 
 Henry Jones $80,000 
 
 Discount on Stock 20,000 
 
 To Unissued Stock $100,000 
 
 For sale of 1,000 shares of unissued stock 
 to Henry Jones at $80 per share, payable 
 $40,000 down and the balance in one 
 month. 
 
 August 15, 1916 
 
 Cash $40,000 
 
 To Henry Jones $40,000 
 
 First payment on subscription to 1,000 
 shares of stock. 
 
 September 15, 1916 
 
 Cash $40,000 
 
 To Henry Jones $40,000 
 
 Balance of payment on subscription to 1,000 
 shares of stock. 
 
 The Stock Discount account now remains open upon the 
 books and should either be closed into Profit and Loss 
 during the year, or spread over a term of years; or the 
 
114 
 
 SPECIAL ENTRIES 
 
 directors may appropriate enough of the surplus profits in 
 the form of a dividend to wipe it off entirely. It is prudent 
 in any case to get rid of it as soon as possible so as to 
 remove from the records an undesirable item. In the fol- 
 lowing entry it is closed into Profit and Loss. 
 
 Profit and Loss $20,000 
 
 To Discount on Stock $20,000 
 
 To close Stock Discount account into Profit 
 and Loss — entry made by order of the 
 board of directors. 
 
 The above entry will suffice, perhaps, in case the profits 
 are ample to take care of it; but, if by this disposition a 
 deficit is created in the Profit and Loss account, nothing has 
 been gained by the transfer. 
 
 § 103. Stock Sold Above Par 
 
 It is but seldom that stock in a newly organized com- 
 pany sells for more than its face value. Occasionally, how- 
 ever, where the new company takes over valuable property, 
 or its organizers are men known to be successful and its 
 purpose is attractive, subscriptions are taken at more than 
 par. 
 
 After a company has been organized and has achieved 
 success, its stock, if offered for sale, is usually for the pur- 
 pose of raising money to extend the business, purchase new 
 properties, or do something else distinctly advantageous t& 
 the corporation. In such cases the stock is frequently worth 
 more than par, and the right of purchase is usually offered 
 first to the stockholders, who are privileged to buy all or 
 part of the issue at par or at a given figure above par. Such 
 privileges have a distinct value, and it is not unusual for 
 rights of this kind in the larger corporations to be traded in 
 freely. 
 
 When a corporation sells its stock at a premium, the 
 
STOCK OF ORIGINAL ISSUE nj 
 
 proceeds in excess of the par value are credited either to 
 Premium account or to Surplus account, and represent 
 profits. Speaking generally, however, it would be of doubt- 
 ful wisdom for the directors to distribute such premiums in 
 the form of dividends, even though they may have the 
 technical authority to do so. 
 
 To illustrate the accounting treatment of premiums, 
 assume that $100,000 face value of the unsubscribed stock of 
 the Lancaster Cement Company has been sold November i, 
 1916, to George Bowers for $120,000, payable $50,000 at 
 date of purchase and the balance in one month. The entries 
 for the transaction would be as follows : 
 
 November i, 1916 
 
 George Bowers (or Subscriptions) $120,000 
 
 To Unissued Stock $100,000 
 
 " Stock Premium 20,000 
 
 The Lancaster Cement Company has this 
 day sold to George Bowers $100,000 of its 
 unissued stock for $120,000; $50,000 is 
 payable on the day of purchase, and the 
 balance in 30 days. 
 
 November i, 1916 
 
 Cash $50,000 
 
 To George Bowers $50,000 
 
 First payment on account of subscription 
 to stock. 
 
 December i, 1916 
 
 Cash $70,000 
 
 To George Bowers $70,000 
 
 Balance due on account of subscription to 
 stock. 
 
 The premium may stand in the Stock Premium account, 
 or be transferred to Surplus or to a permanent reserve 
 account ; or it might be reserved for the extinguishment of 
 some doubtful or wasting asset, as good-will, plant, or some 
 
Il6 SPECIAL ENTRIES 
 
 machine or patent right. In case it were transferred, Stock 
 Premium account would, of course, be debited and the 
 account to which it is transferred be credited. 
 
 § 104. Stock Issued at a Premium to Create a Surplus 
 
 In the previous illustration the stock of an established 
 company was sold at a premium. It is not unusual for a 
 corporation to sell its stock above par at the time of incor- 
 poration, for the purpose of creating a surplus — a practice 
 which is usually followed by insurance companies, banks, 
 trust companies, and other financial institutions. A com- 
 pany with a substantial surplus is more likely to possess the 
 confidence of the public than one that has none; and by 
 selling stock at a premium a more or less substantial surplus 
 or margin is provided at the outset, which may be drawn 
 upon to meet organization expenses, and carry the company 
 and give it solidity until it becomes firmly established. 
 
 When stock is thus sold at a premium, the entries are 
 the same as in any other sale above par. For example, if a 
 share of stock is sold for $150, the par value, $100, might be 
 credited to Unissued Stock or Capital Stock, and the $50 
 to Premium or Surplus. 
 
 There are material advantages in this plan of selling 
 stock, especially in the case of a national bank, where a 
 double liability is attached by statute to every share of its 
 stock. If the stock is sold at a premium sufficient to meet 
 the statutory liability, not only is this liability provided 
 against, but the bank is given a substantial and desirable 
 addition to its working capital. 
 
 In any such case the premium is credited to Surplus. 
 Thus, assume that the Second National Bank of Shawmut 
 has been incorporated with a capital stock of $250,000, all 
 of which has been sold at a premium of 50%. The book 
 entry would appear as follows : 
 
STOCK OF ORIGINAL ISSUE u^ 
 
 Cash $375,000 
 
 To Capital Stock $250,000 
 
 " Surplus 125,000 
 
 The Second National Bank of Shawmut in- 
 corporated with capital stock of $250,000, 
 has on this date sold the same at a 
 premium of 50%. 
 
 This contributed surplus remains on the books as a 
 credit to Surplus account. 
 
 § 105. Payment of Salaries in Stock 
 
 Not infrequently the salaries of managers and officers 
 of corporations are paid wholly or partly in stock. The 
 procedure is not improper under suitable conditions, and the 
 entries are simple. It is in effect a payment of salaries in 
 cash which is subsequently returned as pa)rment for stock. 
 Such stock salaries might be paid monthly if so agreed, but 
 even when based on monthly instalments, they are usually 
 allowed to accumulate till the end of the year or longer, 
 before an issue of stock is made. In any case, a debit will 
 be made to the proper salary account or else to expense 
 account, and a credit of the full face value of stock issued 
 made to Capital Stock, Unissued Stock, or Treasury Stock, 
 according to the conditions and the method of entry. If 
 the stock is not taken at its par value, any excess over par 
 is credited to Surplus, or, if taken below par, the difference 
 between this price and par is debited to Surplus. 
 
 § 106. Payment of Commissions in Stock 
 
 Commissions paid in stock are of common occurrence 
 in the promotion or organization of a company, and they 
 create no unusual bookkeeping entries. If paid by issue of 
 original stock. Commission account (or such other expense 
 account as commissions may be charged to) is debited, and 
 Capital Stock or Unissued Stock account is credited; pay- 
 
Il8 SPECIAL ENTRIES 
 
 ments from treasury stock are similarly debited and are 
 credited to "Treasury Stock." Indeed, there is no objection 
 to the liquidation of any debts by stock, so long as the 
 capital is not impaired by so doing, i.e., so long as a fair 
 equivalent is received for the issued stock. An existing 
 mortgage or even a loan or current debt might be cancelled 
 by means of a stock issue, provided the creditor were willing 
 to accept it as a substitute for cash. Dividends are fre- 
 quently paid in stock, such dividends being known as "stock 
 dividends" (§ 131). 
 
CHAPTER VIII 
 
 TREASURY STOCK AND STOCK OF 
 OTHER COMPANIES 
 
 Transactions in Treasury Stock 
 
 § 107. Donated Stock 
 
 In speculative companies, donations of stock to the 
 treasury (see § 27) are customary, and give rise to some 
 of the most unsatisfactory entries of corporate bookkeeping. 
 
 Any donation to a commercial undertaking is anomalous, 
 but when it takes the form of stock just issued (and hence 
 of unknown value) by the very corporation to which it 
 is donated, the transaction is entirely outside the realm of 
 ordinary business and its proper entry is difficult. The 
 object of such a donation of stock has already been stated 
 (§ 27). The newly organized corporation requires stock 
 which can be sold below par without carrying with it a 
 liability. Treasury stock supplies this need, and so long as 
 the laws relating to full-paid stock exist in their present 
 form, so long will transactions in donated stock continue.* 
 
 When a corporation reacquires its own stock, whether 
 by donation or purchase, this stock becomes, from the 
 accounting standpoint, an asset, and is debited to "Treasury 
 Stock" at the price paid if the stock is purchased, or at its 
 estimated value if it is donated. The corresponding credit 
 in the case of stock purchased for cash is, of course, to 
 Cash account, but in the case of donated stock the account 
 
 *Under the New York law permitting corporations to issue stock without par 
 value, stock so issued may be sold at any desired price without liability, 
 
 119 
 
I20 ■ SPECIAL ENTRIES 
 
 to be credited will vary according to the method of record 
 adopted. 
 
 § io8. Donated Stock — First Method of Entry 
 
 Under this method, if a corporation is organized with 
 a capital stock of $75,000, all of which is issued in payment 
 for property, and stock of the face value of $10,000 is 
 returned to the company to be sold to secure operating 
 capital, the entries, assuming the stock to be salable at par, 
 will be as follows : 
 
 Treasury Stock $10,000 
 
 To Donation Account (or Working Capital 
 
 Donated) $10,000 
 
 Stock donation of 100 shares to be sold to pro- 
 vide working capital. 
 
 When the stock is sold, the following entry is required : 
 
 Cash $10,000 
 
 To Treasury Stock $10,000 
 
 For 100 shares of treasury stock sold at $100 
 per share. 
 
 The "Donation" account is then closed into Surplus 
 account as follows : 
 
 Donation Account $10,000 
 
 To Surplus $10,000 
 
 Closing Donation account into Surplus. 
 
 This gives the corporation an apparent profit of $10,000. 
 Whether such a surplus is a real profit applicable to divi- 
 dends must be decided, according to conditions, by the 
 directors of the particular corporation. As a matter of fact, 
 such a surplus is practically taken out of capital and its 
 use for dividends is of doubtful propriety. If the stock was 
 donated to provide working capital, the use of its proceeds 
 for dividends would be manifestly improper. 
 
TREASURY STOCK 121 
 
 Donated stock can rarely be sold at par, and it is entered 
 at the time it is received, at such price as the corporate 
 authorities think it will produce. Thus, in the case in- 
 stanced, if instead of $ioo per share the stock were expected 
 to bring but $50 per share, it would be entered upon the 
 corporate books as follows: 
 
 Treasury Stock $5,ooo 
 
 To Donation Account $S,ooo 
 
 For 100 shares of stock donated to treasury 
 for the purpose of securing working capital; 
 estimated value, $50 per share. 
 
 When the stock is sold at the estimated price, the other 
 entries are similar to those given. Cash being debited, Treas- 
 ury Stock credited with the amount received, and Donation 
 account closed into Surplus. If, however, the stock when 
 sold produced a larger price than was expected, say $60 
 per share, the cash entry would be as follows : 
 
 Cash $6,000 
 
 To Treasury Stock $S,ooo 
 
 " Donation Account 1,000 
 
 For 100 shares of stock donated to treasury and 
 sold at $60 per share. 
 
 This gives a total credit in Donation account of $6,000, 
 which is the amount actually realized on the donated stock. 
 Donation account is then closed into Surplus by a journal 
 entry. 
 
 If, on the other hand, the treasury stock sold at less 
 than the estimated value, say, for instance, $40 per share, 
 the cash entry would be as follows : 
 
 Cash $4,000 
 
 To Treasury Stock $4,000 
 
 For 100 shares donated to treasury and sold at 
 $40 per share. 
 
122 SPECIAL ENTRIES 
 
 The difference between the estimated value and sale 
 price of the stock is then debited to Donation account as 
 
 follows : 
 
 Donation Account $i,ooo 
 
 To Treasury Stock $i,ooo 
 
 For 100 shares of stock donated to treasury and 
 entered at $50 per share, but sold at $40 per 
 share. 
 
 This shows a credit balance in Donation account of 
 $4,000, which is the real value of the stock donated, and the 
 account is then closed into Surplus. The same end might, 
 of course, be attained by the single entry which follows : 
 
 Donation Account $5,ooo 
 
 To Surplus $4,000 
 
 " Treasury Stock 1,000 
 
 § 109. Donated Stock — Second Method of Entry 
 
 The objection to the first method of recording donated 
 stock lies in the fact that it shows an apparent profit before 
 active corporate operations have begun, or even before the 
 company has become well established. At this stage, when 
 the corporation's sole assets are the property taken over 
 and the stock which has been donated to it (the value of 
 which really rests upon this same property), any profits 
 shown could hardly be other than fictitious; certainly not 
 ttnless the property for which the stock was originally is- 
 sued was actually worth as much or more than the face 
 value of the stock, in which case a real profit from donated 
 stock would result. In practice, the value of property taken 
 over by a corporation is seldom conservatively estimated, 
 and the apparent profits from donated stock are therefore 
 usually fictitious and misleading. 
 
 Under the second method of entry, donated stock is 
 considered as a concession on the price of the property for 
 
TREASURY STOCK 
 
 123 
 
 which it was issued, and the value of the returned stock is 
 accordingly credited to this same property account. This 
 reduces the book cost of the property to the corporation, 
 but does not show the immediate and usually factitious profit 
 that is shown by the first method of entry. The method is 
 therefore more conservative than the one first presented 
 and is to be preferred, especially in cases where the property 
 was overvalued at the time of incorporation. 
 
 Thus, if a corporation is formed with a capital stock 
 of $100,000 and this entire amount is issued in payment for 
 patent rights, and $25,000 face value of this stock is then 
 returned to the corporation, the entries under the second 
 method would be as follows : 
 
 Patent Rights $100,000 
 
 To Capital Stock $100,000 
 
 Entire capital stock issued in exchange for 
 patent rights. See page ... of minute 
 book. 
 
 When the donation of $25,000 face value of the stock 
 is received, it is credited to "Patent Rights" at the price at 
 which it is expected to be sold. Thus, if the $25,000 face 
 value of stock returned was expected to bring $50 per share, 
 the entry would be as follows : 
 
 Treasury Stock $12,500 
 
 To Patent Rights $12,500 
 
 For 250 shares of stock valued at $50 per 
 share, donated to treasury for purposes of 
 the corporation. 
 
 If this stock is sold at the price expected, the cash entry 
 would show the following debits and credits : 
 
 Cash $12,500 
 
 To Treasury Stock $12,500 
 
 For 250 shares of treasury stock sold at $50 
 per share. 
 
124 
 
 SPECIAL ENTRIES 
 
 If, however, the stock should sell at more than $50 
 per share, say $60 per share, the excess must go to Patent 
 Rights in order to show the true rebate or concession made 
 on the price.. The entry would therefore be as follows : 
 
 Cash $15,000 
 
 To Treasury Stock $12,500 
 
 " Patent Rights 2,500 
 
 For 250 shares of treasury stock sold at $60 
 per share. Originally credited to Patent 
 Rights at $50 per share. 
 
 Likewise, if the stock sold at less than $50 per share, 
 say $40, the deficiency must be debited to Patent Rights, 
 as shown in the following entry : 
 
 Cash $10,000 
 
 Patent Rights 2,500 
 
 To Treasury Stock $12,500 
 
 This reduces the net credit on patent rights to the 
 amount actually realized from the sale of the treasury stock. 
 
 The advantage of the second method of handling do- 
 nated stock lies in its conservative presentation of the 
 conditions. Under the first method, as already stated, a 
 profit is shown before the corporation has even begun its 
 active operations. Under the second method, no immediate 
 profit is shown as a result of the stock donation. Perhaps 
 at some latei" date when the books are balanced, an inventory 
 of the property will show a value in excess of its cost; this 
 gain is real, and might then — unless conservative account- 
 ing practice prohibits — properly be transferred to Surplus. 
 
 An objection sometimes urged against the second method 
 of entering donated stock is the fact that the entry may, by 
 inference, cast some reflection upon the directors' usual 
 statement in their resolution of acceptance, that the property 
 "is of the reasonable value of the stock issued therefor." 
 
TREASURY STOCK 
 
 125 
 
 This is a matter for the treasurer of the corporation and 
 the directors to consider and decide for themselves. The 
 objection has no legal weight. 
 
 §110. Bonus Paid in Stock 
 
 Stock given in bonuses is issued without any direct con- 
 sideration, and as an extra inducement to purchasers. Such 
 issues are not necessarily improper as they usually promote 
 the sale of bonds, preferred stock, or other securities, and 
 thus directly benefit the corporation. The particular stock 
 given as a bonus, however, apparently goes without direct 
 consideration, and will, as a matter of course, be taken 
 from treasury stock. A "Bonus" account is opened, and the 
 entries are made on the basis of the price at which the 
 stock was debited to Treasury Stock account. 
 
 Thus, if $10,000 face value of common stock is given 
 from treasury stock as a bonus to the purchasers of a like 
 amount of preferred stock, and this common stock had been 
 debited to Treasury Stock account at 50 cents on the dollar, 
 the entry would be as follows : 
 
 Bonus $5,000 
 
 To Treasury Stock $5,000 
 
 For 100 shares of stock originally entered at $50 
 per share, given as a bonus with 100 shares of 
 preferred stock sold at par. 
 
 Bonus account would thereafter be treated as part of 
 the organization expenses, which are generally written off 
 over a period of years. 
 
 Original stock might be issued as bonus stock so long 
 as no one offers objection, but, since it would not in that 
 case be full-paid stock, the holders would remain liable to 
 corporate creditors for the full face value in case of in- 
 solvency. In any such case the outgoing stock would be 
 
126 SPECIAL ENTRIES 
 
 debited to Bonus account and credited to Capital Stock or 
 Unissued Stock, as the case might be. 
 
 § III. Purchase and Sale of Corporatioh's Own Stock 
 
 A corporation may issue its capital stock in exchange 
 for cash, property, or services. It does not, however, as a 
 rule have the right to purchase back such stock without 
 statutory or special permission from the state in which 
 it was incorporated; and even then, charter authority or 
 sanction of the stockholders may be required. This is so 
 because the purchase of its own stock by a corporation is 
 practically a reduction of its capital stock, and such a 
 reduction can be effected only by permission of the state and 
 by following the legal procedure prescribed. 
 
 There are many instances of companies having purchased 
 their own stock, but the authority under which it is done 
 can be determined only after an inspection of the statutes 
 of the particular state and the charter and by-laws of the 
 particular corporation. Sometimes an issue of preferred 
 stock provides for its redemption or repurchase at specified 
 dates or periods, or at the option of the company officials. 
 When such an issue is contemplated, a careful investigation 
 should be made to determine whether the proposed redemp- 
 tion is legally possible. 
 
 When a company purchases its own stock, it is not 
 usually as an investment, but in pursuance of some pre- 
 arranged plan or for the protection of its own interests in 
 some way. Stock so secured should be charged to Treasury 
 Stock. Stock bought back does not have the voting right 
 while in possession of the corporation, nor may it participate 
 in dividends. 
 
 Stock which has come back into the possession of a 
 company may, as a rule, be sold again on the open market. 
 As to whether or not it may be sold at a discount depends 
 
TREASURY STOCK 
 
 127 
 
 upon circumstances. It is apparent that it may not be resold 
 for less than it cost if such sale would impair the capital. 
 This would not, of course, be the case with stocky which 
 has already been issued full-paid and then donated back 
 to the company. Stock cancelled for non-payment of in- 
 stalments may be resold, but the selling price should be high 
 enough to bring, in connection with any payments already 
 received, at least the par value of the shares involved. 
 
 § 112. Entries for Purchase and Sale of Corporation's Own 
 Stock 
 
 To illustrate the accounting treatment of transactions 
 in a company's own stock, suppose that a company has 
 purchased 500 shares of its full-paid stock for $45,000, and 
 that after holding it for a time, 250 shares have been resold 
 for $25,500 (200 shares for $20,000, and 50 shares for 
 $5,500). Later the company made two sales of 125 shares 
 each at $90, closing out the balance of the stock. The 
 entries are as follows: 
 
 First Entry 
 
 Treasury Stock $45,000 
 
 To Cash $45,000 
 
 For purchase of 500 shares full-paid stock of 
 this Company at $90 per share. 
 
 Second Entry 
 
 Cash $25,500 
 
 To Treasury Stock $25,500 
 
 For the sale of 250 shares of treasury stock. 
 200 shares @ IDO and 50 shares @ no. 
 
 The third and fourth entries recording the further sales 
 would be similar to the second entry, varying only as to 
 amounts. 
 
128 SPECIAL ENTRIES 
 
 Fifth Entry 
 
 Treasury Stock $3,ooo 
 
 To Profit and Loss (or Surplus) $3.00° 
 
 For profits realized on the purchase and sale of 
 treasury stock. 
 
 Profits of this nature, while technically available for 
 dividends, are preferably credited to Surplus or held in 
 some special reserve account. 
 
 Transactions in Stock of Other Corporations 
 
 § 113. Purchase and Sale of Stock of Other Corporations 
 
 A corporation may acquire the stock of another corpora- 
 tion only when it is expressly authorized to do so by its 
 charter or by the statutes of the state. But cases have fre- 
 quently arisen in which the circumstances were such that 
 the courts have sanctioned such purchases — as, for instance, 
 stock held as security for a debt and bought in — even 
 though both the law and the charter of the corporation were 
 silent in this respect. Permission to purchase stocks of 
 other companies is given by the statutes of several of the 
 states, but it is usually required that the stock thus pur- 
 chased shall not be that of a competing company. In some 
 cases it is left to the incorporators themselves to define in 
 the charter to what extent securities of other companies 
 may be held or purchased. In New York, power is granted 
 corporations to hold stock in similar or related corporations 
 by proper charter provisions; and when one corporation 
 holds stock in another, its directors or officers are eligible 
 as directors in the other corporation but they cannot vote 
 the stock of any competing corporation. Similar power 
 is given in New Jersey, Pennsylvania, Illinois, and many 
 other states, while in some states such purchase of stock is 
 prohibited. New Jersey corporations are given unrestricted 
 authority to purchase stocks of other corporations. 
 
STOCK OF OTHER CORPORATIONS 129 
 
 In some states "holding companies" may be organized, 
 whose purpose is not to carry on any active business, but 
 merely to purchase and hold the stocks, bonds, and securities 
 of other corporations, the same as individuals might. The 
 "holding company" secures a controlling interest in its sub- 
 sidiary companies, which has the effect of merging or 
 consolidating all of the separate operating companies under 
 one management, and it derives its revenue entirely from 
 the dividends on the stock of these underlying companies. 
 The United States Steel Corporation is a holding company, 
 and owns the stock of various underlying companies 
 which in turn are known as, "operating companies." (See 
 Chapter XXXI.) 
 
 When stock of another corporation is purchased, it is 
 not treasury stock of the corporation which acquires it, but 
 an investment, and goes into an entirely separate and dis- 
 tinct account headed "Investments," or "Stocks of Other 
 Companies," or some other distinguishing caption. If bonds 
 are included in the purchase, the account might be headed 
 "Securities of Other Companies," or else "Stocks and Bonds 
 of Other Companies" ; or separate accounts might be opened 
 for each class of security or even for each security. Such 
 investments are usually entered up at the cost price, and, 
 when sold, at the selling price. The profit or loss sustained 
 as a result of the sale will, of course, be closed into the 
 Profit and Loss account. 
 
 § 114. Entries for Purchase and Sale of Stock of Other 
 Corporations 
 
 To illustrate the entries involved, assume that the Ameri- 
 can Trading Company has purchased $300,000 par value of 
 stock of the Baldwin Mercantile Company for $250,000. 
 It later disposes of $40,000 face value of this stock for 
 $50,000, thereby netting a profit of $10,000. Later the 
 
130 SPECIAL ENTRIES 
 
 Baldwin Mercantile Company declares a 6% dividend. The 
 following entries are required for proper record of the 
 transactions in stock: 
 
 Stocks of Other Companies (or "Stock of Bald- 
 win Mercantile Company") $250,000 
 
 To Cash $250,000 
 
 For purchase of $300,000 par value of stock 
 of the Baldwin Mercantile Company. 
 
 Cash $50,000 
 
 To Stocks of Other Companies $50,000 
 
 For sale of $40,000 par value of stock of 
 the Baldwin Mercantile Company. 
 
 Stocks of Other Companies $10,000 
 
 To Profit and Loss (or Surplus) $10,000 
 
 For profit on sale of $40,000 of stock in 
 Baldwin Mercantile Company. 
 
 The second and third entries could easily be combined. 
 When the 6% dividend is declared by the underlying tom- 
 pany and paid over to the holding company, an entry similar 
 to the following is required : 
 
 Cash $15,600 
 
 To Income Account (or*"Dividends on In- 
 vestments") $15,600 
 
 For dividend of 6% on $260,000 par of stock 
 of the Baldwin Mercantile Company. 
 
 § 115. Entries When Stock Is Exchanged for Stock of 
 Other Corporations 
 
 In cases where the purchase of securities in other cor- 
 porations is sanctioned by statute or by charter, the manner 
 of making payment is usually left to the contracting parties. 
 The stock of another company, instead of being purchased 
 for cash, might therefore, if the state laws permit, be ob- 
 
STOCK OF OTHER CORPORATIONS 131 
 
 tained in exchange for the stock of the acquiring company. 
 To illustrate the entries when this is done, assume that 
 the Delaware Manufacturing Company has been organized 
 with a capital stock of $1,000,000, comprising 10,000 shares 
 of the par value of $100 each, of which 1,000 shares have 
 been subscribed and paid for in cash. Additional stock 
 of the company has been disposed of as follows : 
 
 1. 3,000 shares in exchange for 2,500 shares of stock, 
 
 $100 each, of the Hudson Manufacturing Com- 
 pany. 
 
 2. 1,000 shares in exchange for 1,200 shares in the 
 
 Superior Textile Company. 
 
 3. 1,000 shares in exchange for 1,000 shares in the 
 
 Brown Cloth Company. 
 
 4. 1,000 shares in exchange for 500 shares of the 
 
 Southern Cotton Company. 
 
 First Entry 
 
 Unissued Stock $1,000,000 
 
 To Capital Stock $1,000,000 
 
 The Delaware Manufacturing Company 
 is incorporated with an authorized 
 capital stock of $1,000,000. 
 
 Second Entry 
 
 Cash $100,000 
 
 To Unissued Stock $100,000 
 
 For 1,000 shares of stock sold for cash to 
 the following persons : 
 
 (Names stated) 
 
 Third Entry 
 
 Stocks of Other Companies $300,000 
 
 To Unissued Stock $300,000 
 
 For purchase of 2,500 shares of the 
 Hudson Manufacturing Company in 
 exchange for 3,000 shares of this Com- 
 pany. , 
 
132 
 
 SPECIAL ENTRIES 
 
 Fourth Entry 
 
 Stocks of Other Companies $100,000 
 
 To Unissued Stock $100,000 
 
 In exchange for 1,200 shares of the 
 Superior Textile Company. 
 
 Fifth Entry 
 
 Stocks of Other Companies $100,000 
 
 To Unissued Stock $100,000 
 
 In exchange for 1,000 shares of the 
 Brown Cloth Company. 
 
 Sixth Entry 
 
 Stocks of Other Companies $100,000 
 
 To Unissued Stock $100,000 
 
 In exchange for 500 shares of the 
 Southern Cotton Company. 
 
 Entries 3 to 6 inclusive tnight easily be consolidated. It 
 will be seen that the stock has been issued at par and that 
 each lot of stock in other companies has been valued at the 
 par value of the stock given for it. The unsold stock, num- 
 bering 3,000 shares, the par value of which is $300,000, 
 will stand as a debit balance to Unissued Stock until sold. 
 
CHAPTER IX 
 
 DIVIDENDS AND THEIR ENTRY 
 
 § n6. The Nature of Dividends 
 
 Dividends are corporate profits which have been set aside 
 by formal action of the directors for distribution among the 
 stockholders. The corporate books are periodically bal- 
 anced, the profits determined, and the directors then decide 
 what portion, if any, of these profits shall be withdrawn for 
 division among the stockholders. If a dividend is voted, or 
 as it is termed, "declared," it is in the shape either of a 
 percentage on the par value of the outstanding stock, or a 
 fixed amount on each share. The amount received by each 
 stockholder is therefore determined by the number of share^i 
 he holds. 
 
 § 117. Directors' Powers as to Dividends 
 
 It is a well-recognized principle of law that the directors 
 of a corporation, alone, have the power to declare a dividend 
 out of the earnings of the corporation and to determine its 
 amount. This right of directors is incident to their general 
 power to manage the affairs of the corporation, and is 
 recognized either directly or by implication by the laws of 
 every state in the Union. The right is, of course, subor- 
 dinate to any statutory, charter, or by-law provisions which 
 may apply ; but beyond this the whole matter is in the dis- 
 cretion of the board of directors. 
 
 Usually in small companies the by-law provisions re- 
 lating to dividends merely provide that dividends shall be 
 declared from surplus profits at such times as the board may 
 direct. The by-laws of the larger companies, however, are 
 
 133 
 
134 SPECIAL ENTRIES 
 
 generally more explicit, as for example, directing the board 
 — if profits permit — to declare dividends on the first of each 
 year, or at the regular meetings in January and July, or on 
 some other specific date. 
 
 If the directors, at the regular time for declaring a divi- 
 dend, decide not to declare one, they are said to have "passed 
 the dividend." 
 
 § ii8. Informal Distribution of Corporate Profits 
 
 Corporate profits are occasionally distributed among 
 stockholders without the formality of declaring a dividend 
 — a valid proceeding if all the stockholders consent. Where 
 the corporation is small, the distribution of profits is some- 
 times effected without recourse to dividends, by means of 
 salaries which therefore sometimes appear unreasonably 
 large. In such cases all the stockholders are usually also 
 officials of the corporation, and thus all participate in this 
 informal division of profits. This plan is permissible only 
 when all the parties interested assent and no improper ends 
 are to be attained thereby. When, however, such salaries 
 are paid for the sake of concealing profits, with a more or 
 less fraudulent intent, the courts hold them as "dividends 
 of profits under another name, put in that guise for con- 
 cealment and delusion." (Rubber Co. v. Goodyear, 9 Wall 
 [N. Y.J 788 [1869].) 
 
 § 119. Surplus — Equalizing Dividends 
 
 While dividends must, if declared, be declared from 
 earnings, the capital being kept intact for the protection of 
 the creditors of the corporation, it is not obligatory on the 
 directors to distribute all the net profits and it would be 
 poor policy to do so. A surplus should be accumulated to 
 meet unexpected losses and for other unforeseen contin- 
 gencies. When this is done, if it seems wise, this surplus 
 
DIVIDENDS AND THEIR ENTRY 135 
 
 may be drawn upon to pay dividends in poor years when 
 the profits are not sufficient for that purpose, and in this 
 way dividends be equahzed. The advantage of this is 
 obvious. 
 
 § 120. Declaration of Dividends 
 
 Dividends' may be declared payable to the stockholders 
 of record on and after the day of the declaration, or on a 
 specified later day, but could not be declared payable to the 
 stockholders who were of record on a day prior to the 
 announcement. This is obvious, as such stockholders might 
 no longer be stockholders when the dividend was declared. 
 
 Many companies close the transfer books for a certain 
 number of days before payment of dividends, so as to avoid 
 the confusion occasioned by making transfers before all of 
 the dividend checks are made out; and during that period 
 refuse to recognize any change in the ownership of stock. 
 (See § 62.) Other companies make it a point to announce 
 in their dividend notices that "books will not close" or 
 "books will remain open." During the days the transfer 
 books remain closed, stock of the company which is sold 
 goes "ex-dividend," that is, without the dividend. In other 
 words, the dividend will not be paid to the purchaser, but 
 to the one in whose name the stock stands on the company's 
 books. 
 
 A customary form of the resolution of the board of 
 directors declaring a dividend is as follows : 
 
 Resolved, that the regular semiannual dividend of four per cent 
 (.(%) from surplus profits be and hereby is declared upon the common 
 stock of the Company, payable upon the 20th day of October, 1916, to 
 the stockholders of record as shown by the books of the Company on 
 the loth day of January, 1916, and that the Treasurer of the Company 
 be: and hereby is authorized and directed to pay said dividend in 
 accordance with the terms of the present resolution. 
 
 Resolution Declaring Dividend 
 
136 
 
 SPECIAL ENTRIES 
 
 § 121. Notice of Dividend 
 
 Among the smaller corporations the secretary usually 
 sends notice to the stockholders when a dividend is declared, 
 notifying them of the rate and sometimes the amount, date 
 of payment, and any other details of importance. A notice 
 of this kind may be either printed or typewritten. 
 
 Among the larger corporations it is usual, after passing 
 the resolution declaring a dividend, to publish a notice of 
 this dividend in the daily papers. The following is a typical 
 dividend notice: 
 
 Fulton Coal Company 
 
 General Office, Reading Terminal 
 Philadelphia 
 
 July 17, 1916 
 The Directors have declared a dividend of fifty cents (50c) per 
 share, payable on Monday, July 24, 1916, to the stockholders as they 
 stand registered on the books of the Company at the close of business 
 July 17, 1916. 
 
 The transfer books of the Company will be closed until July 25, 
 1916. 
 
 W. G. Brown, 
 
 Secretary 
 Dividend Notice — Publication 
 
 § 122. Ownership of Dividends 
 
 When a dividend from the net profits of a corporation 
 has once been legally and publicly declared, it cannot there- 
 after be rescinded or annulled, but its amount is immediately 
 transferred from the corporate ownership to the ownership 
 of the stockholders ; and this principle holds even though at 
 the time it was declared no definite date was fixed for its 
 payment. If, however, a dividend has been declared but 
 this fact has not been made public, being known only to 
 the directors, they may rescind it. Also, if it were illegal, 
 a dividend formally declared and announced might be re^ 
 yoked at any time before payment. Should the board, for 
 
DIVIDENDS AND THEIR ENTR-^ 137 
 
 example, declare a dividend in defiance of or in ignorance 
 of the fact that there were no profits from which it might 
 legally be taken, they might revoke it at any time before it 
 was actually paid. 
 
 As soon as the day appointed for payment of a dividend 
 is reached, the dividend becomes due and payable, and the 
 stockholders can enforce its payment by legal procedure. 
 
 § 123. Payment of Dividends 
 
 When a dividend is declared, its amount is credited to 
 Dividend account (§83) and debited to Profit and Loss or 
 Surplus. In the smaller corporations dividends are usually 
 paid by check on the general bank account, just as in the 
 case of any other company payment. Cash account is 
 credited and Dividend account debited as the dividend checks 
 are drawn. In the larger corporations it is usual to draw 
 one check payable to the bank for the total amount of the 
 dividend, and this check is entered in the cash book and 
 posted to Dividend account in the ledger. This closes the 
 account, and the general books of the company are no longer 
 concerned with that particular dividend, no matter how 
 long some of the stockholders may hold their dividend checks 
 before getting them cashed. 
 
 The check' for the total dividend is deposited in the bank 
 to the credit of a special account — as for instance, "Kingston 
 Steel Works — ^Dividends" or "William Kingston, Treas- 
 urer" — or even in another bank than that in which the 
 corporation keeps its main deposit, and the individual divi- 
 dend checks are drawn on this account, using a special check 
 book. These are mailed or otherwise delivered to their 
 owners, and, from the bank's statement of the dividend 
 account, it can be seen at any time which stockholders have 
 not, up to that time, drawn their money. This need not 
 concern the general books of the corporation, however, be- 
 
138 
 
 SPECIAL ENTRIES 
 
 cause the entire matter is now outside the usual course of 
 business; and even though there are outstanding unpaid 
 dividend checks, the balance in the account need not neces- 
 sarily show on the balance sheet. 
 
 Instead of the plan just outlined some (though few) 
 large corporations make no entries for dividend payments 
 on the cash book until the dividend checks are paid at the 
 bank. As reports are received from the bank, entries are 
 made debiting Dividend account and crediting Cash.* Under 
 this plan the credit balance of the Dividend account will 
 show at any time the amount of the dividend still unpaid. 
 It is not unusual for dividend checks to remain unpaid for 
 a considerable time or even indefinitely, in which case this 
 plan of recording dividend payments has some advantages. 
 The Cash account in this case is also made to show its 
 correct status, so that dividend checks outstanding do not 
 have to be deducted in arriving at the correct balance of the 
 dividend cash. 
 
 The larger corporations with many stockholders usually 
 have specially printed dividend checks, giving the date and 
 number of the dividend. By means of an addressing ma- 
 chine, the name and address of the stockholder are stamped 
 on the face of the check in the lower left hand comer, after 
 which the amount is filled in on the typewriter or other 
 printing machine. After the checks and amounts are veri- 
 fied, proved on the adding machine, and signed by the proper 
 officials, they are placed in window envelopes for mailing. 
 
 § 124. Dividend Sheet or Book 
 
 The practice of setting aside each quarter or half-year 
 in a separate bank account the exact amount required for 
 the payment of dividends, and drawing special checks against 
 this fund, keeps dividend cash entirely separate frojc the 
 
 •Daily statements are received from the bank along with cancelled checks from 
 the previous day. 
 
DIVIDENDS AND THEIR ENTRY 
 
 139 
 
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SPECIAL ENTRIES 
 
DIVIDENDS AND THEIR ENTRY i^j 
 
 general cash of the company. A dividend sheet or book 
 similar to those on pages 139, 140, should be prepared each 
 time, showing the riames of stockholders, date of dividend, 
 amount and number of each check, etc. As the checks are 
 paid a record may be made in this book, if desired, but 
 where the names are numerous this is hardly worth while. 
 
 The dividend sheet or book contains a list of the stock- 
 holders entitled to receive dividends. This list is usually 
 made up from the stock ledger each time a dividend is de- 
 clared, after the transfer books are closed, though in the 
 case of companies with but few stockholders this is not 
 necessary. When the stockholders are many and the stock 
 active, it is very necessary that these lists be compiled, and 
 that care be taken in checking up and proving the amounts 
 which are to be paid. 
 
 The bound dividend book is used, if at all, only by small 
 companies whose stock is not active ; the larger corporations 
 using loose sheets and placing them in binders for con- 
 venience. These sheets, if bound together, would constitute 
 the ordinary dividend book. Two forms of dividend sheet 
 are shown on pages 139, 140, illustrating two methods of 
 paying dividends. 
 
 Where stockholders come to the office of the corporation 
 or to the bank for their dividends, a space is allowed on the 
 dividend sheet for their signatures. Some companies prefer 
 this plan as it keeps the stockholders in touch with the 
 corporation and its business. Most companies, however, 
 have adopted the plan of mailing all dividend checks, and 
 these are always made payable to order. The indorsement 
 of the check is then considered a sufficient receipt, and the 
 receipt column is unnecessary. 
 
 § 125. Entries for Cash Dividends 
 
 To illustrate a simple form of entering cash dividends. 
 
142 
 
 SPECIAL ENTRIES 
 
 suppose the net profits of the Kingston Steel Works for the 
 year 19 15 amounted to $38,690.40. The directors have 
 declared the regular annual dividend of 5% on the $500,000 
 of outstanding paid-up capital stock, payable in cash in ten 
 days, the remaining profits going to surplus. The dividend 
 is the seventh annual dividend that has been declared. 
 
 The entries for the declared dividend and for paying it 
 are as follows : 
 
 January 7, 1916 
 
 Profit and Loss $38,690.40 
 
 To Dividend No. 7 $25,000.00 
 
 " Surplus 13,690.40 
 
 Seventh annual dividend of 5% on the 
 outstanding capital stock of the Com- 
 pany declared this day by the board 
 of directors and payable January 17, 
 1916. 
 
 January 17, 1916 
 
 Dividend No. 7 $25,000 
 
 To Cash $25,000 
 
 For payment of dividend No. 7, as per 
 order of the directors. 
 
 In many cases no Dividend account is opened, in which 
 case the dividends paid are charged direct to Profit and Loss 
 or to Surplus account, the entries for the foregoing transac- 
 tion being as follows : 
 
 January 7, 1916 
 
 Profit and Loss $38,690.40 
 
 To Surplus $38,690.40 
 
 January 17, 1916 
 
 Surplus $25,000 
 
 To Cash $25,000 
 
 Payment of the seventh annual dividend 
 of 5% on the outstanding stock of the 
 Company, declared January 7, 1916, 
 and payable January 17, 1916. 
 
DIVIDENDS AND THEIR ENTRY 
 
 143 
 
 If a special bank account is set apart for dividend checks, 
 the transfer of dividend cash is made as explained in § 123, 
 by drawing one check for the required amount, Dividend 
 or Surplus account being debited and Cash credited. The 
 individual checks are then issued by the officers in charge 
 of the dividend disbursements. 
 
 When dividends are paid quarterly, the current credit 
 entries to Dividend account are sometimes omitted entirely, 
 the cash payments being debited to Dividend account, which 
 once or twice a year is closed into Surplus account. 
 
 § 126. Dividends Paid with Borrowed Money 
 
 It is not unusual for even the most prosperous company 
 to be temporarily short of ready cash to meet dividend pay- 
 ments. The current assets may be three times as much as 
 the current liabilities, and yet consist largely of notes and 
 accounts receivable which cannot be used to pay dividends. 
 In such a case it is perfectly proper for the directors to 
 borrow money to pay a dividend. In that event the follow- 
 ing entries might be made, the first a journal entry, all 
 the others cash book entries: 
 
 First Entry January 4, 1916 
 
 Surplus $10,000 
 
 To Dividend Payable $10,000 
 
 Dividend of 5% declared this day on capital 
 stock of the Company. Payable in cash 
 January 15, 1916. 
 
 Second Entry January 13, 1916 
 
 Cash $10,000 
 
 To Notes Payable $10,000 
 
 Three months' note discounted at First 
 National Bank to secure funds for p^- 
 ment of dividend due January 15. 
 
144 SPECIAL ENTRIES 
 
 Third Entry 
 
 January 13, igi6 
 
 Discount $150 
 
 To Cash $150 
 
 Discount at 6% on Company's three months' 
 note of $10,000. 
 
 Fourth Entry 
 
 January 15, igi6 
 
 Dividend Payable $io,ooa 
 
 To Cash $10,000 
 
 Payment of dividend of 5% on capital stock 
 of the Company. 
 
 § 127. Entries for Scrip Dividend 
 
 Another way to pay a dividend when temporarily short 
 of cash is by an issue of scrip. Scrip is a promissory note of 
 a corporation, usually bearing interest, and falling due upon 
 a specified date, or after a specified occurrence, as for in- 
 stance when a proposed bond issue shall have been sold. 
 The scrip is in the form of certificates, on which appear the 
 company's promise to pay the money and the various terms 
 of the contract. These certificates sometimes call for or are 
 convertible into stock of the company, and such scrip some- 
 times participates in dividends. The scrip certificates are 
 frequently transferable, and pass by assignment from hand 
 to hand in the open market. 
 
 The Novelty Manufacturing Company with a capital 
 stock of $1,500,000, $1,000,000 being common stock and 
 $500,000 preferred stock, declares its regular annual divi- 
 dend of 3% on both issues, payable in scrip. Dividend de- 
 clared May 15, 19 16, payable June 15, 191 6; scrip payable 
 in cash June 15, 1917. 
 
 The journal entries for the declaration and payment of 
 this annual 3%) scrip dividend on the common and pre- 
 ferred stock are as follows: 
 
DIVIDENDS AND THEIR ENTRY 145 
 
 First Entry 
 
 May 15, 1916 
 
 Surplus $45,000 
 
 To Dividend — Common $30,000 
 
 " Dividend — Preferred 15,000 
 
 Annual dividend of 3% on both common and 
 preferred stock declared this day, payable 
 June 15, 1916, in scrip of the Company, 
 maturing June 15, 1917 and bearing interest 
 at 5%. 
 
 Second Entry 
 
 June 15, 1916 
 
 Dividend — Common $30,000 
 
 Dividend — Preferred 15,000 
 
 To Dividend Scrip (or Scrip Payable) . . . $45,000 
 
 Dividends paid this day in scrip maturing 
 June 15, 1917 and bearing interest at 5%. 
 
 When the scrip matures, an entry similar to the follow- 
 ing is necessary : 
 
 June IS, 1917 
 
 Dividend Scrip $45,000 
 
 Interest 2,250 
 
 To Cash $47,250 
 
 For payment of dividend scrip maturing to- 
 day, with interest from June 15, 1916 at 5%. 
 
 § 128. Entries for Special and Interim Dividends 
 
 Occasionally, after a very prosperous year or a longer 
 period of prosperity, during which a large surplus has been 
 accumulated, the directors declare a "special dividend" or 
 "bonus" in addition to the regular dividend. This is com- 
 monly called "cutting a melon." Sometimes the employees 
 of the company are given a portion of the "melon," in 
 which case the process is known as "profit-sharing." 
 
 To illustrate the entry of such dividends, assume that a 
 
1^6 SPECIAL ENTRIES 
 
 corporation with $1,000,000 capital stock, and profits for 
 the year of $125,400, declares its regular annual dividend of 
 7% and at the same time declares a "special dividend" of 
 2%, and awards to its employees a bonus of 10% of the 
 net earnings of the year just ended. The entries are as 
 follows : 
 
 January 4, 1916 
 
 Surplus $102,540 
 
 To Dividend No. 17 $70,000 
 
 " Special Dividend No. i 20,000 
 
 " Bonus to Employees 12,540 
 
 As per resolution passed this day by the 
 board of directors declaring the regular 
 annual dividend of 7% on the capital 
 stock of the Company; an additional 
 dividend of 2% ; and awarding to the 
 employees a bonus of 10% of the net 
 earnings of the year just ended; all pay- 
 able in cash on the isth day of January, 
 1916. 
 
 January 15, 1916 
 
 Dividend No. 17 $70,000 
 
 Special Dividend No. i 20,000 
 
 Bonus to Employees 12,540 
 
 To Cash $102,540 
 
 For payment of dividends and bonus pro- 
 vided for in resolution of the board of 
 directors passed January 4. 
 
 Dividends declared between the regular dividend dates 
 are called "interim dividends," and are declared when un- 
 usual profits exist to justify a special dividend, or when for 
 some reason it is desired to anticipate the regular dividend in 
 whole or in joart. When dividends are paid quarterly, as 
 is the case with most of the larger corporations, an interim 
 dividend is seldom if ever declared. The entries in case of 
 interim dividends, would of course be identical to those of 
 a regular dividend. 
 
CHAPTER X 
 
 DIVIDENDS AND THEIR ENTRY 
 (Continued) 
 
 § 129. Entries for Dividends Applied to Stock Subscriptions 
 
 As a declared dividend is a debt due from the corpora- 
 tion to the stockholder, any indebtedness of a stockholder 
 to the corporation may be set off against his dividend and 
 be deducted from it, provided the debt is actually due at the 
 time the dividend is payable. Accordingly, the corporation 
 has full power to apply dividends in payment of amounts 
 due on subscriptions to its stock. 
 
 It may be noted that a contract between the corporation 
 and a subscriber to its stock providing that his subscription 
 shall be paid by dividends on the stock subscribed for, is 
 absolutely invalid both as against the corporation and against 
 corporate creditors. Under such an agreement, any credits 
 of declared dividends actually made would be held a valid 
 payment, but in case of the insolvency of the corporation 
 before the stock was full-paid, the stockholder could be 
 called upon to pay in cash all amounts still due on his sub- 
 scription, and this regardless of the agreement that it was 
 to be paid by dividends. 
 
 To illustrate the entries when dividends are to be applied 
 on a stock subscription, let us suppose that $200,000 par 
 value of new stock of the Kanawha Iron Works (shares $50 
 each) has been offered for sale to provide funds for the 
 erection of additional buildings; that all this has been sub- 
 
 147 
 
148 
 
 SPECIAL ENTRIES 
 
 scribed, and a first instalment of 50% has been paid upon 
 it. John Smith is a subscriber for 10 shares. On January 5, 
 1917, the board of directors passes a resolution calHng for 
 the final instalment of 50% on the entire subscribed stock, 
 payable February i. On February 3, at which time John 
 Smith has not paid the final instalment on his stock, the 
 directors declare an annual dividend of 5% on the entire 
 outstanding stock ($500,000) as of January i, payable 
 February 15. The entries for these transactions are as 
 follows : 
 
 First Entry 
 
 January 5, 1917 
 Final Instalment on Stock (or Instalment No. 2) $100,000 
 
 To Subscriptions $100,000 
 
 As per resolution passed this day by the 
 board of directors, calling for the final 
 instalment of $100,000 on $200,000 of 
 capital stock of the Company. 
 
 This entry will close the Subscription account, substi- 
 tuting for it the Final Instalment account. Assuming that 
 all the stockholders have paid the first instalment in full, 
 the First Instalment account is already closed. 
 
 Second Entry 
 
 February i, 1917 
 
 Cash $99,750 
 
 To Final Instalment on Stock $99,750 
 
 Payment of final instalment on capital stock. 
 
 This, of course, would be comprised in cash book entries 
 showing the names of the stockholders and amount paid 
 by each. To simplify the illustration, it is assumed that all 
 except John Smith had paid at the time of declaring the 
 dividend. 
 
DIVIDENDS AND THEIR ENTRY j-.g 
 
 Third Entry _ , 
 
 February 3, 1917 
 
 Surplus $25,000 
 
 To Dividend No. 5 $25,000 
 
 The board of directors have this day declared 
 
 the regular annual dividend of 5% on the 
 
 capital stock of the Company, payable in 
 
 cash on the 15th day of February. 
 
 Fourth Entry _ , 
 
 February 15, 1917 
 
 Dividend No. 5 $24,975 
 
 To Cash $24,975 
 
 Dividend paid this day as per resolution of 
 
 the board of directors, February 3. 
 
 Fifth Entry _ , 
 
 February 15, 1917 
 
 Dividend No. 5 $25 
 
 To Final Instalment on Stock $25 
 
 To apply dividend of John Smith as part pay- 
 ment of final instalment of $250 due on 10 
 shares of capital stock of the Company. 
 
 § 130. Entries for Cumulative Dividends 
 
 Preferred dividends for the current year must be paid 
 before dividends may be paid the holders of common stock ; 
 and if the preferred stock is "cumulative," all dividends on 
 it which have been "passed" in former years must also be 
 paid in full before the common stock can participate. If 
 the provisions by which the preferred stock is created do not 
 state whether it is cumulative or non-cumulative, it is treated 
 as cumulative. 
 
 To illustrate the difference between the two kinds of 
 stock, suppose a company with preferred stock calling for 
 7% dividends has "passed" all dividends for two years, and 
 at the end of the third year desires to pay a dividend on the 
 common stock. If the preferred stock is cumulative, it 
 will first hav? to pay all the "passed" dividends on the pre-: 
 
ISO 
 
 SPECIAL ENTRIES 
 
 f erred stock amounting to 14%, and the current dividend 
 as well — 21% in all; while, if the preferred stock is non- 
 cumulative, it need only pay the current dividend of 7%. 
 
 Although the preferred stock dividends must be paid 
 before the common stock can receive any share of the profits 
 of the corporation, these dividends do not become an obliga- 
 tion of the company until they are formally declared by the 
 board of directors. It would seem, therefore, to be poor 
 accounting to enter them on the books as an obligation at 
 the time they are "passed," although this is sometimes done. 
 It is necessary, however, that the unpaid cumulative divi- 
 dends be shown on the balance sheet, and this is best done 
 by means of a footnote stating the contingent liability for 
 the dividends which have been "passed." 
 
 Where a preferred dividend is passed but it is desired 
 that it be shown on the books, it may be done by an entry 
 similar to the following: 
 
 Surplus $30,000 
 
 To Unpaid Preferred Dividend $30,000 
 
 For 1916 preferred dividend of 6% not de- 
 clared by the board of directors but ordered 
 to be shown upon the books. 
 
 This might make the Surplus account show a debit bal- 
 ance, and in any event it would be reducing surplus for 
 the sake of a liability which was only contingent. Instead 
 of charging the dividend against surplus, it might therefore 
 be a better plan to set up the following nominal asset account 
 to offset the contingent liability of the unpaid preferred 
 dividend : 
 
 Dividends — Preferred Stock $30,000 
 
 To Unpaid Preferred Dividends , $30,000 
 
 For 1916 preferred dividend of 6% not de- 
 clared by the board of directors but ordered 
 to be showrn upon the books. 
 
DIVIDENDS AND THEIR ENTRY 151 
 
 § 131. Entries for Stock Dividends 
 
 Sometimes the directors declare instead of a cash divi- 
 dend, what is known as a "stock dividend." There may be 
 stock in the company's treasury, donated or purchased, that 
 may properly be divided among the stockholders in the form 
 of a dividend. Or unissued stock may be issued for the 
 purpose, or new stock may even be created. The directors 
 are perfectly justified in using such stock for dividends, pro- 
 vided there are undivided profits of an amount equal to the 
 face value of the stock issued as dividends. To illustrate 
 the entries, suppose that the Michigan Furniture Company, 
 with an authorized capital stock of $1,000,000, has had a 
 very prosperous year, its profits amounting to over $100,- 
 000, but the directors desire to invest most of their available 
 funds in additional shops and machinery. Their regular 
 annual dividend is 10%. Only one-half of the authorized 
 capital stock has been issued, so they declare the regular 
 10% dividend but make it payable in stock of the company. 
 
 First Entry 
 
 Surplus $50,000 
 
 To Dividend No. 4 $50,000 
 
 A dividend of 10% on the $500,000 outstanding 
 capital stock of the Company has this day- 
 been declared by the directors, payable in 
 stock of the Company. 
 
 Second Entry 
 
 Dividend No. 4 $50,000 
 
 To Capital Stock $50,000 
 
 Stock issued to pay stock dividend of 10%. 
 
 If the unissued stock is being carried on the books in 
 Unissued or Unsubscribed Stock account, the second entry 
 would be a credit to that account. If the dividend were paid 
 out of treasury stock. Treasury Stock account would, of 
 course, be credited. 
 
152 
 
 SPECIAL ENTRIES 
 
 § 132. Entries for Bond Dividends 
 
 Corporate bonds may, at the discretion of the directors, 
 take the place of cash in the payment of dividends, provided 
 only that they are issued against actual profits. In other 
 words, if there are profits from which dividends may be 
 legally paid, the directors may pay them in cash, in stock, 
 in bonds, or in any other available property owned by the 
 corporation. To payment in bonds, however, there are two 
 practical objections which do not exist in the case of stock 
 dividends : ( i ) bonds bear interest which becomes a fixed 
 charge as soon as it is due, and (2) they are an absolute 
 obligation of the corporation which must be paid at ma- 
 turity. 
 
 It is not unusual for short term notes or debenture bonds 
 to be issued in payment of dividends where it seems pre- 
 ferable to conserve the cash for working purposes; but 
 even this is a somewhat extreme measure unless it be for 
 payment of cumulative dividends. 
 
 Suppose that in the preceding example the directors, 
 with the consent of the stockholders, had paid the dividends 
 iri bonds, the entries would be as follows : 
 
 Surplus $50,000 
 
 To Dividend No. 4 $50,000 
 
 A dividend of 10% on the capital stock of the 
 Company has this day been declared by the 
 directors, payable in the first mortgage 
 treasury bonds of the Company. 
 
 Dividend No. 4 $50,000 
 
 To First Mortgage Treasury Bonds $50,000 
 
 First mortgage 4% treasury bonds given to 
 stockholders in payment of 10% dividend 
 on the stock of the corporation. 
 
DIVIDENDS AND THEIR ENTRY 153 
 
 § 133. Bank Dividends 
 
 Banks pay dividends on their stock with checks drawn 
 on themselves (cashiers' checks), and this makes the book- 
 keeping entries slightly different from those of other com- 
 panies. The first entry is : 
 
 Undivided Profits $50,000 
 
 To Dividend No. 34 $50,000 
 
 For dividend of 5% declared this day by the 
 directors on the capital stock of the bank. 
 
 The charges to Dividend account come from the cash 
 book as the dividend checks are presented for payment at the 
 paying teller's window or through the clearing house. The 
 balance of Dividend account, therefore, shows the amount 
 of dividend checks outstanding, and appears on the balance 
 sheet as "Unpaid Dividends." 
 
 § 134. Property Dividends 
 
 Dividends, as already stated, may consist of any kind 
 of corporate property, though, except in the case of cor- 
 porate securities, there are obvious difficulties in the way of 
 distribution which make such dividends rare. Thus, a com- 
 pany whose profits were in land might divide this land 
 among its stockholders as a dividend, if it were practically 
 possible, and no objection could be raised. The more usual 
 form of property dividend is, however, that of securities 
 of other corporations purchased at some previous time for 
 investment, or received when the corporation sells rights of 
 some kind to another corporation, taking the stocks and 
 bonds of that other corporation in payment. In 1916 one 
 of the great manufacturers of war supplies paid a dividend 
 in Anglo-French 5% Bonds. 
 
 Property dividends are also declared when a corporation 
 is liquidated, all of its property, perhaps, having been ex- 
 
154 
 
 SPECIAL ENTRIES 
 
 changed for stock or bonds, or both, of the purchasing com- 
 pany. In this case the distribution is not, strictly speaking, 
 a payment of dividends, but is a distribution of assets, and 
 the ordinary rule that dividends may be declared only from 
 profits does not apply. 
 
 § 135. Unearned Dividends 
 
 Although the laws of all of the states forbid the payment 
 of dividends if such payment results in the impairment of 
 capital, there are more or less frequent evasions of this rule. 
 The fact that a dividend has been paid out of capital may 
 not be known to anyone except the directors; in fact, the 
 directors themselves are sometimes ignorant of such an 
 occurrence, owing to the fact that they will not take the 
 trouble, or have not sufficient knowledge of accounting, to 
 inform themselves of the true condition of the company. 
 Yet they may be held liable by the courts for any loss to 
 creditors occasioned by the payment of dividends out of 
 capital. 
 
 Errors as to profits may arise from many causes. The 
 books of the company may perhaps show a surplus of earn- 
 ings which in reality does not exist, because no provision 
 has been made for bad debts or depreciation; or materials 
 have been included in the inventories which have not yet 
 been credited to Accounts Payable; or materials have been 
 valued at the selling price ; or orders for future delivery may 
 have been booked as sales ; the book value of real estate may 
 have been written up ; assets with no value, such as patents 
 and copyrights which have expired, may still be carried upon 
 the books; judgments against the company may have been 
 omitted from the accounts. These and other errors may 
 have been made which hide the fictitious character of the 
 apparent profits, so that the payment of dividends under 
 such conditions results in an impairment of capital. An ex- 
 
DIVIDENDS AND THEIR ENTRY 
 
 155 
 
 amination by a competent auditor, however, would disclose 
 any such errors and prevent the declaration of illegal 
 dividends. 
 
 In case dividends were declared which impaired the 
 capital, and the company were forced into the hands of a 
 receiver or into bankruptcy before the deficit was made up, 
 the directors would be personally liable for the amount of 
 the illegal dividends. 
 
 In case accounting errors are discovered which have 
 resulted in a fictitious surplus, the proper charges must be 
 made to show the true condition. This may, if dividends 
 have been declared or other expenditures have been made 
 on the strength of the supposed surplus, result in a debit 
 balance in Surplus account. It is perfectly proper to allow 
 this debit balance to remain on the ledger until wiped out 
 by the accumtdating profits, but in the balance sheet it should 
 be placed on the asset side and called "Deficit" ; yet in 
 financial statements it is not unusual to see it deducted from 
 the capital stock. 
 
CHAPTER XI 
 
 PROPRIETORSHIP INCORPORATED 
 (NEW YORK) 
 
 § 136. Organization Procedure 
 
 The organization details outlined in Chapters XI to 
 XIII are in accordance with the laws of the states in 
 which the corporations discussed are respectively incor- 
 porated. Of course, an attorney will be retained when an 
 incorporation is to be made, and on him rests the direct 
 responsibility for the technical details; but the accountant 
 should have at least a general knowledge of the required 
 procedure. 
 
 In New York the procedure in organizing a corporation 
 is that which obtains in a majority of the states of the Union, 
 and for this reason the present chapter discusses the forma- 
 tion of a New York corporation in detail. 
 
 § 137. General Provisions 
 
 A New York corporation need not limit itself to one 
 object as in Pennsylvania and some other states, but may 
 be formed to carry on as many different kinds of ordinary 
 business as are set iorth in the certificate of incorporation. 
 The application for charter — which becomes the certificate 
 of incorporation when allowed and filed by the Secretary of 
 State — must be signed by three or more incorporators, who 
 must be natural persons of full age, at least two-thirds of 
 them citizens of the United States, and at least one a resident 
 of the State of New York. Each incorporator must subscribe 
 for one or more shares of stock. 
 
 156 
 
PROPRIETORSHIP INCORPORATED 157 
 
 An organization tax of 1/20 of 1% of the total 
 authorized capital stock must be paid to the State Treasurer. 
 The Secretary of State's fee for filing the certificate of in- 
 corporation is $10, and for recording, 15 cents per folio of 
 100 words. The fee of the county clerk for filing the 
 certificate is 6 cents, and for recording, 10 cents per folio. 
 
 There are frequently, of course, other expenses incident 
 to incorporation, which must be assumed by the incorpora- 
 tors or by the attorney in charge, and for which they bill the 
 corporation after its organization. 
 
 § 138. Financial Details of the Incorporation 
 
 Charles W. Hampton has been conducting a wholesale 
 and retail mercantile business for the past ten years in the 
 City of New York. He wishes to bring other parties into 
 the business, and with this in view has decided to incorporate 
 as of June 4, 1916, under the name of the "Hampton Trad- 
 ing Corporation," with a capital stock of $250,000, con- 
 sisting of 2,500 shares of the par value of $100 each. The 
 shares have been subscribed for as follows : 
 
 Name Address Sliares Amount 
 
 Charles W. Hampton New York City 1,230 $125,000 
 
 Samuel Johnson , *' Soo 50,000 
 
 James J. Miller " 500 50,000 
 
 Lincoln Webster Albany, New York 100 10,000 
 
 Robert W. Kester " 100 10,000 
 
 Hampton is to receive 1,250 shares of full-paid stock in 
 exchange for his business, buildings, stock, and equipment, 
 including the various assets and liabilities as per the accom- 
 panying balance sheet. The business of Hampton is to be 
 taken over as soon as possible after the first meeting of the 
 directors, at which time the other subscribers to the stock 
 of the company will pay 50% of their subscriptions, the 
 remainder to be paid August 9, 1916. 
 
158 
 
 SPECIAL ENTRIES 
 
 Charles W. Hampton 
 Balance Sheet, as of June i, 1916 
 
 Assets 
 
 Liabilities 
 
 Real Estate: 
 
 Mortgage on Warehouse $25,000.00 
 
 Land, Store, and 
 
 Loans from Bank 10,000.00 
 
 Warehouse $80,000.00 
 
 Notes Payable 17,750.00 
 
 Store Equipment 8,500.00 
 
 Accounts Payable 22,800.00 
 
 Delivery Equipment 9,000.00 
 
 
 
 Office Equipment 4,400.00 
 
 Total Liabilities.... $75,550.00 
 
 Merchandise 46,300.00 
 
 Charles W. Hampton : 
 
 Accounts Receivable... 16,400.00 
 
 Capital Account 100,000.00 
 
 Notes Receivable 9,350-oo 
 
 Personal Account 5,140.00 
 
 Cash 6,740.00 
 
 
 $180,690.00 
 
 $180,690.00 
 
 Note: A good-will of $19,860 is to be included in the above to 
 provide full payment for $125,000 of stock in the new company. 
 
 § 139. Certificate of Incorporation 
 
 This is usually executed in duplicate, signed by at least 
 three subscribers to the stock of the proposed corporation, 
 and then duly acknowledged by them before a notary. The 
 directors for the first year are named in the certificate, and, 
 if the certificate or by-laws so provide, directors need not 
 be stockholders. The certificate of incorporation must 
 contain : 
 
 1. The name of the proposed corporation, which must' 
 
 indicate that it is a corporation and must not con- 
 flict with that of any existing corporation. 
 
 2. The purpose or purposes for which it is to be formed. 
 
 3. The amount and kind of capital stock. 
 
 4. The number of shares, each of which shall not be 
 
 less than $5 nor more than $100; and the amount 
 of capital, not less than $500, with which it will 
 begin business. 
 
PROPRIETORSHIP INCORPORATED icg 
 
 5. The location of the principal business office. 
 
 6. Its duration, which may be perpetual. 
 
 7. The number of directors (not less than three). 
 
 8. The names and post-office addresses of the directors 
 
 for the first year. 
 
 9. The names and post-office addresses of the subscrib- 
 
 ers to the certificate, and the number of shares 
 which each agrees to take in the corporation. 
 
 The certificate should also set forth if power is desired 
 to_ hold the stock of other corporations ; if cumulative voting 
 is desired ; if the voting power of the stockholders shall be 
 limited in any way, and that directors need not be stock- 
 holders, if this is desired. It may also contain any provisions 
 for the regulation of corporate affairs, and any desired 
 limitations on the powers of the directors and stockholders 
 which do not conflict with the laws. 
 
 The charter of the Hampton Trading Corporation will 
 be found in the Appendix, Form i. 
 
 § 140. Filing the Certificate of Incorporation 
 
 One of the duplicate originals of the charter is sent to 
 the Secretary of State at Albany with a check or money 
 order for the amount of the filing and recording fees 
 
 (§ 137)- 
 
 At the same time a check or money order for the organi- 
 zation tax (§ 137) is sent to the State Treasurer at Albany. 
 The Secretary of State, if he finds the certificate of incorpor- 
 ation to be in proper shape, notifies the State Treasurer, who 
 issues duplicate receipts for the organization tax, one of 
 which he dehvers to the Secretary of State, forwarding 
 the other to the person who paid the tax. The Secretary of 
 State then records the certificate of incorporation and gives 
 notice of its filing to the person from whom it was received. 
 
l6o SPECIAL ENTRIES 
 
 The other duplicate original certificate of incorporation, 
 signed and acknowledged as was the original, must be filed 
 in the office of the clerk of the county in which the principal 
 office is located. To this must be attached the duplicate 
 receipt for organization tax received from the State Treas- 
 urer, and the certificate must be accompanied by the proper 
 fees. 
 
 The formal incorporation of the company is now com- 
 pleted. Frequently an extra copy of the original certificate 
 of incorporation is forwarded to the Secretary of State at 
 the same time the original is sent, with the request that he 
 certify and return it. The fees for such certification are 15 
 cents for each 100 words, and $1 for affixing the seal. This 
 gives a certified copy which is legal evidence of the due 
 incorporation of the company. 
 
 § 141. First Meeting of Stockholders 
 
 There is no statutory or other requirement that a meet- 
 ing of the stockholders be held as a part of the organization 
 procedure, as the directors for the first year are named in 
 the charter and these directors have, in all ordinary cases, 
 full power to do everything necessary to organize the com- 
 pany. It is, however, customary for the incorporators — 
 who are the subscribers to the stock of the corporation men- 
 tioned in the certificate of incorporation, and who become 
 the legal stockholders of the corporation as soon as the 
 charter is granted — to meet when the certificate has been 
 filed in the county clerk's office. At this meeting by-laws 
 are adopted, and resolutions are passed authorizing the issue 
 of stock for cash or for property, or both. When property 
 is to be taken over in payment for stock, a stockholders' 
 resolution authorizing the exchange and the acceptance of 
 the property by the directors, though not essential, is 
 desirable. 
 
PROPRIETORSHIP INCORPORATED ^oi 
 
 § 142. Minutes of First Meeting of Stockholders; By-Laws 
 
 The first meeting of stockholders is, as intimated, 
 ordinarily a mere formal afifair, at which by-laws already 
 prepared are adopted and such other action is taken as may 
 have been previously agreed upon. The first meeting of 
 stockholders is usually assembled by means of a written 
 "Call and Waiver of Notice." The minutes of the first 
 meeting of stockholders of the Hampton Trading Corpora- 
 tion are shown in Form 4 of the Appendix. Proxy for 
 this meeting is shown in Form 5 ; call and waiver of notice, 
 in Form 6. 
 
 The by-laws shown in Form 2 of the Appendix, while 
 brief, are sufficient for the needs of any corporation of 
 medium size. They meet the requirements of the New York 
 statutes, and may be adapted to meet any special require- 
 ments of other states or of corporations of other purposes. 
 For large corporations more elaborate forms of by-laws are 
 required, in which the details of corporate procedure are 
 set forth much more fully. Such by-laws may be found in 
 any of the standard works on corporate organization and 
 procedure.* 
 
 Occasionally a certified copy of the by-laws is required, 
 or extracts from them must be certified. In such case, the 
 general form of certification shown in Form 3 of the Appen- 
 dix will usually be found sufficient. 
 
 § 143. Minutes of First Meeting of Directors; the Stock 
 Book 
 
 The first meeting of directors usually follows closely the 
 first meeting of stockholders. The minutes shown in Form 
 7 of the Appendix cover in detail the usual procedure. 
 
 The procedure outlined completes the organization of 
 the company : the business of Hampton has been taken over 
 
 '*See Conyngton's "Corporate Organization.'' 
 
1 62 SPECIAL ENTRIES 
 
 in payment for stock, the first instalment on stock subscrip- 
 tions has been received, and the various organization 
 expenses have been paid. It is now necessary to complete 
 the official records and make the opening entries in the books 
 of account. 
 
 The New York statutes require that every stock cor- 
 poration shall keep at its office correct books of account of 
 all its business and transactions, and a book to be known 
 as the stock book (§§ 65, 66), containing the names, alpha- 
 betically arranged, of all persons who are stockholders of 
 the corporation, their place of residence, the number of 
 shares of stock held by each, the date of purchase, and the 
 amount paid thereon. Also the statutes require that this 
 stock book shall be open daily during at least three busi- 
 ness hours, for the inspection of the corporation's stock- 
 holders and judgment creditors, who may make extracts 
 therefrom. The corporation or officers refusing or neglect- 
 ing to exhibit the books or permit extracts to be taken there- 
 from as provided by the statutes, are liable to a penalty of 
 $50 for each day of neglect or refusal. 
 
 The proper stock book entries should be made at the 
 time the stock certificates are issued, and afterward at the 
 time transfers are made. The form of stock book to be 
 used in New York is prescribed by the Comptroller and is 
 shown in § 66. 
 
 § 144. Journal Entries 
 
 The opening entries in the books of account should now 
 be made, according to the plan adopted by the accountant. 
 A matter of prime importance here is the inclusion of ade- 
 quate and complete explanations. Vague or incomplete 
 records should not be tolerated. 
 
 In the opening entries which follow, the accounts of in- 
 corporators are entered in the general ledger. This would 
 
PROPRIETORSHIP INCORPORATED 
 
 163 
 
 not be advisable if the number of incorporators or sub- 
 scribers to be entered were large. Other opening entries 
 which accomplish the same end in a somewhat dififerent 
 manner will be found in Chapter VII, "Stock of Original 
 Issue." 
 
 The following entries for stock subscriptions and for 
 taking over the assets and Habilities in payment are made 
 as of June 9, 19 16, the date of organization : 
 
 June 9, 1916 
 
 Charles W. Hampton $125,000 
 
 Samuel Johnson 50,000 
 
 James J. Miller 50,000 
 
 Lincoln Webster xo,ooo 
 
 Robert W. Kester 10,000 
 
 Unissued Stock S.ooo 
 
 To Capital Stock $250,000 
 
 Hampton Trading Corporation, incorporated 
 
 with an authorized capital of $250,000, 
 
 divided into 2,500 shares of $100 each, 
 
 subscribed for as follows : 
 
 Charles W. Hampton 1,250 shares 
 
 Samuel Johnson 500 
 
 James J. Miller 500 
 
 Lincoln Webster 100 
 
 Robert W. Kester 100 
 
 Unissued Stock ; . . . . 50 
 
 Subscriptions payable 50% in cash and 
 
 balance August 9, 1916. 
 
 At the time of incorporation, certain necessary expenses 
 must be advanced by the incorporators or by the attorney in 
 charge. These are reimbursed after organization. All cash 
 entries are given in the cash book shown below. The only 
 remaining journal entry required is that recording the trans- 
 fer of assets and liabilities from Hampton to the corporation, 
 as follows: 
 
1 64 SPECIAL ENTRIES 
 
 Plant and Sundry Assets $200,550 
 
 To Sundry Liabilities and Subscription.. $200,550 
 
 Assets 
 
 Real Estate $80,000 
 
 Store Equipment 8,500 
 
 Delivery Equipment 9,000 
 
 Office Equipment 4,400 
 
 Merchandise 46,300 
 
 Accounts Receivable 16,400 
 
 Notes Receivable 9.350 
 
 Cash 6,740 
 
 Good- Will 19,860 
 
 Liabilities and Subscription 
 
 Mortgages Payable $25,000 
 
 Bank Loans 10,000 
 
 Notes Payable 17.750 
 
 Accounts Payable 22,800 
 
 Charles W. Hampton 125,000 
 
 For the entire assets and liabilities of 
 Charles W. Hampton, taken over this day 
 in full payment of his subscription. A 
 good-will of $19,860 is allowed over and 
 above the net worth indicated by his 
 balance sheet. (See minutes of stock- 
 holders and of directors for authority 
 and for further details.) 
 
 As will be seen, the cash turned over by Hampton is 
 included in the journal entry, in order to show all of the 
 assets and liabilities together. This plan, which obviates the 
 necessity of splitting entries, is to be favored for it sets forth 
 the entire transaction. The cash account is ticked in the 
 journal, and the general ledger account in the cash book, to 
 indicate that they are not to be posted. If this were not 
 done, the items might be posted from both books. 
 
PROPRIETORSHIP INCORPORATED 
 
 i6s 
 
 § 145. Cash Book Entries 
 
 Cash Book 
 
 I9I6 
 
 
 1916 
 
 
 
 June 9 Samuel Johnson 
 
 
 June 9 
 
 Organizing Expenses : 
 
 (Paid on June 
 
 
 
 Organization 
 
 
 2) 
 
 $500.00 
 
 
 Tax 
 
 $125.00 
 
 Charles W. 
 
 
 
 Filing Certifi- 
 
 
 Hampton (Bal- 
 
 
 
 cate 
 
 10.00 
 
 ance trans- 
 
 
 
 Recording Fees 
 
 20.00 
 
 ferred) 
 
 6,740.00 
 
 
 Counsel's Fee.. 
 
 250.00 
 
 Samuel Johnson. 
 
 24,500.00 
 
 
 Accountant's 
 
 
 James J. Miller.. 
 
 25,000.00 
 
 
 Fee 
 
 250.00 
 
 Lincoln Webster. 
 
 5,000.00 
 
 
 Other Outlays. 
 
 200.00 
 
 Robert W. Kes- 
 
 
 
 Balance 
 
 65,885.00 
 
 ter 
 
 5,000.00 
 
 
 
 
 (Payment of first 
 
 
 
 
 
 instalment of 
 
 
 
 
 
 50% on sub- 
 
 
 
 
 
 scriptions to 
 
 
 
 
 
 stock.) 
 
 
 
 ? 
 
 
 $66,740.00 
 
 166,740.00 
 
 § 146. Other Entries 
 
 The necessary entries have now been made in the journal 
 and cash book, and the accounts called for by these entries 
 must be opened in the general ledger. An account should 
 also be opened for unissued stock. The subscribers' accounts 
 will be credited and cash debited, through the cash book, 
 when the final payments are made August 9, 19 16. 
 
 There is nothing unusual in the form of any of these 
 ledger accounts and they are not shown here in account form. 
 
 In the stock ledger, records of the stock holdings of each 
 subscriber must appear. Instalment receipts must be issued 
 as payments are received, and stock certificates made out 
 when the final payments are made. It is the duty of both 
 the attorney and accountant to see that the general pro- 
 cedure is in accordance with legal and business requirements. 
 
CHAPTER XII 
 
 MANUFACTURING AND MINING 
 CORPORATIONS 
 
 Manufacturing Corporation 
 
 § 147. Details of Incorporation 
 
 The preliminary organization of the Rockwell Manufac- 
 turing Company, of Philadelphia, Pennsylvania, is effected 
 March 2, 1916. The company is to be incorporated for the 
 manufacture and sale of household furniture, with a capital 
 stock of $100,000, consisting of 1,000 shares of the par 
 value of $100 each. The incorporators and the number of 
 shares subscribed for by each are as follows : 
 
 Name 
 
 Address 
 
 Shares 
 
 Amount 
 
 George Rockwell 
 
 657 Broad St., Philadelphia 
 
 400 
 
 $40,000 
 
 Jane Rockwell 
 
 6S7 Broad St., Philadelphia 
 
 200 
 
 20,000 
 
 Henry Lindon 
 
 1415 Market St., Philadelphia 
 
 300 
 
 30,000 
 
 Thomas J. Peterson 
 
 Harrisburg, Pa. 
 
 100 
 
 10,000 
 
 The first instalment of 10%, as required by the Penn- 
 sylvania law, has been paid in cash. Immediately after the 
 date of final organization, another payment of 50% will 
 be due, and the balance will be payable one month there- 
 after. 
 
 § 148. Statutory Records 
 
 After the organization has been completed and all re- 
 quirements complied with, it is in order to make the neces- 
 sary records in the books of the corporation. In Pennsyl- 
 vania the statutes provide that either the treasurer or secre- 
 
 166 
 
MANUFACTURING CORPORATION 167 
 
 tary shall keep at the office of the principal place of business 
 a book containing the names of all persons who are, or 
 who within one year shall have been, stockholders of such 
 company, showing the number of shares held, when they 
 became owners thereof, the amount paid in, etc. This book 
 is to be open for inspection during business hours. It is 
 obvious that the stock ledger shown in § 66 would meet the 
 statutory requirements. 
 
 § 149. The Books of Account 
 
 Books of account are not prescribed by statute, but a 
 complete set of books should be provided, and they must, 
 of course, be properly kept. The opening entries for journal 
 and cash book are shown on the following pages, including 
 payment of the first and second subscription instalments and 
 the customary expenses at the time of incorporation. Ac- 
 counts with stockholders must be opened in the stock ledger, 
 instalment receipts issued, and the stock certificate book 
 made ready for use as soon as the instalments are com- 
 pleted. 
 
 § 150. Journal Entries 
 
 For opening entries, the plan that will best suit the case 
 of the particular corporation should be adopted. Since there 
 are only a few subscribers to stock, separate subscription and 
 instalment registers are not necessary, as their names can 
 be entered in the subscription and instalment accounts. 
 
 It will be noted that the first cash was received March 
 2, 1916, the date of application for charter. Since, however, 
 the corporation does not come into legal existence until the 
 charter is granted, it would seem desirable to make the 
 opening entries on March 23, the actual date of organiza- 
 tion. Entries should state all details fully, however, and 
 give the dates of any payments already made. 
 
l68 SPECIAL ENTRIES 
 
 First Entry 
 
 March 23, 1916 
 
 Subscriptions $100,000 
 
 To Capital Stock $100,000 
 
 Incorporation of the Rockwell Manufactur- 
 ing Company with a capital stock of 
 
 $100,000, shares $100. Subscriptions as 
 
 below (under date of March 12, 1916) on 
 
 terms of 10% down, 50% on date of 
 
 organization, and the balance in one 
 
 month : 
 
 George Rockwell 400 shares 
 
 Jane Rockwell 200 " 
 
 Henry Lindon 300 " 
 
 Thomas J. Peterson 100 " 
 
 The first instalment of 10% having- been paid at the 
 time of incorporation, is entered directly in the cash book, 
 as shown herewith. Next, under the same date, make an 
 entry for the second instalment as below. The first instal- 
 ment might, of course, be put through the journal in like 
 manner, but, as it has already been paid, the cash book entry 
 would seem to be all that is necessary. We might also omit 
 the entry for Instalment No. 2 and let that likewise be 
 credited to Subscriptions through the cash book. 
 
 Second Entry 
 
 March 23, 1916 
 
 Instalment No. 2 $50,000 
 
 To Subscriptions $50,000 
 
 For second instalment, being 50% of the 
 amount subscribed : 
 
 George Rockwell $20,000 
 
 Jane Rockwell 10,000 
 
 Henry Lindon 1 5,000 
 
 Thomas J. Peterson S,ooo 
 
 Also, if an instalment register (§ 58) is used, the 
 
MANUFACTURING CORPORATION 
 
 1 60 
 
 journal entries for instalments would usually be omitted, 
 and payments credited directly to Subscriptions account 
 through the cash book. When Instalment No. 3 becomes 
 due in one month, it will be treated in the same manner as 
 Instalment No. 2. 
 
 To complete the accounting records it is not necessary 
 to open accounts for the individual stockholders in the stock 
 ledger, though this might be necessary in some states to 
 comply with the statutory requirements. A stock account 
 for George Rockwell follows : 
 
 
 
 ^fe/ncte/zPtHyKUrMy 
 
 «u 
 
 
 
 
 
 
 1 f 1 .. 
 
 
 
 
 ^5 CANCCILLED 
 
 CERTIFICATES ISSUED 
 
 
 CEETIFICAT 
 
 DATE 
 
 JOURNAL 
 FOLIO 
 
 CERTIFICATE 
 NUMBER 
 
 NO or 
 
 SHARES 
 
 DATE 
 
 JOURNAL 
 
 Fa\o 
 
 CERTIFICATE 
 NUMBER 
 
 NO.OF 
 SHARES 
 
 
 
 
 
 
 1m: 
 
 71 
 
 5 
 
 / 
 
 iJco 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 . 
 
 
 
 
 
 
 
 
 
 
 _^ 
 
 L-l 
 
 
 
 
 
 
 
 
 ^ 
 
 ^ — 1 
 
 
 --~^IC^^=^i^^ — 
 
 Tl 
 
 ^ 
 
 
 
 
 
 ^^^.^^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Stock Ledger Account 
 
 Stock certificates should not be issued until the final 
 instalment is paid. 
 
I70 
 
 SPECIAL EiyT:RIES 
 
 151. Cash Book Entries 
 
 Cash Book 
 
 
 Receipts 
 
 
 
 Payments 
 
 
 I9I6 
 
 
 
 1916 
 
 
 
 Mar. 2 
 
 Subscriptions, 
 10% paid in 
 
 
 Mar. 23 
 
 Incorporation 
 
 Expenses : 
 
 
 
 by: 
 
 
 
 Charter Fee 
 
 $30.00 
 
 
 George Rock- 
 
 
 
 Bonus on Capital 
 
 200.00 
 
 
 well 
 
 $4,000.00 
 
 
 Recording Fees.. 
 
 2.50 
 
 
 Jane Rockwell 
 
 2,000.00 
 
 
 Counsel 
 
 100.00 
 
 
 Henry Lindon 
 
 3,000.00 
 
 
 Accountant 
 
 100.00 
 
 
 Thomas J. 
 
 
 
 Equipment 
 
 100.00 
 
 
 Peterson ... 
 
 1,000.00 
 
 
 Expenses 
 
 35.00 
 
 Mar. 23 
 
 Instalment No. 
 2, 50% : 
 George Rock- 
 well 
 
 Jane Rockwell 
 
 Henry Lindon 
 
 Thomas J. 
 
 Peterson ... 
 
 20,000.00 
 10,000.00 
 15,000.00 
 
 5,000.00 
 
 
 
 
 §152. The Ledger Accounts 
 
 Capital Stock 
 
 1916 
 
 Mar. 23 Subscriptions $loc,ooo.OO 
 
 Subscriptions 
 
 1916 
 
 Mar. 23 Capital Stock: 
 
 George Rock- 
 well $40,000.00 
 
 Jane Rockwell 20,000.00 
 
 Henry Lindon 30,000.00 
 
 Thomais J. 
 Peterson. . . . 10,000.00 
 
 1916 
 
 Mar. 2 Cash, 10% $10,000.00 
 
 Mar. 23 Instalment No. 
 
 2, 50% 50,000.00 
 
MINING CORPORATION 
 Instalment No. 2 — 50% 
 
 171 
 
 I9I6 
 
 1916 
 
 
 
 Mar. 23 Subscriptions, 50% : 
 
 Mar. 
 
 23 
 
 Cash $50,000.00 
 
 George Rock- 
 
 
 
 (Payment may 
 
 well $20,000.00 
 
 
 
 be credited 
 
 Jane Rockwell 10,000.00 
 
 
 
 separately if 
 
 Henry Linden 15,000.00 
 
 
 
 desired.) 
 
 Thomas J. 
 
 
 
 
 Peterson — 5,000.00 
 
 
 
 
 $50,000.00 
 
 $50,000.00 
 
 Instalment No. 3 — 40% 
 
 (Same form of account as for Instalment No. 2) 
 
 Mining Corporation 
 
 § 153. Details of Incorporation 
 
 To illustrate the opening entries for a miiningf company, 
 assume that the Copper County Mining Company is to be 
 incorporated under the laws of Michigan with an authorized 
 capital stock of $50,000, consisting of 2,000 shares of $25 
 each. The company is to take over from James R. Cooke 
 and Frank Patterson, a partially developed copper mine 
 located in Copper County, Michigan, and carrying with it 
 200 acres of mineral land. The incorporators and the 
 amount of stock subscribed for by each as of July 15, 1916, 
 are as follows : 
 
 Name 
 
 Address 
 
 Shares 
 
 Amount 
 
 James R. Cooke 
 
 Detroit, Michigan 
 
 900 
 
 $22,500 
 
 Frank Patterson 
 
 Calumet, 
 
 900 
 
 22,500 
 
 John H. Jerome 
 
 Detroit, 
 
 100 
 
 2,500 
 
 John H. Wilson 
 
 ** ** 
 
 100 
 
 2,500 
 
)72 
 
 SPECIAL ENTRIES 
 
 The entire mine property is conveyed to the company by 
 Cooke and Patterson in full payment for their subscriptions, 
 and Jerome pays cash in full for his loo shares. Wilson 
 pays $ioo, but, failing to pay the balance, his stock is de- 
 clared forfeited. Cooke and Patterson each donate 200 
 shares of stock to the company, this stock to be sold for the 
 purpose of providing working capital. Of the donated stock, 
 200 shares are sold at $15 per share and 100 shares at $20 
 a share. All this stock is paid for in cash. The sum of 
 $2,000 has been paid out for development expenses, and 
 $1,000 is paid on account of new buildings and construction 
 The various organization expenses have been paid by the 
 incorporators, who are reimbursed after incorporation. 
 
 § 154. Opening Entries 
 
 The books of account must contain a complete record of 
 the business operations of the company. The official books 
 and records to be kept by the secretary must be obtained 
 and duly entered up. Opening entries for the corporation 
 are made, under a slightly different plan from the preceding 
 illustrations, as on July 15, 1916, the date of organization: 
 
 July 15, 1916 
 
 Unissued Stock $50,000 
 
 To Capital Stock Authorized $50,000 
 
 The Copper County Mining Company has this 
 day been incorporated with a capital stock 
 of $50,000, par value of shares $25 each. 
 (See minute book, page 4.) 
 
 James R. Cooke $22,500 
 
 Frank Patterson 22,500 
 
 John H. Jerome 2,500 
 
 /ohn H. Wilson 2,500 
 
 To Unissued Stock $50,000 
 
 Subscriptions have been received as follows : 
 
MINING CORPORATION 173 
 
 James R. Cooke 900 shares 
 
 Frank Patterson 900 " 
 
 John H. Jerome 100 " 
 
 John H. Wilson 100 " 
 
 Cash $2,600 
 
 To John H. Jerome $2,500 
 
 " John H. Wilson 100 
 
 For full payment of Jerome's subscription to 
 100 shares of stock, as per agreement; pay- 
 ment of $100 on Wilson's stock, balance to 
 be paid in 10 days. 
 
 Copper County Mine (or Mine Property, or Real 
 
 Estate) $45,000 
 
 To James R. Cooke $22,500 
 
 " Frank Patterson 22,500 
 
 The Copper County Mine property and all 
 improvements have this day been conveyed 
 to the Company by Cooke and Patterson 
 in full payment for their subscriptions to 
 stock of the Company, 1,800 shares. By 
 order of the directors. (See minute book, 
 page 5.) 
 
 Capital Stock Authorized $47,Soo 
 
 To Capital Stock $47,Soo 
 
 To transfer to Capital Stock account the 
 amount of paid-up capital stock. 
 
 Organization Expenses $325 
 
 To Cash $325 
 
 To cover various incorporating fees and ex- 
 penses advanced by incorporators, $35; 
 charges of attorney, $150; charges of ac- 
 countant, $75; other preliminary expenses, 
 $65. 
 
 § 155. Entries for Donated Stock 
 
 When the stock is donated to the treasury of the Com 
 
174 
 
 SPECIAL ENTRIES 
 
 pany, an entry is required debiting Treasury Stock and 
 crediting "Working Capital Donated" or "Donation" ac- 
 count, as follows : 
 
 Treasury Stock $10,000 
 
 To Working Capital Donated $10,000 
 
 ror 400 shares of the Company's stock donated 
 by James R. Cooke and Frank Patterson, 
 200 shares each, to be sold to provide work- 
 ing capital. 
 
 The donated stock is placed in the hands of a trustee, 
 usually one of the officers, appointed either by the donors or 
 by the company. An account with this trustee is opened in 
 the stock book and credited with the 400 shares donated. 
 The stock book accounts of the donors are, of course, 
 debited. The donated certificates are attached to their re- 
 spective stubs in the stock certificate book and cancelled, but 
 stock certificates need not be made out in the trustee's favor, 
 as that necessitates the making of transfers each time a sale 
 is made. As the stock is sold certificates are made out 
 direct to the purchasers, but the record of issue, both in the 
 stock certificate book and in the stock ledger, will show that 
 the stock has been transferred from "Trustee" account. The 
 following entries — ^most of them in the cash book — are 
 necessary : 
 
 Cash $3,000 
 
 To Treasury Stock $3,000 
 
 For the sale of 200 shares of treasury stock at 
 $15 per share to the following persons: 
 (Names entered here) 
 
 Cash $2,000 
 
 To Treasury Stock $2,000 
 
 For sale of 100 shares of treasury stock at $20 
 per share to the following persons : 
 (Names here) 
 
MININO CORPORATION 17^ 
 
 Development Expenses $2,000 
 
 To Cash $2,000 
 
 Expenditures for develoning the surface and 
 entrance to the mint 
 
 Mine Construction (or Builditu^ and Improvements) $1,000 
 
 To Cash $1,000 
 
 Expenditures for construction purposes at the 
 mine. 
 
 Working Capital Donated. $2,500 
 
 To Treasury Stock. $2,500 
 
 To adjust difference between book price and sale 
 price of the 300 shares of treasury stock 
 already sold. 
 
 § 156. Entries for Forfeited Subscription 
 
 The subscription of John H. Wilson was not completed, 
 and after calling on Wilson for payment of the amount still 
 due on his stock — $2,400 — without result, it was declared 
 forfeited. It is debited back to Unissued Stock as follows : 
 
 Unissued Stock $2,500 
 
 To John H. Wilson $2,400 
 
 " Profit on Forfeited Stock 100 
 
 For 100 shares of stock subscribed for by John H. 
 Wilson, on which but $100 was paid and the 
 stock was therefore declared forfeited. 
 
 The entry to be made for forfeited stock must obviously 
 depend on the manner of making the opening entries. 
 
 The $100 paid by Wilson is retained by the corporation 
 and is credited at once to Profit on Forfeited Stock or to 
 Profit and Loss. Before forfeiting stock for unpaid sub- 
 scriptions, the statutes of the state should be consulted for 
 the procedure required. In the absence of any such pro- 
 vision, the stock may be forfeited when the subscriber, after 
 ■ demand therefor, refuses or is unable to pay the amount due. 
 
176 SPECIAL ENTRIES 
 
 Sometimes the forfeited shares are advertised for sale and 
 sold to the highest bidder who in this case must offer at 
 least $2,400. 
 
 The foregoing entries are for a mine with a small 
 capitalization, but the general requirements are the same for 
 any mining company. 
 
 There are still on hand 100 shares of treasury stock 
 which may be sold at an early date or held until it will sell 
 for a higher rate or even a premium. In case the mine 
 proves to be successful, there should be no difficulty in dis- 
 posing of this stock at a higher price. The profit realized 
 from the donation of stock may be transferred from Work- 
 ing Capital Donated account to Surplus if so desired. 
 
CHAPTER XIII 
 
 PARTNERSHIPS INCORPORATED 
 
 The entries of the present chapter are those required 
 for the amalgamation and incorporation of two Chicago 
 partnerships which for a number of years have been success- 
 fully conducting a manufacturing business. The entire 
 business — ^plant, good-will, assets, and liabilities — of each 
 concern is to be transferred to the new company in exchange 
 for capital stock. Preliminary to this it is necessary to 
 discuss briefly the general nature and treatment of good- 
 will. 
 
 § 157. Good-Will 
 
 "Good-will is the monetary value placed upon the con- 
 nection and reputation of a mercantile or manufacturing 
 concern, and discounts the value of the turnover of a busi- 
 ness in consequence of the probabilities of the old customers 
 continuing."* An eminent English juristt defines good- 
 will as "every advantage . . . that has been acquired by 
 the old firm in carrying on its business, whether connected 
 with the premises in which the business was previously car- 
 ried on, or with the name of the late firm, or with any 
 matter carrying with it the benefit of the business." 
 
 Lisle in his "Accounting in Theory and Practice," gives 
 as the basis of the value of good-will, the place, the name, 
 and the chance that no one connected with the old firm will 
 step in to compete. There are other elements which enter 
 
 *George Lisle in "Accounting in Theory and Practice." 
 fVice-Chancellor, Sir W. Page Wood. 
 
178 SPECIAL ENTRIES 
 
 in, however ; such as the personnel of the concern, its trade- 
 marks, etc. Although complex, good-will may be defined in 
 general terms as the value of any benefits a business may 
 enjoy or advantages it may possess, apart from its actual 
 property or other tangible holdings. 
 
 § 158, Determination of the Value of Good-Will 
 
 As a rule, the question of computing the value of good- 
 will comes up only when a business is to be sold or its pro- 
 prietorship transferred. Then arises the necessity of know- 
 ing how much must be paid for that element in the business 
 which is represented by the increase in its earning capacity. 
 The business has property of a certain definite value. It 
 also has profit-producing power beyond mere interest and 
 replacement returns on the material value of the capital 
 and property invested. This is the good-will ; and the price 
 for which a business is sold will, of course, include this 
 good-will, as will also the capitalization if the business is 
 incorporated. 
 
 Good-will is in many cases the most valuable asset of a 
 large business. The Royal Baking Powder Company, when 
 amalgamating with its competitors, is said to have valued 
 the good-will carried by the word "Royal" at $12,000,000. 
 The annual report of the B. F. Goodrich Company carries 
 the item of "good-will" at $57,789,000, while real estate, 
 plant, etc., are valued at $12,679,151, and patents at $583,- 
 650. As the company has outstanding $60,000,000 common 
 stock and $30,000,000 preferred, the good-will constitutes 
 over 64% of the value back of the capitalization. 
 
 It is customary to base the value of good-will upon the 
 profits of a concern for a given number of years. The 
 average profits for a period of from three to five years 
 previous to the date of valuation are taken, and from these 
 is deducted a fair percentage as interest on the original in- 
 
PARTNERSHIPS INCORPORATED 179 
 
 vestment of the proprietor, and a like deduction is made 
 for his services. The sum that remains is the basis for 
 determining the good-will. A wholesale or retail trading 
 concern may fix the value of its good-will at from one to 
 five years' profits; while in a professional business it is 
 estimated at from one to two years' profits. The value may 
 vary not only with the nature of the business, but also with 
 the particular conditions under which it operates. In a 
 business which has an absolute monopoly in one line, the 
 good-will may well be considered as much larger than in 
 the ordinary business ; again, a business which requires the 
 personal attention of but one man is worth more than a 
 business of equal turnover which takes up the entire atten- 
 tion of two or three men. 
 
 § 159, Accounting Treatment of Good- Will 
 
 Good-will is commonly regarded as a fixed asset, since 
 it represents a definite capacity for earning. This capacity, 
 although it may vary with business conditions, can never 
 be said to depreciate in the accounting sense. Good- Will 
 account, therefore, unless written off, or increased with the 
 growth of the business, remains the same, showing on the 
 debit side the amount originally paid for the good-will. 
 
 Good-Will account in the case of corporations is also 
 used at times as a convenient place in which to record over- 
 capitalization or capitalization in excess of property values. 
 When an incorporating concern has valued its actual prop- 
 erty at a certain amount, its good-will is valued at such 
 additional amount as will make the total capitalization of 
 the company equal to the estimated value of the business. 
 Good-will, then, being an elastic quantity, may easily be 
 estimated at more than it is actually worth. Whether esti- 
 mated conservatively or not, in all such cases the Good- Will 
 account in the ledger shows the difference between the face 
 
l8o SPECIAL ENTRIES 
 
 value of the capital stock and the value of the actual property 
 owned by the corporation. 
 
 There is a tendency in modern business to dispense with 
 good-will altogether, it being written off the books grad- 
 ually. The General Electric Company and the Victor Talk- 
 ing Machine Company have each written their good-will 
 down to $i.oo at which amount it is being carried on the 
 books. A possible reason for this is that the valuation of 
 good-will being based on a given number of years' purchase 
 of the profits of the vendor concern, less a fair return on 
 capitalization, its cost is consumed concurrently with the 
 efflux of the period for which it has been purchased. The 
 general practice, however, is to regard the book value of 
 good-will as unchangeable, simply representing the amount 
 paid for it in the first place. 
 
 § 1 60. Conditions of the Incorporation 
 
 In Illinois the entire capital stock must be subscribed and 
 one-half paid up before the company is permitted to begin 
 operations, and therefore the partnership agreements to take 
 stock appear in the application for charter. The actual 
 transfer of the partnership assets and liabilities to the cor- 
 poration is not, of course, made until the latter is com- 
 pletely organized and ready to enter into contracts. The 
 transfer acts practically as a dissolution of the partner- 
 ships. 
 
 The change of ownership incident to the transfer of a 
 partnership business to a corporation does not necessarily 
 produce any change in the business or in the established 
 policy of management; or even in the manner of keeping 
 the books of account, except such changes as are necessary 
 to adjust the capital account to the altered conditions. Dur- 
 ing the process of the incorporation now to be considered, 
 the partnerships go on with their operations as before, all 
 
PARTNERSHIPS INCORPORATED igi 
 
 of the output after the agreed date belonging to the corpora- 
 tion. 
 
 § i6i. Agreement for Incorporation 
 
 Certain preliminary agreements have been entered into 
 by the owners of the two concerns now being consolidated. 
 The matter of good-will, amount at which to capitalize, pro- 
 portions of common and preferred stock, the allotment of 
 shares among incorporators, the selection of officers, etc., 
 have all been given careful consideration and are embodied 
 in the preHminary agreement for incorporation which 
 follows : 
 
 Agreement for Incorporation 
 
 OF 
 
 Lowell, Mason & Company and Oliver & Dickson 
 
 This Agreement for Incorporation made this 28th day of August, 
 1916, by and between Robert Lowell, Walter F. Mason, and Norman 
 Lowell, copartners in the manufacture and sale of chemicals and 
 chemical supplies in the city of Chicago, under the firm name of 
 Lowell, Mason & Company, and Nelson G. Oliver and George Dickson, 
 copartners in the manufacture of chemicals, also in the city of Chicago, 
 under the firm name of Oliver & Dickson. 
 
 Witnesseth : 
 
 1. That the business heretofore conducted by each of the above- 
 named firms shall be amalgamated and incorporated under the laws 
 of the State of Illinois as the Lowell-Mason Chemical Company. 
 
 2. That the capital stock of said corporation shall be Five Million 
 Dollars ($5,000,000), consisting of Three Million Dollars ($3,000,000) of 
 common stock, being 30,000 shares of the par value of One Hundred 
 Dollars ($100) each, and Two Million Dollars ($2,000,000) of seven 
 per cent (7%) cumulative preferred stock, being 20,000 shares of the 
 par value of One Hundred Dollars ($100) each. Three Million Dollars 
 ($3,000,000) of the common stock, being the entire issue thereof, and 
 One Million Dollars ($1,000,000) of the preferred stock, is to be issued 
 full-paid in exchange for the said bovinesses as going concerns as here- 
 inafter stated, including all of their assets, credits, trade-names, form- 
 
j82 special entries 
 
 ulae, and good-will, and said incorporated company shall assume all 
 of the outstanding liabilities of the said firms as existing at the time 
 of transfer, on the date of final organization. 
 
 3. That the stock of the said corporation shall be issued full-paid 
 as follows : To the aforesaid firm of Lowell, Mason & Company, ~One 
 Million, Five Hundred Thousand Dollars ($1,500,000) of common 
 stock and Five Hundred Thousand Dollars ($500,000) of preferred 
 stock, distributed to the partners as follows: 
 
 Robert Lowell, 7,500 shares common and 2,500 shares preferred 
 Walter F. Mason, 6,000 " " " 2,000 " 
 
 Norman Lowell, 1,500 " " " 500 " 
 
 To the aforesaid firm of Oliver & Dickson, One Million, Five 
 Hundred Thousand Dollars ($1,500,000) of common stock and Five 
 Hundred Thousand Dollars ($500,000) of preferred stock, distributed 
 to the partners as follows: 
 
 Nelson G. Oliver, 7,500 shares common and 2,500 shares preferred 
 George Dickson, 7,500 " " " 2,500 " " 
 
 The remaining stock, being One Million Dollars ($1,000,000) of 
 preferred stock, is to be underwritten by Baker, Wilson & Shaw, 
 bankers, at 95 (5% commission), a contract to that effect having 
 already been executed. 
 
 4. And it is covenanted and agreed that Two Hundred Thousand 
 Dollars ($200,000) of common stock shall be returned by the afore- 
 said contracting parties to the corporation, One Hundred Thousand 
 Dollars ($100,000) from each firm, to be treasury stock and to be 
 given to the said bankers free of charge as a bonus with the One 
 Million Dollars ($1,000,000) of preferred stock subscribed by them. 
 
 5. That the Board of Directors shall consist of five members, and 
 the first Board named shall consist of: 
 
 Robert Lowell 
 
 Walter F. Mason 
 
 Norman Lowell 
 
 Nelson G. Oliver 
 
 George Dickson 
 That cumulative voting shall be employed in the election ot 
 directors; that directors shall be stockholders; and that salaries oS 
 officers shall be fixed or changed only by a four-fifths' vote of th» 
 entire Board. 
 
 6. The first officers of the corporation shall be as follows : 
 
PARTNERSHIPS INCORPORATED 183 
 
 President Robert Lowell 
 
 Vice-President Nelson G. Oliver 
 
 Treasurer Walter F. Mason 
 
 Secretary George Dickson 
 
 and that the President and Treasurer shall each have an annual salary 
 of Twelve Thousand Dollars ($12,000), and that the Vice-President 
 and Secretary shall each have an annual salary of Eight Thousand 
 Dollars ($8,000). 
 
 7. That after the formation of said corporation the existing firms 
 of Lowell, Mason & Company and Oliver & Dickson shall be formally 
 dissolved, and the business connections of each, and the general public, 
 shall be formally notified thereof. 
 
 In Witness Whereof, the parties have hereunto affixed their hands 
 and seals on the day and year first above written. 
 
 Robert Lowell [l. s.] 
 
 Walter F. Mason [l. s.] 
 
 Norman Lowell [l. s.] 
 
 Nelson G. Oliver [l. s.] 
 
 George Dickson [l. s.] 
 
 Attest : 
 
 Charles W. Bennett 
 
 § 162. Allotment of Stock 
 
 The allotment of common and preferred stock is given 
 in fuller detail in the following tabulation : 
 
 Shares 
 
 Name Address Common Preferred Amount 
 
 Robert Lowell Chicago 7,Soo 2,500 $1,000,000 
 
 Walter F. Mason " 6,000 2,000 800,000 
 
 Norman Lowell " i.Soo soo 200,000 
 
 Nelson G. Oliver " 7,500 2,500 1,000,000 
 
 George Dickson Evanston 7,500 2,500 1,000,000 
 
 Baker, Wilson & Shaw Chicago 10,000 1,000,000 
 
 Total Subscriptions 30,000 20,000 $5,000,000 
 
 § 163. Underwriting Expenses 
 
 It is customary for corporations In disposing of large 
 stock and bond issues, to seek the aid of well-known bank- 
 
1 84 SPECIAL ENTRIES 
 
 ing houses. When, this is done, the bankers "underwrite," 
 or become responsible for, the sale of a given amount of 
 stock. In the present instance the amount involved is 
 $1,000,000, the bankers agreeing to take this entire block 
 of stock at 95, or rather on a 5% commission basis. They 
 then sell the stock to their customers at par or above, the 
 difference between the cost and selling prices representing 
 their profit or commission. It is probable that in a case 
 like this the preferred stock would be sold at par and the 
 $200,000 of common stock be included therewith as a bonus, 
 the transaction bringing the bankers a profit of $50,000 — 
 the amount of their commission. 
 
 To the newly organized company the transaction is 
 legitimate, since the $50,000 realized by the bankers is re- 
 garded as a selling commission, exactly as if the expense 
 of selling the stock had been incurred by the company it- 
 self. The bonus of treasury stock given the bankers might 
 be entered on the books, as shown later; or be transferred 
 directly from the stockholders to the banking firm, or to the 
 new purchasers, without being entered on the books at all. 
 As the incorporators have donated the stock for the good of 
 the cause, it matters little how the transaction is handled 
 so long as the desired end is reached, and such receipts or 
 other evidences of it are preserved as will establish the facts 
 should the necessity arise. 
 
 When stock is underwritten it is not unusual for the 
 bankers to turn over to the company full payment for the- 
 underwritten stock; a check for the difference between this 
 amount and the underwritten price being, in turn, given to 
 them. Such amount is then charged to Commission account 
 or to Underwriting Expense or some other suitable account. 
 This has the merit of bringing the transaction on the books 
 in a very clear and simple manner, and of eliminating from 
 record the appearance of selling stock at a discount. In the 
 
PARTNERSHIPS INCORPORATED 
 
 185 
 
 present case, however, but 50% of the underwritten stock 
 ($500,000) is paid by the underwriters at the time, and a 
 check for $25,000 (^% commission on 50% of the under- 
 written stock), is given to them. The remainder of the 
 underwriters' subscription ($500,000) will be paid later as 
 per agreement. 
 
 § 164. Balance Sheets of the Incorporating Firms 
 
 The balance sheets of the two partnerships, Lowell, 
 Mason & Company and Oliver & Dickson, as of September 
 I, 1916, before the incorporation, are given below. These 
 statements and the agreement for incorporation as given 
 in § 161, form the basis for opening the books of the new 
 company. 
 
 Lowell, Mason & Company 
 Balance Sheet, September i, 1916 
 
 Assets 
 
 
 Liabilities 
 
 
 Land and Buildings. . . 
 
 $250,000.00 
 
 Mortgage Payable .... 
 
 $100,000.00 
 
 Machinery and Tools. 
 
 115,000.00 
 
 Interest Accrued 
 
 2,500.00 
 
 Patents and Patterns.. 
 
 72,800.00 
 
 Notes Payable 
 
 40,000.00 
 
 Trucks and Motors . . . 
 
 25,000.00 
 
 Interest Accrued 
 
 1,500.00 
 
 Fuel and Supplies 
 
 12,400.00 
 
 Accounts Payable 
 
 25,000.00 
 
 Raw Material 
 
 52,800.00 
 
 Accrued Taxes 
 
 6,500.00 
 
 Work in Process 
 
 57,300.00 
 
 Reserve Accounts: 
 
 
 Finished Stock 
 
 44,900.00 
 
 For Depreciation... 
 
 12,000.00 
 
 Deferred Charges to 
 
 
 " Bad Debts 
 
 2,200.00 
 
 Operating 
 
 9,250.00 
 
 Capital Accounts: 
 
 
 Investments in Stocks 
 
 
 Robert Low- 
 
 
 and Bonds 
 
 I4'?.700.00 
 
 ell $500,000 
 
 
 Notes Receivable 
 
 142,000.00 
 
 Walter F. 
 
 
 Accounts Receivable.. 
 
 174,800.00 
 
 Mason . . . 400,000 
 
 
 Cash 
 
 95,000.00 
 
 Norman 
 
 
 
 
 Lowell . . 100,000 
 
 1,000,000.00 
 
 
 Profits Undivided.... 
 
 5,250.00 
 
 ! 
 
 1,194,950.00 
 
 £,194,950.00 
 
1 86 SPECIAL ENTRIES 
 
 Oliver & Dickson 
 Balance Sheet, September i, 1916 
 
 Assets 
 
 
 Liabilities 
 
 Leasehold 
 
 $156,000.00 
 
 Notes Payable (Se- 
 
 Machinery and Tools. 
 
 85,000.00 
 
 cured) $126,000.00 
 
 Delivery Equipment.. 
 
 30,000.00 
 
 Accounts Payable 136,300.00 
 
 Fuel and Supplies 
 
 9,400.00 
 
 Interest Accrued 1,600.00 
 
 Patents and Patterns.. 
 
 122,000.00 
 
 Accrued Operating 
 
 Raw Material 
 
 75,100.00 
 
 Charges 10,700.00 
 
 Work in Process 
 
 80,900.00 
 
 Capital Accounts : 
 
 Finished Stock 
 
 198,000.00 
 
 Nelson G. 
 
 Deferred Charges 
 
 12,300.00 
 
 Oliver ...$500,000 
 
 Bonds and Securities. 
 
 150,000.00 
 
 George 
 
 Accounts Receivable, 
 
 
 Dickson.. 500,0001,000,000.00 
 
 Net (book value 
 
 
 
 
 $223,000) 
 
 221,500.00 
 
 
 Cash 
 
 134,400.00 
 
 
 5 
 
 1,274,600.00 
 
 $1,274,600.00 
 
 § 165. Statutory Requirements 
 
 The Illinois statutes state that, "It shall be the duty of 
 the directors or trustees of every stock corporation to cause 
 to be kept at its principal office or place of business in this 
 state correct books of account of all its business, and every 
 stockholder in such corporation shall have the right at all 
 reasonable times, by himself or by his attorney, of examin- 
 ing the records and books of account of the corporation." 
 
 § 166. Opening Entries 
 
 The opening entries for the new corporation must be 
 such as will record correctly and in proper sequence the 
 various transactions involved in the incorporation of the 
 company, and in transferring to it, in exchange for jts capital 
 stock, the entire plant, business, and net assets of each firm. 
 Those shown below do not differ materially from the entries 
 
PARTNERSHIPS INCORPORATED 
 
 187 
 
 given in previous chapters, except in the manner of making 
 charges for stock. Instead of opening accounts for the 
 various subscribers or even for subscriptions, accounts are 
 opened separately for the three different concerns which 
 have subscribed for stock, and the amount agreed upon is 
 charged to each. 
 
 September i, 1916 
 First Entry 
 
 Unissued Common Stock $3,000,000 
 
 Unissued Preferred Stock 2,000,000 
 
 To Capital Stock — Common $3,000,000 
 
 " Capital Stock — Preferred 2,000,000 
 
 The Lowell-Mason Chemical Company is 
 incorporated this day under the laws 
 of Illinois, with a capital stock of $5,- 
 000,000 divided into 30,000 shares of 
 common stock of the par value of 
 $100 each, and 20,000 shares of 7% 
 cumulative preferred stock of the par 
 value of $100 each. 
 
 In the second entry, each firm is charged with the 
 amount of stock to be turned over to its members, or to 
 whomsoever it directs. A separate entry and explanation 
 might be made, if desired, for each firm, or even for each 
 subscriber, but in either case each entry should clearly state 
 the amount of common and preferred stock taken. The 
 entry for stock given to the banking firm might advan- 
 tageously be separated from the others. 
 
 Second Entry 
 
 Lowell, Mason & Company $2,000,000 
 
 Oliver & Dickson ■. 2,000,000 
 
 Baker, Wilson & Shaw 1,000,000 
 
 To Unissued Common Stock $3,000,000 
 
 " Unissued Preferred Stock 2,000,000 
 
:8 SPECIAL ENTRIES 
 
 Subscriptions of the above firms for the 
 entire common and preferred stock of 
 the Company; the distribution of this 
 stock, as per agreement for incor- 
 poration, the subscription list, and the 
 certificate of incorporation, being as 
 follows : 
 
 Shares 
 Com- Pre- 
 Name mon ferred 
 
 Robert Lowell 7.500 2,500 
 
 Walter F. Mason 6,000 2,000 
 
 Norman Lowell 1,500 500 
 
 Nelson G. Oliver 7,500 2,500 
 
 George Dickson 7,500 2,500 
 
 Baker, Wilson & Shaw 10,000 
 
 Total 30,000 20,000 
 
 September i, 1916 
 
 Third Entry 
 
 Plant and Sundry Assets $2,000,000 
 
 To Lowell, Mason & Company $2,000,000 
 
 Purchase price of the plant, assets, and 
 business of Lowell, Mason & Company 
 taken over this day as a going concern, 
 in full payment of stock subscriptions 
 to 15,000 shares of common and 5,000 
 shares of preferred stock of the Com- 
 pany, as per agreement for incorpora- 
 tion. (See minute book, page 5.) All 
 right, title, and interest in the assets of 
 Lowell, Mason & Company are con- 
 veyed to the Lowell-Mason Chemical 
 Company, and all liabilities of that firm 
 are assumed by the Lowell-Mason 
 Chemical Company, as per agreement 
 for incorporation. 
 
PARTNERSHIPS INCORPORATED 
 
 189 
 
 Fourth Entry 
 Sundries to Sundries : 
 
 Land and Buildings 
 
 Machinery and Tools 
 
 Patents and Patterns 
 
 Trucks and Motors 
 
 Fuel and Supplies 
 
 Raw Material 
 
 Work in Process 
 
 Finished Stock 
 
 Deferred Charges to Operating 
 
 Investments in Stocks and Bonds 
 
 Notes Receivable 
 
 Accounts Receivable 
 
 Cash 
 
 Good- Will 
 
 To Mortgage Payable 
 
 " Interest Accrued 
 
 " Notes Payable 
 
 " Accounts Payable 
 
 " Accrued Taxes 
 
 " Reserve for Depreciation 
 
 " Reserve for Bad Debts 
 
 " Surplus 
 
 " Plant and Sundry Assets 
 
 To record in the ledger the various 
 specific assets and liabilities turned 
 over by Lowell, Mason & Company. 
 
 $250,000 
 115,000 
 72,800 
 25,000 
 12,400 
 52,800 
 
 57.300 
 44,900 
 
 9.250 
 
 143.700 
 
 142,000 
 
 174,800 
 
 95,000 
 
 1,000,000 
 
 $100,000 
 
 4,000 
 
 40,000 
 
 25,000 
 
 6,500 
 
 12,000 
 
 2,200 
 
 S.250 
 2,000,000 
 
 Fifth Entry 
 
 Plant and Sundry Assets $2,000,000 
 
 To Oliver & Dickson 
 
 Purchase price of the plant, assets, and 
 business of Oliver & Dickson, taken 
 over by the Company as a going con- 
 cern, as per agreement for incorpora- 
 tion. (See minute book, page 5.) 
 Assets of Oliver & Dickson are taken 
 over and liabilities assumed by Com- 
 pany as shown below. 
 
 $2,000,000 
 
I go SPECIAL ENTRIES 
 
 Sixth Entry 
 Sundries to Sundries: 
 
 Leasehold $156,000 
 
 Machinery and Tools 85,000 
 
 Delivery Equipment 30,000 
 
 Fuel and Supplies 9,400 
 
 Patents and Patterns 122,000 
 
 Raw Material 75,ioo 
 
 Work in Process 80,900 
 
 Finished Stock 198,000 
 
 Deferred Charges 12,300 
 
 Bonds and Securities 150,000 
 
 Accounts Receivable 223,000 
 
 Cash 134,400 
 
 Good-Will 1,000,000 
 
 To Notes Payable (Secured) 
 
 " Accounts Payable 
 
 " Interest Accrued 
 
 " Reserve for Bad Debts 
 
 " Accrued Operating Charges 
 
 " Plant and Sundry Assets 
 
 To record in the ledger accounts the 
 specific assets and liabilities turned 
 over by Oliver & Dickson, as above. 
 
 Seventh Entry 
 
 Cash $500,000 
 
 To Baker, Wilson & Shaw 
 
 Payment of 50% of subscription of Baker, 
 Wilson & Shaw, underwriters, to $1,- 
 000,000 of preferred stock. 
 
 Eighth Entry 
 
 Organization Expense $31,000 
 
 To Cash 
 
 By order of the directors for payment of 
 various expenses incurred during the 
 incorporation of the Company, includ- 
 ing 5% commission to Baker, Wilson 
 & Shaw on $500,000 of stock subscrip- 
 tion. (Give expense items in detail.) 
 
 $126,000 
 
 136,300 
 
 1,600 
 
 1,500 
 
 10,700 
 
 2,000,000 
 
 $500,000 
 
 $31,000 
 
PARTNERSHIPS INCORPORATED 191 
 
 Ninth Entry 
 
 Treasury Stock — Common $200,000 
 
 To Stock Donation Account $200,000 
 
 2,000 shares of common stock donated to 
 the Company in accordance with the 
 agreement for incorporation, as fol- 
 lows: 
 
 Lowell, Mason & Company 1,000 shares 
 Oliver & Dickson 1,000 " 
 
 Tenth Entry 
 
 Stock Donation Account $200,000 
 
 To Treasury Stock — Common /. . $200,000 
 
 For the bonus of 2,000 shares of common 
 
 stock transferred to Baker, Wilson & 
 
 Shaw as per underwriting contract, 
 
 being one share of common stock for 
 
 every five of preferred stock under- 
 written. This stock has been donated 
 
 by the incorporators and is full-paid 
 
 and non-assessable. 
 
 $500,000 of the underwriters' stock subscription still 
 remains to be settled for as per agreement, at which time 
 Cash and Organization Expense will be increased and the 
 account with Baker, Wilson & Shaw closed out. 
 
 § 167. Closing the Partnership Books 
 
 The manner of closing the partnership books will be 
 illustrated in detail by the closing entries for Lowell, Mason 
 & Company. A somewhat different procedure is shown in 
 condensed form in closing the books of Oliver & Dickson. 
 
 It is not unusual, when a partnership is incorporated, 
 for the bookkeeping system, if well-arranged, to be retained 
 and be used by the new company, rather than to open new 
 books. When that is the case, only such entries are required 
 as are necessary to open the accounts peculiar to the corpora- 
 
192 
 
 SPECIAL ENTRIES 
 
 tion and record the transactions incident to incorporation. 
 However, in the case now under consideration new books 
 are presumed to have been opened, and, of course, all asset 
 and liability accounts must necessarily be closed on the 
 partnership books and the balances be transferred to the 
 corporation's accounts. 
 
 It will be noticed that each firm has been allowed 
 $1,000,000 for its good-will in addition to payment in full 
 for its net worth. The amount may be too much, but that 
 is a matter with which the accountant is not particularly 
 concerned since this has already been determined and he 
 must accept conditions as he finds them. The two firms 
 receive stock of the new company in exchange for their 
 respective plants and net assets; and this stock in turn is 
 apportioned to the former partners in proportion to their 
 holdings as set forth in the agreement. The successive 
 entries shown below exhibit in proper sequence the pro- 
 cedure and book entries required. 
 
 § 168. Closing Entries on Books of Lowell, Mason & 
 Company 
 
 The following entries will properly adjust and close the 
 accounts of Lowell, Mason & Company. The same end 
 could be reached by different series of adjusting entries. 
 
 First Entry September i, 1916 
 
 Good-Will $1,000,000 
 
 To Robert Lowell $500,000 
 
 ' Walter F. Mason 400,000 
 
 " Norman Lowell 100,000 
 
 To place upon the books good-will of 
 $1,000,000 in accordance with agree- 
 ment for incorporation of the Lowell- 
 Mason Chemical Company entered into 
 August 28, 1916. Good-will appor- 
 tioned according to the partners' hold- 
 ings. 
 
PARTNERSHIPS INCORPORATED 
 
 193 
 
 Second Entry 
 
 Lowell-Mason Chemical Company $2,194,950 
 
 To Sundry Assets : 
 
 Land and Buildings $250,000 
 
 Machinery and Tools 115,000 
 
 Patents and Patterns 72,800 
 
 Trucks and Motors 25,000 
 
 Fuel and Supplies 12,400 
 
 Raw Material 52,800 
 
 Work in Process 57,300 
 
 Finished Stock 44,900 
 
 Deferred Charges to Operating. . . 9,250 
 
 Investments in Stocks and Bonds. 143,700 
 
 Notes Receivable 142,000 
 
 Accounts Receivable 174,800 
 
 Cash 95,000 
 
 Good-Will 1,000,000 
 
 Plant, good-will, and sundry assets turned 
 
 over to the Lowell-Mason Chemical 
 
 Company in exchange for $2,000,000 
 
 par value of stock of that Company, 
 
 as per agreement for incorporation. 
 
 Third Entry 
 Sundry Liabilities: 
 
 Mortgage Payable $100,000 
 
 Notes Payable 40,000 
 
 Interest Accrued 4,000 
 
 Accounts Payable 25,000 
 
 Accrued Taxes 6,500 
 
 Reserve for Depreciation 12,000 
 
 Reserve for Bad Debts 2,200 
 
 Profits Undivided 5,250 
 
 To Lowell-Mason Chemical Company $194,950 
 
 To close accounts and transfer to Lowell- 
 Mason Chemical Company all of the 
 liabilties of this firm, as per agreement 
 for incorporation. 
 
 All assets and liabilities have now been closed off and 
 
194 
 
 SPECIAL ENTRIES 
 
 transferred to the new corporation; and the only accounts 
 remaining open are the capital accounts of partners and the 
 debit balance of the Lowell-Mason Chemical Company. The 
 required amount of stock has been received from the new 
 company to pay for the $2,000,000 of net assets turned over. 
 This stock is distributed to the former partners as originally 
 agreed, and entered on the books as follows : 
 
 Stock of Lowell-Mason Chemical Company $2,000,000 
 
 To Lowell-Mason Chemical Company $2,000,000 
 
 For 20,000 shares of stock of Lowell- 
 Mason Chemical Company received to- 
 day in full payment for net assets 
 shown in the previous entries. The 
 stock is issued in the partners' names 
 as follows : 
 
 Shares 
 Com- Pre- Par 
 Names men ferred Value 
 
 Robert Lowell.. 7,500 2,500 $1,000,000 
 Walter F.Mason 6,000 2,000 800,000 
 Norman Lowell 1,500 500 200,000 
 
 Total 15,000 5,000 $2,000,000 
 
 Robert Lowell $1,000,000 
 
 Walter F. Mason 800,000 
 
 Norman Lowell 200,000 
 
 To Stock of Lowell-Mason Chemical 
 
 Company $2,000,000 
 
 For distribution of the above-mentioned 
 stock to the partners, and to close the 
 capital accounts of the firm. 
 
 § 169. Closing the Books of Oliver & Dickson 
 
 The entries below illustrate another plan of closing the 
 partnership accounts. These entries are condensed as much 
 as possible so as to show merely the procedure rather than 
 
PARTNERSHIPS INCORPORATED jge 
 
 the record of details such as was shown in the previous 
 closing entries. 
 
 Good-Will $1,000,000 
 
 To Nelson G. Oliver $500,000 
 
 George Dickson 500,000 
 
 (Full explanation here.) 
 
 Lowell-Mason Chemical Company $2,000,000 
 
 Sundry Liabilities (listed separately) 274,600 
 
 To Good-Will and Sundry Assets 
 
 (listed separately) $2,274,600 
 
 (Full explanation here for transfer of 
 all assets and liabilities.) 
 
 Nelson G. Oliver $1,000,000, 
 
 George Dickson 1,000,000 
 
 To Lowell-Mason Chemical Company $2,000,000 
 
 To close capital accounts of the partners 
 upon distribution to them of stock of 
 the Lowell-Mason Chemical Company : 
 Shares 
 Name Common Preferred 
 
 Nelson G. Oliver. . 7,500 2,500 
 
 George Dickson., . . 7,500 2,500 
 
 Total 15,000 5,000 
 
 § 170. Balance Sheet of New Company 
 
 The accompanying balance sheet of the new corporation 
 shows the combined assets and liabilities and capital stock 
 of the Lowell-Mason Chemical Company. The balance sheet 
 of each firm as given in § 164 shows the condition of the 
 two firms at the time of the incorporation. Add $1,000,000 
 for good-will to the net capital of each firm to get the value 
 placed upon its business. On the books of the new company 
 the assets and liabilities taken over from the two firms are, 
 
196 
 
 SPECIAL ENTRIES 
 
 of course, to be combined in the respective accounts, as 
 shown in the consoHdated balance sheet herewith. 
 
 Sometimes, the names of accounts are changed slightly 
 to meet the tastes of the accountant or bookkeeper; and it 
 might be advisable to keep the two sets of accounts with 
 customers of the respective firms in separate ledgers. The 
 good-will of $2,000,000 might have been reduced to $1,994,- 
 750 and the surplus of $5,250 eliminated. The organization 
 expenses are usually spread over a term of five or ten years 
 by annual charges to Profit and Loss. 
 
 Lowell-Mason Chemical Company 
 Balance Sheet as on September i, 1916 
 
 Assets 
 
 
 Liabilities 
 
 Land and Buildings... 
 
 $250,000.00 
 
 Mortgage Payable.... $100,000.00 
 
 Machinery and Tools. 
 
 200,000.00 
 
 Notes Payable 166,000.00 
 
 Patents and Patterns.. 
 
 194,800.00 
 
 Accounts Payable 161,300.00 
 
 Leasehold 
 
 156,000.00 
 
 Interest Accrued 5,600.00 
 
 Trucks and Motors... 
 
 25,000.00 
 
 Accrued Taxes and 
 
 Delivery Equipment... 
 
 30,000.00 
 
 Charges 17,200.00 
 
 Fuel and Supplies.... 
 
 21,800.00 
 
 Reserve Accounts: 
 
 Raw Material 
 
 127,900.00 
 
 For Depreciation... 12,000.00 
 
 Work in Process 
 
 138,200.00 
 
 " Bad Debts 3,700.00 
 
 
 242,900.00 
 
 
 Deferred Charges to 
 
 Total Liabilities $465,800.00 
 
 Operating 
 
 21,550.00 
 
 
 Investments 
 
 293,700.00 
 
 Capital Stock: 
 
 Notes Receivable 
 
 142,000.00 
 
 Common 3,000,000.00 
 
 Accounts Receivable. . 
 
 397,800.00 
 
 Preferred, 7% Cum- 
 
 Cash 
 
 698,400.00 
 
 ulative 2,000,000.00 
 
 Subscriptions to Stock 
 
 500,000.00 
 
 Surplus 5,250.00 
 
 Organization Expenses 
 
 31,000.00 
 
 
 Good-Will 
 
 2,000,000.00 
 
 
 
 
 $5,471,05000 
 
 $5,471,050.00 
 
Part IV — Corporate Bond Issues 
 
 CHAPTER XIV 
 THE CORPORATION BOND 
 
 § 171. Nature of the Bond 
 
 A bond is a promise under seal to pay a definite sum 
 of money at a stated time, usually with an agreement to 
 pay interest at certain periods, and a pledge of certain 
 properties as security for payment of both principal and 
 interest. When a corporation borrows money, its indebted- 
 ness may be evidenced either by notes or bonds. If the 
 amount borrowed is small, or if it is borrowed in a single 
 sum, or but from few persons, or for a short time, notes 
 are usually given. If, however, the amount is large and 
 obtained from a number of people, and borrowed for a 
 period of years, the corporate obligation is preferably and 
 usually evidenced by bonds. 
 
 The difference between a corporate note and a bond is 
 not always clearly marked. Both are promises to pay 
 money. The phrasing of the bond is usually more formal 
 than that of the note, and it must be executed under seal, 
 while the corporate note need not. Also payment of bonds 
 is usually, though not invariably, secured as to both prin- 
 cipal and interest by certain specified property held for the 
 purpose under a formal deed of trust. 
 
 A bond payable "to order," or "to bearer," or "to 
 holder," is a negotiable instrument, and this in spite of the 
 
 197 
 
198 
 
 CORPORATE BOND ISSUES 
 
 fact that it is executed under seal. Hence, if such a bond 
 is in due form and is purchased for value and in good faith, 
 the purchaser is protected against any defenses set up by 
 the corporation and against any claims of previous owners. 
 
 A bond issue consists of a number of bonds which, while 
 they may vary as to denomination, are all of like general 
 tenor, and, if secured at all, are all secured and, unless 
 otherwise expressly provided, equally secured under one 
 deed of trust. 
 
 Bonds are issued in varying denominations. $1,000 is 
 the usual face value; $500 bonds ire not infrequently 
 issued; $100 bonds have grown in favor in the past few 
 years; and bonds are sometimes issued for popular sub- 
 scription of still smaller face value. Bonds of a face value 
 of $5,000 and $10,000 are frequent, and they are some- 
 times issued in still larger denominations. 
 
 Bonds are a direct corporate obligation and do not in 
 any way partake of the nature of stock. They may, how- 
 ever, be given rights of participation in corporate profits if 
 desired, and, in the absence of statutory prohibition, may 
 be given voting rights as well. 
 
 § 172. Authorization of Bond Issues 
 
 "The power of a corporation to borrow money is im- 
 plied, and exists without being expressly granted by a 
 charter or statute."* In the absence of restraining laws, 
 a corporation may therefore issue corporate notes and bonds 
 to any desired amount. Also, unless otherwise expressly 
 provided by law, or by charter or by-law provision, the 
 power to incur corporate indebtedness lies with the directors, 
 zaid they may at their discretion issue corporate notes and 
 bonds without authorization from the stockholders. Public 
 utility corporations operating under the jurisdiction of 
 
 * Cook on Corporations, § 760. 
 
THE CORPORATION BOND iqq 
 
 States having- a public utility commission are usually re- 
 quired to secure the authorization of the commission for 
 any contemplated bond issues. 
 
 § 173. Constitutional and Statutory Provisions Affecting 
 Bond Issues 
 
 Constitutional provisions affecting the issue of bonds 
 are found in many states, but as a rule confine themselves 
 to the requirement that bonds shall be issued only for value 
 and that any fictitious increase of indebtedness is void. In 
 a few states the constitution requires the authorization of 
 bond issues by stockholders. 
 
 Statutory provisions requiring the assent of a specified 
 majority of the stockholders before bonds may be issued 
 are also found in many states. The statutory provisions 
 also frequently specify the notice which must be given for 
 stockholders' meetings to authorize bond issues. 
 
 Statutory provisions limiting the amount of corporate 
 indebtedness are found in many states, and in some states 
 specific provisions exist as to the selling price of bonds, as 
 in North Carolina where the statutes provide that bonds 
 may be sold below par and commissions may be paid upon 
 the sales. Other special provisions as to bond issues are 
 found in a number of states. 
 
 The statutes of the particular state should, of course, 
 always be consulted when a bond issue is contemplated. 
 Any proposed action may be materially affected by the 
 provision of the law. 
 
 § 174. Procedure in Issuing Bonds 
 
 The various steps to be taken in any bond issue must 
 necessarily depend upon the kind of bonds and the con- 
 ditions of the particular issue. The general procedure is 
 about as follows, subject to any statutory, charter, or by- 
 
200 CORPORATE BOND ISSUES 
 
 law provisions which may apply. It will be understood, 
 of course, that any important bond issue should be made 
 under the direct supervision of competent attorneys. 
 
 1. The directors pass a preliminary resolution recom- 
 mending the bond issue and directing the call of a special 
 meeting of stockholders to consider the recommendation. 
 Even where the directors have power to authorize a bond 
 issue, it seems preferable and prudent to obtain the approval 
 of the stockholders. 
 
 2. A statement of the proposed bond issue is then pre- 
 pared and submitted for the consideration of the stock- 
 holders. This should give the time to run, how secured, 
 terms of payment, rate of interest, redemption conditions, 
 and all other important details. 
 
 3. If the bond issue is approved by the stockholders, 
 their approval is usually expressed in the form of a resolu- 
 tion, though sometimes when a meeting is inadvisable, the 
 issue is approved by written consent of the individual 
 stockholders. 
 
 4. The issue having been sanctioned by the stockhold- 
 ers, the directors pass such resolutions as are necessary to 
 authorize the bonds and their issue in due form by the 
 officers of the corporation. 
 
 5. If there is a public service commission in the state, 
 proposed bond issues of all corporations coming under its 
 jurisdiction must have its approval before issuance. 
 
 6. A trust company is usually selected as the trustee 
 for the bonds, and a contract is made for its services. 
 
 7. The deed of trust conveying properties to the trustee 
 in trust for bondholders, and setting forth all the conditions 
 under which the bonds are issued, is drawn and duly 
 executed by the proper officers of the company. 
 
 8. The bonds are prepared. These are usually engraved 
 on a good bond paper with coupons attached if the issue 
 
THE CORPORATION BOND 201 
 
 is of coupon bonds. The trustee's certificate must appear 
 on each bond. 
 
 9. If realty is covered by the deed of trust, a copy must 
 be filed in every county where the real estate is located. 
 
 10. Sale of bonds either direct to the pubHc, or through 
 some firm of bankers, is provided for. This is usually done 
 either before the bonds are authorized or soon after. The 
 sale price usually depends on the standing of the issuing 
 company. 
 
 11. Provision must be made for the payment of 
 interest coupons at the issuing oiifice or by some bank or trust 
 company. 
 
 12. Provision must be made for the redemption of 
 bonds at the date provided by the trust agreement. 
 
 § 175. Preparation of Bonds 
 
 Bonds are usually printed or engraved by a responsible 
 company and from specially prepared plates. Every pre- 
 caution is taken to prevent the plates or any impression 
 from them being lost or stolen, and the engravers may even 
 be required to give security against loss resulting from 
 negligence on their part. The bonds are bound in book 
 form and numbered consecutively or in series. When ready 
 for issue the bonds are sealed with the corporate seal, 
 attested by the officers of the issuing company, and then 
 sent to the trustee, who certifies and delivers them as pro- 
 \'ided in the mortgage. Before certification, each bond is 
 examined to see whether it is in proper form. If all the 
 bonds of an issue are not to be sold at once, the entire 
 issue may be engraved and the reserved bonds held till 
 their time for sale, or the preparation of these latter may 
 be delayed until they are needed. If they will not be 
 used for a number of years, it is preferable to wait until 
 the time of sale to engrave the bonds. 
 
202 CORPORATE BOND ISSUES 
 
 § 176. Terms Used in Connection with Bonds 
 
 Like capital stock, the bond issue is usually authorized 
 for a stated amount, and the bonds are then sold at such 
 times and in such amounts as the conditions dictate. All 
 bonds of the same issue usually bear the same date regard- 
 less of the date of sale, and any coupons which have matured 
 before the particular bonds are sold, are clipped off, can- 
 celled, and pasted in the coupon register. 
 
 The term "authorized" used in connection with a bond 
 issue, has reference to the aggregate amount of bonds 
 sanctioned or agreed upon by the stockholders and directors, 
 regardless of whether all these are, or are not, disposed of 
 at one time. "Issued" or "outstanding" bonds are those 
 that have actually been disposed of by the company either 
 to the public or to the underwriters. Bonds are "nominally 
 outstanding" when certified by the trustee and offered for 
 sale to the public, or when they are pledged as security or 
 otherwise placed in some fund for the issuing company, no 
 actual sale having taken place. "Unissued bonds" are those 
 that have been authorized but not sold. "Escrow bonds" 
 are those held under option or subject to some other similar 
 condition. "Unsubscribed bonds" include all bonds not yet 
 taken by the public; and "subscribed bonds" those that have 
 been sold or contracted for, though payment for these 
 may not yet have been fully made. 
 
 "Treasury bonds" (as the term is ordinarily used) are 
 the unissued or unsubscribed bonds that have not been dis- 
 posed of by the company. The entire amount of authorized 
 bonds, or any part thereof, may under this interpretation 
 be considered as "treasury bonds" until disposed of by the 
 issuing company. Some accountants, however, prefer to 
 give the term the same meaning as when employed in con- 
 nection with stock, designating as "treasury bonds" only 
 such bonds of the company as have come back into its 
 
THE CORPORATION BOND 203 
 
 possession by purchase or otherwise, for investment or for 
 sinking fund purposes. Since the term is confusing, it 
 would seem better not to use it at all, but instead to use 
 some term which would clearly and unmistakably indicate 
 the real nature of the account or classification. 
 
 Bonds repurchased by the company should be clearly 
 indicated in the balance sheet, either as a subdivision of 
 "Investments," or as "Treasury Bonds," with a suitable 
 explanation of what is meant thereby, or under such other 
 caption as will clearly indicate the nature of the asset with- 
 out possibility of misunderstanding. Bonds of the company 
 purchased by the trustees of the sinking fund, insurance 
 fund, reserve fund, beneficial fund, or by any subsidiary or 
 affiliated organization, board, or society, should, however, 
 be listed in the assets of such funds, and not necessarily as 
 treasury bonds. Indeed, it is not uncommon for bonds so 
 purchased to be included among the general investments 
 of the company; but this should not be done unless they are 
 distinctly earmarked. 
 
 "Cancelled bonds" are those that have, under the terms 
 of the issue, been redeemed by the issuing company through 
 the sinking fund trustee or by direct purchase in the open 
 market. Securities or other properties are said to be in the 
 "treasury" of a company when they are in the custody of 
 the treasurer, who is the financial officer and custodian of 
 all funds and securities. The "bonded indebtedness" of a 
 company has reference to its outstanding bonds. "Funded 
 debt" is another term for "bonded debt" or outstanding 
 bonds, being obligations of a permanent nature the security 
 for which is composed of pledged property. 
 
 § 177. Issued and Outstanding Bonds 
 
 The following paragraph taken from the accounting 
 classification of the Interstate Commerce Commission indi- 
 
204 CORPORATE BOND ISSUES 
 
 cates its designations of bonds before and after the issue 
 thereof : 
 
 "For the purposes of the balance sheet statement, funded 
 debt securities are considered to be nominally issued when 
 certified by trustees and placed with the proper officer for 
 sale and delivery, or pledged, or otherwise placed in some 
 special fund of the accounting company. They are con- 
 sidered to be actually issued when they have been sold to 
 a bona fide purchaser for a valuable consideration, and 
 such purchaser holds them free from all control by the 
 accounting company. All funded debt securities actually 
 issued and not reacquired and held by or for the accounting 
 company are considered to be actually outstanding. If re- 
 acquired by or for the accounting company under such 
 circumstances as require them to be considered as held alive 
 and not cancelled or retired, they are considered to be 
 nominally outstanding." 
 
 The term "treasury bond" is not used in the Commis- 
 sion's classification. It is understood by the Commission, 
 however, to cover either nominally issued or nominally out- 
 standing bonds which are held by the corporation in its 
 treasury upon its own behalf. It may be said that this is 
 the stand taken by public utility commissions also, but the 
 accountant or corporation official may freely use whatever 
 caption for accounts he may desire, so long as it is one that 
 is clearly understood by all concerned and the corporation 
 is not subject to commission regulations. 
 
 § 178. Sinking Funds 
 
 A sinking fund as applied to bond issues is a fund 
 created for the purpose of redeeming the bonds when due, 
 or prior thereto, as may be provided by the deed of trust. 
 Thus, bonds may be retired from time to time xs the sink- 
 ing fund accumulates, or the fund may be allowed to remain 
 
THE CORPORATION BOND 
 
 205 
 
 intact until tlie maturity of the bonds, when, if properly 
 constituted and maintained, it is sufficient for the retirement 
 of the entire issue.* 
 
 § 179. Sale of Bonds 
 
 Unless prevented by statutory enactment, bonds may be 
 sold at any price that can be obtained. In most of the 
 states there are provisions that bonds may be issued only 
 for value actually received, but, in the absence of some 
 more specific limitations, bonds may still be issued below 
 par if in good faith. In some few states more specific 
 provisions exist. 
 
 The sale of bonds below par by the issuing corporation 
 might, however, constitute an infraction of the laws against 
 usury. Thus, if a 5% bond of the face value of $1,000 be 
 sold for $500, the rate of interest paid on the money so 
 secured is 10%. If, then, this exceeds the legal rate of 
 interest in the state in which the sale was made, the trans- 
 action is usurious and illegal, and for this reason the original 
 purchaser, or a subsequent purchaser knowing the circum- 
 stances, might be unable to enforce the payment of his bond. 
 This condition could not, however, obtain if the bonds were 
 in the hands of an innocent holder for value, nor in states 
 in which the statutes are silent as to usury, nor in states 
 where bonds may by statute provision be sold below, par, 
 nor in states where corporations are not allowed to avail 
 themselves of the defense of usury. 
 
 § 180. Liabilities of Vendor 
 
 The vendor of a bond does not warrant the legality of 
 the issue, nor in any way guarantee payment of the bond. 
 All he undertakes is that so far as he has knowledge, the 
 bond is legally issued and what it purports to be, that it 
 
 *See also Chapters XX- XXL "Sinking Funds." 
 
2o6 CORPORATE BOND ISSUES 
 
 has come into his hands in due course and for valuable con- 
 sideration, and that he is legally competent to transfer it 
 to the purchaser. In this the bond differs from a note, 
 draft, or check, which the vendor is held to guarantee unless 
 assigned "without recourse." 
 
 § i8i. Rights of Holders 
 
 A bond as a negotiable or quasi-negotiable instrument 
 is not subject to the defenses that might exist between the 
 original parties. In practice, "the courts go very far in 
 protecting boim Ude holders of corporation bonds, and will 
 uphold and enforce such bonds under nearly all circum- 
 stances. The defense that the bonds were issued below par 
 does not avail as against bona Ude holders."* 
 
 A first mortgage bond does not lose its priority though 
 issued after a second mortgage bond. Nor does the num- 
 ber or date of issue of a bond in any way affect its rights 
 of payment as regards the other bonds of the same issue, 
 unless expressly so provided by the bond or deed of trust. 
 Such provisions are legal but unusual, and, as a rule, every 
 bond of an issue has all the rights of any other bond of 
 that issue. 
 
 Bonds cannot be redeemed by the issuing corporation 
 before they are due save by consent of the holders, unless 
 there is express provision in the deed of trust for such 
 prior redemption. Nor can the corporation deposit with 
 the trustee sufficient money for the redemption of the bonds 
 and thereupon cancel the mortgage. It may, of course, 
 deposit the money for the payment of the bonds, but the 
 deed of trust remains in force, and should the deposited 
 money be lost before the bonds mature, the corporation 
 must again provide for their payment if the trustee cannot 
 make good the loss. If, however, at the maturity of the 
 
 * Cook on Corporations, § 766; see also Didcermann v. Northern Trust Company, 
 1,76 U. S. 1S8 (isK)0|) 
 
THE CORPORATION BOND 20'r 
 
 bonds, all are not presented for payment, the trustee may- 
 reserve a sufficient amount of money for the retirement of 
 the missing bonds and discharge the deed of trust. 
 
 Coupons may be detached from their bonds before 
 maturity and be sold separately if the bond is negotiable, 
 but otherwise not. The holder of a negotiable bond or a 
 negotiable coupon, i.e., one payable to bearer or holder or 
 order, is always presumed to be the bona Ude holder of such 
 bond or coupon until the contrary is proved, and, in the 
 absence of any suspicious circumstances, the corporation 
 may safely take up the instrument and pay the amount 
 due thereon to the holder. Nor, having done so, could it 
 thereafter be held liable, even should it be shown that the 
 holder was not the rightful owner of the bond or coupon. 
 
 The pledgee of registered bonds may have them trans- 
 ferred to his own name and may collect the interest or 
 coupons on the pledged bonds as the same become due, but 
 must apply all money so received against the debt. 
 
 Suit may be brought on a bond or coupon if not paid 
 at maturity, just as suit may be brought on a promissory 
 note, and this even though the mortgage is not foreclosed. 
 In case of judgment, however, no execution may be had 
 against the mortgaged property. In some few states, as in 
 New Jersey, such suit by the individual holders before fore- 
 closure is forbidden by statute. 
 
 In case of foreclosure, if the property held under the 
 deed of trust is not sufficient to pay the bonds secured 
 thereby, the bondholders have recourse against the corpora- 
 tion for the balance due. 
 
CHAPTER XV 
 
 CLASSIFICATION OF BONDS 
 
 § 182. General Classification 
 
 Bonds may be roughly classified as to the nature of 
 their security, into debenture and mortgage bonds, and as 
 to form, into coupon and registered bonds. The distin- 
 guishing features of these general classes are given below. 
 
 § 183. Debentures 
 
 Bonds may either be secured or unsecured as to re- 
 payment. If unsecured, the bonds are usually termed 
 "debentures." This use of the term is not, however, 
 invariable, as bonds of a certain class secured by collateral 
 are at times similarly designated. 
 
 The usual unsecured debenture bond is merely the for- 
 mal corporate promise to pay money. It is an obligation 
 of the corporation and may be sued upon if unpaid at ma- 
 turity, but, as it is unsecured, there can be no foreclosure 
 in case of default, either as to interest or principal. Its 
 claim is superior to that of preferred stock, but is inferior 
 to that of any secured indebtedness of the corporation. It 
 takes no precedence over any other unsecured debt, and 
 its value therefore depends entirely upon the financial 
 strength of the issuing corporation. 
 
 The term debenture bond is also used to designate an- 
 other type of unsecured bond distinguished by the fact 
 that its interest is not payable unless earned. This inter- 
 est may be either cumulative or non-cumulative. Such a 
 bond differs from preferred stock only in the fixed obliga- 
 
 208 
 
CLASSIFICATION OF BONDS 209 
 
 tion as to its principal; this obligation, however, becomes 
 effective only at the maturity of the bond, no foreclosure 
 or other action being possible before that date. 
 
 As stated, secured bonds of a certain class are some- 
 times styled debentures. To secure payment of these 
 bonds, certain of the corporate assets — usually stocks and 
 bonds of other corporations — are deposited with a trustee 
 under a trust agreement. The bond is then in effect a 
 collateral note, and is frequently called a "collateral trust 
 bond" (§ 196). 
 
 § 184. Mortgage Bonds 
 
 A mortgage bond is one the payment of which is se- 
 cured by a mortgage or deed of trust on part or all of the 
 property of the corporation. This deed of trust usually 
 authorizes the trustees, in case of default on interest or 
 principal of the secured bonds, to take possession of the 
 property and either operate it or sell it, as may be pro- 
 vided, for the benefit of the bondholders. 
 
 "Mortgage" bonds are first mortgage, second mort- 
 gage, etc., according to the lien of the deed of trust by 
 which they are secured. Thus, a first mortgage bond, as 
 its name implies, is a first Hen on the property covered by 
 the deed of trust — unless a builder's lien, receiver's certifi- 
 cates, or similar obligations take precedence — while a sec- 
 ond mortgage bond secured on the same property is a 
 second lien; i.e., in case of foreclosure the first mortgage 
 bonds must be paid in full, both principal and interest, be- 
 fore the holders of the second mortgage bonds receive 
 anything. First mortgage bonds are therefore obviously 
 more desirable than those of a junior lien, that is, those 
 of an inferior or later lien, unless the property is of such 
 value as to be an absolute and unquestionable security for 
 the entire amount of outstanding bonds. 
 
2IO CORPORATE BOND ISSUES 
 
 § 185. Coupon Bonds 
 
 A coupon bond is one which has attached to its coupons, 
 or orders for payment of interest, each coupon requiring 
 payment on its due date of the interest instalment repre- 
 sented by that particular coupon. Coupons are in effect 
 promissory notes, each calling for the payment of one in- 
 stalment of interest on the bond to which it is attached. 
 The interest on coupon bonds is payable to the holder of 
 its coupons and not to the holder or owner of the bond, 
 unless he is also the owner or holder of the coupons. 
 
 Interest on bonds is usually payable semiannually, and 
 each of the coupons attached to a coupon bond calls for 
 the exact amount of one of the semiannual interest pay- 
 ments on that bond. Thus, a coupon bond running ten 
 years with interest payable semiannually, has attached to 
 it twenty coupons. Each coupon is numbered to corre- 
 spond with its bond, but also has a serial number of its 
 own — running from one to twenty in the instance cited — 
 indicating the order in which the coupons come due. (See 
 § 205 ; also Chapter XVIII.) 
 
 Coupon bonds are usually made payable to bearer, 
 and the coupons of such bonds, regardless of whether the 
 bonds are registered or otherwise, are always payable to 
 bearer and pass by delivery when they are clipped from the 
 bond. 
 
 § 186. Registered Bonds 
 
 A registered bond is one issued in the name of some 
 particular person in the same manner as is a certificate of 
 stock, the bond thereafter being transferable only on the 
 books of the company. 
 
 Coupon bonds, as stated above, are usually payable to 
 bearer and are then transferable by mere delivery. Some- 
 times, however, they are issued in registered form as to 
 
CLASSIFICATION OF BONDS 21 1 
 
 principal, or with the option of registry as to principal, as 
 in the case of the United States Steel Corporation bond 
 shown in § 204 ; but in any such case the coupons are still 
 made payable to bearer. The interest then is paid to any- 
 one who presents the coupon, but the principal — the bond 
 being registered — will only be paid to the person in whose 
 name the bond stands on the books of the company, or 
 to his assignee. 
 
 Bonds without coupons are always registered, are 
 transferable only by assignment, and interest is payable to 
 the registered owner alone and is usually paid by checks 
 sent out to these registered owners. 
 
 Coupon bonds payable to bearer and registered bonds 
 are often issued under the same deed of trust. Usually, 
 when this is done the two classes of bonds are made in- 
 terchangeable, i.e., any holder of a coupon bond payable 
 to bearer may at any time exchange it for a registered 
 bond, or the owner of a registered bond may at any time 
 exchange it for a coupon bond payable to bearer. 
 
 The advantage of an unregistered coupon bond is 
 found in the readiness with which it may be transferred. 
 The advantage of a registered bond lies in the difficulty 
 of its negotiation in case the bond is lost or stolen. If a 
 bond payable to bearer is either lost or stolen, its sale or 
 disposal is comparatively easy, since, once in the hands of 
 an innocent holder for value, it is valid. A registered 
 bond, on the contrary, should it be lost or stolen, is prac- 
 tically non-negotiable. It is payable only to the party 
 named in the bond, and, before it can be successfully ne- 
 gotiated, the requisite forgery of his signature would ef- 
 fectually prevent a valid transfer. 
 
 When registered bonds are assigned, the assignee sur- 
 renders the old bond and receives in exchange a bond is- 
 sued in his own name, the new ownership being recorded 
 
212 CORPORATE BOND ISSUES 
 
 upon the books of the company at the same time. A small 
 fee is usually charged for the transfer or reissue of a bond. 
 
 § 187. Kinds of Bonds 
 
 Many kinds of bonds are issued, under varying desig- 
 nations, usually derived from the more important or dis- 
 tinctive features of the particular issue. 
 
 Bonds frequently possess the characteristics of several 
 dififerent classes. Thus the bonds of the United States 
 Steel Corporation shown in the coupon form in the fol- 
 lowing chapter, known as "ten-sixty-year five per cent 
 sinking fund gold coupon bonds," were made redeemable 
 at any time after ten years from date of issue at the option 
 of the corporation; their payment is provided for by a 
 sinking fund and they are payable in gold coin. Also, if 
 not previously redeemed, they must be paid at the end of 
 sixty years, and they bear 5% annual interest. All this is 
 indicated by their title. 
 
 The bonds most frequently issued are briefly discussed 
 in the following sections. 
 
 § 188. First Mortgage, etc.. Bonds 
 
 A first mortgage bond is one secured on property upon 
 which no other bonds or similar obligations are secured. 
 
 If a number of bond issues are secured by the same 
 property, the first issue is, as stated (§ 184), a first mort- 
 gage bond; the next, a second mortgage bond; the next, 
 a third mortgage bond, etc.; the Hen of each of these lat- 
 ter being inferior to that of the issue or issues which pre- 
 cede it, but superior to that of the issue or issues which 
 follow. 
 
 § i8g. Junior Lien, etc.. Bonds 
 
 A junior lien bond is one which comes after, or is in- 
 
CLASSIFICATION OF BONDS 21 3 
 
 ferior to, some other bond or bonds in its lien upon the 
 property by which it is secured. Thus, the lien of a sec- 
 ond mortgage bond is a junior lien to that of the first 
 mortgage bond. 
 
 When several different issues of bonds are secured by 
 the same property, those having the superior lien are some- 
 times styled "underlying" bonds, the term indicating that 
 they are closer to the property and have a superior or 
 prior claim. Thus, if first and second mortgage bonds are 
 secured on the same property, the first mortgage bonds 
 are underlying bonds. If third mortgage bonds are also 
 issued, both first and second mortgage bonds are under- 
 lying bonds. 
 
 § 190. Gold, etc.. Bonds 
 
 A bond may in express terms provide for payment in 
 gold, silver, legal tender money, etc. Such provisions are 
 legal and enforceable. If no medium is specified in which 
 payment of a bond must be made, legal tender is always 
 understood. 
 
 § igi. Convertible Bonds 
 
 A convertible bond is one which, under prescribed 
 conditions, carries the right of conversion into other se- 
 curities of the same corporation. The usual form of 
 convertible bond is that which may be exchanged for 
 common or preferred stock of the issuing corporation at a 
 fixed rate of exchange and within a certain period. 
 
 The American Telegraph and Telephone Company is- 
 sued on March i, 1913, $67,000,000 of twenty-year con- 
 vertible 4 J4 % bonds. These bonds were made convertible 
 at par into common stock of the company at $120 per 
 share (par value $100) from March i, 191 5, to March i, 
 1925. It is apparent, therefore, that the price of the bonds 
 
214 CORPORATE BOND ISSUES 
 
 should follow any advance in price of the stock, while 
 their investment value should prevent their following any 
 downward trend the stock might take. The stock of this 
 company on March i, 1915, sold around $120 per share, 
 and the bonds at par, so that an exchange on that basis 
 would appear to be profitable when it is considered that 
 the stock is paying dividends at the rate of 8%. By de- 
 positing $600 par of bonds on which the holder previously 
 netted an income of $27, he might receive in exchange 
 $500 par of stock with a market value of $600, but on 
 which the income is $40, or 6^% on the investment. 
 This is an increase of $13 in his annual income. The 
 holder of a $100 bond was permitted to exchange it for one 
 share of stock by paying the additional $20 in cash; or if 
 his holdings of bonds were larger, he was permitted to 
 take the nearest even number of shares of stock and re- 
 ceive the difference in his favor, if any, in cash. June 15, 
 1916, this same stock sold around $130 per share, giving 
 a direct and substantial cash profit on the exchange. 
 
 It is obvious that the conversion privilege gives a bond 
 a speculative character which adds greatly to its attrac- 
 tiveness as an investment. If the stock of the issuing com- 
 pany advances materially, the exchange can be made at a 
 profit. If the stock does not advance, the bonds 
 themselves are still a good investment. In short, the plan 
 combines the safety of a bond investment with the profit 
 possibilities of an investment in stock. (See also § 272.) 
 
 § 192. Serial Bonds 
 
 These bonds are issued in series, one series payable each 
 year, until the entire issue has been redeemed. If, for in- 
 stance, the bonds cover ten years, the first series will have 
 one year to run; the second, two years; the third, three 
 years; and so on, until the final series, which will have ten 
 
CLASSIFICATION OF BONDS 
 
 215 
 
 years. Coupons are attached to each series corresponding 
 with the number of years the bonds have to run, (See 
 also § 271.) 
 
 Serial bonds were formerly issued only by municipali- 
 ties, or by companies whose credit rating was not high, 
 but it is usual now for strong corporations to adopt this 
 type, and the fact that it is selected does not mean that 
 the company is financially unstable. It is believed by 
 many to be the most satisfactory basis on which to raise 
 funds for capital improvements. In some cases the serial 
 bond is insisted on by the bond houses which are asked to 
 underwrite the issue; in others it is demanded by the in- 
 vestors; and not infrequently it is preferred by the issuing 
 company itself. 
 
 Serial bonds might be debentures, but are usually se- 
 cured by a mortgage of the company's properties cover- 
 ing the entire issue. When this is the case it is obvious 
 that, as one series of the bonds is paid ofif each year, the 
 security back of the remaining series automatically in- 
 creases, so that the margin of security to the investor is 
 constantly growing larger. While this may be an advan- 
 tage to the investor, it is sometimes disadvantageous to 
 the issuing company which has all the securing property 
 tied up until the last instalment of the bonds is paid. To 
 prevent this, the terms of the issue not infrequently pro- 
 vide for the relinquishment of portions of the security aftei 
 given redemption stages have been reached. 
 
 § 193. Redeemable Bonds 
 
 Redeemable bonds are issued with the proviso that the 
 issuing corporation may redeem or call them before the 
 arrival of the date of maturity fixed by the deed of trust, 
 either for cancellation or for sinking fund purposes. There 
 are many bond issues of this nature, containing provisions 
 
2i6 CORPORATE BOND ISSUES 
 
 that the bonds may be redeemed, all or in part, at a stated 
 price and accrued interest at the option of the company, 
 on any interest day after a given date on 90 days' notice, 
 notwithstanding the fact that the maturity date is far 
 removed. 
 
 Frequently, when the redemption privilege is retained 
 by the issuing corporation, it is provided that a premium 
 shall be paid upon the bonds redeemed before maturity, 
 which are usually selected by lot. Thus the sinking fund 
 provision of the deed of trust securing the ten-sixty-year 
 5% sinking fund gold coupon bonds of the United States 
 Steel Corporation, provides that at any time after ten 
 years from the date of issue, any outstanding bonds may 
 be redeemed by payment of the principal and a premium 
 of 10% of such principal together with all accrued inter- 
 est; bonds redeemed to be selected by lot and redemption 
 to be confined to coupon bonds until all outstanding cou- 
 pon bonds are redeemed. (See also §§ 260, 261, 267, 268.) 
 
 § 194. Profit-Sharing, etc., Bonds 
 
 Profit-sharing bonds, or dividend bonds, or partici- 
 pating bonds, as they are variously termed, are bonds 
 which in addition to their regular interest are entitled to 
 some participation in the dividends of the company. The 
 dividends paid on a profit-sharing bond may be limited 
 to a fixed amount or percentage, or be conditioned other- 
 wise, or the bond may participate as fully as does the 
 common stock of the company. 
 
 It is obvious that such a provision gives the bond a 
 speculative character which adds materially to its attrac- 
 tiveness as an investment. If it participates fully on the 
 same basis as does the stock of the corporation, it has all 
 the safety of a bond with all the profit possibilities of 
 stock, and is preferable to a convertible bond because the 
 
CLASSIFICATION OF BONDS 217 
 
 bond features do not have to be sacrificed to secure the 
 profit-sharing stock possibihties. 
 
 § 195. Income Bonds 
 
 An income bond is one which relies upon the net in- 
 come of the company for its interest payments. It is a 
 lien on the net income, but, unless profits are earned, its 
 interest is not an obligation of the company. Such bonds 
 differ from preferred stock only in the fact that their prin- 
 cipal is an absolute obligation of the company and must 
 be paid at the maturity date. Income bonds are sometimes 
 termed debentures. (See §§ 183, 232.) 
 
 Income bonds may be either cumulative or non-cumu- 
 lative as to interest. The principal may be secured or 
 unsecured. 
 
 § 196. Collateral Trust Bonds 
 
 A collateral trust bond is one which is secured by col- 
 lateral — usually stocks and bonds of other corporations 
 owned by the issuing corporation. These are deposited 
 with a trustee under an agreement setting forth the con- 
 ditions of the trust. Such a bond is frequently termed a 
 "debenture." (See also §§ 183,273.) 
 
 § 197. Guaranteed Bonds 
 
 A guaranteed bond is one the payment of which, either 
 as to interest or principal, or both, has been guaranteed 
 by some other corporation. Such a guarantee must be 
 in writing and must either be written on the instrument 
 itself, or be attached to it, to be effective. 
 
 Under proper conditions such guaranteed bonds are 
 legal and are frequently issued. Thus, the bonds of a sub- 
 sidiary railroad may be guaranteed by the parent road, or 
 a bond of a constituent corporation may be guaranteed 
 
2i8 CORPORATE BOND ISSUES 
 
 by the holding company or trust of which it forms a part. 
 (See also §§ 221, 231, 276.) 
 
 § 198. Consolidated, etc., Bonds 
 
 Consolidated bonds, adjustment bonds, reorganization 
 bonds, and refunding bonds are used, as their names indi- 
 cate, in the various consolidations and adjustments com- 
 mon in the combinations or reorganizations of railroads 
 and of the larger industrial corporations. 
 
 Thus, a consolidated bond will be used to retire two 
 or more smaller issues, the new bonds usually being se- 
 cured upon the properties which previously supported the 
 retired issues. 
 
 Refunding bonds are those used to replace or redeem 
 bonds which are maturing. Usually refunding bonds 
 carry a lower rate of interest than the bonds they replace, 
 although if the money conditions are difficult at the time, 
 the interest rate may be the same or even higher. Re- 
 funding bonds are sometimes exchanged directly for the 
 old bonds, or otherwise are sold to provide money for the 
 retirement of the maturing bonds. 
 
 Adjustment bonds are those used in readjustments or 
 consolidations of existing indebtedness. Reorganization 
 bonds, issued when a corporation is in process of reorgani- 
 zation, are usually employed to take up, or as a substitute 
 for, other outstanding issues. They are generally the regu- 
 lar first mortgage bonds. 
 
 § 199. Interest Bonds 
 
 Interest bonds are those issued in payment of interest 
 due on bond issues when cash is not available for the pur- 
 pose. They preserve the interest from default and thereby 
 prevent foreclosure and the other legal complications of 
 a default. 
 
CLASSIFICATION OF BONDS 219 
 
 § 200. Terminal, etc., Bonds 
 
 Terminal bonds are those issued by and secured on the 
 property of a terminal company which is, as a rule, sub- 
 sidiary to the railroad or steamship line using the terminal. 
 Such bonds are usually issued for terminal purchases or 
 improvements. Extension bonds are those issued by a 
 railroad to extend its lines. Equipment bonds are those 
 issued for equipment, usually by a railroad company, 
 though they might be issued in connection with an indus- 
 trial corporation. Construction bonds, as their name in- 
 dicates, are issued to secure money for the purposes of 
 construction. 
 
 § 201. Car Trust Bonds 
 
 Car trust or equipment trust bonds or certificates are 
 issued by a trustee who holds for their security, equipment 
 purchased or leased by a railroad company. The money 
 reaUzed from the sale of these bonds goes to the manu- 
 facturers or vendors of the equipment, or the bonds may 
 be turned over to them direct. The railroad company re- 
 ceives its equipment subject to the trust agreement, and 
 retires the equipment bonds in such amounts and at such 
 periods as are fixed by the trust agreement. The title to 
 the equipment does not usually vest in the railroad com- 
 pany until all the bonds are redeemed. This is a favorite 
 kind of bond for some railway companies and is popular 
 with many street railway companies. 
 
 Bonds and notes of this character are usually issued 
 in series, redeemable in their serial order as payments are 
 made by the railroad company. When the final payment 
 is made by the railroad company, the deed of trust by 
 which the property is held is released and the equipment 
 becomes the property of the purchasing company. (See 
 also §§ 224, 275.) 
 
220 CORPORATE BOND ISSUES 
 
 § 202. Purchase Money Bonds 
 
 Purchase money bonds are those given to secure funds 
 for the purchase of the property by whith they are secured. 
 
 § 203. Short Term Notes 
 
 A short term note is merely a corporation's promissory 
 note. It may be secured or unsecured. If secured, it is 
 usually by the deposit of collateral with a trustee under a 
 trust agreement. The larger issues generally have coupons 
 attached and differ but little from the usual bond, except 
 in their early maturity. 
 
 Short term notes are issued when the existing condi- 
 tions are unfavorable for a long time loan, and usually 
 either carry a larger rate of interest than a bond issue, or 
 are sold at a discount that produces the same practical 
 result. Short term notes are usually floated with the ex- 
 pectation that they will either be retired at maturity or 
 will be taken up by a bond issue on more favorable terms 
 than would have been possible at the time the notes were 
 issued. 
 
 Short term notes usually run from one to five or six 
 years. The security deposited with the trustee consists 
 of bonds and stocks of other companies, on almost the 
 same plan as collateral trust bonds. These notes are 
 issued under varying conditions, and their tenor and 
 redemption features give to them such designations as 
 "collateral lien notes," "collateral trust serial notes," 
 "collateral gold notes," etc. Any one of these titles might 
 contain the word "guaranteed" in case that is a feature 
 of the note. (See also § 223.) 
 
CHAPTER XVI 
 
 BOND FORMS 
 
 § 204. Form of Bond 
 
 The language of a bond is usually more formal than 
 that of a note. It must be executed under seal, and, if 
 secured, reference is made in the bond itself to the deed 
 of trust under which it is issued. 
 
 Usually a statement of the general conditions of a bond 
 issue appears upon the face of each bond, and reference is 
 made to any features of special importance, such as the 
 existence of a sinking fund, the conditions of redemption, 
 the method of transfer and exchange when bonds payable to 
 bearer and registered bonds are issued under the same deed 
 of trust, etc., etc. 
 
 Following is the form of coupon bond, with privilege of 
 registration, used by the United States Steel Corporation: 
 
 United States of America 
 State of New Jersey 
 
 United States Steel Corporation 
 
 Ten- Sixty- Year Five Per Cent Sinking Fund Gold 
 
 Coupon Bond 
 
 $ No 
 
 United States Steel Corporation, a corporation created and exist- 
 ing under the laws of the State of New Jersey, and hereinafter termed 
 the "Steel Company," for value received promises to pay, on the first 
 day of April, A. D. 1963, at the office or agency of the Steel Company 
 in the City of New York, to bearer, or if registered, to the registered 
 
 holder of this bond, thousand dollars in gold coin of the 
 
 United States, of the present standard of weight and fineness, and to 
 pay interest thereon from April i, 1903, at the rate of five per cent per 
 
 221 
 
222 CORPORATE BOND ISSUES 
 
 annum, such interest to be payable at such office or agency in like gold 
 coin semiannually on the first day of May and of November in each year 
 (except that the first instalment is to be for seven months and the last 
 for five months interest), but only upon presentation and surrender of 
 the respective coupons for such interest hereto attached as they severally 
 mature. All payments upon this bond, both of principal and interest, 
 shall be made without deduction of any tax or taxes which the Steel 
 Company, its successors or assigns, may be required to pay, deduct, or 
 retain therefrom under any present or future law of the United States, 
 or of any State, County, or Municipality therein. 
 
 This bond is one of a duly authorized issue of coupon bonds and 
 registered bonds of the Steel Company, the aggregate amount whereof is 
 limited so that there shall never at any one time be outstanding bonds of 
 said issue for an aggregate principal sum exceeding $250,000,000; all of 
 which bonds have been issued, or are to be issued, under and in 
 pursuance of, and are to be secured ratably by, and are subject to, an 
 indenture dated April i, A. D. 1903, duly executed by the Steel Com- 
 pany to the United States Trust Company of New York, as Trustee, 
 covering, subject to the prior lien of the indenture dated April i, 1901, 
 executed by the Steel Company to the United States Trust Company of 
 New York, all the stocks, bonds, and other property now or at any time 
 hereafter subject to said indenture dated April i, 1901, and all the 
 stocks, bonds, and other property that by the terms of said indenture 
 dated April i, A. D. 1903, shall be subject to the hen thereof; and 
 hereby reference is made to said indentures with the same effect as if 
 herein fully set forth. 
 
 No recourse shall be had for the payment of the principal or interest 
 of this bond against any stockholder, officer, or director of the Steel 
 Company, either directly or through the Steel Company, by virtue of 
 any statute or by enforcement of any assessment or otherwise ; any and 
 all liability of stockholders, directors, and officers of the Steel Com- 
 pany being hereby released. 
 
 This bond shall pass by delivery unless registered in the owner's 
 name on the books of the Steel Company at its office or agency in 
 said City of New York, such registry being noted on the bond by the 
 bond registrar of the Steel Company, after which no transfer shall be 
 valid unless made on said books in the manner prescribed in said 
 indenture, and similarly noted on the bond ; but the same may be dis- 
 charged from registry by being transferred in like manner to bearer, 
 after which transferability by delivery shall be restored ; but again, 
 from time to time, it may be registered or transferred to bearer as 
 before. Such registration, however, shall not affect the transferability 
 of the coupons for the interest hereon, by delivery merely, and pay- 
 ment to the bearer thereof shall discharge the Steel Company in respect 
 
BOND FORMS 
 
 223 
 
 of the interest therein mentioned whether or not the bond shall have 
 been registered. 
 
 This bond, with the coupons for all interest instalments which shall 
 not have matured, may also, as provided in said indenture, be exchanged 
 for a registered bond without coupons for an equal aggregate principal 
 sum. 
 
 Neither this bond nor any coupon for interest thereon shall be- 
 come or be valid until the bond shall have been authenticated by the 
 certificate indorsed hereon duly signed by the Trustee under said 
 indenture. 
 
 This bond is subject to redemption at the pleasure of the Steel 
 Company as provided in said indenture, on any first day of May or 
 any first day of November, after April i, 1913, by payment of the 
 principal of the bond and the unpaid accrued interest, together with a 
 premium of ten per cent of such principal. The Steel Company annually 
 will pay the sum of $1,010,000 to the Sinking Fund Trustees under said 
 indenture, which sum is to be applied to the redemption of bonds of 
 said issue, in the manner provided in said indenture. 
 
 No action or proceeding at law or in equity shall be instituted or 
 shall be maintainable upon this bond or upon any of the coupons 
 > hereof for the enforcement or collection of interest or for maturing the 
 principal thereof by reason of any default in payment of any instal- 
 ment of interest hereon, until after such instalment thereof shall have 
 been unpaid and in default for the continuous period of two years, nor 
 except when and as permitted by the terms of said indenture. 
 
 In Witness Whereof, said United States Steel Corporation has 
 caused these presents to be signed by a Vice-President, and its cor- 
 porate seal to be hereunto affixed, and to be attested by its Secretary 
 or by an Assistant Secretary, and coupons for such interest bearing 
 the engraved fac-simile signature of its Treasurer to be attached hereto, 
 the first day of April, A. D. 1903. 
 
 United States Steel Corporation 
 [seal] By 
 
 Vice-President 
 Attest : 
 
 Secretary 
 
 This bond, as will be noted, may be registered if desired 
 and may again be restored to its first condition of trans- 
 ferability by delivery. Its registration does not, however, 
 affect the coupons which pass by delivery alone and are 
 payable to tearer regardless of whether the bond be regis- 
 
224 CORPORATE BOND ISSUES 
 
 tered or transferable by delivery. This would be the case 
 without provision therefor in the bond, unless the coupons 
 contained express stipulations to the contrary. 
 
 A shorter form of coupon bond as used by a smaller 
 corporation is as follows : 
 
 The National Paper Company 
 First Mortgage Six Per Cent Gold Coupon Bond 
 
 No. 35 $500 
 
 Know All Men By These Presents, That The National Paper 
 Company, a corporation organized and existing under the laws of the 
 State of New York, is indebted, and for value received promises to pay, 
 to the bearer hereof, or to the registered holder of this bond, if the 
 same be registered, the suit! of Five Hundred Dollars ($SOo) in gold 
 coin of the United States of the present standard of weight and fine- 
 ness, on the first day of October, 1921, at the office of the said Com- 
 pany, in the City of New York, with interest at the rate of six per cent 
 per annum, payable semiannually at said office, in like gold coin, on the 
 first days of October and April in each year, upon surrender of the 
 annexed coupons therefor as they severally mature. 
 
 Both the principal and interest of this bond are payable without 
 deduction for any United States, State, Municipal, or other tax or taxes 
 which said The National Paper Company may be required to pay or 
 deduct therefrom under or by reason of any present or future law, the 
 said Company hereby agreeing to pay such tax or taxes. 
 
 This bond is one of a series of coupon and registered bonds of The 
 National Paper Company, bearing interest at the rate of six per cent 
 per annum, issued or to be issued in pursuance of, and subject to, the 
 terms of the mortgage or deed of trust hereinafter referred to, but so 
 that the aggregate amount of said bonds, both coupon and registered, 
 shall not exceed the total sum of Thirty Thousand Dollars ($30,000). 
 All of said bonds are equally secured by a mortgage or deed of trust, 
 dated October i, 1916, executed by The National Paper Company to 
 Charles White of the City of New York, as Trustee, conveying the 
 property and franchises of The National Paper Company mentioned 
 in said mortgage or deed of trust, to which reference is hereby made 
 for a description of the property and franchises mortgaged, and the 
 nature and extent of the security, and the rights of the holders of said 
 bonds under the same, and the terms and conditions upon which said 
 bonds are issued and secured. 
 
 This bond may be registered, in the name of the owner, on the 
 
BOND FORMS 225 
 
 books of the Company, such registration to be indorsed hereon, and 
 thereafter no transfer shall be valid unless made on the books of the 
 Company by the registered owner and sirailarly'indorsed hereon, but 
 said bond may again be made payable to bearer by like transfer, and 
 thereafter pass by delivery until again registered. Notwithstanding 
 such registration the coupons hereon shall remain and be negotiable by 
 delivery and payable to bearer on presentation. 
 
 This bond shall not become obligatory for any purpose until it shall 
 have been authenticated by the certificate, hereon indorsed, of the 
 Trustee under said mortgage or deed of trust. 
 
 In Witness Whereof, The National Paper Company has caused 
 these presents to be signed by its President, and its corporate seal to 
 be hereunto affixed, and to be attested by its Secretary, and coupons 
 for said interest, with the engraved signature of its Treasurer, to be 
 attached hereto, this ist day of October, 1916. 
 
 The National Paper Company 
 
 [Seal] By 
 
 President 
 Attest : 
 
 Secretary 
 
 § 205. Form and Nature of Coupon 
 
 A coupon, as already stated (§ 185), is in form a 
 promissory note. It is attached to the bond as a convenient 
 method of indicating the amount and the due date of 
 interest, and of the collection of this interest when due. 
 One coupon is attached to the bond for each interest instal- 
 ment. Thus a twenty-year bond with semiannual interest 
 payments would carry forty coupons. These coupons are 
 numbered serially, and also carry the number of the bond 
 to which they are attached. Coupon No. i represents the 
 interest that will be due at the first interest period. As soon 
 as that period arrives, the coupon is said to mature, and it 
 is then detached from the bond and either presented for 
 payment or deposited for collection, as would be done with 
 any other promissory note. Coupons may be detached from 
 Ihc bond before maturity and sold independently of the 
 
226 CORPORATE BOND ISSUES 
 
 bond. The possession of the coupon is sufficient evidence 
 of ownership in the absence of proof to the contrary, and, 
 as a coupon is payable to bearer, no indorsement is necessary 
 or usual when it is presented for payment or deposited for 
 collection. 
 
 When an interest payment on coupon bonds is about to 
 fall due, the amount necessary to meet the maturing cou- 
 pons is usually deposited in some designated bank or trust 
 company which acts for the corporation and pays the cou- 
 pons as they are presented. The coupons are then cancelled 
 and are pasted in the coupon register (§ 214). 
 
 The form of coupon used in connection with the bond 
 of the United States Steel Corporation shown on the pre- 
 ceding pages is as follows : 
 
 No $ 
 
 Coupon for $ , gold coin of the United States of America, 
 
 payable to bearer on the first day of , at the 
 
 office or agency of the United States Steel Corporation in the City of 
 
 New York, without deduction for taxes, for months interest 
 
 due on that day on the $ Ten-Sixty-Year Five Per 
 
 Cent Sinking Fund Gold Bond of United States Steel Corporation, 
 
 No , subject to the terms of said bond, and of the indenture 
 
 dated April i, 1903, therein mentioned. 
 
 Treasurer 
 Coupon (U. S. Steel Corporation) 
 
 § 206. Trustee's Certificate 
 
 Bonds issued under a deed of trust must be certified by 
 the trustee before they are issued. The trustee's certificate 
 appears on the back of each bond, and evidences the fact 
 that the bond is one of the issue mentioned in the deed of 
 trust. This certification is not part of the bond, though 
 it may be required before the bond itself can be considered 
 as issued, nor is it in any sense an indorsement of the bond 
 
BOND FORMS 
 
 227 
 
 nor a certification of its correctness as to form or subject 
 matter. The object of the trustee's certificate is to identify 
 the bond and to prevent overissues. If the trustee certifies 
 more bonds than are called for by the deed of trust, he 
 may make himself personally responsible for the overissue, 
 but he incurs no liability whatsoever by reason of any 
 proper certification. 
 
 The form of trustee's certificate indorsed on the bonds 
 of the United States Steel Corporation is as follows : 
 
 This Is To Certify that this bond is one of the issue of bonds of 
 United States Steel Corporation mentioned in the indenture dated April 
 I, 1903, within referred to, executed by United States Steel Corpora- 
 tion to the undersigned as Trustee. 
 
 United States Trust Company of New York 
 
 By 
 
 Trustee's Certificate 
 
 § 207. Deed of Trust 
 
 A deed of trust is a mortgage on certain specified prop- 
 erty given to a trustee who acts for the holders of the bonds 
 secured thereby. The deed of trust recites at length the 
 terms and conditions under which the bonds are issued and 
 under which the property for their security is held. 
 
 A modern deed of trust is usually a very comprehensive 
 and formidable instrument. A brief form may occupy 
 perhaps from ten to twenty pages of printed matter. More 
 extended forms frequently occupy one hundred pages or 
 more. 
 
 In the bond itself reference is always made to the deed 
 of trust by which it is secured, and in the deed of trust the 
 bond is recited in full. The bond by express terms is sub- 
 ject to the conditions of the deed of trust. According-iy, 
 the statements of the bond are controlled by the explana- 
 tions and any non-conflicting conditions of the deed of trust. 
 
228 CORPORATE BOND ISSUES 
 
 If the deed of trust should fail for any reason, the bonds 
 then become the unsecured obligation of the corporation, 
 and take their place on a parity with the other vinsecured 
 corporate debts. 
 
 § 208. Recitals of Deed of Trust 
 
 In the deed of trust usually employed, the preamble 
 recites the conditions precedent to the issue, gives the form 
 of bond in full, and the form of coupon and trustee's cer- 
 tificate, also in full ; followed by the granting clauses, which 
 include a description of the property covered, and by the 
 trust reservation with stipulation for equal participation of 
 all the bonds of that issue in the protection afforded by the 
 mortgaged property. 
 
 Following this come the "covenants, conditions, uses, 
 and trusts" subject to which the bonds are issued and the 
 mortgaged property is held. These have a wide range. 
 Some of the more usual of the matters provided for are 
 as follows : 
 
 1. Procedure for execution, certification, and delivery 
 
 of bonds. 
 
 2. Enjoyment of property by mortgagee until default. 
 
 3. Payment of principal and interest without deduc- 
 
 tion for taxes, and in "gold coin," "legal tender," 
 or otherwise, as the case may be. 
 
 4. Payment of all taxes and assessments on property 
 
 held under the deed of trust, and, if the nature of 
 the property is such as to require it, maintenance 
 of the same in repair, under due insurance and 
 freedom from liens. 
 
 5. Provision that the deed of trust shall be a first mort- 
 
 gage — if such is the case — and be duly executed, 
 recorded, and maintained. 
 
BOND FORMS 229 
 
 6. Provision for any necessary additional assurances 
 
 for protection of bondholders. 
 
 7. Provision for trustee to enter upon property and 
 
 conduct business without foreclosure under cer- 
 tain conditions. 
 
 8. Creation of sinking fund for retirement of bonds. 
 
 9. Procedure for foreclosure in case of default. 
 
 10. Provision that bonds shall be matured by failure to 
 
 pay interest. 
 
 11. Stipulation that loans, advances, or payments made 
 
 on coupons for account of the mortgagee shall 
 not keep such coupons alive. 
 
 12. Provision for redemption of bonds. 
 
 13. Provision for discharge of deed of trust. 
 
 14. Provision for substitution or appointment of new 
 
 trustee. 
 
 15. Disclaimer of responsibility on part of trustee. 
 
 16. Interpretation of terms used in deed of trust. 
 
 17. Provision that deed of trust may be executed in 
 
 duplicate. 
 
 In addition to these common provisions, others are 
 often dictated by particular conditions. Thus, if both regis- 
 tered and coupon bonds are issued, provision must be made 
 for registration and for the exchange of one kind of bond 
 for the other if this is prescribed. Provisions may also be 
 inserted for the issue of temporary certificates, or for re- 
 placement of destroyed or mutilated bonds, or for dis- 
 crimination against coupons detached or assigned before 
 maturity, or for exemption of the stockholders and ofiicers 
 of the issuing company from all liability under the deed of 
 trust or for the bonds issued thereunder. In a mortgage 
 on realty it may be provided that upon payment to the 
 trustee of a certain specified price, parts of the property 
 
230 
 
 CORPORATE BOND ISSUES 
 
 may be sold free from the encumbrance of the mortgage, 
 or that under prescribed conditions properties may be with- 
 drawn from the mortgage and new properties substituted 
 in their place. 
 
 § 209. Duties of Trustee 
 
 The duties of the trustee under a deed of trust are 
 usually few, but may be onerous. He certifies each bond 
 issued. At times the recording of the deed of trust is made 
 one of his duties. In case of default he is usually required 
 either to take possession of the property and operate it or 
 sell it, according to the conditions of the deed of trust, for 
 the benefit of the bondholders. If called upon to operate 
 the property, his duties and liabilities may be heavy. If 
 the property is operated at a loss, he may be responsible 
 for the deficit. 
 
 The trustee makes an annual charge for the service 
 rendered to the issuing corporation, but as a rule the duties 
 are few and the fee correspondingly low. 
 
 § 210. Execution and Filing of Deed of Trust 
 
 The deed of trust is executed with the same formality 
 as a deed of land. It must be signed and sealed both by 
 the corporation and by the trustee, and be duly acknow- 
 ledged before a notary public or other duly authorized 
 officer. The corporate signature is usually affixed by the 
 president, and the corporate seal is affixed and attested by 
 the secretary. The acknowledgment is also usually made 
 by the president of the corporation, but is of equal force 
 if made by the secretary, treasurer, or any other duly 
 authorized executive officer. It is immaterial whether the 
 deed of trust be executed within the state in which the 
 corporation was organized or elsewhere. 
 
 If realty is included, the deed of trust must be filed in 
 
BOND FORMS 23 1 
 
 the office of the county clerk in every county in which the 
 real estate is situated. 
 
 § 211. The Bond Register 
 
 If bonds issued by a corporation are sold through an 
 underwriting syndicate, or through a bank or trust company 
 which acts as transfer agent and registrar, the corporation 
 need maintain no special record of the transaction beyond 
 making the proper entries in its books of account. If, how- 
 ever, the bonds are sold by the corporation direct, the 
 treasurer or the accounting department must keep a more 
 detailed record, and for this purpose a bond register is 
 necessary. If coupon bonds are issued, a coupon register 
 also must be kept for each denomination of bond. 
 
 Registered bonds are, as already stated (§ i86), of two 
 classes : ( i ) bonds which are registered both as to prin- 
 cipal and interest, interest checks being issued on the speci- 
 fied interest dates direct to the holders of record; and (2) 
 bonds which are registered as to principal only, the interest 
 being represented by coupons and therefore payable to the 
 holders of these coupons upon surrender of the same. 
 
 The principal record for the registered bond is the 
 bond register. An index of bondholders is also usually 
 maintained. This is merely a card list on which is entered 
 the name and address of each bondholder, together with 
 the number of his bond, its amount, and such other data 
 as may be desirable. The card also provides for a record 
 of the party from whom the bond was transferred, in case 
 it is not an original issue, and blanks for name of party to 
 whom it is transferred, in case of transfer. (See page 235.) 
 
 § 212. Form of Bond Register 
 
 The bond register shown below provides space for the 
 name and address of the holder, the number of his bond, 
 
232 
 
 CORPORATE BOND ISSUES 
 
BOND FORMS 
 
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234 
 
 CORPORATE BOND ISSUES 
 
 the date it was acquired, the party to whom transferred, 
 and twenty columns for twenty interest payments. Thus a 
 complete record is provided for a ten-year bond on which 
 interest is payable semiannually. 
 
 When a registered bond is transferred, a new one is 
 issued on surrender of the old, just as a new stock certificate 
 is issued when stock is' transferred. The surrendered bond is 
 cancelled and filed, and in the bond register a red-ink line 
 is ruled through the name and address of the former owner, 
 and through the number and amount of the cancelled bond 
 itself. Also the number of the new bond is written directly 
 after the last entry of interest payment on the old bond, as 
 indicated on the form shown. A line ruled through the 
 remaining interest columns then completely cancels the 
 line devoted to the cancelled bond, though the original entry 
 still shows the transfer of the old bond and the number of 
 the new bond by which it was replaced. The name and 
 address of the owner of the new bond is then recorded on 
 the first vacant line of the bond register in the column 
 headed "To Whom Issued," and the record of th^ transfer 
 is complete. 
 
 As will be noted, the bonds are entered in numerical 
 order, and any special bond may be readily located if its 
 number is known. If the number is not known but the 
 name of the owner is, the bond may be traced through the 
 index of bondholders. If desired, the number of the page 
 of the bond register on which the individual's name appears 
 can be entered on the index of bondholders, a copy of which 
 is shown on page 235. 
 
 The difference between the footings of the "Arnount" 
 columns of the bond register and the sum total of all bonds 
 cancelled — which is obtained by adding together all amounts 
 through which the red-ink line is drawn — should agree with 
 the balance of the Bond account in the general ledger. 
 
BOND FORMS 
 
 835 
 
 BOND NO. 
 _ £uss 
 
 AMni INT flODoi 
 
 NAME PinnjipiiMy, (jo?iA^(£^. 
 
 CLASS 
 
 BONDHOLDER'S ADDRESS 
 
 TRANSFERRED TO 
 
 Post Office 
 
 Name 
 
 County 
 
 State 
 
 ^UmJ^^-tA^ 
 
 Address 
 
 Street and No. 
 
 2(><j ^jUlT^ly^ Out/. 
 
 Transferred from ^ 
 
 Index of Bondholders 
 
 If the bonds are not coupon bonds, interest is computed 
 on each at the half-yearly or yearly interest dates, and 
 recorded under the proper interest period in the bond 
 register. At the same time, interest checks are issued to 
 the registered holders. The sum total of the footings of the 
 "Interest" columns should agree with the total amount of 
 interest checks issued, and is charged through the cash book 
 to the "Accrued Interest on Bonds" account. This is on 
 the assumption that accrued bond interest is entered 
 monthly or at least prior to the date of payment. 
 
 Interest checks are made out direct from the bond 
 register. For the sake of accuracy, it is advisable to arrange 
 these interest checks alphabetically and compare the names 
 of the payees with the names shown by the cards of the 
 index of bondholders. This reduces to a minimum the 
 possibility of checks being made payable to the wrong 
 person. 
 
 The register for coupon bonds does not show interest 
 payments, but merely the ownership of the bonds. In such 
 case the rulings for interest payments are omitted. The 
 
236 CORPORATE BOND ISSUES 
 
 bonds are entered as presented for registry rather than 
 numerically as is the case with registered bonds. 
 
 § 213. Payment of Coupons 
 
 Coupons are generally presented for payment at the 
 office of the fiscal agent or trustee, in envelopes specifying 
 the title of the security, number and amount of the coupons, 
 and the name of the concern or individual presenting them. 
 Payment is made by check when possible, and, of course, 
 out of funds supplied by the issuing corporation. The cou- 
 pons are cancelled by having one or more holes punched in 
 them ; all cancelled coupons are kept together, and at proper 
 intervals are sent to the company which issued the security, 
 with a statement of the account showing the total coupons 
 paid and the amount still outstanding. 
 
 The following is a form of report of coupons paid-: 
 
 The Annuity Trust Company 
 
 Philadelphia, Pennsylvania 
 Gentlemen : 
 
 We send you herewith by a package containing 
 
 cancelled coupons amounting to $ from 
 
 bonds of your Company as set forth in the attached receipt, having 
 been paid by us out of funds deposited by your Company for that 
 purpose. 
 
 Please sign and return the accompanying receipt. 
 Very truly yours, 
 
 Manager, Corporate Trust Department 
 Report of Coupons Paid 
 
 Attached to this report, or accompanying it, is a receipt 
 setting forth the amounts and the numbers of the various 
 cancelled coupons. This is signed by the company issuing 
 the bonds and returned to the trustee. A common form of 
 receipt reads about as follows : 
 
BOND FORMS 237 
 
 Trust Department 
 
 The Annuity Trust Company 
 Philadelphia, Pennsylvania 
 
 $ Date 
 
 Received of The Annuity Trust Company the following: 
 
 coupons * for $ for interest 
 
 due date on bonds of 
 
 Company, numbered (here give the numbers of the coupons cancelled), 
 duly cancelled and paid by said Trust Company out of funds deposited 
 by this Company for that purpose. 
 
 Treasurer 
 Receipt for Coupons Paid 
 
 § 214. The Coupon Register 
 
 Coupon bonds registered as to principal are entered in 
 the bond register, and an alphabetical card index of bond- 
 holders is provided for each denomination of bonds issued. 
 A coupon register is also provided for the proper record 
 of paid coupons. 
 
 If coupon bonds are not registered, but are transferred 
 by delivery, the bond register and the card index of bond- 
 holders are, of course, unnecessary, the coupon register alone 
 being maintained. This coupon register is shown below. 
 
 An entire page of the coupon register is required for 
 the record of each bond, and all paid coupons belonging 
 to that bond are pasted on the page allotted to it in the 
 space numbered to correspond with the particular coupon. 
 The method of using the coupon register is simple. As will 
 be noted, the number, the amount, and a brief description 
 of each bond are entered at the top of the page devoted to 
 that bond. As each coupon comes in and is paid, it is 
 pasted over its number on this page. A glance at the 
 coupon register will therefore show at any time wh^it 
 
238 
 
 CORPORATE BOND ISSUES 
 
 E 455 
 
 METROPOLITAN INVESTMENT CO. 
 
 BOND REGISTER 
 *l,000f«. 6%TRU5TB0ND 
 
 Dated_^k3ikUJ9/^ Due ^y^- // jga^ First Coupon due^$^4i^ 
 
 20 
 
 19 
 
 12 
 
 ^ 
 
 16 
 
 9 
 
 2 
 
 
 15 
 
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 ] CANCf 1 1 fVi \ 
 \ COUPON 1 
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 Coupon Register 
 
 coupons have been paid and also what coupons are due 
 but unpaid. 
 
 A special bank account should be kept for the payment 
 of coupons, and the balance of this bank account should 
 agree with the total amount of the coupons due and unpaid 
 as shown by the coupon register. 
 
CHAPTER XVII 
 
 BOND SALES 
 
 § 215. Selling the Bonds 
 
 After the bond issue is authorized and all other pre- 
 liminary formalities completed, the important question is, 
 "How can the bonds be sold to the best advantage?" This 
 question can be answered only in the light of specific con- 
 ditions — as, for instance, the stability of the issuing com- 
 pany, the kind and condition of property ofifered as se- 
 curity, whether or not the bonds are indorsed or guaran- 
 teed by a stronger company, the rate of interest to be 
 paid, the length of time to run, the redemption provisions, 
 arid the condition of the money market at the time of 
 sale. The manner of disposing of the bonds and the 
 agencies through which they are to be sold also have an 
 important bearing upon the success of the issue. If they 
 are sold through some well-known banking house, their 
 attractiveness is much increased, for this practically 
 amounts to an indorsement of the bonds, as such bankers 
 before taking bonds for sale always make a careful inves- 
 tigation of the reliability of the issuing company and of 
 the conditions underlying the bonds. For this purpose 
 the larger bond houses employ a stafif of experts com- 
 posed of engineers, appraisers, attorneys, accountants, etc. 
 
 Large bond issues are nearly always sold to, or 
 through, underwriting syndicates or financial institutions 
 which make a business of such work. The syndicate 01 
 banker agrees to take the bonds at a certain figure and 
 to assume the risk of selling them. If, as is sometimes the 
 
 239 
 
240 
 
 CORPORATE BOND ISSUES 
 
 case, bonds are sold through a financial agent, this agent 
 simply acts for the corporation, selling the Donds at the 
 highest figure possible and receiving his compensation in 
 commissions. 
 
 Bonds may sell at, or below, their par value, or at a 
 premium, depending upon the stability of the issuing, com- 
 pany and the rate of interest to be paid. The bonds may 
 be all or partly sold at the time of issue, and those that 
 have been disposed of may be paid for in monthly or 
 periodical instalments. In any case, there are numerous 
 expenses incident to a bond issue, and these may either be 
 charged immediately to operating expenses or spread over 
 a term of years. 
 
 § 216. Bond Issue Regulations 
 
 A proposed bond issue of a public utility corporation 
 must have the sanction of the public service commission 
 of the state in which the corporation is located before it 
 may be issued. This serves as a protection to the public 
 at large, the stockholders of the corporation, and the pur- 
 chasers of the bonds. Not only do these commissions 
 regulate the bond issues of corporations, but they pre- 
 scribe among other things the classifications of accounts 
 to be used by companies operating within their jurisdic- 
 tion. The following entries for bond issues of public 
 utility companies are in accordance with commission regu- 
 lations. 
 
 Commission regulations place bond issues under the 
 heading of "Funded Debt," each issue being designated 
 by the kind and tenor of the debt obligation incurred. 
 The manner of making entries, however, dififers shghtly, 
 if at all, whether the bonds are of one kind or another. 
 Commission regulations as to bond issues are very much 
 the same in dififerent states. 
 
BOND SALES 
 
 241 
 
 § 217. First Mortgage Bonds Sold at Par 
 
 To illustrate the sale of bonds at par, we will assume 
 that the directors and stockholders of the Lenox Iron 
 Works have authorized January i, 1916, an issue of first 
 mortgage gold bonds for $1,000,000, having twenty years 
 to run, with interest at 5%, payable semiannually on the 
 first day of January and July. The bonds are coupon in 
 form with the privilege of registration as to principal. 
 
 Under these circumstances, it might be permissible to 
 ignore the matter as far as the books of account are con- 
 cerned, until the bonds are sold, at which time an entry 
 would be made only for those sold, as shown below. It 
 seems prudent, however, to have a transaction of such im- 
 portance placed upon the books immediately. For this 
 purpose, at the date of issue and before sale of the bonds, 
 an entry is made as follows: 
 
 January i, 1916 
 
 Unissued First Mortgage Bonds $1,000,000 
 
 To First Mortgage Bonds $1,000,000 
 
 Authorized issue of $1,000,000 first mort- 
 gage 5% twenty-year gold bonds as 
 sanctioned this day by the directors 
 and stockholders. 
 
 Instead of "Unissued Bonds," some other appropriate 
 title for the account may be used, if desired, as "First 
 Mortgage Treasury Bonds," "Unsold First Mortgage 
 Bonds," etc. The credit entry may, if desired, be made 
 to "First Mortgage Bonds Payable," "Authorized First 
 Mortgage Bonds," "Bonds Payable," or any other caption 
 that will designate the issue clearly. If there are dififer- 
 ent issues, the caption may distinguish them by indicating 
 the interest rate, the life, or the due date of the bonds, as 
 "First Mortgage 5% Gold Bonds of 1950" or "First Mort- 
 gage 6% Twenty-Year Bonds," etc. 
 
242 CORPORATE BOND ISSUES 
 
 § 2i8. Entry on Sale of Bonds 
 
 If the entire issue of bonds is sold by the issuing 
 company for cash, the following entry* should be made: 
 
 Cash .- $1,000,000 
 
 To Unissued First Mortgage Bonds $1,000,000 
 
 Sale at par of the entire issue of first 
 mortgage bonds as authorized by the 
 directors. 
 
 In case the bonds are paid for in property of some 
 kind, then, of course, the property received is debited in 
 place of cash. 
 
 If the bonds were not recorded on the books at the 
 time of authorization, the cash book entry would be: 
 
 Cash $1,000,000 
 
 To First Mortgage Bonds $1,000,000 
 
 Sale at par of the entire issue of first 
 mortgage 5% twenty-year gold bonds 
 as authorized by the directors. 
 
 In case only a part of the bond issue has been taken 
 at the date of issue, then a cash book entry to Unissued 
 Bonds account must be made for only the sum taken. 
 Subsequent sales of bonds for cash should be recorded in 
 the same manner. In the sale of bonds after date of issue, 
 however, the element of accrued interest is involved in the 
 sale price and must be included. 
 
 Unsold bonds should not appear as an asset in the 
 balance sheet. In order that the sold and unsold bonds 
 may be clearly distinguished, they should appear in the 
 balance sheet about as follows: 
 
 First Mortgage 5% Gold Bonds: 
 
 Total Amount Authorized $1,000,000 
 
 Less Unsold Bonds 500,000 
 
 Bonds Issued and Outstanding $500,000 
 
 *A11 cash book entries are, as a matter of convenience, shown in journal form. 
 
BOND SALES 243 
 
 § 219. Bonds Sold at Par and Accrued Interest 
 
 Inasmuch as the entire bond issue bears the date of 
 authorization, it is apparent that interest will have accu- 
 mulated on all bonds sold on subsequent dates. It mat- 
 ters not whether the bonds are sold at par or otherwise; 
 interest will have accrued on the par value thereof to the 
 date of sale, and the investor is expected to add it to the 
 purchase price of the bonds. In that case the cash book 
 entry would be as follows, assuming that $500,000 of 
 bonds were sold three months after the bonds were 
 issued. 
 
 April I, 1916 
 
 Cash $506,250 
 
 To Unissued First Mortgage Bonds. . . . $500,000 
 
 " First Mortgage Bond Interest 6,250 
 
 Sale of $500,000 of first mortgage bonds and 
 accrued interest on same at 5% for three 
 months. 
 
 Payment of the full amount of accrued interest is in 
 effect a payment of interest before it is due, and in the 
 present illustration the purchaser loses the interest on 
 $6,250 from date of payment until the next interest date, 
 i.e., three months. Outside of this, there is neither a loss 
 nor a profit to either party, since in three months after 
 the given date the company will pay the entire interest on 
 all outstanding bonds for the first half-year; at that time 
 the purchaser will receive back the interest money ad- 
 vanced by him, and in like manner the company will re- 
 turn the interest thus received. If the sale were deferred 
 until the first or some subsequent interest date, accrued 
 interest would not enter into consideration at all, for at 
 that time the company would clip all coupons from the 
 unsold bonds and, after cancellation, paste them in the 
 coupon register without further entry. 
 
244 CORPORATE BOND ISSUES 
 
 § 220. Bond Subscriptions Paid For in Instalments 
 
 If bonds are sold directly to the public by the issuing 
 company, or even through brokers on a commission basis, 
 it is not unusual to allow the purchasers a term of months 
 in which to make their payments, the instalments being 
 due at designated intervals. If the present bond issue had 
 been sold to subscribers on the instalment plan, the entry 
 would be: 
 
 January i, 1916 
 
 Bond Subscriptions $1,000,000 
 
 To Unissued First Mortgage Bonds.. $1,000,000 
 
 Sale of $1,000,000 of bonds to sundry 
 subscribers at par, payable one- 
 quarter down and the balance in three 
 monthly payments of one-quarter each 
 on the first day of each month. ( Names 
 of subscribers should be entered on 
 separate sheets or in a subsidiary sub- 
 scription ledger provided for the 
 purpose.) 
 
 Bond Subscriptions should be credited as payment of 
 each instalment is made, and official receipts be issued 
 therefor. When payments are completed, the instalment 
 receipts are returned and the bonds issued. The deferred 
 instalments may perhaps bear interest at a given rate, or 
 at the same rate the bonds are to draw, in which case an 
 additional credit to Bond Interest account for the interest 
 received is necessary, which in turn will ofifset an equiva- 
 lent charge to the same account. Monthly balance sheets 
 made during the interval would of course show the amount 
 of bond subscriptions deferred. 
 
 Instalment payments may obtain when bonds are sold 
 to the company's bankers. In that event the entire con- 
 tract amount, after allowance for discount, if any, should 
 be charged up to the brokers as shown below: 
 
BOND SALES 
 
 245 
 
 Barton and Day, Bankers $1,000,000 
 
 To Unissued First Mortgage Bonds 
 
 (or to First Mortgage Bonds) $1,000,000 
 
 Entire issue of first mortgage bonds sold 
 at 100 flat, payable $400,000 down 
 and the balance in two instalments of 
 $300,000 each, due in one and two 
 months respectively. 
 
 Credit is, of course, given Barton and Day, as payments 
 are made by them. 
 
 § 221. Guaranteed Bonds 
 
 When bonds of one corporation are guaranteed by 
 another corporation, it is manifest that the guaranteeing 
 corporation must constantly hold itself in readiness to pay 
 the bond interest upon any default on the part of the 
 issuing company; but were such payment made, it would 
 be considered only as an advance or loan to the subsidiary 
 company, from whom repayment would be expected at 
 some future date. The entries to be made on the issuing 
 and guaranteeing companies' books should be in harmony. 
 
 As to whether or not a ledger entry is required by 
 either company at the time bonds are guaranteed, as an 
 official record of the conditions, depends on the wishes of 
 the directors. If a minute of such guarantee is clearly set 
 forth in the official records of each company, that should 
 suffice, since the fact of the guarantee is conspicuously 
 stated in the bonds themselves as well as in the deed of 
 trust. A foot-note of the guarantee should, of course, be 
 made on the balance sheet of the guaranteeing company. 
 
 § 222. Entries for Collateral Trust Bonds 
 
 As previously stated (§ 196), collateral trust bonds 
 are bonds secured by a deposit of stocks and bonds of 
 other corporations. This "collateral" usually represents 
 
246 CORPORATE BOND ISSUES 
 
 the company's entire or partial ownership of companies 
 in the same or similar lines of business, and located in its 
 own or in adjoining territory. The collateral stocks and 
 bonds are deposited with a trustee in accordance with the 
 trust agreement, and the market value of these securities 
 is usually considerably more than the bonds which they 
 secure. 
 
 Collateral trust bonds are frequently issued in the form 
 of short term notes, or collateral trust serial notes, and 
 when issued by underlying companies they may even be 
 "guaranteed" by the holding, leasing, or parent company. 
 The "guarantee" is not infrequently given by one or more 
 individuals who are financially able to act as surety. 
 
 The book entries for collateral trust bonds do not 
 dififer materially from those required for recording regular 
 mortgage bonds. With the mortgage bond, however, 
 though a conveyance under trust mortgage is made to the 
 trustee, the real estate security remains in the company's 
 possession; while in the case of the collateral bond, all of 
 the security is placed in the hands of the trustee. The 
 terms of the trust indenture usually provide that the 
 collateral may be changed at any time for other collateral 
 of equal value, either at the request of the issuing company 
 or of the trustee. 
 
 The collateral security must be conveyed to the trustee 
 before the actual sale of bonds begins, though this con- 
 veyance does not deprive the company of its rights and 
 privileges as owner of the collateral, such as voting at 
 meetings of stockholders, receiving the income from its 
 investment, etc. The question now arises, what kind of 
 record should be made for the collateral deposited with 
 the trustee? An adequate record of the transfer should, 
 of course, be made in the ofificial minutes, and the Public 
 Service Commission of New York requires that the pledged 
 
BOND SALES 247 
 
 collateral must be set forth in an account by itself. Cor- 
 porations not subject to commission regulations may 
 make entries in any logical manner, but in all cases it seems 
 desirable to set forth in a separate account all pledged 
 securities. 
 
 The stocks and bonds used as collateral, when first 
 purchased, are usually entered on the books at the pur- 
 chase price regardless of par value, and are charged to 
 some representative account, as "Investments" or "Stocks 
 and Bonds of Other Companies," or to accounts repre- 
 senting the kinds of securities purchased. 
 
 On the assumption that the collateral is standing in 
 an "Investments" account and has a book valuation of 
 $1,340,000, the following entry is required to suitably 
 record the conditions: 
 Pledged Investments (To secure collateral 
 
 trust bonds) $1,340,000 
 
 To Investments $1,340,000 
 
 To record the pledge of the following 
 collateral with the Hudson Trust 
 Company, as security for the issue 
 of $1,000,000 collateral trust bonds : 
 (Here list details of the stocks and 
 bonds pledged.) 
 
 The above entry removes the collateral entirely from 
 the Investments account and leaves therein only such 
 securities as are still in the company's possession; while 
 the Pledged Investments account exhibits the book value 
 of securities in the trustee's possession. In a manufac- 
 turing corporation an account might be opened with the 
 trustee and the collateral security stated therein. If there 
 are several bond issues, it is desirable to have separate 
 accounts for the pledged collateral belonging to each issue. 
 
 It is obvious that the securities pledged to secure 
 collateral bonds will fluctuate in value in harmony with 
 
248 CORPORATE BOND ISSUES 
 
 business conditions, and, if listed securities, their market 
 value can be noted at any time. A permanent reduction 
 in the value of the collateral deposited, or in any of the 
 investments held by the company, should be recorded in 
 the company's accounts by a charge to Profit and Loss 
 and a credit to the accounts afifected. In case the value 
 of the listed securities rises, the change of value might be 
 recorded if it were thought desirable so to do, by a charge 
 to the accounts affected and a credit to Profit and Loss. 
 In case the pledged collateral falls below a given margin 
 of safety, the trustee has the right to call for an additional 
 deposit. 
 
 Corporations which have a considerable investment 
 in stocks and bonds usually provide separate books for 
 recording, the details of such investments. When this is 
 the case, a notation in the accounts affected might perhaps 
 he considered a sufficient record of securities deposited as 
 collateral, but the entry shown above is preferable since 
 it provides a more systematic record of the conditions. 
 
 § 223. Entries for Short Term Notes 
 
 The opening entries for short term notes do not differ 
 from those required for collateral trust bonds. An entry 
 should, of course, be made crediting the entire issue of 
 notes under whatever caption is necessary, as "Three-Year 
 Notes," "Two-Year Collateral Trust Notes," etc., and 
 debiting the cash received and selling expense. In case 
 the notes are secured by collateral, an entry for the 
 securing collateral is necessary as explained in the pre- 
 ceding example. 
 
 § 224. Entries for Equipment Trust Serial Bonds 
 
 Equipment trust bonds, or car trust bonds (frequently 
 called certificates), are secured by a mortgage on all or a 
 
BOND SALES 249 
 
 part of the equipment of a railway company. The trust 
 agreement by its terms is in the nature of a lease. In 
 other words, the transaction is a conditional sale, the 
 company paying each year an annual instalment on the 
 bonds, and the trustee — acting for the persons who ad- 
 vanced the money — holding a Hen on the entire property 
 specified until the last instalment, or rental, is paid, at 
 which time a release is given. The bonds or certificates 
 are usually put out in series, from time to time, as each 
 succeeding series is issued, as "Series A," "Series B," 
 "Series C," etc. As they are secured on the equipment, 
 the margin of security increases automatically as the 
 annual instalments are paid. These usually begin to 
 mature early in the life of the property. Under the trust 
 indenture, each car, locomotive, or other chattel is plainly 
 marked so as to identify the mortgaged property, which 
 the company must maintain in proper efficiency. While 
 the equipment comes at once into the possession of the 
 railway company, the full ownership is, from the nature 
 of the case, deferred until the final bond instalment is paid, 
 when the trustee releases the title to the company. 
 
 To illustrate the entries required when equipment trust 
 bonds are sold, assume that the Green Valley Railway 
 Company has issued equipment trust 5% gold bonds dated 
 July I, 1916, for $4,000,000, payable in instalments of 
 $400,000 each year beginning July i, 1917; the bonds are 
 secured by new standard equipment costing $5,000,000, 
 upon which an initial payment of $1,000,000 has been 
 made by the company. Since the issue of equipment or 
 car trust certificates is subject to commission regulations, 
 these regulations must be followed in making the entries. 
 Assuming that the equipment was purchased through, and 
 the bonds given to, Murray Brothers & Co., bankers, at 
 95, and that a trust mortgage is made to a trustee as 
 
250 
 
 CORPORATE BOND ISSUES 
 
 security for the bondholders, and that expenses connected 
 with the issue amount to $6,000, the required entries are 
 as shown below. 
 
 When the trust is created and the first payment of 
 20% is made on account of the equipment, the entry is : 
 
 July I, 1916 
 
 Equipment $1,000,000 
 
 To Cash $1,000,000 
 
 Initial payment of 20% on the follow- 
 ing equipment costing $5,000,000 pur- 
 chased through Murray Brothers & 
 Co., for which $1,000,000 is paid in 
 cash and the balance is satisfied by 
 equipment bonds. (Here give details 
 of the equipment and bonds, or else 
 refer to the agreement where they 
 can be found.) 
 
 If thought preferable, the above and following pay- 
 ments might be put through the account of the bankers, 
 who are holders of the lien; Equipment and Leased 
 Equipment being debited and the bankers credited with 
 the entire purchase price of the equipment. 
 
 July I, 1916 
 
 Leased Equipment $4,000,000 
 
 To Equipment Trust 5% Bonds $4,000,000 
 
 For issue of equipment trust bonds in 
 denominations of $1,000, being balance 
 of payment of equipment purchased 
 through Murray Brothers & Co., 
 Bankers, as per trust agreement. The 
 bonds mature $400,000 on July i of 
 each year during the next ten years. 
 
 Expense on Equipment Trust Bonds $6,000 
 
 To Cash $6,000 
 
 Expenses incurred in connection with the 
 issue of equipment trust bonds. 
 
BOND SALES 
 
 251 
 
 As each bond instalment matures and is paid, an entry 
 is required in the bond account and also in the Equipment 
 account, since the portion paid must be transferred from 
 "Leased Equipment" to the "Equipment" account. The 
 equipment is required, of course, to be fully and adequately 
 maintained by the operating company. The entries for 
 interest are required to be made semiannually, and 
 monthly adjustments should be made to distribute the 
 interest over its period. The instalment entries are: 
 
 July I, 1917 
 
 Equipment Trust 5% Bonds $400,000 
 
 To Cash $400,000 
 
 First instalment on equipment trust bonds 
 paid this day, per trust agreement. 
 
 At the same time, and at each instalment date there- 
 after, the following transfer entry is required : 
 
 Equipment $400,000 
 
 To Leased Equipment $400,000 
 
 For transfer to the Equipment account, of 
 property covered by current instalment. 
 
CHAPTER :^VIII 
 
 BOND INTEREST 
 
 § 225. Paying Bond Interest 
 
 Under the terms of the usual trust deed securing a 
 bond issue, the trustee is empowered to enter upon and 
 foreclose the mortgage upon default of interest payment. 
 Therefore, the company is bound to meet its bond interest 
 obligations, or else face a foreclosure suit with its possible 
 receivership or bankruptcy. Whether the profits are suf- 
 ficient or not to meet fixed charges, the bond interest 
 must be paid. 
 
 Bond interest is usually paid semiannually from the 
 date of issue, but it may be paid quarterly or annually. 
 Interest on registered bonds is paid to the registered 
 holders by checks sent out at interest periods by the 
 company itself or by its fiscal agent, while interest on 
 coupon bonds is paid upon presentation of the coupons 
 at the office of the company or of its fiscal agent. The 
 coupons are sometimes made payable at any one of two 
 or three different agencies. Owners of coupons may either 
 send them direct to the issuing company or agency and 
 receive a cash remittance in exchange, or deposit them 
 in their local banks for collection. (See also § 185, and 
 Chapter XVI.) 
 
 § 226. Method of Handling Interest Coupons 
 
 Using the bond issue of $1,000,000 5% gold bonds of 
 the Lenox Iron Works, cited in the preceding chapter, 
 we assume that the first interest period, July i, 1916, has 
 
 252 
 
BOND INTEREST 253 
 
 arrived and that $25,000 has been turned over to the 
 company's fiscal agent for payment of the coupons as they 
 are presented. On the company's books the only entry 
 required at the time is the following, which, of course, 
 should appear in the cash book : 
 
 July I, 1916 
 
 Bond Interest $25,000 
 
 To Cash $25,000 
 
 For payment of semiannual bond interest on 
 $1,000,000 5% bonds, due today at the office 
 of the trustee. The Grove Street Trust 
 Company, to whom the check has been 
 issued. 
 
 The preceding entry is made immediately on sending 
 the interest check to the trust company or bank where 
 the coupons are payable. This check is usually sent the 
 day before the interest is payable or perhaps sooner, de- 
 pending on the distance. When the coupons are paid and 
 cancelled, they are then turned over to the issuing com- 
 pany and by them pasted in the coupon register (§ 214), 
 or otherwise disposed of. 
 
 In case the interest coupons are payable at the office 
 of the company, it is obvious that, with the simple 
 accounting system assumed, no entry would be necessary 
 until the coupons were presented and paid. Even when 
 the coupons are payable at the company's office, a special 
 bank account is frequently opened for their payment, a 
 check being drawn for the full amount and deposited 
 under a special account. If the coupons were all paid on 
 the due date, the entry would be similar to that given 
 above, the explanation showing that payment was made 
 at the office. It is but rarely, however, that this happens, 
 and when it is not the case, entry is, of course, made only 
 for the coupons presented and paid. The amount still 
 
254 
 
 CORPORATE BOKD ISSUES 
 
 outstanding can easily be calculated, but the bond interest 
 account itself will not show its correct debit until all of 
 the coupons have been paid. It is apparent, therefore, 
 that at the end of each year the books must either be kept 
 open until all coupons come in, or present an incomplete 
 record comprising only such bond interest as has been 
 paid. Neither of these plans meets the needs of present- 
 day accounting. The most approved plan is to set up at 
 each interest date the amount of interest due. Assuming 
 that this plan is adopted, the following entry is necessary 
 at the end of the preceding month : 
 
 June 30, 1916 
 
 Bond Interest $25,000 
 
 To Bond Interest Payable $25,000 
 
 For half-yearly bond interest due and pay- 
 able tomorrow. 
 
 Instead of "Bond Interest Payable," the account might 
 be termed "Coupons Payable" or "Bond Interest Ac- 
 crued." There is a difference, however, between interest 
 "due and payable" and interest "accrued." For instance, 
 on June i, 1916, the larger portion of the interest on the 
 bonds for the period under consideration has accrued, but it 
 is not due and payable until July i, 19 16. 
 
 Outstanding coupons continue to be obligations of the 
 company until paid. As the coupons are redeemed, 
 charges are made against Bond Interest Payable account, 
 so that the excess credit to this account will show at any 
 time the liability on outstanding coupons. If there are 
 several bond issues, an Interest Payable account might be 
 set up for each. 
 
 Assuming that all of the bond coupons were paid by 
 the company on the due date, we have the following 
 entry; 
 
BOND INTEREST 255 
 
 July I, 1916 
 
 Bond Interest Payable $25,000 
 
 To Cash $25,000 
 
 For interest coupons presented and paid this 
 day. 
 
 At the end of each year, if not oftener, the Bond 
 Interest account should be closed mto Profit and Loss 
 or into such other account as the system in use may 
 call for. 
 
 § 227. Interest on Registered Bonds 
 
 In the case of registered bonds, interest checks are 
 usually sent by the treasurer of the company direct to the 
 holders, though not infrequently the checks are sent by 
 the fiscal agent. They are usually mailed so as to reach 
 the payees on the date when the interest is due or as soon 
 as possible thereafter. The book entries for accruing and 
 paid interest on registered bonds do not differ from those 
 required and illustrated for interest on coupon bonds. An 
 alphabetical list of the registered bondholders entitled to 
 receive interest checks must be prepared for each interest 
 period. 
 
 § 228. Bond Interest Accrued Monthly 
 
 Nearly all large corporations require monthly state- 
 ments of income and operating expenses and statements 
 of condition, so that it becomes necessary at the end of 
 each month to compile the various expenses belonging to 
 that period. These expenses obviously comprise not only 
 the current expenses and pay-roll, but a proportionate 
 share of prepaid and accruing charges, as interest, dis- 
 count, taxes, insurance, etc. Bond interest is generally 
 payable half-yearly, so that each monthly statement 
 should include O'le-sixth of the half-yearly fixed interest 
 
256 
 
 CORPORATE BOND ISSUES 
 
 charge. As an offset to each monthly interest apportion- 
 ment, a corresponding credit is set up to "Accrued Bond 
 Interest," or "Accrued Interest Coupons," or "Accrued 
 Bond Coupons," or some other account that will clearly 
 designate the interest obligation. Such entries are made 
 through the journal. For example, referring to the 
 previous illustration, if the half-yearly bond interest of 
 $25,000 is to be accrued in monthly proportions, an entry 
 is required at the end of each month as follows : 
 
 January 31, 1916 
 
 Bond Interest $4,166.67 
 
 To Bond Interest Accrued $4,166.67 
 
 Accrual of interest on $1,000,000 of 5% 
 bonds for month of January. 
 
 A similar entry should be made at the end of each 
 succeeding month. A like entry is necessary for registered 
 bond interest, and for interest on any other bond or 
 mortgage obligation, and even for interest accruals on 
 current liabilities. Monthly entries are necessary also for 
 interest accruing on investments and receivables, especially 
 when monthly statements are required. 
 
 At the end of each six months the bond interest is 
 paid, Cash being credited, and the "Bond Interest Ac- 
 crued" account closed by the corresponding debit; but 
 whether or not the "Bond Interest" account is closed at 
 the same time depends on the closing dates adopted by 
 the company. As a rule, it remains open until the end of 
 the fiscal year, though at any time during the year it 
 shows the cumulative total for all of the months as well 
 as the interest for each month. Sometimes the ledger 
 accounts are closed monthly, in which case the Bond 
 Interest account is closed into Profit and Loss twelve 
 times a year. 
 
BOND INTEREST 257 
 
 § 229. Interest on Two or More Bond Issues 
 
 Definite examples of entries to fit all bond interest 
 conditions cannot well be given. Those already given, 
 with those which follow, illustrate their general character 
 and are in accordance with the entries employed by many 
 of the larger corporations. Each entry must indicate for 
 what purpose it was made and the conditions involved. 
 Monthly entries are made for accruing bond interest on 
 the various bond issues and for the several series of any 
 particular issue. An account is opened for each separate 
 obligation as a rule, and sometimes for each part issue 
 thereof. 
 
 As a basis for the entries which follow, assume that 
 January i, 1916, first mortgage 5% bonds are issued for 
 $2,000,000, interest payable April i and October i ; also 
 first and refunding 6% mortgage gold bonds for $4,000,- 
 000, interest payable January i and July i. At the end 
 of June, the following entry is necessary to record the 
 interest accruals for the month, similar entries having been 
 made for the intervening months. 
 
 June 30, 1916 
 
 Interest on Funded Debt $28,333.34 
 
 To Accrued Interest on Bonds $28,333.34 
 
 Monthly interest accrual on outstanding 
 bonds as follows: 
 
 Bonds Accrued 
 
 Outstanding Interest 
 First mortgage 
 
 5% bonds... $2,000,000.00 $8,333.34 
 First and re- 
 funding 6% 
 bonds 4,000,000.00 20,000^0 
 
 $6,000,000.00 $28,333.34 
 When several series of bonds are outstanding, it may 
 
258 CORPORATE BOND ISSUES 
 
 be advisable to open an interest account for each series, 
 as "Accrued Interest on Bonds — Series A," "Accrued 
 Interest on Bonds — Series B," etc. Of course, in a book- 
 keeping system where the voucher is in use, a journal 
 voucher would be made out for the above entry, giving 
 full details respecting the interest applications, as "Ac- 
 crued Interest on First Mortgage 5% Bonds," and 
 "Accrued Interest on First and Refunding 6% Mortgage 
 Bonds." 
 
 Since the coupons of the first and refunding mortgage 
 6% bonds are now due, an entry is made setting up the 
 liability for the particular coupon and closing ofif the 
 portion of interest accrued to date, thus: 
 
 June 30, 1916 
 
 Accrued Interest on Bonds $120,000 
 
 To Bond Coupon No. 9, Due July i, 
 
 1916 (A Co. 6's) $120,000 
 
 For six months' interest due July i, 1916, 
 on $4,000,000 of first and refunding 6% 
 gold bonds. 
 
 An entry similar to the above is required each time 
 the coupons on any particular bond issue fall due. At 
 the same time a check is issued to the financial agent for 
 redemption of the coupons No. 9 as they mature. The 
 entry is: 
 
 The Globe Trust Company, Trustee $120,000 
 
 To Audited Vouchers (or Cash) $120,000 
 
 For payment of six months' interest due 
 July I, 1916, on $4,000,000, etc. 
 
 It will be seen now that all No. 9 coupons are standing 
 on the ledger as a Hability and so remain until paid, no 
 matter how long that may be; also that there is a cor- 
 responding charge to the trustee for an equivalent amount. 
 
BOND INTEREST 259 
 
 The trustee renders a report at the end of each month, 
 setting forth the amount and number of coupons paid to 
 date, all of which are turned over to the company for 
 cancellation. At that time an entry is made for as many 
 coupons as may have been paid. For illustration we will 
 assume that $84,800 of the above amount has been pre- 
 sented and paid, requiring this entry: 
 
 July 31, 1916 
 
 Bond Coupon No. 9, Due 7/1/16 (A Co. 6's) $84,800 
 
 To The Globe Trust Company, Trustee. . . $84,800 
 
 For interest coupons paid by The Globe Trust 
 Company, Trustee, during the month of 
 July, 1916, as per statement rendered. 
 
 If more than one class of coupons were paid, they 
 would also be debited in like manner. For the first 
 mortgage 5% bonds, similar entries are required at the 
 end of September. At the end of the fiscal year or half- 
 year, the account for the interest on bonds must, of 
 course, be closed into Profit and Loss. At that time 
 Bond Interest accounts for any and all issues or series, 
 whether accrued for the full year, or only for one month, 
 must be closed off. 
 
 § 230. Interest on Treasury Bonds 
 
 Treasury bonds (see § 176), for the present considera- 
 tion, are understood to comprise the issuing company's 
 own bonds which have been acquired by purchase or 
 donation. This ownership, so long as the bonds have not 
 been cancelled, makes no difiference in the manner of 
 handling or accruing bond interest payable. The monthly 
 accruals are set up as usual, and the interest check handed 
 over to the paying bank at the proper date, while the 
 bank in turn cashes the bond coupons presented for pay- 
 
26o CORPORATE BOND ISSUES 
 
 ment, regardless of ownership or of the sources from 
 whence they come. The issuing company, on the other 
 hand, treats the treasury bonds as investments, the same 
 as bonds of other companies, and collects the income 
 therefrom in like manner. In case monthly accruals of 
 $10,000 income from treasury bonds and other invest- 
 ments are required to be set up, an entry should be made 
 at the end of each month about as follows: 
 
 January 31, 1916 
 
 Accrued Income from Investments $10,000 
 
 To Income from Investments $10,000 
 
 For accrued income on investments for one 
 month, as follows: (Recite the amount, rate, 
 etc.) 
 
 If it is desired that the income from treasury bonds 
 be kept separate from that of other investments, debit 
 Accrued Income from Treasury Bonds and credit Income 
 from Treasury Bonds. 
 
 As the cash is received in payment the following cash 
 book entry is required on the due date: 
 
 July I, 1916 
 
 Cash $60,000 
 
 To Accrued Income from Investments .... $60,000 
 
 For cash income on investments due today as 
 follows: (Recite details of investments.) 
 
 At the end of each fiscal period the Income from 
 Investments account is closed to Profit and Loss as 
 follows: 
 
 December 31, 1916 
 
 Income from Investments $120,000 
 
 To Profit and Loss (or Income) $120,000 
 
 To close into Profit and Loss, being total 
 income for the year from investments. 
 
BOND INTEREST 261 
 
 If income is derived from several disconnected sources, 
 it might be advisable to open separate accounts to dis- 
 tinguish them from one another, as Income from Bonds, 
 Income from Real Estate Investments, Income from 
 Dividends, etc. 
 
 § 231. Interest on Guaranteed Bonds 
 
 Interest payments on guaranteed bonds are handled 
 in the same manner as those of any other class of bonds. 
 The issuing company pays the interest in the usual way 
 if it is able. In case it is unable to do so, the guaranteeing 
 company must make the payment, which must obviously 
 be considered an advance to the subsidiary company, to 
 be repaid at some future date. At the time of the advance, 
 a cash book entry should be made as follows: 
 
 Advances to Subsidiary Company (giving name 
 
 of company) $25,000 
 
 To Cash , $25,000 
 
 For payment of interest due this day on $1,- 
 000,000 of guaranteed 5% bonds of The 
 Company. 
 
 On the books of the issuing company the following 
 entry is required: 
 
 Bond Interest (or Bond Interest Accrued) $25,000 
 
 To Advances from Company $25,000 
 
 (Full explanation here.) 
 
 The entries may, of course, be very different from those 
 shown, depending upon the agreement existing between 
 the two companies; but in any case the matter should 
 be clearly set forth in each company's books. 
 
 § 232. Interest on Income Bonds 
 
 Since income bonds are to all intents and purposes 
 
262 CORPORATE BOND ISSUES 
 
 the same as preferred stock, it is manifest that the book 
 entries for the interest thereon would be practically the 
 same as those required for dividends when declared. As 
 in the case of stock, interest on income bonds can be paid 
 only when the company's profits are sufificient to justify 
 such payment; therefore, as a rule no entry is necessary 
 or advisable until the directors decide whether or not it 
 shall be paid. On the other hand, when it is practically 
 assured that the interest coupons will be paid, monthly 
 entries for accruing interest are in order. Income bonds 
 generally contain half-yearly coupons, though their pay- 
 ment, of course, is contingent upon the company's 
 earnings. When declared at the interest date the follow- 
 ing entry is made: 
 
 December 31, 1916 
 
 Interest on Income Bonds $25,000 
 
 To Interest Payable on Income Bonds.... $25,000 
 
 For interest at 5% on income bonds for six 
 months, declared by the directors and pay- 
 able January i, 1917. 
 
 The Interest account is closed into Profit and Loss. 
 Note that instead of the word "interest," we might use 
 the word "dividend." When the interest is paid, the cash 
 entry should be as follows: 
 
 January i, 1917 
 
 Interest Payable on Income Bonds $25,000 
 
 To Cash $25,000 
 
 For payment of interest on income bonds. 
 
 § 233. Interest on Special Bond Issues 
 
 The principles already stated for the entry of bond 
 interest apply in handling the interest on all other bond 
 issues where registered and coupon bonds are used, 
 
BOND INTEREST 26'^ 
 
 whether secured or otherwise. Profit-sharing or par- 
 ticipating bonds require extra entries for setting aside the 
 share of profits apportioned to them, which in turn would 
 be paid by check or otherwise, as the case might be. 
 
 5 234. Interest Charged to Construction 
 
 The Interstate Commerce Commission and the various 
 state pubHc utility commissions permit the capitalization 
 of various charges during periods of construction. This 
 principle might apply equally as well to corporations not 
 under commission regulation, so long as the charges capi- 
 talized are actual and legitimate and expended during 
 the construction of plant, or extension of property and 
 equipment. Real estate development companies and other 
 similar enterprises generally include certain "loading" 
 charges as part of the development or construction cost. 
 Such charges may include development expenses, interest 
 on bonds and loans, legal and other direct expenditures, 
 proportion of bond discount, etc. These items are usually 
 charged to the appropriate accounts; and then at the end 
 of the year, or upon completion of the construction, a 
 transfer entry is made to place them in the Construction 
 account — or to such other account as may be proper. 
 
 The following entry shows the manner in which such 
 transfers should be made: 
 
 December 31, 1916 
 Construction Account (or Plant and Equipment) $42,000 
 
 To Construction Expenses $20,000 
 
 " Bond Interest 10,000 
 
 " Loan Interest 4,000 
 
 " Bond Discount 8,000 
 
 To close above accounts into Construction ac- 
 count, being all of the construction expenses 
 and interest, and the proportionate amount 
 of the bond discount for the period. 
 
264 CORPORATE BOND ISSUES 
 
 Many corporation officials advocate the addition of 
 all bond discount and expense to plant account, especially 
 if the bond issue was created for extension of the plant; 
 but this is not good practice, since the manufacturing 
 account through depreciation charges would eventually 
 be made to bear a considerable portion of the expense of 
 financing the company. 
 
 § 235. Income from Investments 
 
 Income from investments other than treasury bonds 
 is handled in the same manner as explained above. Divi- 
 dends from stock investments, however, should not be 
 entered as accrued monthly income, or entered in any 
 other way until the dividend has actually been declared. 
 
 A plan of entering income from investments that 
 dififers slightly from the one suggested under "Interest 
 on Treasury Bonds" is given below. Assume that Com- 
 pany A owns $1,000,000 of Company B's 6% bonds, 
 payable January i and July i. At the end of each month 
 the following entry should be made on Company A's 
 books for the accrued income: 
 
 January 31, 1916 
 
 Accrued Interest on Bonds Owned $S,ooo 
 
 To Interest on Bonds Owned $5,000 
 
 (Full explanation here.) 
 
 At the regular interest dates, July i and January i, 
 or in fact the day preceding, the following entry should 
 be made: 
 
 June 30, 1916 
 
 Company B $30,000 
 
 To Accrued Interest on Bonds Owned .... $30,000 
 
 (Full explanation here.) 
 
BOND INTEREST 
 
 265 
 
 When the bond coupons are presented to the paying. 
 I:)ank and the cash received therefor, the following entry 
 is required: 
 
 July I, 1916 
 
 Cash $30,000 
 
 To Company B $30,000 
 
 (Full explanation here.) 
 
 It is apparent, of course, that this could be handled very 
 differently so long as it records the matter adequately and 
 clearly. The debit in the first entry might be to Accrued 
 Interest Receivable or Accrued Interest on Bonds Receiv- 
 able. The second and third entries could be consolidated 
 into one, debiting Cash and crediting^ Accrued Interest on 
 Bonds Owned. 
 
CHAPTER XIX 
 
 BOND DISCOUNT AND PREMIUM 
 
 § 236. Bonds Sold Above or Below Par 
 
 When bonds are sold, the standing of the issuing com- 
 pany and its ability to pay all obligations at maturity have, 
 of course, a direct and important bearing on the price 
 secured. A strong, well-managed corporation may be able 
 to sell a 45^% or 5% bond near to or above par, while 
 another company not so well known or not so strong finan- 
 cially may be unable to sell a 6% bond save at a considerable 
 discount. 
 
 For instance, the issue of $49,000,000 consolidated 
 mortgage 43^ Jo gold bonds of the Pennsylvania Railroad 
 Company, dated February i, 1915, due in i960, was offered 
 through a prominent banking house of New York and 
 promptly taken up at 103^ and over, and accrued interest 
 to date of delivery. At this price the investor got but little 
 over 4>^ % on his investment, but the undoubted stability of 
 the company, its careful management, and the ready miarket 
 for the bonds in case the investor should wish to sell, made 
 them very attractive. Also, the fact that these bonds were 
 a legal investment for savings banks in several states, and, 
 by agreement of the company, free from taxation under 
 present or future laws of the State of Pennsylvania or of 
 the United States, added to their desirability. 
 
 On the other hand, April i, 19 16, the Chesapeake and 
 Ohio Railway Company issued $40,180,000 of 5% con- 
 
 266 
 
BOND DISCOUNT AND PREMIUM 
 
 267 
 
 vertible thirty-year secured gold bonds, carrying many de- 
 sirable features. These were debenture bonds offered also 
 through a strong New York banking concern, but they sold 
 at approximately 95 with interest to date of sale. 
 
 In both of these cases the bankers through whom the 
 bonds were sold were of undoubted strength, and the dif- 
 ference in price clearly reflected the relative desirability of 
 the bonds from the standpoint of the investor. In the case 
 of the Pennsylvania bonds, every desirable feature was 
 present. In the case of the Chesapeake and Ohio bonds, the 
 preceding financial history of the road had an adverse in- 
 fluence and the general conditions under which the bonds 
 were issued were not as satisfactory as in the case of the 
 Pennsylvania bonds. As a result, the Pennsylvania bond? 
 sold at a premium of 3 ^ % and over, and the Chesapeake 
 and Ohio bonds at a discount of approximately 5%. 
 
 § 237. Bonds Sold Between Interest Dates 
 
 When bonds are sold at other than the regular interest 
 dates, allowances must, of course, be made for accrued 
 interest in determining the price actually received for the 
 bonds. For instance, a bond bearing interest at the rate of 
 6% per annum, payable semiannually, January i and July i, 
 must receive its 3% on the interest date regardless of when 
 it was sold. If, then, such a bond were sold March i, interest 
 has accrued to the amount of i % , and this must be deducted 
 from the amount received to determine the real price of the 
 bond. If the amount received for the bond were 103, it is 
 obvious that 1% on the face of the bond must be allowed 
 for the accrued interest, and this being deducted leaves 102 
 as the price actually received for the bond. 
 
 If the bond were sold for 100, there would obviously be 
 a discount of 1% on the transaction, the actual price of the 
 bond being 99. 
 
268 CORPORATE BOND ISSUES 
 
 § 238. Expenses of Bond Issue 
 
 Many authorities consider the expenses incurred in the 
 floating of a bond issue as directly chargeable to the cost of 
 the issue, in the same manner as discount on the bonds. The 
 Public Service Commission of the First District of New 
 York includes among such expenses the following : "All 
 expenses connected with the issue and sale of evidences of 
 debt, such as fees for drafting mortgages and trust deeds, 
 fees and taxes for recording mortgages and trust deeds, 
 cost of engraving and printing bonds, fees paid trustees 
 provided for in the mortgages and trust deeds, fees and 
 commissions paid underwriters and brokers for marketing 
 such evidences of debt, and other regular expenses." 
 
 § 239. Entries for Bond Discount and Expense 
 
 To illustrate the disposition to be made of discount on 
 bonds and the other expense inevitable in connection with 
 a bond issue, we will assume that the bond issue of 
 $1,000,000 of the Lenox Iron Works was sold for cash at 
 90 flat, and that expenses incurred in connection with the 
 issue amounted to $5,000. The bond discount may be 
 charged under "Discount on Bonds" or some other suitable 
 title, and the expense, to "Expense of Bond Issue" ; or both 
 the discount and expense may be charged to one account, as 
 "Bond Discount and Expense." The entry for the sale is : 
 
 January i, 191 6 
 
 Cash $900,000 
 
 Bond Discount and Expense 100,000 
 
 To Unissued First Mortgage Bonds. . . $i,ooo,ooij 
 
 For entire issue of first mortgage 5% 
 bonds sold to bankers at 90. 
 
 Bond Discount and Expense $5,ooo 
 
 To Cash $5,ooc 
 
 For bond issue expenses paid in cash. 
 
BOND DISCOUNT AND PREMIUM 269 
 
 § 240. Entries for Bond Premium 
 
 Premium received on the sale of bonds is credited to a 
 distinguishing account, as "Premium on Bonds," "Bond 
 Premium," or "Premium and Discount on Bonds." As- 
 suming that the issue of $1,000,000 bonds of the Lenox 
 Iron Works sold at a premium of 2%, the following entry 
 would be made : 
 
 January i, 1916 
 
 Cash $1,020,000 
 
 To Unissued First Mortgage Bonds. . $1,000,000 
 
 " Premium on Bonds 20,000 
 
 (Full explanation here.) 
 
 § 241. Nature of Bond Premium and Discount 
 
 The entries required to bring bond premium or bond 
 discount upon the books are simple. After they are brought 
 upon the books, their proper treatment is a more difficult 
 problem. 
 
 The premium or discount which Is either received or 
 given upon the sale of the bonds may be said to represent 
 a deduction from, or an addition to, the interest paid on the 
 bonds. In other words, "Premium or discount on bonds is a 
 deduction from, or addition to, the nominal rate of interest 
 which the bond carries ; that is to say, there is a rate known 
 as the true or effective rate, at which any corporation can 
 place its bonds at par ; if it elects to place them at any other 
 rate, the bonds will sell at a premium or discount as the case 
 may be; but the effective rate remains the same and this 
 effective rate is the proper charge to Income account. 
 Hence, the premium or discount should theoretically be 
 spread over the term of the bonds, and the annual instalment 
 thereof credited or charged to the Income account each 
 year."* 
 
 •"Accounting t-ractice and Procedure" by A. Lowes Dickinson, page 134- 
 
270 
 
 CORPORATE BOND ISSUES 
 
 § 242. Treatment of Bond Premium and Discount 
 
 As already stated, bond premium or discount is from its 
 very nature a deduction from, or an addition to, the cost of 
 the funds raised by the issue. It therefore really decreases 
 or increases the amount of nominal interest paid during the 
 life of the bonds. 
 
 In order that each accounting period may show accu- 
 rately the true cost of carrying the issue, the premium or 
 discount must be written ofif over the life of the bonds and 
 credited or charged periodically to the interest account and 
 through this to Profit and Loss. 
 
 Some organizations with a large surplus make a practice 
 of writing off the Bond Discount and Expense account im- 
 mediately, but this does not show the true cost of carrying 
 the issue and is therefore misleading. Other organizations 
 write off the discount in several instalments, but this is not 
 accurate and is as objectionable as the practice of charging 
 it off immediately. 
 
 Bond premium is, much more frequently than discount, 
 thrown immediately into the profit and loss or surplus 
 accounts. This practice is, of course, just as misleading as 
 the same method of handling a discount would be, for it will 
 result in an erroneous statement of the operating costs. 
 
 § 243. Effective Rate Method 
 
 The best modern practice of handHng either bond prem- 
 ium or discount is that known as the effective rate method, 
 this effective rate being figured on the amount actually 
 received for the bond, and not on its par. Under this 
 method the effective rate which the issue bears is charged 
 against Income as the Accrued Interest account is set up. 
 In the case of discount, the effective rate is debited to the 
 Interest account and the nominal rate credited to Accrued 
 Interest, while the difference between the nominal and 
 
BOND DISCOUNT AND PREMIUM 
 
 271 
 
 effective rates is credited to Bond Discount and Expense. 
 In the case of premium, the difference between the effective 
 and nominal rates is debited to the Premium account. 
 
 To illustrate the handling of premium or discount 
 accounts on the books under the effective rate method, let 
 us assume that the $1,000,000 issue of the Lenox Iron 
 Works which sold at 90 flat, and the expenses of which were 
 $5,000, runs for twenty years and bears interest at the rate 
 of 5% per annum, payable annually. The total of the Dis- 
 count and Expense account shows $105,000 that must be 
 written off over the life of the bonds. Instead of the nomi- 
 nal rate of 5%, or $50,000, which the issue carries, the 
 true or effective rate would be 6.139% or $55,250. At the 
 end of the first year, if monthly entries are not made, the 
 entries recording this would be : 
 
 Interest on Bonds $50,000 
 
 To Accrued Interest $50,000 
 
 Interest accrued on the issue of $1,000,000 
 first mortgage 5% bonds. 
 
 Interest on Bonds $5,250 
 
 To Bond Discount and Expense $5,250 
 
 Difference between the nominal and true effec- 
 tive rates on the $1,000,000 bond issue. 
 
 Accrued Interest on Bonds $50,000 
 
 To Cash $50,000 
 
 Payment on accrued interest on $1,000,000 
 bond issue. 
 
 The interest is eventually closed into Profit and Loss by 
 the following entry : 
 
 Profit and Loss $S3>2So 
 
 To Interest on Bonds $55,250 
 
 Transfer of the effective interest on $1,000,000 
 bond issue to Profit and Loss. 
 
272 
 
 CORPORATE BOND ISSUES 
 
 The entries for bond premium would, of course, be of 
 the same general nature, the effective rate, however, being 
 less than the nominal or accrued interest charged. 
 
 Where the bonds are to be redeemed at maturity at par, 
 the problem of writing off the interest or discount is, as has 
 just been shown, comparatively simple; but where they are 
 to be redeemed at prices other than par, and at varying dates 
 of maturity, the problem is much more complicated. The 
 whole matter is summed up admirably in the quotation given 
 below.* 
 
 § 244. Varying Conditions Affecting Annual Charge 
 
 "In accounting for the charge to income where the ef- 
 fective interest method is adopted, these cases must be 
 considered : 
 
 "(a) Bonds issued at a discount and redeemable at par. 
 When the bonds are first issued the full par value would be 
 credited to the liability account, while the difference between 
 this full value and the cash received would be charged to a 
 discount on bonds account. The full effective rate of inter- 
 est would be charged to Income account, while so much of 
 it as represents the nominal interest would be credited to 
 Interest Accrued, and the balance to Bond Discount, thus 
 gradually reducing this account over the life of the bonds. 
 
 "(b) Bonds issued at a premium and redeemable at par. 
 The conditions are exactly the reverse of case (a). Dis- 
 count on Bonds account will become Premium on Bonds 
 account with a credit balance; the effective interest charge 
 will be less than the actual, leaving a charge to Bond Pre- 
 mium account in reduction of the balance on that account. 
 
 "(c) Bonds issued at par, redeemable at a premium. 
 This case is in substance identical with (a), but in practice 
 
 *By permission, from "Accounting Practice and Procedure" by A. Lowes Dick 
 
 son, pages 135-141. 
 
BOND DISCOUNT AND PREMIUM 273 
 
 the treatment is different, as there is neither discount nor 
 premium at the date of issue. The charge to Income ac- 
 count will exceed the interest accrued, and the difference 
 will be credited to Bond Premium account and accumulated 
 there until final redemption, all premiums paid on redeemed 
 bonds being charged to this account. 
 
 "(d) Bonds issued at a discount and redeemable at a 
 premium. This combines cases (a) and (c). The excess 
 of the effective rate will be credited to Premium and Dis- 
 count account, and will gradually convert the debit balance 
 on that account into a credit sufficient to equal the amount 
 of all premiums payable on final redemption. 
 
 "In practice it is often found that bonds are purchased 
 in the market at prices varying from, and generally less 
 than, the specified redemption prices, and then transferred 
 to the trustees of the sinking fund at the specified prices, 
 and a saving thus effected which must be taken into account 
 when determining the annual charge to income. Or, again, 
 the redemption dates may be anticipated for a whole or part 
 of the issue, and further disturbing factors thus introduced. 
 
 "The saving on the purchase of bonds in the market at 
 prices below those fixed for redemption, may be dealt with 
 in one or the other of the following methods : 
 
 1. Credit the amount to Income account each year, 
 
 thus finally disposing of it. 
 
 2. Credit the amount to Discount (or Premium) on 
 
 Bonds account, thus eventually producing a sur- 
 plus on this account, which would ultimately be 
 transferred to Income account. 
 
 "Neither of these methods is theoretically accurate ; but 
 in view of the impossibility of determining what the market 
 price will be in the future, theoretical accuracy is impossible. 
 
 "The treatment in the case of anticipation of redemption 
 
274 
 
 CORPORATE BOND ISSUES 
 
 dates Is a more difficult matter, for, if carried out on at all 
 a large scale and not accompanied by an equitable reduction 
 on the redemption price, the eiifective' interest rate will be 
 materially increased. The only sound method would appear 
 to be to recalculate the effective rate on the basis of the bonds 
 still outstanding and the new redemption terms. If this is 
 not dene, there may be a considerable shortage to make up 
 at the date of final redemption. This fact is frequently over- 
 looked, although it should be recognized as an important 
 factor, particularly in any refunding or redemption plan. 
 
 § 245. Methods of Determining Charge to Income 
 
 "There are various methods in use for determining the 
 proper interest charge to be made to Income account under 
 the various conditions that arise. 
 
 "The first and most correct method, which may be called 
 the effective interest method, consists in charging to Income 
 account the effective interest rate calculated from the known 
 conditions of issue upon the whole amount outstanding 
 during the year, with an addition or deduction of an amount 
 equal to the excess or deficit of the amount paid for redemp- 
 tion during the year as compared with the fixed amount 
 provided. For instance, if the conditions of the issue pro- 
 vided that $100,000 of bonds be retired during the year at 
 105, and as a matter of fact they are purchased at 95, the 
 true interest on the bonds bearing interest during the year 
 would be reduced by $10,000, representing the saving on 
 bonds retired during the year as compared with the price 
 therefor assumed in determining the effective rate. The 
 tendency of this method would probably be to increase 
 gradually the annual charge to Income for interest and 
 sinking fund until the limit price of redemption was reached ; 
 for, as the amount of the bonds outstanding diminished, the 
 market price might be expected to rise. 
 
BOND DISCOUNT AND PREMIUM 275 
 
 "The second and more common method, which may be 
 called the equal instalment method, is to ignore altogether 
 the effective interest rate ; to charge to Income account each 
 year the interest actually paid, together with a proportionate 
 part, according to the whole term of issue, of the discount 
 on issue or premium on redemption ; Income account being 
 also credited with any savings made by purchase of bonds in 
 the market. 
 
 "A third method, which may be called the bonds out- 
 standing method, and which may be safely adopted where, 
 by reason of complication in the terms of issue and redemp- 
 tion, it is difficult or impracticable to determine the true 
 interest rate, is to distribute the discount or premium over 
 the period in the proportion that the bonds outstanding for 
 each year bear to the sum of the bonds outstanding for 
 all years of the currency of the loan. Any saving made by 
 the purchase of bonds in the market is credited to Income 
 account. 
 
 "When a large accumulated surplus is available, the 
 practice is frequently adopted of charging the whole dis- 
 count on issue to Profit and Loss account, taking up any 
 profit or loss on subsequent redemption at a discount or 
 premium to the credit of Profit and Loss account as it arises, 
 and leaving the nominal interest of the bonds actually out- 
 standing each year as the only charge to Income account. A 
 great objection to this practice is that thereby the true rate 
 of interest paid on loans during their currency is entirely 
 lost sight of; current fixed charges against earnings are 
 understated; and the portion representing the discount is 
 charged against surplus arising out of previous operations, 
 instead of being charged against income from current 
 operations which should meet it. Any savings on bonds 
 which are purchased, in the mai^ket are a credit to Income 
 account. 
 
276 CORPORATE BOND ISSUES 
 
 § 246. Operation of the Various Methods of Determining 
 Annual Charge to Income 
 
 "In order to show the effect of these various methods, 
 it may be well to consider a specific case as follows : 
 
 "An issue of $i,ooo,OQO of bonds is made at 90, carrying 
 interest at 5%, and redeemable at the rate of $50,000 each 
 half year, at 100 for the first five years, and thereafter at 
 105. Calculations made on these premises show that the 
 effective rate of interest is approximately 8 3/16%. Bonds 
 are redeemed each as specified, but they are purchased in 
 the market at the following prices, viz. : 
 
 1st year >..,.. 92 
 
 2nd year 93 
 
 ard year 95 
 
 4th year 97 
 
 5th year 98 
 
 6th year 100 
 
 7th year 102 
 
 8th year 104 
 
 9th and loth drawn at 105 
 
 "The tables that follow give all the essential figures. 
 
 "In the table on page 277, the last four columns show 
 the charges to Income account on the basis ( 5 ) of the effec- 
 tive interest method; (6) of the equal instalment method; 
 (7) of the bonds outstanding method; and (8) of charging 
 all discount and premium to surplus ; in each case crediting 
 to Income account the surplus arising from purchasing 
 bonds at less than the fixed redemption price. 
 
 "If the latter be credited direct to surplus, or carried in 
 the Bond Discount account until all discount has been writ- 
 ten off by the operation of these credits and the balance of 
 the effective rate, then, at the end of the nth half year in 
 the first case and at the end of the 15th half year in the 
 
BOND DISCOUNT AND PREMIUM 
 
 277 
 
 Charge- to Income 
 when Discount 
 charged to Profit 
 and. Loss Ac 
 count 
 
 Charge to Income 
 when Discount 
 written off on 
 Bonds outstand- 
 ing method 
 
 Charge to Income 
 on equal annual 
 Instalment 
 Method 
 
 Charge to Income 
 on effective in- 
 terest method 
 
 Surplus on p u r - 
 chase at less than 
 redemption 
 price 
 
 Discount provided 
 for (2) — (1) 
 
 Effective Interest 
 charge at 8 3/16% 
 p. a. (b) 
 
 Payments for In- 
 terest at 57o p. 
 a. (a) 
 
 Period V2 Year 
 
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2^8 
 
 CORPORATE BOND ISSUES 
 
 second, the discount will be extinguished and thereafter 
 only the actual interest paid, less surplus on market pur- 
 chases, will be charged to Income. 
 
 § 247, Determining Annual Charge When Proportionate 
 Discount Is Written Off 
 "The charge to Income account on the bonds outstanding 
 method is arrived at as shown in the following table. It 
 is so close to that given by the effective interest method that 
 for all practical purposes it may safely be adopted. 
 
 1 
 
 V 
 
 1 
 
 1 
 
 
 flj 
 
 § 
 
 Z 
 
 o„ 
 
 ,|, 
 
 a 
 c boo 
 
 npq 
 
 S <« 
 
 u 
 
 § 
 
 M V 
 
 
 E 
 
 a 
 
 E 
 >. 
 
 w 
 V 
 
 C 
 
 3 
 
 A. 
 
 C 
 
 
 £ 
 
 
 CA 
 
 "J 
 
 h 
 
 ■Ui 
 
 < 
 
 I 
 
 $1,000,000 
 
 100/1050 
 
 $11,905 
 
 $25,000 
 
 $4,000 
 
 $32,905 
 
 2 
 
 950,000 
 
 95/1050 
 
 11,310 
 
 23,750 
 
 4,000 
 
 31,060 
 
 3 
 
 goo,ooo 
 
 90/1050 
 
 10,714 
 
 22,500 
 
 3,500 
 
 29,714 
 
 4 
 
 850,000 
 
 85/1050 
 
 10,119 
 
 21,250 
 
 3,500 
 
 
 S 
 
 800,000 
 
 80/1050 
 
 9,524 
 
 20,000 
 
 2,500 
 
 27,024 
 
 6 
 
 750,000 
 
 75/1050 
 
 8,929 
 
 18,750 
 
 2,500 
 
 25,179 
 
 7 
 
 700,000 
 
 70/1050 
 
 8,333 
 
 17,500 
 
 1,500 
 
 24,333 
 
 8 
 
 650,000 
 
 65/1050 
 
 7,738 
 
 16,250 
 
 1,500 
 
 22,488 
 
 9 
 
 600,000 
 
 60/1050 
 
 7,143 
 
 15,000 
 
 1,000 
 
 21,143 
 
 10 
 
 550,000 
 
 55/1030 
 
 6,S4S 
 
 13,750 
 
 1,000 
 
 19,29s 
 
 II 
 
 500,000 
 
 50/1050 
 
 5,952 
 
 12,500 
 
 2,500 
 
 15,952 
 
 12 
 
 450,000 
 
 45/1050 
 
 5,357 
 
 11,250 
 
 2,500 
 
 14,107 
 
 13 
 
 400,000 
 
 40/1050 
 
 4,762 
 
 10,000 
 
 1,500 
 
 13,262 
 
 14 
 
 330,000 
 
 35/1050 
 
 4,167- 
 
 8,750 
 
 1,500 
 
 11,417 
 
 15 
 
 300,000 
 
 30/1050 
 
 3,571 
 
 7,500 
 
 Soo 
 
 10,571 
 
 16 
 
 250,000 
 
 25/1050 
 
 2,976 
 
 6,250 
 
 Soo 
 
 8,726 
 
 17 
 
 200,000 
 
 20/1050 
 
 2,381 
 
 5,000 
 
 
 7,381 
 
 18 
 
 150,000 
 
 15/1050 
 
 1,786 
 
 3,750 
 
 
 5,536 
 
 19 
 
 100,000 
 
 10/1050 
 
 1,190 
 
 2,500 
 
 
 3,690 
 
 20 
 
 50,000 
 
 5/1050 
 
 595 
 
 1,250 
 
 ... 
 
 1,845 
 
 
 $10,500,000 
 
 $125,000 
 
 $262,500 
 
 $34,000 
 
 $353,500 
 
CHAPTER XX 
 
 SINKING FUNDS 
 
 § 248. Function of the Sinking Fund 
 
 A fund is always an asset. A sinking fund is a reserva- 
 tion of assets, usually cash, set aside periodically for a 
 specified purpose and placed in the hands of a trustee for 
 safe-lxeping '-ntil the date arrives for its expenditure in 
 accordance with the purpose for which it was created. 
 
 The sinking fund is resorted to as a convenient hiethod 
 of accumulating funds for various purposes, as for the 
 redemption of bonds, the cancellation of a lease, the replace- 
 ment of some fixed asset, as a plant or a costly machine, or 
 the replacement of an investment in some wasting property, 
 as oil wells, quarries, or mines. When the sinking fund is 
 used in connection with the depreciation of mines, it is 
 frequently spoken of as an "extinguishment fund." 
 
 The most common use of the sinking fund in corporation 
 affairs is for the redemption of bond issues, and for this 
 reason the present discussion of sinking funds is confined 
 to the fund for the redemption of bonds. 
 
 There are some objections to the sinking fund as a 
 method of accumulating funds, since it withdraws and 
 holds at a nominal rate of interest current cash that could 
 be used more profitably in the business. The fund at the 
 best can hardly earn more than 4% or 5%, while invested 
 in the business it should be made to earn 10% or more. 
 
 The sinking fund must, of course, be made to earn as 
 much as possible during the period of its reservation, and 
 to that end it is usually deposited in a savings bank, at 
 
 279 
 
28o CORPORATE BOND ISSUES 
 
 interest, until the opportunity arises for investment in high- 
 grade interest-bearing securities. The manner in which the 
 sinking fund shall be invested is usually set forth in the 
 trust deed or other instrument through which the sinking 
 fund is brought into existence. 
 
 § 249. Creation of the Sinking Fund 
 
 The manner of creating the sinking fund is usually set 
 forth in the trust deed. Some of the various methods fol- 
 lowed in the maintenance of sinking funds are as follows : 
 
 Cash instalments, paid to the trustee half-yearly or 
 yearly, are either deposited in savings banks or invested in 
 approved gilt-edged securities. Sometimes the trustee is 
 permitted and may even be compelled to invest in bonds of 
 the issuing company, usually with definite instructions as to 
 whether the purchased bonds shall be cancelled or kept 
 alive as a sinking fund investment. Frequently it is pro- 
 vided that the first payment to the sinking fund need not 
 be made for two or more years after the issuance of the 
 bonds, so as to give the company time to "get its breath" 
 before beginning the process of redemption. 
 
 The sinking fund instalments may be composed of 
 definite amounts, as $20,000, $50,000, $100,000, or more, 
 as the case may be, proportioned to the amount and time 
 of the bond issue; or they may vary from year to year, 
 being either a given per cent of the outstanding bonds, or 
 a given per cent of the gross business of the company, or a 
 given proportion of the gross profit or net profit. 
 
 In the case of a mine or quarry the instalments may 
 either be definite amounts, as stated above, or else based 
 upon the output of ore — as 12 cents per ton for every ton 
 of ore mined, 10 cents for every square yard of stone 
 quarried, etc. 
 
 In the case of timber companies the instalments may be 
 
SINKING FUNDS 281 
 
 based upon the quantity of timber cut, being so much on 
 every thousand feet of timber. With real estate develop- 
 ment companies the sinking fund payments are frequently 
 governed by the number of lots or divisions plotted or the 
 progress attained in improving the property. 
 
 In this connection it may be of interest to review 
 some of the sinking fund methods used by well-known 
 corporations. 
 
 The first mortgage 5 % sinking fund 30-year gold bonds 
 of the Baldwin Locomotive Works contain the following 
 provisions respecting the sinking fund : 
 
 "Beginning with the year 1915 there will be an annual 
 sinking fund payment of 2% per annum on the maximum 
 amount of bonds which shall at any time be issued. Bonds 
 for the sinking fund are to be purchased at a price not 
 exceeding 107 1/2% and accrued interest, or drawn by lot at 
 that price." 
 
 A subsidiary of the Erie Railroad Company issued $6,- 
 000,000 of first mortgage 6% sinking fund gold bonds, and 
 the mortgage indenture requires a cumulative sinking fund 
 sufficient to retire at least $2,377,000 bonds before maturity. 
 The sinking fund clause calls for a deposit of $20,000 April 
 I, 1916, and annually thereafter, this fund being applicable 
 to the purchase of the outstanding bonds upon tenders by 
 bondholders at not exceeding no up to and including 
 the year 1920, and at 115 thereafter prior to maturity. If 
 not obtainable at these prices, bonds may be called by lot at 
 corresponding prices upon the succeeding first day of July. 
 The redemption price stated is noticeably high, especially 
 since it is the usual practice of railroad companies to issue 
 refunding bonds. 
 
 Article three of the trust deed of the United States Steel 
 Corporation is specific as to the sinking fund provisions 
 and the manner of investing the funds by the trustee. 
 
282 CORPORATE BOND ISSUES 
 
 Annual deposus to the fund were begun the year following 
 the bond issue. Some of the provisions are as follows : 
 
 "On or before the ist day of April, 1904, and annually 
 on or before each first day of April thereafter until all the 
 bonds hereby secured shall have been acquired for the sink- 
 ing fund under this article, or shall have been redeemed as 
 herein provided, or shall have been paid or satisfied, the 
 Steel Company will pay to Messrs. J. P. Morgan & Co., 
 hereby appointed Sinking Fund Trustees, or to their suc- 
 cessors in trust, the sum of $1,010,000. All sums so re- 
 ceived by the Sinking Fund Trustees, together with the 
 accretions thereto as hereinafter provided, shall constitute a 
 sinking fund for the redemption of the bonds hereby 
 secured, and shall be held, used, and applied as hereinafter 
 provided. 
 
 "All bonds hereby secured that shall be purchased by 
 the Sinking Fund Trustees or be redeemed, as hereinafter 
 provided, by use of moneys in the sinking fund, shall be 
 deemed to remain alive for the purpose of such sinking 
 fund ; and semiannually the Steel Company shall pay to the 
 Sinking Fund Trustees the interest on all such bonds of the 
 Steel Company held by the Sinking Fund Trustees for the 
 purpose of such sinking fund. 
 
 "All moneys received by the Sinking Fund Trustees 
 under this article, including moneys received by the Sinking 
 Fund Trustees from the Steel Company in respect of interest 
 on bonds hereby secured and held for the purposes of the 
 sinking fund, and moneys received for principal or proceeds 
 of, or interest upon, other bonds or obligations held in the 
 sinking fund, and also all interest that may be allowed by 
 the Sinking Fund Trustees upon sinking fund moneys 
 during the deposit thereof with the Sinking Fund Trustees, 
 F^iall be held by the Sinking Fund Trustee as bankers in 
 ^[•enera] accourx. . ^ 
 
SINKING FUNDS 
 
 283 
 
 § 250. Sinking Fund Created Out of Profits 
 
 The deed of trust sometimes requires that a sinking fund 
 "shall be created out of profits." Even where this is done 
 by means of a reserve fund, there is also usually a reserva- 
 tion of actual cash. In this case an amount equal to the 
 cash reservation is set aside out of profits by means of a 
 debit to Profit and Loss and a credit to Sinking Fund 
 Reserve, or to Bond Extension Reserve, or to Debt 
 Extinguishment Reserve. 
 
 In the present day the sinking fund reserve is not so 
 often required as part of the scheme of bond redemption. 
 Bonds are not necessarily paid out of profits, and there is 
 no more need of reserving profits for their redemption 
 than for the reservation of profits for the payment of 
 promissory notes or ordinary bank loans. The provision, 
 however, has some merit as it has a tendency to prevent 
 directors from paying dividends with cash that should be 
 placed in the sinking fund or be kept in the business for 
 working purposes. (See § 262.) 
 
 When a special sinking fund reserve is created, it has 
 no specific function to perform beyond the mere safeguard- 
 ing of the profits, and when the, bonds are redeemed the 
 account must be closed into Surplus. This results in a 
 sudden and substantial increase of available profits, and 
 the directors may then properly "cut a melon" if they see 
 fit, declaring these excess profits in dividends. This would 
 not impair the capital stock. 
 
 § 251. Safeguarding the Sinking Fund 
 
 The sinking fund instalments are usually placed in the 
 hands of a trustee for safe-keeping, this trustee being some 
 reliable trust company, a firm of .bankers, or a committee 
 of individuals. Sometimes the corporation itself takes 
 charge of the sinking fund, and in this case the fund is 
 
284 CORPORATE BOND ISSUES 
 
 placed in the care of either the board of directors or «. 
 committee of directors. 
 
 The sinking fund cash may be deposited by the trustee 
 in one or more reHable savings banks to draw the regular 
 rate of interest, or may be all or partly used for the purchase 
 of high-grade interest-bearing securities such as are legal 
 for investment trust funds. Or, as stated, it may be used, 
 in whole or in part, for the purchase of the company's out- 
 standing bonds either at the market price or at some given 
 price, usually above par. Bonds redeemed are either turned 
 over to the company and by it cancelled, or are held "alive" 
 in the sinking fund as a source of income. (See § 260.) 
 
 Sinking fund cash is occasionally invested in other ways, 
 as in real estate mortgages, in building and loan associa- 
 tions, or even in an extension of the company's own 
 properties; any such variations of the usual investments 
 depending upon the provisions of the deed of trust. 
 
 § 252. Adequacy of the Sinking Fund 
 
 It will readily be seen that the amount of the sinking 
 fund deposits must be calculated in advance, so that when 
 the bonds mature there will be sufficient cash available for 
 their redemption. In case of shortage for any cause, 
 additional funds must be raised to pay off the maturing 
 bonds. On the other hand, if the required amount has been 
 accumulated prior to the date of maturity, further sinking 
 fund payments may be discontinued unless otherwise pro- 
 vided in the agreement under which the sinking fund is 
 created. 
 
 Where definite amounts are set aside yearly, such 
 amounts are generally governed by the aggregate debt out- 
 standing, and by the estimated rate of interest the fund is 
 likely to earn. For example, if it is desired to meet a debt 
 of $800,000 in twenty years, an annual deposit of $26,866 
 
SINKING FUNDS 
 
 285 
 
 to the sinking fund would, at 4% interest compounded 
 annually, provide an adequate cash supply for the purpose, 
 but this presupposes that the trustee will be able to keep 
 the funds continuously invested at this rate. This may 
 not always be possible, and, on the other hand, it is probable 
 that the trustee may be able to secure a better interest rate, 
 particularly if he is permitted to invest in the company's 
 own bonds. It will be seen, then, that the exact earning 
 capacity of trust funds cannot be accurately foretold, and 
 that officials should be governed accordingly in determining 
 the sinking fund instalments. 
 
 § 253. Annuity Method for Sinking Funds 
 
 There is a growing tendency to apply scientific annuity 
 calculations to bonds and sinking funds, as well as to 
 amortizing diminishing balances. Under this plan it is 
 assumed that all instalments and interest accumulations to 
 the sinking fund will earn compound interest from year to 
 year, at a given rate, say 3 or 4%. The amount that shall 
 be in the fund at any time is carefully estimated when the 
 bonds are issued, so that at the date of maturity there may 
 be in the hands of the trustee enough to pay the debt. If at 
 any time this estimate falls short, because of a lower earn- 
 ing rate or for any other reason, an adjustment must be 
 made by increasing the annuity or by making a special 
 deposit equal to the existing deficit. When estimating the 
 rate of yield, care must be taken not to use a higher rate 
 than the regular savings bank interest. If, however, the 
 sinking fund trustee invests in the company's own bonds at 
 any time, the income will be materially increased. 
 
 § 254. Calculating Fund Annuities 
 
 Annuity calculations may be largely avoided by the use 
 
 *For a detailed discussion of the subject see "The Accountancy of Investments," 
 by Charles E. Sprague 
 
286 CORPORATE BOND ISSUES 
 
 of annuity tables, but, notwithstanding this, it is most 
 desirable to have at least a working knowledge of their 
 principles. 
 
 An annuity is a definite sum of money paid at regular 
 intervals. For example, an investment of $i at 6% per 
 annum, compounded annually, amounts in five years to 
 approximately $1.33822558. In other words, if the original 
 $1 were left on deposit in some one bank for five years, and 
 the annual interest of 6 cents withdrawn each year and 
 deposited in another bank at 6% compounded annually, at 
 the end of five years there would be the original $1 in the 
 first bank and $.33822558 in the second bank. This latter 
 amount is the result of an annual deposit of 6 cents for a 
 period of five years with the interest accumulations; there- 
 fore $.33822558 is the value at maturity of an annuity of 
 6 cents for five years at 6%. From this, the final value of 
 any annuity at 6% for five years may readily be found, by 
 dividing $.33822558 by 6 to find the value of an annuity of 
 I cent and multiplying this by the number of cents in the 
 actual annuity. Thus, an annuity of $1 for five years has 
 
 $ 7'?822C ^8 
 
 a final value of — — ^ X 100, which equals $5.637093. 
 
 This plan requires the use of only the ordinary compound 
 interest tables. The process may be stated as follows : 
 
 To find the final value of an annuity for a given time at 
 a given rate, first multiply the compound interest on $1 for 
 the given time at the given rate by 100 and divide by the 
 given rate. This gives the final value of an annuity of $1. 
 Then the final value of the given annuity is found by multi- 
 plying the final value of an annuity of $1 by the number of 
 dollars in the given annuity. 
 
 The following example will illustrate more fully the 
 application of the compound interest method to sinking 
 fund accumulations : 
 
SINKING FUNDS 
 
 287 
 
 The People's Gas Company on January i, 19 16, issued 
 $2,000,000 of first mortgage 5% sinking fund gold bonds, 
 payable in twenty-five years, interest payable semiannually. 
 In order to meet the bonds at maturity, such annual sum 
 in cash is to be deposited with a designated trust company 
 as will accumulate, at 4% compound interest during the 
 currency of the obligations, to an amount sufficient to redeem 
 the bonds. 
 
 In finding the amount of the yearly annuity payment, 
 we need not consider discount if the bonds should be sold 
 at less than par, nor the expenses of the issue, nor the pay- 
 ment of interest coupons. Bond discount and expense are 
 treated as expense incident to the issue, and as the coupons 
 mature they are paid out of current funds, and the amount 
 charged to Bond Interest, which in turn is closed into the 
 Profit and Loss account. We have therefore to provide 
 only for the payment of the principal sum of $2,000,000 
 at the end of the twenty-fifth year. 
 
 We find — usually by consulting an annuity table — that 
 $1 invested annually at 4% compound interest will amount 
 to $41.64590829 at the end of twenty-five years. If $1 
 Invested annually for twenty-five years at 4% compound 
 interest will amount to $41.64590829, then by dividing this 
 value into $2,000,000 — the amount to be accumulated — 
 the qu'otient is the number of dollars which must be invested 
 each year to amount in twenty-five years, at 4% compound 
 interest, to the desired sum. Carrying out this division we 
 find the required annuity payment to be $48,023.93. 
 
 In ascertaining the amount of a sinking fund annuity, 
 the determining factors are the principal to be accumulated, 
 the time to run, and the rate of interest obtainable. 
 
 § 255. Sinking Fund to Retire Preferred Stock 
 
 The sinking fund plan is occasionally adopted for the 
 
288 CORPORATE BOND ISSUES 
 
 retirement of preferred stock. The following' quotation 
 has reference to a new issue of preferred stock of a well- 
 known manufacturing corporation : 
 
 "A sinking fund has been created out of earnings for 
 the retirement of the preferred stock at not exceeding $115 
 per share and accrued dividend, by setting aside $200,000 
 from the net profits for the fiscal year ended July 31, 1914, 
 and annually thereafter an amount equal to 2% of the par 
 value of all preferred stock at any time theretofore issued; 
 and if in any fiscal year dividends are paid on the com- 
 pany stock in excess of 7%, the next succeeding preferred 
 stock sinking fund instalment is to be increased by an 
 amount equal to such excess." 
 
 The entries for such a sinking fund would be the same 
 as in the case of a sinking fund for the redemption of bonds. 
 
CHAPTER XXI 
 
 SINKING FUNDS (Continued) 
 
 § 256. Sinking Fund Account 
 
 The sinking fund, as already stated, is made up of 
 periodical cash payments to the trustee and the interest 
 accumulations; therefore, definite book entries are required 
 at regular periods to record properly the instalments and 
 interest accretions. An account must be opened for the 
 sinking fund, or for the sinking fund trustee, to which shall 
 be debited the various payments and accumulations, with 
 corresponding credits to cash and to sinking fund income. 
 If the trust agreement requires that the sinking fund shall 
 be created out of profits, then an annual reserve equivalent 
 to the sinking fund instalment must be set aside. The fund 
 itself, however, is composed of assets and recorded on the 
 debit side of the ledger, while the Sinking Fund Reserve 
 account is a credit and shown on the credit side. Careful 
 book records must, of course, be kept of all details respecting 
 the sinking fund and any reserves required in connection 
 therewith. 
 
 In the case of small companies the sinking fund pro- 
 cedure is often much less formal than in the case of larger 
 companies, and it is not unusual for the whole of the funds 
 to remain in the hands of the directors themselves; but in 
 any case the accounts should be so kept as to show all 
 information that may be required by any of the interested 
 parties respecting the bonds and the sinking funds. 
 
 The regulations of the Interstate Commerce Commission 
 provide for sinking fund accounts of railroads, and quota- 
 
 289 
 
290 
 
 CORPORATE BOND ISSUES 
 
 tions from these may be of interest to other than railroad 
 accountants. The first quotation prescribes what shall be 
 included in the sinking fund. 
 
 "This account shall include the amount of cash, the 
 ledger value of live securities of other companies, and other 
 assets which are held by the trustees of sinking and other 
 funds for the purpose of redeeming outstanding obligations, 
 including such assets so held in the hands of the accounting 
 company's treasurer when the assets are segregated under 
 a distinct fund; also amounts deposited with such trustees 
 on account of mortgaged property sold, the proceeds of 
 which are to be held for the redemption of securities, and 
 the par value of live securities issued or assumed by the 
 accounting company and held in such funds. A separate 
 account shall be kept for each fund. The title of each such 
 account shall designate the obligation in support of which 
 the fund is created." 
 
 Railway companies not infrequently create sinking fund 
 reserves also, which, of course, must be set aside out of 
 profits. The Commission's ruling on the subject of the 
 Sinking Fund Reserve account is as follows : 
 
 "This account shall include the net balances in accounts 
 to vihich are credited definite appropriations of income and 
 surplus, whether held in general funds or specifically set 
 aside in the hands of a trustee for sinking and redemption 
 funds. It shall also include income accretions to such funds 
 retained therein." 
 
 Income from sinking fund assets is required to be cared 
 for in the manner specified by the Commission, under "In- 
 come from Sinking and Other Reserve Funds." To this 
 account are to be credited income accrued on cash securities 
 and other assets belonging to sinking and other reserve 
 funds, such income being included under non-operating 
 income in the company's regular income statement. In 
 
SINKING FUNDS 2QI 
 
 oase a Sinking- Fund Reserve account is maintained, a 
 definite amount must be set aside out of income by a debit 
 to the account "Surplus Applied to Sinking and Other 
 Reserve Funds" and a credit to "Sinking Fund Reserves." 
 Such amoimts are generally set up monthly, but at the end 
 of each year "Surplus Applied to Sinking and Other 
 Reserve Funds" account must necessarily be closed out. 
 
 § 257. Entries for Sinking Fund Instalments 
 
 The sinking fund instalments are paid in cash to the 
 trustee, either half-yearly or yearly, or even at greater inter- 
 vals, according to the requirements of the deed of trust. 
 For illustration, we will assume that the $% bond issue of 
 the Lenox Iron Works for $1,000,000 required an annual 
 deposit of $50,000 to the sinking fund beginning December 
 31, 1916. This payment will be recorded: 
 
 December 31, 1916 
 
 Sinking Fund. Trustee $50,000 
 
 To Cash $50,000 
 
 First deposit to the sinking fund for redemp- 
 tion of $1,000,000 first mortgage 5% bonds 
 due January i, 1936, as required by trust 
 agreement. 
 
 If there were several bond issues requiring sinking 
 funds, each fund would have a separate account. They 
 should be designated according to the kind and tenor of 
 the bonds, as "Sinking Fund of First Mortgage 5% Bonds 
 of 1925," "Sinking Fund of $4,000,000 First Mortgage 
 5% Sinking Fund Gold Bonds of 1940," as the case may 
 require. Sometimes the name of the trustee is included in 
 the caption, as "Security Trust Company, Trustee of Sink- 
 mg Fund," or "Trustee of Sinking Fund of $1,000,000 5% 
 Bonds," etc. The title should be sufficiently descriptive to 
 indicate clearly the fund and its purpose. 
 
292 CORPORATE BOND ISSUES 
 
 § 258. Entries for Sinking Fund Interest 
 
 The duty of the trustee being to safeguard properly the 
 sinking fund and to keep it earning, we will assume, in the 
 present instance, that he deposited the funds in the savings 
 bank to draw 4%. At the end of the first year he must 
 make his report to the company, giving the status of the 
 fund and stating the accumulated income thereon, which in 
 this case would be 4% of $50,000, or $2,000. Upon 
 receipt of this report the following entry should be made 
 on the company's books : 
 
 December 31, 1917 
 
 Sinking Fund Trustee $2,000 
 
 To Sinking Fund Income $2,000 
 
 To record income from sinking fund deposit of 
 $25,000 for one year at 4%, as per report of 
 the trustee. 
 
 Sinking fund income should be credited to some account 
 that will clearly indicate the sources from which it came, 
 as shown in the above entry. It is manifestly a part of 
 the company's regular income and must sooner or later 
 appear in the Profit and Loss account. The entry for sink- 
 ing fund income would be : 
 
 Sinking Fund Income $2,000 
 
 To Profit and Loss $2,000 
 
 To close sinking fund income, being the total 
 earning for the year as reported by the trustee. 
 
 Under the terms of trust under which the sinking fund 
 was established no mention has been made of the disposition 
 of the income from the fund, but it might be handled in one 
 of three ways, i.e., turned over to the company, retained by 
 the trustee as an addition to the sinking fund, or be applied 
 to lessening the next sinking fund instalment (§253). For 
 the present illustration we have adopted the second method 
 
SINKING FUNDS 293 
 
 as the entries are more involvied. Under the first method 
 the trustee would turn over to the company cash to the 
 amount of the interest or income and the company would 
 debit cash and credit sinking fund trustee. 
 
 To illustrate monthly entries showing the accrual of the 
 sinking fund interest, the following have been constructed 
 upon the facts of the preceding material: 
 
 Accrued Sinking Fund Income $166.67 
 
 To Sinking Fund Income $166.67 
 
 Accrued income @ 4% on $50,000 of cash on 
 deposit in savings bank for one month, 1/12 
 of $2,000. 
 
 This entry would be made at the end of each month, 
 and at the end of the year the following entry would be 
 made: 
 
 Sinking Fund Trustee $2,000 
 
 To Accrued Sinking Fund Income $2,000 
 
 Cash collected by sinking fund trustee during 
 the year, being 4% on $50,000 on deposit at the 
 savings bank. 
 
 § 259. Entries for Sinking Fund Investments 
 
 . Instead of depositing the sinking fund cash in the sav- 
 ings bank, the trustee may find it more profitable to invest 
 it, or a portion of it, in gilt-edged bonds paying a higher 
 rate of interest. In some cases he is required to invest the 
 funds in bonds of other companies, or of the issuing com- 
 pany itself. We will assume, therefore, that on January i, 
 19 18, the trustee purchases $100,000 of first mortgage 5% 
 bonds of the United States Steel Corporation at par, interest 
 due January i and July i. No entry need be made on the 
 company's books for this transaction, since the cash used 
 has already been charged to the sinking fund trustee; in 
 other words, he is simply replacing cash assets with an 
 
294 
 
 CORPORATE BOND ISSUES 
 
 equivalent amount of securities. If it is desired, however, 
 as is frequently the case, to show the sinking fund invest- 
 ments separately from the sinking fund cash, even though 
 they are in the hands of the trustee, the following would be 
 the procedure : 
 
 January i, 1918 
 
 Sinking Fund Investments $100,000 
 
 To Sinking Fund Trustee $100,000 
 
 For investment by the trustee in 5% bonds 
 of the United States Steel Corporation at 
 par, as per his report of this day. 
 
 An investment in the company's own bonds would be 
 handled in practically the same way. 
 
 The sinking fund now contains bonds which will pay 
 interest twice during the year, $2,500 in cash each six 
 months. If the bonds had been purchased at a premium or 
 discount, another element would have been introduced — 
 that of properly recording such difference.* At the end of 
 the first half-year an entry for income would be required as 
 follows : 
 
 July I, 1918 
 
 Sinking Fund Trustee $2,500 
 
 To Sinking Fund Income $2,500 
 
 For coupons collected on $100,000 5% bonds of 
 United States Steel Corporation held in the 
 sinking fund, as per report of the trustee. 
 (Full details necessary.) 
 
 If desired this could be handled by monthly entries 
 accruing the income. 
 
 At the end of the year, interest will have accumulated 
 on both interest and bonds, requiring the following entry 
 on the company's books : 
 
 •For detailed discussion o£ tliii subject, see "The Accounting of Investment" 
 by Ctiarles £, Sprasu<!' 
 
SINKING FUNDS 
 
 295 
 
 December 31, 1918 
 
 ijir.king Fund Trustee $2,630 
 
 To Sinking Fund Income $2,630 
 
 i*or interest accumu'-'-'.ons to the fund, as per 
 report of the trustee, as follows: 
 interest at 4% on $2,000 in bank, one 
 
 yeai $80 
 
 Interest at 5% on t! 100,000 bonds, one 
 
 half-year 2,500 
 
 Interest at 4% on $2,500 in bank, one 
 half-year 50 
 
 Total $2,630 
 
 Another instalment of $50,000 is dtie the sinking fund 
 at this time, and is entered as before. 
 
 § 260. Entries for Investment in IssuiKg Company's Bonds 
 
 The trust deed in many cases provides for the redemp- 
 tion of the bonds b}- the sinking fund trustee, either at the 
 market price or at a fixed price, and he is compelled to carry 
 out such provisions. 
 
 In that event he either carries the bonds in the sinking 
 . fund as a source of income, or turns them over to the com- 
 pany for cancellation. To exemplify the entries for the 
 purchase of such bonds for sinking fund investment, we will 
 carry the illustration of the Lenox Iron Works a step 
 further, by a purchase on January i, 1919, of $50,000 oi 
 the company's own bonds at 102^. 
 
 The entry to be made for this transaction must be 
 governed by the circumstances, not because the bonds are 
 those of the issuing company, but because of the disposition 
 lo be made of the $1,250 premium paid thereon. Three 
 courses are open : 
 
 I. No entry need be made on the company's books at 
 all, either for the purchase of the bonds or for the premium 
 paid. 
 
296 CORPORATE BOND ISSUES 
 
 2. An entry may be made at the time, debiting Sinking 
 Fund Investments or some other appropriate account with 
 the cost price of the bonds, and crediting Sinking Fund 
 Trustee with the cost of the bonds, $51,250; the premium in 
 this case being amortized over the life of the bonds. 
 
 3. An entry as in Method 2, but for the par value of 
 the bonds instead of the cost price ; in this case the premium 
 must be charged either against Sinking Fund Income, 
 against Profit and Loss, or to an account called "Premium 
 on Sinking Fund Investments." The last named account 
 should then be closed into Profit and Loss or be amortized 
 gradually over the life of the bonds. 
 
 The plan of entry to be selected will depend on circum- 
 stances. There is a premium of $1,250 to be recorded in 
 some way, and eventually to be disposed of ; and no matter 
 how it is done, the company is the loser of this amount, 
 especially since the bonds are not to be resold but held until 
 maturity and redeemed at par. 
 
 Since the bonds so purchased will draw 5%, it may be 
 good policy to pay the premium and then charge it off, all 
 at once, or gradually, against the income on the trustee's 
 books; the trustee deducting same from the amount of 
 income reported to the company. But since the Sinking 
 Fund account on the company's books should represent the 
 true status of the trustee's holdings, it seems advisable to 
 relieve him from any further consideration of the premium 
 payment. If his fund is required to be maintained at a 
 definite status at all times, the company may be required to 
 pay over to the trustee additional cash to meet the premium 
 payment. 
 
 If, however, the purchase of outstanding bonds at a 
 premium is to continue, it would seem most desirable to 
 charge off the premium annually against Profit and Loss 
 account ; or if a Sinking Fund Reserve account is maintained 
 
SINKING FUNDS 
 
 297 
 
 (§§ 262, 283) the premium could be charged against it. 
 
 If the bonds are purchased in the open market at a 
 discount, such discount may be credited either to Profit and 
 Loss or to Surplus. 
 
 The entry at the date of purchase under the approved 
 plan (3) is as follows : 
 
 January i, 1919 
 
 Sinking Fund Investments $50,000 
 
 Premium on Sinking Fund Investments 1,250 
 
 To Sinking Fund Trustee $51,250 
 
 For purchase of $50,000 of the company's 5% 
 bonds at 1023^ by the trustee for sinking 
 fund investment. 
 
 If the sinking fund investments are not kept separately 
 from the sinking fund cash, then an entry for the premium 
 only would be necessary, and this premium must be disposed 
 of by monthly entries, or at the end of the year by a debit 
 to either Profit and Loss or Expense as follows : 
 
 December 31, 1919 
 
 Profit and Loss $1,250 
 
 To Premium on Sinking Fund Investments $1,250 
 
 To close this account for the year. 
 
 The United States Steel Corporation charges off each 
 year all premiums (upward of $800,000 or more per year) 
 on bonds purchased and held by the sinking fund trustee, 
 this item together with the bond interest being entered as 
 a deduction from net income. Some corporations create 
 reserves to take care of these premiums, as "Reserves for 
 Bond Redemption Premium" or some other appropriately 
 named account. 
 
 § 261. Entries for Bonds Cancelled Through Sinking Fund 
 
 The entries for bonds of the issuing company purchased 
 
 and held by the trustee for sinking fund purposes, were set 
 
2g8 CORPORATE BOND ISSUES 
 
 forth in § 260. When the trust mortgage requires that the 
 bonds of the company so purchased shall be turned over to 
 the issuing company and cancelled, a different principle is 
 involved and the status of the sinking fund is necessarily 
 affected. The security to bondholders, hovi^ever, remains 
 the same in either case; indeed, from the bondholders' 
 standpoint the cancellation of the bonds is preferable, since 
 his margin of security automatically increases in proportion 
 as the volume of outstanding bonds decreases. The trust 
 agreement may stipulate, however, that as bonds are called 
 for redemption and cancelled, certain modification of the 
 security held may be made. For a further explanation of 
 this subject, see Chapter XXII, "Redemption of Bonds." 
 
 Assuming that $50,000 of bonds purchased by the 
 Lenox Iron Works through the sinking fund trustee on 
 January i, 1919, were turned over to the company and 
 cancelled, an entry would be required as follows : 
 
 January i, 1919 
 
 First Mortgage 5% Sinking Fund Bonds $50,000 
 
 Premium on Bonds Cancelled 1,250 
 
 To Sinking Fund Trustee $51,250 
 
 Purchase for cancellation of $50,000 of the 
 Company's 5% bonds at I02j^ through the 
 sinking fund trustee. 
 
 If the trust mortgage provides that the sinking fund 
 shall be maintained at a given amount, the company may 
 be compelled to reimburse the trustee for the premium 
 payment. 
 
 It may even be a condition of the cancellation agree- 
 ment that the trustee shall be reimbursed in full for the 
 amount expended in repurchasing the company's bonds. 
 This must, of course, be provided for in advance. If at the 
 time of cancellation the entire amount is paid over to the 
 trustee, an entry similar to the following would be made: 
 
SINKING FUNDS 299 
 
 January i, 1919 
 
 First Mortgage 5% Sinking Fund Bonds $50,000 
 
 Premium on Bonds Cancelled 1,250 
 
 To Cash $51,250 
 
 (Full explanation required.) 
 
 This brings the sinking fund again up to its former 
 status, but it is patent that unless the sinking fund is to be 
 maintained regardless of the amount of the outstanding 
 bonds, there is no necessity for continuing to reimburse the 
 trustee for such bond purchases. The premium of $1,250 
 may at the proper time be closed either into Profit and Loss 
 or into the "Reserve for Bond Redemption Premium" in 
 case the latter account is used. 
 
 § 262. Entries for Sinking Fund Reserve 
 
 We have already stated (§ 250) that the deed of trust 
 frequently requires an amount equal to the sinking funa 
 instalments to be set aside out of profits.* To carry out 
 this provision a definite amount agreeing with the sinking 
 fund payment must be reserved each period, virhether yearly 
 01 oftener, and credited to a reserve account set up for that 
 purpose. Resorting again to the example under discussion, 
 we will assume that the Lenox Iron Works is required to 
 set aside each year out of profits an amount equal to that 
 of the sinking fund instalments, $50,000 per year. In that 
 event it becomes necessary to withdraw the required amount 
 out of profits by an entry similar to the following: 
 
 December 31, 1916 
 
 Profit and Loss $50,000 
 
 To Sinking Fund Reserve $50,000 
 
 To set aside profits equal to the sinking fund 
 deposit for redemption of $1,000,000 first 
 mortgage 5% bonds, in accordance with the 
 trust agreement. 
 
 *9ee fi 282, 283 for discugsion of reierve accounts and reierva fundi. 
 
300 CORPORATE BOND ISSUES 
 
 Whether or not this reserve shall be kept in harmony 
 with the Sinking Fund account depends upon the trust 
 agreement. In case this is a requirement, it is obvious that 
 every dollar added to the fund must also have an equivalent . 
 credit to the reserve account, so that the two accounts will 
 show like amounts though on opposite sides. This plan is 
 illustrated in the following entries. 
 
 During 19 17 the sinking fund accumulates a profit of 
 $2,000, which was credited to income and which must be 
 reflected in the reserve account as well as in the sinking 
 fund" account. The following entry will therefore properly 
 record the regular instalment of $50,000 and the income 
 for one year on the preceding deposit ; 
 
 December 31, 1917 
 
 Profit and Loss $52,000 
 
 To Sinking Fund Reserve $52,000 
 
 To set aside an amount equal to the annual 
 deposit to the sinking fund, plus the profits 
 accumulated for the year, as follows : 
 Annual deposit to sinking fund... $50,000 
 Income on previous balance reported 
 
 by trustee 2,000 
 
 An entry similar to the above must be made at the end 
 of each year, comprising the regular instalment and all 
 accrued profits for the year. This entry presupposes, of 
 course, that additions to the sinking fund have already 
 been charged to the trustee and credited to income on 
 December 31, 1917 (§ 258), and again July i and Decem- 
 ber 31, 1918 (§ 259). As interest accumulations are 
 reported by the trustee, adjusting entries are made to the 
 Sinking Fund account; but under the plan adopted it may 
 not be necessary to credit the sinking fund reserve until 
 the end of the year, at which time the entry will include 
 both the regular $50,000 instalment and the accrued interest. 
 
SINKING FUNDS 
 
 301 
 
 If it is desired, as is frequently the case, to credit earn- 
 ings directly to the Sinking Fund Reserve account instead 
 of to income, the following entry would be required for 
 the $2,000 above reported. 
 
 December 31, 1917 
 
 Sinking Fund Trustee $2,000 
 
 To Sinking Fund Reserve $2,ooc 
 
 For interest accretions to the sinking fund for 
 year, as per report of the sinking fund trustee. 
 
 If the Sinking Fund account and the Sinking Fund 
 Reserve account are to be kept in harmony, certain adjust- 
 ments may be required from time to time, as in the purchase 
 of bonds of the issuing company or others at a premium. 
 Referring to the investment of $51,250 recorded in a 
 previous section (§ 260), instead of charging this premium 
 ■.to a premium account it may be charged directly to the 
 reserve account by an entry as follows : 
 
 January i, 1919 
 
 Sinking Fund Reserve $1,250 
 
 To Sinking Fund Trustee $1,250 
 
 (Full explanation required here.) 
 
 This entry if used would, of course, be incorporated in 
 the entry referred to above. The amount might, if desired, 
 be first charged to the premium account and in turn closed 
 into the reserve account. There are many ways of making 
 entries and it would be impracticable to enumerate them 
 all. (See also § 283.) 
 
 § 263. The Sinking Fund on the Balance Sheet 
 
 The sinking fund, consisting as it does of cash and 
 securities, would naturally be placed among the assets in 
 the balance sheet; but since the sinking fund assets are 
 not free for use as working capital but have been handed 
 
302 
 
 CORPORATE BOND ISSUES 
 
 over to the trustee practically as part payment on the 
 bonded debt, there is some question as to the expediency 
 of including them among the balance sheet assets. Many 
 companies list sinking fund assets among the corporate 
 assets, while others show them as deductions from the 
 bonded debt. The plan adopted depends largely on the 
 ideas of the accounting officer or of the corporation officials. 
 The following methods of listing are in common use, the • 
 amount of the sinking fund being as of December 31, 1918 : 
 
 1. Sinking Fund in Hands oi Trustee $iS7,i3t> 
 
 2. Trustee of Sinking Fund, being amount of cash and 
 
 securities held by the Trustee for redemption of 
 $1,000,000 s% First Mortgage Bonds of 1936 IS7,I30 
 
 3. Sinking Fund Assets, being amount in hands of Trustee, 
 
 as follows : 
 
 Invested in Securities $100,000 
 
 Cash in Savings Bank 57,13° 157,130 
 
 4. Sinking Fund Assets. (Cash and securities amounting 
 
 to $157,130 in hands of Trustee, deducted from out- 
 standing bonds, per contra.) 
 
 Under the last plan (4) the sinking fund assets appear 
 only as a memorandum among the assets, while the amount 
 of the funds is deducted from the bonds themselves on the 
 opposite side. 
 
 § 264. Entries on Books of Sinking Fund Trustee 
 
 The records of the trustee of a sinking fund are not 
 kept in any standard form. Therefore, all that is necessary 
 are full and complete accounts so that the conditions of the 
 trust can be readily ascertained at any time. Of course, 
 the accounts of a trustee and of the company should be in 
 absolute harmony on all matters pertaining to the bond issue 
 and the sinking fund. 
 
 The first official act of the trustee after the deed of trust 
 is executed, is the indorsement of the bonds as they are 
 
SINKING FUNDS 
 
 30.3 
 
 issued. A record of this is, of course, kept, by the trustee, 
 and this is the first entry on his books until either interest 
 or a sinking fund instalment is received by him from the 
 company, or interest becomes due on the bonds. 
 
 To illustrate the entries on the books of the sinking 
 fund trustee, the transactions in connection with the bond 
 issue of the Lenox Iron Works (§ 257) may again be taken. 
 The first payment to the sinking fund trustee was $50,000 
 in cash on July i, 191 6, this payment being made to meet 
 the semiannual bond interest. The entry on the books 
 of the Lenox Iron Works was as follows : 
 
 July I, 1916 
 
 Bond Interest $50,000 
 
 To Cash $50,000 
 
 For payment of semiannual bond interest on 
 $1,000,000 5% bonds, due today at the office 
 of the trustee, The Grove Street Trust Com- 
 pany, to whom the check has been issued. 
 
 The corresponding entry on the books of the sinking 
 fund trustee is shown below : 
 
 July I, igi6 
 
 Cash $50,000 
 
 To Coupons No. i (Lenox Iron Works) . . $50,000 
 
 First deposit of cash for payment of Coupon 
 No. I on $1,000,000 coupon bonds of the 
 Lenox Iron Works. 
 
 The coupons payable account will obviously remain 
 open until all the coupons are paid. As payments are made, 
 the trustee, of course, debits the coupon account and credits 
 cash. 
 
 Upon receipt of the first sinking fund instalment the 
 following entry was made on the books of the Lenox Iron 
 Works : 
 
304 
 
 CORPORATE BOND ISSUES 
 
 December 31, 1916 
 Sinking Fund Trustee (or Trustee of the Sink- 
 ing Fund) $50,000 
 
 To Cash $50,000 
 
 (Explanation.) 
 
 The corresponding entry on the books of the sinking 
 fund trustee is as follows : 
 
 December 31, 1916 
 
 Cash $50,000 
 
 To Sinking Fund (Lenox Iron Works) . . $50,000 
 
 First sinking fund instalment of the Lenox 
 Iron Works for redemption of $1,000,000 
 first mortgage 5% bonds of 1916, due Jan- 
 uary I, 1936. 
 
 The succeeding entries of the sinking fund trustee 
 would, as in those shown above, corresiX)nd to the entries 
 on the company's books and therefore require no further 
 illustration. 
 
CHAPTER XXII 
 
 REDEMPTION OF BONDS 
 
 § 265. Plans for Redeeming Bonds 
 
 The due date of any issue of bonds is stated in the 
 deed of trust and also on the face of each bond. The 
 deed of trust usually provides also that if any instalment 
 of bond interest is not paid when due, and default con- 
 tinues for a specified length of time, the principal is 
 thereby matured and must be paid. In event of continued 
 default in either the principal or interest, it is usually 
 provided that foreclosure may follow, or perhaps the 
 trustee is authorized to take possession of the mortgaged 
 property and operate it for the benefit of the bondholders. 
 
 The method of redeeming bonds depends largely on 
 the nature of the particular bonds. The following methods 
 are in general use : 
 
 1. Payment in cash at maturity, usually through the 
 sinking fund. 
 
 2. By calling certain bonds each year for redemption. 
 Under this method the numbers of the outstanding bonds 
 are placed in a box or hat, shaken up, and a given number 
 of them drawn, those drawn indicating the bonds which 
 are to be redeemed. Legal notice of the numbers drawn 
 for redemption is given to the bondholders by advertise- 
 ment in the daily papers, and the bonds specified cease to 
 bear interest from the date of the drawing, or some other 
 specified date. 
 
 3. Refunding at maturity, in which case the bonds 
 are cancelled and new ones issued in their place the 
 
 30s 
 
306 
 
 CORPORATE BOND ISSUES 
 
 holders of the old bonds either taking new bonds, or casL 
 secured by the sale of these new bonds, in exchinge foi 
 their old bonds. 
 
 4. By serial payments. Under this plan serial bonds 
 are issued, payable in instalments of so much per year 
 during the currency of the bonds. 
 
 5. By conversion into stock of the company, either 
 at a fixed date or at the maturity of the bonds, or at some 
 other convenient time prior to maturity. 
 
 § 266. (i) Redemption of Bonds Through Sinking Fund 
 
 Bonds redeemed through the sinking fund are paid at 
 maturity by the trustee, who then passes the cancelled 
 certificates over to the issuing corporation for final record. 
 Sometimes the cancelled bonds are cremated (§ 278), 
 though more frequently retained by the company as a 
 permanent voucher. 
 
 The book entries at maturity of the bonds are very 
 simple. To illustrate the entries necessary, the bond issue 
 of the Lenox Iron Works may again be taken. This con- 
 sisted of $1,000,000 of first mortgage 5% sinking fund 
 bonds due January i, 1936. Assuming that the bonds 
 have matured and that the sinking fund for their redemp- 
 tion amounts to $992,000, leaving $8,000 more to be 
 made up by the company, book entries are required as 
 follows: 
 
 January i, 1936 
 
 Sinking Fund Trustee $8,000 
 
 To Cash $8,000 
 
 Cash paid over to the trustee of the sinking fund 
 as per request, being the amount still re- 
 quired by him for payment of $1,000,000 first 
 mortgage bonds maturing this day. 
 
 If the sinking fund had been scientifically calculated 
 
REDEMPTION OF BONDS 
 
 30; 
 
 and maintained at all times at a given rate of interest 
 without loss, the required amount for the redemption of 
 the bonds should be available at their maturity in the 
 sinking fund. It is, however, for obvious reasons, but 
 seldom that the sinking fund is exactly equal to the 
 maturing bonds. When a shortage occurs the company 
 must raise the additional funds. If, on the other hand, 
 the fund is in excess of the required amount, such excess 
 must, of course, be returned to the company after the 
 bonds are redeemed. 
 
 Upon receiving notice from the trustee that all of the 
 bonds have been redeemed, the following entry is made: 
 
 January i, 1936 
 
 First Mortgage Bonds $1,000,000 
 
 To Sinking Fund Trustee $1,000,000 
 
 For payment by the trustee of $1,000,000 
 -first mortgage 5% twenty-year sink- 
 ing fund bonds of 1916 due this day. 
 The trust deed has been cancelled and 
 the mortgage satisfied of record in the 
 county recorder's office. 
 
 Through the above entry, both the bond and the 
 sinking fund accounts have been closed out. This results 
 in the cancellation of two main accounts. The Sinking 
 Fund Investments account, if kept on the company's 
 books, should be closed into the trustee's account when 
 he turns the securities into cash. In that case the entry 
 given above should be preceded by the following entry, 
 for the amount assumed to have been invested in 
 securities: 
 
 Sinking Fund 1 rustee $900,000 
 
 To Sinking Fund Investments $900,000 
 
 For conversion into cash by the trustee of 
 sinking fund securities held by him to 
 the amount of $900,000. 
 
3o8 
 
 CORPORATE BOND ISSUES 
 
 This entry is made regardless of vvhether the sinking 
 fund investments are bonds of the issuing company or of 
 other companies. The cancellation of all three accounts 
 involved in the above entries might, of course, be accom- 
 plished through the one journal entry as follows: 
 
 First Mortgage Bonds $1,000,000 
 
 To Sinking Fund Investments $900,000 
 
 " Sinking Fund Trustee 100,000 
 
 (Full explanation required here.) 
 
 If a Sinking Fund Reserve account had also been created 
 out of profits (see §§ 250 and 262), as is frequently the 
 case, it can now be disposed of, as there is no further need 
 of preventing the declaration of dividends to the impairment 
 of current assets. The Surplus account or some permanent 
 reserve can be credited with the amount of this account. 
 Assuming that it has a credit balance of $1,000,000, the 
 following entry is required: 
 
 Sinking Fund Reserve $1,000,000 
 
 To Surplus $1,000,000 
 
 (Full explanation required here.) 
 
 This reserve may now be used for dividend purposes. 
 If that is not desired, it should be credited to some 
 account other than Surplus account, such as Capital 
 Surplus, Appropriated Surplus, or Reserve for Deprecia- 
 tion. 
 
 § 267. (2) Bonds Drawn by Lot for Redemption 
 
 When bonds are to be redeemed before maturity, the 
 sinking fund trustee either advertises for the desired 
 number of bonds at a stated price, draws certain numbers 
 (bonds) by lot for redemption at a fixed price, or buys 
 them in the market at the best prices obtainable. If the 
 bonds to be redeemed are drawn by lot, in the case of 
 
REDEMPTION OF BONDS 309 
 
 coupon bonds, notice thereof is given to the holders by 
 means of newspaper advertisements; in the case of reg- 
 istered bonds, notices are sent direct to the holders. When 
 bonds of the issuing company are purchased by the sinking 
 fund trustee, they are, according to the provisions of the 
 trust agreement, either retained as a sinking fund in- 
 vestment — unless resold later at a higher price — or are 
 handed over to the issuing company and cancelled. The 
 company's bonded indebtedness is in the latter case 
 reduced to the extent of the bonds retired. 
 
 The investor frequently objects to the plan of drawing 
 bonds for retirement, because he never knows when his 
 number may be drawn. He must therefore be on the 
 lookout at each interest period for the announcement of 
 drawings, thereby causing a certain amount of anxiety. 
 If he should overlook the announcement, he would hold 
 his bonds and be deprived of the use of his money for the 
 ensuing six months, discovering his loss at that time 
 through the fact that his coupons came back unpaid. 
 Also the plan results in a very short investment period 
 for those whose bonds are called first, and an uncertain 
 investment period for all the holders of the particular 
 bonds. On the other hand, the fact that called bonds are 
 visually purchased at a premium has a tendency to offset 
 any trouble to which the investor may be put in watching 
 for the newspaper notices of calls and through the uncer- 
 tainty of his investment period. 
 
 The plan of selecting bonds for redemption by lot 
 applies equally as well to debentures, short term notes, 
 and other obligations. Bonds of clubs, institutions, office 
 buildings, and the Hke, are frequently issued under this 
 plan of redemption. 
 
 The following advertisement calling for bonds for 
 redemption is typical: 
 
,10 corporate bond issues 
 
 Redemption Notice 
 American Smelters Securities Co. 
 
 Six Per Cent Fifteen- Year Sinking Fund Gold Bonds, Dated 
 February i, 191 i 
 Notice Is Hereby Given that one million, three hundred and forty- 
 seven thousand dollars ($1,347,000) face amount of the above-described 
 bonds were this day drawn for redemption as provided in Article 
 Fourth of the Trust Agreement securing same, and numbered as 
 follows : 
 
 (1368 numbers listed here) 
 
 All future interest on any of the bonds so designated ceases with 
 the coupon due August i, 1916. 
 
 In accordance with the foregoing, said numbered bonds will be paid 
 at this office on and after the first day of August, 1916, at 105% and 
 accrued interest. 
 
 Central Trust Company of New York 
 
 Trustee 
 By Geo. W. Davison, Vice-President 
 Dated New York, April 17, 1916. 
 
 The following bonds, called for redemption on February i, 1916, 
 have not been presented for payment, viz. : 
 
 ('jjp numbers here) 
 
 § 268. Entries for Bonds Called for Redemption 
 
 When bonds are called for redemption, they may, 
 accordmg to the terms of the deed of trust, be either 
 retained by the sinking fund trustee as a sinking fund 
 investment, or be turned over to the company for can- 
 cellation. Entries for bonds redeemed for sinking fund 
 investment will be found in § 260; entries for bonds pur- 
 chased by the sinking fund trustee for cancellation will be 
 found in § 261. 
 
 § 269. (3) Refunding Bonds 
 
 As already stated, a bond issue inay be renewed or 
 "funded" by a new issue of bonds bearing equally as good 
 or better security. The deed of trust may even contain 
 
REDEMPTION OF BONDS . 311 
 
 a provision giving the company the option of calling the 
 bonds on or after a certain date. The reason for this is 
 apparent. If the bonds are issued at a time when the 
 interest rate is high or when the company is not well- 
 known, the inclusion of a redemption clause that may be 
 taken advantage of when the company is better known or 
 stronger financially, or the money market is easier, would 
 seem wise and prudent, as it may then call the old bonds 
 and reissue new bonds bearing a lower rate of interest. 
 Other conditions may arise also which would render the 
 refunding of bonds before maturity necessary or.advisable. 
 
 Nearly all railroad bonds are issued with the expec- 
 tation of refunding at maturity. There are several reasons 
 for this practice, but chiefly because of the relation of the 
 bondholder to the corporation. Bond investors desire a 
 fair return on their money, a sufficient guarantee that the 
 principal is well secured, and assurance that such an in- 
 vestment is permanent and not likely to be interrupted. 
 A long time investment with a certainty of security and 
 interest payments at a reasonable rate is greatly pre- 
 ferred to short time paper even at a higher rate of interest. 
 For this reason, the refunding of bonds when the company 
 is of unquestioned financial strength is looked upon with 
 favor. 
 
 On the other hand, corporation interests are also well 
 served by the refunding of bonds as opposed to their 
 redemption in cash. If the company can make 10% on its 
 investment in business activities, it seems better to use 
 the money in that way than to set it aside in a sinking 
 fund to earn 3 or 4%. 
 
 Turning from the railroads, it is apparent that long 
 time or refunding bonds are not likely to be issued on 
 properties having a short life or a wasting nature; as the 
 ordinary manufacturing plant, a coal mine, standing tim- 
 
312 CORPORATE BOND ISSUES 
 
 ber, or tracts of land which are to be broken up into 
 building lots. In cases of this kind the sinking fund 
 method or the serial bond almost invariably prevails. 
 
 Public utility corporations, as a rule, keep increasing 
 their bonded debts until the limit prescribed by charter 
 is reached, so that when one issue is cancelled another 
 and larger issue replaces it, and as the process goes on 
 any underlying or prior lien obligations are likely to be 
 combined in the new issue. 
 
 § 270. Entries for Refunding Bonds 
 
 For illustration of the entries required where bonds 
 are refunded, we will assume that the first mortgage 5% 
 bonds of the Pleasant Valley Electric Railway Company 
 for $10,000,000 matured July i, 1916, and that they were 
 refunded by part of a new issue of consolidated first mort- 
 gage 5% fifty-year bonds for $20,000,000. The following 
 entry is required for the refunding operation: 
 
 July I, 1916 
 First Mortgage 5% Bonds (maturing) . . $10,000,000 
 To Unissued Consolidated First 
 
 Mortgage 5% Bond's (or Cash) $10,000,000 
 
 Refunding of $10,000,000 first mort- 
 gage 5% bonds due this day at the 
 office of the trustee, the Barton 
 Trust Company. The bonds have 
 been cancelled and returned and the 
 mortgage satisfied of record. 
 
 In cases such as this the new bonds may either be 
 exchanged for the old, as assumed above, or they may be 
 sold in the usual way and cash used for redeeming the 
 maturing obligations. This latter plan is the more general 
 and is the one employed by the Pennsylvania Railroad 
 Company and many other large companies. 
 
REDEMPTION OF BONDS 313 
 
 § 271. (4) Redemption of Serial Bonds 
 
 Serial bonds have already been discussed in § 192. 
 The bonds are usually paid in annual instalments of given 
 amounts beginning a few years after the date of issue; 
 therefore the redeeming process is a continuous feature 
 after it is once started. Like other mortgage bonds, 
 serial bonds are usually payable at the office of the com- 
 pany's fiscal agent or at the office of the trustee, but in 
 any case the money required for their redemption is paid 
 over by the company as the instalments mature. The 
 interest coupons are payable by the company or its fiscal 
 agent. 
 
 Assuming that the first mortgage 6% serial bond issue 
 of $3,000,000 of the Georgian Paper and Pulp Company 
 is payable in instalments of $150,000 each year beginning 
 February i, 1919, and that the date for paying the first 
 instalment is at hand, the. following retirement entry is 
 made: 
 
 February i, 1919 
 
 First Mortgage 6% Serial Bonds $150,000 
 
 To Cash $150,000 
 
 Payment of Instalment No. i of the $3,- 
 000,000 first mortgage serial 6% bonds of 
 1916. 
 
 As the bonds are paid they are cancelled and handed 
 over to the company for record. In place of the above 
 entry two entries may be substituted if desired, one 
 crediting cash and debiting the trustee as the cash is paid 
 over, and the other debiting the bond account and credit- 
 ing the trustee as the bonds are received by the company. 
 
 Under the trust deed the company has the privilege 
 of paying ofif additional instalments in order of serial 
 numbers (or the reverse order), in advance of maturity, at 
 103 and interest. As already explained in § 260, the pre- 
 
314 
 
 CORPORATE BOND ISSUES 
 
 mium paid for such redemption is in turn closed into Profit 
 and Loss. In that case the entry differs from the above only 
 with respect to premium paid, and is : 
 
 First Mortgage 6% Serial Bonds $150,000 
 
 Premium on Redeemed Bonds 4)500 
 
 To Cash $154,500 
 
 (Full explanation required here.) 
 
 § 272. (5) Entries for Convertible Bonds 
 
 A convertible bond, as already stated (§ 191), is one 
 which under prescribed conditions carries the right of 
 conversion into other securities of the same corporation. 
 These convertible bonds may be exchanged for stock of 
 the company at a stated price, provided the holders 
 thereof care to take advantage of the privilege. For in- 
 stance, the convertible 4 1/2% bonds for $67,000,000 of 
 the American Telephone and' Telegraph Company are 
 convertible at par into stock of the company at $120 per 
 share from March i, 191 5, to March i, 1925. When the 
 convertible bonds are issued provision is, of course, made 
 so that there may be a sufficient amount of unissued stock 
 or other securities to which the conversion privilege will 
 apply. 
 
 The entries required to give expression to such a 
 conversion are quite simple: 
 
 Convertible Bonds, etc 
 
 To Unissued Stock (or other security) ... 
 
 " Premium on Stock 
 
 (Full explanation.) 
 
 § 273. Redemption of Collateral Trust Bonds 
 
 The entries for the redemptioti of collateral trust bonds 
 are not different from those for the redemption of ordinary 
 mortgage bonds, except that the security which had 
 
REDEMPTION OF BONDS 
 
 315 
 
 passed out of the company's possession at the date of 
 Issue now comes back. An extra entry is required to 
 record this transfer. 
 
 Assuming that the due date of the Harney Electric 
 Company's $1,000,000 twenty-year collateral trust 5 9^ 
 gold bonds, interest payable half-yearly, has arrived, that 
 they have been paid by the trustee, and that the collateral 
 has been released to the company, the entry I'equired at 
 the time is: 
 
 July I, 1936 
 
 Collateral Trust 5% Bonds $1,000,000 
 
 To Cash .$1,000,000 
 
 Payment of $1,000,000 twenty-y;ar 5% 
 collateral trust bonds matured this day 
 at the office of the trustee, the Hudson 
 Trust Company. 
 
 If desired, this amount may first be charged to the 
 trustee, if payment is made by him, and be followed by 
 another entry debiting the bond account and crediting 
 the trustee. 
 
 The collateral security now having been released to 
 the company may be recorded by the following entry: 
 
 July I, 1936 
 
 Investments $1,340,000 
 
 To Pledged Investments $1,340,000 
 
 Return of collateral pledged with the 
 Hudson Trust Company as security 
 for $1,000,000 collateral trust bonds, 
 as foUowrs : (Here list details and 
 values of stocks and bonds returned.) 
 
 This returns the securities to the Investments accouirt, 
 an'd they are now free for use in other ways if necessary. 
 The explanations given above apply also to secured short 
 term notes, and like obligation."!. 
 
3i6 CORPORATE BOND ISSUES 
 
 § 274. Redemption of Short Term Notes 
 
 Short term notes (§ 203) are either secured or un- 
 secured, and as they mature they are paid Uke other bond 
 obligations, and the book entries required are similar to 
 those for other classes of bonds. If the notes are secured 
 by a deposit of collateral, an entry should be made as soon 
 as the collateral is returned, removing the collateral from 
 the Pledged Collateral account and returning it to the 
 Investments account, as in the case of collateral trust 
 bonds. Unissued, or nominally issued, bonds of the com- 
 pany that have been pledged as security for bank loans or 
 other obligations, should in like manner be recorded in some 
 distinguishing account. 
 
 § 275. Redemption of Equipment Trust Bonds 
 
 Equipment certificates are usually issued in series, as 
 Series A, B, C, etc., each being secured by a given portion 
 of the equipment. As each instalment of the certificates 
 is paid by the trustee out of money supplied by the com- 
 pany, the equipment trust certificates are cancelled and 
 returned to the company. As soon as a series is paid of¥, 
 which may require two or three instalments, the equip- 
 ment thereunder is released to the company. It is then 
 transferred from the trust equipment account to the free 
 equipment account. Assuming that upon payment of the 
 first instalment of $1,000,000 of an equipment trust bond 
 issue, one-fifth of the equipment held as security is re- 
 leased to the company, it would be reflected in the 
 following entries, it being assumed that the released 
 equipment is of the value of $2,000,000: 
 
 July I, 1916 
 
 Equipment Trust Certificates $1,000,000 
 
 To Cash $1,000,000 
 
 First instalment of 6% equipment trust 
 certificates paid this day, etc. 
 
REDEMPTION OF BONDS 
 
 317 
 
 This entry is then followed by a transfer entry 
 somewhat as follows: 
 
 Equipment Cars (or Locomotives) $2,000,000 
 
 To Equipment Trust Cars $2,000,000 
 
 For transfer of $2,000,000 of equipment 
 released under equipment trust cer- 
 tificates. (Full explanation.) 
 
 § 276. Redemption of Guaranteed Bonds 
 
 Guaranteed bonds are issued, as a rule, by subsidiary 
 or affiliated companies (see § 197), and should be re- 
 deemed by the issuing company. A contingent liability 
 is, however, incurred by the guaranteeing company as 
 soon as the bonds are indorsed, but it is not usual to make 
 any entry in the books of account at the time. A complete 
 record of the matter is, of course, made in the corporate 
 minutes. If no entry is made when the bonds are indorsed 
 by the company, then no entry is necessary at their 
 maturity so long as they are duly paid by the issuing 
 company. On the other hand, if an entry is made at the 
 beginning, an oflfsetting entry is required when the bonds 
 are paid by the issuing company. 
 
 If the guaranteeing company is required to- make 
 payment for all or any part of the bond issue, it must 
 then, of course, make an entry debiting the issuing com- 
 pany and crediting cash, and will look to the issuing 
 company for reimbursement. The Pennsylvania Railroad in 
 1 91 5 had outstanding guaranteed stock trust certificates of 
 underlying companies aggregating $14,393,250, of which 
 $7,478,250 matures in 1948 and $6,915,000 in 1921. 
 
 § 277. Bonds in Default 
 
 In case of default in the payment of bonds, or even 
 in the interest thereof, the trustee is usually empowered 
 
3i8 
 
 CORPORATE BOND ISSUES 
 
 by the deed of trust to enter upon and take charge of the 
 mortgaged property for the benefit of the bondholders. 
 In that event the company is forced into bankruptcy, or 
 a receivership, or a reorganization of some kind, unless 
 the bondholders consent to an extension or renewal, oi 
 to some other plan of adjustment that will permit the 
 company to continue its career. For instance, the 
 Missouri Pacific Company's 5% secured notes for $25,- 
 000,000, due June i, 19 14, were extended for one year 
 with interest at 6%. Again, in 1915 these notes were 
 renewed for another year, over 95% of the holders having 
 agreed to the extension. Those not agreeing to the ex- 
 tension were paid in cash. 
 
 Unpaid bond obligations should, by right, be removed 
 from the regular bond account and credited to some other 
 account that will clearly designate the nature of the 
 cbligation, as: 
 
 Four- Year Secured 6% Notes $600,000 
 
 To Matured Four- Year 6% Notes $600,000 
 
 An account may even be opened for "Defaulted 6% 
 Notes," "Overdue 6% Notes," "Renewed 6% Notes," or 
 "Extended 6% Notes," as the case may require. 
 
 § 278. Destroying Bonds 
 
 When bonds are redeemed by the trustee they are, of 
 course, cancelled, and they are then either returned to the 
 company or cremated by the trustee. The advisability of 
 burning retired bonds is a matter of dispute. If done at 
 all, it is done in the presence of the officers of the issuing 
 company and of the trust company, all of whom sign in 
 dupHcate a cremation certificate, their signatures being 
 duly witnessed. The cremation certificate reads about as 
 follows : 
 
iffiDEMPTION OF BONDS 319 
 
 "This is to certify that we, the undersigned, ha^e this 
 day in the presence of each other, destroyed the following 
 described securities by burning the same to ashes." (Here 
 follows a detailed description of the securities burned.) 
 
Part V — Corporation Reports and Statements 
 
 CHAPTER XXIII 
 
 CLOSING THE BOOKS; RESERVE FUNDS 
 AND SURPLUS 
 
 § 279. Closing the Books 
 
 At the end of each fiscal year, or oftener, it is customary 
 to "close the books," that is, "close the ledger." Where it 
 can be done conveniently, it is usual and advisable to make 
 the fiscal year correspond with the calendar year; but in 
 many cases it is preferable to have the fiscal year end at a 
 time when business is slack, or when the inventory can be 
 taken with the least labor. In the dry-goods business, for 
 instance, the fiscal year might be made to close just before 
 the fall merchandise comes in, when the stock is low, so that 
 the physical inventory may be taken with comparative ease. 
 Under the modern plan of keeping perpetual or book inven- 
 tories, however, a physical inventory is not necessarily taken 
 before closing the books, and the end of the fiscal year is 
 usually made to coincide with the end of the calendar year. 
 
 At the closing date it is the practice to prepare such 
 statements, usually profit and loss statement and balance 
 sheet, as will clearly exhibit the business operations of the 
 company for the year and also show its true financial con- 
 dition at the time. 
 
 Financial statements do not, however, in themselves 
 necessitate a closing of the books, and they are frequently 
 made up monthly, quarterly, or half-yearly for the purpose 
 of supplying information which the officers and directors 
 
 320 
 
CLOSING THE BOOKS 321 
 
 need before the time of the annual closing. This does not 
 mean that the ledger is closed, or changes made in any of 
 the accounts, but simply that the required balances, inven- 
 tory totals, and accrued items are compiled from the books 
 and records as they stand, and are presented in condensed 
 form to the corporation officials. A complete profit and loss 
 statement can be made each month with but little extra 
 ■work, provided a running inventory is maintained in the 
 records. In many companies, however, it is the practice to 
 make adjusting entries each month to bring the ledger into 
 harmony with the monthly profit and loss statement and 
 balance sheet. In that case all prepaid and accrued items, 
 as interest, insurance, taxes, etc., must be considered. The 
 distribution of overhead expenses is also a feature of great 
 importance in the case of manufacturing establishments. 
 
 § 280. Procedure in Closing the Books 
 
 The steps to be taken in closing the books are briefly as 
 follow^s : 
 
 1. Determine the inventories of merchandise, proper- 
 ties, supplies, etc., making adjustments where necessary, 
 and enter them in the proper respective accounts. 
 
 2. Compute and group prepaid and accrued items and 
 make entries to the proper accounts. 
 
 3. Determine depreciation of properties and make 
 entries for same. 
 
 4. Consider and enter reserves of whatever nature. 
 
 5. Close the nominal accounts into Profit and Loss 
 account, usually by journal entry. Journal entries may be 
 used also for the entering of inventories and accruals. The 
 net profit or net loss is then carried to Surplus account or to 
 Undivided Profits account. 
 
 6. Balance and rule the nominal accounts and bring 
 down the inventories where necessary. 
 
322 
 
 REPORTS AND STATEMENTS 
 
 7. Make a second trial balance of the ledger. This 
 would now consist only of assets and liabilities and the 
 balance of the Profit and Loss account. 
 
 8. Prepare income and profit and loss statement show- 
 ing gross and net profit, accompanied by analyses and pei'- 
 centages when desired. Show comparisons of items with 
 like items from preceding years where desirable. 
 
 9. Prepare balance sheet showing the company's net 
 worth and financial condition. Show comparisons with 
 assets and liabilities of preceding years where desirable. 
 
 10. Prepare other exhibits, schedules, or summaries 
 as required. 
 
 11. Contingent assets or liabilities should be noted, at 
 least as a footnote to the balance sheet, and adjustments 
 made where necessary. 
 
 § 281. Closing the Ledger 
 
 The ledger must be closed systematically with the 
 various nominal or profit and loss accounts properly sub- 
 divided. For example, all accounts directly affecting pro- 
 duction costs should be closed into the Manufacturing 
 account, in order to determine the exact cost of the finished 
 stock; and all selling expenses, administrative expenses, etc., 
 should be carefully classified and closed in accordance with 
 the degree of information required and the plan of the 
 bookkeeping system. The net profit must, of course, be 
 clearly stated, and sometimes the gross profit as well. It is 
 not necessary to close the real or asset and liability accounts, 
 except when they are balanced by settlement or adjustments, 
 or when forwarding them to another page or to another 
 ledger. 
 
 Monthly trial balances should, of course, be made of all 
 ledgers, and the main ledger be in balance before it is closed. 
 
 When closing the ledger, transfers of the nominal ac- 
 
CLOSING THE BOOKS 323 
 
 counts to the manufacturing accounts and to the Profit and 
 Loss account are usually, though not necessarily, made by 
 journal entry. Transfers might be made directly on the 
 face of the ledger without supporting journal entries or 
 explanation, but it is preferable to make such transfers 
 through the journal; this summarizes all of the items and 
 provides a means of supporting each ledger entry by ade- 
 quate explanation. The journal explanations may be very 
 brief, but should be clear and unmistakable for the benefit of 
 others who may have to make reference thereto. 
 
 It is in closing the ledger preparatory to the making of 
 the statements that many of the more difficult problems of 
 accounting arise. With this in view, the following sections 
 have been devoted to a brief discussion of most of these 
 points. 
 
 The methods of handling the accounts peculiar to cor- 
 porations when preparing statements have already been 
 treated in considerable detail (see especially Chapter VI, 
 "Distinctive Corporate Accounts"), so that discussion of 
 them has been omitted in this chapter. 
 
 Reserve Funds 
 § 282. Reserve Accounts 
 
 Reserves represent profits set aside for definite and 
 specific purposes. The prudent business man is careful not 
 to overstate his profits, and, to prevent this, due allowance 
 is made in the form of reserves to meet any anticipated or 
 expected losses. They include all amounts reserved or kept 
 back for future use, as reserve for bad debts, reserve for 
 depreciation, reserve for discounts, reserve for insurance or 
 sick benefits, reserve for sinking fund, etc. For instance, it 
 is a well-known fact that customers' accounts are frequently 
 uncollectible, and experience has shown the advisability of 
 making due allowance for such losses. The following 
 
324 
 
 REPORTS AND STATEMENTS 
 
 reserve for bad debts, against which worthless accounts may 
 be charged directly as they occur or at the end of the year 
 through the Bad Debts account, illustrates the working of a 
 reserve account. 
 
 Reserve for Bad Debts 
 
 I9I6 
 Dec. 31 
 
 Bad Debts 
 written off 
 during the 
 
 
 1916 
 Jan. I 
 Dec. 31 
 
 Balance 
 
 Profit and Loss 
 
 $3,680.29 
 3,291.40 
 
 H tt 
 
 year and 
 charged to 
 Bad Debts 
 
 account $3,468.75 
 
 Balance 3,502.94 
 
 1917 
 Jan. I 
 
 Balance 
 
 
 
 $6,971 
 
 69 
 
 $6,971.69 
 
 
 
 
 $3,502.94 
 
 § 283. Reserve Accounts and Reserve Funds 
 
 When profits are reserved for a particular purpose, and 
 specific funds or property are set aside or invested to meet 
 the needs of this reserve, a reserve fund is thereby created. 
 Thus, if a reserve is created for the redemption of bonds or 
 for the replacement of a wasting asset, by the reservation of 
 cash, or by the investment of cash in securities, the cash or 
 securities being held for the specific purpose of redeeming 
 the bonds, the result is a sinking fund or replacement fund, 
 as the case may be. If, however, a reserve is created for the 
 redemption of bonds by a charge against Surplus or Profit 
 and Loss, but no actual reservation of cash or other property 
 is made, the result is a sinking fund reserve. In the one 
 case the actual cash is withdrawn and held, and it, or its 
 equivalent if it is invested, is there for the redemption of the 
 bonds as they fall due. In the other case, the profits have 
 
RESERVE FUNDS 
 
 32s 
 
 been withdrawn from Surplus or Profit and Loss, as the 
 case may be, so that they cannot be declared in dividends 
 or diverted to other uses. 
 
 This being- so, when the bonds fall due, their redemption 
 will not impair the capital or reduce the surplus, because of 
 the reserve ; but this is all the reserve does, and the directors 
 must then take such steps as may be necessary to secure cash 
 to pay the bonds. Sufficient cash may perhaps be in the 
 treasury for the purpose, but, in the case of a large amount 
 of bonds or an entire issue falling due, this is seldom the 
 case; as a result cash must be borrowed or be secured by 
 the sale of some of the company's property to meet redemp- 
 tive needs. For this reason, to provide for the redemption 
 of bonds or the liquidation of any heavy obligation, the 
 reserve fund, or both fund and reserve are generally set up. 
 
 Reserve accounts are in the nature of liabiHties and are 
 always shown on the balance sheet as credits, or as a deduc- 
 tion from assets, while funds of whatever nature are assets 
 and therefore appear on the debit side or otherwise as a 
 deduction from liabilities. Loss of assets for which re- 
 serves have been provided is written off by a debit to the 
 reserve and a credit to the specific asset. An examination 
 of the balance sheets appearing in Chapters XXV, XXVI 
 will show the different reserve accounts and the manner of 
 handling them. 
 
 § 284. Secret and Hidden Reserves 
 
 The terms "hidden reserves" and "hidden assets" are 
 practically synonymous with "secret reserves." The latter 
 term is familiar to accountants as representing the excess of 
 actual net worth of a concern over and above the amount 
 indicated on its balance sheet. For some reason, the direc- 
 tors may not wish to disclose in a financial statement the 
 true status of the company's condition, and they act accord- 
 
326 
 
 REPORTS AND STATEMENTS 
 
 ingly in understating the true facts. This may be due to a 
 spirit of conservatism which is no doubt permissible in case 
 no one is injured thereby. Sometimes, however, the actual 
 net profits for a given year are understated for the purpose 
 of lessening the state and federal corporation tax, and per- 
 haps to keep both stockholders and competitors in ignorance 
 of the company's actual earnings. 
 
 Following are various acts or omissions which result in 
 the creation of secret reserves : 
 
 1. Intentionally or inadvertently omitting assets 
 
 which should be included. 
 
 2. Undervaluing assets, intentionally or otherwise. 
 
 3. Writing off too much depreciation. 
 
 4. Charging additions and improvements to Repairs 
 
 or Maintenance account instead of to Plant 
 account. 
 
 5. Creating reserves for bad debts in excess of the 
 
 amount required. 
 
 6. Charging production costs intentionally or other- 
 
 wise, to general expense instead of to the manu- 
 factured article, thus undervaluing the cost. 
 
 7. Including fictitious liabilities in the accounts, or 
 
 overstating actual liabilities. 
 
 8. Making additions or improvements and charging 
 
 the cost to Surplus account, thereby hiding their 
 value. 
 
 9. Neglecting to take into consideration in the ac- 
 
 counts natural increases in value of real or other 
 property. 
 10. Understating values in good years and increasing 
 them in lean years as a means of keeping the 
 dividends uniform from year to year. 
 
 The hidden reserve is a commendable creation in case it 
 
RESERVE FUNDS 
 
 327 
 
 is not carried to excess and provided it is not detrimental to 
 interested persons. The spirit of conservatism, to a reason- 
 able extent, is to be commended by the accountant rather 
 than criticized. If, however, stockholders are kept in igno- 
 rance of secret reserves of considerable amount, the auditor 
 should draw attention to this fact in his report. 
 
 § 285. Depreciation 
 
 Depreciation is the reduction in the value of a fixed 
 asset through use, the passage of time, or obsolescence. All 
 property, with the possible exception of land, must inevi- 
 tably reach the end of its usefulness, since disintegration ia 
 the law of nature. Machinery in use suffers from wear and 
 tear. Machinery not in use is subject to depreciation from 
 rust and decay. Whether in use or not, the onward march 
 of invention and improvement in mechanical lines, together 
 with the necessity of meeting sharp competition in business, 
 requires that machinery shall be modern in every respect. 
 Accordingly, obsolete machinery must be replaced by mod- 
 ern equipment. 
 
 In the case of machinery or equipment designed for 
 manufacturing purposes, depreciation is considered a part 
 of the cost of production. 
 
 § 286. Methods of Handling Depreciation 
 
 There are several methods of handling depreciation on 
 the books. Since it is not possible to determine the exact 
 rate at which properties will depreciate, it becomes necessary 
 to follow the results of past experience. From this it is 
 possible to determine with reasonable certainty the life of a 
 given property; and the rates of depreciation may then be 
 approximated. 
 
 The methods more commonly employed in caring for 
 depreciation are as follows - 
 
,28 REPORTS AND STATEMENTS 
 
 1. Even portions of the original value are charged off 
 
 each year. 
 
 2. An annual per cent of the diminishing value is 
 
 charged off each year. 
 
 3. Depreciation is offset by improvement and mainte- 
 
 nance charges. 
 
 The life of machinery is from five to twenty years, de- 
 pending upon the usage to which it is subjected. It is mani- 
 fest that the rate on diminishing values must be higher than 
 the rate on the original value. If a machine is likely to run 
 for twenty years, then a fair rate of depreciation would be 
 S% on the original cost and from 7 to 10% on the diminish- 
 ing balance. The method of diminishing values seems the 
 more logical of the first two methods of caring for deprecia- 
 tion, since the burden is distributed more equitably and the 
 property has a residual value at all times. It throws the 
 heaviest charge for depreciation on the first few years when 
 the machinery is in good condition, and then gradually 
 decreases as the efficiency of the property is impaired. On 
 the other hand, the repairs during the last years are larger 
 than at the beginning, so that the annual deduction from 
 profits is not unequally distributed. 
 
 All repairs should, of course, be charged to Repairs 
 account and then closed into Profit and Loss account, or 
 perhaps treated as a manufacturing cost. Additions and 
 permanent improvements should be charged to the property 
 account benefited thereby, and be subjected to the same 
 process of depreciation as the original property. There are 
 very few cases, if any, where repairs and improvements can 
 take the place of an ample provision for depreciation. 
 
 The rates of depreciation on different kinds of properties 
 have been carefully compiled by engineers and accountants, 
 and depreciation tables have been worked out from these 
 calculations, which will be found convenient. 
 
RESERVE FUNDS 
 
 329 
 
 The first method of depreciation requires no illustration. 
 The following account will show the application of the 
 second method. 
 
 Machinery Account 
 
 (10% Depreciation off Diminishing Values Annually) 
 
 I91S 
 
 Jan. I 
 
 Investment . 
 Balance .... 
 Balance .... 
 
 . .$100,000.00 
 
 1915 
 Dec. 3.1 
 
 1916 
 Dec. 31 
 
 Depreciation. 
 Balance 
 
 Depreciation. 
 Balance 
 
 . $10,000.00 
 . 90,000.00 
 
 
 $100,000.00 
 
 $100,000.00 
 
 1916 
 Jan. I 
 
 . $ 90,000.00 
 
 . $ 9,000.00 
 . 81,000.00 
 
 
 $90,000.00 
 
 $90,000.00 
 
 1917 
 Jan. I 
 
 . $ 81,000.00 
 
 
 This process is continued from year to year until the 
 value of the machinery is consumed, or it is sold or dis- 
 carded. If the depreciation proves too high or too low, 
 modification of the percentage rate used or other adjust- 
 ments may be necessary. 
 
 If statements are required each calendar month, necessi- 
 tating a distribution of depreciation, it will be necessary to 
 make an entry each month debiting Depreciation and cred- 
 iting the property account for one-twelfth of the annual 
 amount to be written ofif. In lieu of this process, a good 
 plan is to make entries only at the end of the year for the 
 amount to be written ofif, while the monthly distribution is 
 made on separate analysis sheets. In this way the informa- 
 tion required for monthly statements can be compiled on 
 loose sheets without affecting the ledger accounts or necessi- 
 tating so many journal entries. 
 
330 
 
 REPORTS AND STATEMENTS 
 
 § 287. Reserve for Depreciation 
 
 Instead of writing down the property account from year 
 to year, a more generally approved plan of entering depre- 
 ciation on the books is to set up a "Reserve for Deprecia- 
 don." It is credited each year or each month with the 
 -imount to be written off, while a corresponding charge is 
 made to Profit and Loss, to Operating Expense, or to De- 
 preciation account. It is apparent that under this method 
 the property account remains on the books at its cost value, 
 while the corresponding reserve account stands as an open 
 credit on the books and in the trial balance. This is more 
 satisfactory than a direct credit to the property account, 
 since it shows at any time the book accounts of properties 
 at their cost price, and the depreciation reserves set up 
 against them. 
 
 Where properties are written down very rapidly by 
 actual credits to the property account, it is hard to convince 
 the insurance adjuster, in case of loss by fire, that they are 
 really worth more than the balances shown in the accounts. 
 Of course, it is not assumed that either the corporation offi- 
 cials or the insurance adjuster would be influenced by the 
 account alone without an investigation of the facts ; yet it is 
 nevertheless a difificult matter to show that properties are 
 really worth more than the owner has actually valued them 
 in his book accounts. While the property and reserve ac- 
 counts are shown separately in the books, in the balance 
 sheet the reserve for depreciation is frequently deducted 
 from the property, thus : 
 
 Plant and Machinery $100,000.00 
 
 Less Reserve for Depreciation . 10,000.00 $90,000.00 
 
 § 288. Operation of Reserve for Depreciation Account 
 
 A general reserve account mav be opened for deorecia- 
 
RESERVE FUNDS 33 1 
 
 tion of all properties, or a separate reserve account may be 
 opened for each class of property. This depends, of course, 
 upon the different kinds of properties to be depreciated and 
 on the plans of the supervising accountant. It should be 
 remembered that reserves are not surplus profits, but merely 
 negatives to, or deductions from, the corresponding assets. 
 Instead of deducting these depreciation reserves from their 
 corresponding assets, as shown in the illustration above, they 
 are frequently placed in the balance sheet among the liabili- 
 ties. Any addition to the Machinery account will, of course, 
 require a corresponding increase to the annual reserve. In 
 case a machine becomes obsolete and is discarded, it must 
 be charged off to the reserve account as follows : 
 
 Reserve for Depreciation $14,500 
 
 To Machinery Account $14,500 
 
 To write off obsolete and worn-out machinery 
 as follows: (Here give details.) 
 
 The sale of old machinery or of scrap necessitates a 
 debit to Cash and a credit to Reserve for Depreciation or to 
 Profit and Loss account. If an ample depreciation account 
 is maintained for all properties, any machine becoming obso- 
 lete or worthless before the time estimated should, in like 
 manner, be written off against Reserve for Depreciation. 
 In case the reserve is not sufficient to offset the entire 
 amount, then the excess must be charged to Profit and Loss. 
 The accountant or careful corporation official will see that 
 the depreciation reserve is maintained at an amount amply 
 sufficient for every purpose. 
 
 § 289. Sinking Fund for Exhaustion of Mines 
 
 In the ordinary commercial undertaking the profits are 
 made on the turnover, and at the end of a term of years the 
 investment — save in case of disaster — is intact, and pre- 
 
232 REPORTS AND STATEMENTS 
 
 sumably the business is far more valuable than when it was 
 started. In mining and similar undertakings, however, the 
 profit is made from the removal of the mineral, and under 
 ordinary conditions the value of the property becomes 
 steadily less with each ton of ore removed, until on its final 
 exhaustion there is left a tract of rough and worthless land 
 and machinery of but little further value. In other words, 
 the original investment has disappeared — has been con- 
 sumed, or realized upon, in the course of operation. 
 
 This gradual working out or liquidation of the original 
 investment is characteristic of mining, quarrying, timbering, 
 and other operations, and, if the conditions are. clearly rec- 
 ognized, is not in any way objectionable. Frequently, 
 however, the owners prefer to establish a sinking fund or 
 depreciation reserve that will preserve the integrity of the 
 original investment, so that profits only will be paid the 
 owners from current operation. 
 
 The establishment of such a sinking fund, or "exhaus- 
 tion" or "replacement" fund as it is frequently called, is a 
 comparatively simple matter. The amount of mineral in 
 the mine, or of timber on the tract, is estimated; and a 
 certain amount calculated to replace the original investment 
 upon or before the exhaustion of the property, is reserved 
 and set aside for each ton of ore mined, or for each thou- 
 sand feet of lumber cut. For instance, the Cambria Steel 
 Company carries a "Reserve for Extinguishment of Min- 
 erals" aggregating some $500,000; the Bethlehem Steel 
 Corporation carries a "Reserve for Depreciation of Prop- 
 erty, Exhaustion of Minerals, etc.," of over $10,000,000; 
 the International Harvester Company carries a "Reserve 
 for Plant Depreciation and Extinguishment" of over 
 $10,000,000; and the United States Steel Corporation has 
 reserves for similar purposes aggregating oVer $24,000,000. 
 
 The amount reserved for exhaustion Or replacement is 
 
RESERVE FUNDS 333 
 
 deducted from profits and credited to a special reserve 
 account; but, since the creation of such a reserve is entirely 
 at the option of the owners, the actual assets may remain 
 in the business, or, if preferred, may be set aside in cash as 
 a special exhaustion fund. If cash is drawn from the busi- 
 ness to provide this special fund, it may either be placed in 
 the hands of a trustee, or of a committee of directors, or of 
 the entire board. Unlike a bond sinking fund where the 
 deed of trust requires cash to be withdrawn, the exhaustion 
 fund is generally a voluntary matter and may be regulated 
 as seems best to the owners of the property. 
 
 § 290. Insurance, Benefit, and Accident Funds 
 
 The creation of special funds and reserves for insuring 
 properties against loss by fire, for sickness and pensions, for 
 old age benefits, and against accidents and other contingen- 
 cies, is a common feature of modern corporation finance. 
 
 The United States Steel Corporation in its last annual 
 report shows resejrves on the liability side of its balance 
 sheet as follows : 
 
 Contingent and Miscellaneous Operating Funds 
 
 Pension Fund 
 
 Insurance Funds 
 
 The Pennsylvania Railroad Company maintains the 
 following funds, the purposes of which are apparent : 
 
 Consolidated Mortgage Sinking Fund 
 Insurance Fund for Fire, Marine, etc. 
 Employees' Voluntary Relief Fund 
 Employees' Saving Fund 
 Employees' Pension Fund 
 
 The International Harvester Company in its annual 
 report shows the following reserves on the liability side of 
 its balance sheet : 
 
..24 REPORTS AND STATEMENTS 
 
 Depreciation and Extinguishment 
 
 Special Maintenance 
 
 Collection Expenses on Receivables 
 
 Fire Insurance Fund 
 
 Pension Fund 
 
 Industrial Accident Fund 
 
 Profit-Sharing 
 
 Contingent (European War Losses, etc.) 
 
 The three representative corporations cited above may 
 be taken as fair examples of the modern practice in the mat- 
 ter of creating reserves and funds. Except in a few of the 
 compulsory cases, the reserves are not represented by 
 specially appropriated assets, thus indicating that the regu- 
 lar cash assets are relied upon to meet any demands made 
 from these sources. 
 
 Surplus 
 § 291. Surplus or Undivided Profits Account 
 
 "Surplus" account usually contains all those profits that 
 are not reserved for some special purpose or which are not 
 immediately to be distributed in the form of dividends. Or, 
 more broadly, it is the account in which is entered all excess 
 of assets over liabilities which is available for dividends or 
 other general purposes of the company. In the balance 
 sheet it is represented by the excess of assets over liabilities 
 and capital, the difference being- a credit either to Surplus, 
 or to Undivided Profits, or sometimes to Profit and Loss. 
 Where a surplus exists, it is usually maintained as a meas- 
 ure of safety to strengthen the financial condition of the 
 company and to safeguard it against unforeseen contingen- 
 cies. In England and extensively in Canada, the surplus is 
 called the "Reserve Fund." 
 
 Surplus account may be credited with the year's net 
 
SURPLUS 
 
 335 
 
 profit before the dividend is declared, or with the portion 
 of profits to be retained in the business after payment of 
 dividends. Dividends are usually not declared until the 
 amount of net profit is known, unless the unapportioned 
 surplus is ample to cover any shortage that might result; 
 to do otherwise might result in wiping out the reserve that 
 had been created during prosperous years. A large sur- 
 plus is the pride of every well-managed corporation, and 
 especially of banking institutions in which the surplus is 
 frequently larger than the capital stock itself. 
 
 Banks usually make a distinction between surplus and 
 undivided profits. Each year they carry a given amount of 
 the net profit to Surplus account to serve as permanent 
 working capital, while the remainder after payment of divi- 
 dends is carried in the Undivided Profits account. Many 
 corporations make no distinction but use either one or the 
 other for all purposes. Some use "Surplus and Undivided 
 Profits" account, or "Surplus and Deficiency" account, 
 while others use only the Profit and Loss account. 
 
 The Surplus account is frequently entitled "Surplus and 
 Deficiency" account, in order that it may, without misnomer, 
 not only accommodate surplus but any deficiency as well. 
 This is the plan used by public service commissions in their 
 schedules and reports. The account is credited with surplus 
 profits and charged with such net loss as may result in any 
 year. A debit excess of this account, of course, represents 
 a deficiency or impairment of capital, while a credit excess 
 is the opposite. 
 
 § 292. Contributed Surplus 
 
 Sometimes stock is subscribed for at a figure above its 
 par value, and a surplus is thus created by contribution at 
 the time the company is organized. This is done in order 
 that the company may have a safety fund for emergencies, 
 
336 REPORTS AND STATEMENTS 
 
 or additional working capital while the business is being 
 launched. In that case Surplus account is usually credited 
 for the amount contributed in excess of the capital stock. 
 This plan is commonly employed in the organization of 
 national banks in which the stockholders are liable for debts 
 of the company to an amount equal to the stock they hold. 
 The practice is to sell the stock at, say, $125, $150, or even 
 $200 per share, in which case the double liability of the 
 stockholders is completely provided for and the institution 
 itself secures a material addition to its working capital. 
 
 Surplus is sometimes the result of a direct acquisition of 
 value not belonging to the fiscal period or to the opening of 
 business, as an increase in value of real estate, of invest- 
 ments, or of other assets of a permanent nature. If such 
 increase is permanent, it may legitimately be credited to 
 Surplus account. Property value increases, however, if 
 used for the purpose of creating a fictitious surplus on 
 which to declare dividends, should be severely condemned 
 by accountants and corporation officials. It is not good 
 business prudence in any case to use appreciation of values 
 for dividend purposes. Dividends declared and paid on the 
 strength of fictitious profits must, as a rule, be accounted 
 for in case of the company's failure ; it is equivalent to pay- 
 ing dividends out of capital for which the directors are held 
 personally liable. 
 
 § 293. Investments of Surplus 
 
 It is common practice for corporations to invest part of 
 their surplus cash in gilt-edged securities, such as bonds and 
 stocks of other companies. This insures the company 
 against danger of being without liquid funds in case of a 
 crisis ; but, on the other hand, when the low rate of return 
 from these securities is considered, it is manifest that the 
 money thus invested could be used more profitably in the 
 
SURPLUS 
 
 337 
 
 business. However, most corporations follow the practice 
 of investing in such securities, knowing that they can be 
 used at any time as collateral for securing bank loans or 
 for sale on the stock exchange. 
 
 It should be remembered that any "surplus" is always 
 represented by an equivalent of assets, but as a rule these 
 assets are not earmarked or in any way designated except 
 perhaps as investments. In case a special surplus fund is 
 created by setting aside cash, an account must be opened 
 under the caption "Surplus Fund" or "Investments," or any 
 other designating term. Such outside investments may, 
 but generally do not, represent all of surplus profits. Sur- 
 plus account always shows a credit balance (unless a deficit 
 occurs), while the surplus fund (or any other fund) shows 
 a debit balance. Income from surplus funds invested should, 
 of course, be credited to Income account. 
 
CHAPTER XXIV 
 
 FORMS OF STATEMENTS 
 
 § 294. Corporate Reports 
 
 There are two types of corporate reports and statements : 
 those rendered by the directors and corporate officials to the 
 stockholders and governmental authorities, and those ren- 
 dered by the accounting department of the corporation to 
 the executives. It is to the latter class that the present dis- 
 cussion will be directed. 
 
 § 295. Necessity for Reports 
 
 To manage the business intelligently it is essential that 
 corporate officials be constantly informed as to the financial 
 status and progress of the concern. In the case of the small 
 corporation where the executives are in intimate touch with 
 the daily activities of the business, monthly or even quar- 
 terly statements of income and profit and loss, and balance 
 sheets are adequate to give them sufficient information to 
 run the business properly. 
 
 In the case of the large corporation, however, where the 
 scope of activity and the volume of business is such that it 
 is absolutely impossible for the executive to keep in close 
 personal touch with the various details of the business, it 
 is the duty of the accounting department to provide suitable 
 statements and statistical data to keep him. thoroughly 
 informed. In an organization of this type it may be neces- 
 sary to have daily reports showing in memorandum form 
 the essential facts of the business such as the sales, pur- 
 
 338 
 
FORMS OF STATEMENTS 
 
 339 
 
 chases, collections, expenditures, bank balances, manufac- 
 turing or operating details ; weekly or monthly statements 
 of cash receipts and disbursements; monthly statements of 
 income and profit and loss, and balance sheets, together 
 with such other statistical information as may be needed.* 
 
 § 296. Form of Statements 
 
 While there are no generally accepted or standard forms 
 for corporate statements, those given on the following pages 
 are fairly representative of the best practice. Modifications 
 may often prove desirable to meet the needs of local condi- 
 tions, but, when making these modifications, the accountant 
 must be most careful to see that the statements as rendered 
 \\ill not be misleading to anyone, and that they convey 
 information to those who will use them in as interesting and 
 clear a manner as possible. The forms given in Chapters 
 XXV; XXVI, in connection with the problems illustrating 
 the preparation of corporate statements, are suggestive of 
 modifications that are good. 
 
 § 297. Balance Sheets 
 
 Balance Sheet, December 31, 19.., 
 
 Assets 
 Current Assets: 
 
 Cash $ 
 
 Notes and Accounts Receivable. . . ; 
 
 Inventories $ 
 
 Deferred Charges to Operation: 
 Prepaid Insurance, etc 
 
 Plant Assets: 
 
 Real Estate $. 
 
 Machinery, Fixtures, etc 
 
 *For further details, see "Accounting Practice and Procedure" by Dickinson, 
 and "Auditing — ^Theory and Practice" by MontRomery. 
 
340 
 
 REPORTS AND STATEMENTS 
 
 Other Assets : 
 Good-Will Patents, etc $. 
 
 Liabilities 
 
 Current Liabilities. : 
 Notes Payable. ... 
 Accounts Payable., 
 Accrued Wages 
 
 Fixed Liabilities ; 
 
 Bonded Debt.. 
 
 Reserves 
 
 Excess of Assets 
 (Or Net Worth) 
 
 Capital Stock 
 
 Surplus (or Deficit) . 
 
 Comparative General Balance Sheet 
 
 At December 31, 19.., and at December 31, 19.. 
 
 December December Increases 
 311, 19. . 31, 19. . Decreases* 
 Assets and Deferred Debit Items: 
 Capital Assets : 
 
 Land $ $ $ 
 
 Factory and Office Buildings 
 
 Building Equipment 
 
 Power Plant 
 
 Machinery and Tools 
 
 Experimental and Improvement 
 
 Plant 
 
 Maintenance Plant 
 
 Printing Plant 
 
 Transportation Plant 
 
 Furniture and Fixtures 
 
 Trade-Marks and Patents 
 
 Total Capital Assets. 
 
 *Decreases are shown in red. 
 
FORMS OF STATEMENTS 341 
 
 Comparative General Balance Sheet — Continued 
 
 December December Increases 
 
 31, 19.. 31, 19.. Decreases* 
 Working and Trading Assets: 
 
 Working : 
 
 Goods in Process — Inventory $ $ $ 
 
 Manufacturing Materials and Sup- 
 plies — Inventory 
 
 Materials for Repairs and Main- 
 tenance — Inventory 
 
 Scrap Material — Inventory 
 
 Shipping Material — Inventory ^ . 
 
 Coal, Oil, and Waste — Inventory 
 
 Advertising Matter 
 
 Stationery and Printing 
 
 Trading : 
 Finished Goods — Inventory. 
 
 Total Working and Trading. 
 
 Total Capital and Working and 
 Trading Assets $ $• 
 
 Current Assets: 
 
 Cash in Banks and in Office 
 
 Special Deposits 
 
 Notes Receivable 
 
 Customers' Accounts Receivable — 
 Claims against Transportation Cos.. 
 Advances to Employees 
 
 Total Current Assets $. 
 
 Deferred Debit Items: 
 
 Fire Insurance Premiums, unex- 
 pired portion 
 
 Freight and Cartage Outvirard, ap- 
 plicable to goods finished, ware- 
 housed, and unsold 
 
 Total Deferred Debit Items $. 
 
 "Decreases are shown in red. 
 
242 REPORTS AND STATEMENTS 
 
 CoMFASATSVE, GENERAL BALANCE Sheet — Continued 
 
 December December Increases 
 31, 19. . 31, 19. . Decreases* 
 Total Current Assets and Deferred 
 Debit Items $ $ $ 
 
 Total Assets and Deferred Debit 
 Items 
 
 Liabilities and Surplus.' 
 Capital Liabilities : 
 
 Capital Stock Authorized, Issued 
 and Outstanding $ $. 
 
 Real Estate Bond and Mortgage 
 
 Total Capital Liabilities. 
 
 Current Liabilities : 
 
 Notes and Loans Payable 
 
 Accounts Payable: 
 
 (a) To Creditors 
 
 (b) " Employees — Wages Ac- 
 
 crued 
 
 (c) " Salesmen — Salaries, Com- 
 
 missions and Expenses. 
 
 (d) " Employees — Profit Shar- 
 
 ing Scheme 
 
 (e) " Employees — Deposits for 
 
 Use of Tools 
 
 (f) " State— For Taxes 
 
 Total Current Liabilities. 
 Total Liabilities 
 
 Surplus : '' 
 
 (a) Appropriated: 
 
 For Reserves for Claims 
 against Transportation 
 
 Companies $. 
 
 For Reserves for Deprecia- 
 tion of Physical Assets 
 
 *I}ecreue> are ahown in red. 
 
343 
 
 FORMS OF STATEMENTS 
 
 Comparative General Balance Sheet — Continued 
 
 December December Increases 
 31, 19.. 31, 91.. Decreases* 
 For Possible Losses of Ac- 
 counts Receivable 
 
 Total Appropriated 
 
 (b) Available for Dividends 
 
 Total Surplus 
 
 Total Liabilities and Surplus,, 
 
 § 298. Statements of Income and Profit and Loss 
 
 Statement of Income and Profit & Loss 
 For the Year Ended December 31, 19. . 
 Sales $. 
 
 Less Returns. 
 
 Net Sales $. 
 
 Deductions from Sales: 
 
 Allowances $ 
 
 Outward Freight and Cartage 
 
 Income from Sales $. 
 
 Manufacturing Cost of Goods Sold: 
 
 Purchases of Raw Materials $ 
 
 Inward Freight and Cartage 
 
 $. 
 Add^Decrease in Inventory o,f Raw Material. . . 
 
 $• 
 
 Direct Labor 
 
 Superintendence 
 
 Factory Office Salaries 
 
 Heat, Light, and Power 
 
 Factory Supplies 
 
 'Decreases shown in reiL 
 
344 
 
 REPORTS AND STATEMENTS 
 
 Statement of Income and Profit & Loss — Continued 
 
 Factory Expense 
 
 Factory Repairs - 
 
 Depreciation of Operating Equipment 
 
 Deduct — Increase In Inventory of Goods in 
 Process 
 
 Total Manufacturing Cost 
 
 Add — Decrease in Inventory of Finished Goods 
 
 Total Manufacturing Cost of Goods Sold. 
 
 Gross Profit on Sales 
 
 Selling Expense : 
 
 Salaries of Sales Manager and Clerks 
 
 Salaries of Salesmen 
 
 Salesmen's Commissions 
 
 Traveling Expense 
 
 Advertising 
 
 Selling Profit 
 
 Administrative Expense : 
 
 Salaries of Officers 
 
 Salaries of Clerks 
 
 Stationery and Printing 
 
 Postage 
 
 Telephone and Telegraph 
 
 General Expense 
 
 Net Profit on Sales — Income from Operations . . 
 Other Income: 
 
 Income from Securities 
 
 Interest on Notes Receivable 
 
 Cash Discount on Purchases 
 
 Total Income 
 
 Deductions from Income : 
 
 Interest on Bond and Mortgage Payable 
 
 Interest on Notes Payable 
 
 Cash Discount on Sales 
 
 Insurance 
 
FORMS OF STATEMENTS 345 
 
 Statement of Income and Profit & Loss — Continued 
 
 Taxes 
 
 Net Income — Profit and Loss 
 
 Profit and Loss Credits: 
 Profit on Purchase of Consolidated Trading 
 
 Company 6% Bonds $. 
 
 Profit on Purchase of National Products Com- 
 pany 6% Bonds 
 
 Profit and Loss — Gross Surplus for the Period.. 
 Profit and Loss Charges: 
 
 Provision for Depreciation of Buildings 
 
 Provision for Contingencies 
 
 Profit and Loss for the Period 
 
 Profit and Loss Surplus at Beginning of Period. 
 
 Profit and Loss Surplus Before Deducting Dividends $. 
 
 Dividends Declared 
 
 Profit and Loss Surplus, December 31, 19. 
 
 Statement of Income and Profit and Loss 
 For the Year Ended December 31, 19. . 
 
 Income from Sales: 
 
 Gross Sales $ 
 
 Less Returns 
 
 Net Sales $• 
 
 Deductions from Sales: 
 
 Allowances to Customers: 
 
 On Sale Price $• 
 
 On Damaged Goods 
 
 Freight and Cartage Outward — on Sales 
 
 Stable and Automobile -Expense— Proportion 
 Applicable to Sales 
 
 Total Deductions from Sales. 
 
 Income from Sales *. 
 
346 REPORTS AND STATEMENTS 
 
 Statement of Income and Profit & Loss — Continued 
 Cost of Goods Sold: 
 
 Manufacturing Cost of Goods Finished During the Period : 
 Prime Cost : 
 Materials and Supplies Consumed — Including 
 
 Freight and Cartage thereon $ 
 
 Productive Labor 
 
 Total Prime Cost $ 
 
 Manufacturing Overhead : 
 
 Superintendence . •. $ 
 
 Unproductive Labor 
 
 Heat, Light, and Power 
 
 Factory Expense 
 
 Repairs and Maintenance, Machinery and 
 Tools 
 
 Total Manufacturing Overhead $ 
 
 General Factory Overhead: 
 
 Salaries and Wages — Shipping Department. . $ 
 
 Shipping Material Consumed 
 
 Shipping Department Supplies 
 
 Miscellaneous Shipping Expense 
 
 Traveling Expense — Shipping Department 
 
 Stationery and Printing Consumed by Factory 
 
 Total General Factory Overhead $ 
 
 Total Manufacturing Cost for the Period $ 
 
 Deduct — Increase of Inventory of Goods in 
 Process as between January i and Decem- 
 ber 31, 19 
 
 $ •• 
 
 Add — Decrease of Inventory of Goods in 
 Process as between January i and Decem- 
 ber 31, 19 
 
 Manufacturing Cost of Goods Finished During 
 
 the Period $ 
 
 Inventory Adjustment: 
 Deduct — Increase of Inventory of Finished 
 
FORMS OF STATEMENTS 347 
 
 Statement of Income and Profit & Loss — Continued 
 Goods as between January i and December 
 31, 19.., after deduction therefrom of the 
 value of goods distributed free, and used 
 by salesmen 
 
 Add — Decrease of Inventory of Finished Goods 
 as between January i and December 31, 
 19. ., after deduction therefrom of the value 
 of goods distributed free, and used by sales- 
 men 
 
 Manufacturing Cost of Goods Sold $. 
 
 Additional Cost — Freight, Handling and Ware- 
 housing of Raw Materials Consumed 
 
 Total Cost of Goods Sold 
 
 Gross Profit and Sales $. 
 
 Selling Expense: 
 
 Salaries of Selling Management $ 
 
 Salaries, Commissions, and Expenses of Sales- 
 men 
 
 Advertising Expense 
 
 Free Goods 
 
 Traveling Expense of Sales Manager 
 
 Premiums 
 
 Stationery and Printing Consumed by Office 
 of Sales Manager 
 
 Special Inducements to Jobbers 
 
 Salesmen's Samples used in demonstration 
 
 Sundry Expense of Sales Office 
 
 Total Selling Expense 
 
 Selling Profit $. 
 
 Administrative and General Expenses: 
 Administrative : 
 
 Office Salaries $ 
 
 General Office Expenses and Supplies 
 
 Telephone and Telegrams 
 
 Legal Expense 
 
348 REPORTS AND STATEMENTS 
 
 Statement of Income and Profit & Loss — Continued 
 
 Traveling Expense of Administrative Officers 
 
 Postage Expense 
 
 Stationery and Printing — Office 
 
 Heat and Light — Office 
 
 Miscellaneous 
 
 General : 
 
 Repairs and Maintenance of Buildings 
 
 Experimental Expense — Processes and New 
 
 Goods 
 
 Experimental Expense — Machinery. 
 
 Total Administrative and General Expense 
 
 Profit from Operations 
 
 Additions to Income: 
 
 Interest on Notes Receivable 
 
 Sundry Sales of Materials and Empty Con- 
 tainers 
 
 Discounts Gained on Creditors' Accounts 
 
 (Cash Discounts) 
 
 Interest on Bank Balances 
 
 Total Additions to Income 
 
 Total $. 
 
 Deductions from Income: 
 
 Taxes, Licenses, and Fees $ 
 
 Fire Protection 
 
 Discounts Lost on Customers' Accounts (Cash 
 
 Discounts) 
 
 Interest and Discounts — Notes Payable 
 
 Collection Fees and Other Bank Charges 
 
 Total Deductions from Income 
 
 Gross Profit and Income from Operating and Other Sources $. 
 
 Extraordinary Losses of the Period: 
 Frozen Goods $ ,, 
 
FORMS OF STATEMENTS 
 
 Statement of Income and Profit & Loss — Continued 
 
 Accounts Receivable — Uncollectible 
 
 Breakage of Carboys and Other Empty Con- 
 tainers Returnable to Shippers 
 
 349 
 
 Total Extraordinary Losses of the Period. 
 
 Net Profit for the Year Ended December 31, 19 $. 
 
 Reserved: 
 
 For Depreciation of Physical Assets $ 
 
 For Possible Losses of Accounts Receivable 
 
 Total Reserved. 
 
 Profit and Loss Surplus at December 31, 19 $. 
 
 Surplus at January i, 19 $ 
 
 Less Adjustments during the Period : 
 
 Returned Sales of prior periods, and Frozen 
 Goods sold in prior periods, the profit on 
 which figures in the surplus as established 
 at January i, 19.., including freight and 
 all expenses paid by the Company on such 
 returns • 
 
 Net Adjusted Surplus, January i, 19. 
 
 Surplus at January i, 19. . (as per Balance Sheet of this 
 Company given in the foregoing) , . . $. 
 
 § 299. Statement of Cash Receipts and Disbursements 
 
 Statement of Cash Receipts and Disbursements 
 For the Year Ended December 31, 19. . 
 Debits — Cash Received: 
 (i) From the Collection of Current Assets: 
 
 Customers' Accounts $ 
 
 Claims against Transportation Companies 
 
 Notes and Loans Receivable, and Interest 
 thereon $• • 
 
 • • •» o 
 
 (2) From the Sale of Working Assets : 
 
 Materials and Supplies Sold to Employees $. 
 
350 REPORTS AND STATEMENTS 
 
 Cash Receipts and Disbursements — Continued 
 Carboys and Empty Containers 
 
 (3) From the Incurrence of Liabilities : 
 
 Notes and Loans Payable ? 
 
 Deposits by Employees 
 
 Credit Accounts of Officers 
 
 (4) From Miscellaneous Sources: 
 
 Fire Insurance Premiums Refunded $. 
 
 Dividends on Mutual Fire Policies 
 
 Refunds by Creditors, for overpayments 
 and allowances not deductible from bills . 
 
 (5) Total Receipts for Period 
 
 (6) Balance on Hand, January i, 19 
 
 (7) Total Debits $. 
 
 Credits — Cash Disbursed: 
 (i) For Liabilities Liquidated: 
 
 To Creditors $ 
 
 " Employees — for Wages 
 
 " Banks for Loans and Notes 
 
 " Mortgagee — for Reduction of Mort- 
 gage $. 
 
 (2) To Interest on Indebtedness 
 
 (3) For Reduction of Credit Accounts of Officers 
 
 (4) For Pre-Process Cost of Goods Manufactured: 
 
 Freight and Cartage Inward and Handling Charge. 
 
 (5) For Factory Overhead Expenses: 
 
 Automobile Expense $ 
 
 Warehouse Charges and Cartage 
 
 General Expense of Factory 
 
 Miscellaneous Shipping Expense 
 
 (6) For Selling Expenses : 
 
 Salaries and Commissions of Salesmen.. $ 
 
 Advertising Expense 
 
 Special Commissions to Jobbers 
 
 (7) For General and Administration Expense : 
 
 Salaries $ 
 
FORMS OF STATEMENTS 
 
 Cash Receipts and Disbursements — Continued 
 
 Postage Expense 
 
 Telephone and Telegrams 
 
 Traveling Expense of Officers 
 
 Legal Expense 
 
 Miscelaneous Expense 
 
 351 
 
 (8) Total Cash Disbursements for Period $. 
 
 (9) Balance on Hand, December 31, 19 
 
 (10) Total Credits $• 
 
CHAPTER XXV 
 
 PREPARATION OF STATEMENTS— MANUFAC- 
 TURING CORPORATION 
 
 The object of this and the followhig chapter is to illus- 
 trate with actual figures how the different periodic state- 
 ments are made up, first for a manufacturing business and 
 then for a trading business, and to show the different 
 methods of arranging the items. A comparison of the 
 operating statements and balance sheets will indicate dif- 
 ferent methods of classification and arrangement, thus 
 indicating that there is no ideal form that could be used in 
 all cases. Accountants differ in their ideas of making state- 
 ments, though in every case the net results would be the 
 same. It will be noted that the statements of the Lake 
 Manufacturing Company are arranged in account form, the 
 debits and credits being on opposite sides ; while in the case 
 of the Bryant-Chase Company a different order obtains, the 
 debits being given first, followed immediately by the credits. 
 
 § 300. Trial Balance 
 
 The following trial balance shows the balances of the 
 various accounts of the Lake Manufacturing Company for 
 the fiscal year ending December 31, 1916: 
 
 Lake Manufacturing Company 
 Trial Balance, December 31, 1916 
 
 Cash $40,324.00 
 
 Cash Deposit for Dividend No. 11 4,100.00 
 
 Cash Deposit for Bond Interest SiOOO.oo 
 
MANUFACTURING CORPORATION 
 
 353 
 
 Land 200,000.00 
 
 Buildings 300,000.00 
 
 Machinery 200,000.00 
 
 Tools and Implements 40,430.00 
 
 Horses, Wagons, and Harness 30,000.00 
 
 Office Furniture S,2or.oo 
 
 Notes Receivable 25,812.00 
 
 Accounts Receivable 163,374.00 
 
 Sinking Fund 30,000.00 
 
 Investment of Surplus 20,000.00 
 
 Salesmen's Accounts — Advances on Salaries 1,960.00 
 
 Organization Expenses Unapportioned 14,700.00 
 
 Bond Discount Unamortized 12,000.00 
 
 Dividend No. 11, 5%, authorized July i, 1916 45,000.00 
 
 Good- Will 150,000.00 
 
 Unsubscribed Stock 100,000.00 
 
 Notes Payable $42,000.00 
 
 Accounts Payable 103,561.00 
 
 First Mortgage 5% Twenty- Year Bonds 200,000.00 
 
 Special Accounts — Officers and Clerks 15,363-00 
 
 Bond Interest Coupons Due 5,000.00 
 
 Dividend No. 11, Vouchers Outstanding.... 4,100.00 
 Reserve for Bad Debts— less $1,940 written 
 
 Oflf II2-0O 
 
 Reserve for Depreciation— Buildings, 2^/2%. 5,000.00 
 
 Reserve for Depreciation— Machinery, 6% . . 18,000.00 
 
 Reserve for Depreciation — Horses, Wagons, 
 
 etc., 10% 3,000.00 
 
 Capital Stock, 10,000 shares at $100 1,000,000.00 
 
 Sinking Fund Reserve 30,000.00 
 
 Sales, less Returns and Allowanceo 1,250,550.00 
 
 Rent of Part of Business Premises 500.00 
 
 Inventory, December 31, 1915 (.Material 
 
 $74,621 ; Finished Stock $30,000) 104,621.00 
 
 Purchases 390,000.00 
 
 Freight and Cartage Inbound 5,662.00 
 
 Labor— Factory Pay-Roils 600,400.00 
 
 Salaries of Officers and Clerical Force 75,120.00 
 
 Salaries of Salesmen 60,440.00 
 
 Advertising 50,300.00 
 
 Taxes Paid 4,020.00 
 
 Insurance 2,600.00 
 
 Bond Interest 10,000.00 
 
354 
 
 REPORTS AND STATEMENTS 
 
 Interest and Discount 6,500.00 
 
 Expenses — Stable 4,000.00 
 
 Expenses — Office, Legal, and Unclassified... 25,750.00 
 
 Maintenance — Repairs, Buildings, etc 26,942.00 
 
 Profit and Loss, 1915 Surplus 77,070.00 
 
 $2,754,256.00 $2,754,256.00 
 
 Inventories, December 31, 1916: 
 
 Finished Stock $160,560.00 
 
 Materials and Work in Process 110,000.00 
 
 Factory Pay-Rolls, Accrued but Not Paid S,7So.oo 
 
 Unexpired Insurance 912.00 
 
 Interest Accrued on Investments 1,000.00 
 
 Interest Earned on Sinking Fund 1,200.00 
 
 From the foregoing trial balance and notations, it is 
 possible to prepare a manufacturing account, a trading and 
 profit and loss account, and a balance sheet, as of December 
 31, 1916. The same reserves for depreciation are to be 
 made as at the end of the preceding year. 10% is to be 
 written off from the balance of organization expenses, and 
 5% off of bond discount. 2% of notes and accounts re- 
 ceivable is to be allowed as a provision against possible 
 losses. A further appropriation of $30,000 is to be made to 
 the sinking fund, the cash to be given to the trustee on 
 January 2, 191 7. As a final balance, the profits available 
 for distribution are to be shown as a credit balance to 
 Undivided Profits account. 
 
 Below the balance sheet proper, under the head "Contin- 
 gent Liabilities," should be noted any obligations on which 
 the company is contingently liable, such as discounted notes, 
 and similar possible obligations. Contingent liabilities in- 
 clude those on which the company is liable in a secondary 
 way, the liability on which becomes absolute only in case of 
 the failure of some one else involved to carry out his 
 obligation. 
 
MANUFACTURING CORPORATION 
 
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358 REPORTS AND STATEMENTS 
 
 § 303. Balance Sheet 
 
 Lake Manufac 
 Balance Sheet at Close of 
 
 Assets 
 
 Current Assets: 
 
 Cash on Hand $40,324.00 
 
 Notes Receivable $25,812.00 
 
 Accounts Receivable 163,374.00 189,186.00 
 
 Finished Stock 160,560.00 
 
 Materials and Work in Process 1 10,000.00 
 
 Total Current Assets $500,070.00 
 
 Special Funds: 
 Sinking Fund with Trustee, including 
 
 Earnings* $31,200.00 
 
 Surplus Fund Investments 20,000.00 
 
 Cash, Balance of Dividend No. 11 4,100.00 
 
 Cash, Deposit for Bond Interest 5,000.00 60,300.00 
 
 Fixed Assets: 
 
 Land $200,000.00 
 
 Buildings 300,000.00 
 
 Machinery 200,000.00 
 
 Tools and Implements 40,430.00 
 
 Horses, Wagons, etc 30,000.00 
 
 Office Furniture 5,201.00 
 
 Total Fixed Assets , 775,631.00 
 
 Miscellaneous Assets : 
 
 Good- Will $150,000.00 
 
 Advances to Salesmen 1,960.00 
 
 Insurance Unexpired 912.00 
 
 Interest Accrued i.coo.oo 
 
 Bond Discount Unamortized 11,400.00 
 
 Organization Expenses Unapportioned 13,230.00 178,502.00 
 
 $1,514,503.00 
 
 •Another deposit of $30,000 due January ^, 1917. 
 
MANUFACTURING CORPORATION 359 
 
 TURING Company 
 
 Business, December 31, 1916* 
 
 Liabilities and Capital 
 Current Liabilities : 
 
 Notes Payable $42,000.00 
 
 Accounts Payable 103,561.00 $145,561.00 
 
 Special Accounts: 
 
 Officers and Clerks iS.363-oo 
 
 Bond Interest Coupons Due 5,000.00 
 
 Dividend No. 11, Vouchers Outstanding 4,100.00 
 
 Wages Accrued, Factory Pay- Roll 5,750.oo 
 
 Total Current Liabilities $175,774.00 
 
 Fixed Liabilities : 
 
 First Mortgage 5% Twenty- Year Bonds 200,000.00 
 
 Reserve Accounts : 
 
 For Sinking Fund $60,000.00 
 
 Interest Earned on above 1,200.00 
 
 For Bad Debts 3,896.00 
 
 For Depreciation of : 
 
 Buildings 12,500.00 
 
 Machinery 30,000.00 
 
 Horses, Wagons, etc 6,000.00 1 13,596.00 
 
 Total Liabilities '■ $489,370.00 
 
 Capital and Profits : 
 
 Capital Stock $1,000,000.00 
 
 Less Stock Unsubscribed 100,000.00 
 
 Stock Outstanding $900,000.00 
 
 Surplus from last year 77,070.00 
 
 Undivided Profits for 1916 48,063.00 
 
 Net Worth of Company 1,025,133.00 
 
 $1,514,503.00 
 
360 REPORTS AND STATEMENTS 
 
 § 304. Closing Entries in Journal 
 
 The following journal entries are required to adjust and 
 close the various ledger accounts of the Lake Manufacturing 
 Company which have been affected by the business opera- 
 tions of the year. Two divisions of the nominal accounts 
 are made — the Manufacturing account, and the Trading 
 and Profit and Loss account in which the various accounts 
 are summarized. 
 
 December 31, 1916 
 
 Manufacturing Account $1,076,433 
 
 To Inventory of Material, January 
 
 I, 1916 $74,621 
 
 " Purchases 390,000 
 
 " Freight and Cartage 5,662 
 
 " Labor — Factory Pay-Roils 600,400 
 
 " Labor — Accrued 5.750 
 
 To establish the Manufacturing account 
 by transferring the above accounts 
 thereto. 
 
 Materials and Work in Process, December 
 
 31, 1916 $110,000 
 
 To Manufacturing Account $110,000 
 
 To enter inventory of material and work 
 in process on the accounts stated, in 
 order to determine prime cost of goods 
 used. 
 
 Manufacturing Account $52,150 
 
 To Maintenance Charges $26,942 
 
 " Taxes 4,020 
 
 " Insurance 1,688 
 
 " Reserve for Depreciation of 
 
 Buildings 7,500 
 
 " Reserve for Depreciation of 
 
 Machinery I2,ooo 
 
MANUFACTURING CORPORATION -61 
 
 To close the above manufacturing costs 
 into Manufacturing account. (The 
 unexpired insurance is entered di- 
 rectly to the account and not posted 
 through the journal.) 
 
 Trading and Profit and Loss Account $1,048,583 
 
 To Inventory of Finished Stock, 
 
 January i, 1916 $30,000 
 
 " Manufacturing Account 1,018,583 
 
 To establish the Trading and Profit and 
 Loss account by transferring thereto 
 the inventory of finished goods on 
 hand at the beginning of the year, 
 and the manufactured output for 
 1916. 
 
 Sales, Net $1,250,550 
 
 Inventory of Finished Stock, December 31, 
 
 1916 160,560 
 
 To Trading and Profit and Loss 
 
 Account $1,411,110 
 
 To close Sales account into Trading 
 account and to establish inventory of 
 finished goods as at the end of the 
 year. 
 
 Trading and Profit and Loss account $117,740 
 
 To Salaries of Salesmen $60,440 
 
 " Reserve for Depreciation of 
 
 Horses, Wagons, etc 3,ooo 
 
 " Stable Expenses 4,000 
 
 " Advertising 50,300 
 
 To close the various selling expenses 
 into Profit and Loss account. 
 
 Trading and Profit and Loss account $123,224 
 
 To Salaries— Office $7S.i20 
 
 " Bond Interest 10,000 
 
362 
 
 REPORTS AND STATEMENTS 
 
 To Interest and Discount 6,500 
 
 " Expenses — Office, Legal and Un- 
 classified 25,750 
 
 " Reserve for Bad Debts 3,784 
 
 " Organization Expenses 1,47° 
 
 " Bond Discount 600 
 
 To close the above general administra- 
 tion charges into Profit and Loss, and 
 to write off 2% for bad debts, 10% 
 for organization expenses, and 5% for 
 bond discount. 
 
 Sublease of Premises $500 
 
 Interest Accrued on Investments 1,000 
 
 To Profit and Loss $1.5°° 
 
 To close miscellaneous income accounts 
 into Profit and Loss. 
 
 Trading and Profit and Loss $123,063 
 
 To Undivided Profits $123/363 
 
 To close Profit and Loss account and 
 transfer the net profit of $123,063 to 
 the Undivided Profits account. 
 
 Undivided Profits $75,ooo 
 
 To Dividend No. 11, July i, 1916... $45,ooo 
 
 " Sinking Fund Reserve 30,000 
 
 To close interim dividend account and 
 to appropriate $30,000 to the sinking 
 fund reserve. 
 
 This completes the closing entries. It is apparent that, 
 instead of grouping the items as shown, further subdivisions 
 could have been made. More detailed explanations of the 
 journal entries might be advantageous, but it v^^ill be seen 
 that certain explanations are made in the statements them- 
 selves as an aid to a clearer understanding of them. Bad 
 debts written off during the year, amounting to $1,940, 
 
MANUFACTURING CORPORATION 363 
 
 were charged directly to the Reserve for Bad Debts account 
 established at the close of 191 5. 
 
 § 305. Comments on Closing of Lake Manufacturing Com- 
 pany's Books 
 
 The balance sheet exhibits the various assets and liabili- 
 ties of the company, conveniently grouped and classified. 
 The various reserves are placed among the liabilities as 
 negatives to the corresponding assets. They are frequently 
 placed on the debit side as deductions from the assets. The 
 sinking fund reserve is an exception, since it remains on the 
 credit side as profits which eventually revert to surplus. 
 The balance sheet should be prepared so as to exhibit the 
 affairs of the company in a clear, unmistakable way, the 
 form being varied to meet the needs of the particular 
 business. 
 
 The year's operating results are set forth in the Manu- 
 facturing account and the Trading and Profit and Loss ac- 
 count. The first statement exhibits the manufacturing 
 output for the year after allowing for work in process. The 
 balance is carried to the profit and loss statement as the cost 
 of finished stock. The Profit and Loss account includes the 
 income from other sources, also the various selHng and 
 administrative expenses and the resultant net profit. 
 
 The Undivided Profits account contains the profits of the 
 year remaining unapportioned and available for dividends. 
 
 It is apparent that the Lake Manufacturing Company 
 does not have a complete cost system. If it had, the book 
 inventory of material, work in process, and finished stock 
 would be available. As the matter stands, physical inven- 
 tories have to be taken in order to determine these values. 
 
 Bond interest coupons are payable January i, 19 17, and 
 $5,000 has already been deposited with the fiscal agent for 
 their pa)Tiient. A like amount has been charged against 
 
3^4 
 
 REPORTS AND STATEMENTS 
 
 Profit and Loss and credited to Bond Coupons Due. Coun- 
 teracting entries are required as the coupons are paid and 
 turned over to the company. 
 
 When the semiannual dividend of $45,000 was declared, 
 a charge was made to Dividend account and a credit to 
 Dividends Payable. When the voucher checks were issued. 
 Dividends Payable account was debited and Dividend 
 Vouchers credited ; cash entries not haviiig been made until 
 the vouchers were returned from the bank. As a result, the 
 dividend vouchers still unpaid are clearly shown, which in 
 this case amount to $4,100. 
 
 Allowance has been made for depreciation of properties 
 and for possible losses on bad debts. The sinking fund 
 trustee already has $31,200 in his possession, this including 
 $1,200 of accumulated interest. Another appropriation of 
 $30,000 must be turned over to the trustee on January 2, 
 191 7, the Sinking Fund Reserve account already having 
 been credited with this amount. 
 
 Surplus profits for the year, amounting to $48,063, still 
 remain on hand, after deducting the sinking fund reserve 
 and the interim dividend of July i. Another semiannual 
 dividend will no doubt be declared, resulting in a further 
 decrease of $45,000. Surplus funds, amounting to $20,000, 
 have been set aside and invested in securities to be available 
 when necessity arises. 
 
 Ample deductions have been made from organization 
 expenses and from bond discount, both being amortized over 
 a term of years. 
 
 Among the assets the special funds amount to $60,300. 
 These are appropriated for special purposes and set apart to 
 distinguish them from other available funds of the business. 
 
CHAPTER XXVI 
 
 PREPARATION OF STATEMENTS— TRADING 
 CORPORATION 
 
 § 306. Trial Balance 
 
 The following trial balance of the Bryant-Chase Com- 
 pany, dealers in general merchandise, is as of December 31, 
 1916: 
 
 Bryant-Chase Company 
 . Trial Balance, December 31, 1916 
 
 Cash $17,800.00 
 
 Notes Receivable 28,520.00 
 
 Accounts Receivable 93,410.00 
 
 Stock Subscriptions 50,000.00 
 
 Investments 30,000.00 
 
 Treasury Stock 30,000.00 
 
 Real Estate, Buildings, and Machinery 210,000.00 
 
 Furniture and Fixtures 34,600.00 
 
 Delivery Equipment 14,500.00 
 
 Consigned Goods to Agent, Not Sold 2,800.00 
 
 Charges on Consigned Goods Not Sold 80.00 
 
 Notes Payable $38,800.00 
 
 Accounts Payable 66,550.00 
 
 Reserve for Depreciation 3,140.00 
 
 Reserve for Bad Debts 2,100.00 
 
 Capital Stock Outstanding 250,000.00 
 
 Capital Stock Subscribed 50,000.00 
 
 Working Capital Donated 30,000.00 
 
 Sales 390,000.00 
 
 Goods Consigned to Agents, at Cost 14,600.00 
 
 Subrent of Warehouse 450.00 
 
 Profit on Sale of City Property 1,250.00 
 
 Profit on Consignment Sales 2,340.00 
 
 Interest on Investments 200.00 
 
 Discount on Purchases 1,990.00 
 
 Rebates and Allowances on Purchases I,I30.0(; 
 
 365 
 
366 REPORTS AND STATEMENTS 
 
 Trial Balance — Continued 
 
 Freight Inbound 31,150.00 
 
 Rebates and Allowances on Sales 1,580.00 
 
 Inventory, December 31, 1915 86,000.00 
 
 Purchases 210,000.00 
 
 Wages to Clerks and Packers 16,600.00 
 
 Salaries to Officers and Office Help 8,400.00 
 
 Salaries and Expenses of Salesmen 8,890.00 
 
 Office Expenses 4,600.00 
 
 General Expenses 3,400.00 
 
 Stable and Delivery Expenses 2,300.00 
 
 Rent of Warehouse 2,500.00 
 
 Commissions Paid 2,800.00 
 
 Discount on Sales 3,460.00 
 
 Freight Outbound 1,840.00 
 
 Cartage 350.00 
 
 Warehouse Expenses 630.00 
 
 Light and Heat 540.00 
 
 Repairs 1,120.00 
 
 Interest on Bank Charges 290.00 
 
 Interest on Cancelled Mortgage 100.00 
 
 Insurance and Taxes 320.OO 
 
 Donations 230.00 
 
 Bad Debts Written Off 2,050.00 
 
 Loss on Sale of Securities 320.00 
 
 Undivided Profits on December 31, 1915 20,630.00 
 
 $873,180.00 $873,180.00 
 
 At this time, allow $3,000 additional as a reserve for 
 bad debts, and $10,660 additional as a reserve for deprecia- 
 tion. Salaries are overpaid by $200. Accrued interest on 
 investments, $850. The directors have, December 31, 19 16, 
 declared a dividend of 20% (dividend No. 2) on the out- 
 standing capital stock, payable January 25, 19 17. 
 
 In closing the books the follovsring statements are re- 
 ijuired : 
 
 1. Trading and profit and loss statement for the year. 
 
 2. Balance sheet drawn up in suitable grouping. 
 
 3. Percentage statement based on the net sales. 
 
TRADING CORPORATION 367 
 
 § 307. Trading and Profit and Loss Statement 
 
 Bryant-Chase Company 
 Trading and Profit & Loss Statement 
 For Year Ended December 31, 1916 
 
 Earnings 
 
 Gross Sales $390,000.00 
 
 Less Allowances and Rebates 1,580.00 $388,420.00 
 
 Inventory, January I, 1916 $86,000.00 
 
 Purchases $210,000.00 
 
 Freight Inward 3,150.00 
 
 $213,150.00 
 Less Allowances and Rebates 1,130.0a 
 
 $212,020.00 
 Less Goods Consigned to Agents, at 
 
 cost 14,600.00 197,420.00 
 
 $283,420.00 
 Less Inventory, December 31, 1916 54,000.00 
 
 Cost of Goods Sold 229,420.00 
 
 Gross Profit on Trading $159,000.00 
 
 Discount on Purchases $1,990.00 
 
 Subrent of Warehouse 450.00 
 
 Profit on Consigned Goods 2,340.00 4,780.00 
 
 Gross Business Profit $163,780.00 
 
 Expenditures 
 Selling Expenses : 
 Salaries and Expenses of Salesmen $8,890.00 
 
 Wages to Clerks and Packers 16,600.00 
 
 Commissions 2,800.00 
 
 Discount on Sales 3>46o.oo 
 
 Warehouse Rent 2,500.00 
 
 Warehouse Expenses 630.00 
 
 Stable and Delivery Expenses 2,300.00 
 
 Freight Outward 1,840.00 $39,020.00 
 
368 REPORTS AND STATEMENTS 
 
 Trading and Profit & Loss Statement — Continued 
 General and Administrative Expenses : 
 
 Cartage $350.00 
 
 Salaries — Office 8,200.00 
 
 Repairs 1,120.00 
 
 Interest on Bank Charges 290.00 
 
 Interest on Cancelled Mortgage.... 100.00 
 
 Insurance and Taxes 320.00 
 
 Donations 230.00 
 
 Office Expense 4,600.00 
 
 General Expense 3,400.00 
 
 Light and Heat 540.00 
 
 Reserve for Bad Debts..... 3,000.00 
 
 Reserve for Depreciation 10,660.00 32,810.00 
 
 Total Expenses 71,830.00 
 
 Net Profit of Business for Year. $91,950.00 
 
 Other Profit and Loss Items: 
 
 Profit on Sale of City Property $1,250.00 
 
 Interest on Investments 200.00 
 
 Interest on Investments, Accrued. . . . 850.00 
 
 $2,300.00 
 Deduct : 
 Loss on Sale of Securities 320.00 
 
 Profit Outside of Business 1,980.00 
 
 Net Profit for Year 1916 $93,930.00 
 
 § 308. Balance Sheet 
 
 Bryant-Chase Company 
 Balance Sheet, as of December 31, 1916 
 
 Current Assets: Assets 
 
 Cash $17,800.00 
 
 Notes Receivable 28,520.00 
 
 Salaries Overpaid 200.00 $46,520.00 
 
 Accounts Receivable $93,410.00 
 
 I.ess Reserve for Bad Debts 3,050.00 90,360.00 
 
 $136,880.00 
 
TRADING CORPORATION 369 
 
 Balance Sheet — Continued 
 Investments : 
 
 Stocks and Bonds of Other Companies 30,000.00 
 
 Inventories : 
 
 Merchandise $54,000.00 
 
 Goods in Hands of Agents, including Freight 
 Charges 2,880.00 56,880.00 
 
 Accrued Items: 
 
 Accrued Interest on Investments 850.00 
 
 Subscriptions , to Stock 50,000.00 
 
 Treasury Stock 30,000.00 
 
 Fixed Assets: 
 
 Real Estate, Buildings, and Machinery $210,000.00 
 
 Furniture and Fixtures 34,600.00 
 
 Delivery Equipment 14,500.00 
 
 $259,100.00 
 Less Reserve for Depreciation 13,800.00 245,300.00 
 
 Total Assets $549,910.00 
 
 Liabilities and Capital 
 
 Current Liabilities : 
 
 Notes Payable $38,800.00 
 
 Accounts Payable 66,550.00 
 
 Dividend No. 2, payable January 25, 1917 50,000.00 $ISS.350.00 
 
 Capital and Undivided Profits: 
 
 Capital Stock Outstanding $250,000.00 
 
 Capital Stock Subscribed 50,000.00 
 
 Working Capital Donated 30,000.00 
 
 Undivided Profits, December 31, 
 
 191S 20,630.00 
 
 Net Profit for 1916. 93,930-00 $444,S6o.OO 
 
 Less Dividend No. 2, payable Jan- 
 uary 25, 1917 50,000.00 
 
 Company's Net Worth 394,560.00 
 
 Total Liabilities and Capital $549,910.00 
 
37° 
 
 REPORTS AND STATEMENTS 
 
 Statement of Percentages 
 For Year Ended December 31, 1916 
 Based on Net Sales 
 
 Net Sales $388,420.00 equals 100% 
 
 Gross Profit and Trading 159,000.00 
 
 Other Income and Profits 6,760.00 
 
 Net Profit 93,930.00 
 
 Cost of Sales 229,420.00 
 
 Selling Expenses 39,020.00 
 
 General and Administrative Expenses.... 32,810.00 
 
 40.935% 
 1.740% 
 24.182% 
 59-065% 
 10.046% 
 8.447% 
 
 § 309. Closing Journal Entries 
 
 The following entries are made on the assumption that 
 a trading or merchandise account is in use and that the be- 
 ginning and closing inventories were entered therein without 
 journal entries. Instead of posting the totals of the groups 
 to the Trading or Profit and Loss account, it is better to 
 carry the separate amounts. In this way the various items 
 are shown in the Trading account and in the Profit and Loss 
 account, making it easier to compile therefrom the trading 
 and profit and loss statements. 
 
 Sales Account $390,000 
 
 Discount on Purchases 1,990 
 
 Subrent of Warehouse 450 
 
 Profit on Consigned Goods 2,340 
 
 Goods Consigned to Agents 14,600 
 
 Rebates and Allowances on Purchases.... 1,130 
 
 To Trading Account $410,510 
 
 To close above accounts into Trading 
 account. 
 
 Trading Account $214,730 
 
 To Purchases $210,000 
 
 " Freight Inward 3,150 
 
 " Allowances and Rebates on Sales 1,580 
 
 To close above accounts into Trading 
 account. 
 
TRADING CORPORATION 
 
 371 
 
 Trading Account $163,780 
 
 To Profit and Loss $163,780 
 
 To close gross trading profit into Profit 
 and Loss account. 
 
 Profit and Loss $39,020 
 
 To Salaries and Expenses of Sales- 
 men $8,890 
 
 " Wages to Clerks and Packers... 16,600 
 
 " Commissions 2,800 
 
 " Discount on Sales 3>46o 
 
 " Warehouse Rent 2,500 
 
 " Warehouse Expenses 630 
 
 " Stable and Delivery Expenses. . . 2,300 
 
 " Freight Outward 1,840 
 
 To close the above selling expenses into 
 Profit and Loss account. 
 
 Profit and Loss $32,810 
 
 To Cartage $35° 
 
 " Salaries — Office 8,200 
 
 " Repairs r,i20 
 
 " Interest on Bank Charges 290 
 
 " Interest on Cancelled Mortgage 100 
 
 "' Insurance and Taxes 320 
 
 " Donations 230 
 
 " Office Expense 4,600 
 
 " General Expense 3.40O 
 
 ' Light and Heat 540 
 
 ' Reserve for Bad Debts 3,000 
 
 " Reserve for Depreciation 10,660 
 
 To close the above general and admin- 
 istrative expenses into Profit and Loss 
 account. 
 
 Interest Accrued on Investments $850 
 
 To Interest on Investments $850 
 
 To record accrued- interest on invest- 
 ments. 
 
272 REPORTS AND STATEMENTS 
 
 City Property $1,250 
 
 Interest on Investments 1,050 
 
 To Profit and Loss $2,300 
 
 To close the above profits into Profit 
 and Loss account. 
 
 Profit and Loss $320 
 
 To Securities $320 
 
 For loss on sale of securities closed into 
 Profit and Loss account. 
 
 Profit and Loss $93,930 
 
 To Undivided Profits $93,930 
 
 To close net profit for year into Undi- 
 vided Profits account, adding it to the 
 former balance of $20,630. 
 
 Undivided Profits $50,000 
 
 To Dividend No. 2 $50,000 
 
 To record Dividend No. 2 declared by 
 the board of directors December 31, 
 1916, being 20% of the outstanding 
 capital stock. 
 
 There are, of course, variations of these journal entries 
 that under other conditions may be preferable. The ar- 
 rangement and allocation of items in the trading and profit 
 and loss statement might, and frequently would, be changed. 
 The final net profit is practically the same in every case. 
 
 § 310. Comments on Closing of Bryant-Chase Company's 
 Books 
 
 The manner of closing the books for a trading corpora- 
 tion does not dififer from that of the manufacturing cor- 
 poration. 
 
 Attention is called to the accounts peculiar to corpora- 
 tions, such as subscriptions to Stock, Treasury Stock, Capi- 
 tal Stock, Capital Stock Subscribed, and Working Capital 
 
TRADING CORPORATION 
 
 373 
 
 Donated. These are discussed in detail in Chapter VI, 
 "Distinctive Corporate Accounts." 
 
 It will be seen that the form of statement differs slightly 
 from that of the Lake Manufacturing Company, preceding. 
 This form is used very extensively by large corporations, 
 and has met with general approval from accountants. 
 
 The balance sheet shows a different division of items 
 from that of the Lake Manufacturing Company, simply to 
 indicate the variation in arrangement frequently found in 
 practice. There is no one form that is considered better 
 than all others. 
 
 The dividend is deducted from profits and credited to 
 Dividend account, but this is shown only in the balance 
 sheet ; it differs slightly from the preceding form. The divi- 
 dend is not yet payable, but when due the required entries 
 will be made. The percentage statement is brief but shows 
 the manner of setting forth such information. It may be 
 elaborated and extended in any way thought desirable. It 
 is of inestimable value in presenting information pertaining 
 to the rise and fall of results in comparison with previous 
 years. 
 
CHAPTER XXVII 
 CORPORATE REPORTS 
 
 § 311. Special Reports 
 
 In the preceding chapters the discussion has been devoted 
 to the reports and statements as rendered by the accounting 
 department to the corporate officials. In this chapter an 
 attempt will be made to treat briefly the reports as rendered 
 by the officials and the directors to the stockholders, to the 
 public, and to governmental bodies. The scope and content 
 of the reports as outlined are necessarily suggestive but 
 cover in general practically all the important points which 
 they usually take up. 
 
 § 312. Reports to Stockholders 
 
 At the annual meeting, it is customary for the directors 
 to give an account of their stewardship for the preceding 
 year, through reports presented by their elected officers. 
 The character of such reports depends upon the size of the 
 company, the nature of the business, and the amount of 
 information which it is wise to disclose. It is obvious that in 
 a small corporation, where the stockholders are in close 
 touch with the management and the business, a report, if 
 made at all, would be merely a brief recital of facts. But in 
 the case of large industrial and public service corporations 
 where the stock is in many hands, it is the practice to 
 prepare an exhaustive annual report which is printed and 
 distributed to the stockholders. 
 
 Special reports from officers and committees may be 
 called for at any meeting of stockholders. 
 
 374 
 
CORPORATE REPORTS 375 
 
 § 313. Reports of Officers and Committees 
 
 The following reports may be required at the annual 
 meeting, though it is seldom that all of them will be called 
 for at any one meeting. 
 
 1. Committee Reports. Under this head come the re- 
 ports of the various standing committees authorized to take 
 charge of certain parts of the business, as the "Executive 
 Committee" and the "Finance Committee," and of any 
 special committees appointed to act on certain questions or 
 in certain matters. 
 
 2. Auditor's Report. This report is usually merged 
 into, and becomes part of, the president's or treasurer's 
 report, as its details might well appear in either of these 
 other reports. All accounts and balance sheet items are, in 
 the larger corporations, audited and passed upon by a pro- 
 fessional accountant before they are published or presented 
 to the annual meeting. 
 
 3. General Manager's Report. Gives a detailed review 
 of the general manager's conduct of the business during the 
 year. This report is generally transmitted to the president 
 and through him to the stockholders, either as part of the 
 president's report or in separate form. It is frequently 
 known as the superintendent's report. 
 
 4. Treasurer's Report. Contains usually a cash state- 
 ment for the year, statement of earnings and expenses, a 
 general balance sheet, etc. The treasurer's report is fre- 
 quently incorporated in the president's report. 
 
 5. President's Report. Reviews the business of the pre- 
 ceding year and sets forth the plans proposed for the coming 
 year. This report usually includes a statement of the gross 
 business done, the net earnings, improvements made, condi- 
 tion of the finances, and the company's property generally, 
 and any other items of interest not covered by other re- 
 ports- 
 
376 REPORTS AND STATEMENTS 
 
 § 314. Committee Reports 
 
 In the larger corporations there are usually one or more 
 standing committees appointed from the board of directors, 
 such as the executive committee which exercises the general 
 authority of the board in the interim between its meetings, 
 and the finance committee which has general supervision of 
 the financial affairs of the company. The standing commit- 
 tees do not usually report to the stockholders, their reports 
 being made to the board of directors and the matters under 
 their supervision being usually covered by the president's 
 and the treasurer's reports respectively. 
 
 Special committees of stockholders are frequently ap- 
 pointed in both large and small corporations. The duties of 
 these special committees are to investigate and report or act 
 upon a special matter assigned them. Where such matters 
 are important or urgent, special meetings of the stock- 
 holders might be called to hear their reports ; but otherwise 
 these committees would report to the stockholders at the 
 annual meeting. 
 
 There is no special form for committee reports. A clear 
 statement of what they have accomplished, addressed to the 
 stockholders or the directors as the case may be, and signed 
 by the members of the committee or by the chairman for the 
 committee, is all that is required. 
 
 § 315. Auditor's Report 
 
 The by-laws of a corporation frequently make provision 
 for periodical audits by professional accountants. In some 
 cases auditing committees are appointed by the stockholders 
 or the board of directors to pass upon the books and ac- 
 counts of the corporation, either independently or in con- 
 junction with professional auditors. In no case, however, 
 should an audit made by a committee of stockholders or 
 directors, be considered an audit in the true sense of the 
 
CORPORATE REPORTS 377 
 
 word. An effective audit requires an examination of the 
 books of account, of the cash, securities, inventory, calcula- 
 tions, etc. ; and this necessitates expert work of an accu- 
 rate, painstaking nature, which can be given only by a 
 professional auditor. 
 
 A monthly or quarterly audit or inspection of the 
 accounts by a committee of directors is often made and is to 
 be strongly commended; but the directors are not likely to 
 take the time, or give the effort, or possess the expert knowl- 
 edge necessary for a really effective audit. Besides this, 
 they cannot always be depended upon to expose or to disap- 
 prove of questionable occurrences which have taken place 
 during their period of office and perhaps with their knowl- 
 edge and concurrence, and it is quite apparent that such 
 audits are not to be given the same weight as would be given 
 the audit of a public accountant. 
 
 A complete audit should review all of the business opera- 
 tions of the year ; but, since in many cases this requires more 
 time and expense than is thought expedient, an audit is 
 sometimes made in which the examination is restricted to 
 the more important items and accounts. In such cases sum- 
 maries are compiled, results proved, certain entries vouched, 
 cash inspected, bank balances proved, and perhaps an in- 
 spection made of certain items or block of entries through- 
 out the period under review. While a partial audit of this 
 kind is not thoroughly satisfactory, it is frequently deemed 
 sufficient by the corporate officials. In making either a par- 
 tial or a complete audit, the auditor is expected' to see that 
 the books present the true condition of the corporate busi- 
 ness ; and that the profit and loss statement and balance sheet 
 taken therefrom exhibit, properly arranged, the true results 
 of business operations for the period under review. The 
 auditor is, as a rule, engaged by the directors and reports 
 to them, though not infrequently he is employed by the 
 
378 
 
 REPORTS AND STATEMENTS 
 
 stockholders, in which case his report would, of course, go 
 to the stockholders. In either case his report must be un- 
 biased and prepared for the benefit of all concerned. As 
 stated, the auditor's report is frequently utilized for, and 
 more or less completely incorporated in, the reports of the 
 president and the treasurer. 
 
 The audit report for a large corporation may include the 
 following : 
 
 1. Statement of earnings and operating expenses. This 
 is frequently made in comparative form to show the varia- 
 tion of current income and expenses from those of previous 
 years. 
 
 2. Balance sheet. This shows the assets and liabilities 
 of the company properly classified, on the date of closing. 
 It also is frequently given in comparative form. 
 
 3. Schedules and statements. These give the support- 
 ing details and analysis of the results given in the balance 
 sheet and the statement of earnings and operating expenses. 
 
 4. Percentage exhibit. By this exhibit in comparative 
 form, the income, and the operating and administrative 
 expenses based on the sales are shown in comparative form. 
 Such comparisons of amounts can be most readily made by 
 means of percentages. 
 
 5. Auditor's certificate. This is a brief certificate cer- 
 tifying to the accuracy of the exhibits and statements. 
 
 6. Auditor's general report or letter of explanation. , 
 This may be very brief or considerably extended, as the 
 occasion demands. It may contain suggestions or recom- 
 mendations pertaining to the books and accounts if such are 
 deemed advisable or necessary.* 
 
 In some cases the auditor's report is merely a certificate 
 of the correctness of the books and accounts, or of the 
 
 *For an exhaustive discussion of audits, see "Auditing — ^Theory and Practice" 
 by Robert H. Montgomery. 
 
CORPORATE REPORTS 
 
 379 
 
 financial statement made to the stockholders, given after an 
 examination of the books. Of this general character is the 
 auditor's certificate which appears in connection with the 
 annual report to stockholders of the United States Steel 
 Corporation. This certificate is as follows : 
 
 Certificate of Auditors 
 
 New York, March 8, 1916. 
 To THE Stockholders of the United States Steel Corporation: 
 
 We have examined the books of the U. S. Steel Corporation and 
 Subsidiary Companies for the year ending December 31, 1915, and 
 certify that the Balance Sheet at that date and the Relative Income 
 Account are correctly prepared therefrom. 
 
 During the year only actual additions and extensions have been 
 charged to Property Account, and the provision made for depreciation 
 and extinguishment is, in our opinion, fair and reasonable. The item 
 of Deferred Charges represents expenditures reasonably and properly 
 carried forward to operations in subsequent years. 
 
 The valuation of stocks on hand, as shown by inventories certified 
 by the responsible officials, have been carefully and accurately made 
 at approximate cost. Full provision has been made for bad and 
 doubtful accounts receivable and for all ascertainable liabilities. 
 
 We have verified the cash and securities by actual inspection or 
 by certificates from the Depositaries, and are of opinion that the 
 Marketable Bonds and Stocks included in Current Assets are worth 
 the value at which they are stated in the Balance Sheet. 
 
 We certify that in our opinion the Balance Sheet is properly 
 drawn up so as to show the financial position of the Corporation and 
 Subsidiary Companies on December 31, 1915, and the Relative Income 
 Account is a fair and correct statement of the net earnings for the 
 fiscal year ending at that date. 
 
 PricEj Waterhouse & Co. 
 
 § 316. General Manager's Report 
 
 The general manager's or superintendent's report will 
 give the important details of his work for the preceding 
 year. It is but seldom that such a report is made direct to 
 the stockholders. The usual course is for the manager or 
 superintendent to hand his report to the president, who may 
 
380 REPORTS AND STATEMENTS 
 
 incorporate it bodily in his report or make such extracts 
 from it as he thinks will be of interest to the stockholders of 
 the company. 
 
 § 317. Treasurer's Report 
 
 In many corporations the treasurer makes no inde- 
 pendent report, the president's report covering the general 
 afifairs and conditions of the corporation together with its 
 finances and plans for the future. This is true, for instance, 
 of the United States Steel Corporation, where but one 
 formal report — that of the chairman of the board — is made 
 to the stockholders. In perhaps the majority of cases, how- 
 ever, the treasurer makes his own report to the stockholders, 
 covering in it such details of the financial affairs of the 
 corporation as the directors deem it expedient for the 
 stockholders to know; or, to express it otherwise, all such 
 financial details as will be of interest to the stockholders, 
 the publication of which will not result in injury to the 
 company's business. 
 
 Where but one formal report is made to the stock- 
 holders and this report is made by the president, the treas- 
 urer or the treasurer's department will, of course, supply 
 the president with material for the financial portion of his 
 statement. In any case, the two officials should work in 
 sufficiently close touch to prevent any serious overlapping 
 of their reports. 
 
 The treasurer's report may be informal, merely giving 
 the general results of the year's work ; or it may be a more 
 or less detailed statement of the company's financial condi- 
 tion, or may take the form of a complete balance sheet and 
 profit and loss statement. The following from the annual 
 report of the United Fruit Company shows the treasurer's 
 introduction to the detailed exhibits, thus giving an idea as 
 to the scope of the complete report, 
 
CORPORATE REPORTS 381 
 
 Treasurer's Report 
 
 To THE President and Board of Directors 
 OF THE United Fruit Company : 
 I hand you herewith statements covering the operations of the 
 company for the fiscal year ended September 30, 1915, together with 
 reports showing its financial condition on that date, viz. : 
 Income Account 
 Balance Sheet 
 
 Cost of Plantations and Equipment 
 Live Stock 
 
 Area of Owned and Leased Lands 
 Area of Cultivations 
 Railways 
 
 Steamship Service 
 Insurance Fund 
 
 Charles A. Hubbard, 
 
 Treasurer 
 Boston, December 3, 1915. 
 
 § 318. President's Report 
 
 The president's report is usually the most important of 
 those made to the stockholders at the annual meeting. In 
 many cases it is the only formal report. Its contents will 
 vary with the conditions. Where it is the only report, it 
 will cover both the general and financial conditions of the 
 company, as well as any special conditions that are of 
 interest to the stockholders. 
 
 The following report is brief but satisfactory. It 
 prefaces a formal balance sheet and income report, and with 
 these constitutes the entire annual report to the stock- 
 holders. 
 
 To THE Stockholders of the 
 
 American Coal Products Company: 
 
 The Directors herewith submit for the information of the Stock- 
 holders the following financial statements covering the fiscal year 
 ended December 31, 191S : 
 
 Against operations for the year 1915 we have written off a suf- 
 ficient proportion of the cost of our new plants to bring their capital- 
 
382 REPORTS AND STATEMENTS 
 
 ization down to a peace basis. We also instructed all of our subsid- 
 iary companies, in making their returns for the year, to charge off 
 doubtful items. 
 
 Upon our regular profit-sharing plans and special compensation 
 to all of our wage earners we have provided out of the earnings of the 
 year for the distribution of approximately $550,000, partly in cash and 
 partly in stock. Every employee of the Company has received some 
 definite benefit from its prosperity. 
 
 After deducting the above items the net profit for the year 
 amounts to $2,902,236.30 
 
 Deducting 7% cash dividends on Preferred Stock... 175,000.00 
 
 Leaves $2,727,236.30 
 
 This has been apportioned by the Directors as 
 follows : 
 
 Dividends on Common Stock : 
 
 In Cash, 7% $761,932.50 
 
 In Common Stock, 5% 538,000.00 
 
 Reserves 420,000.00 
 
 Surplus 1,007,303.80 $2,727,236.30 
 
 The excess of current assets over current liabili- 
 ties has increased during the year by $31389,727.31 
 
 and now stands at $8,245,776.93 
 
 The $2,000,000 of notes outstanding a year ago have been paid by 
 an issue of approximately the same amount of Preferred Stock. The 
 Company has now no obligations at any bank, and $900,000 in market- 
 able securities in excess of ordinary needs. 
 
 The name of the American Coal Products Company has been 
 changed to "The Barrett Company" with a similar amount of stock as 
 the American Coal Products Company, and stock certificates are to be 
 exchanged, share for share, in the immediate future, notice of which 
 will be sent to the stockholders shortly. 
 
 Appended hereto are Consolidated Income Account for the yeal 
 1915 and Comparative Consolidated Balance Sheet as at December 31, 
 igiS and 1914.* 
 
 William Hamlin Childs, 
 
 President 
 
 March i, 1916 
 
 The only formal report presented at the annual meeting 
 of the stockholders of the United States Steel Corporation is 
 
 *These statements have tjeen omitted. 
 
CORPORATE REPORTS 
 
 383 
 
 a report from the board of directors signed by the chair- 
 man of the board. This corresponds to the president's 
 report in other corporations. The report is very compre- 
 hensive, covering everything of interest to the stockholders 
 that may properly be disclosed. The heading of this report 
 and a brief statement of the matters discussed appears 
 below. 
 
 Fourteenth Annual Report 
 
 TO Stockholders of 
 
 United States Steel Corporation 
 
 Office of United States Steel Corporation, 
 SI Newark Street, Hoboken, New Jersey, 
 March 14, 1916. 
 To THE Stockholders : 
 
 The Board of Directors submits herewith a combined report of 
 the operations and affairs of the United States Steel Corporation and 
 Subsidiary Companies for the fiscal year which ended December 31, 
 191S, together with a statement of the condition of the finances and 
 property at the close of that year. 
 
 The report covers : 
 
 1. Summary of income for the year. 
 
 2. Summary of surplus account. 
 
 3. Comparative income for two years — 1914 and 
 
 1915- 
 
 4. Maintenance, renewal, and extraordinary replace- 
 
 ments. 
 
 5. Bond sinking, depreciation, and extraordinary 
 
 replacement funds. 
 
 6. Summary of depreciation provided from gross 
 
 earnings. 
 
 7. Trustee's account of bond sinking funds. 
 
 8. Capital stock, bonded debenture, and mortgage 
 
 debt. 
 
384 REPORTS AND STATEMENTS 
 
 9, Purchase money obligations, special loans, and 
 notes payable. 
 
 10. Summary of inventories. 
 
 11. Comparative summary of production for two years 
 
 — 1914 and 1915. 
 
 12. Summary of capital expenditure. 
 
 13. Employees and pay-rolls. 
 
 14. Volume of business. 
 
 15. Balance sheet, statements of accounts, and sta- 
 
 tistics. 
 
 16. Comparative general summary of business for two 
 
 years — 1914 and 1915. 
 
 17. General information. 
 
 The report is followed by a consolidated general balance 
 sheet as of December 31, 191 5, together with the consoli- 
 dated income account and general financial statement of all 
 properties. 
 
 The correctness of the financial details of this report is 
 certified to by a prominent firm of accountants, the form 01 
 this certificate appearing in § 315. 
 
 § 319. Statutory Corporation Reports 
 
 On account of the very great diversity found in the 
 corporation reports required by the various states, no 
 specific discussion of these reports is possible here. All 
 that can be given is a general reference to the reports 
 usually required, the details of which in each state must be 
 found by reference to the authorities by which they are 
 prescribed. 
 
 In at least one-half of all the states of the Union, domes- 
 tic corporations are required to pay an annual tax on the 
 amount of capital stock outstanding and to make a report 
 upon which this tax is based. Corporations holding charters 
 
CORPORATE REPORTS 385 
 
 from other states are required to make returns to both 
 states. Local reports must also be made for purposes of 
 property taxation, by both domestic and foreign corpora- 
 tions. Under the Federal Income Tax Law, all corpora- 
 tions are subject to a tax on their net income, and must 
 make a federal report upon which this taxation is based. 
 Corporations doing business in the United States and 
 Canada are also required to make annual reports to desig- 
 nated state and government officials. Reports from banks 
 and trust companies are required several times each year. 
 
 Blank forms for all these reports are usually furnished 
 by the authorities. Foreign corporations generally report 
 on the same blank as domestic corporations, though in some 
 of the states a special blank is provided for their use. 
 
 § 320. The Annual Report 
 
 The annual corporation report as required in most of 
 the states sets forth the names of directors, amount of capi- 
 tal, financial conditions, and operations for the past year; 
 and must be filed with the designated state authority, usually 
 the Secretary of State. There is a time specified when 
 reports are to be filed, and a penalty is frequently imposed 
 for failure to file the report within the specified time. 
 Foreign corporations doing business in a state are required 
 to file reports in both the home and the outside state and to 
 comply with the laws of each. 
 
 In some states it is required that the annual report be 
 recorded in the county wherein the corporation is located, 
 either in duplicate or on a blank for that particular purpose. 
 Not infrequently, the one report is recorded in both the 
 state and county records, and then returned to the company 
 with certifications of record noted thereon. 
 
 In practically all the states, public service companies 
 must make reports of an exhaustive nature, which are re- 
 
386 REPORTS AND STATEMENTS 
 
 quired to be filed once a year or oftener with designated 
 authorities. If there is a public utilities commission in the 
 state, such reports are made to it. Railroad companies 
 doing an interstate business are required to report to the 
 Interstate Commerce Commission. 
 
 The annual reports required by some of the states, 
 especially Pennsylvania, are somewhat elaborate. Separate 
 blanks are usually supplied for the different classes of cor- 
 porations, as public service and insurance companies; while 
 even further divisions are made in some states, where dif- 
 ferent blanks are used for different kinds of business. This 
 is the case in Pennsylvania, where trading companies, 
 manufacturing companies, hotels, and other kinds of com- 
 panies report on separate blanks. In most states where 
 reports are to be filed, a penalty is attached to the failure to 
 do so within the time limit designated. 
 
 § 321. Federal Corporation Report 
 
 At the present time the Federal Income Tax Law re- 
 quires every corporation to file with the Collector of Internal 
 Revenue of the district in which the company has its prin- 
 cipal place of business, a report of its operations for each 
 calendar or fiscal year. This report is made for the purpose 
 of determining each company's net income for the year, on 
 which the government levies a tax of 2%.* Separate forms 
 are provided in duplicate for the different lines of business, 
 as mercantile, miscellaneous, manufacturing, public service, 
 insurance companies, banks and other financial institutions. 
 
 § 322. Taxable Corporations 
 
 Every corporation, joint-stock company, or association, 
 and every insurance company organized in the United 
 States, excepting only the classes of corporations or associa- 
 
 *Congrcss, September, 1916, increased the tax from 1% to 2% on total net 
 income. 
 
CORPORATE REPORTS 
 
 387 
 
 tions specially exempted, must pay a tax of 2% on its net 
 mcome. 
 
 Corporations organized or existing under the laws of 
 any foreign country must also pay a tax of 2% on the 
 amount of net income accruing from business transacted 
 and capital invested in the United States. For failure to 
 comply with the provisions of the law, the assessment is 
 increased 50% and liability to specific penalty, not exceeding 
 $10,000, is incurred. Under both federal and state laws 
 certain corporations and associations are exempted from 
 taxation. 
 
 § 323. Exempted Corporations 
 
 The law specifically exempts the following corporations 
 and associations from the payment of the Federal Income 
 Tax: 
 
 1. Labor, agricultural, or horticultural organizations. 
 
 2. Mutual savings banks not having capital stock. 
 
 3. Fraternal beneficiary societies, orders, or associations 
 operating under the lodge system and providing for payment 
 of hfe, sick, accident, and other benefits to members or their 
 dependents. 
 
 4. Domestic building and loan associations. 
 
 5. Cemetery companies organized and operated exclu- 
 sively for the mutual benefit of members. 
 
 6. Corporations or associations organized and operated 
 exclusively for religious, charitable, scientific or educational 
 purposes, no part of the net income of which inures to the 
 benefit of any private stockholder or individual. 
 
 7. Business leagues, chambers of commerce, or boards 
 of trade not organized for profit, or no part of the income 
 of which inures to the benefit of private stockholders or in- 
 dividuals. 
 
 8. Civic leagues and organizations not organized foi 
 
388 REPORTS AND STATEMENTS 
 
 profit, but operated exclusively for promotion of social 
 welfare. 
 
 9. Clubs organized and operated exclusively for pleasure, 
 recreation and other non-profitable purposes, no part of the 
 net income of which inures to the benefit of any private 
 stockholder or member. 
 
 10. Farmers' or other mutual hail, cyclone, or fire insur- 
 ance companies, mutual ditch or irrigation companies, 
 mutual or co-operative telephone companies, or like organi- 
 zations of a purely local character, the income of which con- 
 sists solely of assessments, dues, and fees collected from 
 members for the sole purpose of meeting its expenses. 
 
 11. Farmers', fruit growers', or like associations, or- 
 ganized and operated as sales agents for the purpose of 
 marketing the products of its members and turning back to 
 them the proceeds of sales, less the necessary selling ex- 
 penses, on the basis of the quantity of produce furnished 
 by them. 
 
 12. Corporations or associations organized for the ex- 
 clusive purpose of holding title to property, collecting income 
 therefrom, and turning over the entire amount thereof, less 
 expenses, to an organization which itself is exempt from the 
 tax imposed by this title. 
 
 13. Federal land banks and national farm-loan associa- 
 tions. 
 
 14. Joint-stock land banks as to income derived from 
 bonds or debentures of other joint-stock land banks or any 
 Federal land bank belonging to such joint-stock land bank. 
 
 It should be especially noted that in the case of the 
 sixth and seventh classes of corporations above mentioned, 
 the exemption is forfeited if their stockholders or members 
 receive a financial profit from the operations of the corpora- 
 tion or association. 
 
CORPORATE REPORTS 389 
 
 § 324. Return Made for Either Calendar or Fiscal Year 
 
 Every corporation which does not give notice that its 
 fiscal year ends at a date other than December 31, must file 
 a return of its capital stock and indebtedness as of that date 
 and its income for the calendar year, on or before March i 
 of the following year. Any corporation whose fiscal year 
 does not coincide with the calendar year will be permitted 
 to file its annual return for its fiscal year instead of for the 
 calendar year, by notifying the collector of the district in 
 which its principal office is located, of the date with which 
 its fiscal year closes. Its return must then be filed within 
 sixty days after the close of its fiscal year. The date desig- 
 nated as the close of the fiscal year must be the last day 
 of a month ; and written notice of the selected date must be 
 filed with the local collector not less than thirty days prior 
 to "the first day of March of the year in which its reports 
 would be filed." 
 
 Full details respecting the Income Tax Law, its reports, 
 exemptions, withholding of individual income, source, etc., 
 can be had from the internal revenue officer of any local 
 district. The regulations are fully set forth on the blanks 
 themselves. 
 
Part VI — Corporate Combinations 
 
 CHAPTER XXVIII 
 
 METHODS OF CONSOLIDATION 
 
 § 325. Purposes of Corporate Combinations 
 
 The past thirty years have witnessed a wonderful 
 growth in the number and size of business combinations. 
 The movement began among the railroads, but it soon 
 appeared in manufacturing, and more recently it has 
 entered the commercial field. So common are combina- 
 tions of corporate interests at the present time that nearly 
 all large industrial, transportation, and public service 
 corporations own or control one or more underlying or 
 affiliated companies. 
 
 The primary purpose of practically all combinations 
 is to eliminate competition and secure larger profits 
 through the control of prices or rates. It is true, also, 
 that large-scale operation makes it possible to effect 
 economies, to increase efficiency, and to render more 
 satisfactory service. In spite of these advantages, some 
 of which are shared by the consuming public, there has 
 always been more or less hostility toward combinations, 
 due largely to their abuse of the monopolistic powers they 
 usually possess, This hostility has manifested itself in 
 state and federal laws designed to control or prohibit 
 those combinations which are regarded as inimical to the 
 public welfare. Legislation of this kind has limited the 
 
 390 
 
METHODS OF CONSOLIDATION 
 
 391 
 
 field within which combinations may be formed, and it 
 has also made their formation — even when permissible — 
 somewhat more difficult to effect. 
 
 § 326. Methods of Corporate Consolidation or Control 
 
 Besides the legal difficulties in the way of corporate 
 combinations, there are usually other difficulties of a 
 financial or economic character which have to be over- 
 come. To formulate a plan legally and financially possible, 
 and at the same time acceptable to the varying interests 
 of those concerned, is a matter which frequently taxes the 
 ability and ingenuity of those who undertake its 
 consummation. 
 
 "Mutual understandings," "gentlemen's agreements," 
 etc., whereby the competing parties agree to divide ter- 
 ritory, restrict output, maintain uniform prices, or do 
 other things for their mutual protection; or agreements 
 of competitors to pool their interests and divide the 
 resulting profits, have frequently been tried but rarely 
 with success. 
 
 The better and more acceptable methods of consoli- 
 dating or otherwise bringing corporate interests under a 
 unified control are given below, and most of these methods 
 are illustrated in the succeeding chapters. 
 
 1. By Merger. The several consolidating corpora- 
 tions reincorporate under a single charter and become 
 constituent parts of the new company. This plan is 
 practically an outright purchase, as outlined in the next 
 paragraph, except that the purchase under Plan 2 does 
 not necessitate the rechartering of the purchasing cor- 
 poration: (See Chapter XXIX.) 
 
 2. By Purchase. The property and plant of a com- 
 petitor is purchased outright, and either closed down or 
 continued as a branch of the purchasing company. This 
 
392 CORPORATE COMBINATIONS 
 
 may involve the voluntary dissolution of the selling com- 
 pany. The current assets and liabilities of the selHng 
 company may or may not be included in the sale; if not, 
 they must be disposed of preliminary to the company's 
 liquidation. Any bonded liabilities will, of course, follow 
 the plant, or other property, which forms the underlying 
 security. (See Chapter XXIX.) 
 
 3. By Lease. The property of one or more com- 
 peting companies is leased to another company for a 
 stated number of years, very much as one person 
 would lease or rent properties from another. (See 
 Chapter XXX.) 
 
 4. By Holding Companies. Usually the holding 
 company is a corporation created for the purpose of deal- 
 ing in the securities of other corporations, though in some 
 cases one of the consolidating companies, possessing a 
 liberal charter, may be made use of for this purpose. 
 Ownership of a bare majority — sometimes even less than 
 half — of the stock of the competing companies is suf- 
 ficient for efifective control. 
 
 The holding company is perhaps the most common 
 form of combination. It is the form to which the name 
 "Trust" is usually applied, because it is really the lineal 
 descendant of the trust or trusteeship organization under 
 which such famous combinations as the Standard Oil 
 Company and the Sugar Trust were first formed. (See 
 Chapter XXXI.) 
 
 5. By Parent Companies. Territorial rights or pat- 
 ent rights are sold or leased to operating companies in 
 different localities, these operating companies being first 
 organized by the parent company and sufficient stock 
 being retained in each to insure its control. This is 
 merely a variation of the holding company. (See 
 Chapter XXXI.) 
 
METHODS OF CONSOLIDATION 393 
 
 6. By Interlocking Directorates. Under this method, 
 either the same men appear as directors of the different 
 corporations to be controlled, or men representing the 
 interest which controls the allied corporations are so 
 distributed through the various boards of directors as 
 effectually to control the corporate operations. Each 
 company is to all intents and purposes a separate and 
 independent company, the control exercised through 
 its board of directors not affecting its status or its 
 accounting. 
 
 § 327. Expert Investigations 
 
 It is customary in any consolidation of large companies 
 to have a careful preHminary investigation of the whole 
 matter by lawyers, financiers, engineers, appraisers, and 
 accountants, and the results of such examinations when 
 properly carried out determine whether or not the pro- 
 posed plans are feasible or advisable. 
 
 The following very excellent discussion of an account- 
 ant's investigation for purposes of a merger or other con- 
 solidation, covers very completely the details and procedure. 
 
 Accounting Investigation Preliminary to 
 Consolidation* 
 
 § 328. Scope of Investigation 
 
 The nature and extent of the accountant's investiga- 
 tion will depend, of course, largely upon his instructions 
 and the conditions; but we will assume that manufac- 
 turing concerns in the same line of business contemplate 
 consolidation; that the report of the accountant upon 
 each of the plants is to form the basis of the consolidation, 
 
 The discussion of an accounting investigation which follows is, by permission, 
 I almost verbatim from "Corporation Accounting and Investigations" by F. H. 
 iherson, F. C. A., C. P. A., in the Journal of Accountancy, November, 1908. 
 
 taken 
 Macpherson, 
 
394 CORPORATE COMBINATIONS 
 
 and that the accountant's instructions are general and 
 not specific; and that they include the determining of the 
 assets and liabilities as well as the earnings. 
 
 Accountants differ as to the scope of an investigation. 
 There are those who take the position that the accountant 
 is not expected to make the thorough examination that 
 a regular audit would entail, but that the genuineness of 
 the books and of the balance sheet should be assumed. 
 Most accountants, however, believe that the investigating 
 accountant should analyze the accounts thoroughly, in 
 the doing of which fraud, if any, would be discovered. 
 
 Regular audits and special investigations have, or 
 ought to have, the same end in view — the obtaining of a 
 correct statement of facts; and an accountant should not 
 accept and prepare a report from any balance sheet with- 
 out satisfying himself by a sufficient analysis of the 
 regularity of the accounts, and of the methods followed 
 by which are produced the virions items which enter into 
 the assets of a concern, or which go to make up the 
 revenue and expenditure accounts. 
 
 § 329. Report on Assets 
 
 Statements covering each of the concerns examined 
 should be included in the report of the accountants in- 
 dependent of each other, and, based upon the specifications 
 which have been set out, should contain information as 
 follows: 
 
 I. Assets as of a given date (the same in each in- 
 stance) divided as to; 
 
 (a) Realty 
 
 (b) Plant and machinery 
 
 (c) Merchandise (raw material) 
 
 (d) Merchandise (in process) 
 
 (e) Merchandise (finished product) 
 
METHODS OF CONSOLIDATION 
 
 395 
 
 (f) Leasehold 
 
 (g) Good-will 
 (h) Patents 
 
 (i) Accounts receivable 
 (j) Bills receivable 
 (k) , Cash on hand and in bank 
 (1) Bills receivable under discount (indirect) 
 (m) Accrued interest, insurance, etc. 
 (n) Such other divisions of the assets as the 
 nature of the business may demand 
 
 2. Liabilities, as of a given date (the same in each 
 
 instance), divided as to: 
 
 (a) Bills payable 
 
 (b) Accounts payable 
 
 (c) Mortgage indebtedness 
 
 (d) Bills receivable under discount (indirect) 
 
 (e) Other indirect liabilities 
 
 (f) Capital account 
 
 (g) Such other division of the liabilities as the 
 
 nature of the business may demand 
 
 3. Revenues and expenses. Of each business, show- 
 
 ing earning power of each in a given time 
 (usually three years if the business has been in 
 operation so long) and preferably covering the 
 same period. 
 
 Taking the items under "Assets" in their order, the 
 accountant will ordinarily not be called upon to verify 
 items "a" to "h"; the land, buildings, stock in trade, lease- 
 hold, etc., being specially valued by independent valuers. 
 If not, and these are subject to verification by the auditoi^, 
 he should in the case of : , 
 
 (a) Realty. Call for the title deeds and see that the 
 
396 
 
 CORPORATE COMBINATIONS 
 
 account is not charged with fictitious increases in value, 
 or with the annual taxes. 
 
 (b) See that a sufficient allowance has been made for 
 depreciation on buildings, etc. 
 
 (c, d, e) Merchandise. Raw, in process, and the fin- 
 ished product. Get certified inventories, which should be 
 checked both as to extensions and additions; an indepen- 
 dent appraisement is altogether preferable. Compare 
 inventory with invoices in the case of raw material. To 
 see that profits are not anticipated, a careful inspection 
 of cost accounts is required. In case of manufactured 
 stock care must be exercised to see that office and selling 
 expenses are not prorated and added to the costs of goods 
 appearing in the inventory. Note should be taken of the 
 "dead wood" in the stock and that proper allowance has 
 been made to cover. 
 
 (f) Leasehold. Is not usually a consideration, but 
 if found to exist, a special valuation to ascertain present 
 value is best; otherwise, the original cost, less propor- 
 tionate reduction for the expired period, should be taken. 
 
 (g) Good-will. This item can only be determined 
 by agreement between the parties, and is one which does 
 not seriously concern the accountant, except that if it is 
 put in at an arbitrary sum by the vendors, he should see 
 to it that the price be set forth separately and distinctly 
 in the "assets" so that the purchasers may know just how 
 much they are expected to pay. 
 
 (h) Patents. See that these are entered at their 
 proper present worth — which will be determined by the 
 remaining life thereof, and the present "state of the art" 
 in that particular connection. 
 
 (i) Accounts receivable. A careful examination 
 should be made to ascertain the condition of these, that 
 .they are alive and collectible, and that proper provision 
 
METHODS OF CONSOLIDATION 397 
 
 has been made for bad and doubtful; also that secreted 
 in the accounts receivable may not be found charges for 
 "goods on consignment" billed out at the usual profit and 
 going to swell the volume of output, thus unduly in- 
 creasing the earnings by the "anticipation of profits." 
 
 (j) Bills receivable. Same examination as in the case 
 of accounts, so far as prospects of realization are 
 concerned. 
 
 (k) Cash on hand and in bank. The same verification 
 as in a regular audit. 
 
 (1) Bills receivable under discount. This is an in- 
 direct asset as well as an indirect liability, and it is 
 important in the case of an amalgamation, where the 
 liabilities are being assumed, that information on this 
 point should be given. It may be necessary that some 
 allowance should be made in anticipation of "loss upon 
 realization." 
 
 (m) Accrued interest, insurance, etc. See that the 
 claim for these is fair and proper. 
 
 § 330. Report on Liabilities 
 
 Turning next to the question of liabilities, we take up: 
 (a, b) Bills payable and accounts payable. The 
 verification will be the same as in a regular audit. In this 
 connection it may be proper to say that there is not much 
 danger of the liabilities being overstated. The principal 
 danger lies in the understating or not taking to account 
 of the outstanding liabilities, and this must be carefully 
 guarded against if the transfer of the business involves 
 the assuming of all the liabilities. 
 
 (c) Mortgage indebtedness. Verification by the ob- 
 taining of a statement from the mortgagees, both as to 
 principal and arrears or accrued interest. 
 
 (d) Bills receivable under discount. The remarks 
 
398 CORPORATE COMBINATIONS 
 
 under item "1" in assets would properly apply here, being 
 applicable in both cases. 
 
 (e) Other indirect liabilities. These may be in the 
 nature of indorsements (although a strictly improper and 
 
 .illegal proceeding in the case of joint-stock companies), 
 claims for damages, disputed accounts for materials, 
 services or commissions. A distinct statement in writing 
 as to the existence or non-existence of these should be 
 obtained from the proper officers of the company. 
 
 (f) The value of the business to the purchasers will 
 be represented by the difference between the assets and 
 liabilities in each case and if profitable should equal the 
 issue of capital stock with an addition to the assets of any 
 undivided profits, which would enhance the value of the 
 equity to be transferred to the amalgamation. 
 
 § 331. Revenue and Expense Accounts 
 
 The question of revenue and expenses of operation 
 will in all probability more particularly occupy the atten- 
 tion of the accountant, rather than the ascertaining of 
 the value of the assets and liabilities; in fact, his instruc- 
 tions may limit him to the determining of these without 
 regard to the other. Taking the revenue accounts first: 
 the accountant will require to make a careful investiga- 
 tion of the receipts for the period (usually three years) 
 under examination. He will see that no' extraneous 
 revenue has been introduced and that the progress in the 
 revenue account has been consistent and steady, or other- 
 wise. He must be watchful that the revenue account has 
 not been increased by credits for goods "on consignment" 
 with an off-setting entry to accounts receivable. 
 
 Other points which require tO' be looked into are: 
 that goods "on approval" likely to be returned to stock 
 afterwards have not found their way in the sales account; 
 
METHODS OF CONSOLIDATION 300 
 
 that fictitious sales, for the purpose of swelling the rev- 
 enue, have not been put through the books, and shipments 
 not made before close of inventory; that incompleted and 
 unshipped orders have not been credited to sales account, 
 thus inflating revenue by ungained profits; that rebates 
 and allowances are a charge against sales and not an 
 addition to merchandise account. In a word, the bona 
 fides of all sales, especially near the end of the period, 
 should be determined to the satisfaction of the accountant. 
 
 It is the duty of the accountant to see that all the 
 expenses entered are a proper charge against the business 
 and that they are made within the proper period; that 
 there is no reduction in expenses towards the close of the 
 term under inspection; that the expenses are regular and 
 consistent and bear a steady ratio to the turnover; that 
 proper and reasonable allowances have been made for re- 
 pairs and renewals, and that these are charged against 
 revenue and not as an increase of capital. 
 
 Excessive profits from any particular cause should be 
 noted, as, for instance, those which might arise from the 
 making of heavy purchases in anticipation of an upward 
 tendency in prices, and which anticipation had been ful- 
 filled. He should be satisfied that all profits earned and 
 taken to account are incidental to the business. A sale 
 of real estate not required for the purposes of the business, 
 and made at a substantial profit, forms an example. On 
 the other hand, expenditures of exceptional and unusual 
 character which have gone to reduce the profits below 
 normal should be noted. 
 
 § 333. Cost of Operation 
 
 In the consideration of the cost of operation, heed 
 should be given to the effect which a limited capital has 
 had upon the expenses of operation. Lack of capital is 
 
400 
 
 CORPORATE COMBINATIONS 
 
 naturally followed by increased borrowings, and increased 
 borrowings augment the interest account. Operation is 
 thus charged with a sum which, had adequate capital been 
 invested, would have been in the nature of a dividend. 
 By way of illustration, take a business in which every 
 dollar of capital invested was borrowed. This may appear 
 an extreme case, but such a business is, nevertheless, 
 sometimes to be found. The borrowed capital is $100,000. 
 Upon this sum interest is paid out of the business and 
 charged to operating expenses. We are asked to inves- 
 tigate. In the preparation of the profit and loss account 
 we eliminate the $6,000 interest paid on this sum, in order 
 to arrive at the earning power of the business. It can 
 readily be seen how unfair any other course would have 
 been, and how lack of sufficient capital in any business 
 will impair the earning power and af¥ect the showing as 
 to profits, unless allowance be made therefor. There is 
 no room here for the exercise of a display of good judg- 
 ment on the part of the auditor in determining what the 
 "adequate capital" should be. 
 
 § 333- Reports and Certificates 
 
 Reports in detail upon each business should be pre- 
 pared and furnished the principals, and these should form 
 the basis upon which the amalgamation is carried out. 
 Regard, of course, will also be had to the introduction of 
 other interests where more extensive operations are con- 
 templated by the amalgamating company. 
 
 In addition to the report in detail, a certificate is 
 usually prepared for use in the prospectus. This certificate 
 is generally barren of all Information except as to the 
 revenues, expenses of operation, and profit-earning power 
 of the various businesses entering the amalgamation, and 
 these in the aggregate. Indeed, certificates are not un- 
 
METHODS OF CONSOLIDATION 
 
 401 
 
 common in which information is given only as to the 
 profits earned by the several businesses. It is unusual to 
 see any reference to the amount of capital invested. A 
 model certificate would be one framed somewhat after the 
 following style: 
 
 CERTIFICATION 
 Gentlemen : — I have examined the records of The Brown Manu- 
 facturing Company, Limited, and of The Jones Manufacturing Company, 
 Limited, each for a period of three years, and hereby certify to the 
 correctness of the underwritten statements, as to Capital, Earnings, 
 Expenses of Operation, and Net Earnings, covering the period given : 
 
 Brown Manufacturing Co., Limited 
 
 Net Capital Expenses of Net Earn- 
 
 1898. 
 1899. 
 1900. 
 
 Employed 
 
 Earnings 
 
 Operation 
 
 ings 
 
 Total. 
 
 i8g8. 
 1809. 
 
 IQOO. 
 
 Total. 
 
 Jones Manufacturing Co., Limited 
 
 Net-Capital Expenses of Net Earn- 
 
 Employed Earnings Operation ings 
 
 1898. 
 1899. 
 1900. 
 
 Combined Companies 
 
 Net Capital Expenses of Net Earn- 
 
 Employed Earnings Operation 
 
 mgs 
 
 Total. $ $ $ 
 
 For further information reference is made to my reports in detail 
 herewith. 
 
 John Thompson, 
 
 Accountant 
 
402 
 
 CORPORATE COMBINATIONS 
 
 The less 'detail there is in the report the. better, for 
 the obvious reason that much of it would not be under- 
 stood by the average individual, and the tendency would 
 be to befog rather than enlighten, and that is very un- 
 desirable. But an accountant issuing a certificate framed 
 as above, with a simple qualifying reference to a report 
 for further and detailed information, will be placing him- 
 self upon safe and sure ground. 
 
CHAPTER XXIX 
 
 CONSOLIDATION BY MERGER 
 
 § 334- General Procedure for Merger 
 
 When a consolidation is to be effected by merger, the 
 consolidating companies usually form one large corpora- 
 tion. The new corporation becomes the sole legal entity, 
 while the original companies lose their separate existence 
 and are finally dissolved. The merger agreement may 
 stipulate that one or more of the merging companies 
 shall first modify in some way its existing assets or 
 liabilities. Usually, however, the new corporation takes 
 over at once, as far as it legally can, the entire rights, 
 property, privileges, and franchises of the constituent 
 corporations as "going concerns," continuing the busi- 
 ness of each, fulfilling all existing contracts, collecting all 
 outstanding claims, and discharging all current liabilities. 
 This is a form of combination that has in many cases proven 
 effective and satisfactory. 
 
 The following example illustrates the manner of 
 merging several independent concerns one of which is a 
 partnership. The details and the accounting require- 
 ments are taken up in proper sequence. Although this 
 example is made somewhat exhaustive in order to bring 
 out the important points, it is, of course, impossible to 
 present all of the points that may come up in connection 
 with a corporation merger. 
 
 § 335- General Conditions of the Mefger 
 
 Three corporations and a partnership are to be com- 
 
 403 
 
404 
 
 CORPORATE COMBINATIONS 
 
 billed. All are prosperous manufacturing concerns in the 
 same or allied industries. They are to become incorporated 
 under the laws of New Jersey as the "Long-Bain Manu- 
 facturing Company" with an authorized capital stock of 
 $16,000,000, of which one-half is to be common stock, and 
 one-half 7% cumulative preferred stock; par value of 
 shares, $100 each. There is also to be an issue of first 
 mortgage 5% thirty-year sinking fund bonds of $5,000,- 
 000. They are to be coupon in form and in denominations 
 of $1,000 and $10,000, with privilege of registration as to 
 principal. 
 
 § 336. Statement of Concerns to Be Merged 
 
 Statement of Merging Companies 
 January i, 1916 
 
 Long Bain Vine 
 
 Assets Company Company Company 
 
 Cash $572,800 $272,500 $33,800 
 
 Notes Receivable.. 340,600 135,800 69,100 
 
 Accounts Receivable 1,021,300 492,750 162,800 
 
 Prepaid Charges . . . 46,200 38,150 9,200 
 
 Investments 500,000 150,000 
 
 Stock and Material. 964,300 510,000 188,800 
 
 Supplies 175,100 51,900 7,800 
 
 Pledged Securities 120,000 
 
 Due from Bain Com- 
 pany 85,000 
 
 Furniture and 
 
 Fixtures 125,000 62,000 22,000 14,000 223,000 
 
 Patents, Patterns 
 
 and Tools 450,000 244,850 
 
 Buildings and Plant 4,390,000 3,359,000 
 
 Good-Will 1,000,000 
 
 Sinking Fund 740,000 
 
 Bell & 
 
 
 Davis 
 
 Total 
 
 $36,100 
 
 $915,200 
 
 114,000 
 
 659.500 
 
 82,400 
 
 1,759,250 
 
 4,000 
 
 57,550 
 
 25,000 
 
 675,000 
 
 152,000 
 
 1,815,100 
 
 12,400 
 
 247,200 
 
 35,000 
 
 155,000 
 
 16,000 
 
 lor.ooo 
 
 132,500 
 
 92,000 
 
 919,350 
 
 450,000 
 
 110,000 
 
 8,309,000 
 
 250,000 
 
 
 1,250,000 
 740,000 
 
 Total $10,410,300 $5,436,950 $1,326,000 $692,900 $17,866,150 
 
CONSOLIDATION BY MERGER 
 
 40s 
 
 Long Bain Vine Bell & 
 
 Liabilities Company Company Company Davis Total 
 
 Secured Loans $ $100,000 $ $30,000 $130,000 
 
 Notes Payable..... 685,000 270,000 150,000 75,ioo 1,180,100 
 
 Accounts Payable.. 350,000 540,000 202,600 205,100 1,297,700 
 
 Accrued Charges.. 37,90° 11,640 8,200 6,200 63,940 
 
 Reserve for Depre- 
 ciation -345,100 120,500 54,000 519,600 
 
 Reserve for Bad 
 
 Debts 10,000 5,310 1,200 1,000 17,510 
 
 Reserve for Insur- 
 ance 105,500, 105,500 
 
 Mortgage Payable 300,000 250,000 20,000 570,000 
 
 Interest Accrued on 
 
 Mortgage Payable 4,500 500 5,000 
 
 Dividend Payable.. 230,000 105,000 30,000 365,000 
 
 First Mortgage 5% 
 
 Bonds 2,500,000 2,500,000 
 
 Capital Stock 5,000,000 3,500,000 600,000 355,000* 9,455,000 
 
 Surplus 1 1,146,800 480,000 30,000 1,656,800 
 
 Total $10,410,300 $5,436,950 $1,326,000 $692,900 $17,866,150 
 
 Profits for Four Years : 
 
 For Year 1912.. $550,000 $290,000 $45,000 $22,500 $907,500 
 
 1913.. 640,000 340,000 71,000 29,500 1,080,500 
 
 1914.. 680,000 430,000 57,000 26,400 1,193,400 
 
 1915.. 760,000 370,000 62,000 38,600 1,230,600 
 
 Total $2,630,000 $1,430,000 $235,000 $117,000 $4,412,000 
 
 Average $657,500 $357,50O $s8,750 $29,250 $1,103,000 
 
 All the merging concerns have been profitable and the 
 corporations have been paying high dividends. All but 
 the Vine Company have allowed a large proportion of 
 
 'Capital t9 crtsdit of partners at this date. 
 
4o6 CORPORATE COMBINATIONS 
 
 their profits to remain in the business, and this is also 
 true of Bell & Davis. 
 
 § 337- Terms of Merger 
 
 The four concerns sell out to the new company and 
 receive in exchange and in full payment for their respec- 
 tive properties, stock as stated below: 
 
 Preferred Copimon Total 
 
 To Long Company $4,000,000 $4,000,000 $8,000,000 
 
 To Bain Company 2,500,000 2,500,000 5,000,000 
 
 To Vine Company 450,000 450,000 900,000 
 
 To Bell & Davis 250,000 250,000 500,000 
 
 To the underwriters for services. . . 100,000 100,000 200,000 
 
 $7,300,000 $7,300,000 $14,600,000 
 
 To be sold to the public 700,000 700,000 1,400,000 
 
 Total authorized issue $8,000,000 $8,000,000 $16,000,000 
 
 Each company is to pay any dividends due its stock- 
 holders at the date of the merger; it is to liquidate its 
 secured loans, thereby releasing the pledged securities, 
 and then convey the remaining assets and liabilities to the 
 new company in exchange for the stated amounts of the 
 latter's stock. Each company is then to donate to the 
 new corporation for working purposes 10% of the com- 
 mon stock received by it from the new company; and the 
 remainder of the common stock, together with all of the 
 preferred stock received by the corporations, is to be 
 distributed by them among their respective stockholders. 
 When this has beerl done the companies are to go into 
 voluntary liquidation and surrender their charters. 
 
 The good-will allowed to the several concerns in fixing 
 th*'; price to be paid is shown in the following exhibit: 
 
CONSOLIDATION BY MERGER 
 
 407 
 
 Apportionment of Good- Will 
 
 (Showing the amount of good- will allowed to each company) 
 Long Bain Vine Bell & 
 Company Company Company Davis Total 
 Purchase Price.... $8,000,000 $5,000,000 $900,000 $500,000 $14,400,000 
 Former Capital 
 Stock and Surplus 
 (including good- 
 will) 6,146,800 3,980,000 630,000 355,000 11,111,800 
 
 Additional G o o d - 
 
 Will (included in 
 
 purchase price).. $1,853,200 $1,020,000 $270,000 $145,000 $3,288,200 
 Good- Will Formerly 
 
 on Books 1,000,000 250,000 1,250,000 
 
 Total Good- Will. $2,853,200 $1,020,000 $520,000 $145,000 $4,538,200 
 
 The outstanding bonds and mortgages and accrued 
 interest of the merged concerns are to be redeemed with 
 an equivalent amount of the bonds of the new company; 
 and in the case of the Long Company, in addition a 10% 
 bonus of common stock of the new company is to be 
 given. 
 
 The Keystone Trust Company, trustee of the mort- 
 gage deed and of the sinking fund of the Long Company, 
 is to act in a similar capacity for the new corporation. 
 
 The present sinking fund of the Long Company 
 ($740,000) is to remain in the hands of the trustee and 
 to become part of the sinking fund of the new corporation. 
 Beginning January i, 1920, an annual deposit of $120,000 
 is to be made to the sinking fund, and a reserve of 
 $6,000 for premium on bonds purchased by the sinking 
 fund trustee is to be set aside annually out of profits 
 beginning December 31, 1920. The trustee is to have 
 the right to purchase for investment, in the open market, 
 outstanding bonds of the new company at 105 and accrued 
 
4o8 CORPORATE COMBINATIONS 
 
 interest, at any interest period after January i, 1922. At 
 the discretion of the directors, the bonds so held by the 
 sinking fund trustee may be cancelled at par on the books 
 of the company or may be permitted to remain therein 
 as an investment. 
 
 Of the bonds of the new corporation not required to 
 redeem the outstanding bonds of the merged companies, 
 $1,000,000 face value have been sold to Mitchell & 
 Stevens, bankers, at 90, payable one-third down and one- 
 third each three months until paid. Preferred stock 
 $500,000 is sold for cash through Bell Brothers & 
 Company, bankers, with a 50% bonus of common stock, 
 to provide operating capital. 
 
 § 338. Requirements for the Consolidation 
 
 From the standpoint of the accountant, the more 
 important matters involved in the Long-Bain consolida- 
 tion are as follows: 
 
 1. The procedure necessary to complete the con- 
 
 solidation and to bring about the dissolution 
 of the existing concerns. 
 
 2. The opening entries on the books of the newly 
 
 incorporated Long-Bain Company, assuming 
 that a new set of books is to be opened, 
 that all assets and liabilities of the Long Com- 
 pany, of the Vine Company, and of Bell & 
 Davis are to be included in the new ledger, and 
 that the books and accounts of the Bain 
 Company will be continued in the branch ofifice. 
 
 3. The arrangement for the conduct of the branches, 
 
 assuming that the plant of the Long Company 
 is to be used as the head office and all the other 
 concerns operated as branches. 
 
CONSOLIDATION BY MERGER 
 
 409 
 
 4. The closing entries of the Long Company, the 
 
 Vine Company, and the Bain Company at the 
 time of dissolution and merger. 
 
 5. The consolidated balance sheet of the new cor- 
 
 poration after all of the preceding requirements 
 have been carried out. 
 
 § 339- Procedure for Consolidation 
 
 1. Agreement of Directors. A joint agreement by 
 the directors of each constituent company and the partners 
 of the associated firm must be entered into, fixing the 
 terms of the consolidation. 
 
 2. Approval of Stockholders. This joint agreement 
 is then submitted to the stockholders of each company 
 at a meeting called for the purpose, of which due notice 
 must have been given. 
 
 3. Application for New Charter. The charter of the 
 proposed Long-Bain Manufacturing Company must be 
 prepared and filed with the Secretary of State of New 
 Jersey, and all other requirements prescribed by the laws 
 of New Jersey must be complied with. The new company 
 may be organized as entirely independent of the con- 
 solidated corporations, or the promoters may secure 
 authority to increase the stock of the Long Company 
 from $5,000,000 to $16,000,000, and to change its cor- 
 porate name to the Long-Bain Manufacturing Company. 
 
 4. Transfer of Property to New Corporation. All 
 assets and liabilities of the merged concerns must be 
 transferred or assigned to the new Long-Bain Manufac- 
 turing Company. Personal properties are conveyed by 
 assignment or bill of sale, and real properties by deed. 
 The bank balance of each concern must be transferred by 
 check. All negotiable papers must be indorsed over to 
 the new company, and official assignment made of other 
 
^10 CORPORATE COMBINATIONS 
 
 documents such as insurance policies, contracts, etc. The 
 outstanding mortgages of the dissolving companies are 
 to be exchanged for bonds of the new corporation at 
 par, 
 
 5. Surrender of Old Charters. Where the corpora- 
 tions to be taken over are not merged directly in the ab- 
 sorbing corporation, and are not to be kept in existence, 
 application must be made to the state by each corporation 
 for permission to surrender its charter. It is, however, 
 frequently found advisable to keep the charter of "sub- 
 merged" companies alive in order to prevent competitors 
 from adopting the names and benefiting by their former 
 connections; as an alternative, the names of the merged 
 concerns are sometimes carried on the stationery of the new 
 corporation. 
 
 The partnership of Bell & Davis has power either to 
 dissolve or to sell out without asking authority from the 
 state. 
 
 6. Issue of Stock and Bonds of New Company. At 
 the time the properties of the old concerns are transferred 
 to the Long-Bain Manufacturing Company, stock and 
 bonds of this company are issued and distributed to the 
 proper persons in accordance with the terms of consoli- 
 dation. The stock apportioned to each company may be 
 handed over to its directors, and be by them distributed; 
 or certificates may be issued direct to each individual 
 stockholder for the exact amount due to him. Usually 
 a trustee is appointed for this purpose, to whom the 
 separate stockholders deliver or assign their stock in the 
 old corporations in exchange for temporary trust receipts, 
 and to whom the new corporation issues the stock to be 
 exchanged. The trustee then delivers the new stock to 
 its individual owners and surrenders the old stock to the 
 new corporation or retains it for cancellation. The 
 
CONSOLIDATION BY MERGER ^jj 
 
 amount of common stock to be donated back to the new 
 company by each dissolving concern might conveniently 
 be issued by the new company to the trustee in a separate 
 certificate to facilitate the return thereof. 
 
 § 340. Opening Entries on Books of New Corporation 
 
 It is desirable to have an entirely new set of books 
 for the newly organized corporation, in order that ample 
 and careful arrangements may be made to accommodate 
 the larger volume of business and the number of accounts 
 that must necessarily follow such an amalgamation of 
 interests. When opening the new ledger care should be 
 taken to arrange the accounts in a systematic manner 
 and to leave sufficient space for each. If a loose-leaf 
 ledger is to be used, this latter precaution will not be 
 necessary. 
 
 § 341. (i) Entries for Issuance of Stock and Bonds 
 
 The opening journal entries to record the issue and 
 disposition of the capital stock and to bring the bond issue 
 on the books of the new corporation are as follows: 
 
 January I, 1916 
 First Entry 
 
 Unissued Common Stock $8,000,000 
 
 Unissued Preferred Stock 8,000,000 
 
 To Authorized Capital Stock — Com- 
 mon $8,000,000 
 
 " Authorized Capital Stock — Pre- 
 ferred -. . • . . 8,000,000 
 
 The Long-Bain Manufacturing Company 
 has been incorporated with a capital 
 stock of $16,000,000 as shown here- 
 with. It is to take over, as per joint 
 agreement, the assets and liabilities of, 
 and merge, the following concerns, to 
 
412 CORPORATE COMBINATIONS 
 
 which full-paid stock is to be issued in 
 full settlement as shown : 
 
 Preferred Common 
 Long Company. .$4,000,000 $4,000,000 
 Bain Company. . 2,500,000 2,500,000 
 Vine Company. . 450,000 450,000 
 Bell & Davis 250,000 250,000 
 
 Total payment $7,200,000 $7,200,000 
 The remaining 
 
 stock is to be 
 
 disposed of as 
 
 follows : 
 To the under- 
 
 writers for 
 
 services 100,000 100,000 
 
 To be sold to the 
 
 public 700,000 700,000 
 
 Total authorized 
 
 issue $8,000,000 $8,000,000 
 
 Second Entry 
 
 Long Company $8,000,000 
 
 Bain Company 5,000,000 
 
 Vine Company 900,000 
 
 Bell & Davis 500,000 
 
 To Unissued Common Stock $7,200,000 
 
 " Unissued Preferred Stock 7,200,000 
 
 For stock issued to the directors of the 
 above-named concerns, as per agree- 
 ments of merger. The shares are issued 
 at par in full payment for the respec- 
 tive plants and other assets. The 
 shares issued to each company are as 
 follows : 
 
 Preferred Common 
 Long Company. . . . 40,000 40,000 
 Bain Company.... 25,000 25,000 
 Vine Company.... 4,500 4,500 
 Bell & Davis 2,500 2,500 
 
CONSOLIDATION BY MERGER 413 
 
 Third Entry 
 
 Stock Subscription (or The Underwriters) . . . $200,000 
 
 To Unissued Common Stock $100,000 
 
 " Unissued Preferred Stock 100,000 
 
 For subscriptions to 1,000 shares of common 
 stock and 1,000 shares of preferred, to be 
 paid for in professional services. 
 
 This issue of stock might be charged directly to 
 organization expense if desired. 
 
 The following entry is necessary to bring the bond 
 issue on the books: 
 
 Fourth Entry 
 
 Unissued Bonds $5,000,000 
 
 To First Mortgage Bonds $5,000,000 
 
 Authorization of $5,000,000 of first mort- 
 gage 5% thirty-year sinking fund 
 bonds in denominations of $1,000 and 
 $10,000. 
 
 § 342. (2) Entries for Assets and Liabilities Taken Over 
 
 The entries for issuance of stock and bonds are now 
 complete, and the next step is to take over the assets and 
 liabilities of the merging concerns in full payment for 
 their subscriptions. A separate entry is here made for 
 each, though it is obvious that the various assets and 
 liabilities could be amalgamated into one comprehensive 
 entry. In that case the entry would state the aggregate 
 of the items taken over, instead of the separate amounts. 
 
 First Entry (Transfer of Long Company's Assets and Liabilities) 
 Sundry Assets to Sundry Liabilities : 
 
 Assets 
 
 Cash* $342,800 
 
 Notes Receivable 340,600 
 
 Accounts Receivable 1,021,300 
 
 Prepaid Charges 46,200 
 
 *After the payment of $230,000 in dividends. 
 
414 
 
 CORPORATE COMBINATIONS 
 
 Investments 500,000 
 
 Stock and Material 964,300 
 
 Supplies 175,100 
 
 Due from Bain Company 85,000 
 
 Furniture and Fixtures 125,000 
 
 Patents, Patterns, and Tools , 450,000 
 
 Buildings and Plant 4,390,000 
 
 Sinking Fund 740,000 
 
 Good- Will 2,853,200 
 
 Liabilities 
 
 Notes Payable $685,000 
 
 Accounts Payable 350,000 
 
 Accrued Charges 37;900 
 
 Reserve for Depreciation 345,100 
 
 Reserve for Bad Debts 10,000 
 
 Reserve for Insurance 105,500 
 
 Bonds of Long Company 2,500,000 
 
 Long Company 8,000,000 
 
 The above assets and liabilities of the 
 
 Long Company have been taken over 
 
 this day at the valuations shown, as 
 
 per report of the engineers and ac- 
 countants, in full payment for $8,000,- 
 
 000 capital stock of this Company, as 
 
 per order of the directors and agree- 
 ments previously entered into. An 
 
 equivalent of common and preferred 
 
 stock has been issued in exchange 
 
 therefor, as per agreement. 
 
 Total assets $12,033,500 
 
 Total liabilities 4,033,500 
 
 Capital issued 8,000,000 
 
 Second Entry (Transfer of Assets and Liabilities of Bell & Davis) 
 Sundry Assets to Sundry Liabilities : 
 
 Assets 
 
 Cash* $6,100 
 
 Notes Receivable 1 14,000 
 
 *After payment of $30,000 secured loans. 
 
CONSOLIDATION BY MERGER 
 
 4IS 
 
 Accounts Receivable 82,400 
 
 Prepaid Charges 4,000 
 
 Investments 60,000 
 
 Stock and Material 152,000 
 
 Supplies 12,400 
 
 Due from Bain Company 16,000 
 
 Furniture and Fixtures 14,000 
 
 Patents, Patterns, and Tools 92,000 
 
 Buildings and Plant 110,000 
 
 Good-Will 145,000 
 
 Liabilities 
 
 Notes Payable $75,100 
 
 Accounts Payable. 205,100 
 
 Accrued Charges 6,200 
 
 Reserve for Bad Debts 1,000 
 
 Mortgage of Bell & Davis 20,000 
 
 Interest Accrued 500 
 
 Bell & Davis 500,000 
 
 (Full explanation required, as above.) 
 
 The assets and liabilities of the Vine Company are 
 transferred to the books of the new company in like 
 manner after the deduction of the $30,000 to be paid out in 
 dividends. 
 
 As the assets and liabilities of the Bain Company are 
 to be retained and carried in its own ledger, they are not 
 to be taken into the home office accounts. The books of 
 this company are to be kept as heretofore and the only 
 change apparent will be that of ownership, with a reflected 
 increase in capital, surplus, and good-will accounts. The 
 ownership of this branch will be represented in the home 
 office books in a distinguishing account, as "Bain Plant," 
 "Bain Branch," "Investment in Bain Plant," or under 
 some other suitable caption. Since this plant cost 
 $5,000,000, it will therefore be represented at the same 
 valuation on the new coin^an^'s books. The entries are 
 as follows; 
 
4i6 CORPORATE COMBINATIONS 
 
 Bain Plant Investment $5,000,000 
 
 To Bain Company $5,000,000 
 
 For transfer from Bain Company of all 
 assets, liabilities, etc., valued at $5,000,- 
 000, as per statements on file, in ex- 
 change for an equivalent of stock of 
 this Company, as per agreement. 
 
 Certain of the assets of the Bain branch might with 
 advantage be included In the home ofifice accounts (§ 350), 
 in wliich case the above amount would be correspondingly 
 reduced. 
 
 At this time the following entries, which are self- 
 explanatory, might also be made: 
 
 Incorporation Expenses $25,000 
 
 To Cash $25,000 
 
 For incorporation expenses and other charges, 
 including professional services of attorneys 
 and accountants. 
 
 Treasury Stock $720,000 
 
 To Donated Capital (or Donated Surplus) $720,000 
 
 The consolidating companies have this day 
 donated to the Long-Bain Company, for 
 working purposes, one-tenth of their hold- 
 ings of common stock — 10% of $7,200,000 
 equals $720,000, entered at par value. 
 
 This transaction should be completed before the final 
 issue of certificates has been made to the various 
 stockholders. 
 
 § 343- (3) Entries for Retirement of Outstanding Bonds 
 and Mortgages of the Merging Concerns 
 
 First Entry 
 
 Bonds of Long Company $2,500,000 
 
 Mortgage of Bell & Davis 20,000 
 
CONSOLIDATION BY MERGER 
 
 417 
 
 Interest Accrued 500 
 
 Bain Plant Investment 304,500 
 
 Mortgage of Vine Company 250,000 
 
 To Unissued Bonds $3,075,000 
 
 For refunding of all outstanding bonds 
 and mortgages of the merging con- 
 cerns, per merger agreement, entry of 
 Bain Plant Investment including mort- 
 gage of Bain Company and accrued 
 interest on same $4,500. 
 
 Since the bonds of the Long Company and the 
 mortgages of the Vine Company and of Bell & Davis, 
 with accrued interest, have been included in the accounts 
 of the new company, they can be readily cancelled by an 
 offsetting entry. This is not true, however, of the 
 mortgage of the Bain Company branch, since all accounts 
 are retained in its own book. The outlay on account of 
 this branch must then be regarded either as an additional 
 expenditure or as an investment therein and charged up 
 accordingly. It can hardly be considered an additional 
 investment in the true sense of the word, since there is an 
 equivalent issue of bond obligations; but the liabiHty is 
 transferred from the branch books to the home office 
 books. 
 
 Second Entry 
 
 Donated Capital $250,000 
 
 To Treasury Stock $250,000 
 
 A bonus of donated common stock given to 
 holders of refunded bonds of the Long 
 Company, 10% of $2,500,000. 
 
 § 344. (4) Entries Relating to Sale of Securities 
 
 First Entry 
 
 Incorporation Expenses $200,000 
 
 To Stock Subscription (or Underwriters) $200,000 
 
4i8 
 
 CORPORATE COMBINATIONS 
 
 Being an issue of stock to the underwriters 
 of this Company for services rendered in 
 organizing, and in full payment of their 
 subscriptions : 
 
 1,000 shares common $100,000 
 
 1,000 shares preferred 100,000 
 
 Second Entry 
 
 Mitchell & Stevens, Bankers $900,000 
 
 Discount on Bonds 100,000 
 
 To Unissued Bonds $1,000,000 
 
 For sale of $1,000,000 par of bonds to bank- 
 ers at 90, payable one-third down and 
 one-third each three months. 
 
 Third Entry 
 
 Cash $300,000 
 
 To Mitchell & Stevens, Bankers $300,000 
 
 First payment of one-third on account of 
 bond sale. 
 
 Fourth Entry 
 
 Cash $500,000 
 
 To Unissued Preferred Stock $500,000 
 
 For sale of $500,000 par of preferred stock 
 to Bell Brothers & Company, bankers. 
 Full payment received in cash ; 50% bonus 
 of common stock given as entered below. 
 
 Fifth Entry 
 
 Donated Capital $250,000 
 
 To Treasury Stock , $250,000 
 
 Bonus of common stock given to Bell 
 Brothers & Company, being 50% of cash 
 sale of $500,000 of preferred stock. 
 
 § 345- (5) Entry in Settlement of Intercompany Obliga- 
 tions 
 
 The following entry in settlement of intercompany 
 obligations would be made as soon as the Bain plant is 
 
CONSOLIDATION BY MERGER ^ig 
 
 in a position to spare the cash. This indebtedness could 
 have been, and usually is, settled before making the 
 transfer; otherwise it could be included in the regular 
 personal accounts. 
 
 Cash $101,000 
 
 To Due from Bain Company $101,000 
 
 To settle claims owing by the Bain Com- 
 pany at time of amalgamation, and which 
 were carried into the accounts of this 
 Company as follows : 
 
 Owing to Long Company $85,000 
 
 Owing to Bell & Davis 16,000 
 
 There is nothing special to be done with the sinking 
 fund at this time, and it will stand on the books of the 
 new corporation as it formerly stood on the books of the 
 Long Company, until additional instalments are deposited 
 therein. All interest accumulations thereon must, of 
 course, be added from time to time as they are reported 
 by the trustee. It will be noted that the trustee has 
 authority to use the sinking fund for the purchase of 
 outstanding bonds of the company. 
 
 In anticipation of the bond redemption at 105, the 
 company is to begin, on January i, 1920, to set aside out 
 of profits an annual reserve of $6,000 to offset bond 
 premium, which may be credited to Reserve for Bond 
 Premium. When the bonds are called at a premium, such 
 premium is charged against the reserve. 
 
 § 346. The Conduct of the Branches 
 
 There are two main systems of conducting branch 
 houses: in the one, all accounts are kept in the books of 
 the home office and all collections are made therefrom, all 
 business transacted at the branches being reported daily 
 to the home office; in the other, all accounts and records 
 
420 
 
 CORPORATE COMBINATIONS 
 
 are kept at the branch offices and reports are made to the 
 home office from time to time. 
 
 As all the assets and liabilities of the Vine Company 
 and of Bell & Davis have been taken onto the home office 
 books, it may be assumed that these branch offices are to 
 be handled under the first plan — practically as selling 
 agencies. It is evident that the Bain plant is to be 
 handled under the second plan, the assets and liabilities 
 being continued in its own ledgers and its own complete 
 set of books being maintained as before. Therefore, any 
 adjustments necessary in the transfer of ownership and 
 liquidation of certain liabilities must necessarily be made 
 in these books. This branch will keep all accounts per- 
 taining to its business affairs and report periodically to the 
 home office. 
 
 In the Vine Company and Bell & Davis officer, 
 triplicate copies will be made of each invoice; the original 
 will be given to the customer, the duplicate forwarded to 
 the home office, and the triplicate kept on file at the 
 branch. A like plan is followed in connection with all 
 other transactions, thus enabling the home office to record 
 each day the various sales, purchases, and expenses of 
 these branches. 
 
 Cash or merchandise sent from the home office to the 
 branches is charged to them, and remittances of cash or 
 merchandise from the branches to the home office are 
 credited to the branches. Goods or cash sent from one 
 branch to another must, of course, be reported to the 
 home office promptly so that interbranch debits and 
 credits may be made. 
 
 Since the office of the Long Company becomes the 
 head office, no material changes are necessary in its 
 methods of account-keeping, though a new general ledger 
 is assumed to have been opened. 
 
CONSOLIDATION BY MERGER 
 
 421 
 
 § 347- Closing Entries for Long Company 
 
 In these illustrative entries many of the details and 
 computations used in arriving at results are omitted. 
 They are usually all proved by the accountant, however, 
 in his working papers and can be referred to at any time 
 during the process of consolidation. 
 
 First Entry 
 
 Dividend Payable $230,000 
 
 To Cash $230,000 
 
 For payment of dividend due today. 
 
 Second Entry 
 
 Good- Will I $1,853,200 
 
 To Surplus $1,853,200 
 
 This Company has agreed to merge with 
 
 and sell out to the Long-Bain Manu- 
 facturing Company for $8,000,000, as 
 
 per agreement executed this day, and 
 
 as per order of the directors. The 
 
 good-will allowed in addition to the 
 
 $1,000,000 already on the books is 
 
 $1,853,200. 
 
 Third Entry 
 
 Long-Bain Manufacturing Company $12,033,500 
 
 To Sundry Assets: 
 
 Cash $342,800 
 
 Notes Receivable 340.600 
 
 Accounts Receivable 1,021,300 
 
 Prepaid Charges 46,200 
 
 Investments 500,000 
 
 Stock and Material 964,300 
 
 Supplies 175.100 
 
 Due from Bain Company 85,000 
 
 Furniture and Fixtures 125,000 
 
 Patents, Patterns and Tools 450,000 
 
 Building and Plant 4,390,000 
 
 Sinking Fund 740,000 
 
 Good-Will 2,853,200 
 
422 
 
 CORPORATE COMBINATIONS 
 
 For all assets turned over in payment of 
 subscription to $8,000,000 of stock, as 
 per resolution of the directors and 
 stockholders. 
 
 Fourth Entry 
 Sundry Liabilities: 
 
 Notes Payable $685,000 
 
 Accounts Payable 350,000 
 
 Accrued Charges 37.900 
 
 Reserve for Depreciation 345,100 
 
 Reserve for Bad Debts 10,000 
 
 Reserve for Insurance 105,500 
 
 First Mortgage Bonds 2,500,000 
 
 To Long-Bain Manufacturing Com- 
 pany $4,033,500 
 
 For all liabilities of Long Company as- 
 sumed by the Long-Bain Company as 
 per agreement. 
 
 Fifth Entry 
 
 Stock of Long-Bain Manufacturing Com- 
 pany $8,000,000 
 
 To Long-Bain Manufacturing Com- 
 pany $8,000,000 
 
 For $8,000,000 of the capital stock of the 
 Long-Bain Manufacturing Company 
 received this day, as per agreement, 
 in full payment for plant, assets, and 
 liabilities turned over and transferred 
 according to legal requirements : 
 40,000 shares common stock $4,000,000 
 40,000 shares preferred stock 4,000,000 
 
 Total $8,000,000 
 
 Sixth Entry 
 
 Surplus $400,000 
 
 To Stock of Long-Bain Manufactur- 
 ing Company $400,000 
 
CONSOLIDATION BY MERGER 423 
 
 For donation of 10% of the allotment of 
 $4,000,000 common stock, to be used 
 by the Long-Bain Company for work- 
 ing purposes. 
 
 Seventh Entry 
 
 Capital Stock $5,000,000 
 
 Surplus 2,600,000 
 
 To Sundry Stockholders $7,600,000 
 
 For allotment of stock of the Long-Bain 
 Company to the individual stockhold- 
 ers in proportion to holdings. 
 
 The distribution of stock must, of course, be made in 
 the proportion decided upon by the stockholders them- 
 selves, and it is evident that uneven amounts of both 
 classes of stock will obtain. In some cases to make an 
 equitable adjustment, money will have to be passed for 
 the equalization of shares. 
 
 Eighth Entry 
 
 Sundry Stockholders $7,600,000 
 
 To Stock of Long-Bain Manufactur- 
 ing Company $7,600,000 
 
 For distribution of the common and pre- 
 ferred stock of the above company in 
 accordance with allotment agreement. 
 
 § 348. Closing Entries for Vine Company ; Bell & Davis 
 
 Similar adjusting and closing- entries are required on 
 the books of the Vine Company, setting up the necessary 
 accounts for clearing the transaction and distributing the 
 newly acquired stock. 
 
 Closing entries for Bell & Davis are similar to those 
 given in §§ 167-169. 
 
 § 349. Closing Entries for Bain Company 
 
 Since the operating acf-ounts of this company are to 
 
424 
 
 CORPORATE COMBINA'llOWtj 
 
 remain on the books of the branch, it is manifest that only 
 certain adjusting entries are necessary at this time. They 
 are as follows: 
 
 First Entry 
 
 Good- Will $1,020,000 
 
 To Surplus $1,020,000 
 
 For sale value of plant and net worth in 
 excess of present book value. (Full 
 explanation here.) 
 
 Second Entry 
 
 Dividend Payable $105,000 
 
 To Cash $105,000 
 
 For payment of dividend due today. 
 
 Third Entry 
 
 Secured Loans $100,000 
 
 To Cash $100,000 
 
 For payment of secured loans. 
 
 Fourth Entry 
 
 Investments $120,000 
 
 To Pledged Securities $120,000 
 
 For return of pledged securities upon 
 payment of loan. 
 
 Fifth Entry 
 
 Stock of Long-Bain Manufacturing Com- 
 pany $5,000,000 
 
 To Long-Bain Manufacturing Com- 
 pany $5,ooo,ooc 
 
 For common and preferred stock of the 
 Long-Bain Company received in full 
 payment for plant, assets, and liabili- 
 ties: 
 
 25,000 shares common.... $2,500,000 
 25,000 shares preferred.... 2,500,000 
 
 Total o $5,000,000 
 
CONSOLIDATION BY MERGER 
 
 425 
 
 Sixth Entry 
 
 Surplus $250,000 
 
 To Stock of Long-Bain Manufactur- 
 ing Company $250,000 
 
 For donation of 2,500 shares common 
 stock back to the Long-Bain Company 
 for working purposes. 
 
 Seventh Entry 
 
 Capital Stock ^ $3,500,000 
 
 Surplus 1,250,000 
 
 To Sundry Stockholders $4,750,000 
 
 For allotment of stock in the new cor- 
 poration, in proportion to holdings. 
 
 Eighth Entry 
 
 Sundry Stockholders $4,750,000 
 
 To Stock of Long-Bain Manufactur- 
 ing Company $4,750,000 
 
 Por distribution of stock, as per agree- 
 ment of adjustments. 
 
 Ninth Entry 
 
 Mortgage Payable $300,000 
 
 Interest Accrued 4,500 
 
 To Long-Bain Manufacturing Com- 
 pany (Home Office) $304,500 
 
 For payment of mortgage and accrued 
 interest by the Long-Bain Company 
 by an equivalent exchange of 5% bonds. 
 
 Tenth Entry (For payment of interbranch obligations when cash 
 is ample, as per agreement) 
 
 Accounts Payable $101,000 
 
 To Cash $101,000 
 
 Payment of accounts due : 
 
 Long Company $85,000 
 
 Bell & Davis 16,000 
 
 § 350. Balance Sheet of Bain Branch 
 
 The ledger accounts maintained on the Bain branch 
 
426 
 
 CORPORATE COMBINATIONS 
 
 books are reflected in the accompanying balance sheet, 
 showing the proprietorship interest of $5,304,500 standing 
 to the credit of the Long-Bain Manufacturing Company. 
 Certain of the assets could, with some advantage, be 
 transferred to the home office books and removed from 
 the branch ledger, such as the investments, buildings and 
 plant (particularly the real estate). Depreciation reserve 
 and good-will might also be transferred. This would leave 
 only working accounts on the branch ledger, and a credit 
 of $776,000 to the home office account. The accountant 
 must, of course, suit his entries to existing conditions. 
 
 Balance Sheet of the Bain" Branch 
 (After sale to the Long-Bain Company, showing open ledger accounts.) 
 
 Cash $67,300.00 
 
 Notes Receivable 135,800.00 
 
 Accounts Receivable. 492,750.00 
 
 Prepaid Charges 38,150.00 
 
 Investments 270,000.00 
 
 Stock and Material. . 510,000.00 
 
 Supplies 51,900.00 
 
 Fu rniture and 
 
 Fixtures 62,000.00 
 
 Patents, Patterns, and 
 
 Tools 244,850.00 
 
 Buildings and Plant.. 3,359,000.00 
 
 Good-Will 1,020,000.00 
 
 ),25i,95o.oo 
 
 Notes Payable $270,000,00 
 
 Accounts Payable*... 540,000.00 
 Accrued Charges.... 11,640.00 
 Reserve for Depre- 
 ciation 120,500.00 
 
 Reserve for Bad 
 
 Debts 5,310.00 
 
 Long-Bain Company 
 Home Office Ac- 
 count 5,304,500.00 
 
 5,251,950.00 
 
 § 351. Consolidated Balance Sheet of New Corporation 
 
 The consolidated balance sheet which follows is prac- 
 tically a trial balance of the ledger accounts after the 
 incorporation of the new company. 
 
 * Intercompany obligations of $101,000 included, not to be paid until cash is 
 ample. 
 
CONSOLIDATION BY MERGER 
 
 427 
 
 Consolidated Balance Sheet 
 
 Of the Long-Bain Manufacturing Company 
 
 As OF January i, 1916 
 
 (After Incorporation and Merging) 
 
 Assets 
 
 Cash $1,228,700.00 
 
 Notes Receivable... 523,700.00 
 
 Accounts Receivable. 1,266,500.00 
 
 Prepaid Charges.... 59,400.00 
 Investments : 
 
 Bain Branch Plant 5,304,500.00 
 Stock of Other 
 
 Companies 560,000.00 
 
 Stock and Material. 1,305,100.00 
 
 Supplies 195,300.00 
 
 Furniture and Fix- 
 tures 161,000.00 
 
 Patents, Patterns, 
 
 and Tools 674,500.00 
 
 Buildings and Plant. 4,950,000.00 
 Sinking Fund Trus- 
 tee 740,000.00 
 
 Incorporation Ex- 
 penses 225,000.00 
 
 Discount on Bonds. 100,000.00 
 
 Treasury Stock 220,000.00 
 
 Unissued Bonds 925,000.00 j 
 
 Unissued Preferred ' 
 
 Stock 200,000.00 I 
 
 Unissued Common j 
 
 Stock 700,000.00 I 
 
 Mitchell & Stevens, | 
 
 Bankers 600,000.00 j 
 
 Good-Will* 3,518,200.00 
 
 $23,456,900.00 
 
 Liabilities and Capital 
 
 Notes Payable $910,100.00 
 
 Accounts Payable.. 757,700.00 
 
 Accrued Charges . . . 52,300.00 
 
 Reserve for Depre- 
 ciation 399,100.00 
 
 Reserve for Bad 
 Debts 12,200.00 
 
 Reserve for Insur- 
 ance 105,500.00 
 
 Donated Capital 220,000.00 
 
 First Mortgage 
 Bonds 5,000,000.00 
 
 Authorized Capital 
 
 Stock Preferred.. 8,000,000.00 
 
 Authorized Capital 
 
 Stock Common... 8,000,000.00 
 
 $23,456,900.00 
 
 ♦Comprising the goodwill of the Long Company, the Vine Company, and of 
 Bell & Davis. The good-will of the Bain Company is included in the account 
 of the Bain branch plant, shown under "Investments." 
 
428 
 
 CORPORATE COMBINATIONS 
 
 § 352. Consolidation by Purchase 
 
 Under this plan of merger (§ 326), one company pur- 
 chases outright the properties of one or more companies. 
 The general plan and the book entries involved do not 
 differ materially from those already fully explained under 
 consolidation by merger, except that in an outright pur- 
 chase there need not be any application to the state other 
 than for dissolution of the selling companies. They 
 surrender their charters to the state according to pre- 
 scribed legal procedure. 
 
CHAPTER XXX 
 
 CONSOLIDATION BY LEASE 
 
 § 353- Leases 
 
 A common method of securing control of a competing 
 concern is to rent its plant or property for a term of years 
 — a plan extensively used by transportation companies to 
 gain possession of connecting lines. By this method com- 
 petition is eliminated and the lessee company obtains 
 valuable connections and a going business without 
 incurring the cost and delay of building operations. The 
 lessor, on the other hand, besides being relieved of the 
 operation of its properties, may receive more satisfactory 
 returns in the form of rentals. 
 
 Leases commonly run from i to 50 years, but may 
 extend to 99 years, and occasionally to 999 years; such a 
 lease is equivalent to permanent ownership, so much so 
 that the operating company may improve the properties 
 without any hesitancy. Short term leases usually include 
 the option of a renewal on the same or 'on specified terms. 
 The lessor company, as a rule, continues to maintain its 
 separate existence, but its activities consist merely in 
 receiving and disbursing moneys in the form of expenses, 
 dividends, etc. 
 
 Nearly all leases require the operating company to pay 
 taxes, insurance, and up-keep expenses of the leased 
 properties, and to undertake other obligations of a more 
 or less rigid nature. In mining operations the terms of 
 the lease usually require the payment of a certain amount 
 per ton on the output of ore, with a specified minimum 
 
 429 
 
430 CORPORATE COMBINATIONS 
 
 output, while in the case of a railroad or similar property 
 the payment is likely to be a specified rental or a guar- 
 anteed dividend on the lessor's outstanding stock, with 
 perhaps some participation in profits. 
 
 The lessor is given access to the accounts and records 
 of the lessee as far as they relate to the leased property 
 during the life of the lease. Leases of large properties 
 are usually matters of public record and the details thereof 
 accessible to the public. 
 
 § 354. Entries for Property Leased 
 
 Leased properties continue in the ownership of the 
 lessor and must be returned at the expiration of the lease. 
 Where the properties taken over are of such a nature 
 that they are merged and perhaps consumed, as for in- 
 stance, equipment and supplies, the lessee usually absorbs 
 them into its own accounts and at the expiration of the 
 lease either pays for them in cash or returns other 
 equivalent assets. The assets so absorbed may be charged 
 to the property accotints already in the ledger and credited 
 to the lessor, or else be charged to separate accounts. 
 
 The record of leased property stands as entered until 
 the lease expires, while repairs and minor improvements 
 on the property are usually charged to operating ex- 
 penses. Permanent improvements would usually be 
 charged against the lessor, the matter being determined 
 by the terms of the lease. On the balance sheet, leased 
 properties and the owner's credits may appear among the 
 assets and liabilities as cancelling amounts, or may be 
 entered on both sides "in short," in order to indicate 
 their relation to other items; or they may be mentioned 
 in a footnote to the balance sheet, or even be omitted 
 entirely. If they are merged and included in the lessee's 
 properties, a footnote may or may not be necessary, but 
 
CONSOLIDATION BY LEASE 431 
 
 in that case the lessor's account must be included in the 
 liabilities. 
 
 Corresponding, though reverse, entries should be made 
 on the books of the lessor for the properties conveyed by 
 the lease, in case it is decided to make book entries at all. 
 It would seem good practice to debit the leasing company 
 and credit the property leased, but, if all the property 
 owned by the lessor is taken, there would be nothing 
 gained by so doing. This entry would, of course, be 
 suitable where only a part of the property is conveyed, 
 in order to distinguish between properties leased to others 
 and properties operated. 
 
 § 355- Entries for Guarantees 
 
 When guarantees of interest or dividends are included 
 in the terms of a lease, book entries are not absolutely 
 necessary to record the contingent liability incurred; and 
 yet it is good business practice so to record such lia- 
 bilities as to keep the obligation continually before the 
 stockholders. 
 
 The Pennsylvania Railroad Company does not enter 
 such guarantees in its ledger accounts, but in its annual 
 report a complete list of them is included. If book entries 
 are made for guarantees, they must obviously be for record 
 only, because as contingent entries they would offset each 
 other in the accounts. In the annual balance sheet they 
 should be exhibited either among the accounts (in short 
 or otherwise), or as a footnote thereto. 
 
 § 356. Lease Terms 
 
 , To illustrate the entries required when properties are 
 leased by a corporation, assume that the Vermont Mining 
 and Smelting Company has leased a mine from the Union 
 Mining Company for a term of thirty years. The prop- 
 
432 CORPORATE COMBINATIONS 
 
 erties taken over comprise the mine, valued at $400,000, 
 buildings and equipment valued at $30,000, and supplies 
 valued at $8,500. At the termination of the lease the 
 properties are to be returned to the Union Mining Com- 
 pany in as good condition as when taken over, except as 
 to the ore mined. The Vermont Mining and Smelting 
 Company agrees to pay as rental for the mine a guaranteed 
 annual dividend of 4% on the Union Mining Company's 
 capital stock of $1,000,000 during the life of the lease, and 
 a royalty of 10 cents per ton for every ton of ore mined. 
 
 The Vermont Mining and Smelting Company leases 
 also a short railroad and its equipment, valued at 
 $3,000,000, of the Wilson Transportation Company. The 
 lease is to run for thirty years, at the end of which time 
 the property is to be returned in good condition. The 
 lessee is to guarantee during the existence of the lease an 
 annual dividend oi 6% on the capital stock ($2,000,000) 
 of the lessor company as rental, and is in addition to pay 
 all taxes, improvement expenses, and interest on the out- 
 standing bonds, and to make all needed replacements. 
 
 The Vermont Company finds it necessary to expend 
 for improvements on the Union Mining Company property 
 $100,000, and on the railway $400,000; and in order to 
 secure funds for this, the company issues $500,000 of 
 short term notes payable $100,000 each year for five years 
 and drawing 6% interest. The notes are secured by a 
 deposit with the trustee of $500,000 stock of the Lone 
 Ridge Mines Company, a successful subsidiary. The notes 
 are sold at 95 to a banking firm. 
 
 The output of ore from the leased mine during 191 6 
 is 122,000 tons, and the net income therefrom to the 
 lessee after paying operating and repair expenses is 
 $85,000, out of which the rental must be paid. The Union 
 Mining Company is able, out of the rental received, to 
 
CONSOLIDATION BY LEASE 433 
 
 ^PPly 3% of the value of the mine leased on its extinguish- 
 ment fund and also to apply to the dividend fund 2 1/2% 
 on its capital stock. 
 
 The operations of the leased railway for the year are 
 shown in the following summary: 
 
 Gross Freight Earnings $750,000.00 
 
 Operating Expenses $230,000.00 
 
 Replacements and Repairs 145,800.00 
 
 Improvements, etc., charged off 14,000.00 
 
 Guaranteed Dividend to Lessor 120,000.00 509,800.00 
 
 Net Earnings $240,200.00 
 
 The accounting procedure to be considered in con- 
 nection with the foregoing transactions involves entries 
 for: 
 
 1. Lease of the mine and equipment. 
 
 2. Lease of the railway and equipment. 
 
 3. Issue of notes and expenditures for improvements 
 
 on leased properties. 
 
 4. Distribution of rentals of leased properties at 
 
 end of first year. 
 
 5. Union Mining Company at the beginning and 
 
 end of the first year. 
 
 6. Wilson Transportation Company at the end of 
 
 the year's operations ufider the lease. 
 
 § 357- Entries for Lease of Mine 
 
 It is natural to suppose that the lessee will aim to secure 
 from the mine during the life of the lease, all of its ore, 
 unless the lease contains some limitations. The outlay 
 for improvements and extensions made by the lessee must 
 be written off during the life of the lease as operating 
 expenses, excepting as to any movable equipment belong- 
 ing to the lessee. The mine buildings and equipment are 
 
434 CORPORATE COMBINATIONS 
 
 valued at $30,000, and must be returned when the lease 
 expires. The supplies taken over are valued at $8,500, 
 and must be made good when the lease expires. Assuming 
 that the Vermont Company decides to bring these prop- 
 erties into its own accounts, the following entry is made: 
 
 Leased Properties of Mining Company $438,500 
 
 To Union Mining Company for Leased 
 
 Properties $438,500 
 
 For mine, valued at $400,000, buildings and 
 equipment at $30,000, and supplies at $8,- 
 500, taken over under thirty-year lease, to 
 be returned at expiration thereof. 
 
 It will be seen that one entry offsets the other. They 
 must stand thus in the ledger accounts until the lease 
 matures and then be eliminated by a counterbalancing 
 entry. 
 
 Under an alternative plan that is also good practice, 
 no entry in the books is necessary for the leased proper- 
 ties, save the record of the transaction in the minutes of 
 the directors and stockholders. 
 
 The improvements on the mining property, costing 
 $100,000, should be charged to "Improvements Account 
 of Union Mine," and then written off one-thirtieth each 
 }ear during the life of the lease. Any improvements of 
 succeeding years may be spread over the remaining years 
 of the lease's existence. Expenditures for the up-keep of 
 buildings and equipment, replacements and supplies, 
 should be charged like the regular company expenses to 
 Operating Expense account. 
 
 § 358. Entries for Lease of Railway 
 
 The same general accounting procedure may be fol- 
 lowed for the leased railway property as for the leased 
 mine. Both road and equipment must, of course, be kept 
 
CONSOLIDATION BY LEASE 435 
 
 in good condition during the tenure of the lease. The 
 value of the road taken over may or may not be entered 
 upon the books of the lessee, but it is advisable to enter 
 the equipment. All expenditures for extensions or 
 improvements must obviously be spread over the life of 
 the lease; while up-keep and operating expenses are con- 
 sidered as current charges. The guaranteed 6% dividend 
 of $120,000 per year siiould also be considered a charge 
 against operations. 
 
 Leased Equipment of Wilson Transportation 
 
 Company $ 
 
 To Wilson Transportation Company, 
 
 Leased Equipment $ 
 
 For equipment taken over under lease, to 
 be returned at the expiration thereof 
 (full details). 
 
 It is probable that rolling stock and any other prop- 
 erties of the lessee company used in the operation of the 
 railroad property will be transferred to the leased road, 
 and then taken back at the expiration of the lease. 
 
 § 359- Entries for Improvements and Note Issue 
 
 The expenditures for improvements on leased prop- 
 erties should be charged against the improvement 
 accounts of the respective properties in order to keep 
 the different expenditures separate and distinct. The 
 security back of the note issue should be listed separately 
 in the explanation of the journal entry, or else a notation 
 should be made stating the disposition of the collateral. 
 Everything must be so recorded as to be clearly under- 
 stood. Interest on the notes and the amortization of 
 bond discount must be charged each year as operating 
 expenses of the business. The recording entries may be as 
 follows : 
 
436 CORPORATE COMBINATIONS 
 
 Cash $475,000 
 
 Bond Discount 25,000 
 
 To Collateral Serial Notes $50o,ooa 
 
 For sale to bankers at 95 of $500,000 of 
 short term 6% notes, payable $100,000 
 each year for five years, secured by a 
 deposit with the trustee of $500,000 stock 
 of the Lone Ridge Mines Company. 
 
 Pledged Securities for Serial Note Issue $500,000 
 
 To Stocks of Other Companies $500,000 
 
 (Full explanation required here.) 
 
 Union Mine Improvements $100,000 
 
 Wilson Railway Improvements 400,000 
 
 To Cash $500,000 
 
 (Full explanation required here.) 
 
 § 360. Adjusting Entries at End of First Year 
 
 The entries which follow indicate adjustments at the 
 end of one year on the books of the Vermont Mining and 
 Smelting Company. Only such entries are shown here as 
 affect the accounts of the properties leased; interest on 
 bonds, etc., being omitted. 
 
 December 31, 1916 
 
 Union Mine Operating Account $3,500.00 
 
 Wilson Railway Operating Account 14,000.00 
 
 To Union Mine Improvements $3>333-33 
 
 " Wilson Railway Improvements I3.333-33 
 
 " Bond Discount 833.34 
 
 To write off 1/30 of improvements and 
 bond discount in proportion to the im- 
 provements, 1/5 and 4/5, as follows: 
 
 Improvements cost $500,000 
 
 Bond discount 25,000 
 
 Total $525,000 
 
CONSOLIDATION BY LEASE 
 
 437 
 
 Union Mine Operating Account $52,200 
 
 To Union Mining Company $52,200 
 
 For royalties and guaranteed dividends on 
 leased mine for 1916, as per terms of 
 lease, being 10 cents per ton on 122,000 
 tons ore mined, $12,200, and 4% dividend 
 on $1,000,000 of capital stock, $40,000. 
 
 Wilson Railway Operating Account $120,000 
 
 To Wilson Transportation Company. . . . $120,000 
 
 For application of guaranteed 6% dividend 
 on company's outstanding stock after pay- 
 ment of taxes, improvements, operating 
 repairs, etc., according to the terms of the 
 lease. 6% on $2,000,000 capital stock 
 = $120,000. 
 
 Union Mining Company $52,200 
 
 Wilson Transportation Company 120,000 
 
 To Cash $172,200 
 
 For payment of royalties and dividends for 
 leased properties, as per statement. 
 
 Union Mine Operating Account $29,300 
 
 Wilson Railway Operating Account 240,200 
 
 To Profit and Loss $269,500 
 
 For net earnings after paying royalties and 
 guaranteed dividends as per agreement. 
 
 § 361. Entries for Union Mining Company 
 
 There may or may not be entries made on the books 
 of the lessor company at the time of executing the lease. 
 The following entries are suggestive, though a different 
 plan might be followed. Only the accounts affected by 
 the lease are included in the entries, no attention being 
 given to accruals or intermediate entries. 
 
438 
 
 CORPORATE COMBINATIONS 
 
 Entry when lease is made: 
 
 January i, 1916 
 
 Properties Leased to Vermont Mining and 
 
 Smelting Company $438,500 
 
 To Mining Property $400,000 
 
 " Buildings and Equipment 30,000 
 
 " Supplies 8,500 
 
 For lease of properties to Vermont Mining 
 and Smelting Company as per terms of 
 the lease (full explanation). 
 
 Entries at end of first year: 
 
 December 31, 1916 
 
 Cash $52,200 
 
 To Income Account $52,200 
 
 Income from mine and properties leased to 
 Vermont Mining and Smelting Company, 
 as per terms of the lease : 
 122,000 tons of ore mined, at 10 
 
 cents per ton $12,200 
 
 Guaranteed dividend on capital 
 stock 40,000 
 
 Total rental for year $52,200 
 
 Income Account $52,200 
 
 To Extinguishment of Mines Reserve.. $12,000 
 
 " Dividend Account. 25,000 
 
 " Profit and Loss 15,200 
 
 For disposition of income from leased prop- 
 erties. 
 
 § 362. Balance Sheet of Union Mining Company 
 
 The balance sheet of the Union Mining Company at 
 the end of the first year, December 31, 19 16, would appear 
 as follows: 
 
439 
 
 CONSOLIDATION BY LEASE 
 
 Union Mining Company 
 Balance Sheet, December 31, 1916 
 
 (One year after properties were leased to the Vermont Mining and 
 Smelting Company) 
 
 Assets 
 Mines, Buildings, and 
 
 Real Estate $430,000.00 
 
 Properties Leased to 
 
 Vermont Mining and 
 
 Smelting Company.. 438,500.00 
 Supplies and Fixtures . 77,000.00 
 Inventory of Ore at 
 
 Mines and Docks 254,600.00 
 
 Accounts Receivable.. 318,250.00 
 
 Cash 377,520.00 
 
 Prepaid Charges 36,146.00 
 
 Incorporation Expenses, 
 
 Balance 23,200.00 
 
 $1,955,216.00 
 
 Liabilities 
 
 Mortgage Payable $150,000.00 
 
 Temporary Bank Loans 75,000.00 
 
 Accounts Payable 231,450.00 
 
 Accrued Pay-Roil 17,240.00 
 
 Accrued Charges and 
 
 Interest 26,385.00 
 
 Reserve for Extin- 
 guishment of Mines . 12,000.00 
 
 Reserves for Sundry 
 
 Purposes S7,936.oo 
 
 Dividend Account 25,000.00 
 
 Capital Stock Out- 
 standing 1,000,000.00 
 
 Surplus 360,205.00 
 
 $1,955,216.00 
 
 Note: Net income from leased properties, $52,200, applied to re- 
 serve for extinguishment $12,000, to Dividend account $25,000, and to 
 Surplus $15,200. 
 
 § 363. Entries for Wilson Transportation Company 
 
 Since all of the property, road bed, and equipment of 
 the railway has been leased to the Vermont Mining and 
 Smelting Company, it is apparent that no separate entries 
 are necessary in the accounts of the Wilson Transportation 
 Company. The property accounts stand as they are on the 
 books, representing as they do the investment therein. 
 At the end of the year, however, entries must be made in 
 the books to record the dividends guaranteed by the Ver- 
 mont Mining and Smelting Company. 
 
440 
 
 CORPORATE COMBINATIONS 
 
 December 31, 1916 
 
 Cash , $120,000 
 
 To Income Account $120,000 
 
 Being guaranteed income from road and 
 equipment leased to Vermont Mining and 
 Smelting Company, as per terms of the 
 lease. 
 
 Income Account $120,000 
 
 To Dividend Account $120,000 
 
 For dividend guaranteed by the lessee, Ver- 
 mont Mining and Smelting Company, 
 payable January 25, 1917. 
 
CHAPTER XXXI 
 
 HOLDING COMPANIES 
 
 § 364. Classification of Holding Companies 
 
 The holding company is a corporation formed for the 
 purpose of purchasing the securities of other corporations. 
 It furnishes an eflfective method for the consolidation of 
 various companies engaged in the same or related lines of 
 business, and the ehmination of competition. 
 
 Holding companies may be divided into two classes: 
 
 1. Those organized to control other companies in 
 
 similar or associated enterprises, by purchasing 
 a controlling interest in the stock of such 
 companies. 
 
 2. Those formed to invest capital in the securities 
 
 of other companies, though not necessarily to 
 the extent of securing control; such invest- 
 ments may be spread over non-competitive 
 lines of industry, and may include bonds as 
 well as stock. 
 
 § 365> Controlling Corporations 
 
 Where the state laws permit, any company whose 
 charter so provides, may purchase the stocks and bonds 
 of other companies. A company may therefore be both 
 an operating and a holding company. For the purpose 
 of securing control of another corporation, it is customary 
 to' purchase at least 51% of its outstanding stock having 
 voting rights, though sometimes a much smaller propor- 
 
 441 
 
442 CORPORATE COMBINATIONS 
 
 tion may be sufficient for effective control. It has been 
 stated by high authority that 33% of its stock is sufficient 
 to control almost any important railway, owing to the wide 
 distribution of the securities of such companies. There are 
 many instances where the management of banks and 
 industrial companies has been maintained by a unified 
 minority. 
 
 § 366. Status of the Subsidiary Company 
 
 The sale of the stock of a company to a holding com- 
 pany in part, or even in whole, does not necessarily affect 
 its accounting, save as to the record of stock transferred. 
 Nor is its legal status changed in any way, though it 
 may, as a matter of fact, have become a subsidiary under 
 the control of the holding company. The most notable 
 example of holding and subsidiary companies is perhaps 
 found in the case of the United States Steel Corporation 
 which is not an operating company. All dividends de- 
 clared by the constituent or operating companies are 
 paid to their own stockholders; and the holding company, 
 though controlling these constituent companies, benefits 
 by such dividends only as a stockholder and to the extent 
 of its holdings of their stock. 
 
 § 367. Legality of Holding Companies 
 
 Many states prohibit the organization of holding com- 
 panies, while others afford especially favorable facilities 
 for their formation. A holding company may be incor- 
 porated in a state which permits such incorporation, and 
 then lawfully conduct operations through its constituent 
 companies within states prohibiting its existence. The 
 laws of Missouri, for instance, prohibit holding companies, 
 while the laws of New Jersey permit them; and, as a 
 company organized in one state may by comity do business 
 
HOLDING COMPANIES 
 
 443 
 
 in another, a holding company organized in New Jersey 
 may carry on operations through its constituent com- 
 panies in Missouri. For this and other reasons federal 
 control of combinations has been advocated. 
 
 In 1890 Congress passed the Sherman Anti-Trust Act, 
 under which every contract or combination in restraint 
 of trade is declared illegal. Under its provisions some of 
 the largest combinations have already been dissolved. By 
 the passage of the Clayton law in 1914, Congress has 
 undertaken to control more effectively such combinations 
 as come within federal jurisdiction. 
 
 § 368. Accounting Procedure of Holding Company 
 
 The example which follows shows the accounting 
 procedure involved where a corporation has been organized 
 for the sole purpose of purchasing the stocks and bonds 
 of other companies. 
 
 The Harlow Manufacturing Company was incorporated 
 July I, 1916, for the purchase of stocks and bonds of other 
 established companies as a means of providing income and 
 of harmonizing conflicting interests. The capital stock 
 is $1,000,000, composed of 10,000 shares of the par value 
 of $100 each, and $950,000 of this capital stock has been 
 subscribed and paid in. Incorporating expenses amount 
 to $10,000. The proceeds from the stock subscriptions have 
 been used for the purchase of securities as of July i, 1916, 
 as follows : 
 
 1. $100,000 of S% first mortgage bonds of the Vulcan Iron 
 
 Works at 95 and accrued interest for three months $96,250.00 
 
 2. $200,000 of refunding S% first mortgage bonds of the 
 
 Rapid Transit Corporation at 98 and accrued interest 
 
 for three months 198,500.00 
 
 3. 2,000 shares of 7% cumulative preferred stock of the 
 
 Longworth Steel Company at 105, ex-dividend 210,000.00 
 
444 CORPORATE COMBINATIONS 
 
 4. soo shares of 6% preferred stock of the Brownson Trad- 
 
 ing Company at 96 and accrued dividend for six 
 
 months due this day 49,500.00 
 
 5. 3,000 shares of common stock of the Rockway Iron Min- 
 
 ing Company at par, payable one-half down and the 
 
 balance in three months 300,000.00 
 
 6. 1,000 shares common stock of the Delaware River Power 
 
 Company in exchange for a similar number of shares 
 
 of this Company 100,000.00 
 
 $954,250.00 
 
 Dividends and interest received for the six-months 
 period ending December 31, 1916, amount to $27,000; bond 
 interest accrued amounts to $3,750; and accrued cumulative 
 dividends, to $1,500. The operating expenses for this 
 period aggregate $2,800. A dividend of 2% on the com- 
 pany's stock, payable January 15, 191 7, is declared by the 
 directors at their meeting on December 31, 1916. All 
 investments are to be carried on the books at the purchase 
 price. The incorporating expenses are to be written ofif 
 over a period of ten years. 
 
 § 369. Accounting Requirements 
 
 The entries to record properly the transactions of this 
 example are simple and need not be set out in full. The 
 procedure and book records required at the time of in- 
 corporation have already been fully explained. When 
 stocks of other companies are purchased, it is customary 
 to debit them at the cost price to some suitable account, 
 as "Investments," "Stock Investments," or "Stocks of 
 Other Companies." A like procedure is followed in the 
 purchase of bonds of other companies, substituting the 
 word "Bond" for "Stock." Sometimes both stocks and 
 
HOLDING COMPANIES 
 
 445 
 
 bonds are included in one account, but when this is done a 
 special record is kept to show the details of the various 
 securities. 
 
 Accrued dividends on stock investments should, if 
 entered at all, be debited to "Accrued Dividends" account; 
 and likewise, accrued interest on bonds, to an "Accrued 
 Bond Interest" account. The income from such invest- 
 ments may be credited to a general "Income" account, or 
 separately to suitable accounts which distinguish between 
 stock dividends and bond interest. 
 
 The income and expenditures and the resultant assets 
 and liabilities of this company at the close of the first 
 half-year are reflected in the accompanying income account 
 and balance sheet: 
 
 Harlow Manufacturing Company 
 
 Income Account 
 For Six Months Ended December 31, 1916. 
 
 Debits 
 
 July I, 1916 
 
 Bond Interest Accrued. . $3,750.00 
 
 Dividends Accrued 1,500.00 
 
 Balance (Income for Six 
 Months) 27,000.00 
 
 $32,250.00 
 
 General Expenses $2,8oaoo 
 
 Incorporating Expenses 
 
 Written Oiif 1,000.00 
 
 Net Income for Period. 23,200.00 
 
 $27,000.00 
 
 Credits 
 December 31, 1916 
 Preferred Dividend^ Re- 
 ceived $8,500.00 
 
 Preferred Dividends Ac- 
 crued 1,500.00 
 
 Bond Interest Received. 7,500.00 
 Bond Interest Accrued. . 3,750.00 
 Dividends 11,000.00 
 
 $32,250.00 
 Income brought down. .$27,000.00 
 
 $27,000.00 
 
 Balance $23,200.00 
 
446 CORPORATE COMBINATIONS 
 
 Balance Sheet, December 31, 1916 
 
 (End of first six-month period) 
 
 Assets 
 
 Liabilities 
 
 
 Cash on Hand $9,950.00 
 
 Capital Stock : 
 
 
 Investments : 
 
 Authorized $ 
 
 1,000,000.00 
 
 Bonds of Other Com- 
 panies 291,000.00 
 
 Unissued 
 
 50,000.00 
 
 
 
 Stocks of Other 
 
 Outstanding 
 
 $950,000.00 
 
 Companies 658,000.00 
 
 Dividend No. i pay- 
 
 
 Bond Interest Accrued. 3,750.00 
 
 able January 15, 1917 
 
 19,000.00 
 
 Dividends Accrued 1,500.00 
 
 Undivided Profits. . . . 
 
 4,200.00 
 
 Incorporation Expenses, 
 
 
 
 Balance 9,000.00 
 
 
 
 $973,200.00 
 
 $973,200.00 
 
 § 370. Operating Company Purchasing Controlling Interest 
 
 As was stated above, the holding company is usually 
 created for the sole purpose of buying the stock of a num- 
 ber of existing corporations and thereby to exercise control 
 in their management. This, however, is not always the 
 case. 
 
 In the following example the purchasing company is 
 itself actually engaged in operating its plants, but by the 
 purchase of stock it secures control of a company engaged 
 in producing an article needed by it in the manufacture 
 of railway equipment. 
 
 The United Equipment Company has purchased 
 $1,500,000 of the outstanding stock of the Nelson Car 
 Wheel Company at 105, ex-dividend. As payment 
 therefor it is to give $1,000,000 of its unissued common 
 stock at 125, $150,000 of its unissued preferred stock at 
 1 10, and the balance in cash. The financial statement of the 
 Nelson Car Wheel Company and the balance sheet of the 
 United Equipment Company are as follows : 
 
HOLDING COMPANIES 
 
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448 
 
 CORPORATE COMBINATIONS 
 
 United Equipment Company 
 Balance Sheet, July i, 1916 
 
 Assets 
 
 
 Liabilities 
 
 Property, Plants, and 
 
 
 Capital Stock— Pre- 
 
 Equipment 
 
 $8,324,500.00 
 
 ferred $4,000,000.00 
 
 Inventories of Stock 
 
 
 (Authorized $5,000,000) 
 
 and Material 
 
 3,240,800.00 
 
 Capital Stock — Com- 
 
 Investments in Stocks 
 
 
 mon 7,000,000.00 
 
 and Bonds of Other 
 
 
 (Authorized $10,000,000) 
 
 Companies 
 
 2,160,000.00 
 
 First Mortgage $% 
 
 Cash on Hand and in 
 
 
 Twenty-Year 
 
 Banks 
 
 895,940.00 
 
 Bonds, Outstand- 
 
 Accounts Receivable 
 
 2,s6o,3oaoo 
 
 standing 2,500,000.00 
 
 Notes and Loans Re- 
 
 
 (Authorized $5,000,000) 
 
 ceivable 
 
 1,343,400.00 
 
 Notes and Bank 
 
 Sinking Fund Deposit 
 
 
 Loans 1,680,000.00 
 
 with Trustee 
 
 326,900.00 
 
 Accounts Payable... 1,740,300.00 
 
 0*iher Assets 
 
 857,190.00 
 
 Accrued Interest, 
 Taxes, etc 172,100.00 
 
 Dividends for Half- 
 Year, Unpaid 420,000.00 
 
 Sundry Reserves 996,630.00 
 
 Surplus 1,200,000.00 
 
 
 
 $19,709,030.00 
 
 $19,709,030.00 
 
 The points of interest in the present illustration are: 
 
 1. The entries on the books of the United Equip- 
 
 ment Company for the purchase of stock. 
 
 2. The entries on the books of the Nelson Car 
 
 Wheel Company. 
 
 3. The consolidated balance sheet of the two com- 
 
 panies after the transfer of stock, showing the 
 condition of the United Equipment Company. 
 
 The entries required and the consoHdated balance sheet 
 of the two companies are shown on the following pages. 
 
HOLDING COMPANIES 
 
 449 
 
 § 371. Entries on Books of Purchasing Company 
 
 The only entries on the books of the United Equip- 
 ment Company are in the accounts relating to capital, 
 cash, investments, and stock premium; the accompanying 
 entries show how the transaction should be handled. The 
 premium of $75,000 on stock purchased is included in its 
 cost and charged to Investments, thus reflecting as nearly 
 as possible the market value of the stock; it would not 
 be wrong to charge this amount against the Stock 
 Premium account which now shows a credit of $265,000 
 taken upon the sale of the company's own stock, leaving 
 a balance of $190,000. 
 
 First Entry 
 
 Investments in Subsidiary Companies $1,575,000 
 
 To Stockholders of Nelson Car Wheel 
 
 Company $1,575,000 
 
 For purchase of 15,000 shares, par value 
 $1,500,000, of the capital stock of the 
 Nelson Car Wheel Company at 105, 
 to be paid for as follows: 
 10,000 shares common stock 
 
 at 125 $1,250,000 
 
 1,500 shares preferred stock 
 
 at no 165,000 
 
 Cash for the balance 160,000 
 
 Total investment $1,575,000 
 
 Second Entry 
 
 Stockholders of Nelson Car Wheel Company $1,415,000 
 
 To Capital Stock— Common $1,000,000 
 
 " Capital Stock— Preferred 150,000 
 
 " Premium on Stock Sale 265,000 
 
 For issue of stock to the vendors of the 
 Nelson Company stock, as above. 
 
450 
 
 CORPORATE COMBINATIONS 
 
 Third Entry 
 
 Stockholders of Nelson Car Wheel Company $160,000 
 
 To Cash $160,000 
 
 For settlement of balance on stock pur- 
 chased of sundry stockholders. 
 
 As a result of the above entries, the cash of the pur- 
 chasing company is reduced to $735,940, investments 
 increased to $3,735,000, outstanding common stock 
 increased to $8,000,000, outstanding preferred stock in- 
 creased to $4,150,000, and stock premium credited for 
 $265,000. All other items in the balance sheet remain as 
 previously stated. New certificates of stock must now be 
 issued to the selling stockholders of the Nelson Car Wheel 
 Company. Suitable entries must also be made in the 
 official records of the company, comprising the minute 
 book, stock register, and stockholders ledger. 
 
 § 372. Entries on Books of Selling Company 
 
 No entries for the sale of its stock are required on the 
 books of account of the Nelson Car Wheel Company. The 
 sale was a personal matter with the stockholders of that 
 company and one in which no official action is required 
 by the board of directors. Any necessary entries must, of 
 course, be made in the transfer book and stock book, and 
 new certificates be issued in exchange for those cancelled. 
 If for convenience or any other reason the transaction 
 were handled as a company matter, the entries in the 
 general ledger might be as follows : 
 
 July I, 1916 
 Stock Clearing Account (or United Equip- 
 ment Company) $1,575,000 
 
 To Sundry Stockholders $1,575,000 
 
 For sale of $1,500,000 stock of this Com- 
 pany by sundry stockholders to the 
 United Equipment Company at 105. 
 
HOLDING COMPANIES 451 
 
 Stock of United Equipment Company $1,415,000 
 
 Cash 160,000 
 
 To Stock Clearing Account (or 
 
 United Equipment Company) $1,575,000 
 
 Stock of the United Equipment Company, 
 and cash received in exchange for 
 $1,500,000 of stock of this Company, 
 as above, being as follows : 
 10,000 shares common stock 
 
 at 125 $1,250,000 
 
 1,500 shares preferred stock 
 
 at no 165,000 
 
 Cash for the balance 160,000 
 
 Sundry Stockholders $1,575,000 
 
 To Stock of United Equipment Co. . $1,415,000 
 
 Cash 160,000 
 
 For stock received as above and cash 
 turned over to the sundry stockhold- 
 ers, as per agp^eement. 
 
 § 373. The Consolidated Balance Sheet 
 
 The consolidated balance sheet shown herewith con- 
 tains the assets and liabilities of both companies. This 
 plan of including in one statement the items of a main 
 company and its various subsidiaries is now in general 
 use (Chapter XXXII). It will be seen that the combined 
 balance sheet includes only the two stated companies, 
 while the United Equipment Company's holdings of stock 
 in other companies are shown in the Investments account. 
 It is obvious, however, that this account would not include 
 the stock of companies whose statements are included in 
 the consolidated balance sheet. Even the bond investment 
 of $250,000 might be deducted from the Investments 
 account and shown separately or even deducted from the 
 outstanding bonds; but for the purpose of illustration it 
 remains in the present consolidated balance sheet. 
 
452 
 
 CORPORATE COMBINATIONS 
 
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HOLDING COMPANIES 
 
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454 
 
 CORPORATE COMBINATIONS 
 
 § 374. Parent Companies 
 
 A useful variant of the holding company is frequently 
 employed to advantage in the exploitation of inventions. 
 A parent corporation in which the patent rights for such 
 inventions are vested, is formed in some selected state 
 where the power to hold the stock of other corporations 
 is legal. Subordinate companies are then formed in the 
 several states to operate in specified territorial districts, 
 and to these companies rights in the inventions are as- 
 signed for their respective districts, the parent company 
 usually reserving or acquiring a controlling interest in 
 each subordinate company. The patent rights may be 
 sold outright to the sub-companies, or leased on a royalty 
 basis; or perhaps a mere license may be issued. The 
 subordinate company then operates in its own territory 
 under the general direction of the parent company. 
 
 Under this plan the parent corporation makes certain 
 the proper fulfilment of its contracts with the subordinate 
 companies, and also insures the proper harmonizing con- 
 duct of general business.* A well-known example is that 
 of the Packard Motor Car Company; its various sales 
 branches throughout the country are separately incor- 
 porated companies, of which a majority interest is vested 
 in the parent company. The term "parent" is frequently 
 used, however, for any corporation that owns or controls 
 underlying companies. 
 
 Each investment made by the parent company in an 
 underlying company's stock may be charged to "Invest- 
 ments" account, or to a special account carrying the name 
 of the particular stock purchased, as "Stock of Canadian 
 Potato Digger Company." Sales of machines may be 
 made to subordinate companies on liberal terms of credit. 
 
 *For A discussion of this subject, see People v. American Bell Telephone Co., 
 :i? N. Y, 241 (1889). • 
 
HOLDING COMPANIES 455 
 
 and settlements made at convenient times as collections 
 are made from purchasers. The parent company's income 
 is derived from sales to subordinates, from royalties re- 
 ceived from subordinates, and from dividends on its 
 investments in the various companies. 
 
CHAPTER XXXII 
 
 CONSOLIDATED BALANCE SHEETS 
 
 § 375- Purposes of Consolidated Balance Sheet 
 
 A consolidated balance sheet is one that includes or 
 combines the balance "sheets of several different concerns. 
 Many large corporations own or control a number of smaller 
 companies, and, though each may have its own statement, it 
 is frequently necessary or desirable to present all the finan- 
 cial details in one balance sheet, in order to reflect the 
 financial position of the whole group of affiliated companies 
 as one undertaking. The assets and liabilities of the con- 
 stituent companies are therefore included with those of the 
 controlling company, after eliminating therefrom the inter- 
 company stocks, bonds, and accounts which indicate the 
 relation of one company to another. Such a balance sheet 
 has already been given (§ 2>72))- The general balance sheet 
 of the United States Steel Corporation is an excellent 
 example of a consolidated statement, combining as it does 
 the statements of a number of subsidiary companies. 
 
 § 376. Contents of Consolidated Balance Sheet 
 
 The contents of a consolidated balance sheet are prac- 
 tically the same as that of a single company. There are, 
 however, certain points peculiar to such statements which 
 require special attention. They are as follows : 
 
 I. Intercompany obligations-^ — existing debts among the 
 constituent companies for goods sold, for advances made 
 to one another, and for bond interest accrued, or declared 
 dividends — ^being offsetting assets and liabilities, are usually 
 
 456 
 
CONSOLIDATED BALANCE SHEETS 457 
 
 eliminated from the combined statement, though they are 
 sometimes included, either separately or with other current 
 items. 
 
 2. Guarantees, leases, and other contracts existing be- 
 tween the parent company and subsidiaries, are shown in 
 the balance sheet among the assets and liabilities or as foot- 
 notes. The frequent exchange of collateral between the 
 parent and subsidiaries, for accommodation purposes, or 
 otherwise, is also a matter of importance. 
 
 3. The extent of ownership in the subsidiary com- 
 panies' stock — whether the parent company owns all, a 
 controlling interest, or only a portion thereof — and the 
 extent of ownership by the underlying companies in the 
 stock of the parent company or of the other companies, 
 should be clearly stated, either in the balance sheet or in a 
 supporting schedule. The minority interest in surplus 
 profits is sometimes indicated also. 
 
 4. The parent company's ownership of bonds of the 
 subsidiary companies, and vice versa, should also be shown. 
 
 § 377. Preparation of Consolidated Balance Sheet 
 
 The manner of assembling and combining the items of 
 several component companies into a consolidated balance 
 sheet is shown in the following example. Three companies, 
 X, Y, and Z, are used in the illustration, the first being 
 purely a holding company, and the other two, subsidiary 
 operating companies. Intercompany stock holdings and 
 current obligations that require careful handling are 
 included. 
 
 Form A, on the following page, shows how the ac- 
 countant or corporation official gathers details and makes 
 deductions on his "working papers," "working sheets," or 
 "analysis sheets," preparatory to his final exhibit. The 
 assets and liabilities are shown separately and combined. 
 
458 
 
 CORPORATE COMBINATIONS 
 
 
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CONSOLIDATED BALANCE SHEETS 
 
 459 
 
 The eliminations of intercompany items in arriving at the 
 net results are also shown. In the preparation of consoli- 
 dated balance sheets, the statements of the several companies 
 are prepared separately and then brought together, as shown 
 in this ioxxn. 
 
 The details shown in the columns of Form A are used 
 as a basis for illustrating different ways of making up con- 
 solidated balance sheets, as shown in Forms B and C of the 
 present chapter. In the process of reducing the various 
 units to a common basis, it is necessary to make certain 
 cancellations, as indicated in the fifth and sixth columns of 
 Form A. 
 
 § 378. Consolidated Balance Sheet with Intercompany 
 Details 
 
 Form B, which follows, is a very simple example of a 
 consolidated balance sheet, including all of the items of the 
 several companies without any cancellation of intercompany 
 debits and credits. The items are arranged very much as 
 In the fourth column of Form A; in fact, where only two 
 or three companies are concerned the combined information 
 might be presented in a columnar exhibit comprising the 
 first four columns of Form A as they stand. 
 
 Among the assets are included $60,000 of advances to 
 subsidiary companies and $27,000 of intercompany debts, 
 the latter included with the sundry assets. These are like^ 
 wise shown as offsetting liabilities. Taking the entire 
 matter, as one concern, it will be seen that the company 
 owes. $87,000 to itself. The third form omits these items 
 entirely but refers to them in memoranda or footnotes. 
 Accountants sometimes consolidate only the accounts of the 
 subsidiary, companies,, the balance sheet of the holding 
 company .being presented separately in the ordinary or 
 vuiconsoiidated form. 
 
460 
 
 CORPORATE COMBINATIONS 
 
 Form B 
 
 Consolidated General Balance Sheet 
 
 Of Company X and Subsidiaries Y and Z 
 
 December 31, 1916 
 (Presenting all accounts and intercompany details without cancellations) 
 
 Assets 
 
 Plant and Capital Assets $429,800.00 
 
 Cash and Sundry Assets 290,100.00 
 
 Material, Supplies, and Goods in Process 510,000.00 
 
 Prepaid and Deferred Charges 77,900.00 
 
 Advances to Subsidiary Companies 60,000.00 
 
 Investments in Stocks and Bonds of Affiliated Companies* 430,000.00 
 
 Total Assets $1,797,800.00 
 
 Liabilities 
 
 Capital Stock Outstanding: 
 
 Of Company X $500,000.00 
 
 Of Company Y 300,000.00 
 
 Of Company Z 200,000.00 $1,000,000.00 
 
 Bonds of Company Y 50,000.00 
 
 Current Liabilities 471,100.00 
 
 Advances and Intercompany Obligations 87,000.00 
 
 Combined Surplus 189,700.00 
 
 Total Liabilities $1,797,800.00 
 
 § 379- Consolidated Balance Sheet without Intercompany 
 Details 
 
 The consolidated balance sheet of Form C, differs from 
 Form B only in so far as intercompany holdings and Obliga- 
 tions are concerned, which are indicated in such a way as 
 to make the combined statement clear and easily readable. 
 In reducing the various units to a common basis, the re- 
 quired cancellations are first made as indicated in Form A. 
 
 *Xlie investipents. may be stated separately if desired* 
 
COMSOLIDATED BALANCE SHEETS 
 
 461 
 
 
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462 CORPORATE COMBINATIONS 
 
 Since the outside or minority stockholders of Company 
 Y own five-twelfths of the capital stock, their interest 
 therein and in the surplus profits is set forth separately. 
 They also have an interest in the surplus of Company X 
 which might be shown. If one-twentieth of Company X's 
 surplus, or $4,060, belongs to Company Y, then the minority 
 interests of the latter company own five-twelfths of this 
 surplus, or $1,691.67. A comparison of Forms B and C 
 will show the slight differences in arrangement, indicating 
 as they do that form is not so important as clearness of 
 expression and accuracy of results. 
 
 § 380. Additional Illustrations of Consolidated Balance 
 Sheets 
 
 The balance sheet on pages 464, 465, is that of a manu- 
 facturing company, and shows an arrangement of details 
 slightly different from those of Forms B and C. It will be 
 noticed that the company's bonds to the value of $50,000 
 are included in the assets and also in the liabilities, this 
 amount being owned by a subsidiary. The stock holdings 
 are indicated as a memorandum on each side, while the 
 stock premium is included in the assets, thus indicating 
 that the stock owned is worth more than par. This premium 
 might be charged against surplus. If stock is purchased 
 below par, the discount may be credited to surplus, provided 
 said stock is really worth face value. A deficit of an under- 
 lying company should be shown in the consolidated balance 
 sheet as a deduction from surplus. 
 
 The division of surplus profits between the holding com- 
 pany and outside interests must obviously depend on the 
 status of the' preferred stock. The holders of such stock 
 may or may not have an interest in excess profits over and 
 above the dividend payments; therefore no division is 
 attempted in this exhibit. 
 
CONSOLIDATED BALANCE SHEETS 463 
 
 Another balance sheet is given on pages 466, 467 : that 
 of the Minnesota Lumber Company which owns and oper- 
 ates ten retail yards and four subsidiary companies. In this 
 statement the separate yards and underlying details are con- 
 tained in supporting schedules. Each schedule assembles 
 and exhibits all of the items of a similar nature on hand 
 at the various yards and companies ; Schedules i and 4 for 
 cash and merchandise are cases in point. For example, 
 Schedule i would show the cash and book balances, or over- 
 drafts, at the various yards and companies as well as at 
 the home office. Schedule 4 would in like manner show the 
 location of all merchandise inventories and supplies of the 
 various yards and companies. Otherwise, the balance sheet 
 differs but slightly from the other forms presented in this 
 •chapter. By placing the capital and surplus profits after 
 the liabilities instead of before, it is possible to show the 
 "net worth" of the combined companies. 
 
464 
 
 CORPORATE COMBINATIONS 
 
 
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^68 CORPORATE COMBINATIONS 
 
 § 381. Consolidated Income Account 
 
 The profit and loss accounts of the parent company 
 and its various subsidiaries may, like the balance sheets, be 
 combined in one comprehensive income statement or profit 
 and loss account. This is a much simpler process, however, 
 than the preparation of a consolidated balance sheet, since it 
 contains no intercompany obligations or stock and bond 
 holdings. It simply groups the similar items, though care 
 must be exercised to see that profits taken on sales of 
 materials and products among subsidiary companies are 
 deducted, especially if these are still on hand and included 
 in the latter's inventories. A columnar working sheet is 
 generally used in combining the various items of income 
 and expenditure, as already illustrated under the balance 
 sheet. 
 
Part VII — Reorganizations, Receiverships, and 
 Dissolutions 
 
 CHAPTER XXXIII 
 REORGANIZATION BY AGREEMENT , 
 
 § ^82. Definition of Reorganization 
 
 "A reorganization of a corporation is a business arrange- 
 ment (i) whereby the stocks and bonds of the company 
 are rearranged as to amount, income, or priority, or (2) 
 the property is sold to a new corporation for new stock and 
 bonds, or (3) the property is sold by foreclosure of a 
 mortgage upon it, and the purchaser buys for himself and 
 such of the old stockholders and bondholders as he as- 
 sociates with him."* 
 
 § 383. Methods of Reorganization 
 
 According to the definition there are two kinds of re- 
 organization by agreement. The first is a mere readjust- 
 ment of the rights of the various parties interested, i.e., by 
 the stockholders with the co-operation of the bondholders 
 or other creditors, without forming a new corporation. 
 The problems given in this chapter relate to such readjust- 
 ments. 
 
 The second involves the formation of a new corporation 
 and the voluntary sale of all the property of the old cor- 
 poration to it in return for its stocks and bonds. The 
 subject of consolidation by merger and by purchase has 
 
 *Cook on Corporations, I SSj. 
 
 469 
 
470 
 
 REORGANIZATION 
 
 been treated in Chapter XXIX, and the accounting prob- 
 lems connected with this method of reorganization are 
 essentially similar. 
 
 Both of these methods are called reorganizations- by 
 agreement, in contradistinction to reorganizations as the 
 result of legal compulsion where the corporation is insol- 
 vent and its property may be sold to pay off the bondholders 
 and creditors. 
 
 When the property of a corporation is sold under fore- 
 closure proceedings, the entity of the corporation does not 
 pass. Whatever organization is effected by the purchaser 
 to operate the plant, property, or business taken over, is 
 practically a new organization free from all claim or lia- 
 bility of the old corporation. The accounting problems 
 relating to it are similar to the problems involved in opening 
 the records of a new corporation. These have already been 
 treated in Chapters XI, XII, XIII. 
 
 A later chapter will deal with ' reorganization as the 
 result of a receivership. 
 
 § 384. Reorganization by Reduction of Stock 
 
 A reorganization by agreement involving some readjust- 
 ment of the stock and bonds or both, usually requires the 
 unanimous consent of all the stockholders if it is a stock 
 veadjustment, or of all the bondholders if it affects their 
 rights. This would be the case if it were desired to increase 
 '^r decrease the stock or to issue preferred stock. If the 
 bondholders accept half cash and half a new. issue of bonds 
 for their existing securities, it would necessitate a readjust- 
 ment of this kind. 
 
 Such a readjustment could not be enforced against an 
 objecting stockholder or bondholder. In some cases it is 
 possible, however, "for those holding the larger interests to 
 buy out the smaller holders who are likely to, object> if 
 
REORGANIZATION BY AGREEMENT 471 
 
 they are not too numerous or too unreasonable in their terms. 
 A reorganization by agreement is a comparatively 
 simple matter. If it involves an increase or reduction of 
 capital stock, most of the states have prescribed procedure 
 and forms for amending corporate charters that are neither 
 costly nor complex. At common law no charter amend- 
 ment was possible without consent of the legislature and 
 usually of all the stockholders, but under modern procedure 
 most amendments may be made by a majority or by two- 
 thirds or three-fourths of the stockholders. A reduction 
 of capital stock is not as simple as an increase, because in 
 reducing stock, the rights of creditors must be considered, 
 and the surrender of outstanding stock and the issuance of 
 a less number of shares involve some cancellation and re- 
 issue of stock to existing stockholders. Any amendment of 
 the charter is a simple matter in a close corporation with 
 few stockholders. In most of the states any desired amend- 
 ment may be had by consent, notice and formal procedure 
 being largely waived. 
 
 § 385. Balance Sheet Before Reduction of Capital Stock 
 
 As an illustration of the procedure and book records 
 required for reducing the capital stock of a corporation, the 
 following example is given: 
 
 The Swift Automobile Company whose statement is 
 given below was formed by the merger of several automo- 
 bile concerns. At the time of the combination, good-will 
 was placed at $1,000,000 and surplus at $340,000. Since 
 then regular dividends of 7% on preferred and 5% on 
 common stock have been paid, excepting the one recently 
 declared and shown among the liabilities. An audit of the 
 books made for the year ending June 30, 1916, showed that 
 obsolete properties, doubtful accounts, and valueless invest- 
 ments to the amount of approximately $1,000,000 would 
 
472 
 
 REORGANIZATION 
 
 have to be written off. The following statement was sub- 
 mitted by the accountants with the recommendation that the 
 good-will be reduced to a conservative valuation : 
 
 Swift Automobile Company and Branches 
 
 Balance Sheet, June 30, 19 16 
 
 (Before Reduction of Capital) 
 
 Assets 
 
 
 Liabilities 
 
 Cost of Properties 
 
 
 Capital Stock: 
 
 
 and Equipment, 
 
 
 Preferred 
 
 $1,000,000.00 
 
 including Good- 
 
 
 Common 
 
 3,000,000.00 
 
 Will 
 
 Securities Owned, 
 
 $4,500,000.00 
 
 
 
 Total 
 
 $4,000,000.00 
 
 of Subsidiary and 
 
 
 Bonds Outstanding. 
 
 2,500,000.00 
 
 Other Companies. 
 
 1,300,000.00 
 
 Short Term Notes. 
 
 500,000.00 
 
 Sinking Fund De- 
 
 
 Accounts Payable. . 
 
 1,525,900.00 
 
 posit 
 
 220,000.00 
 
 Notes Payable 
 
 490,000.00 
 
 Cash 
 
 235,000.00 
 
 Accrued Items 
 
 31,200.00 
 
 Accounts Receivable 
 
 1,172,300.00 
 
 Bond Interest, pay- 
 
 
 Bills and Notes Re- 
 
 
 able July I, 1916. 
 
 62,500.00 
 
 ceivable 
 
 520,000.00 
 
 Dividend Declared 
 
 
 Material Supplies 
 
 
 and Unpaid 
 
 120,000.00 
 
 and Finished 
 
 
 Sundry Reserves... 
 
 189,000.00 
 
 Parts 
 
 981,600.00 
 
 
 
 Contract Work in 
 
 Total 
 
 $9,418,600.00 
 
 Course of Con- 
 
 
 Indorsement on 
 
 
 struction 
 
 476,300.00 
 
 Notes Discounted 
 
 
 Accrued and Pre- 
 
 
 (per contra) 
 
 850,000.00 
 
 paid Items 
 
 58,400.00 
 
 Balance, Profit and 
 Loss Surplus 
 
 
 
 
 
 Total Assets.... 
 
 $9,463,600.00 
 
 
 
 Notes Discounted 
 
 
 
 
 (per contra) 
 
 850,000.00 
 
 
 
 $10,313,600.00 
 
 $10,313,600.00 
 
 § 386. Accounting Requirements 
 
 Following the suggestion of the accountants, the stock- 
 holders in a special meeting called for the purpose, decided 
 
REORGANIZATION BY AGREEMENT 473 
 
 to write off the entire $1,000,000 of good-will and to add 
 $500,000 to the surplus by a reduction of the capital stock. 
 The common stock, therefore, is to be reduced to $1,500,- 
 000, while the cumulative preferred stock is to remain as 
 before, and $500,000 is to-be added to the surplus account. 
 
 (a) State the procedure required to bring about these 
 changes. 
 
 (b) Give the book entries required to adjust the ac- 
 counts in accordance with the resolutions of the directors 
 and stockholders. 
 
 § 387. (a) Procedure 
 
 The reduction of capital stock requires a charter amend- 
 ment, which must be obtained from the state originally 
 granting the charter and will require the aid of a lawyer. 
 Prescribed procedure must be closely followed. 
 
 § 388. (b) Entries and Records 
 
 Complete official minutes of the proceedings, resolutions, 
 etc., must be kept in the minute books of both the directors 
 and stockholders. All certificates of stock must be turned 
 back to the company and interim receipts taken therefor 
 pending the issue of new certificates. Sometimes a trustee 
 is appointed for this purpose in case the company does not 
 already have a regular fiscal agent or registrar upon whom 
 this duty would devolve. The new common stock cer- 
 tificates when issued will be for one-half the number of 
 shares cancelled, so that each holder thereof will own 50% 
 of his former holdings. This does not mean, however, that 
 the company's actual net worth is less than under the former 
 arrangement, nor that the holder of stock has lost anything 
 by the charter amendment. His shares, while formerly 
 valued below par, are now considerably above. The net 
 worth of the company (capital and surplus) is now $3,045,- 
 
474 
 
 REORGANIZATION 
 
 ooo, SO that each of the 15,000 shares of common stock 
 has a book (or intrinsic) value of $136.33 per share. The 
 book value of the preferred stock remains as before at $100 
 per share. 
 
 Each stockholder's account in the stock ledger should 
 be debited with the number of shares cancelled, and new 
 certificates of stock reissued for the balance. Another plan 
 is to debit each account for the entire number of former 
 shares in order to close the account, after which the account 
 is credited with the actual number of new shares issued. 
 
 The only entry required to be made in the general ledger 
 is one to adjust the Capital Stock, Surplus, and Good-Will 
 accounts, as follows : 
 
 July I, 1916 
 
 Capital Stock — Common $1,500,000 
 
 To Good-Will (or Plant) $1,000,000 
 
 " Surplus 500,000 
 
 To record the requirements of a charter 
 amendment granted this day, reducing 
 the number of shares of common stock 
 from 30,000 to 15,000 of the par value 
 of $1,500,000. 
 
 This entry also cancels the entire Good-Will account 
 and creates an additional surplus of $500,000. 
 
 If it is desired to cancel the old capital stock account 
 and to open a new account for the reduced capital stock, 
 the following plan might be adopted : 
 
 Capital Stock- — Common $3,000,000 
 
 To Capital Stock — Common $1,500,000 
 
 " Good-Will 1,000,000 
 
 " Surplus 500,000 
 
 (Full explanation necessary here.) 
 
 Other methods of stating the journal entry might be 
 used, keeping in mind that accounts should be given such 
 
REORGANIZATION BY AGREEMENT 475 
 
 titles as will readily identify their functions. Referring to 
 the balance sheet, notice the manner of stating the notes 
 under discount at the bank. This plan is used by some 
 accountants. A new balance sheet does not need to be 
 shown at this time since only three accounts are affected 
 by the adjustment. They are: 
 
 Common Stock reduced from $3,000,000 to $1,500,000. 
 Good-Will reduced from $1,000,000 to nothing. 
 Surplus increased from $45,000 to $545,000. 
 
 § 389. Conditions of Reorganization 
 
 This company, like many others, has overvalued its 
 properties and has issued its capital stock on the strength 
 of such valuation. The properties and good-will are Hsted 
 at "cost," that is, after allowing for depreciation; but this 
 only indicates the value placed upon them at the time of 
 purchase, measured in shares of the purchasing company, 
 which evidently was too high. Stock, like water, must find 
 its level sooner or later, and it is well known that the stock 
 market quotations usually show it very close to its intrinsic 
 property valuation after all water or fictitious value has 
 been eliminated. 
 
 Assuming that the good-will of $1,000,000 was largely 
 fictitious, it is apparent that the intrinsic value of the stock 
 was only $3,000,000, or $75 per share ; if the good-will was 
 represented by common stock, then the market value of 
 the common stock will be reduced by one-third, or to 
 $66.67 P^"" share, while the preferred stock will remain at 
 or near the par value. By reducing the capital stock to 
 $2,500,000, the good-will is eliminated and $500,000 added 
 to the Surplus account, with the result that the actual capi- 
 tal and surplus is then $3,045,000, and the intrinsic value 
 of all stock averages slightly over $120 per share. Tlie 
 relative value of preferred and common stock must, ot 
 
476 
 
 REORGANIZATION 
 
 course, depend upon the status of the preferred; if the 
 latter is entitled to only par value, $1,000,000 on liquida- 
 tion, it is obvious that the 15,000 shares of common stock 
 must be worth $2,045,000 or about $136 per share, and the 
 preferred slightly above par in harmony with its annual 
 earnings. It will be seen that the stock reduction and 
 elimination of good-will do not enhance the financial sta- 
 bility of the company upon which its credit is based. On 
 the other hand, the status of the preferred and common 
 stockholders remain the same as to proprietorship and 
 participation in profits. The preferred stock will, if busi- 
 ness permits, pay its 7% dividend or $70,000 per year, 
 while the remaining profits will be available for the common 
 stock dividend. 
 
 The American Milling Company in 1914 reduced its 
 capital stock from $3,500,000 to $700,000, by the elimina- 
 tion of good-will and patents. In a letter sent to the 
 stockholders asking them to vote on the proposed reduction, 
 the following paragraph appeared : 
 
 "The gooQ-wiU and patent rights add nothing to a solid financial 
 basis on which to operate your property and a statement containing 
 items of this character injures us in banking circles to such an extent 
 that your officers are handicapped in mailing a proper financial show- 
 ing, and in addition to this we are compelled to pay $2,800 capital 
 stock tax per annum on this excess which would be saved to you by 
 making the change." 
 
 § 390. Balance Sheet Before Adjustment 
 
 To illustrate the reorganization of a company to avoid 
 the appointment of a receiver, the case of the Booth Manu- 
 facturing Company may be taken. The stock of this 
 company was in the hands of fifty stockholders, five persons 
 held 60% of it and voted themselves into office from year 
 to year. These five officials paid themselves high salaries 
 and even permitted the capital to become greatly impaired 
 
REORGANIZATION BY AGREEMENT 
 
 477 
 
 through extravagance and apparent incompetence. The 
 minority stockholders made application to the court for 
 the appointment of a receiver, on the grounds that they 
 had been treated unfairly and that the interests of the com- 
 pany were being sacrificed for personal advantage of the 
 majority stockholders. The following statement (the case 
 is entirely fictitious) was submitted at the court's request: 
 
 Booth Manufacturing Company 
 
 Balance Sheet, June i, 1916 
 
 (Before Adjustment) 
 
 Asseis 
 
 
 Liabilities 
 
 
 Real Estate 
 
 $20,000.00 
 
 Capital Stock (shares 
 
 
 Machinery and Tools. 
 
 12,000.00 
 
 $10 each) 
 
 $100,000.00 
 
 Furniture and F i x - 
 
 
 iMortgage Outstanding 
 
 15,000.00 
 
 tures 
 
 5,000.00 
 
 Bank Loans, Indorsed 
 
 
 Good-Will 
 
 25,000.00 
 
 by Directors 
 
 Notes Payable 
 
 10,000.00 
 
 Material and Stock on 
 
 
 25,000.00 
 
 Hand 
 
 46,800.00 
 
 Accounts Payable 
 
 32,700.00 
 
 Notes Receivable 
 
 
 
 
 ($12,000 overdue).*. 
 
 27,500.00 
 
 
 
 Accounts Receivable 
 
 
 
 
 ($6,000 doubtful)... 
 
 36,200.00 
 
 
 
 Cash in Bank 
 
 5,900.00 
 
 
 
 Profit and Loss 
 
 4,300.00 
 
 
 
 
 $182,700.00 
 
 $182,700.00 
 
 § 391. Plan of Adjustment Adopted 
 
 In resisting the application for receivership, the directors 
 agreed to a change in the policy and management of the 
 company. This was accepted by the minority interests, 
 thereby obviating the necessity for a receivership. The 
 agreement included the following points : 
 
 *$8,ooo of additional customers' notes have been discounted at the bank and 
 bear the Company's indorsement, one of which for $2,000 made by 1 hompson 
 Brothers has not been paid and must be tdken up by this Company. 
 
478 
 
 REORGANIZATION 
 
 1. Cumulative voting is to be authorized so that the 
 minority stockholders will elect two of the five directors. 
 
 2. Salaries are to be paid only to persons actually en- 
 gaged in the company's work and are to be determined by 
 the unanimous vote of all the directors. 
 
 3. A campaign of business building is to be inaugurated 
 to make the company prosper as in previous years. 
 
 4. No merchandise is to be purchased until the present 
 supply is considerably lessened. 
 
 5. Efforts are to be made to enforce prompt payment of 
 notes and accounts receivable. 
 
 6. An assessment of 12%, payable forthwith, is to be 
 levied on all stock, in exchange for which certificates of in- 
 debtedness, payable in six months without interest, are to be 
 issued. 
 
 7. The indorsed bank loans are to be paid off and the 
 personal liability cancelled. 
 
 8. Annual audits by certified public accountants are to 
 be made hereafter. 
 
 § 392. Accounting Requirements 
 
 In carrying out these requirements and adjustments, the 
 following book entries are required, assuming that $15,000 
 of the stock has been disposed of at a profit of $2,800 ; that 
 $6,000 of the overdue notes receivable have been paid and 
 the remainder renewed, and that $13,500 of accounts re- 
 ceivable have been collected : 
 
 June I, 1916 
 Fh'st Entry 
 
 Cash $12,000 
 
 To Certificates of Indebtedness $12,000 
 
 For advances made by the stockholders, being 
 a 12% assessment on outstanding stock, and 
 
REORGANIZATION BY AGREEMENT 479 
 
 represented by certificates of indebtedness 
 payable December i, without interest, as 
 per special agreement. 
 
 Second Entry 
 
 Bank Loans $10,000 
 
 To Cash ■ $10,000 
 
 For payment of indorsed notes at First Na- 
 tional Bank, under reorganization agreement. 
 
 Third Entry 
 
 Cash $17,800 
 
 To Merchandise $15,000 
 
 " Profit and Loss 2,800 
 
 For special sale of part of the finished stock 
 at a profit of $2,800. 
 
 Fourth Entry 
 
 Cash $19,500 
 
 To Notes Receivable $6,000 
 
 " Accounts Receivable 13,500 
 
 For payment on account of notes and accounts 
 receivable. 
 
 Fifth Entry 
 
 Notes Receivable .....' $6,000 
 
 To Notes Receivable $6,000 
 
 For renewal of overdue notes by sundry 
 customers. 
 
 Sixth Entry 
 
 Thompson Brothers (protested note) $2,000 
 
 To Cash $2,000 
 
 For payment of their dishonored note due to- 
 day at the bank. 
 
 The revised balance sheet after these entries have been 
 made is as follows ; 
 
48o 
 
 REORGANIZATION 
 
 Booth Manufacturing Company 
 
 Balance Sheet^ June i, 1916 
 
 (After Adjustment) 
 
 Assets 
 
 
 Liabilities 
 
 
 Real Estate 
 
 $20,000.00 
 
 Capital Stock 
 
 $100,000.00 
 
 Machinery and Tools. 
 
 12,000.00 
 
 Mortgages Outstand- 
 
 
 Furniture and Fix- 
 
 
 ing 
 
 15,000.00 
 
 tures 
 
 5,000.00 
 
 Certificates of Indebt- 
 
 
 Good-Will 
 
 25,000.00 
 
 edness 
 
 12,000.00 
 
 Material and Stock on 
 
 
 Notes Payable 
 
 25,000.00 
 
 Hand 
 
 31,800.00 
 
 Accounts Payable 
 
 32,700.00 
 
 Notes Receivable 
 
 21,500.00 
 
 
 
 Thompson Brothers 
 
 
 
 
 (protested note) 
 
 2,000.00 
 
 
 
 Accounts Receivable.. 
 
 22,700.00 
 
 
 
 Cash in Bank 
 
 43,200.00 
 
 
 
 Profit and Loss 
 
 1,500.00 
 
 
 
 
 $184,700.00 
 
 $184,700.00 
 
CHAPTER XXXIV 
 
 RECEIVERSHIP 
 
 § 393- Receivers 
 
 A receiver is an officer of the court, appointed in an 
 equitable action, to take charge, custody, control, and 
 management of a plant, property, or business, to hold and 
 operate or sell out to the best advantage. 
 
 The receiver represents the court, and is subject to its 
 order alone, and any interference with the lawful acts of 
 the receiver is contempt of court. His control is complete, 
 and neither directors, stockholders, nor creditors have any 
 voice in the management while the receiver is in charge. 
 
 Of late years the use of receivers in those cases where 
 corporations have become involved in financial difficulties 
 has largely increased. Especially in the case of railroads 
 and the larger industrial corporations, where the enter- 
 prise must be continued, has the use of the receiver become 
 the regular course. The law relating to the appointment 
 and procedure of receivers has become extensive and only 
 a few of its more prominent features can be mentioned here. 
 
 § 394, Appointment of Receivers 
 
 A receiver may be appointed by a court of equity at the 
 suit of creditors having a lien, a mortgage, or judgment 
 ^^■he^e there is eminent danger of the property being lost, 
 wasted, or misapplied. A receiver may be appointed before 
 foreclosure, in an action to foreclose a mortgage, if neces- 
 sary to prevent loss, waste, or depreciation. 
 
 In extreme cases of fraud and mismanagement on the 
 
 481 
 
482 RECEIVERSHIP 
 
 part of the officers of the corporation, a court of equity will 
 appoint a receiver at the suit of minority stockholders. 
 
 In most of the more advanced states, in addition to the 
 usual powers of the court of equity to appoint receivers, 
 the statutes provide for their appointment in certain specified 
 cases. For example, in New York the statutes provide that 
 a receiver may be appointed in cases of foreclosure of a 
 mortgage when the income has been mortgaged or when 
 a property is insufficient to pay the mortgage debt; also 
 the statutes authorize receiverships in various dissolution 
 proceedings. 
 
 Usually a receiver is appointed on the application of a 
 mortgagee or of a trustee of the mortgage deed or trust 
 in connection with the foreclosure proceedings. Where the 
 mortgage covers income, rents, and profits and the cor- 
 poration is insolvent, the appointment of the receiver is a 
 matter of course. Usually it is to the interest of all con- 
 cerned that the receiver should be appointed. Where there 
 is any prospect of a reorganization, such an appointment 
 is absolutely necessary. 
 
 Usually, in a foreclosure suit the court will not appoint 
 an officer, director, or stockholder of the corporation as re- 
 ceiver, nor any one interested on the other side, unless by 
 agreement of both sides. A trust company may be ap- 
 pointed. The appointment of a receiver rests in the dis- 
 cretion of the court. To handle to the best advantage the 
 affairs of a financially embarrassed corporation requires the 
 highest order of business ability and judgment, and it is 
 not always possible to find such men free when they are 
 needed to take receiverships. 
 
 § 395- Powers of Receivers 
 
 From the date of his appointment the receiver takes 
 title to the personal property of the corporation. Real 
 
RECEIVERSHIP 483 
 
 estate must be conveyed to him by an actual deed unless, 
 as in New York, the statutes provide that real estate as well 
 as personal property passes to the receiver on his appoint- 
 ment. After a receiver is appointed, the officers of the 
 corporation have no more authority to do anything in regard 
 to the corporation business ; neither can creditors levy execu- 
 tion, attachment, or other legal process on its property. 
 What is said here applies only to property within the state. 
 If there is property in another state, it will be necessary 
 for the courts of that state to appoint a receiver to take 
 it over. 
 
 With the permission of the court appointing him, the 
 receiver may institute suit almost to the same extent as the 
 corporation he represents, but no one can bring suit against 
 the receiver without the permission of the court. He 
 represents the corporation, stockholders, and creditors. In 
 the case of an imcertain or doubtful claim, he may com- 
 promise it. He may sell all the assets to a new corporation 
 even where some of the stockholders dissent. This power 
 enables him to promote an effective reorganization. 
 
 A receiver cannot undertake new work or extend the 
 operations of the corporation unless he has express authority 
 from the court that appointed him. All that pertains to the 
 usual management and operations of the corporation he 
 may do under his general authority, and the court will 
 sustain him unless his acts are clearly reckless or fraudulent. 
 The books of the corporation are usually placed in his hands 
 and are subject to the inspection of the parties interested. 
 
 Any special authority required to preserve the property 
 or to save the rights of creditors or stockholders will be 
 granted by the court on application ; for instance, a receiver 
 may be authorized to borrow money to pay pressing claims 
 or to pay interest on coupons due on an underlying mort- 
 gage, or to buy new machinery, or to buy rails and rolling 
 
484 RECEIVERSHIP 
 
 Stock. For such purposes the receiver has a right to use 
 the income of the corporation as it comes into his possession, 
 and when this is insufficient he may ask the court for 
 authority to issue receiver's certificates. These are evidences 
 of debt issued by the receiver and take precedence of any 
 existing debts and liens. 
 
 The receiver may take over existing leases and contracts 
 or he may decline to continue them. If he continues existing 
 contracts, then sums becoming due on them thereafter, are 
 preferred claims, being part of the receiver's own expenses 
 of operation. Amounts previously due on them and all 
 claims on rejected leases, notes, and contracts have to 
 take their chance with the claims of the general creditors. 
 The receiver's authority to refuse to carry out executory 
 contracts of the corporation is undoubted, and he has a 
 reasonable time to decide as to whether he will adopt or 
 discontinue such contracts. 
 
 The receiver will apply the income first to the payment 
 of wages, repairs, and expenses of operation. Until these 
 are paid, the bondholders take nothing. 
 
 § 396. Liability of Receivers 
 
 In some cases receivers have managed so badly that on 
 final accounting the expenses of the receivership have con- 
 sumed the entire property, leaving nothing for the creditors. 
 The discretion of the court was at fault, and in such cases 
 there is no redress. The receiver is not liable for any debts 
 or obligations incurred by him in the discharge of his trust, 
 unless he has been guilty of misconduct. He is not liable 
 for lack of business ability. 
 
 If he acts in important matters without express authority 
 from the court, he may make himself liable personally. In 
 a case in Pennsylvania where the receivers were authorized 
 to continue business for six months and they went on for 
 
RECEIVERSHIP 485 
 
 six months longer, the court held them responsible for the 
 losses of the last six months. 
 
 A receiver is allowed reasonable compensation and his 
 counsel fees. In cases where the amount involved is not 
 large, 5%' on receipts and also on disbursements is usually 
 allowed. The court will always be governed by the char- 
 acter of the work. The skill shown should be a factor in 
 determining the amount of compensation. 
 
 § 397- Receivers in Bankruptcy Cases 
 
 A court of bankruptcy may appoint a receiver to take 
 charge of the bankrupt's property when it is necessary for 
 the preservation of the bankrupt's estate, pending the ap- 
 pointment of the trustee; otherwise the property might be 
 wasted and depreciated. A receiver in bankruptcy -has 
 limited powers and his tenure is temporary. It is expected 
 that the trustee will wind up the estate, and hence the 
 receivership is merely a preliminary to his appointment. 
 
 The matter of dissolution by bankruptcy is treated in 
 Chapter XXXVII. 
 
 § 398. The Receiver's Accounts 
 
 A receiver is required to keep careful record of his 
 transactions and to render frequent accounts during his 
 receivership. To save the time of the court, it is usual to 
 give immediate charge to a master in chancery who has 
 authority to pass on the accounts submitted. His decision 
 is final unless an appeal is taken to the court. Unless the 
 items allowed are unusual, the decisions of the master will 
 be sustained. If the master approves the accounts as ren- 
 dered from time to time, the court will rarely fail to sustain 
 him. 
 
 There being no prescribed form of keeping the receiver's 
 accounts, the accountant may usfc his own judgment in out- 
 
486 RECEIVERSHIP 
 
 lining the books to be used or the manner of keeping them. 
 The availability of data pertaining to the trust is the main 
 consideration, however, and should be so regarded in plan- 
 ning the records. No matter what method of account- 
 keeping is used, the receiver is required to state the assets 
 and liabilities of the company at the beginning and termina- 
 tion of his receivership, as well as the various intervening 
 transactions. These statements to the court become public 
 records and are available for general inspection. It may be 
 said that these suggestions apply also to the account-keeping 
 for assignees, trustees, executors, and administrators. 
 
 § 399. The Company's Accounts During Receivership 
 
 The general books of an embarrassed company may be 
 adjusted to meet the new condition of afJairs, but in most 
 cases they are continued as usual until it is known what is 
 to become of the company. If they are to be kept in 
 harmony with the accounts of the receiver, adjusting entries 
 may be made and all ledger accounts closed, except Capital 
 Stock, Receiver, and Deficiency or Surplus. The debit 
 balance to the receiver's account will stand until the end of 
 the receivership. (For adjusting entries, see § 411.) 
 
 Upon termination of the receivership, when the assets 
 and liabilities as then existing are turned back to the 
 company, assuming that business is to be continued, entries 
 must be made debiting assets and crediting the liabilities, 
 the difference being credited to the receiver's account. The 
 receiver's balance (or net worth of the company) will at 
 that time be either greater or less than the amount originally 
 shown, and must then be adjusted into Surplus account. 
 If the capital has undergone certain changes, which is 
 usually the case, suitable adjusting entries must be made 
 to bring it into harmony with present conditions, as reflected 
 in the recei^"er's final official report. 
 
CHAPTER XXXV 
 
 RECEIVERSHIP AND REORGANIZATION ■ 
 
 § 400. Preliminaries to a Receivership 
 
 When a corporation begins to go behind financially, its 
 officials usually continue to manage it long after the danger 
 point is passed. The creditors or bondholders likewise are 
 loath to take any action likely to precipitate a collapse, and 
 as a result operations usually go on until it is not possible 
 to avoid a public breakdown. 
 
 The ordinary small business corporation, under such cir- 
 cumstances, will call a meeting of its creditors, la);- a state- 
 ment of its afifairs before them, and the lawyer representing 
 the corporation will ask for an extension of credits, propose 
 a composition, or ofifer to turn over the business to an as- 
 signee or a friendly receiver. The creditors will determine 
 whether it is best to extend credits, accept any proposed 
 composition, or institute insolvency proceedings. Experi- 
 enced credit men representing larger creditors easily decide 
 what is the best line of policy and, unless matters have gone 
 too far, they generally devise some plan of business reor- 
 ganization without calling in the aid of the courts. 
 
 In the case of larger corporations it is not easy to devise 
 any plan of reorganization without some relief from pressing 
 claims and time to study out practicable methods of reor- 
 ganization. 
 
 The appointment of a receiver attains this end. No suits 
 or claims can be pushed against the corporation, and the 
 business and property are preserved from loss. Nothing else 
 
 487 
 
488 RECEIVERSHIP 
 
 is SO effectual ; therefore in all cases where a larger corpora- 
 tion gets into financial difficulties, the first step is to have 
 a receiver appointed. PreHminary to this, those most in- 
 terested confer together, and decide on a plan of action. 
 
 § 401. Reorganization Agreement 
 
 The larger bondholders, when they face default in in- 
 terest payments and see that a forced sale will not pay what 
 is due, usually get together and prepare an agreement of 
 bondholders or of stockholders, or of both, by which they 
 agree to deposit their holdings, and to sign the agreement to 
 authorize the committee in charge to represent their interests 
 in the oiltlined plan of reorganization. Those who devise 
 the plan usually appoint a committee on reorganization to 
 take charge of the whole matter. The success of the under- 
 taking depends on the ability and repute of the members of 
 this committee. The appointment of a receiver is but one 
 incident in the plan. 
 
 The following is typical of the notices sent out to bond- 
 holders or stockholders, or both, when the reorganization 
 of their corporation seems necessary : 
 
 To THE Holders of 
 Collateral Trust Four Per Cent Gold Bonds of 2002 
 
 OF 
 
 Chicago, Rock Island & Pacific R.- R, Co. 
 
 The Railroad Company having made default in the payment of the 
 interest due May i, 1914, on the above bonds, it is imperative that bond- 
 holders should immediately unite for the protection of their interests. 
 Bondholders who have not already done so should deposit their bonds at 
 once with the Depositary, Central Trust Company of New York, at its 
 office, No. 54 Wall Street, or at its branch office, Madison Avenue and 
 42d Street, New York City, under the agreement dated February 26, 1914. 
 Copies of said agreement may be obtained from the Depositary or 
 from the Secretary of the Committee. Bonds in coupon form must be 
 accompanied by the coupon maturing May 1, 1914. Bonds in registered 
 form and registered coupon bonds must be accompanied by transfers 
 
RECEIVERSHIP AND REORGANIZATION ^Sg 
 
 executed by the registered owner or his attorney duly authorized. Cer- 
 tificates of deposit will be issued by the Depositary for all bonds de- 
 posited, and in due course application will be made for listing such 
 certificates of deposit on the New York Stock Exchange. 
 
 The protective agreement permits the deposit thereunder of such 
 of the stock of The Chicago, Rock Island & Pacific Railway Com- 
 pany as is not pledged under the trust agreement securing the Collat- 
 eral Trust Bonds, and holders of said stock are requested to deposit the 
 same or to communicate with the Committee. 
 
 Any bondholder desiring further information may apply to the 
 members of the Committee or to its secretary. 
 
 Dated, New York, May 2, 1914. 
 
 „ „ Tames Brown 
 
 JOLINE, LaRKIN & RaTHBONE, g^^^^^ j^ g^^^^^ 
 
 Cravath & Henderson jj^^^^ ^^^^^ 
 
 " Frederick Strauss 
 
 C. E. SiGLER, Secretary, J- N. Wallace, Chairman 
 54 Wall Street, New York City. Committee 
 
 A depositary for the bonds, stock, and other securities 
 is usually named in the agreement of reorganization, or, if 
 not, is appointed by the committee. This depositary is 
 usually some well-known trust company. It is customary 
 to have one depositary for the bonds and another for the 
 stock, and still another for the unsecured claims, if the un- 
 secured creditors joined in the agreement. Some form of 
 certificate of deposit or interim receipt is given to each one 
 who deposits his securities and signs the agreement. There- 
 after he has nothing further to do with the matter unless 
 the depositors are called upon to vote in regard to some 
 vital matter concerning the reorganization. 
 
 The reorganization committee have full authority and 
 are trustees for the real owners of the securities. As trus- 
 tees they must act in good faith and may not seek their 
 personal advantage. They cannot make any material altera- 
 tion of the agreement but must carry it out according to its 
 terms. 
 
 Where bonds have been used as security for loans, etc.. 
 
490 
 
 RECEIVERSHIP 
 
 by their owners, the owner is the proper party to assent 
 to the agreement of reorganization, but the new certificates 
 must be issued to the party who holds the bonds as security, 
 unless the debt has been paid off in the meantime. If the 
 new bonds or stock prove valueless, the party who holds 
 them as security may still enforce his original claim against 
 the party who pledged them with him. 
 
 The reorganization committee usually appoints a pur- 
 chasing committee, who bid for the property at the fore- 
 closure sale. They offer in payment certificates of deposit 
 of the various depositaries, showing the amounts of stock 
 and bonds, etc., of the embarrassed corporation that each 
 has deposited, and these are accepted in payment for the 
 property and then cancelled. The property is then turned 
 over to the new company. 
 
 § 402. Conditions Preceding Receivership 
 
 The receivership forms and procedure which follow are 
 in accordance with the practice of the Court of Common 
 Pleas of Pennsylvania, and perhaps some change will be 
 necessary for acceptance in the courts of other states. In 
 New York State, for example, the form of account required 
 by the courts differs from the one shown, requiring first a 
 summary of the entire matter, while full particulars are con- 
 tained in supporting schedules, designated A, B, C, etc. In 
 every case it is, of course, required that the- matter shall be 
 set forth logically and clearly. 
 
 § 403. Statement of Affairs 
 
 To illustrate receivership records and accounts, let us 
 assume that the Excelsior Machine Company, unable to 
 meet its obligations, was placed in the hands of a receiver 
 on July I, 1916. A statement of its condition before and 
 after appraisement is given below. 
 
RECEIVERSHIP AND REORGANIZATION 491 
 
 Statement of Excelsior Machine Company 
 
 At Beginning of Receivership, July i, 1916 
 
 Appraised 
 Assets Book Value Value 
 
 Real Estate, Plant, Good-Will, etc $12,136,500.00 $11,536,500.00 
 
 Investments in Subsidiary and Affiliated 
 Companies (pledged with trustee of 
 
 collateral trust bonds) 4,500,000,00 4,000,000.00 
 
 Merchandise, Materials, Goods in Pro- 
 cess, and Supplies 2,178,960.00 2,100,000.00 
 
 Deposit with Sinking Fund Trustee: 
 
 Cash $350,400.00 
 
 Bonds of This Company.. . 1,945,800.00 2,296,200.00 2,296,200.00 
 
 Accounts Receivable 3,245,140.00 3,200,000.00 
 
 Notes Receivable* 2,862,100.00 2,440,100.00 
 
 Cash on Hand and in Banks 975,850.00 945,850.00 
 
 Total $28,194,750.00 $26,518,650.00 
 
 Appraised 
 
 Liabilities Book Value Value 
 
 Capital Stock — Preferred 7% Cumulative $5,000,000.00 
 
 Capital Stock — Common 5,000,000.00 
 
 First Mortgage 5% Bonds, due 1930 3,500,000.00 $3,500,000.00 
 
 First Mortgage 5% Bonds, due July i, 
 
 1917 3,000,000.00 3,000,000.00 
 
 Collateral Trust 5% Bonds, secured by 
 
 deposit of collateral, per contra 4,000,000.00 4,000,000.00 
 
 Bank Loans Unsecured 500,000.00 500,000.00 
 
 Notes Payable 1,490,500.00 i ,490,500.00 
 
 Accounts Payable 2,375,640.00 2,375,640.00 
 
 Accrued Charges 328,250.00 328,250.00 
 
 Reserves for Depreciation, Bad Debts, 
 
 etc 897,510.00 897,510.00 
 
 Liability on Notes under Discount, esti- 
 mated 60,000.00 
 
 Total Liabilities $26,091,900.00 $16,151,900.00 
 
 Profit and Loss Surplus 2,102,850.00 
 
 •Note* undct discount at bank, $400,000 additional. 
 
492 
 
 RECEIVERSHIP 
 
 Balance, Excess of Assets over Liabili- 
 ties, being Receiver's Equity in the 
 Estate 10,366,750.00 
 
 Total $28,194,750.00 $26,518,650.00 
 
 Note : It might be well to show equities only in the statement of 
 appraisal, deducting all secured habilities from the assets pledged or 
 mortgaged. Bonds held by the trustee may be deducted from the 
 corresponding liability if desired, and perhaps the trustee's cash also. 
 
 § 404. The Receiver's Activities 
 
 Upon his appointment, July i, 1916, the receiver made 
 an appraisement and statement of the company's affairs and 
 filed his inventory with the court. It revealed the following 
 conditions, all of which are included in the above statement. 
 
 1. That the real estate, plant, and good-will should be 
 
 reduced at least $600,000, but the depreciation 
 reserve should not be disturbed. 
 
 2. That the investments had declined $500,000 below 
 
 the book value stated. 
 
 3. That the merchandise and material should be re- 
 
 duced to $2,100,000. , 
 
 4. That the accounts receivable were estimated to be 
 
 worth $3,200,000 
 '5. That notes receivable were doubtful to the extent 
 of $420,000. 
 
 6. That at least $60,000 of the notes under discount 
 
 would be dishonored. 
 
 7. That $30,000 for dishonored notes of a customer 
 
 had been charged to the company's account by 
 the bank. 
 
 8. That building extensions now in operation should 
 
 be continued by the receiver. 
 
 The receivership was terminated December 31, 19 16, at 
 which time a reorganization took place. The statement of 
 
RECEIVERSHIP AND REORGANIZATION 
 
 49:; 
 
 the receiver at the date of his withdrawal, after a tenure 
 of six months, is shown herewith. It contains the ad- 
 justments suggested in his statement to the court, in addition 
 to the following transactions carried out during his incum- 
 bency, which were entered in his separate ledger : 
 
 1. $1,200,000 of 6% receiver's certificates were issued, 
 
 due in four months, dated August i, and sold 
 at 98. 
 
 2. Building extensions were completed at a cost of 
 
 $500,000. 
 
 3. The factory was kept running at a considerable re- 
 
 . duction in capacity. 
 
 4. Goods were sold from stock for cash at the best 
 
 prices obtainable, bringing in $57,680. 
 
 5. Orders were completed and billed, aggregating 
 
 $230,000, for which cash was received; the 
 merchandise, etc., on hand being valued at 
 $2,100,000. 
 
 6. $1,724,440 of the accounts receivable were col- 
 
 lected; also $1,050,880 of the notes receivable, 
 of which $75,000 applied to notes written off as 
 doubtful. 
 
 7. Accrued charges were paid for taxes and labor of 
 
 $81,100, and $196,200 additional for wages of 
 workmen. 
 
 8. Material for use in factory amounting to $72,000 
 
 was purchased for cash. 
 
 9. Various expenses paid in cash amounted to $76,500, 
 
 legal fees $22,500, and compensation of receiver 
 $10,000. 
 
 § 405. Accounting Procedure 
 
 The accounting procedure to record the receiver's activi- 
 ties in this case require the following records and entries : 
 
494 RECEIVERSHIP 
 
 1. Receiver's records and entries on taking charge. 
 
 2. Receiver's records during his management of the 
 
 business. 
 
 3. Receiver's records and entries upon settlement of 
 
 the estate. 
 
 4. Statement of the receiver's account to the court. 
 
 5. Entries to adjust the books of the company upon 
 
 appointment of the receiver. 
 
 6. Entries and adjustments on the books of the com- 
 
 pany at the time the receiver is discharged. 
 
 § 406. (i) Receiver's Records on Taking Charge 
 
 The adjustment of assets as a result of appraisements 
 reduces the surplus of the company to $366,750, being a 
 shrinkage of $1,736,100 (§ 411). The net assets of the 
 company now amount to $10,366,750, as shown by the 
 figures given in the appraisal statement. The receiver opens 
 his own separate ledger and brings into it the assets and 
 liabilities (the latter sometimes omitted), as per appraise- 
 ment. In order that notes and accounts receivable written 
 ofif may not be lost sight of, it is good practice to carry 
 them on the books, say at a value of $1 each. The receiver's 
 opening entry is as follows : 
 
 Opening Entry, July i, 1916 
 
 Assets 
 
 Real Estate, Plant, Good- Will, etc $11,536,500 
 
 Investments in Subsidiary and Affiliated 
 
 Companies, Pledged 4,000,000 
 
 Merchandise, Materials, Goods in Process, 
 
 etc 2,100,000 
 
 Deposit with Sinking Fund Trustee 2,296,200 
 
 Accounts Receivable 3,200,000 
 
 Notes Receivable 2,440,100 
 
 Cash on Hand and in Banks. 945.8.50 
 
RECEIVERSHIP AND REORGANIZATION 455 
 
 Liabilities 
 To First Mortgage 5% Bonds, due 
 
 
 IQ'lO 
 
 $3,500,000 
 
 " First Mortgage 5% Bonds, due 
 
 July I, 1917 
 
 3,000,000 
 
 " Collateral Trust 5% Bonds 
 
 
 (secured by deposit of colla- 
 
 
 teral, per contra) 
 
 4,000,000 
 
 " Bank Loans Unsecured 
 
 500,000 
 
 " Notes Payable 
 
 1,490,500 
 
 " Accounts Payable 
 
 2.375.640 
 
 " Accrued Charges 
 
 328,250 
 
 " Reserves for Depreciation, Bad 
 
 
 Debts, etc 
 
 897.510 
 60,000 
 
 " Notes under Discount 
 
 " Receiver's Equity, Estate of 
 
 
 Excelsior Machine Company 
 
 10,36^,750 
 
 $26,518,650 $26,518,650 
 
 To record assets and liabilities of the 
 Excelsior Machine Company, in re- 
 ceivership, taken over this day by 
 decree of the Court. Appraised 
 values used, and all liabilities stated. 
 
 In opening the receiver's ledger the various accounts 
 should, of course, be properly classified and located. Space 
 must also be provided for the current business transactions 
 of the receiver. If the liabilities were omitted, as is fre- 
 quently the case, it is apparent that the receiver's equity 
 account would show a credit of $26,518,650, the total value 
 of assets; or, if only the property equities were entered, the 
 amount would be $16,018,650. The sinking fund deposit 
 of $2,296,200 might be deducted from the outstanding 
 bonded debt in obtaining the property equity, but this would 
 not make any change in the amount of the receiver's equity 
 in the estate. 
 
496 
 
 RECEIVERSHIP 
 
 § 407. (2) Record of Receiver's Transactions 
 
 The receiver must keep a strict record of all business 
 activities in order that he may give a correct account of 
 them to the court. The entries are made in the cash book, 
 though certain of them might properly be contained in the 
 journal. The result of these entries is summarized in the 
 following cash account. 
 
 Receiver's Cash Account 
 
 (Being a record of his transactions from July i, 1916, 
 
 to December 31, 1916 
 
 Receipts 
 
 
 Pa\niciits 
 
 Balance, Received 
 
 
 Discount on Re- 
 
 
 from Estate 
 
 $945,850.00 
 
 ceiver's Certificates 
 
 $24,000.00 
 
 Receiver's Certifi- 
 
 
 Real Estate Opera- 
 
 
 cates 
 
 1,200,000.00 
 
 tions 
 
 500,000.00 
 
 Merchandise 
 
 57,680.00 
 
 Accrued Charges.. . . 
 
 81,100.00 
 
 
 230,000.00 
 724,440.00 
 
 
 196,200.00 
 72,000.00 
 
 Accounts Receivable. 
 
 Merchandise 
 
 Notes Receivable.... 
 
 975,880.00 
 
 
 76,500.00 
 22,500.00 
 
 Notes Receivable 
 
 Legal Expenses 
 
 (Doubtful) 
 
 75,000.00 
 
 Salary of Receiver. . 
 Receiver's Certifi- 
 
 10,000.00 
 
 
 
 cates Paid 
 
 1,200,000.00 
 
 
 
 Interest on Above... 
 Total 
 
 24,000.00 
 
 
 $2,206,300.00 
 
 
 
 Balance, Cash in 
 
 
 
 
 Hand 
 
 3,002,550.00 
 
 $5,208,850.00 
 
 $5,208,850.00 
 
 § 408, (3) Receiver's Closing Entries 
 
 At the termination of his activities and before the re- 
 organization takes place, the receiver adjusts his ledger 
 accounts to determine the status of the estate. After all 
 entries having to do with merchandise have been posted to 
 
RECEIVERSHIP AND REORGANIZATION 
 
 497 
 
 that account, disregarding the conversion of material into 
 finished or partly finished product, it will appear as follows : 
 
 Merchandise Account 
 
 Values Taken Over 
 
 at Beginning $2,100,000.00 
 
 Purchases 72,000.00 
 
 Profit 265,680.00 
 
 $2,437,680.00 
 
 Cash Sales $57,680.00 
 
 Cash Sales 230,000.00 
 
 Inventory Valuation 
 
 at End 2,150,000.00 
 
 $2,437,680.00 
 
 Below are given the various entries to close the receiver's 
 loss and gain accounts, followed by the Profit and Loss 
 account showing a net loss of $12,520 resulting from the 
 period of receivership supervision. 
 
 December 31, 1916 
 
 Merchandise, Material, etc $265,680 
 
 Notes Receivable (Doubtful) 7S>ooo 
 
 To Profit and Loss 
 
 To record profit on sales on completion of 
 orders, and collection of doubtful notes. 
 
 Profit and Loss $353,200 
 
 To Discount on Receiver's Certificates. 
 
 " Wages 
 
 " Expenses 
 
 " Legal Expenses 
 
 " Receiver's Salary 
 
 " Interest on Receiver's Certificates. . . 
 Entries to close all nominal accounts into 
 Profit and Loss. 
 
 $340,680 
 
 $24,000 
 196,200 
 76,500 
 22,500 
 10,000 
 24,000 
 
 ■Receiver's Equity in Estate , $12,520 
 
 To Profit and Loss 
 
 To close Profit and Loss into receiver's 
 equity account. 
 
 $12,520 
 
498 
 
 RECEIVERSHIP 
 
 Receiver's Profit and Loss Account 
 For Period from July i, 1916, to December 31, igiC 
 
 Discount on Receiver's 
 
 Certificates $24,000.00 
 
 Wages to Workmen. . . 196,200.00 
 
 Expenses, General.... 76,500.00 
 
 Legal Expenses 22,500.00 
 
 Receiver's Salary 10,000.00 
 
 Interest on Receiver's 
 
 Certificates 24,000.00 
 
 $353.20000 
 
 Profit on Merchandise 
 Account $265,680.00 
 
 Collection of Notes 
 Receivable (Doubt- 
 ful) 75,000.00 
 
 Receiver's Net Loss.. . 12,520.00 
 
 $353,200.00 
 
 The receiver's equity account, showing a balance of 
 $10,354,230, as per his accompanying statement, should be 
 about as follows : 
 
 Receiver's Equity Account 
 
 (Showing equity in estate at beginning and termination) 
 
 Net Loss during 
 
 Receivership $12,520.00 
 
 Balance of Estate, 
 
 at Termination . . . 10,354,230.00 
 
 $10,366,750.00 
 
 Balance of Estate, 
 at Beginning $10,366,750.00 
 
 $10,366,750.00 
 
 Balance $10,354,230.00 
 
 Since a reorganization of the company is to take place 
 under a reorganization committee, the receiver hands over 
 the entire estate as now constituted without making any 
 settlement disbursements. An entry for closing, somewhat 
 similar to the following, is required ; giving, of course, the 
 various assets and liabilities in detail : 
 
RECEIVERSHIP AND REORGANIZATION 499 
 
 December 31, 1916 
 
 Receiver's Equity Account $10,354,230 
 
 Sundry Liabilities (itemized) 16,070,800 
 
 To Sundry Assets (itemized) $26,425,030 
 
 To close receiver's accounts on term- 
 ination of receivership, all assets and 
 liabilities of the estate having been 
 transferred to the Reorganization 
 Committee, per order of the Court, 
 without making distribution of 
 assets. 
 
 The aggregate assets and liabilities are included in the 
 above entry (instead of the equities only as shown in the 
 receiver's final statement), because the assets and liabilities 
 are all spread separately in the book accounts of the receiver. 
 
 As a result of all transactions, the receiver's statement 
 at time of closing will appear as follows : 
 
 Statement of Receiver of Excelsior Machine 
 
 Company 
 
 At Termination of Receivership Jurisdiction, December 31, 1916 
 
 Assets 
 
 'ieal Estate, Plant, Good-Will, etc $12,036,500.00 
 
 Less Encumbrance; 
 First Mortgage 5% 
 
 Bonds, due 1930 $3,500,000.00 
 
 First Mortgage 5% 
 Bonds, due 1917 3,000,000.00 6,500,000.00 
 
 Receiver's Equity in Property $5,536,500,00 
 
 Investments in Affiliated 
 
 Companies $4,000,000.00 
 
 Less Deposit to Secure 
 Collateral Trust Bonds. 4,000,000.00 (nil) 
 
 Merchandise, Material, Supplies, etc 2,150,000.00 
 
 Sinking Fund Deposit with Trustee*.... 2,296,200,00 
 
 •This not being available to the receiver might be omitted, in which case the 
 property encumbrance would_ be reduced by a hke amount; the receiver's equity 
 would remain the same in either case. 
 
500 
 
 RECEIVERSHIP 
 
 Interest Accrued on Sinking Fund De- 
 posit (omitted) 
 
 Accounts Receivable 1,475,560.00 
 
 Notes Receivable 1,464,220.00 
 
 Cash on Hand and in Bank 3,002,550.00 
 
 Total Equity in Assets $15,925,030.00 
 
 Liabilities 
 
 Bank Loans Unsecured $500,000.00 
 
 Notes Payable 1,490,500.00 
 
 Accounts Payable 2,375,640.00 
 
 Accrued Charges, remaining 247,150.00 
 
 Reserves for Depreciation, etc 897,510.00 
 
 Liability on Notes Discounted '. 60,000.00 
 
 Total Liabilities 5,570,800.00 
 
 Receiver's Equity, Excess of Assets over Liabilities $10,354,230.00 
 
 § 409. (4) Receiver's Statement to the Court 
 
 The receiver may present to the court only one account 
 or statement, known as the "First and Final Account," or 
 he may present several. An auditor is usually appointed 
 by the court to audit, examine, vouch, and pass upon the 
 receiver's accounts in detail and to report to the court be- 
 fore distributions are made, or dividends paid to creditors. 
 The auditor causes an advertisement to be placed in the 
 papers, giving notice that he will sit on a certain date to 
 receive claims and hear complaints on the audited statement. 
 The hearing may even be adjourned one or more times. 
 The auditor generally makes up a statement of his own from 
 that presented by the receiver, though it is usually briefer 
 and may even be only a summary of the receiver's trans- 
 actions. It recites in brief, as a rule, the activities of the 
 receiver as an introduction to the audited statement, all of 
 which is later filed with the court, to be kept as a permanent 
 record. 
 
RECEIVERSHIP AND REORGANIZATION 501 
 
 First and Final Account of Charles W. Bennett, 
 
 Receiver for the Excelsior Machine Company 
 
 December 31, 1916 
 
 Debits 
 
 The Receiver charges himself as follows . 
 
 Inventory and Appraisement of Assets taken over July i, 1916: 
 Equity in Real Estate, Plant, Good-Will, etc. $5,036,500.00 
 Equity in Investments of Subsidiary Com- 
 panies (none) 
 
 Merchandise, Materials, Goods in Process, 
 
 and Supplies 2,100,000.00 
 
 Sinking Fund Deposit with Trustee* 2,296,200.00 
 
 Accounts Receivable 3,200,000.00 
 
 Notes Receivable 2,440,100.00 
 
 Cash on Hand and in Banks 945,850.00 
 
 Total Assets taken over $16,018,650.00 
 
 Additions to Capital 
 
 For Outlay Increasing Value of Real Es- 
 tate and Properties $500,000.00 
 
 Increase in Cash, per Cash Account 2,056,700.00 
 
 Increase in Value of Merchandise 50,000.00 
 
 Total Increase in Assets 2,606,700.00 
 
 Total Value of Assets Taken Over and Acquired. $18,625,350.00 
 
 Deductions from Capital 
 
 Assets Realized and Collected as Follows : 
 
 Accounts Receivable Collected $1,724,440.00 
 
 Notes Receivable Collected 975,880.00 
 
 Total Deductions 2,700,320.00 
 
 Balance, Receiver's Equity in Estate $15,925,030.00 
 
 The above, it should be noted, omits all liabilities, ex- 
 cepting $81,100 of previously accrued charges paid off by 
 
 *This is not in the hands of the receiver, but if omitted should he added to 
 the equity in properties, increasing the latter to $7,332,700- 
 
502 
 
 RECEIVERSHIP 
 
 the receiver, and therefore represents equities in all the assets 
 of the estate. If the liabilities were stated, the balance of 
 the estate would be reduced to $10,354,230, the amount 
 shown in the receiver's equity account (§ 408). The re- 
 ceiver's statement to the court in this case, however, does 
 not take the liabilities into consideration, but does include 
 all activities during his tenure as receiver as shown by the 
 statement of trading and the statement of cash received and 
 disbursed. 
 
 The books and records should not be confused with the 
 account rendered to the court. 
 
 Receiver's Statement of Trading 
 
 Expenditures 
 
 Inventory Received from Estate at Be- 
 ginning $2,100,000.00 
 
 Purchases of Merchandise 72,000.00 
 
 Discount on Receiver's Certificates 24,000.00 
 
 Wages to Workmen 196,200.00 
 
 Expenses, General 76,500.00 
 
 Legal Expense 22,500.00 
 
 Receiver's Salary 10,000.00 
 
 Interest on Receiver's Certificates 24,000.00 
 
 Total Expenditures $2,525,200.00 
 
 Income 
 
 Inventory of Assets of Estate, on Hand at 
 
 Close of Receivership $2,150,000.00 
 
 Collection of Doubtful Notes 75,000.00 
 
 Sales of Merchandise 230,060.00 
 
 Sales of Merchandise 57,680.00 
 
 Total Income 2,512,680.00 
 
 Excess of Expenditures over Income, being Net Loss 
 during Receiver's Operations $12,520.00 
 
RECEIVERSHIP AND REORGANIZATION 503 
 
 Statement of Receipts and Disbursements 
 
 Receiver's Cash Account 
 
 (Being a record of his transactions from July i, 1916 
 
 to December 31, 1916) 
 
 Cash Received 
 
 Balance, Received from Estate $945,850.00 
 
 Cash Received from : 
 
 Receiver's Certificates $1,200,000.00 
 
 Merchandise 230,000.00 
 
 Merchandise 57,680.00 
 
 Accounts Receivable 1,724,440.00 
 
 Notes Receivable 975,880.00 
 
 Notes Receivable (Doubtful) 75,000.00 4,263,000.00 
 
 Total $5,208,850.00 
 
 Cash Paid Out 
 
 Discount on Receiver's Certificates $24,000.00 
 
 Real Estate Operations 500,000.00 
 
 Accrued Charges 81,100.00 
 
 Wages 196,200.00 
 
 Merchandise 72,000.00 
 
 Expenses 76,500.00 
 
 Legal Expenses 22,500.00 
 
 Salary of Receiver 10,000.00 
 
 Receiver's Certificates Paid 1,200.000.00 
 
 Interest on Above 24,000,00 
 
 Total 2,206,300.00 
 
 Balance, Cash in Hands of Receiver $3,002,550.00 
 
 Referred to Auditor December 31, 1916. 
 
 § 410. (5) Adjustment of Company's Books on Appoint- 
 ment of Receiver 
 The books of the embarrassed company are frequently 
 left in the condition that prevailed when the receivership 
 began. In that case no entries of any kind are made until 
 the time of reorganization, when the abandoned accounts 
 
504 RECEIVERSHIP 
 
 may be adjusted to the new conditions. Sometimes it may 
 be thought advisable, however, to adjust the accounts at 
 both the beginning and end of receivership jurisdiction. 
 This is assumed to have been done with the books of the 
 Excelsior Machine Company. 
 
 By referring to the appraisement, it will be seen that 
 numerous adjustments of values were made. The losses 
 sustained thereby should be adjusted into Surplus account 
 in order to bring the ledger into agreement with the prop- 
 erty valuations taken over by the receiver. 
 
 § 411. Entries to Adjust Inventories 
 
 Shrinkage in assets occasioned by the appraisements are 
 adjusted through the following entry on the books of the 
 company : 
 
 July I, 1916 
 
 Surplus $1,736,100 
 
 To Real Estate, Plant, etc $600,000 
 
 " Investments 500,000 
 
 " Merchandise, etc 78,960 
 
 " Accounts Receivable 4S.140 
 
 " Notes Receivable 422,000 
 
 " Cash 30,000 
 
 " Notes under Discount 60,000 
 
 To adjust losses and shrinkage in as- 
 sets, per appraisement of receiver. 
 
 It will be seen that this adjustment reduces the surplus 
 of the company from $2,102,850 (§ 406) to $366,750. 
 
 Closing entries should then be made, charging the re- 
 ceiver with the assets and liabilities taken over, as follows : 
 
 July I, 1916 
 
 Receiver $26,518,650 
 
 To Real Estate, Plant, Good-Will, 
 
 etc $11,536,500 
 
RECEIVERSHIP AND REORGANIZATION 
 
 50s 
 
 To Investments in Subsidiary and 
 
 AfBHated Companies, Pledged 4,000,000 
 
 " Merchandise, Materials, Goods 
 
 in Process, etc 2,100,000 
 
 " Deposit with Sinking Fund 
 
 Trustee 2,296,200 
 
 " Accounts Receivable 3,200,000 
 
 " Notes Receivable 2,440,100 
 
 " Cash on Hand and in Banks . . 945.850 
 
 To record transfer of Company's assets 
 to the receiver, as per order of the 
 Court. 
 
 First Mortgage $% Bonds, due 1930 $3,500,000 
 
 First Mortgage 5% Bonds, due July i, 1917 3,000,000 
 Collateral Trust 5% Bonds (secured, per 
 
 contra) 4,000,000 
 
 Bank Loans, Unsecured 500,000 
 
 Notes Payable 1,490,500 
 
 Accounts Payable 2,375,640 
 
 Accrued Charges 328,250 
 
 Reserves for Depreciation, Bad Debts, etc. 897,510 
 
 Notes under Discount 60,000 
 
 To Receiver $16,151,900 
 
 For liabilities taken over by the re- 
 ceiver this day, by order of the 
 Court. 
 
 The receiver's account in the company's ledger now 
 shows a debit balance of $10,366,750, corresponding with 
 the estate equity account of the receiver in his own ledger. 
 The company's accounts after transferring the assets and 
 liabilities to the receiver appear as follows : 
 
 Trial Balance, July i, 19 16 
 
 Receiver's Account $10,366,750.00 
 
 Capital Stock — Preferred $5,000,000.00 
 
 Capital Stock — Common 5,000,000.00 
 
 Surplus 366,750.00 
 
 $10,366,750.00 $10,366,750,00 
 
5o6 RECEIVERSHIP 
 
 § 412. (6) Entries on Termination of Receivership 
 
 It is not ordinarily advisable for the company to take 
 the assets and liabilities back into its ledger accounts until 
 the reorganization takes place. At that time the various 
 adjustments should, of course, be made in order to reopen 
 the ledger in harmony with the reorganized conditions. If 
 it is thought desirable, hovi^ever, to take the assets and lia- 
 bilities as shown by the receiver's final statement into the 
 company's ledger accounts, with the idea of making reor- 
 ganization adjustments later, the entry would be : 
 Closing Entry, December 31, 1916 
 Debits 
 
 Real Estate, Plant, and Good-Will $12,036,500 
 
 Investments 4,000,000 
 
 Merchandise, Materials, etc 2,150,000 
 
 Sinking Fund Trustee 2,296,200 
 
 Accounts Receivable 1,475,560 
 
 Notes Receivable 1,464,220 
 
 Cash 3,002,550 
 
 Credits 
 To First Mortgage 5% Bonds, due 
 
 1930 $3,500,000 
 
 " First Mortgage 5% Bonds, due 
 
 July I, 1917 3,000,000 
 
 " Collateral Trust Bonds 4,000,000 
 
 " Bank Loans 500,000 
 
 " Notes Payable 1,490,500 
 
 " Accounts Payable 2,375,640 
 
 " Accrued Charges 247,150 
 
 " Reserve for Depreciation, etc.. 897,510 
 " Liability- on Notes under Dis- 
 count 60,000 
 
 " Receiver's Account 10,354.230 
 
 To record existing assets and liabili- 
 ties on books of the company on 
 termination of receivership (preced- 
 ing the reorganization adjustments). 
 
RECEIVERSHIP AND REORGANIZATION 507 
 
 It will be seen that there is a difference of $12,520 in the 
 receiver's account, which amount must now be adjusted 
 into surplus by the following- entry: 
 
 Surplus $12,520 
 
 To Receiver $12,520 
 
 To close and adjust receiver's account into 
 Surplus. 
 
 The Surplus account now shows a credit balance of 
 $354,230, thus indicating a heavy shrinkage as a result of 
 the receivership and its resulting destruction of values. 
 After the reorganization takes place, these ledger accounts 
 will, of course, be readjusted to harmonize with the new 
 conditions as adopted by the committee of reorganization. 
 
 In the case of railways and public utilities, there is good 
 reason for keeping the company's books continuously during 
 the receivership regardless of the receiver's records, since 
 it is usually a foregone conclusion that, because of their 
 necessary service to the community, they will continue opera- 
 tions as usual, both during and subsequent to the receivership 
 jurisdiction. 
 
CHAPTER XXXVI 
 
 RECEIVERSHIP AND SALE 
 
 § 413." Introductory 
 
 Reorganization following the appointment of a receiver, 
 and the necessary accounting procedure have been set forth 
 in the preceding chapter. If, as it may happen, a reor- 
 ganization cannot be effected, it becomes the duty of the 
 receiver to sell the property and use the proceeds of the 
 sale in paying ( i ) the expenses of the receivership and sale, 
 (2) the creditors or bondholders of the corporation. If 
 anything' remained the corporation would be entitled to 
 it. In the case that follows the receiver was able to sell the 
 property so as to give the old stockholders a liberal cash 
 payment and stock in the new corporation. This is an 
 unusually good showing. The payment to the stockholders 
 would involve the dissolution of the old corporation ; other- 
 wise the distribution would be illegal. 
 
 § 414. Statement of Condition 
 
 The following statements are informal and only intended 
 to illustrate the principles involved. A more formal pres- 
 entation of a receiver's accounts will be found in the next 
 chapter. 
 
 The Willis Grocery Company was placed in the hands 
 of a receiver on April i, 191 6, at the request of merchandise 
 creditors. William Hart was appointed receiver with full 
 authority to continue the business under court supervision 
 and to conserve the company's property, in the hope of 
 effecting a favorable settlement with the creditors. Follow- 
 ing is the statement before making appraisement : 
 
 508 
 
RECEIVERSHIP AND SALE 
 
 509 
 
 Statement of the Willis Grocery Company 
 
 As OF April i, 1916 
 
 (Showing condition upon appointment of receiver, William Hart, 
 before making appraisements and book adjustments.) 
 
 Assets 
 Buildings, Properties, 
 
 and Warehouses.... $50,000.00 
 
 Store Equipment 10,000.00 
 
 Delivery Equipment.. 10,000.00 
 
 Merchandise in Stock 75,600.00 
 
 Produce on Hand 11,850.00 
 
 Accounts Receivable.. 85,410.00 
 
 Notes Receivable 12,500.00 
 
 Investments in Bonds 
 of Unlisted Com- 
 panies 25,000.00 
 
 Cash on Hand 5,820.00 
 
 Impairment of Capital 5,280.00 
 
 $291,460.00 
 
 Liabilities 
 
 Capital Stock $200,000.00 
 
 Less Uncalled Sub- 
 scriptions 50,000.00 
 
 Outstanding $150,000.00 
 
 Mortgage on Real Es- 
 tate 25,000.00 
 
 Bank Loans Secured 
 by Deposit of In- 
 vestments (per con- 
 tra) 10,000.00 
 
 Notes Payable 15,000.00 
 
 Accounts Payable 91,460.00 
 
 $291,460.00 
 
 Experts -appointed by the court to appraise the assets 
 made the following reductions, based partly on going values : 
 
 Value of Merchandise reduced by $10,000.00 
 
 Value of Produce reduced by 2,000.00 
 
 Accounts Receivable written off as worthless 4,270.00 
 
 Notes Receivable written off 1,800.00 
 
 Depreciation of Properties and Buildings written off 6,200.00 
 
 Depreciation of Store Equipment 2,000.00 
 
 Depreciation of Delivery Equipment 2,000.00 
 
 Value of Investments reduced by. 3,000.00 
 
 Total reductions $31,270.00 
 
 The receiver, after complying with all legal require- 
 ments, continued the business for five months in an effort 
 to put the company on its feet, but without success. Pro- 
 
Sio 
 
 RECEIVERSHIP 
 
 posals for reorganization were not acceptable to the unse- 
 cured creditors or to the stockholders. On September i, 
 1916, a meeting of stockholders and creditors was called, 
 and a proposition to sell the business as a going concern 
 to a new corporation was accepted. The terms of sale were 
 as follows : 
 
 1. Payment through the receiver to the former stock- 
 
 holders as follows : 
 
 (a) $60,000 in stock of the new company. 
 
 (b) $50,000 in cash, to be turned over out of 
 the assets. 
 
 2. New company to take over all remaining assets and 
 
 assume all liabilities, continuing the former set 
 of books. 
 
 3. All expenses of sale to be met by the purchasers. 
 The transactions of the receiver up to September i are 
 
 shown below : 
 
 Results of Operations by the Receiver 
 From April i to September i, 1916 
 
 Receipts 
 
 Collections from Notes Receivable $5,500.00 
 
 Collections from Accounts Receivable 22,640.00 
 
 Sales of Merchandise S3,7SO.oo 
 
 Sales of Produce 24,800.00 
 
 E.rpenditiires 
 
 Purchases of Merchandise $9,620.00 
 
 Purchases of Produce 13,110.00 
 
 Payment of Wages 4,000.00 
 
 Operating Expenses 4,500.00 
 
 Expenses and Salary (Nominal) of Receiver 1,500,00 
 
 Interest Accrued on Mortgage, September i, 1916, Unpaid... 625.00 
 
 The accounting procedure which follows illustrates on 
 the books of the dissolving company: 
 
RECEIVERSHIP AND SALE 
 
 5IZ 
 
 1. The receiver's records and entries upon taking 
 
 charge. 
 
 2. The receiver's entries for his official business 
 
 transactions. 
 
 3. The balance sheet of the company on September i , 
 
 1916, as presented by the receiver to the meeting 
 of stockholders and creditors. 
 
 4. The receiver's entries upon dissolution of the com- 
 
 pany and sale of its assets and liabilities. 
 
 § 415. (i) Receiver's Records on Taking Charge 
 
 The receiver's statement upon appointment shows a 
 deficit of $36,550 after allowing for depreciation and de- 
 ductions. The statement is similar to the one shown in 
 § 414, but with asset values reduced and the Capital Stock 
 account usually omitted. The appraisal statement is pre- 
 sented to the court for record. 
 
 The receiver continues the same books of account after 
 making the required adjustments, so that only adjusted 
 balances of accounts appear in the ledger. Under these con- 
 ditions his official transactions are entered up as in any 
 ordinary business. The adjusting entries to harmonize the 
 accounts with the revised statement of condition are given 
 below. The plan followed in this instance might not apply 
 in every case or be acceptable to all accountants, yet it is 
 simple and can be readily understood. The inventories of 
 merchandise and produce have been entered to the accounts 
 without journal entries. 
 
 First Entry 
 
 April I, 1916 
 
 Profit and Loss $31,270 
 
 To Merchandise $10,000 
 
 " Produce '. 2,000 
 
 " Accounts Receivable 4,270 
 
212 RECEIVERSHIP 
 
 To Notes Receivable i,8oo 
 
 " Buildings and Properties 6,200 
 
 " Store Equipment 2,000 
 
 " Delivery Equipment 2,000 
 
 " Investments 3,ooo 
 
 To record the loss on notes and accounts re- 
 ceivable and reduction in values of stock, 
 properties, and equipment — to harmonize the 
 accounts with the receiver's statement of 
 affairs. 
 
 The ledger now shows an impairment or debit to Profit 
 and Loss of $36,550, and with an outstanding capital of 
 $150,000, this leaves an equity of only $113,450. These 
 two accounts should not appear in the receiver's ledger at 
 all, and therefore are closed out by journal entry, leaving 
 instead a credit balance of $113,450 to "Willis Grocery 
 Company Estate" account. The required journal entry 
 would be as follows : 
 
 April I, 1916 
 Second Entry 
 
 Capital Stock $150,000 
 
 To Profit and Loss $36,550 
 
 " Willis Grocery Company Estate 1 13,450 
 
 To close the Capital Stock and Profit and 
 Loss accounts and to open Willis Grocery 
 Estate account to show the receiver's equity 
 therein. 
 
 § 416. (2) Entries to Record Receiver's Activities 
 
 The recording of the receiver's activities would be made 
 in the cash book and journal. The cash book entries are 
 summarized in the cash account given below and the closing ;, 
 journal entries follow: 
 
RECEIVERSHIP AND SALE 
 
 Receiver's Cash Account 
 April i to September i, 1916 
 
 513 
 
 Receipts 
 
 
 Disbursements 
 
 Balance taken over 
 
 
 Merchandise Purchases $9,620.00 
 
 April I, 1916 , 
 
 $5,820.00 
 
 Produce Purchases.... 13,110.00 
 
 Notes Receivable 
 
 5,500.00 
 
 Payment of Wages 4,000.00 
 
 Accounts Receivable.. 
 
 22,640.00 
 
 Operating Expenses . . . 4,500.00 
 
 Sales of Merchandise. 
 
 • 53,750.00 
 
 Expenses and Salary 
 
 Sales of Produce 
 
 . 24,800.00 
 
 of Receiver 1,500.00 
 
 
 Total $32,730.00 
 
 
 
 Balance in Hands of 
 
 
 
 Receiver 79,780.00 
 
 Total 
 
 $112,51000 
 
 $112,510.00 
 
 September i, 1916 
 First Entry 
 
 Produce $4,34° 
 
 Merchandise 530 
 
 To Profit and Loss 
 
 For profit on sale of produce and merchandise. 
 
 $4,870 
 
 Second Entry 
 
 Profit and Loss $10,625 
 
 To Wages 
 
 " Expenses 
 
 " Receivership Expenses 
 
 " Accrued Interest 
 
 To close above accounts into Profit and Loss, 
 and to enter up accrued interest. 
 
 $4,000 
 
 4.500 
 
 1,500 
 
 625 
 
 Third Entry 
 
 Surplus and Deficiency $5>7SS 
 
 To Profit atid Loss 
 
 To close Profit and Loss account into Surplus 
 and Deficiency account 
 
 . $5,755 
 
5H 
 
 RECEIVERSHIP 
 
 The foregoing entries when posted result in the follow- 
 ing balance sheet as of September i, 1916. 
 
 In case a Surplus and Deficiency account is not kept, 
 the balance should be closed into the estate account. 
 
 § 417. (3) Receiver's Statement of Condition 
 
 Receiver's Statement of Condition of 
 Willis Grocery Company 
 
 (As submitted to the meeting of stockholders and creditors at 
 date of sale, September I, 1916.) 
 
 Assets 
 
 
 Liabilities 
 
 
 Buildings and Prop- 
 
 
 Secured Bank Loans. 
 
 $10,000.00 
 
 erties 
 
 $43,800.00 
 
 Notes Payable 
 
 15,000.00 
 
 Less Mortgage Out- 
 
 
 Accounts Payable 
 
 91,460.00 
 
 standing 
 
 25,000.00 
 
 Interest Accrued 
 
 Total 
 
 625.00 
 
 Equity in Property. 
 
 $18,800.00 
 
 $117,085.00 
 
 Store Equipment 
 
 8,000.00 
 
 Balance of Estate, be- 
 
 
 Delivery Equipment.. 
 
 8,000.00 
 
 ing excess of Assets 
 
 
 Investments ($12,000 
 
 
 over Liabilities 
 
 107,695.00 
 
 pledged) 
 
 22,000.00 
 
 
 
 Merchandise 
 
 22,000.00 
 
 
 
 Produce 
 
 2,500.00 
 
 
 
 Notes Receivable 
 
 5,200.00 
 
 
 
 Accounts Receivable . 
 
 58,500.00 
 
 
 
 Cash on Hand 
 
 79,780.00 
 
 Total 
 
 
 Total 
 
 $224,780.00 
 
 $224,780.00 
 
 It is apparent from the above statement that the estate's 
 deficit is $42,305 after allowing for $150,000 of outstand- 
 ing capital. In other words, the stockholders have $107,695 
 of their capital left. 
 
 § 418. (4) Entries for Sale and Dissolution 
 
 The price secured for the business is slightly more 
 ($2,305) than the net value of the estate as shown by the 
 receiver's statement of condition. As a going concern, how- 
 
RECEIVERSHIP AND SALE ^ig 
 
 ever, there is a good-will element which has not been stated 
 in the balance sheet. 
 
 In this illustration all the accounts in liquidation are 
 cleared through a receiver's realization and liquidation ac- 
 count as shown below. A further use of this account is 
 shown in Chapter XXXVII, "Dissolution of Corporations." 
 
 All transfers of properties must be made by the receiver 
 and properly recorded in the county records. After trans- 
 fer of the business to the purchasers, the balance remaining 
 would belong to the stockholders. In this case the stock- 
 holders did not desire to continue a losing business with 
 impaired capital; they therefore dissolved the corporation 
 and directed the receiver to distribute the remaining assets 
 to the stockholders. The court made its order to the same 
 effect, and, after compliance and the rendition of his final 
 accounting to the court, the receiver was discharged. 
 
 First Entry {For transfer of assets to the purchasers') 
 September i, 1916 
 
 Realization and Liquidation Account $199,780 
 
 To Sundry Assets (itemized) $199,780 
 
 For sale and transfer of assets, as per re- 
 ceiver's statement, to purchasers of the 
 business,' by resolution of the stockhold- 
 ers and court order. (Mortgage is en- 
 tered among the liabilities.) 
 
 Cash to the amount of $50,000 is held back by the re- 
 ceiver as per agreement. At the proper time he hands this 
 over to the parties in interest. 
 
 Second Entry {Transfer of liabilities to purchasers) 
 
 Sundry Liabihties (itemized) $142,085 
 
 To Realization and Liquidation Account $142,085 
 
 For transfer of all liabilities (including 
 mortgage) to the purchasers, by court 
 order- 
 
5i6 
 
 RECEIVERSHIP 
 
 Third Entry (Receipt of stock from purchasers) 
 
 Stock of New Company $60,000 
 
 To Realization and Liquidation Account $60,000 
 
 Being part of sale price agreed upon for 
 the business as a going concern, the cash 
 and stock to be turned over to the stock- 
 holders by the receiver. 
 
 Fourth Entry {To adjust profit on sale of business) 
 
 Realization and Liquidation Account $2,305 
 
 To Surplus and Deficiency $2,305 
 
 To record profit realized on sale of busi- 
 ness, this amount being in excess of the 
 net v\?orth. 
 
 Fifth Entry (Adjustment of capital and surplus accounts and 
 distribution of proceeds) 
 
 Capital Stock $150,000 
 
 To Cash $50,000 
 
 " Stock of New Company 60,000 
 
 " Surplus and Deficiency 40,000 
 
 For distribution of cash and stock among 
 the stockholders in proportion to their 
 holdings, each receiving eleven-fifteenths 
 in value of his former holdings ; and for 
 closing capital and surplus accounts. 
 
 All book accounts of the dissolving company are now 
 closed out, the company's charter is surrendered by due 
 process, and the receiver discharged. 
 
CHAPTER XXXVII 
 
 DISSOLUTION OF CORPORATIONS 
 
 § 419. Voluntary Dissolution 
 
 In most of the states a corporation may be dissolved by- 
 its stockholders, the procedure being simple; and while in 
 some states unanimous consent is required, in others two- 
 thirds, three-fourths, or even a bare majority is enough to 
 terminate the corporate existence. 
 
 Many of the smaller corporations end their existence 
 informally by failure to pay taxes or to make corporate 
 reports, in consequence of which the state forfeits the 
 charter under which they operate. 
 
 In case of voluntary dissolution, the directors are the 
 trustees authorized to settle the company's affairs, and 
 they may bring this about in the simplest manner possible. 
 The chief difficulty, however, lies in collecting outstanding 
 accounts, and in disposing of properties without too great 
 sacrifice. The liquidation of liabilities may begin at once, 
 or as rapidly as cash is received. As the assets are sold, 
 entries are made through the cash account ; a like procedure 
 being required also for cash disbursements. Losses may 
 be closed into some clearing account as "Profit and Loss," 
 "Deficiency," or "Surplus" ; and this in turn, as a final step, 
 is closed into the Capital Stock account. There is nothing 
 peculiar about closing the books of a corporation when it is 
 dissolved, and any accountant or bookkeeper can handle 
 the situation without trouble. 
 
 § 420. Dissolution Through Bankruptcy 
 
 The insolvency or bankruptcy of a corporation does not 
 
 517 
 
2i8 DISSOLUTION OF CORPORATIONS 
 
 necessarily involve dissolution. Unless formal proceedings 
 are taken to dissolve the corporation, it will survive and 
 may be again used as a business organization. As there is 
 a possibility of the officers and stockholders being involved 
 in penalties and liabilities, it is safer to go through a formal 
 dissolution. 
 
 When a corporation becomes insolvent, its affairs are 
 usually wound up by bankruptcy proceedings. As soon as 
 the trustee in bankruptcy is appointed, he is required to 
 make an inventory and appraisement of the estate, showing 
 the exact condition of the insolvent corporation. This is 
 known as a "Statement of Affairs," and is made in the 
 simplest way possible for the convenience of both court and 
 creditors. With the statement of affairs is frequently pre- 
 sented a "Deficiency Account," showing the company's 
 capital impairment and how such impairment or deficit of 
 capital came about. 
 
 A statement of aftairs is somewhat similar to a balance 
 sheet. It is prepared from the books, schedules, creditors' 
 claims, etc., and contains on one side all liabilities, dis- 
 tinguishing between those which are unsecured, partially 
 secured, or fully secured; the preferred claims are set forth 
 on the same side of the statement. On the other side, the 
 assets of the concern are shown at their nominal or book 
 value, and also at the value which they are expected to 
 realize. Any assets which have been given or pledged as 
 security for creditors' claims are separated from those which 
 are available for distribution among the unsecured creditors. 
 The difference between the two sides of the statement shows 
 either the nominal net surplus or net deficiency, and is 
 transferred to a special account known as the "Deficiency" 
 account. Contingent liabilities should also be shown among 
 the liabilities and the loss expected thereon should be 
 indicated. 
 
DISSOLUTION OF CORPORATIONS 
 
 519 
 
 § 421. The Deficiency Account 
 
 The deficiency account shows on one side the net de- 
 ficiency as transferred from the statement of affairs, the 
 capital accounts, and the profits made on the business since 
 its commencement or since a date when the books show it 
 to have been in a sound condition. On the other side are 
 shown the losses incurred in realizing upon the assets, any 
 withdrawal of profits, and losses not otherwise provided for 
 in the statement. 
 
 The object of the deficiency account is to show the 
 amount of any deficit and its various items. It shows to 
 what extent the capital has been impaired or how far the 
 company falls short of being solvent. It is practically a 
 Profit and Loss account, but is opened only in case of in- 
 solvency proceedings. The deficiency account and the 
 items with which it is debited and credited are as fol- 
 lows : 
 
 Deficiency Account 
 
 Debit: 
 
 With dividends paid. 
 
 With losses through failures 
 as per Profit and Loss account. 
 
 With shrinkapje in assets as 
 per statement of affairs. 
 
 With depreciation of ac- 
 counts receivable. 
 
 With depreciation of mer- 
 chandise. 
 
 With depreciation of fixtures, 
 etc. 
 
 Credit : 
 
 With capital investment. 
 
 With surplus profits at clos- 
 ing of previous period. 
 
 With profit on trading. 
 
 With balance, deficiency per 
 statement of affairs. 
 
 § 422. Realization and Liquidation Account 
 
 The realization and liquidation account is a summary 
 of the assets to be realized and the liabilities to be liquidated, 
 with the accompanying entries for assets actually realized 
 
520 
 
 DISSOLUTION OF CORPORATIONS 
 
 and for liabilities liquidated. This account, or statement, 
 can be readily understood by reference to the accompanying 
 illustration. 
 
 Realization and Liquidation Account 
 
 Debit: 
 
 With assets to be realized. 
 
 With liabilities liquidated. 
 
 With expenses of realization 
 and liquidation. 
 
 With supplementary charges 
 if any. 
 
 Credit : 
 
 With liabilities to be liqui- 
 dated. 
 
 With proceeds of assets real- 
 ized. 
 
 With loss due to liquidation, 
 charged to Capital account. 
 
 With supplementary credits 
 if any. 
 
 This account is similar to that of the receiver or trustee 
 to whom is given the duty of settling the company's afifairs. 
 He is charged with all the assets of the company turned 
 over to him, and credited with all the liabilities assumed. 
 He is then in turn credited for all cash received from 
 realization of assets, cash being debited; and he is debited 
 for all liabilities discharged, since they cease to be offsets 
 to the assets taken in trust, cash at the same time being 
 credited. It will be seen that the trustee's cash account 
 becomes a supplement to the realization and liquidation 
 account. 
 
 § 423. Statement of Condition 
 
 The Longworth Store Company being unable to meet 
 its obligations, is forced into bankruptcy by the creditors. 
 From the books, from the schedules of the company's affairs, 
 from creditors' proved claims, and from the appraisements, 
 the following statement of condition has been ascertained 
 as of May i, 1916, by the trustee in bankruptcy: 
 
DISSOLUTION OF CORPORATIONS 52 1 
 
 Cash on Hand $5,500.00 
 
 Customers' Accounts, $1,000 good; $600 doubtful, but esti- 
 mated to produce $200 ; $1,000 bad 2,600.00 
 
 Property, estimated to produce $9,000 14,000.00 
 
 Notes Receivable, good". 4,250.00 
 
 Securities, $3,000 pledged with partially secured creditors ; 
 
 remainder held by fully secured creditors 28,000.00 
 
 Merchandise, expected to bring $15,000 24,650.00 
 
 Dividends paid during year, 25% 6,250.00 
 
 Trade Losses, due to drop in price of goods 7,400.00 
 
 Creditors Unsecured 25,000.00 
 
 Preferred Claims — Wages, Salaries, and Taxes 700.00 
 
 Creditors Partially Secured 23,900.00 
 
 Creditors Fully Secured 17,000.00 
 
 Capital Stock 25,000.00 
 
 Surplus 1,050.00 
 
 In the course of the bankruptcy proceedings the follow- 
 ing accounting exhibits are required : 
 
 1. A statement of affairs, showing the assets and the 
 
 liabilities with respect to their .--ealization and 
 liquidation. 
 
 2. A deficiency account, showing such of the above 
 
 stated particulars as would account for the de- 
 ficiency exhibited in the statement of affairs. 
 
 3. A reahzation and liquidation account, showing 
 
 settlement of the estate. 
 
 § 424, (i) Statement of Affairs 
 
 The trustee, or his accountant, prepares the statement 
 of affairs from information gleaned from the various 
 sources open to him, and submits it, together with the com- 
 plementary deficiency account, to the meeting of creditors. 
 He submits also his inventory and appraisement to the 
 court for record in the court journal. It is apparent that 
 the trustee should either be an accountant himself, or shoui 1 
 engage the services of an accountant for the determination 
 
522 DISSOLUTION OF CORPORATIONS 
 
 of the company's condition and for compiling the many 
 various details that will be found necessary in preparing his 
 statements. 
 
 A trial balance is compiled as a preliminary to the prepa- 
 ration of a statement. The statement of affairs and the 
 deficiency account which follow illustrate the manner of 
 setting forth the information called for. The trustee's cash 
 account is a simple statement of receipts and payments. All 
 payments are to be supported by vouchers which, with all 
 other records, are presented for the official audit at the 
 proper time. Careful minutes are kept of all meetings of 
 creditors, resolutions, court orders, etc., in order that a full 
 report as to the existing conditions may be prepared when- 
 ever required. 
 
 The directors of a corporation are not usually liable for 
 the debts of the company, but in the case illustrated an 
 interim dividend has apparently been paid out of capital 
 and, if this should be so, the amount must be made good by 
 the directors. 
 
 Trial Balance^ May i, 1916. 
 
 Cash $5,500.00 
 
 Customers 2,600.00 
 
 Property 14,000.00 
 
 Notes Receivable 4,250.00 
 
 Securities 28,000.00 
 
 Merchandise 24,650.00 
 
 Dividends 6,250.00 
 
 Trade Losses 7,400.00 
 
 Creditors Unsecured $25,000.00 
 
 Creditors Partially Secured 23,900.00 
 
 Creditors Fully Secured 17,000.00 
 
 Wages, Salaries, Taxes 700.00 
 
 Capital Stock 25,000.00 
 
 Surplus from Previous Year 1,050.00 
 
 $92,630.00 $92,650.00 
 
DISSOLUTION OF CORPORATIONS 523 
 
 LoNGwoRTH Store Company 
 
 Statement of Affairs 
 At Date of Failure, May i, 1916 
 
 Assets Book Estimated 
 Value to 
 
 Realize 
 
 Cash on Hand $5,500.00 $5,500.00 
 
 Property •. . . 14,000.00 9,000.00 
 
 Notes Receivable, good 4,250.00 4,250.00 
 
 Customers : 
 
 Good 1,000.00 1,000.00 
 
 Doubtful 600.00 200.00 
 
 Bad 1,000.00 
 
 Merchandise 24,650.00 15,000.00 
 
 Securities $28,000.00 28,000.00 
 
 Pledged with Partially Secured Cred- 
 itors, per contra 3,000.00 
 
 $25,000.00 
 Pledged with Fully Secured Creditors 
 
 for Debts of $17,000 25,000.00 
 
 Surplus of Securities, per contra 8,000.00 
 
 Total $79,000.00 $42,950.00 
 
 Deduct Preferred Creditors, per contra 700.00 
 
 Assets Available for Dividends $42,250.00 
 
 (Equivalent to a dividend of 92.07% on claims 
 of 45.900, exclusive of realization expenses.) 
 Balance, Deficiency per Deficiency account 3,650.00 
 
 $45,900.00 
 
 Liabilities Gross Expected 
 
 Unsecured Creditors : Amount to Rank 
 
 On Book Accounts $25,000.00 $25,000.00 
 
524 
 
 DISSOLUTION OF CORPORATIONS 
 
 Fully Secured Creditors : 
 
 On Book Accounts $17,000.00 17,000.00 
 
 Estimated Value of Securities 25,000.00 
 
 Surplus, to contra. 
 
 Partially Secured Creditors : 
 
 On Book Accounts $23,900.00 23,900.00 
 
 Estimated Value of Securities 3,000.00 
 
 Preferred Creditors : 
 Wages, Salaries, Taxes, deducted from assets 
 per contra 
 
 700.00 
 
 Total $66,600.00 
 
 Liabilities Due to Ranking Creditors 
 
 20,900.00 
 
 $45,900.00 
 
 § 425. (2) Deficiency Account 
 
 LoNGwoRTH Store Company 
 Deficiency Account 
 At Time of Failure, May i, 1916 
 (Being an analysis of the deficiency as shown in the statement of 
 affairs.) 
 
 Debits 
 Loss from Shrinkage 
 in Assets: 
 Property 
 
 $5,000.00 
 9,650.00 
 1,400.00 
 
 Credits 
 Capital Stock Invested $25,000.00 
 Surplus Profits from 
 
 Previous Year 1,050.00 
 
 Customers' Accounts 
 
 Total Credit $26,050.00 
 
 Balance, Deficiency, per 
 Statement of Affairs 3,650.00 
 
 Total Shrinkage... 
 Interim Dividends Paid 
 Trade Losses 
 
 $16,050.00 
 6,250.00 
 7,400.00 
 
 
 $29,700.00 
 
 $29,700.00 
 
 Note: It will be seen that the capital and surplus, amounting to 
 $26,050, have been wiped out, and $3,650 of the assets besides. 
 
DISSOLUTION OF CORPORATIONS 525 
 
 § 426. Trustee's Cash Account 
 
 The activities of the trustee in realizing upon assets and 
 in liquidating liabilities . are set forth in the following 
 cash account. Several months are usually required for the 
 settlement of an estate in bankruptcy, and during that period 
 two or more dividends may be paid to creditors. 
 
 First and Final Account of 
 Alfred S. Dickinson, Trustee in Bankruptcy 
 FOR THE Estate of Longworth Store Company, 
 Bankrupt 
 December i, 1916 
 
 The Trustee Charges Himself with 
 
 Cash Taken Over $5,500.00 
 
 Proceeds of Sale of Property 9,000.00* 
 
 Profit on Sale of Property 1,000.00 
 
 Proceeds of Sale of Merchandise 15,000.00* 
 
 Profit on Sale of Merchandise 1,000.00 
 
 Amounts Collected from Notes Receivable 4,250.00 
 
 Amounts Collected from Customers 1,200.00 
 
 Amounts Collected from Customers in Excess of Estimate 50.00 
 
 Proceeds of Sale of Pledged Securities (less claims of ' 
 
 Secured Creditors, $20,000, per contra) 28,000.00 
 
 Total Debits $65,000.00 
 
 The Trustee Takes Credit for 
 
 Payment of Preferred Claims $700.00 
 
 First Dividend to Unsecured Creditors, being 50% on $45,900 22,950.00 
 Payment to Fully Secured Creditors from Sale of Pledged 
 
 Securities, per contra 17,000.00 
 
 Payment of Partially Secured Creditors, or Portion secured 
 
 from Sale of Pledged Securities, per contra 3,000.00 
 
 Expenses of Administration and Commission to Trustee.... 2,500.00 
 
 Total Credits $46,150.00 
 
 Final Dividend of 41.07% by Order of Court 18,850.00 
 
 Total Payments $65,000.00 
 
 *Tbese are the amounts as per Statement of Affairs. 
 
526 DISSOLUTION OF CORPORATIONS 
 
 Summary 
 
 Total Receipts of Cash $65,000.00 
 
 Total Payments to Secured and Preferred Cred- 
 itors and for Expenses 23,200.00 
 
 Total Dividends to Creditors, being 91.07% $41,800.00 
 
 § 427. (3) The Realization and Liquidation Account 
 
 As previously stated, this is a summary of the trustee's 
 records in selling the properties and collecting debts due to 
 the bankrupt estate, and also of liabilities paid by him. In 
 the following illustration the assets and liabilities are shown 
 separately for greater convenience in illustrating the divi- 
 sions and cancellations : 
 
 Realization and Liquidation Account 
 
 Of Longworth Store Company 
 
 As OF December i, 1916 
 
 Account of Assets 
 
 To be Realized ; 
 
 
 Realized : 
 
 
 Cash (see Cash Ac- 
 
 
 Property 
 
 $10,000.00 
 
 count) 
 
 
 Merchandise 
 
 16,000.00 
 
 Property 
 
 $9,000.00 
 
 Securities 
 
 28,000.00 
 
 Merchandise 
 
 15,000.00 
 
 Notes Receivable 
 
 4,250.00 
 
 Securities 
 
 28,000.00 
 
 Customers' Accounts 
 
 1,250.00 
 
 Notes Receivable 
 
 4,250.00 
 
 
 
 Customers' Accounts 
 
 1,200.00 
 
 
 
 Total 
 
 $57,450.00 
 
 
 Supplementary Charges 
 
 : 
 
 
 
 Increase in Value of 
 
 
 
 
 Property over Ap- 
 
 
 
 
 praisement 
 
 1,000.00 
 
 
 
 Increase in Value of 
 
 
 
 
 Merchandise over 
 
 
 
 
 Appraisement 
 
 1,000.00 
 
 
 
 Customers' Increase. 
 
 50.00 
 
 
 
 
 $59,500.00 
 
 $59,500.00 
 
DISSOLUTION OF 
 Account of 
 
 CORPORATIONS 
 Liabilities 
 
 527 
 
 Liquidated 
 
 Preferred Claims $700.00 
 
 Secured Creditors... 20,000.00 
 First Dividend to 
 
 Creditors 22,950.00 
 
 Second Dividend to 
 
 Creditors 18,850.00 
 
 Total $62,500.00 
 
 Commissions and Ex- 
 penses 2,500.00 
 
 Balance, Loss to Cred- 
 itors, carried to Capi- 
 tal Account 4,100.00 
 
 $69,100.00 
 
 To be Liquidated : 
 
 Preferred Claims $700.00 
 
 Secured Creditors. . . 20,000.00 
 
 Unsecured Creditors 25,000.00 
 Partially Secured 
 
 Creditors 20,900.00 
 
 Total $66,600.00 
 
 Supplementary Credits : 
 Commission and Ex- 
 pense of Trustee.. 2,500.00 
 
 $69,100.00 
 
 Trustee's Cash Account 
 
 Receipts 
 
 
 Payments 
 
 
 Amount on Hand 
 
 $5,500.00 
 
 Preferred Claims 
 
 $700.00 
 
 Sale of Property 
 
 10,000.00 
 
 First Dividend, 50%... 
 
 22,950.00 
 
 Sale of Merchandise.. 
 
 16,000.00 
 
 Secured Claims 
 
 17,000 00 
 
 Notes Receivable 
 
 4,250.00 
 
 Secured Claims 
 
 3,000.00 
 
 Customers' Accounts.. 
 
 ,1,250.00 
 
 Expenses and Commis- 
 
 
 Sale of Securities 
 
 28,000.00 
 
 sions 
 
 2,500.00 
 
 
 
 Dividend, 41.07% Final 
 
 
 
 
 Settlement 
 
 18,850.00 
 
 
 $65,000.00 
 
 $65,000.00 
 
 Note: Vouchers for all cash disbursements should be available. 
 
APPENDIX 
 
 INCORPORATION FORMS 
 
 Form I. New York Charter 
 
 Certificate of Incorporation 
 
 OF THE 
 
 Hampton Trading Corporation 
 
 We, the undersigned, all being of full age and two-thirds being 
 citizens of the United States and one of us a resident of the State of 
 New York, for the purpose of forming a corporation under the Busi- 
 ness Corporations Law of the State of New York, do hereby certify 
 and set forth : 
 
 First. The name of said corporation shall be : 
 "Hampton Trading Corporation." 
 
 Second. The purposes for which said corporation is to be formed 
 are as follows : 
 
 (a) To buy, sell, produce, manufacture, and dispose of all 
 kinds of goods, wares, foods, potables, drugs, merchandise, manu- 
 factures, commodities, furniture, machinpry, agricultural tools, sup- 
 plies and products, and generally to engage in and conduct any 
 form of manufacturing or mercantile enterprise not contrary to law. 
 
 (b) To lease, buy, sell, use, mortgage, improve, and otherwise 
 handle, deal in, and dispose of all such property, real and personal, 
 as may be necessary or convenient in connection with the aforesaid 
 business of the Company. 
 
 (c) To conduct and transact business in any of the states, 
 territories, or colonial dependencies of the United States and in 
 any foreign country or countries, to have offices therein, and to 
 hold real and personal property therein without limit, subject to 
 the local law. 
 
 Third. • The amount of capital stock of said corporation shall be 
 Two Hundred and Fifty Thousand Dollars ($250,000). 
 
 The amount of capital with which said corporation will begin 
 business is Ten Thousand Dollars ($10,000). 
 
 Fourth. The number of shares of which said capital stock is to 
 consist shall be Two Thousand, Five Hundred (2,500) Shares of the 
 9ar valae of One Hundred Dollars ($100) each. 
 
530 
 
 FORMS 
 
 Fifth. The principal business office of said corporation shall be 
 located in the Borough o£ Manhattan and in the City, County, and 
 State of New i'^ork. 
 
 Sixth. The duration of said corporation shall be perpetual. 
 
 Seventh. The number of directors of said corporation shall be 
 five. 
 
 Eighth. The names and post-office addresses of the directors oi 
 said corporation for the first year are as follows : 
 
 Names Addresses 
 
 Charles W. Hampton, 167-169 Center St., New York City 
 Samuel Johnson, " " 
 
 James J. Miller, " " 
 
 Lincoln Webster, 73s Main St., Albany, New York 
 
 Robert W. Kester, 
 
 Ninth. The names and post-office addresses of the subscribers to 
 this certificate, and the number of shares which each agrees to take in 
 said corporation are as follows : 
 
 Names Addresses Shares 
 
 Charles W. Hampton, 167-169 Center St., New York City, 1,250 
 
 Samuel Johnson, " " 500 
 
 James J. Miller, " " 500 
 
 Tenth. At all elections of directors of this corporation, each 
 stockholder shall be entitled to as many votes as shall equal the number 
 of his shares of stock, multiplied by the number of directors to be 
 elected, and he may cast all of such votes for a single director or may 
 distribute them among the number to be voted for, or any two or 
 more of them, as he may see fit. 
 
 In Witness Whereof, we have made and signed this certificate in 
 duplicate this 5th day of June, 1916. 
 
 Charles W. Hampton 
 Samuel Johnson 
 James J. Miller 
 State of New York "I 
 
 rSS ' 
 
 County of New York J 
 
 Personally appeared before me this sth day of June, 1916, Charles 
 W. Hampton, Samuel Johnson, and James J. Miller, to me personally 
 known to be the persons described in and who executed the foregoing 
 certificate and severally acknowledged that they executed the same for 
 the purposes set forth. j^^^^^ Bv^-eu., 
 
 /"NOTARIAL "1 Notary Public for 
 
 \ SEAL J New York County 
 
FORMS 
 
 531 
 
 Form 2. By-Laws* 
 
 By-Laws 
 
 OF THE 
 
 Hampton Trading Corporation 
 New York 
 
 Article I — Stock 
 
 1. Certificates of Stock shall be issued in numerical order from 
 the stock certificate book, be signed by the President and Treasurer, 
 and be sealed by the Secretary with the corporation seal. A record of 
 each certificate issued shall be kept on the stub thereof. 
 
 2. Transfers of Stock shall be made only upon the books of the 
 Company by the holder thereof in person, or by his duly authorized 
 attorney. The stock books of the Company shall be closed to transfers 
 twenty days before general elections and ten days before dividend 
 days. 
 
 3. The Treasury Stock of the Company shall consist of such 
 issued and outstanding stock of the Company as may be donated to the 
 Company or otherwise acquired, and shall be held subject to disposal 
 by the Board of Directors. Such stock shall neither vote nor participate 
 in dividends while held by the Company. ' 
 
 Article II — Stockholders 
 
 X. The Annual Meeting of the stockholders sTiall be held in the 
 principal office of the Company in New York City, on the fourth 
 Saturday of December of each year, at eleven o'clock a.m., if not a 
 legal holiday; but if a legal holiday, then on the following Monday. 
 
 2. Special Meetings of the stockholders may be called at the 
 principal office of the Company at any time, by resolution of the Board 
 of Directors, or upon written request of the stockholders holding one- 
 third of the outstanding stock. 
 
 3. Notice of Meetings, written or printed, for every regular or 
 special meeting of the stockholders, shall be prepared and mailed to 
 the last-known post-office address of each stockholder, not less than 
 ten days before any such meeting, and if a special meeting, such notice 
 shall state the object or objects thereof. 
 
 4. A Quorum at any meeting of the stockholders shall consist of 
 a majority of the voting stock of the Company, represented in person 
 or by proxy. A majority of such quorum shall decide any question 
 that may come before the meeting. 
 
 •See Conyngton's "Corporate Or^anizatioo." 
 
232 FORMS 
 
 5. The Election of Directors shall be held at the annual meeting 
 of the stockholders. The election shall be by ballot and each stock- 
 holder of record shall be entitled to cast five votes for each share of 
 stock held by him, and such votes may be cast all for one director 
 or be distributed among the number to be elected, in any manner the 
 voting stockholder may desire. 
 
 6. The Order of Business at annual meetings and, as far as it 
 applies, at all other meetings of the stockholders, shall be : 
 
 1. Calling of roll 
 
 2. Proof of due notice of meeting 
 
 3. Reading and disposal of any unapproved minutes 
 
 4. Annual reports of officers and committees 
 
 5. Election of directors 
 
 6. Unfinished business 
 
 7. New business 
 
 8. Adjournment 
 
 Article III — Directors 
 
 1. The Business and Property of the Company shall be managed 
 by a Board of five Directors, who shall be stockholders and who shall 
 be elected annually by the stockholders for the term of one year, and 
 shall serve until the election and acceptance of duly qualified suc- 
 cessors. Any vacancies may be filled by the Board for the unexpired 
 term. 
 
 2. A regular Meeting of the Board of Directors shall be held in 
 the principal office of the Company in New York City, on the last 
 Saturday of each month, at 12 noon, if not a legal holiday; but if a 
 legal holiday, then on the following Monday. 
 
 3. Special Meetings of the Board of Directors, to be held in the 
 principal office of the Company in New York City, may be called at 
 any time by the President, or by unanimous written consent of all 
 the members, or by the presence of all members at such meetings. 
 
 4. Notices of both regular and special meetings shall be mailed 
 by the Secretary to each member of the Board not less than five days 
 before any such meeting, and notices of special meetings shall state 
 the purposes thereof. 
 
 5. A Quorum at any meeting shall consist of the majority of the 
 entire membership of the Board. 
 
 6. Officers of the Company shall be elected by ballot of Directors 
 at the first meeting after the election of Directors each year. Vacancies 
 on the Board shall be filled for the unexpired term. The Board of 
 Directors shall fix the compensation of the officers and agents of the 
 Company. 
 
FORMS 
 
 533 
 
 7. The Order of Business at any regular or special meeting of the 
 Board of Directors shall be: 
 
 1. Reading and disposal of any unapproved minutes 
 
 2. Reports of officers and committees 
 
 3. Unfinished business 
 
 4. New business 
 
 5. Adjournment 
 
 Article IV — Officers 
 
 1. The Officers of the Company shall be a President, a Vice- 
 Pi esident, a Secretary, and a Treasurer, who shall be elected for one 
 year, and shall hold office until their successors are elected and quahfied. 
 The positions of Secretary and Treasurer may be united in one person. 
 
 2. The President shall preside at all meetings, shall have general 
 supervision of the affairs of the Company, shall sign or countersign 
 all certificates, contracts, and other instruments of the Company, as 
 authorized by the Board of Directors ; shall make reports to the 
 Directors and stockholders, and perform all such duties as are incident 
 to his office or are properly required of him by the Board of Directors. 
 In the absence or disabihty of the President, the Vice-President shall 
 exercise all his functions. 
 
 3. The Secretary shall issue notices for all meetings, shall keep 
 their minutes, shall have charge of the seal and the corporate books ; 
 shall sign, with the President, such instruments as shall require such 
 signature, and shall make such reports and perform such other duties 
 as are incident to his office, or are properly required of him by the 
 Board of Directors. 
 
 4. The Treasurer shall have the custody of all moneys and securi- 
 ties of the Company, and shall keep regular books of account and 
 balance the same each month. He shall sign or countersign such 
 instruments as require his signature, shall perform all duties of his 
 office or that are properly required of him by the Board, and shall 
 give bond for the faithful performance of his duties in such sum and 
 with such sureties as may be required by the Board of Directors. 
 
 Article V — Dividends and Finances 
 
 1. Dividends shall be declared only from the surplus profits, at 
 such times as the Board of Directors shall direct; and no dividends 
 shall be declared that will impair the capital of the Company. 
 
 2. The Moneys of the Company shall be deposited in the name of 
 the Company, in such bank or trust company as the Board of Directors 
 shall designate, and shall be drawn out only by check signed by the 
 Ti easurer and countersigned by the President. 
 
534 
 
 FORMS 
 
 Article VI — Seal 
 
 I. The Corporate Seal of the Company shall consist of two con- 
 ctntric circles, between which is the name of the Company, and in the 
 center shall be inscribed "Incorporated 1916, New York," and such 
 seal, as impressed on the margin hereof, is hereby adopted as the 
 corporate seal of the Company. 
 
 Article VII — Amendments 
 
 1. These By-Laws may be amended, repealed, or altered, in 
 whole or in part, by a three-fifths vote of the entire outstanding stock 
 of the Company, at any regular meeting of the stockholders, or at any 
 special meeting where such action has been announced in the call and 
 notice of such meeting. 
 
 2. The Board of Directors may adopt additional by-laws in 
 harmony therewith, but shall not alter nor repeal any by-laws adopted 
 by the stockholders of the Company. 
 
 Form 3. Certification of By-Laws ' 
 
 We, the undersigned, Charles W. Hampton and Samuel Johnson, 
 respectively the duly elected President and Secretary of the Hampton 
 Trading Corporation, a corporation organized under the laws of the 
 State of New York, do hereby certify that the foregoing By-laws 
 are the By-laws of the said corporation, duly adopted by the stock- 
 holders of said corporation at their first meeting held on the 9th day 
 of June, 1916, in the office of the said corporation, 167-169 Center 
 Street, New York City, as shown by the minutes of said meeting. 
 
 In Testimony Whereof, we have hereunto affixed our official 
 
 signatures and the corporate seal of said corporation, this gth 
 day of June, 1916. S^^^^^ Johnson, 
 
 rcoRPORATE-i Secretary 
 
 [_ SEAL J 
 
 Charles W. Hampton, 
 
 President 
 
 Form 4. Minutes of First Meeting of Stockholders 
 
 Hampton Trading Corporatiox 
 
 Minutes of First Meeting of Stockholders 
 
 Held June g, 1916 
 
 Pursuant to! written call and waiver of notice signed by all the 
 
 incorporators, the first meeting of the Hampton Trading Corporation 
 
FORMS 
 
 535 
 
 was held in its principal office, 167-169 Center Street, New York City, 
 ai 4 P.M. on the 9th day of June, 1916. 
 
 Mr. Charles W. Hampton called the meeting to order, and by 
 motion unanimously carried was appointed Chairman. Mr. Samuel 
 Johnson was appointed Secretary. 
 
 There were present in person : Charles W. Hampton and Samuel 
 Johnson. 
 
 James J. Miller's proxy was presented by Charles W. Hampton 
 and was ordered filed with the Secretary. 
 
 The Secretary presented and read the call and waiver pursuant 
 to which the rreeting was held. On motion it was ordered to be 
 entered in the minute book following the minutes of the meeting. 
 
 The Chairman then presented a copy of the Certificate of In- 
 corporation and stated that the original had been filed with the 
 Secretary of State on the 6th day of June, 1916, and that a duplicate 
 copy had beeen filed for record with the County Clerk on the 8th day 
 of June, 1916. 
 
 Upon motion duly made and carried, said Certificate of Incorpora- 
 tion was ordered received, the Directors named therein were recognized 
 as the Directors of the Company, and the Secretary was instructed to 
 spread the said Certificate in full upon the first pages of the book 
 o£ minutes. 
 
 The Chairman presented a form of By-laws prepared by Counsel 
 for the Company, which was read, article by article, and as a whole 
 unanimously adopted and ordered to be entered in the book of minutes 
 immediately following the Certificate of Incorporation. 
 
 The Secretary then presented a written proposal from Charles W. 
 Hampton, of 167-169 Center Street, New York City, offering to transfer 
 and assign to the Company his entire plant and business, comprising 
 all of his assets and liabilities in exchange for One Thousand, Two 
 Hundred and Fifty (1,230) Shares of the capital stock of the Company. 
 
 After due consideration, the Hampton proposal was ordered re- 
 ceived and the following resolution in regard thereto was moved, 
 seconded, and passed by unanimous vote: 
 
 Whereas, a proposition has been received from Charles W. 
 Hampton, offering to sell, assign, and convey to this Company 
 the plant, property, all assets and liabilities, and all of his estab- 
 lished mercantile business, as a going concern, in exchange for 
 One Thousand, Two Hundred and Fifty (1,250) Shares of stock in 
 this Company; and 
 
 Whereas, it appears to the stockholders of this Company that 
 the said property and business are desirable for the purposes of 
 the Company and are reasonably worth the purchase price thereof: 
 
536 FORMS 
 
 Now, Therefore, Be It Resolved, that the said propo.sal for 
 the exchange of said business, property, assets and liabilities for 
 One Thousand, Two Hundred and Fifty (1,250) Shares of the 
 capital stock of this Company, as set forth in said proposal, be 
 and hereby is approved, and the Directors of this Company are 
 hereby authorized, empowered, and instructed to accept the said 
 proposal, and to issue One Thousand, Two Hundred and Fifty 
 (1,250) Shares of stock of the Company for the said property and 
 business in accordance with the terms. 
 
 There being no further business, the meeting was declared ad- 
 journed. 
 
 Samuel Johnson, 
 
 Secretary 
 Charles W. Hampton, 
 
 Chairman 
 
 Form 5. Proxy — First Stockholders' Meeting 
 
 Proxy 
 
 FOR 
 
 First Meeting of Stockholders 
 
 Know All Men By These Presents, that I, the undersigned, one 
 of the incorporators of the Hampton Trading Corporation and a sub- 
 scriber to the stock thereof, do hereby constitute and appoint Charles 
 W. Hampton my true and lawful attorney, with full powers of sub- 
 stitution and revocation, to represent me at the first meeting of the 
 stockholders of said corporation, to be held on the pth day of June, 
 1916, and at any meeting postponed or adjourned therefrom, hereby 
 granting my said attorney full power and authority to act for me at 
 said meeting, and in my name, place, and stead to vote thereat upon 
 the stock of said corporation subscribed for by me, or upon which I 
 may then be entitled to vote, in the transaction of any and all busi- 
 ness pertaining to the affairs of the Company that may be brought 
 before said meeting, all as fully as I might or could do if personally 
 present, and I hereby ratify and confirm all that my said attorney, 
 or his substitute, shall lawfully do at such meeting in my name, place, 
 and stead. 
 
 In Witness Whereof, I have hereunto affixed my signature this 
 9th day of June, 1916. 
 
 James J. Miller [i. s.] 
 In presence of 
 
 Walter H. King 
 
FORMS 
 
 537 
 
 Form 6, Call and Waiver of Notice — First Meeting of 
 Stockholders 
 
 Call and Waiver of Notice 
 
 FOR 
 
 First Meeting of Stockholders 
 
 We, the undersigned, being all of the incorporators of the Hamp- 
 ton Trading Corporation, and all the subscribers to its capital stock 
 entitled to notice of said meeting, do hereby call the first meeting of 
 the stockholders of said corporation, to be held in the principal office 
 of the Company, 167-169 Center Street, New York City, at 4 p.m. on 
 the 9th day of June, 1916, for the purpose of receiving the charter, 
 adopting by-laws, considering and acting upon a proposal for the issue 
 of One Thousand, Two Hundred and Fifty (1,250) Shares of the 
 capital stock of the corporation in exchange for property, and the 
 transaction of all such other business as may be necessary or convenient 
 in connection with the organization of said corporation, and we do 
 hereby waive all requirements as to notice or publication of the tirat;, 
 place, and purposes of this first meeting and do consent to the trans- 
 action thereat of any and all business pertaining to the affairs of the 
 Company. 
 
 Dated, New York City, Charles W. Hampton 
 
 June 9, 1916. SamCel Johnson 
 
 James J. Miller 
 
 Form 7, Minutes of First Meeting of Directors 
 Hampton Trading Corporation 
 Minutes of First Meeting of Directors 
 Held June 9, 1916 
 Pursuant to written call and waiver of notice, the Board of 
 Directors of the Hampton Trading Corporation held its first meeting 
 in its principal office at 167-169 Center Street, New York City, at 5 p.m. 
 on the 9th day of June, 1916. 
 
 Mr. Charles W. Hampton called the meeting to order, and on 
 motion was elected temporary Chairman. Mr. Samuel Johnson was 
 appointed Secretary pro tern. 
 There were present: 
 
 Charles W. Hampton 
 Samuel Johnson 
 James J. Miller 
 . Lincoln Webster 
 Robert W. Kester 
 
'538 
 
 FORMS 
 
 The Secretary presented the call and waiver of notice, puiMianl to 
 which the meeting was held, duly signed by all the Directors. It was 
 ordered spread upon the minute book immediately following the 
 minutes of the meeting. 
 
 The Chairman then presented a form of By-laws adopted by the 
 stockholders at their first meeting, and stated that the next order of 
 business as set forth therein was the election of a President, Vice- 
 President, Secretary, and Treasurer, to serve for the ensuing cor- 
 porate year and until the election and acceptance of their successors. 
 The following officers were then elected by unanimous vote : 
 
 President Charles W. Hampton 
 
 Vice-President Lincoln Webster 
 
 Secretary Samuel Johnson 
 
 Treasurer James J. Miller 
 
 The permanent officers of the Company then took charge of the 
 meeting. 
 
 By motion, duly seconded and passed, the amount of the Treas- 
 urer's bond was fixed at Three Thousand Dollars ($3,000), such bond 
 to be in form and with sureties approved by the Board. 
 
 The Treasurer-elect then presented a bond for said amount, 
 signed by himself as principal, and by the Fidelity Guarantee Company 
 of New York City as sureties. The form of the instrument and the 
 sureties thereon meeting with the approval of the Board, the bond as 
 presented was formally accepted and placed in custody of the President. 
 
 The Secretary then presented a form of stock certificate for 
 approval, which was by motion adopted as the stock certificate of the 
 Company; and the Secretary was instructed to spread the said form 
 upon the pages of the minute book immediately following the record 
 of the meeting. 
 
 The President then presented a written proposal from Charles W. 
 Hampton, of 167-169 Center Street, New York City, offering to assign 
 to the Company in exchange for One Thousand, Two Hundred and 
 Fifty (1,250) Shares of stock, the assets and liabilities shown on the 
 accompanying balance sheet, estimated to be worth One Hundred and 
 Twenty-Five Thousand Dollars ($125,000). The said proposal was 
 ordered spread in full upon the minutes, and is as follows : 
 
 {Here should be recorded the proposal for the exchange of property 
 for stock and the balance sheet which accompanies it.) 
 
 The President then presented the resolution of the stockholders, 
 approving of said proposition, and authorizing and instructing the 
 Directors to accept the same and to take such action in regard thereto 
 as might be necessary to make such acceptance fully effective. 
 
FORMS 539 
 
 The President then called the Vice-president to the chair and with- 
 drew during the discussion and vote upon the proposal. 
 
 The following resolution was thereupon moved, seconded, and 
 after due discussion was unanimously adopted: 
 
 Whereas, the property offered in exchange for One Thousand, 
 Two Hundred and Fifty (1,250) Shares of the capital stock of 
 this Company by Charles W. Hampton, in his proposition to the 
 Company, is adjudged by this Board to be of the reasonable value 
 of One Hundred and Twenty-Five Thousand Dollars ($125,000) 
 and to be necessary for the use and lawful purposes of the 
 Company ; 
 
 Resolved, that the said property be received, and that this 
 Board of Directors hereby, in accordance with the authorizations 
 and instructions of the stockholders of this Company, accept the 
 same in full payment for the said One Thousand, Two Hundred 
 and Fifty (1,250) Shares of the capital stock of the Company, in 
 accordance with the terms of said proposal ; and the proper officers 
 of this Company be hereby authorized and directed to receive the 
 duly executed transfers and assignments of the property and busi- 
 ness specified ill said proposal, and to issue in exchange therefor 
 One Thousand, Two Hundred and Fifty (1,250) Shares of stock 
 of the Company, all full-paid and non-assessable, to such person 
 or persons as may be designated by the written order of the 
 aforementioned Charles W. Hampton. 
 
 The President was recalled to the room and resumed the chair. 
 Upon motion duly made, seconded, and passed, the following 
 resolution was adopted. 
 
 Resolved, that the Treasurer be and hereby is authorized and 
 instructed to open an account for the Company with the Seaboard 
 National Bank, of New York City, and to deposit therein all the 
 funds of the Company coming into his custody; such account to 
 be in the name of the Company and funds deposited therein to be 
 withdrawn only by check signed by the Treasurer and counter- 
 signed by the President. 
 
 The following motions were then made, seconded, and duly passed 
 by the unanimous vote of all present: 
 
 Moved, that the office of Charles W. Hampton at 167-169 Center 
 Street, New York City, as acquired by the Company, be and hereby 
 is designated as the principal office of the Company within the 
 State of New York. 
 
540 FORMS 
 
 Moved, that the Secretary be hereby instructed to purchase all 
 such record, stock and transfer books, and all such books of 
 account and stationery and office supplies, as may be necessary for 
 the proper operation and record of the Company's business. 
 
 Moved, that the Treasurer be and hereby is authorized and 
 directed to pay out of the funds of the Company the sum of 
 Five Hundred Dollars ($500) or so much of it as may be necessary 
 to defray the cost of incorporation of the Company and the 
 expenses incident thereto. 
 
 Moved, that Lincoln Webster, Samuel Johnson, and James J. 
 Miller be hereby appointed inspectors of election to serve at the 
 first annual election of Directors of the Company, and at any 
 election of Directors by the stockholders previous thereto. 
 
 There being no further business for consideration, the meeting 
 vi^s adjourned. 
 
 Samuel Johnson, 
 
 Secretary 
 Charles W. Hampton, 
 
 President 
 
 Pursuant to the instructions of the preceding minutes, the following 
 instruments are hereunto appended in the order given: 
 
 1. Call and vyraiver of notice 
 
 2. Form of stock certificate 
 
 Form 8. Call and Waiver of Notice — First Meeting of 
 Directors 
 
 Call and Waiver of Notice 
 
 FOR 
 
 First Meeting of Directors 
 
 We, the undersigned, being all the Directors of the Hampton Trad- 
 ing Cbrporation, do hereby call the first meeting of said Directors to 
 be held in the office of the Company at 167-169 Center Street, New 
 York City, at 5 p.m. on the 9th day of June, 1916, for the purpose of 
 electing officers of the Company, acting upon a proposition for the 
 issue of One Thousand, Two Hundred and Fifty (1,250) Shares of 
 the capital stock of the Company in exchange for property, and the 
 transaction of all such other business as may be necessary or desirable 
 
FORMS 541 
 
 in connection with the organization of the Company and the promotion 
 of its business, and we hereby waive all statutory and by-law require- 
 ments as to notice of time, place, and object of this first meeting, and 
 consent to the transaction thereat of any and all business pertaining to 
 the affairs of the Company. 
 
 Charles W. Hampton 
 New York City, Samuel Johnson 
 
 June 9th, 1916. James J. Miller 
 
 Lincoln Webster 
 Robert W. Kester 
 
 Note: For general form of stock certificate, see Chapter V„ 
 
INDEX. 
 
 Accident reserves, 333, 334 
 Accountant, duty of, 165 
 Accounting, (.See also "Ac- 
 counts,"' and "'Statements") 
 closing of books, 320-337 
 entries, 
 bonds (See "Bonds") 
 capital stock donated, 119, 120, 
 
 121, 122 
 capital stock, original issue, 
 
 101-118 
 capital stock sold above par, 
 
 114 
 capital stock sold below par, 
 
 112, 113, 114 
 cash, 165, 170 
 dividends, loi 
 entries, closing, 
 
 manufacturing ousiness, 360- 
 
 362 
 trading business, 370-373 
 entries, opening, 162, 167, 168, 
 172, 173, 186-191 
 capital stock sold after organ- 
 ization, III, 112 
 stock full paid, 103, 104, 105, 
 
 106 
 stock on instalments, 106, 107, 
 108, 109 
 ledger accounts, stock on instal- 
 ments, 109, no. III 
 methods, statistics frequently 
 
 govern, 45 
 profits, method of entering, loi 
 pro forma statement, 103 
 Accounts, (See also "Account- 
 ing") 
 accrued interest on bonds, 97 
 bond discount, 96 
 bond premium, 95, 96 
 
 bonds, 95 
 
 bonus, 125 
 
 books of (See "Books") 
 
 capital stock authorized, 82, 8S 
 
 capital stock, common, 80, 81 
 
 capital stock, preferred, 81 
 
 capital stock subscribed, 85 
 
 capital stock virithout par value, 
 89, 90, 91 
 
 distinctive corporate, 80-100 
 
 dividends, 94, 95 
 
 donation, 87 
 
 good-will, 99, 100 
 
 instalment, 86 
 
 interest on bonds, 97 
 
 interest on mortgages, 97 
 
 investments, 100, 128 
 
 ledger, 170, 171 
 
 organization expenses, 92 
 
 premium on capital stock, 88 
 
 reserve, permanent, 99 
 
 sinking fund, 98 
 
 sinking fund reserve, 98, 99 
 
 stock discount, 88, 113 
 
 subscriptions to stock, 84 
 
 surplus, 93, 94 
 
 surplus or unappropriated prof- 
 its, 92 
 
 treasury stock, 87 
 
 unissued stock, 81, 82, 83 
 Accruals, closing of books, 321 
 Accrued interest on bonds ac- 
 count, 97 
 Adjustment bond, 218 
 Agricultural organizations, 
 
 tax (federal) exempt, 387 
 Allotment of capital stock, 183 
 American Telegraph & Telephone 
 Co., 
 
 bonds, convertible, 213 
 
 543 
 
544 
 
 INDEX 
 
 Amortization, 
 organization expenses, 92 
 profit on sale of capital stock, 
 88 
 Annual meeting (See "Meetings, 
 
 annual") 
 Assessment (See "Taxes") • 
 Assets, (See also "Balancesheets") 
 contingent, 
 
 closing of books, 322 
 deferred, 
 bond discount, 96 
 bonus account, 125 
 organization expenses, 92 
 fixed, 
 good-will, 99, 100 
 inflation of values, 94 
 hidden (See "Reserves") 
 intangible, capital stock issued 
 
 for, 24 
 reserves negatives to, or de- 
 ductions from, 331 
 Assignment, 
 capital stock certificate, 64 
 subscriptions and instalments, 57 
 Attorney, duty of, 165 
 
 B 
 
 Balance sheets, 339-343 
 capital stock, 
 common, par value not given, 
 
 90, 91 
 cumulative preferred stock, 90 
 consolidated, 456-468 
 deficit, method of showing, 
 
 462 
 
 holding company, 452, 453, 458, 
 
 460, 461, 464, 46s 
 
 incorporation of partnerships 
 
 (Illinois), i8s, 186, 19s, 196 
 
 manufacturing corporation, 356, 
 
 357 
 proprietorship, changing to cor- 
 poration, 158 
 
 reorganization of corporation, 
 
 471, 472, 476, 477, 480 
 sinking funds, treatment of, 301, 
 
 302 
 trading corporation, 368, 369 
 Baldwin Locomotive Works, 
 
 sinking fund provisions, 281 
 Bankruptcy, 
 dissolution of corporation, 517, 
 
 518 
 receiver in, 485 
 Banks, 
 capital stock issued at premium, 
 
 116 
 capital stock subject to special 
 
 liabilities, 20 
 dividends paid by, 153 
 federal land, federal tax exempt, 
 
 388 
 joint-stock land, federal tax ex- 
 empt, 388 
 mutual savings, federal tax ex- 
 empt, 387 
 national, surplus contributed, 
 
 336 
 surplus distinguished from un- 
 divided profits, 335 
 Benefit reserves, 333, 334 
 Benevolent organizations (See 
 "Charitable corporations") 
 Boards of trade, 
 non-stock corporations (N. Y.), 
 
 3 
 tax (federal) exempt, 387 
 Bond, 
 capital stock certificate reissue 
 may require, 1 1 
 Bond discount account, 96 
 Bond dividends (See "Dividends, 
 
 bond") 
 Bondholders' index, 231, 235 
 Bond premium account, 95, 96 
 Bond register, 231, 232, 233 
 
INDEX 
 
 545 
 
 Bonds, (See alsp "Coupons") 
 account, 95 
 adjustment, 218 
 bonded indebtedness, 203 
 cancelled, 203 
 cancelled through sinking fund, 
 
 297, 298 
 capital stock preferred compared 
 
 with, 24 
 car trust, 219 
 classification of, 208 
 collateral trust, 209, 217, 245- 
 248 
 notes, short term, 246 
 Public Service Commission 
 (N. Y.) requirements, 246, 
 247 
 consolidated, 218 
 construction, 219 
 convertible, 213 ,214 
 coupon, 210, 221-223, 224, 22s 
 collection on, 252, 253, 254 
 form of coupon, 225, 226 
 payment of, 236 
 debenture. 208, 209, 217 
 
 dividends paid with, IS2 
 default on, 317, 318 
 defined, 197 
 denomination of, 198 
 discount and premium on, 266- 
 278 
 accounting entries, 268 
 effective rate method, 270-272 
 nature of, 269 
 treatment of, 269 
 dividends on, 216, 217 
 entries, 239-278, (See also "re- 
 demption" below) 
 sinking fund, 279-304 
 equipment, 219 
 equipment trust, 219 
 redemption of, 316 
 equipment trust serial, 248-250 
 accounting entries, 250 
 
 escrow, 202 
 
 expenses covering issue, ac- 
 counting entries, 267 
 extension, 219 
 first mortgage, 212 
 form of, 221-230 
 funded debt, 203 
 gold, 213 
 
 guaranteed, 217, 218, 24S 
 liability of guarantor contin- 
 gent, 317 
 redemption of, 317 
 income, 217 
 
 interest on, 261, 262 
 interest on, 210, 218, 235, 252- 
 26s 
 accruals monthly, 255 
 effective interest method, 274- 
 
 278 
 equal instalment method, 275- 
 
 278 
 issues, two or more, 257, 258 
 legal proceedings to collect, 
 
 24 
 outstanding method, 275-278 
 payment of, 252-255 
 unpaid, may mature bonds 
 prematurely, 24 
 issuance of, 199-201 
 
 procedure, 200 
 issued and outstanding, Inter- 
 state Commerce Commis- 
 sion designation of, 203, 204 
 issues, 
 authorization, 198, 199 
 "authorized," 202 
 Constitutional provisions af- 
 fecting, 199 
 deed of trust, 226-230 
 defined, 198 
 expenses covering, 268 
 "nominally outstanding," 202 
 "outstanding," 202 
 
546 
 
 INDEX 
 
 Bonds — continued 
 issues — continued 
 Public Utility Commissions' 
 authorization, 198, 199, 200 
 regulations covering, 240 
 sinking funds for redemption 
 
 of, 279-304 
 statutes affecting, 199 
 stockholders' assent required, 
 199 
 kind of, 212 
 
 mortgage, 206, 209, 212, 246 
 class of, 209 
 first, sale at par, 241 
 junior lien, 209, 212, 213 
 negotiable instruments, 
 
 holders' rights, 206 
 negotiable instruments if pay- 
 able "to order," etc., 197 
 nominal issued, pledged as se- 
 curity for bank loans, 316 
 participating, 198, 216, 217 
 premium on (See "Bonds, dis- 
 count and premium on") 
 preparation of, 201 
 prices of, 213, 214 
 profit-sharing, 216, 217 
 purchase money, 220 
 realty covered by deed of trust, 
 
 200 
 redeemable, 215, 216 
 redeemed, cremation of, 318, 319 
 redemption of, 206, 215, 216, 305- 
 
 319 
 accounting entries, 295, 296, 
 
 310, 312-317 
 collateral trust bonds, 314, 315 
 convertible bonds, 314 
 drawn by lot, 308, 309 
 methods of, 305 
 notes, short term, 316 
 notice, 310 
 
 refunding bonds, 310-312 
 serial bonds, 313, 314 
 
 sinking fund, 306-308 
 refunding, 218, 310-312 
 
 accounting entries, 312 
 registered, 207, 210, 211 
 assignment of, 211 
 exchange for coupon bond, 
 
 211 
 interest on, 255 
 pledges of, 207 
 transfer of, 234 
 reorganization, 218 
 sale of, 20s, 239-251 
 accounting entries covering, 
 
 242 
 between interest dates, 267 
 interest accrued on sales at 
 
 par, 243 
 usury, 20s 
 seal required in execution of, 197 
 serial, 214, 215 
 accountini; entries for re- 
 demption, 313 
 special issues, interest on, 262 
 "subscribed," 202 
 subscriptions, instalment pay- 
 ments, 244 
 suit for non-payment at matu- 
 rity, 207 
 terminal, 219 
 
 terminology covering, 202, 203 
 treasury, 202 
 
 interest on, 259-261 
 trustee for, 200 
 trustee's certificate, 200 
 underlying, 213 
 underwriting, 239 
 unsubscribed, 202 
 Bonus account, 125 
 Bonus capital stock, 21 
 Books, corporate, 44-79, 139, 140, 
 231-238 (See also "Bond 
 register,'' "Stock book," 
 etc.) 
 Pennsylvania statutes, 167 
 
INDEX 
 
 547 
 
 Brokers, stock book or ledger re- 
 quired in N. Y., 75, 76 
 Building and loan associations, 
 tax (federal) exempt, 387 
 Business leagues, tax (federal) 
 
 exempt, 387 
 Business organization, 
 corporation, i, 13, 14 
 partnership, i, 12, 13 
 proprietorship, i 
 By-laws, 
 charter prevails over, 6 
 directors make, authorization 
 
 required, 6 
 dividends affected by, 133, 134 
 meetings, 
 annual, 31 
 notice of, 33 
 proxies, 32 
 NeviT York form of, 531-534 
 quorum specified in, 33, 39 
 stockholders make, 6 
 subordinate to state laws, 6 
 transfer book closing and open- 
 ing, 32 
 
 Calendar, corporate, 30, 40, 41, 42 
 essentials to be recorded, 41 
 New York corporation, 41, 42, 
 
 43 
 Call and waiver of notice, 
 
 directors' meeting, 540, 541 
 
 stockholders' meeting, 537 
 Capital, 
 
 actual, 16 
 
 impairment of, 91, 93, I54. I5S 
 
 nominal, 16 
 
 property, 16 
 
 share, 16 
 
 working, defined, 17 
 
 Capitalization, (See also "Capi- 
 tal stock") 
 defined, 16 
 overcapitalization, 
 good-will account to record, 
 179 
 Capital stock, (See also "Divi 
 dends," "Investments,"' and 
 "Subscriptions") 
 accounting entries, loi 
 allotment of, 183 
 amount regulated by statute, 8 
 assets from sale of, 19 
 assignment of certificate, 64 
 authorized, account, 82 
 basis of determining amount, S 
 bonus, common stock, 21 
 bonus paid in, 123 
 cancelled for non-payment of 
 
 instalments. 127 
 certificate book, 60, 61, 62 
 certificates, 61 
 
 fee for issuance, 11 
 
 instalment payments, 53, 54, 56 
 
 issuance of, 11, 85 
 
 loss of, II, 71 
 
 reissue of lost, 11 
 
 signature, New Jersey statute, 
 
 7 
 "split," 65 
 transfer, 63 
 commissions paid in, 117 
 "common," 22, So, 81 
 certificates, 61, 62 
 dividends postponed to pre- 
 ferred stock, 25 
 defined, 8, 16 
 donated, 21 
 
 accounting entries, 1 19, 120, 
 
 121, 122, 173 
 mining corporation, 174 
 proceeds not applicable to div- 
 idends, 120 
 trustee for, 174 
 
548 
 
 INDEX 
 
 Capital stock — continued 
 entries, (See "Accounting") 
 exchange of, 130, 131, 132 
 "ex-dividend," 13s 
 forfeited, 172, 175 
 full-paid, 19, 20, 21 
 
 accounting entries, 103, 104, 
 IDS, 106 
 "full-paid and non-assessable," 
 
 22 
 functions of, 18 
 instalment, accounting entries, 
 
 106, 107, 108 
 interest not paid on, 18 
 issued and unissued stock, ig 
 issued at par for value, 17 
 issued for property or services, 
 
 20 
 issue limited by charter, 16 
 kinds of, 16 
 
 liability of holder of instalment 
 stock, 20 
 
 partly paid stock, 20, 21 
 liability represented by, 8i 
 nature of, 18 
 non-assessable, 22 
 "original issue," 19, 101-118 
 
 liability attached if issued as 
 bonus, 125 
 
 liability of purchaser if sold 
 below par, 112 
 outstanding, 19 
 owner of record, 10 
 ownership, legal evidence of, 71 
 partly paid, 19, 20 
 par value unspecified, 17 
 preferred, 22, 23, 24 
 
 account, 81 
 
 certificates, 61, 63 
 
 convertible, 26, 27 
 
 dividends, cumulative, 24, 26 
 
 guaranteed, 27 
 
 non-participating, 26 
 
 not a debt, 24 
 
 sinking fund for retirement, 
 
 287, 288 
 voting right conditional, 24 
 voting right denied, 24 
 purchase of corporation's own 
 
 stock, 126, 127, 128 
 purchase of stock of other cor- 
 porations, 129, 130 
 reduction in reorganization, 474 
 reduction regulated by statute, 
 
 126 
 register of transfers, 67, 68, 69, 
 
 70 
 resale of, 126, 127 
 salaries paid in, 117 
 sale of corporation's own stock, 
 
 127 
 sale of stock of other corpora- 
 tions, 128, 129 
 shares, par value of, g 
 sold after organization, entries, 
 
 III 
 stock book or ledger, 71, 72, 73, 
 
 74. 75, 162 
 subscribed, account, 85 
 subscription list, forms, 52, 53 
 subscriptions, 49, 157 
 forfeited, 172, 17S 
 instalment payments, 51 
 irrevocable if by charter ap- 
 plication, 51 
 list of, 50 
 
 notes given in payment, 49 
 paid by crediting dividends, 
 
 147, 148, 149 
 prorating of, 53 
 rejection of, 53 
 surplus created by issuance at 
 
 premium, 116 
 transfer book, 66 
 transfer of, 10 
 transfer tax, 14 
 treasury stock, 19, 21, 22, lig- 
 128 
 
INDEX 
 
 549 
 
 Capital stock — continued 
 treasury stock — continued 
 salable below par, 21 
 underwriting bonus, 184 
 voting rights, none, 126 
 trust fund, payment of debts, 19 
 underwriting expenses, 183, 184 
 unissued does not receive divi- 
 dends, 19 
 unissued has no vote, 19 
 unissued is valueless, 19 
 voting, 12, 19, 22, 24, 33, 36, 37, 
 39, 126 
 Lorpoixation-owned shares 
 
 have no note, 126 
 cumulative, 12, 36, 37 
 "watered," 27, 28, 29 
 without par value, 89-91 
 Capital surplus, 88 
 Car trust bond, 219 
 Cash book, 
 
 entries, 165, 170 
 Cash receipts and disbursements, 
 
 349-3SI 
 Cemeteries, 
 non-stock corporations, 3 
 tax (federal) exempt, 387 
 Certificate of incorporation (See 
 
 "Charter") 
 Certificates, capital stock (See 
 
 "Capital Stock") 
 Chambers of commerce, 
 
 tax (federal) exempt, 387 
 Charitable corporations, 
 Pennsylvania classification, 2 
 tax (federal) exempt, 387 
 Charter, 5, 6, 48, 156, IS9, 539 
 capital stock issued limited by, 
 
 16 
 filing of, 159 
 issuance omitted, s 
 merger requires surrender of 
 old, 410 
 
 New York form of, 529, 530 
 subordinate to state laws, 6 
 Checks, dividend, 78, 138 
 Chesapeake & Ohio Ry. Co., 
 
 bonds sold at discount, 266, 267 
 Churches, 
 non-stock corporations (N. Y.), 
 
 3 
 Pennsylvania classification, 2 
 Cities (See "Municipal corpora- 
 tions") 
 Civic leagues, 
 
 tax (federal) exempt, 387 
 "Close corporation," defined, 10 
 Closing the books, 320-337 (See 
 
 also "Accounting") 
 Clubs, 
 capital stock without par value, 
 
 91 
 tax (federal) exempt, 387, 388 
 Collateral trust bond, 209, 217, 
 
 245-248 
 "Combination record," 47 
 Combinations (See "Consolida- 
 tions, corporate") 
 Commissions, capital stock in pay- 
 ment of, 117 
 Committees, report of, 375, 376 
 Common stock (See "Capital 
 
 stock") 
 Consolidated bond, 218 
 Consolidations, corporate, 390-468 
 holding companies, 392, 441-453 
 accounting procedure, 443-453 
 controlling corporation, 441 
 subsidiary corporation, 442 
 interlocking directorates, 393 
 investigation, preliminary, 393- 
 400 
 assets, 394-397 
 liabilities, 397, 398 
 reports and certificates, 400- 
 
 402 
 revenue and expenses, 398-399 
 
55° 
 
 INDEX 
 
 Consolidations — continued 
 
 lease, 392, 429-440 
 accounting procedure, 433-44° 
 guarantee records, 431 
 property records, 430, 431 
 
 merger, 391, 403-428 
 accounting entries, 411-419, 
 
 421-427 
 balance sheet, 426, 427 
 balance sheets of companies, 
 
 404, 40s 
 charters of merging compa- 
 nies, 410 
 good-will apportioned, 407 
 procedure and conditions, 403, 
 404, 409, 410 
 methods of, 391-393 
 parent companies, 392, 454, 455 
 purchase, 391, 392, 428 
 purposes of, 390 
 Constitutional provisions affecting 
 
 bond issues, 199 
 Construction bond, 2ig 
 Contracts, receiver has option of 
 
 cancelling, 484 
 Convertible bond, 26, 27, 213, 214 
 Convertible stock, 26, 27 
 Co-operative organizations. 
 New York State, 3 
 non-stock corporations, (N. Y.) 
 3 
 Corporation, 
 accounts (See "Accounts" and 
 
 "Accounting") 
 advantages of, 12, 13 
 books and records, 44-79, 139, 
 140, 231-238 (See also 
 "Bond register," "Stock 
 book," etc.) 
 by-laws (N. Y.), S3I-S34 
 calendar (See "Calendar") 
 capitalization defined by charter, 
 6 
 
 charter, form of (N. Y.), 529 
 
 530 
 "close," 10 
 
 consolidation (See "Consolida- 
 tion") 
 created by legislative act. 3 
 created by state laws, 3 
 defined, i, 10 
 disadvantages, 13, 14 
 dissolution (See "Dissolu- 
 tions") 
 "domestic," 4 
 
 duration defined by charter, 6 
 existence not affected by death 
 
 or withdrawal, 6 
 financial, double liability on 
 
 capital stock, 116 
 foreign, 4 
 
 denial of state privileges, 4 
 exclusion by state, when con- 
 stitutional, 4 
 license fees required, 4 
 formation (See "Incorpora- 
 tion") 
 form of, 
 business, 2 
 financial, 2 
 
 non-stock (New York), 2, 3 
 stock (New York), 2, 3 
 holding companies, 129, 392, 
 
 441-453 
 incorporation (See "Incorpora- 
 tion") 
 indebtedness Hmited by statute, 
 
 199 
 investigations preliminary to 
 
 consolidation, 390-402 
 kind of, 
 non-profit making, 2, 3 
 Pennsylvania classification, 2 
 profit-making, 2, 3 
 legislation controlling, 
 Clayton law, 443 
 Sherman Anti-Trust Act, 443 
 
INDEX 
 
 551 
 
 Corporation — continued 
 liquidation of, 
 assets, distribution of, 154 
 property dividend declared, 
 153, 154 
 location defined by charter, 6 
 management, 7, 13 
 manufacturing, 166-171 
 
 entries, opening, 167, 168 
 mining (Michigan), 171-176 
 entries, opening, 172, 173 
 non-stock, capital stock without 
 
 par value, gi 
 one-man company, 10 
 ■'operating companies,'' 129 
 organization procedure, 156-163 
 purposes defined by charter, 6 
 receivership (See "Receiver- 
 ship") 
 receivership and reorganization 
 (See "Receivership and re- 
 organization") 
 reorganization (See "Reorgani- 
 zation") 
 reports and statements (See 
 "Reports" and "State- 
 ments") 
 reports required from, 15 
 seal, 7 
 social, 2, 91 
 speculative, 
 capital stock, full-paid, 21 
 donated stock, 119 
 stockof (See "Capital stock") 
 subject to state law, 3 
 taxable, 386, 387 
 taxes levied upon, 14 
 tax-exempt, 387, 388 
 termination of, 10 
 Countersignature, capital stock 
 
 transfers, 69 
 Counties incorporated (N. Y.), 3 
 County clerk (N. Y.), 157 
 Coupon bond, ?.io 
 
 Coupons, 
 form and nature of, 225, 226 
 negotiable bonds, method of 
 
 handling, 207 
 payment of, 236 
 receipt for, 237 
 report covering, 236 
 register, 237, 238 
 suit for non-payment at ma- 
 turity, 207 
 Court decisions, 
 Rubber Co. v. Goodyear (N. 
 Y.), 134 
 Cumulative dividends, 24, 25 
 Cumulative votings 12, 36, 37 
 "Cutting a melon," 145 
 
 Death of individual, does not af- 
 fect corporation's existence. 
 6 
 Debenture bonds, 208, 209 
 
 serial, 215 
 Debts, corporate, 
 capital stock issued in liquida- 
 tion, 117, 118 
 Deed of trust, 
 bond issue covered by, 226, 227 
 contents essential, 228, 229 
 execution of, 230 
 failure makes bond issue unse- 
 cured obligation, 228 
 filing of, 230 
 Deficiency account, 335 
 
 bankruptcy, dissolution 
 through, 519, 524 
 Deficit, 
 
 balance sheet, consolidated, 462 
 Depreciation, 
 calculation of, 
 diminishing value method, 329 
 proportionate instalments, 328 
 closing of books, 321 
 
552 
 
 INDEX 
 
 Depreciation — continued 
 defined, 327 
 
 machinery, rate on, 328 
 methods of handling, 327, 328 
 offset by improvement and main- 
 tenance charges, 328 
 Dickinson, A. iLowes, 
 quoted on bond premium and 
 discount, 269, 272-274 
 Directorates, interlocking, 
 
 consolidations, corporate, 393 
 Directors, 
 dividend declaration, 133 
 elect officers, 7 
 election of, 35 
 liability of, 
 dividends unearned declared, 
 
 IS4, 155 
 
 illegal dividends, 155 
 meetings, 161, 162 
 
 minutes covering, 537-540 
 
 notices of, 39 
 
 proxy not allowed, 39 
 
 quorum, 39 
 
 record of, 15 
 number defined by charter, 6 
 number prescribed, 7 
 power to act, 7 
 
 report to stockholders, 383, 384 
 rights to examine books, 45 
 stockholders elect, 7 
 Discount, bond (See "Bonds, 
 
 discount and premium") 
 Dissolutions, corporate, 517-527 
 bankruptcy, 517, 518 
 
 deficiency account, 519, 524 
 
 realization and liquidation ac- 
 
 . count, 519, 520 
 
 trustee's cash account, 525-527 
 informal, 517 
 voluntary, 517 
 Dividend, 
 
 iiook, 76, 77, 138, 140, 141 
 
 Dividends, 133-146 
 account, 94, 95 
 accounting entries, loi, 137 
 bank, 153 
 bond, 216, 217 
 bonds issued in payment of, 152 
 
 objections to, 152 
 "bonus," 145 
 by-laws covering declaration of, 
 
 133, 134 
 capital stock, preferred, 
 cumulative, 25 
 
 cumulative if not specified, 26 
 non-cumulative, 25 
 not a debt of corporation, 24 
 capital stock subscriptions paid 
 
 by, 147, 148, 149 
 capital stock unissued does not 
 
 participate, 19 
 cash, entries covering, 141, 142 
 check, form of, 78 
 cumulative, 24 
 entries covering, 149, 150 
 method of handling unpaid, 
 24 
 declaration of, 133, 135, 136 
 transfer books closed, 135 
 declaration omitted, 134 
 defined, 133 
 
 directors' power to declare, 133 
 endangering solvency of com- 
 pany not permitted, 19 
 illegal, 136 
 
 impairing capital stock not per- 
 mitted, 19 
 "interim," 145, 146 
 non-cumulative, expired if not 
 
 paid, 24 
 notes issued for payment of, 
 
 152 
 notice of, 78, 136 
 publication, 136 
 order, 79 
 ownership of, 136, 137 
 
INDEX 
 
 553 
 
 Dividends — continued 
 "passed," 134, 149, 150 
 
 contingent liability, 150 
 
 entries covering, 150 
 payment of, 137, 138 
 
 borrowed money for, 143 
 , premium on capital stock not di- 
 rectly applicable for, 88 
 profits payable as, 8 
 property, 153 
 receipt for, 141 
 resolution declaring, 135 
 scrip, 144, 145 
 
 definition, 144 
 
 entries covering, 144, 145 
 sheet or list, 138, 139, 141 
 special, 145 
 
 entries covering, 146 
 stockholders' liability when divi- 
 dends are credited, 147 
 stock issued in payment of, 151 
 surplus as means of equalizing, 
 
 134 
 unearned, 154, 155 
 Donated stock (See "Capital 
 
 stock, donated") 
 Donation account, 87 
 
 Educational organizations, 
 
 tax (federal) exempt, 387 
 Election, 
 
 directors', 35 
 
 inspectors of, 35 
 
 officers', 40 
 Electric light and power (See 
 
 "Public utilities") 
 Employees, profit-sharing, 145 
 Entity, corporate, 
 
 foreclosure proceedings, 470 
 Entries (See "Accounting") 
 Equipment trust bond, 219 
 Erie Railroad Company, 
 
 sinking fund provisions, 281 
 
 Escrow bonds, 202 
 Expenses of bond issue, 268 
 Extension bond, 219 
 Extinguishment fund ( See "Sink- 
 ing funds") 
 
 Farmers', 
 
 mutual insurance, 
 tax (federal) exempt, 388 
 Farm-loan associations, national, 
 
 tax (federal) exempt, 388 
 Federal Income Tax, 14 
 
 assessment date, 43 
 
 report for, 42 
 Fees, 
 
 filing certificate of incorporation, 
 
 payment of state, 159 
 recording certificate of incor- 
 poration, 157 
 Fiscal period, 
 
 closing of books, 320, 321 
 Foreclosure proceedings, 
 entity of corporation does not 
 pass, 470 
 Franchise tax (See "Taxes, 
 
 corporation") 
 Fraternal beneficiary societies, 
 
 tax (federal) exempt, 387 
 Fruit-growers, mutual associa- 
 tions, 
 tax (federal) exempt, 388 
 Funded debt (See bonds, 203) 
 Funds, reserve (See "Reserves") 
 
 Gas (See "Public utilities") 
 General Electric Co., 
 
 good-will, treatment of, 180 
 Gold bond, 213 
 Goodrich, B. F. Co., 
 
 good-will, 178 
 
554 
 
 INDEX 
 
 Good-Will, 
 
 account, 99, 100 
 
 accounting treatment of, 179 
 
 apportionment in merging com- 
 panies, 407 
 
 book value unchangeable, 180 
 
 defined, 177, 178 
 
 fictitious, 475 
 
 General Electric Co., treatment 
 of, 180 
 
 Goodrich, B. F. Co., valuation, 
 178 
 
 Royal Baking Powder Co., valu- 
 ation, 178 
 
 valuation, formula for, 178, 179 
 
 Victor Talking Machine Co., 
 treatment of, 180 
 Guaranteed bond, 217, 218 
 Guaranteed stock, 27 
 
 H 
 
 Holding companies, 129, 392, 441- 
 
 453 
 Horticultural corporations, 
 
 tax (federal) exempt, 387 
 Hospitals, Penn. classification, 2 
 
 Illegal corporate action, 
 
 convertible stock and bond 
 question, 26 
 Illinois, 
 
 incorporation of partnership in, 
 
 177 
 statutes, 
 
 account, books of, 186 
 
 capital stock must be entirely 
 subscribed, 180 
 
 capital stock, one-half must be 
 paid, 180 
 
 capital stock, purchase and 
 sale, 128 
 
 incorporation dissolves part- 
 nership, 180 
 
 Impairment of capital, 91, 93, 154, 
 
 ISS 
 Income, 
 account, consolidated, 468 
 bonds (See "Bonds, income") 
 interest charge, 274 
 interest on investments, 264, 265 
 statements, 343-349 
 tax (See "Federal Income 
 Tax") 
 Incorporation, (See also "Cor- 
 poration") 
 agreement for, 181, 182 
 charter, 5 
 
 form of (N. Y.), 529, 530 
 partnership, 24, 156-165, 177- 
 
 194 
 procedure of, 4, S 
 pro forma statement, 103 
 proprietorship (New York), 
 
 156-165 
 State requirements and privi- 
 leges vary, 4 
 Incorporators, 
 eligibility of, 5 
 
 number of (New York), 156 
 qualifications required of, 156 
 Indebtedness, 
 bonded, 203 
 Inheritance tax, 14 
 Insolvency, 
 dissolution of corporation, 517, 
 
 518 
 liability of purchasers of partly 
 paid stock, 20 
 Instalment, 
 account, 86 
 book, 57, 58, 59, 107 
 receipts, 54 
 scrip, 54, 55 
 
 stock, liability of holder, 20 
 Insurance companies, 
 capital stock issued at premium, 
 116 
 
INDEX 
 
 555 
 
 Insurance reserves, 333, 334 
 Interest, 
 bond, 210, 218 (See also 
 "Bonds") 
 account, 97 
 bonds, not coupon, 23s 
 bonds sold between interest 
 
 dates, 267 
 capital stock does not draw, 18 
 construction charged with, 263, 
 
 264 
 income from investments, 264, 
 
 265 
 on mortgages, account, 97 
 sinking funds, 292 
 International Harvester Co., 
 reserves for insurance, benefit 
 and accident funds, 333, 334 
 Interstate commerce, 
 
 foreign corporation entitled to 
 
 privileges granted domestic 
 
 corporation, 4 
 
 Interstate Commerce Commission, 
 
 bonds issued and outstanding, 
 
 203, 204 
 interest charged to construction, 
 
 263, 264 
 sinking fund regulations for 
 railroads, 289, 290 
 Inventories, 
 
 closing of books, 321 
 Investment, (See also "Sinking 
 , funds") 
 account, 100 
 
 purchase and sale, of stock of 
 other corporations, 128 
 
 J 
 
 Journal (See "Accounting en- 
 tries") 
 Junior lien bond, 209 . 
 
 L 
 
 Labor organizations, 
 tax (federal) exempt, 38J? 
 
 Lease, consolidation by, 392, 429- 
 440 (See also "Consolida- 
 tion") 
 Leases, receiver's option of can- 
 celling, 484 
 Ledger, 
 
 accounts (See "Accounts") 
 
 closing of, 322, 323 
 
 stock, 169 
 
 subscription, 84 
 Liabilities, 
 
 contingent, closing of books, 322 
 Liability, 
 
 bond vendor's, 20S 
 
 capital stock partly paid, 20, 21, 
 
 147 
 
 corporate capital stock is not 
 legally, 18 
 
 directors', 1 54. I55 
 
 purchaser's, capital stock origi- 
 nal issue below par, 112 
 License fees, state taxes, 14 
 Lumber corporation, 
 
 balance sheet consolidated, 463, 
 466, 467 
 
 M 
 
 Machinery, depreciation on, 328 
 Macpherson, F. H., F.C.A., C.P.A., 
 quoted on Corporation Ac- 
 counting and Investigations, 
 3931-402 
 Manager, 
 duties of, 8 
 
 responsible to directors, 8 
 Manufacturing, 
 account, 3SS 
 corporation, 
 
 Pennsylvania, 166-171 
 , statements, 352-364 
 Meetings, 
 annual, 30 
 by-laws govern time of, 31 
 directors, election of, 33 
 
555 
 
 INDEX 
 
 Meetings — continued 
 annual — co n tinned 
 
 formalities, opening, 34 
 
 minutes of, 38 
 
 notice, method of giving, 33 
 
 notice to stockholders, 31 
 
 officers' reports, 37 
 
 preliminary arrangements, 31 
 
 procedure at, 34 
 
 quorum, 33 
 
 time of, 31 
 
 transfer books, closing, 32 
 
 voting rights, 32 
 directors', 
 
 election of officers, 40 
 
 minutes of, 537-540 
 
 notices of, 39 
 legal requirements as to, 30-33 
 minutes (See "Minutes") 
 notice of, 31, 32, 33. 40 
 proxy (See "Proxy") 
 special, 30, 40 
 
 authority for call of, 40 
 
 bond issue requires, 200 
 
 legality of notice a factor, 49 
 
 notice must state business, 30, 
 46 
 stockholders', 30, 31, 32, 33, 160, 
 161, 534-537 
 
 laxity in small corporations, 
 30, 31 
 
 quorum specified in by-laws, 
 
 33 
 quorum specified in statutes, 
 
 34 
 voting (See "Voting") 
 waiver of notice, 42, 161, 540, 
 
 541 
 Merger (See "Consolidations, 
 
 corporate") 
 Michigan, 
 
 corporation, mining, 171-176 
 Mines, exhaustion of, 
 sinking fund covering, 331-333 
 
 Minutes, 
 annual meetings, 38 
 arrangement of, 39, 48 
 book of, 15. 47. 48 
 corrections, method of making, 
 
 35 
 directors', form of, 537-540 
 essentials to be included, 38, 40 
 quorum or number present 
 
 should be recorded, 34 
 safeguarding of, 47 
 stockholders' form of (N. Y.), 
 534-536 
 Missouri Pacific Co., 
 
 notes, extension of, 318 
 Missouri statutes, 
 holding companies prohibited, 
 442 
 Motions,' verbatim record on min- 
 utes, when needed, 38 
 Municipal corporations, 
 New York state, 2, 3 
 Pennsylvania classification, 2 
 Mutual companies, 
 tax (federal) exempt, 388 
 
 N 
 
 New Jersey, 
 merger of corporations, 403-428 
 statutes, 
 capital stock certificates, 7 
 capital stock purchase and 
 
 sale, 128 
 convertible stocks and bonds, 
 
 U. S. Steel, 26 
 holding companies permitted, 
 
 442 
 suit prior to foreclosure for- 
 bidden, 207 
 New York State, 
 comptroller, report to, 43 
 corporate calendar, 41, 42, 43 
 
INDEX 
 
 557 
 
 New York State — continued 
 corporate organization proce- 
 dure, 156 
 kind of corporations, 2, 3 ' 
 proprietorship incorporated, 156- 
 
 165 
 Public Service Commission, 246, 
 
 247 
 statutes, 
 accounting records, examina- 
 tion of, 45 
 capital stock purchase and 
 
 sale, 128 
 capital stock without par, 119 
 charter, 529, 530 
 corporation shares without 
 
 par value, 17 
 director's right to examine 
 
 books, 45 
 quorum stockholders required, 
 
 34 
 receivership, 482 
 stock book, 4S, 162 
 stock book or ledger pre- 
 scribed, 72, 75, 162 
 subscriptions not payable by 
 note, 49 
 New York Stock Exchange, 
 
 register required by, 69 
 Nominal issued bonds, pledged as 
 security for bank loans, 316 
 Non-assessable capital stock, 22 
 Non-cumulative dividends, 25 
 Non-participating preferred stock, 
 
 26 
 North Carolina^, statutes, bond is- 
 sues affected by, 199 
 Notes, 
 collateral lien, 220 
 dividends paid with, 152 
 short term, 220, 246 
 
 redemption of, 316 
 subscriptions paid by, 49 
 
 Notices, 
 dividend, 136 
 meetings, 31,- 32, 33 
 special meetings, legality de- 
 pends upon notices, 40 
 
 O 
 
 Officers, 
 
 duties defined by statute in New 
 Jersey, 7 
 
 duties defined in by-laws, 7 
 
 election of, 7, 40 
 
 reports of, 375-383 
 "One-man company," 10 
 Opening entries (See "Ac- 
 counting") 
 Operating companies, 129 
 Organization, 
 
 expenses, account, 92 
 
 expenses, entries covering, 163 
 
 procedure, 156 
 
 tax (N. Y.), 157 
 Overcapitalization (See "Capi- 
 talization") 
 
 Parent companies, 
 consolidations, corporate, 392, 
 
 454, 455 
 Partnership, 
 books, closing of, 191-195 
 defined, i 
 incorporation of, 24, 156-165, 
 
 177-194 
 liability of individual, 12 
 Patent rights, 
 
 capital stock in payment for, 123 
 Penalty, 
 annual report to state (N. Y.) 
 
 not filed, 42 
 comptroller (N. Y.) report to, 
 
 43 
 stock book not open for inspec- 
 tion (N. Y.), 45 
 
558 
 
 INDEX 
 
 Pennsylvania, 
 books required by statute, i66, 
 
 167 
 charter limits to one object, 156 
 corporate reports required, 386 
 corporation, manufacturing, 166- 
 
 171 
 kinds of corporations, 2 
 payments required by statute, 
 
 166 
 receiver's liability, 484, 485 
 statutes, 
 capital stock purchase and 
 
 sale, 128 
 receivership forms and pro- 
 cedure, 490-501 
 Pennsylvania Railroad Co., 
 bonds, guaranteed, 317 
 bonds sold at premium, 266, 267 
 capitalization, 10 
 leased property, guarantees not 
 
 recorded on ledger, 431 
 reserves for insurance, benefit 
 and accident funds, 3331 
 Preferred dividends, 23 
 "Preferred" stock (See "Capital 
 
 stock, preferred") 
 Premium, 
 bond (See "Bond discount and 
 
 premium") 
 on capital stock, account, 88, 
 114, IIS, 116 
 President, 
 
 duties of, 7 
 Profit and loss account, 
 manufacturing corporation, 358, 
 
 359 
 trading corporation, 367, 368 
 Profit-sharing, 145 
 
 bond, 216, 217 
 Profits, 
 accounting entries, loi 
 divided without dividend being 
 declared, 134 
 
 dividends payable from, 8 
 errors calculating, 154 
 salaries as medium of conceal- 
 ing, 134 
 undivided (See surplus, 93) 
 Pro forma statement, 103 
 Property dividends (See "Divi- 
 dends, property") 
 Proprietorship, 
 defined, i 
 
 incorporation of (N. Y.), 156- 
 165 
 Proxy, 
 directorate affected by, 33 
 director's, not allowed, 39 
 notice of meeting usually con- 
 tains, 33 
 stockholders' meeting, 536 
 voting rights, 31 
 Public Service Commission, 
 New York, 
 bond issue expenses, 268 
 bonds, collateral trust, 246, 
 247 
 "Surplus and Deficiency" ac- 
 account, 335 
 Public utilities, 
 bond issue, regulations covering, 
 
 198, 199, 200, 240 
 form of corporation, 2, 3 
 Interstate Commerce Commis- 
 sion, report to, 386 
 Purchase money bond, 220 
 
 Quarries, exhaustion of, 
 
 sinking fund covering, 332 
 Quasi-public corporations (See 
 
 "Public utilities") 
 Quorum, 
 by-laws specify, 33 
 Canada, two minimum at meet- 
 ting, 34 
 
INDEX 
 
 559 
 
 Quorum — continued 
 
 directors' meetings, by-laws 
 regulate, 39 
 
 England, two minimum at meet- 
 ing, 34 
 
 New York, representation re- 
 quired by statute, 34 
 
 statutes regulate in some states, 
 34 
 
 Railroads, (See also "Public 
 utilities") 
 sinking funds, Interstate Com- 
 merce Commission regula- 
 tions, 289, 290 
 Realty, bond issue involving, 230 
 Receipt, treasurer's, 
 capital stock payments, 60 
 instalment payments, SS 
 Receiver, 
 accounts of, 485, 486 
 appointment, 481, 482 
 authority of, 481 
 contracts, cancellation of, 484 
 leases, cancellation of, 484 
 bankruptcy cases, 485 
 certificates of indebtedness, 484 
 compensation of, 485 
 definition, 481 
 liability of, 484, 485 
 limitations placed upon, 483 
 powers of, 482, 483 
 receivership and reorganization, 
 487-S07 
 Receivership, 481-486 (See also 
 "Receivership and reorgan- 
 ization") 
 Receivership and reorganization, 
 487-507 
 accounting procedure for re- 
 ceiver, 493, 494, 49S 
 Pennsylvania requirements, 490- 
 501 
 
 preliminary arrangements, 487 
 reorganization, 
 adjustment of accounts, 503- 
 
 S05, 506, 507 
 agreement, 488, 489 
 committee, 488 
 notice to bondholders, 488 
 Receivership and sale, 508-516 
 accounting procedure, 509-516 
 property transfers, county rec- 
 ords must cover, 515 
 Record, "'combination," 47 
 Records. 44-79, 139, 140, 231-238 
 (See also "Bond register," 
 'Stock book," etc.) 
 Redeemable bonds, 215, 216 
 Redemption of bonds, 206, 215, 
 216, 305-^19 (See also 
 "Bonds") 
 Refunding bonds (See "Bonds, 
 
 refunding") 
 Register, 
 bond, 231, 232, 233 
 stock, 69, 70 
 transfer, 67, 68 
 Registered bond, 207, 210, 211 
 Registrar, 65 
 New York Stock Exchange re- 
 quirements, 69 
 Religious organizations, 
 
 tax (federal) exempt, 387 
 Reorganization, (See also "Re- 
 ceivership and reorganiza- 
 tion") 
 agreement method, 469-480 
 balance sheets, 
 prior to adjustment, 476, 477 
 subsequent to adjustment, 480 
 bonds, 218 
 
 capital stock reduction, 470, 471 
 accounting requirements, 473, 
 
 474. 478, 479 
 statutory requirements, 473 
 conditions of, 475 
 
56o 
 
 INDEX 
 
 Reports, 374-389 
 annual, to state (N. Y.), 42 
 auditor's, 37S, 376, 377, 378. 
 
 379 
 committees', 375, 376 
 corporation to government, IS 
 directors', 383, 384 
 manager's, 375, 379, 380 
 officers!, 375, 380-383 
 president's, 37S, 381-3831 
 statutory, 384 
 federal, 386 
 
 fiscal or calendar year, 389 
 state, 38s 
 tax, federal, 15 
 tax, local, IS 
 tax, state, IS 
 treasurer's, 375, 380, 381 
 "Reserve Fund," 
 English and Canadian term for 
 surplus, 334 
 Reserves, (See also "Sinking 
 funds") 
 bad debts, 324 
 closing of books, 321, 323-327 
 depreciation, 330, 331 
 funds for, 323-325 
 secret or hidden, 325-327 
 created by acts or omissions, 
 326 
 Resignation, individual, 
 no effect on corporation's ex- 
 istence, 6 
 Resolution, ■* 
 
 dividend, 13s 
 Royal Baking Powder Co., 
 
 good-will, 178 
 Rubber Co. v. Goodyear (N. Y.), 
 dividends reduced by salary in- 
 creases, 134 
 
 Salaries, 
 capital stock in payment of, 117 
 
 Sale, 
 property transferred by re- 
 ceiver, county records must 
 cover, SIS 
 Scientific organizations, 
 
 tax (federal) exempt, 387 
 Scrip dividend (See "Dividend, 
 
 scrip") 
 Seal, corporate, 7 
 Secretary, duties of, 7 
 Secretary of State (N. Y.), 157 
 Serial bonds, 214 215 
 Share ledger, 71, 72 
 Shares, 
 par value of, 9 
 value unspecified, 17 
 Sinking funds, 204, 279-304 
 account, 98, 289 
 adequate deposits necessary, 284 
 annuity method for, 285 
 formula for calculating, 286, 
 287 
 balance sheet treatment of, 301, 
 
 302 
 cash, investment of, 284 
 creation of, 280 
 definition, 279 
 instalment entries, 291 
 interest, 292 
 
 accrual entries, 293 
 investment entries, 293-296 
 mines, exhaustion of, 331, 332, 
 
 333 
 preferred stock retired by means 
 
 of, 287 
 premiums, 297 
 
 railroad, Interstate Commerce 
 Commission regulations, 
 289, 290 
 reserve account, 98, 99 
 entries, 299, 300, 301 
 Interstate Commerce Commis- 
 sion regulations, 289, 290 
 method of establishing, 283 
 
INDEX 
 
 561 
 
 Sinking funds — continued 
 safeguarding, 283 
 timber companies, 280 
 trustee, 283 
 
 trustee's books, entries, 302-304 
 Social corporations, 2, 91 
 "Split" stock certificate, 65 
 Sprague, Charles E., 
 quoted on sinking funds, 285, 
 294 
 Statements, financial, (See also 
 "Reports") 
 balance sheets, 339-343. 356, 357 
 cash receipts and disbursements, 
 
 349-351 
 forms of, 338-351 
 income and profit and loss, 343- 
 
 349, 358, 359 
 manufacturing corporation, 352- 
 364 
 balance sheet, 356, 357, 363 
 manufacturing account, 355, 
 
 363 
 trading and profit and loss ac- 
 count, 358, 359, 363 
 trial balance, 352, 353 
 profit and loss, 343-348 
 trading corporation, 365-373 
 balance sheet, 368, 369 
 comparative in percentages, 
 
 370 
 trading and profit and loss, 
 
 367, 368 
 trial balance, 365, 366 
 Statutory provisions, 
 
 bond issues affected by, 199 
 Statutory requirements, (See also 
 various states by their 
 names) 
 meetings, 30, 31 
 stock ledger, 71 
 Stock (See "Capital stock") 
 Stock book, 71, 72, 73, 74, 75, 162 
 
 method of keeping, 72, 73, 74, 75 
 New York forms of, 75, 76 
 Stock corporation, 2 
 Stock discount account, 88, 113 
 Stock dividend (See "Dividends") 
 Stockholders, 2, 9 
 annual meeting (See "Meet- 
 ings") 
 interest indicated by shares of 
 
 capital stock, 18 
 liability limited, 13 
 meeting, first, 160, 161 
 call and viraiver of notice, 537 
 minutes covering, 534-536 
 meetings, record of, 15 
 minority, 
 cumulative voting advantages, 
 
 12 
 protection of, 12 
 of record, 71 
 rights, 
 dividend ownership, 136, 137 
 examination of corporate 
 
 books, 45 
 voting, 12 
 Stock ledger, 71, 72, 169 
 
 method of keeping, 72, 73, 74, 75 
 Stock scrip, 55 
 
 instalment payments, 56, 57 
 Stock transfer book, 66 
 Subscriptions, (See also "Capital 
 stock") 
 account, 84 
 
 notes given in payment of, 49 
 payment of, 60 
 Surplus, 
 account, 93, 94, 334-337 
 contributed, 335 
 dividends equalized by means 
 
 of, 134 
 falsified by inflation of assets, 
 
 94 
 
 investment of, 336 
 
 losses provided for by, 134 
 
562 
 
 INDEX 
 
 Surplus — continued 
 
 not for dividend purposes, ac- 
 count (See reserve, perma- 
 nent, 99) 
 
 unappropriated profits, 92 
 
 Taxes. 
 
 corporation, 14 
 city, 42 
 
 Federal Income, 14, 42, 43 
 franchise tax payable (N. Y,), 
 42 
 
 inheritance, 14 
 
 state, 14 
 Tax reports, 
 
 federal, local, and state, 15 
 Telegraph (See "Public utilities") 
 Telephone ( See " Public utilities") 
 Terminal bond, 219 
 Terminology^ bonds, 202, 203 
 Timber companies, 
 
 sinking funds for, 280 
 Timber lands, exhaustion of, . 
 
 sinking fund covering, 332 
 Trading account, 
 
 manufacturing corporation, 358, 
 
 359 
 trading corporation, 367, 368 
 Trading corporation, 
 statements, 365-373 
 Transfer agents, 65 
 
 stock book or ledger required in 
 N. Y., 75, 76 
 Transfer, books, 66 
 closing before annual meetings, 
 
 31, 32 
 closing before payment of divi- 
 dends, 13s 
 Transfer register, 67^ 68 
 Transportation (See "Public util- 
 ities") 
 
 Treasurer, 
 
 duties of, 7, 8 
 
 New York state, 157 
 Treasury bonds (See "Bonds") 
 Treasury stock, 19, 21, 87, 1 19-128 
 
 asset of corporation, 22 
 
 salable below par, 21 
 
 trustee, 22 
 Trial balance, 
 
 closing of books, 322 
 
 manufacturing corporation, 352, 
 
 353 
 trading corporation, 365, 366 
 Trust companies, 
 capital stock issued at premium, 
 
 116 
 capital stock subject to special 
 liabilities, 20 
 Trust company as receiver, 482 
 Trustee, 
 bonds conveyed to, 200 
 certificate, 226, 227 
 corporate bond issues, duties, 
 
 230 
 treasury stock, 22 
 
 U 
 
 Underlying bond, 213 
 Underwriting, 
 
 expenses, 183, 184 
 
 treasury stock as bonus for, 184 
 Undivided profits (See "Sur- 
 plus") 
 Unissued stock account, 81, 82, 83 
 United States Government, 
 
 corporate reports required, 386 
 
 income tax on corporations, 386 
 United States Steel Corporation, 
 
 bonds, 212 
 
 bonds, coupon form, 221-223, 
 225, 226 
 
 bonds, redeemable issue, 216 
 
 capitalization, 10 
 
INDEX 
 
 563 
 
 United States Steel Corporation 
 — continued 
 convertible stock and bond i:;- 
 
 sues, 26 
 holding company, 129, 442 
 reserve for depreciation, 332 
 reserves for insurance, benefit 
 
 and accident funds, 3331 
 sinking fund premiums, 297 
 sinking fund provisions, 281, 282 
 trustee's certificate, form of, 227 
 Unsubscribed stock (See "Un- 
 issued stock") 
 Usury, 
 
 bonds, sale of, 205 
 Utilities (See "Public utilities") 
 
 Vice-president, duties of, 7 
 Victor Talking Machine Co., 
 
 good-will, treatment of, 180 
 Voting, 
 
 capital stock owned by corpora- 
 
 tion issuing it has no vote, 
 22 
 
 capital stock, unissued, has no 
 vote, 19 
 
 cumulative, 12, 36, 37 
 
 formula for determining num- 
 ber of votes, 37 
 
 preferred stock rights, 24 
 
 proxy, 31, 33, 39 
 
 stockholders, rights of, 12 
 annual meeting, 32 
 
 W 
 
 Waiver of notice, 
 directors' meeting, 42, 540, S4i 
 stockholders' meeting, 161, 537 
 
 Watered stock, 27, 28 
 
 "Watering the assets," 94 
 
 Withdrawal, 
 individual, does not affect cor- 
 poration's existence, 6 
 
 Working capital donated account 
 (See "Donation account")