n% ."ii-'i * VT-: ■-•-';:..s»^;i-^(V m .s''. ':^ I mni I i^sTdk ■ kira i iiT^^m i iei r±iii iirss va^ vas aiwr^: 1906 EDITION. REVISED AND ENLAROED. Corporation Accounting and Corporation Law- A Manual of CORPORATE ORGANIZATION AND MANAGEMENT. ACCOUNTING IN THEORY AND PRACTICE BANKING With -' Special Reference to The National Banking System and a Treatise on UNIVERSITY I STOCK EXCHANGES J. J. RAHILL, C. P. A. Member California Society of Certified Public Accountants. An Appendix on the California Examinations for C. P. A. Certificates, with a Full Set of Questions and Answers, by ALFRED Q. PLATT, C. P. A. Secretary State Board of Accountancy and Chairman of Bxamining Board from 1901 to 1906. FRESNO, CALIFORNIA - 1906. Published by the Author. ,<^^ sehebm: Copyrighted 1905 BY • J. J. RAHIIylv, C. P. A. AI.I, RIGHTS RKSKRVE» DEDICATORY It was chiefly due to the encouragement which I received from members of the Cal- ifornia Society of Certified Public Account- ants, and especially to the encouragement, counsel and assistance which I received from its worthy president, Mr. Alfred G. Piatt, that I undertook the publication of this edition; therefore in token of my faith in, and friendship for this society, of my belief in its principles and purposes, and as an evidence of my appreciation of the support and endorsement which I have received from it, I dedicate this volume to the California Society of Certified Public Ac- countants. J. J. RAHILL, C P. A. ■Vi PREFACE TO FIRST EDITION. Talking with a friend a little over four months ago, on the multiplicity of corporations, I expressed the opinion that a book devoted exclusively to Corporation Accounting and Corporation Law should find favor among accountants and others interested in corporations. He shared my conviction and strongly advised me to set about the publication of such a book. This volume is the result of my labors, performed chiefly at night. There are hundreds of books devoted to book-keeping in general, but none that I know of devoted entirely to this im- portant branch of the science of book-keeping. That this is not complete I own, that it has its shortcomings I confess, but I trust it will not be judged by its shortcomings but rather by such merit as may be found in it. I have endeavored to make this work more than interesting. My aim has been to make it instructive and useful to the large number of good book-keepers who have not had practical training in this branch of accounting. No one man knows all there is to be known of any science and I do not claim to be a master of this, therefore I invite, and will appreciate friendly criticism and endeavor to profit by it in the future. Stock Exchanges are so interwoven with Stock Companies that they necessarily form a part of this work and constitute one of its most interesting features. A digest of the laws of all the states is also a unique and very valuable appendix. That this work will meet with the approval of those for whom it is intended and prove of some value to the profession, is the sincere wish of THE AUTHOR. December 1899. PREFACE TO J 906 EDITION. The unexpected success of the first edition of this work, and the fact that notwithstanding the book has been off the market for more than four years orders continue to come in from all over the country and even from over the seas, led me, somewhat unwillingly, to undertake the publication of this second and more complete edition. The first edition was got- ten out primarily to meet a California demand that existed at the time for such a work, but the reception accorded the book wherever it was introduced, has convinced me that there is a large field for a more complete and comprehensive work on corporation accounting and corporation law. Many new economic conditions have arisen, many and radical changes have been made in the laws governing and regulating corporations, and numerous Corporations, Mergers and Holding Companies have been created under these new conditions and are being administered under these new enact- ments, in a manner wholly different from the past. This work takes cognizance of present conditions and advanced legisla- tion, and is intended to supply the demand for an up-to-date work on its chosen subjects. While positively disclaiming the role of moral preceptor, the author has not failed to call attention to what he has con- ceivt-d to be defects in the law, and flaws in business ethics, and to point out alike to incorporators, stockholders and ac- countants the standards to be attained and the evils to be avoided in respect to corporate organization, management and auditing. The old work has been more than revised — it has been rewritten — many new chapters have been added, the size of the original work has been more than doubled, and the quality, scope and value increased four-fold. The most ap- proved and advanced methods of corporation organization, management and accounting, are clearly explained and illus- trated. The issuing of all classes of bonds and their amorti- zation is made a special feature. The creation and extinction of Sinking Funds is treated in a compendious and comprehen- sive manner. In addition to the extended scope of this work, the appendix on C. P. A. examinations, with a full set of ques- tions and official answers, should make it one of exceeding interest to accountancy students and ambitious book-keepers. My aim and purpose has been to make this work a standard authority on corporation accounting and corporation practice, and I trust that those into whose hands this book shall come will vote my aim accomplished, my purpose fulfilled. THE AUTHOR. December, 1905. COMMENDATORY Oflficially endorsed and recommended by a specially appointed reviewing committee of the Board of Directors of the California Society of Certified Public Accountants, San Francisco, Cal., 1905. PRESS OF THK Frbsno R^pubIvICAn Pubi^ishing Company (Printers-Publishers-Bookbinders) Frbsno, Cai^ifornia PART L CORPORATE ORGANIZATION AND MANAGEMENT. ^ or THE UNIVERSITY CHAPTER I. A Corporation Defined — Various Kinds of Corporations Explained and Classified — Who May Form a Corporation — How Corporations are Formed and Governed. Their Nature, Powers, Privileges and Shortcomings — Their Advantages Over Partnerships — Liberal Corporation Laws. I. The French aptly describe a co^pp^atipT^ „as a ;''5?0Ciete anonyme" or anonymous society for the obvi'ous reasori that its' name or title in contradistinction to' a firm Tyamej.genQr^alJy conceals the identity of its member^,, a/xd the furth'er. teasSti-, that inasmuch as there is no publicity attending the formation of a corporation or the transfer of its stock, and as its mem- bership is subject to complete and continuous change, the membership is practically unknown to anybody. Webster defines a corporation thus : ] "A corporation is a body politic or corporate, formed and authorized by law to act as an indi- vidual or single person ; in other words, a corporation is an artificial person created by law and endowed with the capacity of succession and the further capacity of transacting business as an individual." It may also be defined as a collective legal entity, possessing all of the legal and many of the moral rights and responsibilities granted to, and imposed upon, natural per- sons in the transaction of business ; and while it exists, as a legal fiction, independently of its members, being without con- sciousness it is obviously without moral sensibility and must derive its character from the human units that direct and energize it; and though these units may at times endeavor to shift the blame for their misdeeds on to the shoulders of a "soulless" corporation, they are nevertheless amenable to moral and statutory law for all transgressions and "ultra vires" acts committed in its name — this is reasonably and necessarily so from the very nature of a corporation, for although we say it can sue and be sued, being a mere legal abstraction and not possessed of sensory nerves or of the passive power of suffer- ing, it is an axiom of common sense that any punishment meted out to it must be borne by its* physical membership. The corporation is a development of modern business neces- sity; and while its functions have been often perverted and its 12 COEPORATION ACCOUNTING privileges shamefully abused, still it is, in the main, one of the [most potent causes of our wonderful commercial, financial and ^even scientific advancement. It has simplified the complexity of modern business demands, and made possible the carrying out of the greatest achievements of the age. It is, as v^ill be shown later on, the only safe, rational and efficacious means of uniting capital for the promotion of any business enterprise. Kinds of Corporations. 2. A corporation can be either aggregate or sole. A cor- poration aggregate consists of any number above one, and is preserved by a succession of its members indefinitely, or for a limited number of years, as fixed by its charter. 3,» ,A corporation; sole consists of one person legally made a body.^olitio.bi- 'rq rJp(irate, in order to give him some legal capacities >whiQ];i. as, an *in4ividual he could not have, especially tHe. figHtV<^£ ^S-ucdessic^n. Kings, bishops and ecclesiastics are instances of this class 'o! corporation; the property of which they may be seized in the rights of their subjects or parishion- ers passing to their successors. 4. Properly speaking there are but two classes of corpora- tions — public and private. Municipal corporations, state uni- versities and all corporations operated solely in the interest of the public and supported by public funds come under the first heading; all others are private. Some make a subdivision of private corporations which they term ''Quasi-public"; that is, resembling a public corporation in a certain sense or degree ; as for instance, railroads, street railways, gas companies and all such public service corporations, and also extensive co- operative farming and fruit growing corporations; but inas- much as they are capitalized by private individuals they are private corporations. 5. Private corporations are generally formed for the pur- pose of carrying on business enterprises, in the interest and for the financial benefit of their members. These are called corporations for profit. Others are formed for religious, edu- cational and charitable purposes; such as churches, schools and orphanages. These are variously called theological, edu- cational and eleemosynary corporations. By incorporating, these institutions acquire the right to own and hold real estate and personal property, to buy, sell and mortgage the same under authority of the courts ; to accept donations, deeds and bequests; and to do such other and further things as their charters authorize. Usually they have no capital stock, and their management is vested in a board of trustees. AND CORPOEATION LAW 13 6. A close corporation is merely one of very limited mem- bership, the stock being held by a few persons and not gener- ally traded in. Corporations — How Formed. 7. Corporations may be formed under a general law of the state or "General Corporation Act/' governing corpora- tions', which law becomes operative in their behalf as soon as the members of such corporations organize under its pro- visions. S pecial provisions govern the organization of banks, insurance companies, telegraph companies, etc. Railroad com- panies and other public service companies must obtain a fran- chise from every city and county in which they operate, and must file in each county a copy of their articles of incor- poration. 8. In private corporations', corporate power, that is to say, the legal rights and liabilities of membership, can not be forced on members against their will. It is necessary that they ac- cept the charter; however, if they act under it, the presump- tion is that they accept it. 9. The laws of the various states differ in regard to cor- porations. Further on in this work will be found an epitome, of the corporation laws of all the states, and it might b^'well for those who think of organizing a stock company to read them carefully. No other work of this kind„ known to the writer, embraces this feature. Some states offer exceptional advantages to corporations, while others offer obstacles, and a knowledge of these advantages, or obstacles, as the case may be, may prove very valuable. 10. A corporation must have a name by which it shall be known in lav/ and in its business transactions. This name must be adhered to ; although a corporation may be liable for debts contracted under another name. For instance, the Fresno Republican Publishing Company is liable for obliga- tions incurred in the name of onej of its publications — ''The Fresno Morning Republican." 10. (a) The necessity for using the corporate name is, that in its business affairs' it is known to the law as an indi- vidual. 11. The use of the seal is not as general nor as necessary as was formerly supposed. It is only in the execution of legal documents and on the face of its own stock and bonds' that it is necessary. See paragraph 29 (g). 14 COEPOEATION ACCOUNTING Advantages of Corporations. 12. (a) Unlimited membership with Hmited agency of directors. Partnerships are necessarily Hmited in membership, for the reason that partners may do all sorts of contrary things' for which all members of the partnership are severally liable; and no agreement between the partners can bind outsiders. The usual powers of partnership are supposed to be vested in each member, and the common assumption is that they are, unless notice is given to the contrary; hence, a partner may incur obligations while he is insolvent, that are binding on the other members — not so in a corporation. No mere stockholder nor person other than its manager or other person thereunto duly authorized, can incur debts or obligations in the name of the corporation. As a further safeguard, the by-laws of some companies provide that no agent (not even the president or manager) can obligate the company in any sum exceeding a certain amount, sometimes $ioo, without the previous approval or subsequent ratification of the board of directors. The di- rectors themselves are agents of the corporation, deriving their offices from the stockholders and their powers from the by- laws of the company. Their duties are defined and their pow- ers circumscribed by the regulations of the company, and they are liable to the stockholders, as' well as amenable to the law, for any excess of their authority. A director can also be re- moved from office by a vote of the stockholders holding a suf- ficient number of shares of the capital stock, at a general meet- ing held for that purpose, after due notice of the time and place and intention of the holding of such meeting shall have been given. 13. (b) In a corporation there is a union of capital, with- out a union of service on the part of its members — the directors representing the interests of all the stockholders, while the stockholders are free to engage in any other business. In general partnerships, it is a principle of law that every partner shall give his entire service to the partnership, otherwise he has worked an impairment of the partnership and is liable therefor; but under the corporation dispensation, neither time nor service is* required of any mere stockholder. He is repre- sented by the directors in whose selection he has a choice in proportion to his holdings, and the directors being chosen by a vote of shares always represent the greatest interests ; how- ever, in some states', for instance California and New Jersey, provision is made for minority representation on the Board by means of cumulative voting. 14. (c) Better facilities for borrowing are afforded a AND COBPOEATION LAW 15 corporation, since it can raise money on an issue of bonds, or additional stock, or debentures. It is not an uncommon thing for a company needing additional capital, and not desiring to pledge its securties for an issue of bonds, to create a new issue of preferred stock, which often finds a ready market on account of its preferential dividend features, thus relieving the strin- gency without creating any new trade obligations. Stock- holders are also permitted to invest in the securities of their corporation and stand in the same relation, in this respect, as' do other creditors, in case of insolvency. On the other hand firms requiring more capital must either borrow the money or advance it without security ; as, in case of failure, the part- ners' claims do not hold until all the creditors' claims are sat- isfied. Another advantage the stockholder has over the part- ner in respect of borrowing is, that he can borrow money on his stock as collateral, whereas his interest in a partnership is not collateral. Stock in a successful company is a very con- venient form of collateral; its use as such not requiring the examination of deeds, abstracts or the recording of instru- ments. 15. (d) Neither death nor change of members affects the continuance of a corporation. The continuity of a cor- poration would not be affected even if all its members should die or sell out. The stock would pass to the heirs or assignees' and the business need not be disturbed in name nor otherwise. On the other hand, the death of one partner dissolves a part- nership, and the winding up of his estate often causes' a use- less sacrifice of assets, and not infrequently the ruination of a successful business enterprise. Furthermore, the admission of a new member necessitates the dissolution of a partnership and the formation of a new one, with all its attendant annoy- ances and publicity. Again, a partner wishing to retire from a firm often has trouble in the adjustment and sale of his in- terests ; and while his retirement dissolves the partnership it does not relieve him of partnership liability contracted while he was a partner ; nor even after, provided he has not taken due and proper measures' to notify all his firm's creditors spe- cifically, and the public generally, by advertisement, that he is no longer a member of the firm. He must not even hold himself out, nor permit himself to be held out as a partner, by the use of signs or advertisements or other evidences of proprietary interest that could influence anyone to extend credit to the firm on the strength of his connection therewith ; whereas, new shareholders are admitted to a corporation by the sale or transfer to them of stock, and they may retire from it any time by merely selling their stock without publication 16 COKPOKATION ACCOUNTING or notice of any kind. In some states, as for instance New- Jersey, their liability ceases with their membership;'^ while in others, as for instance California, their liability ceases for debts contracted after they have transferred their stock, but exists as to debts previously contracted, in a certain, well de- fined ratio. Of course it must be understood that it is a well settled principle of common law and public policy, that a transfer of any property with fraudulent intent does not con- stitute a transfer in the eyes of the law. i6. (e) The title to property held in partnership may be affected by the bankruptcy or death of any one of its mem- bers ; but a corporation being a body corporate, the title is vested in it, and is not affected by change of membership or death. If a member of a firrn becomes insolvent his interests may be attached and executed upon — here again the partner- ship is dissolved and in the very nature of things the other partners' interests are injured. If a stockholder becomes in- solvent, his stock alone can be levied upon and sold — the property of the corporation can not be touched — , hence the corporation is not affected. 17. (f) Perhaps the most important and most advan- tageous feature of a corporation is the limited liability of the stockholder as compared wath the partner. In a partnership, every partner is liable for all of the debts of the firm ; and as every partner, generally speaking, is an unlimited agent of the partnership (even though he have but the smallest interest in the business), the partner with the smallest interest can bind the other partners to the extent of their private fortunes, by contracting debts in the partnership name, giving notes or otherwise ; and per contra, the man with the smallest interest may find himself liable for all of the debts of his firm ; when by extravagance, mismanagement or fraud, the other members of the firm have dissipated the assets. In a corporation, how- ever, the most he can lose, in most states, is the amount he has invested or subscribed. At the very outside, it will be an equitable share of the debts ; and in no case can a stockholder endanger his private fortune — the exact liability in each state is treated in Chapter XL of this work. Furthermore, the officers or executive heads in a corporation are limited in their authority to bind the company for extraordinary debts or ob- ligations. Even though the officers should enter into large contracts or give notes in large amounts, their action is not binding on the corporation if they are not authorized to do so *This is one of the weak spots in the New Jersey law. No just law would permit a man to divest himself of his liabilities as he would of his garments. This is a direct incentive to wrong doing. AND CORPORATION LAW 17 by resolution of the board of directors, or by their governing code; or, to put it negatively, if the Articles of Incorporation or By-Lav^s expressly state that they may not borrow money or pledge the credit of the company excepting by resolution of the Board investing them with authority to do so, the company shall not be bound by their act. This necessarily and properly puts the burden on the creditor of knowing that the corporate officers are acting within their powers; hence he asks for copies of by-laws and certified copies of resolutions. i8. (g) Another advantage of corporations is, that in case of financial difficulties they can frequently save them- selves by reorganization ; the creditors often taking reorgani- y zation stock in lieu of their claims, thus saving the company from ruin and themselves from direct and immediate loss. Indeed, many reorganized companies get a new hold on life and prosper exceedingly. 19. (h) Of minor though not of insignificant interest is the ease and exactitude with which adjustments of profits, ^ and capital interests, can be made at time of profit sharing periods or liquidations, as the case may be. These divisions are equitable and ratable on the basis of outstanding shares. There are no complex partnership problems to be adjusted; and accountants and attorneys know that these are rarely ad- justed to the satisfaction of everybody. It is' simply a case of taking the whole number, dividing it by the number of shares, then taking the quotient as the unit of value and mul- tiplying it in turn by the shares of each. 20. (i) In case of suit, a corporation can complain and defend itself in its own name ; but,' in a partnership all the partner' names must be joined in the action. 21. (j) Lastly, a corporation has the quality of perma- nency, the virtue of minimized liability, and the potential strength of numbers unified in capital and purpose ; while the partnership is a creature of change and circumstance, a house built upon shifting sands, a hydra-headed organization lack- ing in permanency, but beset by the sin of unlimited liability. /"He does possession keep, \ I And is too wise to hazard partnership." — Dry den. / The Other Side. 21. (b) It must be admitted, however, that there is an- other side to this picture and that it has its dark shadings too. There are some corporations that dishonor the laws that cre- ated them and disgrace the states that tolerate them. There 18 COEPOEATION ACCOUNTING are men in control of large corporations who use the minority stockholders as they would a door mat. They take advantage of legal technicalities to deprive the small stockholders of their equitable share in the profits. They adjust their salaries to the profits so that there is nothing left for dividends. Being in control, they elect themselves, fix their own salaries, (maybe assess the others out) and the small stockholder finding him- self outwitted, outvoted and outraged, has only one option, and that is to sell out; and, generally, he has to sell for what the "masters" wish to pay — it is a case of the sharks eating up the little fishes. The moral of this is that the small capital- ist has no business investing his savings in those large high- water mark corporations. Hie is simply a cork on the surface of the water, tossed about with the heaving and receding of every wave, voiceless, helpless, dependent. Then there is the tendency in recent corporation legislation in some states to eliminate as far as possible the element of individual liability. While this has some good points in it, the principal in itself is' dangerous. When men gamble for the profits it is only fair that they should gamble for the losses. The evident in- tention of the law seems to be fair, but the advantage taken of it is, imfortunately, not always fair. It is the purpose and function of law to protect not only the weak against the strong, but also against themselves. The capital of a company is supposed to be a trust fund maintained intact for the protec- tion of its creditors. It is supposed to be the sole basis of a company's credit; but when that capital is watered and then expanded with hot air, the basis of credit becomes almost "as baseless as the fabric of a dream." It should be considered the dut}^ of every state limiting the liability of stockholders, to see to it that the capital stock of every corporation is repre- sented and sustained by actual assets equivalent in money value to the par value of the stock for which they were ex- changed, and that, where this is not so, the shareholders hold- ing stock out of proportion to the real value of the capital which they contributed be compelled to transfer to the com- pany every share of stock to which they are not justly en- titled. The state charters the corporations and should exer- cise a reasonable control or supervision over them. It should at least prevent them from prostituting their charters by the perpretation of fraud upon the public; and it can do this in no better way than by employing skilled public accountants to audit and investigate at its formation, and annually there- after, every corporation that offers its stock and bonds to the public. No honest corporation can object to this, and it would go a long way toward inspiring pubilc confidence in ( UNIVERSITY 1 AND CORPORATION JjAW'^^'imSSSSS^^ 19 them, and establishing a feeling of security among creditors generally. It is to be hoped that this condition will be brought about before long, because inasmuch as a corporation has "no back to kick and no soul to damn," it can not be influenced by such extrinsic measures as physical fears or moral terrors, therefore its mystic entity must be awed and controlled by the mystic majesty of the law. The individuals whose thoughts, actions, emotions and ambitions are crystalized in the corporation will then be obliged to give their creature a fair deal. Other objections may be urged against the cor- porate form of association, but none of these apply to the average business corporation, and notwithstanding these ob- jections the corporate form is the best. In measuring the value of a new system, we must carefully weigh its advan- tages and as carefully consider its faults in relation to, and comparison with, the older system; and if the balance of ad- vantage attaches to the new, it is the best; and I think the balance of advantage attaches to corporations' as compared with partnerships. Powers of Corporations. 22. A corporation being a creature of the law has only such powers as the law confers upon it. It has the power to : — 1. Of succession by its corporate name indefinitely or for the period limited by its charter. 2. To sue and to be sued in any court of law or equity. 3. To make and use a common seal and alter the same at pleasure. 4. To purchase, hold and convey such real and personal estate as the purposes of the corporation may require, or for other purposes, in accordance with the laws of the state under which it is organized — if a National Bank, under the National Banking laws'. 5. To appoint such subordinate officers or agents as the business of the corporation may require, and to allow them suitable compensation. 6. To make by-laws, not inconsistent with any existing laws' of the state or of the United States, for the management of its property, the regulation of its affairs, and the transfer of its stock. 7. To admit stockholders or members, and to sell their stock or shares for the payment of assessments or install- ments',as provided by law. Note — For information about incorporating a partnership, see "Con- version of Partnerships," Chapter XXIX, in the practical accounting part of this work. 20 COEPORATION ACCOUNTING 8. To enter into any legitimate obligations or contracts essential to the transaction of its ordinary affairs, or for the purposes of the corporation. 9. To wind up and dissolve itself, or provide for the wind- ing up of its aft'airs at time of dissolution, in accordance with law. How a Corporation is Formed. 23. A corporation is formed by the voluntary association of a certain number of persons.* The minimum number de- pends upon the regulation of the state law under which the corporation is to be organized. In California the minimum is 3, in New Jersey 3, and in Delaware 3; while the revised statutes of Arizona provide that, "Any number of persons may associate themselves together and become incorporated." 24. It is very important, however, for the incorporators' to consider the defects as well as the advantages of the state laws under which they propose to organize. The fairest flower does not always hold the sweetest perfume, and the fairest looking code of corporation laws is not necessarily the best. In measuring the value of the liberal privileges granted we must not overlook the price we pay for these concessions ; hence we should familiarize ourselves with the system of fees and taxes imposed upon corporations ; how corporation prop- erty and franchises are taxed ; the rate of taxation ; the cost of filing instruments, and so forth ; also the kinds of stock that may be issued, if mergers may be formed, if stocks and bonds are interconvertible — if so, how and under what conditions. Liberal Corporation Laws. 25. Herewith is given a summary of the principal features of the so-called "liberal corporation laws" of New Jersey, Delaware and Arizona; as well as of California. *'For "dummy incorporators" see paragraph 203 (a). CHAPTER II. ^ A Comprehensive Review of the Salient Features of the General Corporation Laws of New Jersey, With Numerous Annotations and Court Decisions. 26. New Jersey has of late years been before the public as the nursery, or hatchery, of corporations, trusts, mergers and stupendous combinations of organized capital. It has been damned and praised and yet not half understood by either its enemies or its friends. Quoting from Horace L. Wilgus, Professor of Law in the University of Michigan: — ''This (New Jersey) is the only state that seems yet to have consistently and adequately worked out a corporate policy that compares at all with the care that has been given to the subject in England ; the New Jersey policy, however, is much more liberal than the English ; and whatever one may think of the policy, one must commend the manner in which it has been formulated, amended and applied through the hands of experts, continually following a definite plan and policy, in- stead of being a mere hotch-potch of inconsistent, uncon- nected provisions, often without plan and frequently with as little sense." December 1902. Minimum Number and Capital. 27. Three or more persons, none of whom are required to be citizens of New Jersey, may by voluntary association and compliance with the provisions of the General Corporation Act, form themselves into a business corporation for the transaction of any lawful business. Minimum Capital. 28. No corporation may be formed with a smaller capital than $2000. The Articles must state the amount with which it shall commence business — in no case less than $1000. General Powers Granted. 29. (a) The power of succession by its corporate name, either perpetually or for a limited period, as stated in its charter. ■22 CORPORATION ACCOUNTING (b) The power to sue and be sued in any court of law or equity. (c) The power to acquire, by purchase or otherwise, real estate, and to hold, convey and mortgage same. (It has been held by the New Jersey courts' that only the state can question the right of a corporation to hold real estate in ex- cess of its requirements and further, that even a limited period corporation can hold title to land in fee simple.) (d) The power to appoint officers and agents neces- sary to the transaction of its business, and to pay them suit- ably for their services. (e) The power to make by-laws, fixing and altering the number of its directors, the regulation of its affairs, trans- fer of its stock, etc. (f) The power to wind up and dissolve itself, or be w^ound up and dissolved in the manner provided by the Gen- eral Corporation Act. (g) The power to make and use a common seal and alter the same. (The use of the seal is only necessary on stocks, bonds, deeds, mortgages, resolutions and the like ; and the simple impress of the seal on the face of the paper, with- out any super imposition, is sufficient; the important thing being that the proper corporate seal is used and that it is authoritatively affixed.) Bonds and Mortgages. 30. It is not necessary to obtain the consent of the stock- holders to create a mortgage; the power to do so is vested in the directors, and it is only as a question of domestic policy that the stockholders' consent is, or may be asked. Further, the Hon. James' B. Dill, the foremost corporation lawyer in New Jersey says : "There is no statutory limitation on the power of a corporation organized under this Act to issue bonds or debentures, whether secured by mortgage or otherwise." * *Too much power granted to a board of directors is dangerous. The directors are the agents of the stockholders and in a matter of this kind involving the pledge of the company's assets, they should be required to go back to their principals (the stockholders) for specific authority. Further it appears unwise to fix no limit on the issuance of bonds and debentures, but to permit the issue of all that the public will consume. •Such powers are a strong incentive to reckless speculation and frequently result in disaster. A measure of conservatism is best. AND COEPOEATION LAW 25; Additional Powers. 31. Section 2 of the General Corporation Act reads as fol- lows : In addition to the powers enumerated in the first section of this Act and the powers specified in its charter, or in the Act or Certificate under which it was incorporated, every cor- poration, its officers, directors and stockholders, shall possess and exercise all the powers' and privileges contained in this Act, so far as the same are necessary or convenient to the at- tainment of the objects of incorporation; and shall be gov- erned by the provisions and be subject to the restrictions and liabilities in this Act contained, so far as the same are appro- priate to and not inconsistent with such charter or the Act under which such corporation was formed; and no corpora- tion shall possess or exercise any other corporate powers ex- cept such incidental powers as shall be necessary to the exer- cise of the powers so given." 32. This' is considered a very important section. It sug- gests at once the, twofold source from which a corporation derives its powers — the Corporation Act and the Articles of Incorporation. This does not mean, of course, that the Ar- ticles of Incorporation can contemplate powers beyond the intention or purposes of the Act, but it does mean that it can make effective and express — all the powers specified and im- plied by the creative or enabling act ; and to quote again from Mr. Dill : "Corporations are now authorized to insert in their certificates of incorporation provisions "creating and defining the powers of the corporation"; thus, the corporate powers can be enlarged and amplified so as to include all implied, incidental and necessary powers to the proper execution and attainment of the corporation purposes'; as long as such dif- fuse powers remain consistent with the Act ; and such powers as wisdom and policy might limit or restrict can also be abridged by definition; for example, the certificate may pro- vide for two or more kinds of stock, for cumulative voting, for the power to elect directors on one class of stock exclu- sively (that is* to say, where there are two kinds of stock, common and preferred, the right may be granted to the holders of either class of stock to elect all the directors),* may fix the least number of shares a director shall own, may deprive stockholders of the privilege of examining books, etc. It ap- pears that this provision is intended to prevent one who is a stockholder for ulterior purposes, from carrying out his pur- pose, say of exposing the condition of afifairs of the company *See foot note to paragraph 48. :24 CORPORATION ACCOUNTING to a rival company in which he may be interested; and per contra, all these powers may be limited or negatived ; hence it will be seen that the drafting of the Certificate or Articles of Incorporation is a matter of great importance requiring skill and care, and an expert knowledge of all of the potential pow- ers of the Corporation Act ; and further, that whilst the Act is the preponent power, it is not mandatory as regards all the granted powers and privileges; and that beyond the general powers' and restraints, the subordinate authority of the Cer- tificate binds and controls Again quoting Mr. Dill: *'Care should be taken that the objects and purposes of the Company are stated in the fullest and clearest manner possible, because the Company can not undertake any business not authorized by its charter, and not even the fullest sanction given by the shareholders' will make valid an act which is outside of the company. Directors undertaking any such business may be- come personally liable for loss, and great inconvenience fol- lows from companies having too limited powers. It is often questioned how far it is necessary to detail in extenso in the Certificate of incorporation the powers of the company. The ans"wer is plain. The balance of disadvantage decidedly at- taches to too narrowly defined objects," and again Mr. Dill in his able comments on section 2 "Additional Powers," says : ''This provision may also be construed as meaning that whereas incorporators are enabled to create and define the powers which the corporation shall possess', in addition to those given by section I, that the certificate of incorporation shall then become the measure of the company's powers, and that powers not expressly or impliedly given by it are ex- cluded." By-Laws. 33. The corporate existence of a corporation begins with the filing of the Certificate in the office of the County Clerk of the County in New Jersey in which the principal office shall be established and a certified copy in the office of the Secre- tary of State ; but the organization is only complete when the ■ officers shall have been elected and a code of by-laws adopted. Provision of By-Laws. 34. The by-laws shall provide for the number of directors, the management of the company's property and the govern- ment of its affairs, the term and place of the annual election, the classification of directors (if there is to be more than one class" authorized by the Certificate) the manner of electing officers and their duties, the nature and amount of the treas- AND CORPOEATION LAW 25 urer's bond, the filling of vacancies among officers and direc- tors, the manner of calling and conducting meetings, the qualification of voters, the number necessary to constitute a quorum of stockholders, the manner of stock transfers, the qualification of directors, the establishment of an office outside the state, the keeping of books out of the state, the fixing of dividend periods and the fixing of amount of profits to be re- served as working capital. 35. Briefly discussing these provisions in seriatum order, it may be stated, by way of introduction, that the making of by-laws is the prerogative of the stockholders', and though that power may be granted to the directors by the Certificate of incorporation, the by-laws may be subsequently repealed or amended by the stockholders. The by-laws fix the number of directors — in no case less than three — and may provide for changing the number. They shall also become the governing code of laws for the regulation of all the internal affairs of the company, and they may provide a penalty not to exceed $20 for any infraction. 36. An annual election must be held at the registered office of the company in New Jersey. Inasmuch as the law requires that every New Jersey corporation must maintain a principal office in New Jersey, where a sign must be displayed and a resident agent remain, on whom process can be served in the name of the corporation, it is customary for all corpora- tions organized in New Jersey, but doing business elsewhere, to name some Trust Company in their Certificate as their agent, and its office as their principal office. These Trust Companies maintain a clerical force for the purpose of writing up the stock and transfer books, acting as transfer agents and attending to the filing of all reports and the transaction of all legal business generally. The directors chosen must be stock- holders, and to them is entrusted the management of the cor- poration. The usual term of office is for one year, but different classes of directors may be elected for different periods of time, varying from one to five years'; the term of some of one class must expire each year and one director must be a resi- dent of New Jersey. Election. 37. Elections shall be by ballot unless otherwise expressly provided in the charter. A majority in interest shall consti- tute a quorum and these may be represented either in person or by proxy. Stock transferred within twenty days preceding election is not entitled to vote. Provision may be made for cumulative voting so that every stockholder may have as many 26 COEPORATION ACCOUNTING votes as he has shares multiplied by all the directors to be chosen; these he may concentrate on one, or distribute equally among all, or vote them in any other way he pleases. A can- didate for director can not act as judge, clerk or inspector. The books of the corporation shall be the only evidence of a stockholder's right to vote, and stock belonging to the com- pany can not be voted. 37. (a) The directors shall cause the secretary or other officer to make out an alphabetical list of stockholders 10 days before every election; which list shall be open to the inspec- tion of every stockholder at the principal office for these ten days, giving the address of each stockholder and the number of his shares. The intent and purpose of this provision is, according to a Supreme Court opinion, to give every stock- holder a knowledge of his fellow-stockholders and an oppor- tunity to consult by mail or in person in regard to the coming election and in a measure rescue the election from the control of an unworthy board; however, the same Court has decided that this provision is merely directory and that failure to make such list will not invalidate an election; but then the stock- holders have remedial measures for the removal of dishonest or menacingly incompetent directors. Creative power implies annihilative power. Officers. 38. Every corporation must have a president, secretary and treasurer. The president must be a director; but the sec- retary and treasurer need not be directors. The secretary must take an oath, of office binding himself to the faithful discharge of his duties ; and the treasurer must give bond with such surety and in such amount as the by-laws shall fix and determine. 39. Section 15. Any vacancy occurring among the direc- tors, or in the office of president, secretary or treasurer * * * shall be filled in the manner provided for in the by-laws; in the absence of such provision vacancies shall be filled by the board of directors. Stockholders' Meeting. 40. Section 16. The first meeting of every corporation shall be called by a notice, signed by a majority of the incor- porators, designating the time, place and purpose of the meet- ing, which notice shall be published at least two weeks before the meeting in some newspaper of the county where the cor- poration is established; or said first meeting may be called AND CORPOEATION LAW 27 without publication if two days' notice be personally served on all the incorporators ; or if all the incorporators shall in writ- ing waive notice and fix a time and place of meeting no notice or publication shall be required. * * * 40. (a). Stockholders' meetings must be held within the state at the registered office of the Company, but stockholders need not be present in person ;* and directors' meetings may be held outside the state. All the stock and transfer books must be kept at the New Jersey office and the transfer books shall be open to all stockholders. To be entitled to vote one must be a stockholder of record ; that is to say, ownership of stock will not entitle any one to a vote unless the transfer to him is recorded on the transfer books of the company; and it has been held that a subscriber for stock is a stockholder, and as such is' entitled to vote even though he has not received his certificate. Any meeting requiring notice, may be held without such notice or lapse of time providing all of the stock- holders shall in writing waive such notice. Transfers. 41. Transfers shall be made in the manner provided in the by-laws. All stock is regarded as personal property. When transfer is not absolute but made as collateral security, it is to be noted on the transfer book. (This is a good provision viewed from any standpoint.) Conducting Foreign Business. 42. Any corporation of this state may conduct business in other states or in foreign countries ; and may have one or more offices out of this state ; and may hold, purchase, mortgage and convey real and personal property out of this state ; ''pro- vided, such powers are included within the objects set forth in its certificate of incorporation." The books, other than the stock and transfer books, may be kept outside the state ; but the Supreme and Chancery Courts may order all books for cause, to be brought into the state and kept in it for a desig- nated time. 43. To quote from a court decision bearing upon the above paragraph : "The corporation exists by force of the law that created it, and where that law ceases to exist and is not obligatory, the corporation can have no existence." In other words, a corporation is foreign outside of the state of its origin,. *The wholesale giving of proxies in this manner, vests the entire control in the hands of a few and practically disfranchises all the rest. Stockholders should, if possible, attend meetings. 28 COEPORATION ACCOUNTING and is subject in any other state to the laws affecting and reg- ulating ''Foreign Corporations," hence it has been held by the United States Supreme Court in the matter of a certain cor- poration chartered in Colorado for the purpose of carrying on part of its operations in California that, "the stockholders were liable to creditors according to the provisions of the Cali- fornia Statute." Dividends. 44. Dividends may be paid only out of net profits earned by the company. Suitable penalties are provided for the board of directors or any number of them who shall permit the capi- tal to be impaired or distributed or in any manner reduced, without first having obtained permission to decrease the capi- tal stock. The courts have held that corporations may be compelled to declare dividends out of unused profits where corporations improperly refuse to do so; also that a declared dividend is a debt that can be collected at law. Dividends on preferred stock may be made cumulative, but their payment is of course contingent on their being earned ; and in case they are not earned and the company fails, the holder of cumulative preferred stock has no claim on the assets for accumulated dividends. Fixing Reserve. 45. It appears from Court decisions, that the by-laws' may authorize the directors to fix the reserve of profits for work- ing capital.* Although directors' powers are delegatory they may delegate those powers to others, hence we find in many corporations an Executive Committee possessing and exer- cising the functions of the Board of Directors'. Issuing Stock. 47. The amount of the issue and the kinds of stock to be issued is to be stated in the certificate. Stock may be issued for money or property. When issued for money, the amount must be equal to the par of the stock ; the same applies when issued for property, but, "the judgment of the directors as to *This is a privilege of doubtful value. In the hands of an honest board it makes for the strength and solidity of a company. In the hands of a venal board it may be exercised to withhold dividends, depreciate the stock and freeze out certain stockholders. AND COBPOEATION LAW 29 the value of the property purchased shall be conclusive,"^ (pre- suming of course that the trade is not fraudulent), the courts having held that an honest mistake does not invalidate the transaction. Only certain kinds of corporations' can issue stock for labor or services. Kinds of Stock. 48. There does not appear to be any limit as to the va- rious kinds of stock that may be issued under proper certificate authority;* such as preferred, cumulative preferred, guaran- teed, non-voting-profit-sharing, deferred, founders' stock, and so on; but the total amount of preferred stock, "shall not at any time exceed two-thirds of the paid up capital stock." 49. Preferred stock may be preferred both as to dividends and capital; that is, it may have a preference in sharing the profits and also in the liquidation of the capital liabilities. It may also be made subject to redemption, under certain con- ditions', or may be converted into bonds or common stock un- der other conditions. It should be well understood that no preference of any kind can make a stockholder a creditor of the company. Of course a stockholder may also be a bond holder, and as such bondholder has the same rights as other like creditors, but this will be treated more in extenso in an- other chapter under "Bonds." Bonds may also be converted into common stock. 50. Non-voting-profit-sharing stock may be issued where it is desired to give employes or others a share in the profits without any voice in the management. Liability of Stockholders. 51. A stockholder's liability is single and absolute. He is liable in the amount of the par value of his subscription and iThis is the most vicious provision in all the New Jersey law. The promoters of a company are usually its first board of directors and they ■often unload on to the new company property which they own, or have acquired for the purpose, at anywhere from twice its value upward, their judgment being easily warped by their interests. By clever manipula- tion and advertising, they interest outside capital, get the enterprise going, then quietly unload their stock at, or near, par and multiply their investment, and when they have broken the stock they may buy it back at bear prices, and still retain control after having recouped their orig- inal investment. This is one form of "frenzied finance" made possible by the "conclusive judgment" of the directors as to property values. *When more than one kind of stock is issued the control should be vested in the common stock as that is frequently the only show it has to get dividends. Purchasers of common stock should be sure that the ■control does not vest in the preferred stock. 30 COEPOEATION ACCOUNTING no more. Once he has paid for his stock his Habihty ceases, and creditors must look to the company's assets and not to the stockholder's solvency or ability, in case of company failure — thus the stockholder always knows the limit of his risk and jeopardizes no more. 52. It has been held by the courts that a stock subscrip- tion is a contract, wherein the stockholder agrees to buy and pay for the stock; and the original subscriber to stock is not relieved from liability to pay therefor by mere transfer. Assessments. 53. The directors may from time to time levy assessments to an amount not exceeding the par value of the stock. Due notice of such must be given either personally, by mail, or by publication. In case of failure to pay an assessment the treasurer may sell such number of shares as may be necessary to pay the delinquent assessment and all costs and charges incidental thereto. The time and place of sale and amount due per share must be advertised for three successive weeks before the sale, and notice must be mailed to the delinquent stockholders. Dissolution. 54. Corporations may be voluntarily dissolved by the written consent of all of the stockholders, or by a vote of two- thirds in interest of all the stockholders, by the expiration of its charter, by the courts in insolvency proceedings, by act of the legislature, or by gubernatorial proclamation for failure to pay its taxes. Insolvency. 55. Section 84. *'In case of the insolvency of any cor- poration the laborers and workmen, and all persons doing la- bor or service of whatever character, in the regular employ of such corporation, shall have a first prior lien upon the assets thereof for the amount of wages due to them respectively for all labor, work and services done, performed, or rendered within two months next preceding the date when proceedings in insolvency shall be actually instituted and begun against such insolvent corporation." 56. Section 85. "Such lien shall be prior to all other liens that can or may be acquired upon or against such assets, except the lien and encumbrance of a chattel mortgage, re- corded more than two months next preceding the date when proceedings in insolvency shall have been actually instituted AND COEPOEATION LAW 31 against such insolvent corporation, and except the Hen and encumbrance of a chattel mortgage recorded within two months' next preceding the date when proceedings in insolv- ency shall have been actually instituted against such insolvent corporation, for money loaned or for goods purchased within said period of two months ; and also except as against the lien of mortgages given upon the lands and real estate of such in- solvent corporation." 57. ''This Section defines and limits the only liens which are allowed to take preference over the lien of laborers." — Dill. Receiver's Services. 58. Section 85. Before distribution of the assets of an insolvent corporation among the creditors or stockholders, the Court of Chancery shall allow a reasonable compensation to the Receiver for his services, and the cost and expenses of the administration of his trust, and the cost of the proceedings in said court, to be first paid out of said assets. 59. Section 86. After payment of all allowances, ex- penses and costs, and the satisfaction of all special and general liens upon the funds of the corporation to the extent of their lawful priority, the creditors shall be paid proportionally to the amount of their respective debts, excepting mortgage and judgment creditors when the judgment has not been by con- fession for the purpose oT preferring creditors ; and the cred- itors shall be entitled to distribution on debts' not due, making in such case a rebate of interest, when interest is not accruing on the same; and the surplus funds, if any, after payment of the creditors and the cost, expenses and allowances aforesaid, and the preferred stockholders shall be divided and paid to the general stockholders proportionately, according to their re- spective shares. Reorganization. 60. When a company shall have passed into the hands of a receiver and thereafter shall have paid or provided for its debts, and have a residue of capital sufficient to resume busi- ness, the Court of Chancery may direct the receiver to recon- vey the property remaining, to the corporation; and a ma- jority in interest of the stockholders may agree upon a plan of reorganization, and with the consent of said court mortgage its property and issue bonds, or debentures, or additional stock, or both, and may use these for the purpose of satisfying the claims of creditors who may be willing to compromise in this way, or they may sell them for the purpose of effecting re- organization. 32 COEPORATION ACCOUNTINa Mergers. 6i. It may be of interest to state that New Jersey cor- porations may form mergers in accordance with the provisions of the Corporation Act; they may also own stock in other corporations ; in other words, the formation of "Holding Com- panies" is permissible under the New Jersey law. Foreign Corporations. 62. Before doing business in New Jersey, foreign cor- porations must file copy of charter, statement of capital stock, amount issued, nature of business, etc. They may own and convey real estate in New Jersey. They shall be subject to the provisions of the Corporation Act, as far as they can be applied to foreign corporations; and they shall be subject to the same taxes, etc., as domestic corporations. The cost for filing statement, etc., and issuing Certificate of Authority is $10. Fees and Taxes. 63. The incorporation fee is 20c for each $1000 of capital stock, but in no case less than $25. For increase of capital stock $20 for each additional $100,000. For consolidation or mergers not less than $20. 64. The Franchise tax is one-tenth of one per cent on all amounts of stock issued and outsanding up to and including the sum of $3,000,000. Up to and not exceeding $5,000,000 one-twentieth of one per cent, and $50 additional for every million dollars in excess of $5,000,000. 65. The foregoing synopsis is what it purports to be, a review of the salient points of the New Jersey Corporation laws. It is not within the scope nor purpose of this work to give the entire law in all its phrases as same is embodied in the Act and construed by the courts. Those desiring a com- plete and authoritative annotated edition of the "Corporation Act" should obtain a copy of "Dill on New Jersey Corpora- tions," which may be obtained through any book seller. Courts Opposed to Water. 65. (a) The following clipping from the Financial Age, N. Y., March 13, 1905, is interesting to those who have aught to do with corporation of the aqueous brand: AND COEPOEATION LAW 33 A New Jersey Decision Against Stock Watering. The New Jersey Court of Errors and Appeals has deliv- ered a hard blow at the flotation of companies formed by com- bining numerous plants and capitalizing the whole at figures in excess of the true value .The suit in point was' that of Charles W. Volney against Lewis Nixon for the recovery of one-half of $350,000 par value, fully paid-up stock of the In- ternational Smokeless Powder & Dynamite Company. Nixon won in the Court of Chancery and the Court of Errors last week affirmed that decision. The plaintiff invented a smokeless powder and organized a company, Nixon advanced about $30,000 for the erection of a plant, and was given stock in the Volney Company. Upon organization of the International Company the Volney plant was turned over to it. Volney claims he and Nixon were to receive 10 shares of International stock for each share of Vol- ney stock. Volney further claims that the transaction was made through Nixon, and he never got his share of the new stock. The opinion of the court says it is perfectly plain that the agreement upon which Volney bases his claim for the receipt of stock in the International Company was far in excess of the value of the plant and patent turned over. The opinion caustically adds : "It is the settled policy of the Courts in this State not to aid in the enforcement of such contracts having either an illegal or immoral purpose, even though the objec- tionable feature has been accomplished and there remains only the distribution of the proceeds among the contracting parties. Jersey justice, like "Jersey lightning," strikes quickly and surely at all who disregard its power. — Financial Age, N. Y., March 13, 1905. Interest Rates. The legal and contract rate of interest in New Jersey is six per cent ; usury is punishable by forfeiture of entire interest and costs. Corporations may not plead usury. CHAPTER III. A Digest of the General Corporation Laws of Delaware, Annotated and Compared With Those of New Jersey — Points of Agreement and Points of Difference. — Some Distinct and Interesting Features. 66. Hon. Caleb R. Layton in speaking of the corporation laws of Delaware says : "It is believed that no state has on its statute books more complete and liberal corporation laws than these"; and he cites the following as some of the main advantages : ''Corporations may conduct business in this or any state or foreign county. "Stockholders' and directors' meetings may be held out of the state if desired. "Original stock and transfer books may be kept out of the state, if duplicates of such books' be kept at the principal of- fice in the state. "Stock fully paid up is non-assessable, and fully paid-up non-assessable stock can be issued for property, labor and ser- vices. ''No stock nor bonds issued can be taxed by this state, when the same is owned by non-residents of this state, or foreign corporations. "State tax is about one-half of that under laws of other states offering proper security to stockholders. "Delaware corporations may confer upon the holders of bonds or debentures the power to vote to the same extent and in the same manner as stockholders." A Comparison. 67. We observe a number of striking differences between these provisions and those of the New Jersey laws ; such as' the holding of stockholders' meetings outside of the state ; the keeping of the original stock and transfer ledgers out of the state ; the issuing of stock for labor and services, which can only be done in certain cases in New Jersey, the voting power attached to bonds and debentures, etc. AND COKPOEATION LAW 33 Article IX of the Constitution. 68. Sec. I. No corporation shall hereafter be created, amended, renewed or revised by special act, but only by or under general law,* nor shall any existing corporate charter be amended, renewed, or revised by special act, but only by or under general law; but the foregoing provisions shall not apply to municipal corporations, banks, or corporations for charitable, penal, reformatory, or educational purposes, sus- tained in whole or in part by the state. The general assembly shall, by general law, provide for the revocation or forfeiture of the charters of all corporations for the abuse, misuse, or non user of their corporate powers, privileges or franchises. Any proceeding for such revocation or forfeiture shall be taken by the Attorney General, as may be provided by law. No general incorporation law, nor any special act of incorporation, shall be enacted without the concurrence of two-thirds of all the members elected to each house of the General Assembly. Forming Corporations in Delaware. 69. Three or more persons may form a corporation for the transaction of any lawful business, excepting those excluded by Section i of Article IX of the Constitution. Special regu- lations apply to railroads, telegraph and telephone companies operating outside the state. Existence of Corporation. 70. The existence of a corporation dates from the filing of the Certificate of incorporation in the office of the Secretary of State and a certified copy thereof in the office of the Recorder of Deeds of the County wherein the principal office of the company shall be located. This certificate must be signed and sealed by the original subscribers or corporators and acknowl- edged before some one competent to administer an oath. Be- tween the time of filing the certificate and the election of a board of directors these original corporations shall direct and manage the affairs of the new company. First Meeting. 71. Sec. II. The first meeting of every corporation shall be called by a notice signed by a majority of the incorporators * * * designating the time, place and purpose of the meeting, and such notice shall, at least two weeks before the time of any such meeting, be published three times' in some news- paper of the county * * * or first meeting may be called 36 CORPORATION ACCOUNTING without publication if two days notice be personally served on all parties named in the certificate ; or if all parties named * * * shall in writing, waive notice and fix a time and place of meeting, then no notice of publication shall be required. * * * (This is practically the same as the *New Jersey law.) Corporate Powers. 'J2. The following is a brief summary of the powers granted : The power of succession for the period of incor- poration, or perpetual succession if no limit is named; the usual powers of plaintiff and defendant in any court; the power to make, use and alter a common seal; the power to hold, purchase and convey real or personal property and to mortgage any or all of its property and franchises ; (the power to hold implies the power to acquire by bequest, except in case of religious corporations) the power to appoint officers and agents' for the conduct of its business and to fix their sal- aries ; the power to make by-laws consistent with the laws of the United States and of the State of Delaware ; the power of dissolution and the winding up of its affairs ; the power to conduct business in any state, territory or colony of the United States or in foreign countries, and to have any number of of- fices outside of Delaware; also "to purchase, mortgage and convey real and personal property out of the State"; if its charter so specifies.* 73. Reviewing the above powers we find many important grants, such as the power of perpetuity; which means, that, unless the incorporators limit the period of corporate exist- ence, the corporation exists for all time ; also the corporation is not limited to its necessities in the acquisition of real estate, but may buy and sell without limit and acquire by devise. It may also mortgage its property without having recourse to either the courts or the stockholders.^ This last pro- vision is defeasible on the ground that the law grants certain legal powers to a corporation; but as these legal powers can only be exercised by an agency possessing the physical powers of energy and action, and the metaphysi- cal powers of reasoning and judgment, it is only rational to assume that the enabling powers granted to a corporation ex- tend to its agency; and as this agency — the board of directors — is representative of the stockholders, the logical inference *A corporation has such powers as are expressed or implied in its charter (consistent with law) and powers not so expressed or implied are inhibited. Failure to state means inability to assume. The one excep- tion to this is the State of Maine. iSee foot note to paragraph 30. AND COBPOEATION LAW 3T is that the act of the Board on behalf of the corporation is a corporate act, requiring no specific authority from the stock- holders. * In Delaware, as in New Jersey, all extraordinary powers, to be inherent of the corporation, must be specified in the certificate or articles of incorporation. Further Powers. 74. For further powers see paragraph 31 of this work. The additional powers of the New Jersey and Delaware acts are almost word for word alike and the comments in para- graph 32 apply with few exceptions, with equal force here. By-Laws. 75. The power to make by-laws' may be conferred on the directors by the certificate of corporation, but this is a special privilege, not a vested right, and may be nullified at any time by the stockholders, in whom the power to make and alter by-laws reposes. Provisions of By-Laws. "j^. The by-laws shall provide for the number of directors and also for the changing of that number, for the regulation of meetings, the transfer of stock, the filling of vacancies and the holding of meetings outside the State. Directors. yj. In no case shall there be less than three directors, ex- cept that a majority of the board may designate two of their number as an "Executive Committee" who may be endowed with all the usual powers of the board and may act in its stead. At least one director must be a resident of the State of Delaware. As in New Jersey, the directors may be divided' into three classes, and if so classified, instead of the whole board being elected annually, they shall hold office for one, two or three years, respectively; one class retiring each year. Directors may be elected outside the state — this obviates the necessity of directors living in another State going to Dela- ware to hold meetings or to be elected. Every director must be a stockholder and must own at least three shares of the Capital Stock. Directors shall have the appointive power to *It is both logical and necessary that the consumate act of the Board should be a corporate act, but there are times when the Board should be restrained from acting. The position of the principal must always re- main superior to that of the agent. ^8 CORPOEATION ACCOUNTING fill vacancies' in their body, unless there is an inhibitory clause in the by-laws. Failure to hold directors' meetings in accord- ance with the date specified in the by-laws will not work a forfeiture of the charter; but on the application of one stock- holder, the Chancellor may summarily order an election to be held; and the board will be punished for failure to comply with this order. Dividends. 78. It is one of the functions of the directors to declare and pay dividends ; but dividends can only be paid out of pro- fits earned. The certificate of incorporation may confer on the directors the power to fix a reserve to be withheld out of the profits, for the creation of additional working capital, for con- tingencies' or other purposes,* or the stockholders may fix this reserve. In either case the directors shall have power to distribute the balance of profits over and above this reserve in dividends. It is permissible to pay dividends either in stock at par, or in cash. Loaning Money. 79. With the exception of Building and Loan Associa- tions, no corporation can loan money to any officer of the cor- poration; nor can stock of the company be accepted as se- curity for such loans ; nor can a corporation take a lien on its own stock unless it is necessary to protect itself from loss. The officers violating, or assenting to the violation -of these provisions, shall be jointly and severally liable. This is a measure of protection for stockholders and creditors. Elections and Meetings. 80. Unless otherwise provided in the certificate, all elec- tions shall be by ballot. Every stockholder shall have one vote for every share of stock held. Voting may be in person or by proxy; but there is no provision for cumulative voting. Trustees or fiduciary agents may vote stock held by them in trust. Pledged stock can be voted by the pledger unless he shall have waived his right to vote in favor of the pledgee; but stock transferred within twenty days prior to stockhold- ers' meeting shall not be entitled to vote. This provision tends to prevent in a great measure the political manipulation of stock for election purposes. A list of the stockholders must *A wise provision if not abused. Stockholders are rarely competent to do this but incompetency is better than dishonesty. See foot note to paragraph 45. AND COKPOEATION LAW 39" be made out in alphabetical order by the secretary, ten days prior to the annual meeting, and this list shall be open to the inspection of any stockholder. Evidence of Right to Vote. 8i. The stock ledger shall be the only evidence of a stock- holder's right to vote. Unless the by-laws so provide, these meetings must be held in the State of Delaware, at the prin- cipal or registered office of the Company ; but the stocKnolders- need not be present in person.* The name of every corpora- tion must be conspicuously displayed on its principal office. Important Provisions. 82. A unique and important provision may be made in the certificate of incorporation whereby the holders of bonds or debentures, however secured, have the same right to vote as stockholders ; and also the right to examination of the books in case default is made in the interest or principal of such bonds or debentures. This gives to this' class of credit- ors a voice in the management and also a right to examine into the condition of the company. This is indeed a large measure of protection to the bondholders ; and here is where the public accountant should be called into service. Issue and Transfer of Stock. 83. In Delaware, stock can be issued for money, labor, property (real or personal), leases or franchises. As in New Jersey, the judgment of the directors as to the value of any of these shall be conclusive ; providing of course there is no fraud. ^ Stock shall be paid for in such amounts and at such times as the directors may determine. The amount of the authorized capital must be stated in the certificate — in no case less than $2000. The least paid-up capital with which it can commence business is $1000. All stock is regarded as per- sonal property and is transferable under regulation of the by- laws. When transferred as collateral, it is to be so entered on the transfer-books. Kinds of Stock. 84. Delaware corporations may issue two or more kinds of stock with such designations, preference and voting powers, or with such restrictions and qualifications as shall be provided *See foot note to paragraph 40a on the giving of proxies. iSee foot note to paragraph 47. 40 COHPOEATION ACCOUNTING for in the certificate of corporation. Preferred stock may not exceed two-thirds of the actual paid in capital and may be subject to redemption at not less than par. In no case shall the preference exceed eight per cent. Preferred dividends may be made cumulative. 85. It will be seen from the foregoing that the certificate in this, as in other matters, allows of a wide latitude in the designation and voting powers of stock, and reminds us that the certificate should have a broad foundation, admitting, though not compelling, the exercise of all the potential powers of the Corporation Act itself. The judicious use of the word "may" is to be recommended ; "shall" can be, and is, construed as mandatory, but "may" cannot be so construed. Certificate of Incorporation. 86. In a general way, the certificate shall set forth the name of the corporation; the town or city and the county in which the principal office is to be located; the nature of the business ; (right here is where the scope of the business is to be enlarged so as to include all probable future needs) ; the amount of the capital stock ; the amount with which the busi- ness is to be commenced; the various classes of stock to be issued; the names and residences of original subscribers; duration of the corporation, if it is to be limited; if private property of stockholders shall be subject to payment of cor- porate debts ; and any provision, "creating, defining, limiting and regulating" the powers of the corporation, its directors or any class of stockholders. Officers. 87. Every corporation shall have a president, secretary and treasurer. The secretary and treasurer may be the same person, or the vice president and treasurer may be the same person, or the vice president may also be the secretary. The president must be one of the directors. All officers may be chosen either by the directors or stockholders. The secretary shall be sworn to discharge his duties faithfully, and a bond shall be required of the treasurer. Stockholders' Liability. 88. Stockholders shall be liable only for the par value of their subscriptions. If the company should fail before they liave paid in the full amount of their subscriptions, they shall be required to pay in the balance due, or so much thereof as may be necessary, to satisfy the claims of creditors, but. Sec. AND CORPOEATION LAW 41 51 provides, "No suit shall be brought against any stockholder for any debt of the corporation * '''' * until judgment be ob- tained therefor against such corporation and execution thereon is returned unsatisfied." 89. If a corporation desires to enhance its credit it may provide in its certificate that the property of stockholders shall be liable for corporation debts; but unless this provision is deliberately made the maximum stockholder's liability is fixed and absolute. Assessments. 90. ''The capital stock shall be paid in such amounts and Rt such times as the directors may require." The directors may levy an assessment on unpaid stock at any time and for such amount as in their judgment the necessities of the busi- ness require ; but in no case can these assessments exceed the par of the stock. The word "necessities," seems to be in- serted to protect the stockholder from the caprice or cupidity of a venal board. Thirty days notice of an assessment must be given by publication in a newspaper, or by written notice mailed to stockholders. Failure to Pay Assessments. 91. Delinquent assessments may be collected by an action at law ; or the directors may sell sufficient shares of delinquent stockholders to pay assessments and all incidental costs ; and the purchaser shall be entitled to, and receive a certificate for shares so purchased; providing in case of sale that notice of the time and place of sale and sum due on each share shall have been given by publication once a week for three succes- sive weeks in a newspaper of the county where the principal office is located, and by mailing copy of said notice of sale to last known address of stockholder, at least 20 days before day of sale. Forfeiture of Stock. 92. If the amount of assessment is not recovered at law, or not paid in by stockholder, and no bid sufficient to pay as- sessment and cost is received, the stock, and all sums pre- viously paid thereon, shall, within one year, be forfeited to the corporation. Dissolution. 93. Corporations organized under this Act may be dis- solved by a two-thirds vote of all the stock in interest, at a 42 COKPORATION ACCOUNTING meeting called especially for that purpose. The directors may call a meeting for such purpose when in their judgment the best interests of the corporation will be served thereby. No- tice by mail and by publication must be served on stock- holders. When all the requirements of the statute have been complied with, the Secretary of State will issue a certificate of dissolution; or such certificate shall be issued, without a meeting or publication, when all of the stockholders shall, in writing, consent to the dissolution; however, all corporations dissolved either in this way, by expiration of charter, or other- wise, shall continue to exist as a corporate body for the pur- pose of bringing or defending suits, settling up their business, disposing of their property and distributing their capital as realized among their stockholders, for a period of three years from such dissolution ; but they must not continue in the busi- ness in which they had been engaged. The directors or execu- tive committee shall act as trustees for this purpose and they shall be jointly and severally liable for the assets of the cor- poration. Receivers. 94. On the application of creditors or stockholders of a dissolved corporation the Court of Chancery may appoint a receiver to wind up the corporation's' affairs; with power to collect its bills, discharge its debts, and prosecute and defend in its name. Section 45 of the Corporation Act reads as fol- lows: Final Settlement. 95. "The said trustees or receivers after payment of all allowances, expenses and costs and the satisfaction of all spe- cial and general liens upon the funds of the corporation to the extent of their lawful priority, shall pay the other debts due from the corporation, if the funds in their hands shall be suf- ficient therefor, and if not, they shall distribute the same ratably among the creditors who shall prove their debts in the manner that shall be directed by an order or decree of the Court for that purpose; and if there shall be any balance re- maining after the payment of such debts and necessary ex- penses, they shall distribute and pay the same to and among those who shall be justly entitled thereto, as having been stockholders of the corporation, or their legal representatives." Foreign Corporation. 96. Before commencing business in Delaware, foreign corporations must file with the Secretary of State certified AND COEPOEATION I/AW 43 copy of charter and names of the authorized agents in this state on whom service can be made, also a sworn statement of assets and HabiHties, and pay a fee of $50. Fees and Taxes. 97. The fee for filing certificate of corporation shall be 15c for every $1000 capital stock — in no case less than $20; and the same fee for increase of capital stock. Where mergers are formed an additional fee of 15c for every $1000 capital stock of the consolidation in excess of the joint capital of the companies merged. Religious or charitable corpora- tions are exempt from the payment of fees. 98. Franchise taxes' vary with the nature of the corpora- tion; but for general business, mining or manufacturing cor- porations the tax is one-twentieth of one per cent on actual paid-up capital up to $3,000,000, and one-fortieth of one per cent on stock issued and outstanding from $3,000,000 to $5,000,000, and $30 on each additional million. For foreign corporations the state tax is $50 and fees to the Secretary of State and prothonotaries (Clerks of Court) $10. General. 99. Delaware corporations have two years from date of organization in which to commence business before forfeiture of franchise. They may extend the period of their incorpora- tion, may amend their certificate, increase or decrease their capital stock, merge or consolidate, may change the par value of their shares but there does not appear to be any special provision for reorganization of insolvent corporations. Interest Rates. The legal and contract rate of interest in Delaware is six per cent. The penalty for usury is forfeiture of a sum of money equal to the amount loaned. There are no days of grace in Delaware. CHAPTER IV. An Epitome of the General Corporation Laws of Arizona. — Advantages Arizona Offers to Those Who Choose to Incor- porate Under Its Laws. — A Simple and Unambiguous Set of Laws Embodying New Features, and Establishing New Pre- cedents. lOO. In 1903 Arizona revised its corporation laws so as to grant larger privileges and more exemptions' to, and impose fewer restrictions upon corporations organized under its laws. These laws, simple and unambiguous, resemble in many points those of New Jersey and Delaware ; while in other points they break new ground, establish new precedents, and suggest to one's mind that there is no "Ne Plus Ultra" sign along the cor- poration highway. Corporations in General. loi. Sec. 4. Any number of persons may associate them- selves together and become incorporated for the transaction of any lawful business, but such corporation shall confer no powers or privileges not possessed by natural persons, except as herein provided. Sec. 5. Among the powers of such bodies corporate shall be the following: 1. To have perpetual succession. 2. To sue and be sued by the corporate name. 3. To have a common seal and alter the same at pleasure. 4. To render the shares or interest of stockholders trans- ferable and prescribe the mode of making such trarnsfers. 5. To exempt the private property of members from lia- bility for corporate debts. 6. To make contracts, acquire and transfer property, pos- sessing the same powers in such respects as private individ- uals now enjoy. 7. To establish by-laws and make all rules and regula- tions deemed expedient for the management of their affairs not inconsistent with the constitution and laws of the United States and laws of Arizona. AND COKPOEATION LAW 45 102. Inasmuch as "a number" is a unit, or a collection of units, the liberal construction to be placed on Section 4 is that one or more persons can form a corporation under these laws. If this is not the intent of the Act then the construc- tion is faulty and should read, "Two or more persons" or *'any number above one"; however one thing is clear, two persons can form a corporation in Arizona. 103. The corporate powers 2, 3, 4, and 7 are generic to all corporation laws; but i, 5 and 6 are specific powers. While these powers are inherent to the Arizona corporation they may be waived or nullified by the articles or incorporation, (in fact the power of limited liability is waived if it is not specfically taken advantage of) hence the period of corporate existence may be limited, and private property may be made subject to corporate debts — if the incorporators choose to do so for the purpose of strengthening their credit. Number six grants unabridged personalistic powers in the purchase and sale of real and personal property. Commencing Business. 104. Sec. 6. (as amended by Act 88, Session Laws 1903.) Before commencing business, except that of their own organ- ization, they must adopt articles of incorporation, which shall be signed and acknowledged by them as deeds are required to be acknowledged, and recorded in a book for that purpose in the office of the County Recorder of the county where the principal place of business is to be. The articles of incorpora- tion must contain : 1. The name of the corporators, the name of the corpora- tion and its principal place of transacting business. 2. The general nature of the business proposed to be transacted. 3. The amount of capital stock authorized and the time when and conditions upon which it is to be paid in. 4. The time of the commencement of the corporation. 5. By what officers or persons the affairs of the corpora- tions are to be conducted, and the times at which they are to be elected. 6. The highest amount of indebtedness or liability to which the corporation is at any time to subject itself. 7. Whether private property is to be exempt from cor- porate debts. Unless so exempted, stockholders are liable for the debts of the corporation in the proportion to which their stock bears to the whole capital stock. 46 CORPORATION ACCOUNTING Drawing of Articles. 105. It is important to observe all these provisions in drawing up articles, as these requirements are mandatory. In addition, the date for the holding of annual elections must be stated. Many of these requirements, like the powers granted, are native to every corporation ; but provisions 6 and 7 are exceptions. The incorporators must at once fix a limit of indetbedness beyond which they may not pass, and this limit must include contingent as well as direct liability, and in no case may it exceed in amount two-thirds of the capital stock. To realize the importance of this clause we should read carefully provision 7. If the stockholder's liability is fixed, he can risk only so much anyhow, but if his private property is subject to corporate debts, then, he is greatly con- cerned as to the amount of those debts ; and for his protection, in this latter case, the law benovelently fixes a new limit; the first being an absolute limit, the second a contingent limit; but you ask ''What happens if the corporation debts exceed that limit?" The answer must be the directors shall be jointly and severally liable for that excess. 106. Reading provision 7 of section 6 in connection with provision 5 of section 5 we observe an inconsistency that might easily deceive Here is' a power rendered impotent by desuetude and vitalized only by use ; hence if we would use it we must specifically and unequivocally provide that "The pri- vate property of members shall be exempt from liability for corporate debts," otherwise, instead of being a power, it be- comes an infirmity. Publication of Articles. 107. Every corporation is required to publish its articles of incorporation at least six times, and file an affidavit of such publication in the office of the Territorial Auditor; but busi- ness may be commenced as soon as articles are filed in the County Recorder's office and a certified copy thereof in the office of the Territorial Auditor, provided however that pub- lication shall be completed and affidavit filed within three months of the date of filing articles. Stock Increased or Decreased. 108. Sec. 10 (as amended by Act 88, Session Laws, 1903.) The capital stock of any corporation organized hereunder may be increased or decreased and the articles may be amended in any of the particulars mentioned in Sec. 6 of this Title by AND CORPORATION LAW 47 the affirmative vote of a majority of the stock. Such amend- ment shall be signed and acknowledged by the President and attested by the Secretary of the corporation, "and no such amendment shall be valid unless recorded and published as original articles are required to be. Prolonging Corporate Life. 109. Sec. II. Corporations organized under this Title may be formed to endure for twenty-five years, but they may be renewed from time to time for a period not exceeding twenty-five years, when three-fourths of the votes cast at any stockholders' meeting duly called and held for that purpose shall be in favor of such renewal. no. Note, that the duration of a limited period corpora- tion is twenty-five years; but that limit may be extended in- definitely at the will of the stockholders. Also observe the language of this Section — "three-fourths of the votes at any stockholders' meeting, etc." and not three-fourths of the stock in interest. Dissolution. III. Sec. 12. The corporation shall not be dissolved prior to the period fixed upon in the articles of incorporation ex- cept by a majority vote of its members, unless a different rule is adopted in the articles. A dissolved corporation shall be post-existent for the purpose of winding up its business. Transferring Stock. 112. Sec. 13. Transfer of stock shall not be valid except as between the parties thereto, until the same is regularly entered upon the books of the company so as to show the name of the person by whom and to whom the transfer is made, the number or other designation of the shares, and the date of the transfer.* The books of the company shall be kept so as to show intelligently the original stockholders, their respective interests, the amount that has been paid thereon, and all transfers thereof ; and such books or records or correct copies thereof, so far as they relate to the items mentioned in this section, shall at all times be subject to the inspection of any stockholder desiring the same. 113. Note here, that transfers of stock are not valid be- tween the transferee and the corporation, but only between the parties thereto, until the transferee is a stockholder of record — until then he has not the right to vote, nor is he en- titled to dividends. Observe further, the requirements of the *See paragraphs 260 and 261. 48 CORPORATION ACCOUNTING statute in regard to the keeping a complete history of every transaction in stock, and the right granted to every stock- holder to examine the records and learn the payments made and balances due on subscriptions. Forfeiture of Charter. 114. Any corporation failing to make use of its franchise for a continuous period of five years forfeits the same ; but failure to elect officers or hold meetings as provided in the by-law^s does not v^ork a forfeiture. Fraudulent Transfers. 115. That there are persons v^ho would transfer stock to an irresponsible person or a dummy for the purpose of escap- ing their just liabilities there can be no doubt. To prevent the perpetration of this ethical and moral w^rong Section six- teen has been phrased as follows : 116. Sec. 16. Nothing herein shall exempt the stock- holders of any corporation from individual liability to the amount of the unpaid installment on the stock owned by them or transferred to them for the purpose of defrauding credit- ors; and an execution against the corporation to that extent may be levied upon the private property of such individual. Presumption of Corporate Existence. 117. Persons acting as a corporation are presumed to be corporate until the contrary is shown ; and their franchise does not become void until it is so declared by regular legal pro- ceeding; and such persons sued as a corporate body can not set up as a defense a want of legal organization. Appointing Resident Agent. 118. Sec. 23. All corporations organized under this Chapter shall appoint a bona fide resident of this Territory, who has been a resident of this Territory for at least three years, its agent, upon whom all notices and processes, includ- ing service of summons, may be served, and when so served shall be deemed taken and held to be lawful personal service on such corporation, and said notice shall be filed in the office of the Secretary of the Territory. N. B. No territorial officer can act as agent. Filing Instruments. 119. In 1903 the legislature changed the law so that ar- ticles of incorporation and all other documents hitherto filed AND COEPORATION LAW 49 in the office of the Secretary of the Territory shall be filed in the office of the Territorial Auditor. Fees. 120. Sec. 3. Act 29 passed 1903. The Territorial Audi- tor shall charge and collect in advance the following fees for performing the duties herein required of him : Filing articles of incorporation $10.00 Filing affidavit of publication of articles of incorporation 3.00 Filing appointment of statutory agents 3.00 For issuing certificates of filing of articles of incorpora- tion 3.00 For copy of any document on file in his office not other- w^ise provided for, per folio 20 For affixing seal and certificate to copy 1. 00 Cause For Disincorporation. 121. Following is a list of causes which work a dissolu- tion. Failure to appoint a resident agent, or failure to file no- tice of such appointment with the Territorial Auditor; re- vocation or attempted revocation of the appointment of said agent without duly appointing another; disposal of the cor- porate assets by a majority vote of the outstanding stock; disuse of franchise. Should any of these conditions eventuate the Attorney General or any stockholder or officer may pro- secute and maintain an action in any court in the Territory, and procure a decree of dissolution. Flere again one of the functions of municipal law, that of protecting man against his fellows, steps in with the following proviso : Section 2 of Act 82 Conceming Dissolution of Corporations. 122. Sec. 2. Nothing in this Act, however, shall author- ize the dissolution of a corporation for any of the causes in this Act stated, where it shall be made to appear to the Court that such causes or conditions have been fraudulently pro- cured for the purpose of defrauding either creditors or stock- holders of such corporation. Bringing Books Into Court. 123. Provision is made in the Corporation Act to compel the officers of a corporation to produce all books and records 50 COEPOEATION ACCOUNTING in Court, when sufficient cause shall be shown, in any suit, and in such an event either party to the suit can make use of the books and records so produced as evidence. Chief Advantages. 124. The Territorial Auditor of Arizona sums up the chief advantages of incorporating under the laws of Arizona in the following language. 125. No other territory or state in the American Union offers such advantages to parties desiring to incorporate as does Arizona; its laws governing corporations, foreign and domestic, are both equitable and just, and lend every possible protection to the stockholders and officials; and because of the explicit wording of our statutes no misapprehension as to their construction can occur. Among the many advantages and inducements held out by our laws to incorporators, the following are probably the most prominent: "i. Any number of persons may organize a corporation for the transaction of any lawful business. "2. No director or stockholder need be a resident of Ari- zona, althought a resident agent must be maintained to ac- cept service of legal process. "3. Business may be transacted, and directors' meetings held wherever desired, either within or without the Territory. "4. There is no restriction as to the real estate which the company may hold. ''5. Neither the By-Laws nor any anual report or state- ment need be filed or published. ''6. There is no franchise or other special tax on corpora- tions. Only corporate property within the Territory is taxed, and the only local expense of a corporation which has no prop- erty in Arizona is the maintenance of a resident agent, and the occasional holding of stockholders' meetings for the pur- pose of ratifying the action of meetings held outside. Such meetings may be held in our office by means of proxies with- out any of the stockholders being present in person. "7. Incorporators can obtain a charter on the same day application is made, and business may be transacted imme-: diately thereafter without waiting for publication to be com- pleted. "8. There is no personal liability for the debts of a cor- poration on the part of directors or stockholders if it be so stated in the articles of incorporation. AND COKPOKATION LAW 51 "9. There is no requirement that any part of the stock be paid in at any particular time. "10. The articles of incorporation may provide for pre- ferred stock, treasury stock or bonds, when so desired. "11. Stock may be issued full paid and non-assessable in exchange for property or service. "12. The capital stock may be fixed at any amount de- sired and the cost of incorporating is the same, no matter what amount of capital stock is designated in the articles of incorporation. "13. Amendments to articles are easily made and at small cost. "14. Corporations are created to exist twenty-five years, but this time may be renewed at the end of that period by vote of the stockholders. Advice to Incorporators. 126. The following advice is offered by the Auditor to prospective corporators : In drawing articles of incorpora- tion, care should be' taken to observe the formal requirements of the Arizona law, such, for instance, as stating the date for annual election of directors. The agency appointment should be sent in as soon as pos- sible, as failure to file the appointment of a resident agent for service of process is sufficient cause for the dissolution of a corporation. The by-laws should provide for voting by proxy at stockholders' meetings. In sending articles of incorporation, a permanent address should be given in order that the corporation may be kept in- formed as to matters of interest occurring in Arizona. In sending Articles of Incorporation to the Auditor's of- fice, three copies besides the original articles should be sent. This often saves one or two days' time in return of a certified copy. General Comments. 127. Most of these advantages have been discussed in the foregoing pages and it only remains to call attention to the absence of a franchise tax, and the privilege of issuing various kinds of stocks and bonds. The very fact that stock may be paid for in installments, implies the power to levy as- sessments ; and the further power to enforce their payment in the usual manner; but beyond the par value of the stock, as- sessments can not be levied, and when paid-up stock is issued 52 COEPORATION ACCOUNTING for services' rendered or property conveyed, the service or the property shall constitute a full payment, and stock so issued shall not be assessable. The failure to fix a minimum amount of capital and the substitution of one uniform fee instead of a proportionate scale is a weakness, rather than an advantage. Interest Rates. 127 (a) The legal rate of interest is 6% ; by contract, any rate. No days of grace. CHAPTER Review of the General Corporation Laws of California. — Peculiar Assessment and Liability Features. — Advantages Set Forth. — No More Equitable Laws Under Which to Incorpor- ate. — Notes and Criticisms. 128. Many people cannot distinguish between liberty and license, in fact they continually and persistently confound the two terms. Those people assume that liberal corporation laws grant them the privilege to do extraordinary acts and hold them immune from the consequences of these acts. They do collectively what they would not, and could not do indi- vidually, and transcend the laws of justice and morality. Herein lies the weakness of the so-called liberal laws — a weak- ness which will in time prove fatal. True liberty has as its boundary line that point where the rights of others begin, and liberal laws, properly speaking, are those which recognize and protect the rights of all who come within their jurisdiction. In this sense the corporation laws of California are more lib- eral than those reviewed in the preceding chapters and are more equitable than most of the states. There are no better corporation laws under which to organize. They protect the creditor, as well as the debtor, and in this the corporation is benefited by having a better credit standing. In other words, they are fair to every one, and no honest man can object to fair dealing. The right to participate in the profits implies a duty to share in the losses. 129. The following is a summary of these laws which af- fect corporations in general : Minimum Number. 130. Under an Act approved March 20, 1905, three or more persons may, by voluntary association, form a private corporation. A majority of such persons must be residents of California. .54 COEPORATION ACCOUNTING Purposes. 131. Corporations may be formed for the purpose of ■carrying on any lawful business that individuals may engage in. Corporate Existence. 132. A corporation being a creature of the law, its life, as well as its acts, is regulated by law, hence the maximum limit of corporate existence is fixed at 50 years. Corporations may be formed to exist for a lesser period — the time being fixed by the Articles of Incorporation — but such corporations at any time prior to the expiration of their charters, may renew or extend the same up to the maximum limit of 50 years, by a vote of two-thirds of the stock, at a meeting of stockholders expressly called for that purpose by the directors, or by the written assent of stockholders holding two-thirds of the cap- ital stock. Articles of Incorporation. 133. The articles of incorporation must set forth : 1. The name of the incorporation. 2. The purpose for which it is formed. 3. The place where its principal business is to be trans- acted. 4. The term for which it is to exist, not exceeding 50 years. 5. The number of its directors or trustees, which shall not be less than three, and the names and residences of those who are appointed for the first year ; (special provisions apply to the directorate of fraternal, benevolent, charitable and so- cial organizations. Provision is also made to increase or di- minish the number of directors of a corporation for profit, by a vote of "a majority of the stockholders of the corporation." .The Act does not say a majority of the stock in interest, but it may be presumed that such is the intention, and while the minimum number of directors is fixed at three, it does not appear that the maximum number has been fixed.) 6. The amount of the capital stock and the number of shares into which it is divided. 7. If there be a capital stock, the amount actually sub- scribed and by whom. Acknowledging Articles. 134. Articles must be signed and duly acknowledged by three or more persons, a majority of whom must be residents of California. AND COEPOKATION LAW 55^ 134. (a) If a corporation has acquired property in any county other than the county in which its principal business is located it must file a copy of its articles of incorporation in such county or counties. Failure to do so is fraught with, severe penalties. Amending Articles. 135. If articles of incorporation are found defective or in- sufficient they may be amended by a vote, or the written as- sent, of two-thirds of the stock in interest. Amended articles must be attested and filed same as original articles. The cap- ital stock can not be increased or diminished by amending the articles, but only by compliance with the provisions of the code applicable thereto. Organization. 136. Corporations must organize and commence business or construction work within one year from date of incorpor- ation. Adopting By-Laws. 137. A code of by-laws must be adopted within one month after filing articles of incorporation. These by-laws must be consistent with the state laws ; that is to say, the by-laws can- not legalize any act which the State laws prohibit, nor can they enlarge the powers granted by the State laws, and not even the full consent of all of the stockholders can work a change in this respect. A majority vote of all the subscribers is necessary to the adoption of by-laws if a meeting is called for that purpose, and two weeks' notice of such meeting must be given by advertisement; however, the written consent of the holders of two-thirds of the subscribed stock is effectual, and obviates the necessity of holding a special meeting. Provisions of By-Laws. 138. Sec. 303. Civil Code. A corporation may, by its by-laws, where no other provision is specially made, provide for: 1. The time, place and manner of conducting its meetings and may dispense with notice of all regular meetings of stock- holders and directors. 2. The number of stockholders or members constituting a- quorum. 3. The mode of voting by proxy. -56 CORPORATION ACCOUNTING 4. The qualifications and duties of directors and also the time of their annual election, and the mode and manner of giving notice thereof. 5. The compensation and duties of officers. 6. The manner of election and tenure of office of all of- ficers other than directors. 7. Suitable penalties for violations of by-laws, not ex- ceeding, in any case, one hundred dollars for any one offense. 8. The newspaper in which all notices of the meetings of stockholders or board of directors, notice of which is required, shall be published * * * 139. These provisions are not mandatory. They may be made by the by-laws, but it is not required that they must be made. They are in the nature of privileges granted, rather than duties imposed. By-Laws Certified, Copied, Amended, Repealed. 140. The by-laws must be certified to by a majority of the directors and Secretary, and copied into a book to be known as the "book of by-laws" and this book must be open to public inspection. By-laws may be repealed or amended in any particular, or new by-laws adopted by a two-thirds vote of the subscribed stock at a meeting called for that pur- pose, or by the written consent of the holders of two-thirds of the stock without holding of such meeting; or, by a sim- ilar vote the power to alter the by-laws as above may be delegated to the board of directors, which power may again be revoked by the same vote. To be effectual, all amendments and repeals must be stated in the ''book of by-laws." ''Until copied or stated as heretofore required, no by-law, nor any amendment or repeal thereof, can be enforced against any person, other than the corporation, not having actual notice ■thereof." 141. This last provision is intended to prevent the corpor- ation escaping responsibility for the failure of any of its offi- cers in neglecting their duty in this respect. Directors' Election. 142. Directors must be elected annually and if the by-laws fail to fix the date of election it must be held on the first Tuesday in June of each year. Powers and Qualifications. 143. The corporate powers shall be exercised and the property and business affairs managed, controlled, and con- AND COEPORATION LAW 57 ducted by the board of directors.* In business corporations this board shall not consist of less than three directors, and these directors must be stockholders, holding at least so much stock as the by-laws have fixed as the minimum a director may own. A quorum of directors is sufficient to the trans- action of any business and a majority vote of a quorum of directors binds the corporation. 144. Where the by-laws do not provide for the filling of vacancies in the board, such vacancies must be filled by the board itself; that is, the board may not continue to transact business with a short board, but must complete the required number by appointment. Cumulative Voting. 145. All elections must be by ballot, and votes may be C3.st either in person or by proxy. Cumulative voting is per- mitted, and the right to cumulate votes can not be denied. This applies to all corporations electing directors in this State, whether chartered tmder California laws or other State laws. A majority of the subscribed stock must be represented at all stockholders' meetings where there is voting done, otherwise the meeting must be adjourned from time to time until a ma- jority of the subscribed stock is present. The Secretary must record the adjournment and the reason therefor. To be en- titled to vote at any election one must be a stockholder of record for at least 10 days prior to the election. To ignore the above is to make void the election, and on the petition of any aggrieved stockholder the Superior Court will set the same aside. Minors, Incompetents and Decedents. 146. The stock of a minor or an incompetent may be rep- resented by a guardian ; of a deceased person by an Executor or Administrator. Postponing Election. 147. If an election is not held on the day fixed by law or hy the by-laws, it may be held on a day adjourned to or or- dered by the directors, and if the directors fail to hold or fix a date for election, a meeting may be called by the stockholders for that purpose. Voting By Proxy. 148. The legislature of 1905 added the following new sec- tion to the code : *See paragraph 73 and foot note thereto. 58 COEPOEATION ACCOUNTINa Sec. 321 (b). At all meetings of stockholders of corpora- tions organized under the laws of this state, or in the case of corporations having no capital stock, then at all meetings of the members of such corporations, only the stockholders or members actually present shall be entitled to vote on any pro- position, including the election of directors and other officers of the corporation, unless proxies for absent or non-attending stockholders or members shall be held by some persons pres- ent at such meeting and shall be executed in accordance with the provisions of this Section. Every such proxy must be exe- cuted in writing by the member or stockholder himself, or by his duly authorized attorney. No proxy heretofore given or made shall be valid after the expiration of eleven months from the passage of this act, unless the member or stockholder exe- cuting it shall have specified therein the length of time for which such proxy is to continue in force, which must be for a limited period, and in no case to exceed seven years from the date of the execution of such proxy. No proxy hereafter to be given or made shall be valid after the expiration of eleven months from the date of its execution unless the member or stockholder executing it shall have specified therein the length of time for which such proxy is to continue in force, which must be for some limited period, and in no case to exceed seven years from the date of the execution of such proxy. Every proxy shall be revocable at the pleasure of the person executing it; but a corporation having no capital stock may prescribe in its by-laws the persons who may act as proxies for members, and the length of time for which such proxies may be executed. Removing Directors. 149. The Board of Directors may be removed from office by a vote representing two-thirds of the stock, such vote must be cast at a general meeting called for this especial purpose. Notice of such a meeting must cite the time, place and purpose of same ; and it may be called by the president, a majority of the directors, or by stockholders holding one-half the sub- scribed stock. If the board is removed from office at this meet- ing a new board may be elected at the same meeting; but less than the whole board may not be removed by a two-thirds vote — the' reason being that a minority of the stockholders may be represented on the board by the system of cumulative voting, and a minority representative elected by one-third of the stock should not be removed by the vote of the other two- thirds." AND COEPO'RATION LAW 59 Dividends From Surplus Only. 150. Directors of business corporations must not pay dividends except from the surplus profits of the business. This would imply that the profits must first be ascertained before a dividend may be paid, and that the inflation of assets for the purpose of creating a surplus out of which to pay divi- dends would be unlawful, as such dividends would, in point of fact, amount to a distribution of the capital, instead of a distribution of the profits arising from the business. Directors Liability. 151. Directors must not create any indebtedness in excess of the subscribed capital, nor must they divide or withdraw any part of the capital stock, nor reduce nor increase the same except as provided for in the code. Directors who ignore these inhibitions shall be jointly and severally liable both to the corporation and its creditors to the full amount of the debt contracted, capital divided or withdrawn, or stock reduced; and such liability shall not outlaw. Dissenting directors may be relieved by having their dissent entered on the minutes of the meeting, or if they were absent they shall not be liable for acts committed in their absence and without their knoweldge. 152. The above inhibitions do not apply when a corpora- tion in process of dissolution has paid all its debts' and dis- tributes the remainder of its capital among its stockholders. Place of Meeting. 153. All meetings of the board of directors and of the stockholders must be held at the principal place of business or office of the corporation. While this is the dictum laid down in Section 319 of the Civil Code, it is believed that where the accommodations are insufficient, the meeting, after it is called to order, may adjourn to a more suitable meeting place. Special Meetings. 154. When the by-laws do not provide for regular meet- ings of the board, or the calling of special meetings, all meet- ings must be called by special notice in writing, given each director by the Secretary on the order of the president, or in his absence on the order of two directors. Stockholders Liability. 155. "Each stockholder of a corporation is individually- and personally liable for such proportion of all its debts and. 60 COEPOEATION ACCOUNTING liabilities contracted or incurred during the time he was a stockholder as the amount of stock or shares owned by him bears to the whole of the subscribed capital stock or shares of the corporation." A transfer of stock does not relieve the transferrer from the liability attached to his stock at the time of making the transfer and suit may be maintained against him for his proportion of the corporation's debts; but his liability ceases as to future debts as soon as the transfer of his stock is recorded; but it is important to him to see that the transfer is of record on the books of the corporation. "The liability of each stockholder of a corporation formed under the laws of any other state or territory of the United States, or of any foreign country, and doing business within this state, is the same as the liability of a stockholder of a corporation created under the constitution and laws of this state." This is in keeping with the doctrine that the laws of a state do not exist, and can not be enforced outside its own domestic terri- tory ; and no matter what privileges or limitations a New Jer- sey or Delaware corporation is granted or limted by, they do not apply outside its own domestic territory. When Liability Ceases. 156. When a stockholder transfers his stock he parts with all his interests in the company, and the party to whom he transfers his stock, at once, or at least when the transfer is re- recorded on the books of the company, becomes a stockholder, but while he parts with all his interests as a stockholder, he does not part with all his responsibilities as such. If the com- pany is in debt at the time he transfers his stock, he is Hable for his proportion of the debt contracted while he was a stock- holder, and no transfer of stock relieves him of this liability ; if, however, he pays his proportion of the debt, he is relieved from all further liability. The term stockholder, as used in Section 322 of the Civil Code of California, applies not only to such persons as appear by the books of a corporation to be such, but to all equitable owners of stock whether or not they appear on the books of a corporation as stockholders ; also to every person who purchases stock in the name of a minor, as long as such person remains a minor, also to Guardians and Trustees who voluntarily invest Trust Funds in stocks. Trust Funds so invested shall not be liable to the provisions of this section by reason of such investment, nor shall the person for whom the investment was made, be liable until he becomes competent and able to control the same, the liability of the Guardian or Trustee continuing until that period. Stock held as collateral security, or by a Trustee, does not make the AND COEPOEATION LAW 61 holder thereof a stockholder in the meaning of this section, except as above provided. 157. The wisdom and justice of the above provisions are so apparent as not to need any comment. That portion which relates to equitable owners is both timely and significant. It aims a blow at those venal and cowardly mortals who are willing to reap the rewards of success achieved by others, but have not the courage nor the honesty to shoulder their share of a failure. Equitable owners are owners in fact, and they, and their dummies, are liable before the law. Issuing Certificates. 158. When stock has been fully paid up the president and secretary must issue certificates therefor, or certificates may be issued under restriction and regulation of the by-laws be- fore the full amount is paid thereon, "but any certificate issued prior to full payment must show on its face what amount has been paid thereon." Certificates must not be issued excepli for money paid, service actually rendered or property actually received. Stock issued contrary to this shall be void, without rights of voting or dividends, and directors or officers issuing it shall be liable. Transfer of Stock. 159. With the exception of corporations organized for supplying water for irrigation or domestic purposes, which corporations may provide in their by-laws that the shares of stock shall be appurtenant to the land irrigated and not sep- arately transferable, the shares of stock in all other corpora- tions are personal property and may be transferred by en- dorsement and delivery. Endorsement may be made by the owner, authorized agent, or attorney; but such transfer shall be valid only as between the parties thereto until the transfer is' entered on the books of the corporation *'so as to show the names of the parties by whom and to whom transferred, the number of the certificate, the number or designations of the shares and the date of transfer."* If the party receiving stock by transfer would acquire full stockholders rights he must see to it that the stock is transferred in his name on the books of the corporation. If the party disposing of his stock would rid himself of responsibilities arising out of the future he must seQ to it that his name is removed from the records as a stock- holder; that is, he or his legal representative should go to *See paragraphs 260 and 261. 62 COEPOKATION ACCOUNTINa the office of the company and sign the transfer book, sur- render the old certificate and direct the re-issue of the new. Married Woman's Rights. i6o. A married woman has the same rights as a femme sole in the ownership, voting and transfer of stock. While this would be the logical consequence of the declaration of personal property rights in the ownership of corporation stock, the legislature of 1905 emphasized it by amending section 325 so as to leave no room for doubt on this subject. A married woman can own, transfer, vote in person or by proxy, and re- ceive dividends without the signature of her husband. Must Transfer Stock. 161. If the officers of a corporation refuse to recognize a transfer and will not register the transferee as a stockholder on the books of the corporation he may sue for the value of the stock at the time transfer was refused and obtain judgment for this and the legal rate of interest (7 per cent) up to the time of settlement. The lawful holder of stock may also bring suit in the Superior Court to compel his recognition as such by the corporation ; that is, the entry of his name on the books as a stockholder and the issuance to him of a certificate. Non-Resident Owners. 162. When the shares of stock of a corporation are owned by a person residing outside the State, the president, secre- tary or Directors before making the transfer on the books, may require from the attorney or agent of the non-resident owner, or from the person claiming under the transfer, an af- fidavit or other evidence that said non-resident owner was alive at the time of the transfer, and if such evidence be not furnished, an indemnity bond with two sureties satisfactory to the officers of the corporation, or if not satisfactory, then one approved by a judge of the Superior Court of the County in which the principal office of the corporation is, conditioned to protect the corporation from all liability in case the death of such non-resident owner occurs before the transfer is made,, and if such affidavit, or evidence, or bond be' not furnished, neither the corporation nor any of its officers shall be liable for refusal to make said transfer. Records to Be Kept. 163. Sec. 377 C. C. All corporations for profit are re- quired to keep a record of all their business transactions; a AND CORPOEATION LAW 63 journal of all meetings of their directors, members or stock- holders, with the time and place of holding the same, whether regular or special, and if special, its object, how authorized, and the notice thereof given. The record must embrace every act done or ordered to be done; who were present, and who absent; and, if requested by any director, member or stock- holder, the time shall be noted when he entered the meeting or obtained leave of absence therefrom. On a similar request the ayes and noes must be given on any proposition, and a record thereof made. On similar request, the protest of any, director, member or stockholder, to any action or proposed action, must be entered in full — all such records to be open to the inspection of any director, member or stockholder, or cred- itor of the corporation. 164. This section is given in full because of its import- ance. It is clear, unequivocal and pregnant with timely sug- gestion. It should be read over and over by those who are in the habit of calling, conducting, and recording the proceed- ings of meetings in an easy-going slip-shod way. It is essen- tial that the record state the object of a special meeting, whether the meeting was authorized by the president, a por- tion of the directors, or a sufficiency of the stockholders ; and whether the notice given was personal, by mail, or by adver- tisement ; or whether notice was waived in writing. The rec- ord of those absent and present is to fix responsibility and to relieve from liability. The same is true of recording the time of entry and leaving by members of the board, of recording the ayes and noes and protests — all of which are very impor- tant when action is taken involving the personal liability of members of the board. Directors, stockholders and creditors should observe their rights and duties in this matter. 165. Sec. 378. In addition to the records required to be kept by the preceding section, corporations for profit must keep a book, to be known as the "Stock and Transfer Book" in which must be kept a record of all stock, the names of the stockholders or members, alphabetically arranged ; instalments paid or unpaid; assessments levied and paid or unpaid; a state- ment of every alienation, sale, or transfer of stock made; the date thereof, and by and to whom ; and all such records as the by-laws prescribe. Corporations for religious and benevo- lent purposes must provide in their by-laws for such records to be kept as may be necessary. Such ''Stock and Transfer: Book" must be kept open to the inspection of any stockholder, member or creditor. 64 COEPOEATION ACCOUNTING Examination of Corporations. i66. The Attorney General, or District Attorney, under the direction of the Governor, may examine into the affairs of any corporation, the results of such examination to be laid before the legislature . Right here is where the services of the public accountant are important, both on account of his tech- nical knowledge, and impartiality. The legislature may also initiate the examination at any time, with powers to make it searching and complete. Assessments. 167. Sec. 331 C. C. The directors of any corporation formed or existing under the laws of this State, after one- fourth of its capital stock has been subscribed, may, for the purpose of paying expenses, conducting business, or paying debts, levy and collect assessments upon the subscribed cap- ital stock thereof, in the manner and form, and to the extent provided therein. 168. Sec. 332. No one assessment must exceed ten per cent of the amount of the capital stock named in the articles of incorporation, except in the cases in this section otherwise provided for, as follows : 1. If the whole capital of a corporation has not been paid up, and the corporation is unable to meet its liabilities or to satisfy the claims of its creditors, the assessment may be for the full amount unpaid upon the capital stock; or if a less amount is sufficient, then it may be for such a percentage as will raise that amount. 2. The directors of railroad corporations may assess the capital stock in instalments of not more than ten per cent pen month, unless in the articles of corporation it is otherwise pro- vided. 3. The directors of fire or marine insurance corporations may assess such percentage of the capital stock as they deem proper. 169. Sec. 333. No assessment must be levied while any portion of a previous one remains unpaid ; unless : 1. The power of the corporation has been exercised in accordance with the provisions of this article for the purpose' of collecting such previous assessment; 2. The collection of the previous assessment has beei> enjoined; or 3. The assessment falls within the provisions of either the first, second or third subdivision of Section 332. AND COEPOEATION LAW 65 170. Sec. 334. Every order levying an assessment must specify the amount thereof, when, to whom, and where pay- able; fix a day, subsequent to the full term of publication of the assessment notice, on which the unpaid assessments shall be delinquent, not less than thirty nor more than sixty days from the time of making the order levying the assessment; and a day for the sale of delinquent stock, not less than fifteen nor more than sixty days from the day the stock is declared delinquent. 171. Sec. 335. Upon the making of the order, the secre- tary shall cause to be published a notice thereof in the follow- ing form, which is substantially the form given in the Code: Notice of Assessment. 172. The Company, a corporation or- ganized under the laws of California, principal place of busi- ness or office County, California. Location of property County, California. Notice is hereby given that at a meeting of the Board of Directors of said company, held on the day of I .... , an assessment, No of Dollars and cents ( ) per share was levied upon the subscribed capital stock of the said corporation, pa3^able immediately to the Secretary (or Treas- urer) at his office. California. Any stock upon which this assessment shall remain unpaid on ,1 , will be delinquent and advertised for sale at public auction, and unless payment is made before, will be sold on ,1 , at o'clock M., to pay the delinquent assessment, together with costs of advertising and expenses of sale. Secretary (Treasurer) Office of the Company Dated i, N. B. This form is good in any State. 173. Sec. 336. The notice must be personally served upon each stockholder, or, in lieu of personal service, must be sent through the mail, addressed to each stockholder at his place of residence, if known, and if not known, at the place where the principal office of the corporation is situated, and be pub- lished once a week, for four successive weeks, in some news- paper of general circulation and devoted to the publication of general news, published at the place designated in the articles 66 COEPOEATION ACCOUNTING of incorporation as the principal place of business, and also in some newspaper published in the county in which the works' of the corporation are situated, if a paper be published therein. If the works of the corporation are not within a state or terri- tory of the United States, publication in a paper of the place where they are situated is not necessary. If there be no news- paper published at the place designated as the principal place of business of the corporation, then the publication must be made in some other newspaper of the county, if there be one, and if there be none, then in a newspaper published in an ad- joining county. 174. Sec. 337. If any portion of the assessment mentioned in the notice remains unpaid on the day specified therein for declaring the stock delinquent, the secretary must, unless otherwise ordered by the Board of Directors, cause to be pub- lished in the same papers in which the notice hereinbefore pro- vided for shall have been published, a notice substantially in the following form, which is the form outlined by the Code : Delinquent Sale Notice. 175 Company. Principal place of business County, California. Location of Property, County, Cal. Notice. — There is delinquent on the following described stock on account of assessment No levied on ,1 , the several amounts set opposite the names of the respective shareholders as follows: Names No. of Cert. No. of Shares Amount Dollars Cents And in accordance with law and an order of the Board of Directors made on the day of , I , so many shares of each parcel of said stock as shall be necessary will be sold at public aution at on I AND COEPORATION LAW 67 at o'clock M., to pay the deinquent assessment, to- gether with costs of advertising and expenses of sale. Office of the Company Secretary (Treasurer) N. B. This form also good in any state. 176. Sec. 338. The notice must specify every certificate of stock, the number of shares it represents, and the amount due thereon, except where the certificates may not have been issued to parties entitled thereto, in which case the number of shares it represents, and the amount due thereon, except where certificates may not have been issued to parties entitled thereto, in which case the number of shares and amount due thereon, together with the fact that the certificates for such shares have not been issued, must be stated. 177. Sec. 339. The notice, when published in a daily pa- per, must be published for ten days, excluding Sundays and holidays, previous to the day of sale. When published in a weekly paper, it must be published in each issue for two weeks previous to the day of sale. The first publication of all delin- quent sales must be at least fifteen days prior to the day of sale. 178. Sec. 340. By the publication of the notice, the cor- poration acquires jurisdiction to sell and convey a perfect title to all of the stock described in the notice of sale upon which any portion of the assessment or costs of advertising remains unpaid at the hour appointed for the sale, but must sell no more of such stock than is necessary to pay the assessments due and costs of sale. 179. Sec. 341. Cki the day, at the place, and at the time appointed in the notice of sale, the secretary must, unless otherwise ordered by the directors, sell or cause to be sold at public auction, to the highest bidder for cash, so many shares of each parcel of described stock as may be necessary to pay the assessment and charges thereon, according to the terms of sale. If payment is made before the time fixed for sale, the party paying is only required to pay the actual cost of adver- tising, in addition to the assessment. 180. Sec. 342. The person offering at such sale to pay the assessment and cost for the smallest number of shares or fraction of a share is the highest bidder, and the stock pur- chased must be transferred to him on the stock books of the corporation, on payment of the assessment and costs. 181. Sec. 343. If, at the sale of the stock, no bidder offers the amount of the assessments and costs and charges due, the 68 COEPOEATION ACCOUNTING same may be bid in and purchased by the corporation, through the secretary, president, or any director thereof, at the amount of the assessments, costs, and charges' due; and the amount of the assessments, costs and charges must be credited as paid in full on the books of the corporation, and entry of the trans- fer of the stock to the corporation must be made on the books, thereof. While the stock remains the property of the corpor- ation it is not assessable, nor must any dividends be declared thereon; but all assessments and dividends must be appor- tioned upon the stock held by the stockholders of the corpor- ation. 182. Sec. 344. All purchases of its own stock made by any corporation vest the legal title to the same in the corpora- tion; and the stock so purchased is held subject to the control of the stockholders, w^ho may make such disposition of the same as they deem fit, in accordance with the by-laws of the corporation or vote of a majority of all the remaining shares. Whenever any portion of the capital stock of a corporation is. held by the corporation by purchase, a majority of the remain- ing shares is a majority of the stock for all purposes of election or voting on any question at a stockholders' meeting. 183. Sec. 345. The dates fixed in any notice of assess- ment or notice of delinquent sale, published according to the provisions hereof, may be extended from time to time for not more than thirty days, by order of the directors, entered on the records of the corporation ; but no order extending the time for the performance of any act specified in any notice is effectual unless notice of such extension or assessment is appended to and published with the notice to which the order relates. 184. Sec. 346. No assessment is invalidated by a failure to make publication of the notice hereinbefore provided for^ nor by the non-performance of any act required in order to enforce the payment of the same; but in case of any substan- tial error or omissions in the course of proceedings for collec- tion, all previous proceedings, except the levying of the as- sessment are void, and publication must be begun anew. 185. Sec. 347. No action must be sustained to recover stock sold for delinquent assessments, upon the ground of ir- regularity in the assessment, irregularity or defect of the notice of sale or irregularity in the sale, imless the party seeking to maintain such action first pays or tenders to the corporation,. or the party holding the stock sold, the sum for which the same was sold, together with all subsequent assessments which may have been paid thereon and interest on such sums from AND COEPORATION LAW 69 the time they were paid ; and no such action must be sustained unless the same is commenced by the fihng of a complaint and the issuing of a summons thereon within six months after such sale was made. i86. Sec. 348. The publication of notice required by this article may be proved by the affidavit of the printer, foreman, or principal clerk of the newspaper in which the same was pub- lished ; and the affidavit of the secretary or auctioneer is prima facie evidence of the time and place of sale, of the quantity and particular description of the stock sold, and to whom, and for what price, and of the fact of the purchase money being paid. The affidavits must be filed in the office of the corpora- tion, and copies of the same, certified by the secretary thereof,, are prima facie evidence of the facts therein stated. Certifi- cates, signed by the secretary and under the seal of the corpor- ation, are prima facie evidence of the contents theretof. 187. Sec. 349. On the day specified for declaring the stock delinquent, or at any time subsequent thereto and before the sale of the delinquent stock, the Board of Directors may elect to waive further proceedings under this chapter for the collection of delinquent assessments, or any part or portion thereof, and may elect to proceed by action to recover the amount of the assessment and the cost and expenses already incurred, or any part or portion thereof. General Corporate Powers. 188. Sec. 354. Every corporation, as such, has power: 1. Of succession by its corporate name for the period lim- ited; and when no period is limited perpetually; 2. To sue and be sued in any court; 3. To make and use a common seal and alter the same at pleasure ; 4. To purchase, hold, and convey such real estate and per- sonal estate as the purposes of the corporation may require; not exceeding the amount limited in this part; 5. To appoint such subordinate officers and agents as the. business of the corporation may require, and to allow them suitable compensation ; 6. To make by-laws, not inconsistent with any existing law, for the management of its property, the regulation of its affairs, and for the transfer of its stock ; 7. To admit stockholders or members, and to sell their stock or shares for the payment of assessments or instalments ,*; 8. To enter into any obligations or contracts essential ta- 70 COEPOEATION ACCOUNTING the transaction of its ordinary affairs, or for the purposes of the corporation. 189. While these powers are extensive they are all the powers granted and no other powers may be assumed except such as are necessarily incidental to the powers and privileges so granted. Increasing Capital Stock. 190. Every corporation may increase its capital stock by a vote representing at least two-thirds of the subscribed or outstanding capital. This vote must be had at a special meet- ing, authorized, advertised, and noticed, in accordance with the provisions of the Civil Code governing such increase. Decrease of Capital Stock. 191. The capital stock may be decreased by the same vote and in the same manner as an increase is brought about; but in no case can the capital stock be reduced to a lower amount than the company indebtedness. Bonded Debts and Mortgages. 192. An original bonded indebtedness or an increase of bonded indebtedness may be created by a vote representing two-thirds of the outstanding stock at a meeting called exactly as a meeting to increase or decrease stock is called ; or call and publication may be dispensed with by the directors unani- mously passing a resolution, either at a regular or special meeting, to increase or decrease the capital stock or bonded indebtedness, and the written assent of two-thirds of the stock in interest, and proper service of a copy of said resolution on each and every stockholder mailed to his last known address, and if not known, to the place where the principal office of the company is located. Consolidated Bond Issue. 193. "Any two or more corporations may by a separate compliance, by each corporation, with the provisions of this section (359) applicable in the premises in respect to creating ■or increasing bonded indebtedness ; create or increase a con- solidated bonded indebtedness of such corporations, to be bind- ing jointly and severally on such corporations, and which may be secured by a consolidated mortgage or deed of trust exe- cuted by all such corporations, mortgaging or conveying in AND COEPORATION LAW 71: trust all or any of the properties of all such corporations, ac- quired or to be acquired." Costs of Incorporating. 194. The cost of filing articles of incorporation depends upon the amount of capital stock. The following is' the schedule of fees : Up to and including $ 25,000 $15. Up to and including 75,000 25. Up to and including 200,000 50. Up to and including 500,000 75. Up to and including 1,000,000 100. Over $1,000,000 an additional fee of $50 for every additional $500,000 or fraction thereof. Filing articles of a corporation having no capital stock $5. Filing articles of Co-operative Associations $15. For recording articles of incorporation 20 cents per folio (100 words). For issuing certificate of corporation $3. License Tax. 195. A license tax of $10 a year is imposed on every cor- poration doing business in this state, whether existing or to be hereafter created, also on all foreign corporations. Failure to pay this license by a domestic corporation will result in the forfeiture of its charter; and if a foreign corporation fails to pay said license it shall forfeit its rights to do business' in this state. 196. This applies only to corporations for profit and does not affect educational, religious, charitable, or scientific cor- porations. Miscellaneous Points. 197. Corporations may change their name, their place of business, and the par value of their shares, may sell foreign concessions, may buy or sell franchises, and may disincorpo- rate or dissolve before the expiration of their charters. Dissolution. 198. Sec. 400. Unless other persons are appointed by the Court, the directors or managers' of the affairs of a corporation at the time of its dissolution are trustees of the creditors and 72 COEPOEATION ACCOUNTING Stockholders or members of the corporation dissolved, and have full power to settle the affairs of the corporation. Foreign Corporations. 199. Every foreign corporation must within 40 days after commencing business in this State file in the office of the Sec- retary of State the name of some person residing within this state upon whom legal process may be served. Such filing entitles a foreign corporation to the benefit of the laws limit- ing the time for the commencement of civil action, and no such corporation can maintain or defend any action in any court un- til it has first complied with the above provision. A foreign corporation must also file in the office of the Secretary of State a certified copy of its articles of incorporation, or charter, or of the act creating it, and also in the office of the County Clerk w^here its principal business is transacted, and also the county where it owns its property. The fees for filing the above cer- tified copies shall be the same as are paid by domestic cor- porations, and if the above filing is not done as required the ofifending corporation shall be subject to a fine of $500 and in addition it shall be debarred of any rights to maintain suit or action in any court of this state. Review. 200. The foregoing is a rather comprehensive review of the general corporation laws of California — that is, the powers', privileges, restriction, and inhibitions are generic in their ap- plication to all corporations. Special provisions apply to, regu- late and control quasi-specific corporations, such as Railroad, Telegraph, Street Railway, Water, Gas, Insurance, Banking, Mining, etc. For instance, mining corporations may establish agencies outside the state for the purpose of selling and trans- ferring stock. Certain contiguous mining companies may con- solidate. Railroad companies may merge or consolidate and so on; but it is beyond the scope of this work to attempt to review them all. Interest Rates. 220 (a) The legal rate of interest is' 7% ; by contract, any rate. No grace allowed. Corporations may not plead usury. CHAPTER VI. Details of Organization. — Articles of Incorporation and By-Laws in Extended Form. — Preliminary Meeting. — Organ- ization Meeting. — Directors' Meeting. — Minutes in Extenso. — Ballots, Proxies, Tally Sheets, Stock Lists, Subscription Lists, Certificates, Scrip Certificates, Contracts, Transfer Agents, Transfer Register, Etc., Etc. — Sixty-five Important Points About Organization. 201. The reader or student who has read the preceding chapters should have a good general idea of the nature, scope and purposes of a corporation ; and if he has any intention of forming a corporation he will be able to discriminate in the matter of selecting, say one of the four states whose laws have been reviewed, under which to incorporate. H'e will have ob- served a great similarity in some respects, certain general prin- ciples which are germane to all, and certain other principles and policies which are predominant and seductive in one alto- gether missing in another. He must work out his plan care- fully, with a view to the acquiring of certain privileges' and the guarding against certain dangers, and find out into which his plan will fit the best. This is the desideratum ! This the test of merit ! Evolving a Corporation. 202. The idea of organizing a particular corporation must originate with some one individual — the plan may be the pro- duct of the same mind or of several minds ; however, the man with the idea broaches his proposition to some of his friends whom he thinks best fitted and most likely to join him and aid him in his enterprise. Having informally discussed the feasibiHty of the proposed enterprise, whatever it may be (and it can be any business that an individual is lawfully permitted to engage in), a formal meeting is called for the purpose of shaping and defining the plans of corporate organization, de- ciding upon its purposes, choosing directors for the first year, -fixing the amount and kinds of capital stock, the number of 74 CORPOEATION ACCOUNTING shares into which it shall be divided, the par value of each, and the manner of payment therefor, all of which shall be stated in its certificate or articles of incorporation. Dummy Incorporators. 203 (a) Many of the largest corporations in the United States have been organized by dummies. The United States Steel Corporation is a conspicuous example. This plan is perfectly legal, and quite frequently it is necessary as well as convenient. Generally, attorneys' clerks are selected for this purpose. The least number of incorporators allowed by the law, are permitted to subscribe for the smallest number of shares necessary to bring the corporation into being. The de- tails of incorporation and organization are looked after by the lawyers, and when all the details are complete, and the proper times arrives, the real promoters put in their subscriptions, the dummy directors resign, transfer their stock and get out; a new Board of Directors is elected, and, per saltum, the lowly- born corporation takes its place among the great institutions of the country. The justification for this is, that sometimes the interested parties are too busily engaged in other matters to give the necessary time to the preliminary details ; or they may be absent; or for some reason they do not wish it to be known who is fathering a certain enterprise until they are ready to come before the public equipped and organized. 203. At the first meeting a temporary chairman and sec- retary is chosen, and sometimes a temporary treasurer, to whom the incorporators pay a certain amount each to defray the expenses of incorporation, though this last step is not re- quired by law in ordinary corporations. A minute of this meeting is kept and may be substantially as follows : Preliminary Steps for Organizing the Gold and Silver Mining Company. Fresno, Cal., January i, 1905. 204. Pursuant to mutual understanding and agreement, a meeting was this day held at 1842 Tulare street for the pur- pose of organizing a corporation to engage in gold and silver mining. Following are the names of the persons present: Wm. Glass, C. H. Rowell, Geo. Babcock, M. S. Hutchison and G. W. Lister. Wm. Glass was chosen as chairman and C. H. Rowell acted as secretary. AND CORPOEATION LAW 75 A general discussion ensued regarding the best mode of procedure, the number and par value of the shares, the prac- ticability of the proposition and the prospects of its success ; after which the following resolution was offered by Mr. Bab- cock, and seconded by Mr. Hutchison : Resolved, i. That the business of the proposed corpora- tion shall be to purchase, bond, locate and operate gold and silver mines, and to do and engage in such other business as shall be conducive to the best and most economical operation of the same. 2. That the corporate name of the company shall be "The Gold and Silver Mining Company." 3. That its principal place of business shall be at Fresno, California, and the location of its works and field of operations anywhere within the State. 4. That the capital stock shall be $50,000 common stock, divided into 2500 shares of $20 each. Resolution adopted. On motion of Mr. Babcock, seconded by Mr. Lester, the chairman was instructed to have prepared for a meeting to be held one week hence a draft of "Articles of Incorporation," and also a subscription book or list. Motion carried. On motion duly made and carried the meeting adjourned. C. H. Rowell, Secretary Pro Tern. Fresno, Cal., January 8, 1905. 205. Pursuant to motion made at last meeting, a further meeting was held this day for the purpose of adopting articles' of incorporation, and signing the subscription book, of the Gold and Silver Mining Co. The foregoing named gentlemen were present : Wm. Glass, C. H, Rowell, Geo. Babcock, M. S. Hutchison and G. W. Lister. Minutes of last meeting were read and approved. Mr. Glass, in the chair, announced that acting on instruc- tions received at the last meeting he had prepared "Articles of Incorporation," and also secured a Subscription Book. The secretary then read the "Articles of Incorporation," and the same being satisfactory, on motion of Mr. Hutchison, seconded by Mr. Lister, they were approved as read. The subscription book was then signed as follows: Wm. Glass 20 shares. C. H. Rowell 20 shares. Geo. Babcock 20 shares. M. S. Hutchison 20 shares. G. W. Lister 20 shares. On motion, the meeting adjourned. 76 OORPOEATION ACCOUNTING 206. It would be well to preserve the minutes of the pre- liminary meetings as a part of the records of the company, though their preservation is not necessary after a permanent organization is effected and the company commences business under its charter. It would be advisable not to have these minutes appear in the regular minute book of the corporation, after its organization. What Articles of Incorporation Must Contain. I. The name of the corporation. • 2. The purpose for which it is formed. 3. The location of its principal office or the place where its principal business is' to be transacted. 4. The term for which it is to exist if not perpetual. 5. The number and classification of its directors (where there is more than one class), together with the names, and residences of those who are appointed for the first year. 6. The amount and kinds of the capital stock (if more than one kind), and the number of shares into which it is di- vided. 7. If there is a capital stock, the amount actually sub- scribed and by whom. 8. The names of the incorporators and the amount of their subscriptions, etc. 208. There are many other things that articles of incor- poration may contain, as previously pointed out, if they are to form part of the corporation's powers and privileges. Specimen Forms of Articles. 209. Following is a copy of articles of incorporation which suggest the form and scope of such an instrument. They are specific in form but general in character, and while many things are omitted that might be included under the New Jer- sey provision for instance, they may serve as a basis for a more enlarged and modified form conformative to the requirements and purposes of any ordinary corporation — this is all that is aimed at. For varied forms see "The New Secretary's Manual by W. A. Carney." For New Jersey forms, see "Dill on New Jersey Corporations." Articles of the Gold and Silver Mining Company. 210. Know all men by these presents, that we, the under- signed, have this day voluntarily associated ourselves together AND GORPOEATION LAW 77 for the purpose of forming a corporation, under the laws of the State of California ; and we do hereby certify ; First : That the name of the corporation is the "Gold and Silver Mining Company;" Second: That the purposes for which it is formed are: to mine, own, possess, develop, buy, sell and lease mines and mining property ; to mill and reduce ores, either by milling or smelting, clorination, cyanide process, or otherwise, from the mines owned or operated by this company, or for others ; to locate. and acquire by purchase water-rights for the purpose of using same, or the sale of water; to engage in hotel and boarding-house business at or in the vicinity of mines owned or operated by this company. To own by purchase or other- wise, lands or real estate and to sell the same. To buy and sell machinery and chattels, such as may be used by the company in or about its mines and to carry on the business of mining for gold and silver in the State of California. Third : The place where its principal business is to be transacted shall be the City of Fresno, in the County of Fresno, State of California. Fourth : The term for which it is to exist is fifty (50) years from and after the date of its incorporation. Fifth: The number of directors shall be five (5), and the names and residences of those who are appointed for the first years are Wm. Glass, who resides in the City of Fresno, County of Fresno, State of California; C. H. Rowell, who re- sides in the City of Fresno, County of Fresno, State of Cali- fornia; Geo. Babcock, who resides in the City of Fresno, County of Fresno, State of California ; M. S. Hutchison, who resides in the City of Fresno, County of Fresno, State of Cali- fornia, and G. W. Lister, who resides in the City of Fresno, County of Fresno, State of California. Sixth : The amount of capital stock of said corporation is fifty thousand dollars ($50,000), divided into two thousand five hundred shares common stock of the par value of twenty dollars ($20) each. Seventh : That the amount of said capital stock, which has been actually subscribed is one hundred (100) shares, of the par value of twenty dollars ($20) per share, and the fol- lowing are the names of the persons by whom the same has been subscribed, to-wit : William Glass, twenty (20) shares ; C. H. Rowell, twenty (20) shares ; Geo. Babcock, twenty (20) shares; M. S. Hutchison, twenty (20) shares; G. W. Lister, twenty (20) shares. 78 COEPORATION ACCOUNTING Eighth : The stock of said corporation subscribed for by any person or persons paying coin for same, shall be paid for in the manner following, to-wit: One dollar ($i) per share on the first day of each calendar month until the whole is paid. Ninth: Any person or persons failing to pay any instal- ment upon the subscription price of any of the shares of the capital stock of said corporation, when the same becomes due and delinquent under these articles of incorporation, and the by-laws of the corporation, to be hereafter adopted, shall im- mediately forfeit and lose all of said shares of stock and sums previously paid thereon, and shall receive (50) per cent paid up stock for the amounts previously paid by them. Tenth : The Board of Directors, or a majority of them, acting by resolution in their official capacity on behalf of this corporation, shall have power to exercise all the functions and powers granted to a corporation organized under the laws of this State, and their acts as such shall be corporate Acts ; pro- vided however that their authority may be limited and de- fined by the by-laws to be hereafter adopted. In witness whereof, we have hereunto set our hands and seals this 8th day of January, 1905. WILLIAM GLASS, (Seal) C. H. ROWELL, (Seal) GEO. BABCOCK, (Seal) M. S. HUTCHISON, (Seal) G. W. LISTER, (Seal) STATE OF CALIFORNIA, ) County of Fresno, \ ^^' On this 1st day of February in the year of our Lord, one thousand, nine hundred and five, before me, L. J. Colmore, a notary public in and for the County of Fresno, State of Cali- fornia, residing therein, duly commissioned and sworn, per- sonally appeared William Glass, C. H. Rowell, Geo. Babcock, M. S. Hutchison and G. W. Lister, personally known to me to be the persons whose names are subscribed to the within and foregoing instrument and they and each of them duly acknowl- edged to me that he executed the same. In witness whereof, I have hereunto set my hand and af- fixed my official seal the day and year in this certificate first above written. (Seal) L. J. COLMORE, Notary Public in and for the County of Fresno, State of California. AND CORPOEATION LAW 79 211. Great care and forethought should be exercised in drawing up the articles of incorporation, for the corporation is authorized to do only such acts, and engage in such business, as may bet set forth in its articles of incorporation.* It is there- fore wise to enumerate every line of business that it is thought probable the corporation may wish to engage in at some future time. For instance, the foregoing articles do not allow the company named therein to engage in the grocery business, nor the fruit business, either on its own account or in partner- ship, for be it understood that a corporation can form a part- nership with an individual, who may or may not be a stock- holder, provided its articles of incorporation permit it to do so. In such a case, each are liable for the debts of the part- nership business, same as in any ordinary co-partnership; but neither party is liable for the debts of the other outside the debts of the particular branch of business in which they are partners ; e. g., if they are in partnership in the cattle business, the corporation is not liable for the partner's debts in any other business he may be engaged in on his own account; neither is the partner liable for any of the debts of the corpor- ation incurred in its mining business". Consolidations. 212. A corporation may not legally consolidate with an- other corporation unless the power of consolidation is given to it in its charter. If there should be even a remote possi- bility of a corporation desiring to merge its interests with that of another corporation, provision should be made for such a contingency in its articles of incorporation. The subject of consolidation and mergers from an accounting standpoint will be described and illustrated further on in this work. Sufficient has been said to make it clear that the instrument of incorpora- tion is a very important one, and that it is wise to enumerate extensive powers in the ''Articles of Incorporation." Amended Articles of Incorporation. 213. If it should be subsequently discovered that the ar- ticles of incorporation are defective or incomplete, they may be amended, usually, by vote of the board of directors', or by vote or the written assent of the stockholders, as the articles themselves may provide in consistence with the State Law. *The exception to this rule is the State of Maine. A Maine corpora- tion can do not only what the statute expressly grants but also what it does not forbid. 80 CORPORATION ACCOUNTING Articles Subscribed and Acknowledged. 214. All articles of incorporation must be subscribed and acknowledged before some one competent to administer an oath. The least number of signatures depends upon the mini- mum fixed by the laws of the State under which the corpora- tion is chartered. California requires three — a majority of whom must be residents of the State ; New Jersey three — one of whom must be a resident of the State, and Arizona provides for any number — none of whom need be residents. Filing of Articles of Certificates. 215. Upon filing the articles or certificate of incorporation in the office of the County Clerk, or some kindred office, of the county in which the principal business or office of the com- pany is to be transacted or located and a certified copy thereof in the office of the Secretary of State, the Secretary of State must issue to the corporation, over the great seal of the State, a certificate that a copy of the articles or certificate of incor- poration has been filed in his office, and thereupon the persons signing the articles, and their associates and successors shall be a body politic and corporate. 216. A corporation doing business in more than one county must file its articles in every county in which it does' business, and the State usually fixes a limited time in which business must be commenced. Extending and Dissolving Corporate Existence. 217. Corporations may renew or extend their charters, may disincorporate or dissolve, either voluntarily or involun- tarily, by regular process of law ; but when it comes to taking a step like this, the advice of a lawyer is better than tnat of an accountant, and it is strongly recommended that in such cases, as well as in all cases where doubt exists, or money or prop- erty is' at stake, that the directors seek the advice and acquire the services of a competent attorney. It may be said right here, very emphatically, that it is not the purpose of this work to usurp the functions of the lawyers, nor to define with un- erring certainty the more or less abstruse meaning of legal phraseology; but rather to enable the corporation accountant or officer to deal intelligently, and in a business-like manner, with all matters pertaining to the welfare of the corporation, from either a legal, ethical, or accounting standpoint. The literal and apparently obvious meaning of the codes frequently AND COEPOEATION LAW 81 varies with the judicial interpretation of the same, and statute law is a very mutable thing; therefore it is the highest form of economy, in most cases, to employ counsel whose business it is to keep up with the changes in the law, and informed on decisions of the Courts. Permanent Organization. 218. Preliminary organization having been efifected, the next step is permanent organization. Having fixed a day, by resolution, at the last preliminary meeting for organizing, or having mutually agreed upon a day, and selected some one to draw up a code of by-laws for the government of the corpora- tion, the temporary chairman calls a meeting of all of the stockholders named in the articles of incorporation for the pur- pose of effecting a permanent organization and adopting a code of by-laws. MINUTE BOOK OF THE GOLD AND SILVER MINING COMPANY. Meeting of the persons named as directors in the articles of incorporation of the Gold and Silver Mining Company. Pursuant to notice, duly given, a meeting of the persons named as directors in the articles of incorporation of the Gold and Silver Mining Company was held this ist day of January, 1905, at I o'clock p. m., at 1842 Tulare street, Fresno, Cali- fornia. At this meeting all of the persons so named were present, viz : Wm. Glass', M. S. Hutchison, C. H. Rowell, G. W. Lister, Geo. Babcock. Mr. Glass was called to the chair, and Mr. Rowell was re- quested to act as temporary secretary. Mr. Glass in the chair announced that the certificate of in- corporation of this company having been duly issued from the office of the Secretary of State of California, the object of the meeting was to organize the company and the board of direc- tors by the election of officers, as required by law. Mr. Babcock nominated Mr. Glass for President. No other nominations being made, on motion of Mr. Babcock, seconded by Mr. Lister, the ballot was dispensed with and Mr. Glass was unanimously elected president and thereupon took his seat as president of the company and of the board of directors. (Follow the same form for the election of vice-president, secretary and treasurer.) 82 CORPORATION ACOOUNTING Mr nominated for legal adviser of the company at a retainer of Dollars per year, payable quarterly. On motion of Mr. seconded by Mr the ballot was dispensed with and Mr i was declared unanimously elected legal adviser of the company at a salary of $ per year. The president then suggested, that as the stockholders or subscribers for stock were present, further proceedings be sus- pended and a meeting of the stockholders be called and held forthwith. On motion, duly made and seconded, it was unanimously Resolved : That a meeting of the stockholders of the com- pany be, and it is hereby called to be held this day of 1905, at the hour of o'clock. . . .m., at the place fixed as the office of the company, California. On motion, duly seconded, the meeting adjourned. President. Attest. , Secretary. 220. First stockholders' meeting of the Gold and Silver Mining Company. We, the undersigned, the stockholders and subscribers for stock of the Company, being the owners and holders of all the subscribed capital stock of said company, viz : William Glass 20 shares shares shares shares shares shares', do hereby give our written consent to the holding of this the first stockholders' meeting of Company, the day of 1905J at the hour of o'clock . . . m., at the place determined on as the office of the company, County, California, and we do hereby certify that all the stockholders and subscribers for stock of said company are at this meeting now here present. In witness whereof, we have hereunto subscribed our names this day of , A. D. 1905. AND COKPORATION LAW 83 Pursuant to a call and notice duly made and given, and the above written consent, this, the first meeting of the stock- holders of the .^ Company, was held on this day of * A. D. 1905, at the hour of o'clock. . . .m., at the place determined on as the' office of the company, California. Present: One hundred shares, owned, held and repre- sented as follows, viz : Wm. Glass 20 shares, shares, shares, shares, shares, shares, being all the shares of the subscribed capital stock of the company. Mr , president, in the chair. The secretary read the minutes of the meeting of the per- sons named as directors in the articles of incorporation, which, on motion, duly seconded, were approved. The president announced that the first business of the meeting was the adoption of a code of by-laws for the govern- ment of the company and its officers. Mr presented a code of by-laws which were read by the secretary, and on motion of Mr. , seconded by Mr they were adopted and ordered engrossed in the company's "book of by-laws. There being no further business before the stockholders, on motion, the meeting adjourned. President. Attest : Secretary. Directors' Meeting Held on the Day of A, D. 1905. 221. Mr in the chair. The' secretary read the minutes of the previous meeting of the board, held for the purpose of organizing, and on motion duly made and carried the minutes were approved as read. The secretary next read the by-laws as the same are en- grossed on pages to inclusive of the company's book of by-laws. The following resolution was offered by Mr and seconded by Mr and carried unani- mously. Resolved, that the code of by-laws adopted by the stock- holders at their first meeting and engrossed on the book of by-laws, pages i to inclusive, be, and the same are here- by adopted as the by-laws of this company and further : 84 CORPORATION ACCOUNTING Resolved: That each member of the Board of Directors and the Secretary be, and they are hereby requested to sub- scribe their names to the said by-laws, and to certify the same in that book to be kept in the office of the company and known as, and called the "Book of By-Laws" of the Company. On motion duly seconded it was unanimously Resolved; That the office of the company be, and it is hereby fixed and located at , in the City of Fresno, County of Fresno, State of California. On motion, duly seconded, it was Resolved; That the secretary be, and he is hereby in- structed and directed to procure blank certificates of stock for the use of the company, and also a seal with the following impress : Company, Fresno, California. Incorporated , 1905. The' articles of assignment of the mine to the company, were then read by the secretary and on motion, duly seconded, were ratified. Moved by Mr , and seconded by Mr , that Edgar L. Hamilton be, and he is hereby appointed Superintendent, at a salary of $150 a month. There being no further business before the directors, the meeting adjourned. C. H. Rowell, Secretary. By-Laws of the Gold and Silver Mining Company. Article I. 222. The name of this corporation is The Gold and Sil- ver Mining Company. Article II. The corporate powers of this company shall be vested in a board of five (5) directors. Article III. The officers of this company shall be a president, vice-pres- ident, secretary and treasurer. Article IV. On the first Monday following the first Tuesday in Janu- ary of each year a meeting of the stockholders shall be held. AND COEPOEATION LAW 85- at which the directors of the corporation shall be elected by- ballot, to serve one year from and after their election, and un- til the election of their successors. None but stockholders of. record shall be entitled to vote at any election, and the trans- fer books of the company shall be closed not less than ten days prior to annual election. Votes may be cast either in person, or by proxy and cumulative voting shall be permitted. Article V. The annual meeting of the stockholders shall be called by a notice to be published in a daily newspaper published in the City of Fresno, State of California, once a week for four weeks, and it shall be the duty of the secretary to notify the stockholders of record whose addresses are known, by mail,, of the date of such meeting, at least ten days prior thereto. Article VI. Vacancies in the Board of Directors shall be filled by the other directors in office, and such persons shall hold office un- til the first annual meeting, after their election, or until their successors are elected and qualify. Article VII. The Board of Directors shall have power to call meetings- of the stockholders when they deem it necessary, and they shall call a meeting at any time upon the written request of stockholders holding one-third of the subscribed capital vStock, giving such notice of the call meetings as the exigencies of the case may require. They shall also appoint and remove, at pleasure, all officers, agents and employees of the company; prescribe their duties, fix their compensation, any may require from them security for their faithful services when they deem it necessary. Article VIII. It shall be the duty of the directors to cause to be kept a complete record of all their acts and proceedings and a com- plete record of all the acts and proceedings of all meetings of the stockholders. They shall cause to be made at every regu- lar meeting of the stockholders, a full statement, showing in full and in detail the assets and liabilities of the company, and generally the condition of its affairs. A simliar statement shall be presented at any other meeting of the stockholders, when requested by persons holding at least one-third of the subscribed capital stock of the company. They shall declare dividends out of the surplus profits, whenever in their opinion such profits and the interests of the company warrant the .86 COEPOEATION ACCOUNTING same. Such dividends shall be declared only on the stock that has actually been subscribed; but the unsold stock shall not participate therein. They shall supervise all officers and see that their duties are properly performed. They shall cause to be issued to subscribers contracts for certificates of stock, and when any subscribed stock has been fully paid for, they shall cause to be issued to stockholders, certificates of stock, which shall be in substance and form as prescribed in these by-laws. Article IX. The Board of Directors shall elect one of their number to act as president, and one to act as vice-president; in case of the inability of the president, or his absence from the principal place of business of the corporation, the vice-president shall, during such inability or absence, be vested with all the powers and duties of the president. The president shall preside at all meetings of the stockholders, and of the directors, and shall have the casting vote. He shall sign all contracts and instru- ments of writing, which have first been approved by the Board of Directors. He shall call special meetings of the Board of Directors and special meetings of the stockholders when- ever he deems it for the interest of the company to do so, and he shall discharge such other duties as may be required of him by law and the by-laws of this company. It is to be distinctly understood and is hereby made a part of these by-laws that in case of a tie vote, the mere decision of the president (that is, the announcement of the result), shall constitute his affirma- tive or negative vote. Article X. It shall be the duty of the treasurer to safely keep all of the money of the company, and to disburse the same under the •direction of the directors, and in conformtiy to these by-laws. At the regular meeting of the stockholders in January, he shall submit to the meeting a full and complete statement of his accounts, with proper vouchers for all disbursements, and he shall make such statements, when required by the president, or any three members of the Board of Directors, to any meet- ing of the stockholders or Board of Directors. He shall make no payments, except on a warrant drawn by the president and countersigned by the secretary. He shall perform such other duties as pertain to his office and as are perscribed by the Board of Directors. Article XI. It shall be the duty of the secretary to keep a record of the /proceedings of the Board of Directors and of stockholders. AND CORPORATION LAW 87 He shall keep a book of blank contracts for certificates of stock, fill up and countersign all contracts for, and certificates of stock issued, and make the corresponding entries in such books of such issuance. He shall keep a stock ledger, in debit and credit form, showing the number of shares issued to and transferred to any stockholder, and the date of such issuance and transfer. He shall discharge such other duties as are or may be prescribed by the Board of Directors, not inconsistent with law or these by-laws. Article XII. A general superintendent shall be elected by the Board of Directors, at such time as they deem proper, removable at their pleasure. He shall make full returns to the Board of Directors- of all persons hired or employed at its mines, or in the mills of the corporation, and their wages, and a statement of all ex-- penditures, as often as the board may require, with the neces- sary vouchers, duplicates of which he will keep, and a similar- statement of ore extracted, and report the general condition of the mining work and the affairs of the company which are under his supervision. Should he require funds he shall make a requisition on the Board of Directors therefor, stating the precise object for which they are desired and the amount; if approved by the Board of Directors, the money shall be trans- mitted to him in such manner as they may direct. Article XIII. The sum of twelve hundred ($1200) dollars per annum, and no more, shall be allowed to the entire Board of Directors for traveling and incidental expenses, and the members of the Board of Directors shall receive no other compensation what- ever for their services as such board until the company is put on a sound dividend-paying basis, after which they shall re- ceive $10 each for every directors' meeting attended; but this shall in no case apply to any director who is a salaried officer of the company; provided, however, that in case the Board of Directors shall at any time be increased from five to seven, a pro rata amount shall be allowed for the necessary incidental expeness of the additional directors. Article XIV. No contract by any officer of the company, other than for work and labor performed and materials furnished, of more than one hundred ($100) dollars, shall be valid without the previous approval or subsequent ratification of the Board of Directors. ,88 CORPOEATION ACCOUNTING Article XV. The capital stock of this company shall be fifty thousand dollars ($50,000.00), divided into two thousand five hundred shares (2500), of the par value of twenty dollars ($20) each. All stock shall be held and owned by the subscribers and transferees thereof, subject to the conditions contained in .these by-laws. Stock shall be paid for in the manner follow- ing, to-wit : One dollar per share on application and one dol- lar per share on the first of each and every calendar month thereafter until the whole amount is paid; but for full cash payments at the time of subscription a discount of ten (10) per cent shall be allowed, and for cash payments for ten months in advance a discount of six (6) per cent shall be al- lowed. All owners of shares and of contracts for certificates, .whether original subscribers or transferees thereof, who fail and neglect to pay any instalment upon the subscription price thereof, during the whole of the calendar month, upon the first day of which such instalment becomes due and payable, shall thereupon be immediately notified by the secretary that such instalment is due and payable, and if the same is not paid within thirty days from and after the date of such notice, the .secretary shall, immediately after the lapse of such thirty days from the time of such notice, issue to the owner a certificate of fully paid up shares to the amount of fifty (50) per cent of all money paid in upon the shares, (but no fractional certifi- cate will be issued for the same) upon which the instalment so remains unpaid, and such owner shall forfeit all right, title, interest and ownership in, to and of the shares upon which the instalment upon the subscription price is due and unpaid, and also of, in and to all money previously paid upon the sub- scripiton price of such shares. After two thousand (2,000) shares of the capital stock of the corporation shall have been subscribed for, the Board of Directors may, at any time in their discretion, suspend and prohibit further subscription to said capital stock, and in like manner limit the number of shares that may be subscribed for within any designated period, or until the further order of the' iDoard. Article XVI. Certificates of stock and contracts for such certificates of stock shall be of such form, wording and device as shall be ordered by the Board of Directors, subject to the provisions of the by-laws. When any of the capital stock of this corpor- ation shall be subscribed for, and the first instalment of the •subscription price is paid, there shall be delivered to the sub- AND CORPOEATION LAW 89 scriber a contract in the name of the corporation, signed by the president and secretary, whereby this corporation shall bind itself to issue to such subscriber a certificate for such stock when the subscription price thereof is paid; and such contract shall express upon its face that the stock is owned subject to the conditions contained in the by-laws of this cor- poration, and all of the provisions of Article XV of these by- laws relating to the par value of such stock, the instalments in which the price thereof is to be paid, the failure to pay any instalments, the notice to the owner and forfeiture of stock, shall be expressed in said contract and made a part thereof. Article XVII. All transfers of stock shall be made either in person or by power of attorney. When made by attorney the party mak- ing the transfer must exhibit to the secretary and file in his office, as evidence of his authority, a certified copy of his power of "Attorney in fact"; provided however, that if the owner and holder of the stock shall fill in a power of attorney printed on back of certificate, designating the party offering his stock for transfer or any officer of the company as his at- torney to make transfer, no further evidence of authority shall be required. Article XVIIL The Board of Directors shall meet in regular session, at the office of the corporation in the City of Fresno, State of California, on the last Saturday of each month. Special meet- ings of the Board of Directors may be called by the president, or any three members of the board, for any time, upon written personal notice to all of the directors, of the time and place of such meeting, or by depositing such written notice in the United States postoffice, addressed to the directors at their residence, at least one week before the date of holding such meeting. Three members shall constitute a quorum of the Board of Directors at all meetings of the board, but a major- ity of all the members of the board shall be necessary to make or pass any order, direction or resolution. Article XIX. The company shall cause to be printed and sent each share- holder, semi-anually, a circular giving a full and detailed ac- count of the assets and liabilities, and generally the condition of its affairs, together with a statement of its development work to date, giving number of tons of ore extracted and num- ber of tons of ore milled, etc., together with a statement of all work done up to the time of the issuance of the circular, giv- 90 COEPOEATION ACCOUNTING ing the name of the mine or mines in possession of the com- pany, whether held by bond or purchase, and their condition at that time. Article XX. The directors may, in their discretion, set aside from the profits of each year before declaring dividends a certain per- centage of the profits to be determined by themselves for the purpose of creating a fund to develop new properties, or for reserve or contingent purposes ; provided that in no case shall the amount set aside for any one year exceed twenty-five per cent of the net profits for that year. Article XXI. These by-laws may be appealed or amended or new by- laws may be adopted at the annual meeting of the stockhold- ers, or at any other meeting of the stockholders called for that purpose by the Board of Directors, by a vote representing two-thirds of the subscribed capital stock. The written con- sent of the holders of two-thirds of the subscribed capital stock shall be effectual to repeal or amend any by-laws or to adopt additional by-laws. Article XXII. The order of business at all meetings of the Board of Di- rectors shall be as follows : 1. Roll call. 2. Reading of the minutes of previous meeting. 3. Reports of (a) secretary (b) treasurer. 4. Reports of committees, (a) regular (b) special. 5. Unfinished business. 6. New business. 7. Adjournment. Article XXIII. All disputes arising out of parliamentary questions shall be settled by Robert Rules of Order, We, the undersigned, do hereby ceritfy that we are all of the directors, and all of the stockholders of the Gold and Sil- ver Mining Company, and that the above and foregoing by- laws consisting of twenty-three (23) articles, have this day been adopted by us as the by-laws of such corporation. In witness whereof, we have hereunto signed our names this day of IQ^S- AND COEPOEATION LAW 91. I, , secretary of the Company, a corporation, do hereby certify that the above and foregoing by-laws are the by-laws of the said corporation duly adopted and assented to by all of the holders of the capital stock of said corporation, on the day of , A. D. 1905. 223. The foregoing set of by-laws while designed for a particular class of corporation contain all the usual require- ments of by-laws, and may, with certain modifications and changes, be made to meet the requirements of any business. The' provisions made in article fifteen for forfeiture of stock is made in the interest of the company. It is not made to re- lieve the stockholder from the obligation of his subscription but rather to release the stock to the company for the purpose of being resold. A Short Form of By-Laws for a Close Corporation. By-Laws of the Co. Article I. 224. The name of this corporation is the Company. Article II. Sec. I. The corporate powers of this company shall be vested in a board of five (5) directors, three of whom shall constitute a quorum for the transaction of any business ; but a majority of the board shall be necessary to pass any resolu- tion. Sec. 2. The power so vested in this board may at any time be delegated by a unanimous vote of the Board to any one of their number with the designation of "Manager" and his acts shall be corporate acts and binding on this company except as hereinafter provided in these by-laws. Article III. The officers of this company shall be a president, vice-pres- ident, secretary and treasurer, all of whom must be stockhold- ers of this company, with the exception of the treasurer. Article IV. It shall be the duty of the president to preside at all meet- ings of the stockholders and of the Board of Directors, to sign all certificates of stock and all legal instruments executed by 92 CORPORATION ACCOUNTING this corporation, and such other and further things as these by-laws may hereinafter provide. In his absence or inability these duties shall devolve on and be exercised by the vice- president. Article V. It shall be the duty of the secretary to keep a faithful rec- ord of all meetings of the stockholders and of the board of di- rectors, to countersign all certificates of stock and all legal in- struments and affix the official seal thereto ; he shall also keep a stock ledger and journal showing the names of stockholders and number of shares held by each and do such other things as the board of directors may direct. He shall immediately notify the treasurer of any change in the authority of persons hitherto authorized to sign checks or drafts. Article VI. It shall be the duty of the treasurer to keep a faithful rec- ord of all monies coming into his (or its) possession and to disburse the same only on the order of the person or persons authorized to make drafts on the treasurer by these by-laws, or by resolution of the board ; provided that the treasurer shall be relieved from responsibility for the failure of the secretary to notify him (or it) of any change in the person or persons theretofore authorized to draw checks or drafts. Article VII. Sec. I. The annual meeting of stockholders after the first meeting, shall be held on the first Monday following the first Tuesday in January of each year. At this meeting a board of directors shall be elected to serve for the ensuing year. All •elections shall be by ballot, and votes may be cast in person or by proxy. Two-thirds of the stock in interest shall con- stitute a quorum of stockholders. Sec. 2. No publication of stockholders' meetings shall be necessary, but the secretary shall be required to serve notice either in person, or by mail, on every stockholder at least five days prior to the annual meeting. Article VIII. Vacancies in the board of directors shall be filled by vote of the remaining directors in office. Article IX. The board of directors shall elect from their number one who shall act as manager to serve at the pleasure of the board, and he shall be clothed with all the authority necessary for AND CORPOEATION LAW 93 the efficient management of the business, except as herein- after provided. He shall be empowered to contract for and purchase all goods, wares and merchandise handled by this company; to sell and fix prices on same; to sign checks or drafts against funds in the hands of the treasurer; to borrow money and negotiate notes therefor in the name of this com- pany to an amount not exceeding $1000 dollars; to employ such agents, clerks and servants as in his judgment the best interest of the business demand; to fix their salaries and dis- charge them at will, and to perform such other duties, and exercise such other powers, as usually belong to the office of manager ; provided that in no case shall he enter into any con- tract in a greater sum than $1000 without the' previous ap- proval of the board of directors. Article X. All the foregoing powers shall, in the absence, sickness, or inability of the manager, be vested in and exercised by the' president; but they are not to be regarded as co-ordinate or co-extensive powers ; and in case of the death or removal of the manager a successor must be elected within one month. Article XI. Certificates of stock shall be of such form, wording, and device as the secretary, with the approval of the board of di- rectors, may select. Article XII. The official corporate seal shall bear the following legend Company, Incorporated 1905- Article XIII. No transfers shall be valid between the transferee and this company until the same shall have been recorded on the books of this company; and it is agreed between the subscribers to these by-laws, that no stockholder shall transfer his stock nor any part thereof to any one outside the corporation without first having offered his stock at a meeting of the Board of Directors, for an amount not exceeding the highest bona fide offer made for his stock ; providing that this shall not be construed as absolutely restraining a stockholder from selling his shares. Article XIV. These by-laws may be repealed or amended or new by-laws adopted at any annual meeting of the stockholders, or at any 94 COKPOEATION ACCOUNTING special meeting called for that purpose, provided that a writ- ten or printed notice of such meeting shall be mailed to each stockholder at his last known address at least lo days before said meeting. Article XV. We, the undersigned, being all of the stockholders of the Company, do hereby certify that we know the contents and meaning of the foregoing 15 articles, that we assent to every statement and proposition' therein contained, and that the same have this day been adopted by us as the by-laws and governing code of this cor- poration. In witness whereof we have hereunto signed our names this day of IQOS- Attest : Secretary. Provisions of By-Laws. 225. Following is a list of the general provisions of all by-laws; and if the student or organizer will read them over carefully and note how they are applied and worked out in the foregoing sets of by-laws, he may, with the exercise of care and discretion, construct a code of laws for the government of any ordinary corporation. The by-laws of a corporation may, subject to state laws, provide for. 1. The time, place and manner of conducting the meet- ings, and may dispense with notice of all regular meetings of stockholders or directors ; 2. The number of stockholders or members constituting a quorum ; 3. The mode of voting by proxy ; 4. The qualifications and classification of directors, the time of their annual meeting and manner of giving notice thereof ; 5. The compensation and duties of officers; 6. The manner of election, and the terms of office of all officers other than directors ; 7. Suitable penalties for violation of by-laws, not exceed- ing in any case the maximum fixed by law (in California $100. In New Jersey $20.) AND COEPORATION LAW 95 8. The newspaper in which all required notices of meet- ings of stockholders or directors shall be published. 9. The manner of filling vacancies among directors or of- ficers ; 10. The manner of transferring stock and the regulations governing the same ; 11. The duties of directors and officers and whether they shall be under bonds; 12. The declaration of dividends; 13. The manner in which the by-laws may be repealed or amended. Adopting By-Laws. 226. The by-laws must be consistent with the constitution and laws of the State and must be assented to by those hold- ing a majority of the subscribed capital stock, or a majority of the members if there is no capital stock, at a meeting called for that purpose, due notice of which must be given, or they may be adopted by the written assent of the holders of two- thirds of the capital stock, or two-thirds of the members if there is no capital stock, without the necessity of holding a special meeting — they are usually prepared in advance and adopted at the first stockholders' meeting. Some states per- mit the granting of this power to the directors, subject to re- vision by the stockholders. California Provisions. 22y. The following provisions apply to California. All by-laws adopted must be certified by a majority of the directors and secretary, and copied in a legible hand into a book to be known as the "Book of By-Laws," which book shall be open to public inspection during office hours of each day, except holidays. No by-law shall take effect, and no subsequent amend- ment shall take effect, until copied in said book. By-laws may be repealed or amended, or new by-laws adopted at an annual meeting, or a meeting called for that purpose, by a vote of two-thirds of the stock, and by written assent of the holders of two-thirds of the stock or two-thirds of the members where there is no capital stock. Directors must be elected annually by the stockholders or members, and such election must be held on the first Tuesday in June of each year, unless otherwise provided in the by- laws ; but if from any cause directors are not elected annually, it is not to be supposed that the corporation is without di- 96 COEPOEATION ACCOUNTING rectors or officers. The directors in all cases hold office until their successors are elected. All elections must be by ballot, and every stockholder has the right to vote in person, or by proxy, the number of shares standing in his name on the corporation's books. Every stockholder is entitled to a vote for each share of stock that he holds, and can cast so many votes for as many persons as there are directors to be elected, or he may cumu- late all his votes on one candidate, that is to say, if he has ten shares of stock and there are five directors to be elected, he can multiply his shares by five and cast fifty votes for one person; or he may give twenty-five each to two persons, or distribute his fifty votes among as many, and in such propor- tion as he may choose. If there is no capital stock the mem- ber has as many votes as there are directors to be chosen, which he can distribute in the manner outlined above. The last three paragraphs, with slight modifications apply to New Jersey, Delaware, Arizona and other States. Form of Proxy. 228. The by-laws provide for the form of proxy, which shall be either a parol, or written proxy. 228. (a) By a "Parol" is meant an oral declaration, or word of mouth, or writing without seal. The usual form is the written proxy. A special and a general form are herewith presented. Special Proxy or Power of Attorney. 229. Know all men by these presents: That I, J. J. Rahill, do hereby constitute and appoint Walter Shoemaker my true and lawful attorney, for me and in my name, place and stead, to vote as my proxy at the annual meeting of the stockholders of the Gold and Silver Mining Company, a cor- poration, and at any adjournment of said meeting, all of the twenty shares of the capital stock of said corporation now standing on its books in my name, as fully and amply as I could or might do were I personally present; with full power of substitution and revocation. Witness my hand and seal at Fresno, California, this day of A. D. 1905. J. J. Rahill, (Seal) 230. The reader will notice, that the above form gives to the person holding the proxy the power to substitute another proxy, and also asserts the stockholder's right to revoke either or both appointees, if he should change his mind, or decide to be present in person. AND CORPORATION LAW 97 What a Proxy Indicates. 231. The giving of a proxy indicates the stockholder's de- sire to be represented, and the power of substitution is logical and sometimes necessary to further this desire ; but this proxy power is contingent on the absence of the stockholder, hence the revocation clause by which the delegated power returns to him who gave it and reposes absolutely in the stockholder. General Proxy or Power of Attorney. 232. Know all men by these presents : That I, J. J. Rahill of Fresno, in the County of Fresno, State of California, have constituted and appointed, and by these presents do consti- tute and appoint Walter Shoemaker of Fresno, California, my true and lawful attorney, for me and in my name, place and stead, for the following purposes, to-wit : First: To vote, as my proxy during the term ending on January i, 1906, at all regular meetings and adjournments thereof, and at all special meetings and adojurnments thereof, of the stockholders of the Gold and Silver Mining Company, a corporation of the State of California, having its principal place of business at Fresno, Cal., all of the twenty shares of the capital stock of said corporation standing on the books of said corporation in my name. Second : To consent to, and sign in writing, all records or papers of said corporation, or any proposition whatever, in which or to which my assent and signature as such stockholder may be requisite, or proper, or conformatory to the by-laws of said corporation. Third: I hereby grant unto my said attorney full power and authority to do and perform every act and thing whatso- ever requisite and necessary to be done in the premises, as fully, to all intents and purposes, as I might, or could do, if personally present ; with full power of substitution and revo- cation ; and I hereby ratify and confirm all that my said at- torney, or his substitute or substitutes, shall lawfully do, or cause to be done, by virtue of these presents. It witness whereof, I have hereunto set my hand and seal this first day of A. D. 1905. J.J. Rahill, (Seal) 233. It will be seen that the proxy or agent in the above instrument is made the legal representative of the stockholder, with all his rights, privileges and prerogatives, for a given period of time; but as in the former j)roxy, that authority can be revoked at any time the stockholder chooses. 98 COEPOEATIOlSr ACCOUNTING Ballots. Form of ballots, one executed by a stockholder and one by a proxy : 234. Ballot. Election for Directors of the Gold and Silver Mining Co. Five to be Elected. October i, 1905. Wm. Glass, holding 20 shares, votes said 20 shares for William Glass 20 votes C. H. Rowell 20 votes Geo. Babcock 20 votes M. S. Hutchison. . . .20 votes G. W. Lister 20 votes to serve as directors of said corporation for the year be- ginning this 1st day of Oc- tober, 1905, and until their successors in office are duly elected and qualified or ap- pointed. Wm. Glass. 235. Ballot. Election for Directors of the Gold and Silver Mining Co. Five to be Elected. October i, 1905. Geo. Babcock, holding 20 shares (by his proxy M. S. Hutchison) votes said 20 shares for Geo. Babcock 40 votes M. S. Hutchison. . . .40 votes G. W. Lister 20 votes to serve as directors of said corporation for the year be- ginning this 1st day of Oc- tober, 1905, and until their successors in office are duly elected and qualified or ap- pointed. Geo. Babcock, By his proxy M. S. Hutchi- son. Proxy and Cumulative Voting. 236. The above forms illustrate both the proxy and cu- mulative method of voting. In each of the above a total of 100 votes is cast ; in one case the distribution of these votes is an equal distribution among five, and in the other case an unequal distribution among three. List of Stockholders. 237. Before the time set for the meeting of stockholders, the secretary prepares a roll or list of the stockholders with the names and numbers of shares held by each. This may, or may not be the list of stockholders required by some States to be prepared ten days in advance of election for the purpose of inspection by the stockholders, which purpose has been pre- viously explained. The following form will be found conve- nient for election purposes. 238. AND CORPOEATION . LAW Roll Call. 99 Names of Stockholders Shares Present In Person Shares Present By Proxy Names of Stockholders Shares Present In Person Shares Present By Proxy Forward^ TotH shs.present 239. The by-laws regulate the number of shares, or mem- bers, that shall constitute a quorum of stockholders. If a quorum is present a meeting must be held; if not it must be adjourned from time to time, until the necessary number be present either in person or by proxy. 240. Tally Sheet. Candidates for Directors Name of Stockholder Totals 241. The above form of tally sheet is recommended where the number of stockholders is limited. It is convenient in form and may be easily filed away for future reference, but where the number of stockholders is great, the names are omitted. Instead, the chair appoints a call clerk and two tally clerks, the former calls the names and the vote for each candi- date, and the latter tally, each keeping a check on the other. Previous to this the chair appoints a comimttee, whose duty it is to examine all proxies. This committee reports to the 100 CORPOEATION ACCOUNTING meeting on the validity or irregularity of the various proxies. The report is disposed of in the regular order of business, and those holding regular and valid proxies are allowed to vote them. The foregoing five forms can be obtained in "Carney's Handy Book" for corporations. Subscription Book. 242. We the undersigned, agree to take the number of shares of the Capital Stock of the Gold and Silver Mining Company, of the par value of Twenty Dollars ($20.00) per share',, set opposite our respective names, as follows, to-wit: Names No. of Shares Amount Signatures We, the undersigned officers of the above mentioned com- pany, do hereby certify the foregoing to be a true and correct list of the subscribers to the Capital Stock of the above named corporation. Wm. Glass, President. C. H. Rowell, Secretary. 243. The subscription book is an expedient, though not a necessary part of the records of every corporation. It should at least be preserved until all the subscribed stock is paid for. It often takes the place of the Stock Journal, the posting being done from it direct to the stockholders' accounts in the Stock Ledger; those accustomed to posting from books of original' entry will see the utility and economy of this method. Subscription is Binding. 244. Where there are not many stockholders, a Subscrip- tion List takes the place of the Subscription Book. In many cases the list is not used from choice, but from necessity. This is true in the case' of many oil and mining companies. Such companies often have agents in different parts of the state soliciting, and they each have a subscription list, which the prospective stockholders sign. These lists are sent in to the AND COEPOEATION LAW lOi office when filled, numbered consecutively y, ar|4 r^^e'^f in samp ' safe place until all the stock is subscribed, of until the sub- scription list is closed ; they are then bpiind zo^e,t\i^ti^ pji^pd: and indexed if desired. It should be remeinbeied that wnen one signs a Subscription Book or List, he binds himself to take the stock he has agreed to, and he may be sued for the amount of his unpaid subscription. This is both reasonable and logical. He has entered into a contract between himself and the corporation, the consideration being that he shall have an interest in the business and share in its profits, therefore the corporation can enforce this contract against him. If this was not so a new company might be destroyed in embryo by recalcitrant subscribers. Conditional Subscription. 245. In many large speculative corporations where the launching of the enterprise depends upon the securing of a certain minimum of pledged capital, it is customary to insert a saving clause to this effect : "This agreement is conditioned on the securing by the aforesaid corporation of other bona fide subscriptions to the capital stock aggregating not less than thousand shares." It is contended by some authorities that it is a principle of common law that no contract for subscription is enforceable against the sub- scriber until all of the stock is subscribed. With this conten- tion we are not concerned here ; the point sought to be made is this : the subscriber should not thoughtlessly put his name to anything that might make him defendant in a law suit. 246. Two forms of Subscription Lists are here given. Further on is a form of contract for stock which takes the place of both the Subscription Book and List. Location of Mines^ Business Ofiice of Company, Fresno County, Cal. San Francisco, Cal. Subscription List. We, the undersigned, agree' to take stock in the Free Gold Mining Company, for the amount set opposite our respective names. Said stock to be of the par value of $5.00 per share, payable in monthly instalments of 25 cents per share', per month, until fully paid — payments to commence on delivery of contract, it being optional on the part of subscribers to pay for same in advance and receive 10 per cent discount, or 6 per- cent discount for ten months in advance on delivery of con- tract. 102 COBPOEATION ACCOUNTINO : 'l>Ate > ^".T ': ^':' ^^atines No. Shares Signatures Address \ ) 'i ^ ^^ ^: -^ •: :\ 247. The above form is recommended for the purpose for which it is intended, on account of its completeness in form, and brevity in construction. The agent fills in the date and the name of the subscriber in a clear legible hand and forwards his list to the office, where the contract referred to is filled in, in duplicate, and sent back to the agent for the subscriber's signature. In a subsequent paragraph will be found a method of filing these contracts and also mention of its advantages. Subscription List (Form 2). 348. The subscribers hereto, each for himself, and not one for the other, agree with the Kerosine Oil Company (a cor- poration) to purchase of said corporation the number of shares of its Capital Stock set opposite their respective names upon the following conditions to-wit: (i) That the arpount to be paid said corporation for each share of said Capital Stock is Fifty Dollars (its par value), payable as follows : (2) When the Board of Directors of said corporation shall have certified that twenty-five per cent of its Capital Stock has been agreed to be purchased, then, and upon the happening of that event, there shall become due and payable to said corporation twenty-five per cent of the amount of each share agreed to be purchased, and thereafter there shall be- come due and payable an amount equal to ten per cent of the par value of said stock each and every month until the whole amount thereof has been paid. (3) That when said first payment of twenty-five per cent shall have been made upon each share of said stock, said cor- poration will issue to the purchaser of the same a Certificate of its Capital Stock showing the number of shares purchased with the amount paid endorsed thereon. (4) It being expressly understood and agreed by said corporation, that it will not at any time contract any indebt- AND CORPORATION LAW loa edness in excess of the par value of the number of shares of its Capital Stock issued. Dated at Fresno, Cal., January i, 1905. The Kerosene Oil Company, By G. E. Wentzel, Secretary. By H. E. Dore, President. Name Address N 0. Shares Taken 249. This form cannot be recommended for its brevity, but it has its good points. It is a conditional subscription depend- ing upon the happening of a certain event ; in fact it is a con- tract between the corporation and its subscribers, in which each is bound to the other to do certain things, contingent upon the happening of certain other things. It has its place and a value in that place. 250. As may be seen from the foregoing lists there are many ways of subscribing for stock, and various terms and conditions of payment; there are also many methods of issu- ing certificates. Some companies issue certificates on the pay- ment of 10 per cent or any other fractional part, with a form on the back of the certificate for the endorsement of future payments, the certificate not being considered paid up until the final endorsement is made. Others issue instalment Scrip for each payment, exchangeable for certificates when the final instalment is paid. Still others issue contracts for cer- tificates, which are arranged for the endorsement of payments,, and are exchanged for certificates on the conditions of the con- tract being fulfilled. Again others issue certificates on the payment of a fractional part of the nominal value of the stock,, and levy assessments from time to time as the needs of the business demand; while others, under the pretense of giving" something for nothing, issue paid-up non-assessable stock on the payment of say ten cents on the dollar ; but this trick will not save the stockholder from liability in case of failure. Some State laws require that the amount paid on stock shall be en- dorsed on the certificate (California does this now), so that the purchaser may know the balance of liability he is assum- ing, or the lender know the value of his collateral. 'Tis a pity that this is not the universal rule, although no person 104 CORPOEATION ACCOUNTINa should be foolish enough to purchase stock in any company on the mere showing of the certificate. 251. Instalment Scrip Book. iNSTAIvMENT Scrip. No Fresno, Cal. . ... Shares ^. < i $ Shares Qold and Silver Mining Company. Rejckivkd from Dollars, the same being- the first instalment of Dollars per share, on shares of the Capital Stock of the 1st Instalment per cent. Received the G01.D AND Sii i C ! Co < C3 .00 -t:^ i ^ ^ ^ •X t ^ •+^ c3 s o s 5^ ID o 1 CD 1 1 oo 1 ! ! » 0/- Sk ^ s e "C 15 u s . 1 <^ J o g So V 'fe' CO ^ ^ u>» ?3 ^ i CO o 4) 1 V) 1 i 11 "is s s i u s 1 1 1 OD ^ i ^ ^ ;5^ !:^ ^ 03 e 1 ^ 5k oo : .^ S o •^ 03 Oi 5** 03 Ob , , , ^ ."^ ^ ^ il <§ 1 108 COBPOEATION ACCOUNTING Form of Endorsement. 257. For value received, hereby sell, assign and transfer unto Shares of the Capital Stock of the within Certificate, and hereby irrevocably con- stitute and appoint true and lawful attorney. . ., for and in name, place and stead, but to benefit, to sell, assign and transfer all or any part of the said stock, and for that purpose" to substitute one or more persons with like full power. Dated 190. . . Witness to Signature: 258. The above form is a transfer by attorney and author- izes such attorney to sign the transfer book and convey title to the transferee. Another Form of Transfer. 259. For value received hereby as- sign and transfer to of the shares of the within certificate and by these presents authorize the Secretary of the Corporation to make the necessary trans- fer upon the books of the corporation, issuing to the trans- feree. . .the above mentioned number of shares, and to myself the balance, if any, remaining. Witness Dated 190. . . Points About Transfer Which Every Stockholder Should Know. Legal Titles. Essence of Every Contract. 260. There are many things connected with the transfer of stock that are but little understood by many stockholders. The transferee does not bear the same relation to the company or its creditors that the original subscriber did, ordinarily speaking. Where the transferee purchases the stock in good faith and pays full value therefor, he will not be held liable for any unpaid balance on the subscription, but the original sub- scriber will be held liable. There are two titles resting in every certificate — an equitable and a legal title. When the transferee receives the stock he has legal title to it as between himself and the transferor; but as between himself and the AND CORPOEATION LAW 109 corporation he has only an equitable title; in other words, he is a stock owner, not a stockholder. To be a stockholder and acquire a legal and equitable title to his stock, as between him- self and the corporation, he must have the stock transferred on the books of the corporation in his name. It is very im- portant, therefore, that the transferee of stock should have the transfer made on the books of the company, as until he does' he is not entitled to vote, to receive dividends, or to any notice or information of what is doing, or to be done. In the mean- time the original holder is what is called a trustee **sub modo" for the transferee, and any dividends that accrue to him are held only in trust for the transferee; but it is obvious to any one, that neglect in this matter may mean loss and trouble; and again the essence of every contract is that one parts with certain rights and another acquires those rights, and rights always imply responsibilities, therefore one can not success- fully defend himself against liability on the ground that he was not a stockholder of record; the principle involved being that "the duty to bear burdens is correlative to the right to take benefits." Manner of Making Transfers. 261. As may be inferred from the preceding remarks, there are many ways of transferring one's interest in stock shares. Many of the larger Corporations whose stocks are offered to the general public make use of a regular "Registrar and Trans- fer Agent" for the registration of all issues and transfers of stocks and bonds. It is customary for a Trust Company to act in this capacity and it is their duty to see that there is no fictitious or over issue of stock, and that all transfers are made conformable to the particular laws governing the same. These Trust Companies acting in this capacity stand between the stockholders and the corporation, safeguarding the in- terests of both and inspiring public confidence in the securities which they handle. But assuming that all transfers are to be made at the company's office and that the by-laws provide for all transfers being made in person or by attorney, the follow- ing is suggested as' a correct "Modo et forma." The stock- holder appears at the office of the company either in person or by attorney, and having previously endorsed his certificate, he fills in a transfer blank transferring his stock, or a portion of it, as the case may be. Of course if the vendor of the stock appoints the Secretary of the Company his' attorney to make the transfer (See form of endorsement 259), the vendee of the stock can present it for transfer himself. These transfer 110 CORPOEATION ACCOUNTING blanks* are two, three or four on a page, and are numbered consecutively; they give the number of the certificate trans- ferred, and the number of the one issued in its stead ; they also give the number of the pages on which the surrender and re- issue entries are made, and in this way serve as an index to the accounts. From this book all the transfers are posted, the parties surrendering their stock being credited, and the parties receiving it being debited for the number of shares. (The question of whether a stockholder should be debited or cred- ited for his stock will be found treated elsewhere in this work). Another way is to have a Stock Ledger "folio column" in this book, and opposite the names of the transferror and the trans- feree give the pages of the Stock Ledger to which the entries are posted. Sometimes several certificates are transferred for which only one is re-issued, or several may be re-issued for only one transferred ; to meet this emergency space can be left on the transfer blank opposite the certificate number and the re-issue number, or brackets may be inserted, or the form may be modified by the use of a stub prepared especially for re- cording this data. As soon as a certificate is surrendered the word "cancelled" should be stamped on the face of it, the date added, and the certificate pasted back on its own stub in the Certificate Book. If anybody ever raises a question about the transfer of stock, a look at their account will give the number of the transfer, and as these are recorded consecutively in the Transfer Book it can be located in shorter time than it takes to write this. If the Transfer Book shows that it was signed by somebody as attorney, his authority for so doing can be obtained by turning to the cancelled certificate, the number of which is here given, and which is pasted on its own stub. The endorsement on the certificate will show that the transferror has appointed as his attorney to make the transfer, the person who signed the Transfer Book, and thus the chain of evidence will be complete, the logical sequence of every act established. Form of Transfer Register. 262. Transfer Number for Shares Transferred by Folio . . . Transferred to Folio . . . Certificate No Re-issue Number For value received hereby assign and transfer unto all right, title and in- *Vi(ie paragraphs 284 and 285. AND CORPORATION LAW 111 terest in Shares of the Capital Stock of the Gold and Silver Mining Co., now standing on its books' in name. By:::;:;:::::::;;::::::::::::::::: Attorney. Dated this day of Certificates — How Paid For. 263. Reverting to the subject of stock certificates, every state makes the issue of stock conditioned on the exchange of value; the medium of exchange is also a subject of legislation. For example, the laws of California provide that "No corpora- tion shall issue stock or bonds except for money paid, labor performed or property actually received." These same pro- visions obtain in Delaware, while New Jersey limits the ex- change to money or property. All fictitious or clandestine issues of stock are void. Stock in a corporation being personal property, the owner of it may, generally speaking, give it away for a nominal consideration, but a corporation cannot do this, excepting that when a corporation has a number of shares of stock in its treasury which it does not desire to sell, it may, upon the written application and assent of all the stockholders, distribute the treasury stock pro rata among its stockholders. This method of paying a stock dividend is not a general prin- ciple of corporation law, but obtains where the liability of the stockholder exceeds the par of the stock, and the ratio of lia- bility varies directly with the corporation debts, as in Califor- nia. It is doubtful if it would hold where the liability is lim- ited; that is', it is questionable if in case of insolvency, the stockholders would not have to pay for the benefit of the cred- itors the par value of the stock so held by them ; and yet this would be imposing additional obligations without correspond- ing benefits ; but this is one of those points about which it is best to consult an attorney before taking action. Best Form of Certificate. 264. The best form of certificate is one which provides for the signing of the stub by the stockholder, and the transfer of the certificate either in the person of the owner, or by his lawfully constituted attorney. See paragraphs 256, 257 and 259. In large corporations, where they have a transfer agent, it is customary to appoint him attorney to make transfers, otherwise the secretary or any other officer of the company may be appointed for this purpose. 112 CORPORATION ACOOUNTINO 265. Of course in companies' whose stocks are listed on exchange, the form here referred to would be found incon- venient, where stock certificates are continually changing hands. For such cases the best form is the simple endorse- ment, as one endorses a check or draft. This makes the cer- tificate negotiable, and it may pass current from one hand to another until it finally reaches the office of the company for transfer. When it does reach the office a record is made on the journal of the name of the person who left it. CHAPTER VII. Illustrating Five Forms of Stock Ledgers and Elucidating the Manner of Keeping Them. — The Simplest and Best Form of Stock Ledger. — Stock Journals and New Form of Transfer Book. 266. In stock companies or corporations there are two sets of books, a private set consisting of Minute Book, By- Laws Book, Stock, Ledger, Stock Journal and Transfer Book, and sometimes a Bond Register, Instalment Book and Divi- dend Book ; these books are usually kept by the secretary ; and the general commercial or financial books of the corporation which are kept by the bookkeeper. 26y. Accountants differ as to the best forms for these books as well as to the best manner of keeping them. Having illustrated the Minute Book and explained the object of the By-Laws Book, it is now in order to present some of the Ledger, Journal and Transfer forms and illustrate the manner of keeping them. Whatever forms of books are kept, they should be intelligible and susceptible of easy explanation to one not familiar with accounting. This particularly applies to corporation accounting, where every stockholder has, under certain conditions, the legal right to examine the books of the company and require an explanation of every entry. It is a mistake to suppose that good accounting is essentially com- plicated. Good accounting has as one of its attributes sim- plicity. Forms of Stock Ledger and Other Auxilliary Books. 268. The forms of books and the method of opening and keeping them are not always the choice of the book-keeper, and even if they were, differences of opinion arise as to the best form and the best method. In order to meet various' condi- tions and different views, various forms and methods will be described and illustrated — the illustrations are merely "pro forma." As a matter of fact the keeping of the Stock Ledger and Stock Journal may be as simple and as primitive as one pleases, but the rapid age in which we live requires' forms of quick and easy reference, comprehensive yet lucid, detailed 114 CORPOEATION ACCOUNTING- yet economic. Usually the stock ledger is kept by a single entry. Some credit each stockholder with his stock, in the Stock Ledger, and some debit him. Some use Stock Ledgers with money columns, showing the value of the shares in dol- lars and cents, and others use Ledgers showing only the num- ber of shares ; but in one characteristic all Stock Ledgers must agree, that is. Stock Ledgers must contain accounts with all the stockholders, showing the number of shares held by each, how and from whom they acquired them, how and to whom they disposed of them. Form 2. 269. The journalizing is done from the Certificate Book or the Subscription Book into an elaborate Jouranl which gives a complete record of the sale of the stock and subsequent trans- fer. Form 2. Stock Journal. Left Hand Page Date 1905 By Whom Surrendered Certificate Cancelled Ledger Folio Certifl'te No. No. of Shares Left By Jan. 1 Feb. 1 Paul Jones 1 2 10 Himself 1 Thomas Brown 2 3 10 His Attorney 1 10 Form I. 270. This" is the old style of ordinary ruled Journal and Ledger, in which Capital Stock is debited and individual ac- counts credited in the Stock Ledger. Transfers are recorded in the Stock Journal by an ordinary cross entry, with the necessary explanations. When all stock is sold or subscribed, the Capital Stock account will be debited for the full capital and the stockholders will be credited for an equal amount, and the Ledger will then be in balance. AND CORPORATION LAW 115 Stock Ledger — Form i. JOHN SMITH. 1905 Jan. Feb. To Paul Jones, 50 Shs. " Balance, 50 " 500 500 1,000 1905 Jan. Jan. 100 Shs. 50 Shs. V 1,000 1,000 500 00 00 00 This shows that Smith subscribed for $i,ooo worth of stock, that he afterwards transferred $500 worth to Jones, and that he has $500 worth left. Form 2. Stock Journal. Right Hand Page Certificate Issued Signature In Whose Favor Ledger Folio No Certifl'te No. of Shares Total No. Shares Subject to By-Laws of Company John Smith 1 1 10 10 John Smith Paul Jones 2 2 10 20 Thomas Brown 3 3 10 30 William White 4 4 10 Andrew Green 5 5 5 Thomas Brown 3 6 5 Wm. Patterson 6 7 10 40 271. As will be seen by the illustration, the dates of issue and transfer are all on one page, and each stockholder is cred- ited for the amount of stock issued to him. When he transfers any of his stock he is debited for the shares of his surrendered certificate, and the transferee is credited for whatever portion •of it is transferred to him. The original stockholder is then credited for the remainder, if any. The total number of shares' sold is kept track of as shown in the illustration. This form finds favor with companies whose stocks are listed on ex- 116 COE-POEATION ACCOUNTING change. The fact that stocks are listed on exchange is sup- posed to be a guarantee of their genuineness, as it is under- stood that the Hsting committee makes a thorough examina- tion into the affairs of a company before allowing its stock to be listed. For this reason stock so listed passes from hand to hand by a simple endorsement until it finally reaches the office of the company for transfer, whereupon the name of the per- son leaving the stock is entered in the Journal under the head- ing "Left By." 2^2. Stock Ledger — Form 2. JOHN SMITH. Certificates Cancelled Certificates Issued Date 1905 Jour, Folio Certifi'te No. No. of Shares Frac- tional Date 1905 Jour. Folio Certifi'te No. No. of Shares Frac- tional Feb. 1 1 2 10 Jan. Feb. 1 1 1 2 3 6 10 5 273. In this form of Ledger the shares only are entered. Each stockholder is credited for the number of shares issued to him, and debited when he surrenders' or transfers his stock ; this entry balances his account. He is again credited as shown in the illustration for the number of shares re-issued to him. The difference between the two sides shows the balance of shares he owns' or holds ; or the account may be balanced by ruling it down as done in this instance, and then the credit side will show the standing of it. Form 3. 274. The Journal for this form differs so little from Form 2 and the same form will answer for both so well that it is not thought necessary to take up space in illustrating it. The Ledger, however, differs so widely from the other that it is thought best to explain and exemplify it. A complete record of the stock issued is kept in this Ledger, and the stockholder is charged in the money columns for the par value of the stock he has subscribed for, and credited for subsequent payments on it. When the stock is paid for these columns are ruled down and closed, and only the columns showing the number of shares issued and transferred are used, unless, as sometimes happens, assessments are subsequently entered in the money columns. (In California assessments may be levied above the par of the stock). AND CORPORATION LAW 117 275. Stock Ledger — Form 3. JOHN JONES. Date 1905 Folio Cert. No. Tran. No. No. Shs. Iss'd. No. Shs. Tran. To Whom Transferred Particulars Debit Credit Jan. Jan. Feb. 1 10 1 10 S.J. 1 C.B. 1 C.B. 20 S.J. 2 1 10 10 5 John Smith 10Shs.@|10each Bylstlnstal m't «',2d 100 00 50 50 00 00 100 00 100 00 2y6. This form shows that Jones has paid for his stock, and that he afterwards transferred five shares of it. The dif- ference between the "Issued" and "Transferred" cohimns shows the balance of shares held by him. The new No. in the certificate column shows the number of the new certificate is- sued to him. Form 4.* Q.'jy. . The fourth form is, thought to be, the simplest and most practical. It meets every requirement; is simple, self- explanatory and easily understood by those who know noth- ing about book-keeping. It tells at a glance how much stock anybody holds, without having to wait to figure it up. It shows the source from which each one received his stock, how many shares each one subscribed for, how many each one re- ceived by transfer, and from whom they received them, how many shares each one disposed of and how, whether by for- feiture or transfer, and if by transfer, to whom they were transferred. It gives' the day and date of every transaction, the number of every certificate issued, transferred and re- issued; in fact it is a complete history of every transaction of the company's stock in a clear, lucid, intelligible and compact form. This form of ledger deals only with the number of shares and takes no account of their value. There is no neces- sity for the Stock Ledger showing the value of the shares, THAT is given in the Articles of Incorporation and is expressed on the face of every certificate, and there is no necessity for showing in this ledger the amount the stockholder has paid, or the amount he owes on his stock. It simply shows the number of shares every stockholder holds or has subscribed *See paragraph 281. ; 118 COEPOBATION ACOOUNTINa for, and the fact of their subscription renders them liable for the payment, under whatever conditions the by-laws state. An eminent authority on this subject (Joseph H. Goodwin) has said: ''Since the special design of the Stock Ledger is to show the number of shares held by each stockholder, the issu- ing and transferring of shares is hardly a matter of debit and credit, but rather a matter of the increase and decrease of the number of shares held by each stockholder." That is the point exactly; the corporation is not the stockholders' debtor, nor are they its creditors', as previously explained. Some account- ants credit the stockholders in the Stock Ledger for either the par value of the stock they have received, or the amount they have actually paid on it, but inasmuch as the company is only contingently liable for the amount, and as the certificates are evidence of the stockholders' interest in the company and his right to share in the division of its residual assets in case of dissolution, and as in such case the company does not have to redeem its certificates at their face, but only in an equitable and ratable manner, and as it may pay more or less than the face value, there is no necessity of it all ; however, there is no serious objection to it, excepting that it is a waste of time and energy in an age when both these factors count for so much. The best method is to debit each stockholder for the number of shares he receives, and not the amount, and to credit him with the number he parts with, and, as shown in the illustration, his account will always show at a glance the number of shares he holds. It may be said for the benefit of the critics that the words 'Mebit" and "credit" are not used here in their exact meaning; but rather in an analogical sense. "Debit" is the correlative of credit and means to charge with a debt ; and of course the stockholder who has paid for his stock is not debtor to the company, but he owes the return of the certificate to the company from which he received it and he must pay it back or surrender it before he can receive a re- turn of his capital, and it logically ensues that if we debit him for what he has received (the certificate) we must credit him for its return. Opening Ledger (Form 4.) 278. Open a capital stock account in the beginning of the book, and debit it by a single entry with the full capital of the company.* Whenever any stock is subscribed for, credit this account with the number of shares subscribed, and charge each stockholder with the number of shares he receives. When *See paragraph 279. AND COEPOEATION LAW 119* the stock is all subscribed the stock account will balance and the total of the stockholders' accounts will equal the au- thorized number of shares, and by multiplying this by the value of the stock it will equal the amount credited to Capital Stock account in the General Ledger. Of course the Capital Stock account in the General Ledger may only represent the "Paid-up Capital" of the company, in which case the difference between the two would represent the amount still due on sub- scription. The difference between the two sides of the stock account at any time, will represent the number of shares un- subscribed, while the total of the credits on this account must always equal the total of the individual stockholders' accounts. The only object of debiting the stock account with the number of shares, is to show the number of shares the company is authorized to issue ; this may be omitted altogether if it be de- sired to show the Ledger in equilibrium. But we have seen how a trial balance can be taken so as to prove the accuracy of the work, and it is thought best to let the debit stand on the Stock Account, for the reason given, and the further reason that is shows at a glance the number of shares remaining un- sold. 279. Stock Account. Date 1905 Cert. No. To Whom Issued Other Particulars Shares Debit Credit Balance Jan. 1 1 John Smith Authorized Capital 1,000 250 2 Paul Jones Trustee, Paul Jones, Jr. 100 3 Albert Brown 100 4 Thomas White 100 5 Charles Green 100 350 Feb. 1 Trans.to Trea. Stock Act. 350 00 1,000 1,000 280. A few pages are headed like this (the heading may be done with a pen) in the beginning of the book for the Stock Account, and Treasury Stock Account if there be one. The stock is written up from the Subscription Book or Certificate Book and the names and numbers are entered here, from whence they are posted to the respective accounts of the stockholders. The Treasury Stock* Account is treated exactly *Vide paragraph 302 et seq. 120 COEPOEATION ACOOUNTINa as this, except that it is debited whenever stock is forfeited, and the name of the forfeiter given in the explanation column.* Stock Ledger Form 4 — Subscribers' Account. 281. JOHN SMITH. Date 1905 Certif. No Trans. No. By Whom Transferred To Whom Transferred No. of Shares Issued No. of Shares Trans f. Bal. Shares Held Jan. 1 V Issued from Cap. Stock 250 10 6 1 Albert Brown 50 300 Feb. 1 8 2 Dwyer Gray 100 200 Mar. 1 10 Treas'ry Stock 50 250 282. This account shows that John Smith received 250 shares of the original issue of Stock, that Albert Brown trans- ferred 50 shares to him, that he (Smith) afterwards trans- ferred 100 shares to Gray, and that he subsequently acquired 50 shares of Treasury Stock. It shows how much stock he subscribed for originally, how much he afterwards received, and from what source, and how much he disposed of, and to whom, and how many shares he held at each period. As fast as one can turn the leaves he can find out how many shares each stockholder has, and this is a great convenience in pre- paring for an election. When a person transfers any of his stock the old certificate number is checked off and the new one for the re-issue is inserted opposite the transfer. For ex- ample, Smith transfers part of Certificate No. i to Gray, Gray receives Certificate No. 7 for the part transferred to him, and Smith receives Certificate No. 8 for the balance of Certificate No. I re-issued to him. The certificates checked off are can- celled and those not checked are the ones he holds, which should agree with the aggregate number of shares shown in the "Balance" column. 283. By this last named method the Journal is dispensed with as being wholly unnecessary, the stock account showing in detail the names of all subscribers with the number of shares and certificates of each. The correctness of this can 'be proved at any time by checking it against the stubs of the certificate book. Instead of the Journal, a Transfer Book is used for the purpose of recording transfers of stock; this is sometimes called a Transfer Journal. *See index for "Forfeited Shares." 284. AND COEPORATION LAW Transfer Record. 121 Surrendered to Folio Surrendered by Surrendered Re-issued For value received , hereby surrender. . to Cert. No. No. Shs. Cert. No. No. Shs. sha res of Certificate No tal Stock of 01 tne c;api r^A Vlo^^K-.T 11 ft-l /-.«-; /rr^ i-U^ z^^*. cellation of said Certificate and the issue of new Certificate to the following- person Transfer No. Pag-e of Register shares shares Dated Signed 285. A transfer book is a very necessary part of the office ^equipment of a well regulated corporation,* especially so where stock is required to be transferred either in person of the owner, or by attorney. The endorsement on the certificate is an authorization to somebody to make the transfer ; that is, to sign the transfer book, and the doing so is to the corpora- tion an important act in the concatenation of circumstances attending a proper transfer. Form 5. 286. For those who prefer to have money columns' in the Stock Ledger, a form is herewith given which should meet their requirements and at the same time have the advantages which Form No. 4 possesses. *Vide paragraph 261. 122 COEPOEATION ACCOUNTINa Stock Ledger. — Form 5. JOHN SMITH. Date ■£ 6 5^ CO 1^ By Whom Transferred To Whom Transferred and other Particulars Folio Debit Credit Balance 1905 Shs Amt Shs Amt. Shs Amt. Oct. Nov. Dec. 1 10 10 1 1 1 7 6 8 10 1 2 Capital Stock Albert Brown Treas'ry Stock Istlnstal 60% Transfer to Dwyer Gray 1 2 C.B. 10 250 50 50 2500 250 500 00 00 00 100 1250 500 00 00 250 300 200 250 2500 2750 1500 1000 1500 00 00 00 00 00 287. With this form, the stockholder is charged for the par vahie of his stock at the time of his subscription, and he is' credited in the money column for subsequent payments. The "shares" column show the number of his shares, and the "money" columns show the amount he has paid on it and the balance he owes, if any. If he transfers any of his stock he is credited for the number of shares transferred, and also the amount due on that number at the time of transfer, but, let it be understood, a person cannot transfer his stock in a cor- poration while he is owing the corporation on that stock, with- out its consent and the assumption of his liability by the transferee. In the foregoing illustration the par value of the stock is placed at $10 per share and Brown transfers 50 shares to Smith on which he has already paid the company 50 per cent, Smith is thereupon debited with the 50 shares and the balance, so he pays the first instalment of 50 per cent on his certificate No. i. Later he transfers 100 shares of this cer- tificate to Gray, when he is credited for the 50 shares he trans- fers and the balance he owed the company on them at the time of transfer, namely 50 per cent or $1250. The party to whom he has transferred the shares is debited with the num- ber of shares and the balance due the company on them, namely $1250. When the stock is all paid for the money columns will balance, and then the Ledger is kept in the same way as Form No. 4. In case assessments are levied at some subsequent time, the money columns may, if desired, be again called into requisition. See paragraph 274. CHAPTER VIII. Theory and Nomenclature of Corporation Accounts and Corporate Terms. — Definitions and Differentiations of Every Class of Stocks and Bonds Known. — Funds vs. Accounts. — Sinking Funds and Other Funds and How to Construct Them; Three Different Methods. — Trusts, Syndicates, Holding Com- panies, Voting Trusts. — Trading Statements, Statements of Affairs and Condition, Realization and Liquidation Accounts, Deficiency Accounts. — Theory of Diminishing Values, Etc. Capital Stock. 288. There exists in the minds of many a confused idea of the relation between Capital and Capital Stock. They are regarded by many as synonymous terms, while many others can not differentiate the two terms. Capital, broadly speak- ing, is wealth or means employed to produce wealth or things of value. When so employed it is called "invested" or "active capital." It is subdivided into two classes, "Fixed Capital," such as building, plant, machinery, etc., or the things that are used in production, the things acted on to produce ; and "Cir- culating Capital," such as money, food, supplies, etc., the things acting on the productive agencies, the means employed to set the productive machinery in motion. 289. The capital stock of a corporation is the fixed, deter- minate, nominal value of share interest which it is authorized to sell or exchange for things of equal value — at least that is the theory of capital stock; but the "capital stock" and the ''paid-up capital" are two distinct things. Paid-up capital is the sum total in money or money equivalent contributed by the stockholders of a corporation to a common fund to form a basis of capital on which the corporation commences business. This fund is the measure of the company's assets at the start as well as the measure of its liabilities ; hence we see that it commences its existence as the fiduciary agent of the stock- holders, becoming liable, in a certain sense, for the care and investment of this fund and its return to the contributors or their assigns, in an enhanced or reduced condition, at the close 124 COBPOEATION ACCOUNTINO of its corporate career. Whenever the net assets' of a corpor- ation fall below its paid-up capital it is insolvent, and its cap- ital is said to be impaired. The paid-up capital, or subscribed capital (if all subscriptions are not paid), is regarded as a guarantee fund contributed by the stockholders for the secur- ity of the company's creditors, and it must never be impaired. It must stand between the creditors and loss at all times. It is the margin of protection which the creditors of a corpora- tion have against its failure, the extreme limit of the loss it may sustain and pay all creditors out of its residual assets. From- the foregoing remarks we can easily deduce these facts : The capital of a company is anything of value which the com- pany owns in excess of its liabilities. The capital stock of a company (subscribed or paid up) is the amount supplied, or to be supplied, by the stockholders' to finance the company and give it a basis of credit; it may be more or less than its capital. Certificate of Stock. 290. A stock certificate is an evidence of ownership of the stock of the company named therein; it is simply a paper signed by the president and secretary, or president and treas- urer of a corporation, certifying that the owner thereof is en- titled to so many shares of stock of the corporation as are represented by the face of the certificate. The nominal value of the stock is stated on the face of the certificate, but that does not mean that the holder thereof is the creditor of the cor- poration to that amount, nor to any amount."^ The company is under no obligations to redeem its certificates; in fact, it cannot buy up its own stock unless under certain conditions which are defined later.^ A certificate is not negotiable in the sense that a check, draft, or promissory note is. It may be transferred for any consideration, either by a simple endorse- ment, if the by-laws so allow, or by filling in and signing a regular transfer, either in person or by attorney. A corpora- tion does not recognize a transfer until it is entered on its books, and in most corporations the books are closed against transfers a certain length of time before elections, and, after declaring and before paying dividends. Common Stock. 291. In every corporation the capital stock is divided into a certain number of shares of a certain par, or nominal, value. Where there is only one kind of stock it is called ''common *Vide paragraph 211. iVide paragraph 302 — Sec. 5. AND CORPOEATION LAW 125 stock." In such a case every share has the same voting power,* the same earning capacity, the same obligations, the same common attributes, hence the name "common stock." "Gen- eral stock" and "common stock" are interchangeable terms. The ownership of stock is evidenced by certificates, scrip, or contract. Preferred Stock. 292. Preferred stock differs from the ordinary stock in this, that a certain preferential dividend shall be paid upon it before any dividend can be paid upon the 6rdinary stock, e. g., "five per cent preferred stock" means that it is entitled to five per cent dividend before any dividend can be paid on the com- mon stock ; but it does not mean that it must be paid on it if the company does not earn sufficient profits to justify the pay- ment of that amount.^ It may pay two per cent, or no per cent, and still the owner of preferred stock has" no claim against the company ; he has the simple right to first dividends out of the profits. The common stock receives no dividend until the pre- ferred stock is satisfied, and then only such dividend as the directors shall decide is prudent to pay out of the balance of the profits. Preferred stock is usually given to secure some obligation of the company, although many companies issue two or more kinds of stock at the time of organization. They do this in order to secure capital quickly by offering special inducements to the purchasers of a limited number of shares. Again, a corporation may have excellent prospects and still' be crippled financially and in order to obtain "working capital" it issues' a certain amount of stock which it sells on condition that it will receive dividends in preference to the original issue of stock. 293. Ordinarily speaking the owners of preferred stock have the same right to vote it as have the owners of common stock ; but there is frequently an inhibition against this in the by-laws, on the theory that the owners of the common stock yield up certain dividends' to the owners of preferred before claiming any for themselves; and inasmuch as their claim or show to dividends depends on good management, they can be relied on in self-interest to use every means to earn the pre- ferred dividend and more ; whereas, the preferred stockholders might be satisfied with earning a dividend for themselves only. 294. The following is a short form of preferred stock cer- tificate : *Vide paragrapli 293. ~ iVide paragraph 297. 126 CORPORATION ACCOUNTING No 5% Preferred Stock A THE BLANK RAILWAY COMPANY This is to Certify that is the owner of Ten Shares of the nominal value of $100.00 each in the 5% Preferred Stock A of The Bi,ank RAII.WAY Company a corporation org-anized and existing under the laws of the State of , United States of America; transferrable only on the books of the Com- pany in person or by attorney on return and surrender of this 'certificate properly endorsed; when a certifi- cate or certificates of like tenor will be issued to the assig"nee. IN WITNESS WHEiRE^OF the President and Treasurer have hereunto sig-ned their (seal) names and caused the corporate seal to be affixed hereto this day of. , .190. . Treas. Sec'y Cumulative Preferred Stock. 295. This is a stock which is entitled to "cumulative divi- dends," that is to say, if the dividends are not paid for a cer- tain period of time the accumulated amount is still due to the holders of this kind of stock, and these back dividends must be paid before those due later on are taken care of. In other words, if a company misses or passes a dividend period it does not escape the payment of that dividend or several dividends. It must, when it is in a condition to do so, pay the accumula- tion of the passed dividends. If a company is "over capital- ized" and it is obvious that it cannot pay the preferred divi- dend, the logical and reasonable thing to do is to reduce the preferred stock to common stock. It is also a common prac- tice to convert preferred stock into bonds at a lower rate of interest, as well as to convert bonds into common stock. The manner of making these conversions and the reason for them will be explained further on. See paragraphs 349 and 350. Non-Cumulative Preferred Stock. 296. The meaning of this title is obvious, signifying that the dividends are to be paid if earned by the company; but if there is a lapse in the dividends by reason of the company not earning sufficient to pay them, they do not cumulate, and the stockholder and not the company is the loser — see definition of "Preferred Stock." In both these stocks the amount of the preferential dividend is stated on the face of the certificate. AND CORPORATION LAW 127 Guaranteed Stock. 297. This is practically the same as ''cumulative stock/* It is stock on which a certain dividend is guaranteed;"^ and must be paid before dividends are paid on any other stock of the company. It is an obligation of the company which does not outlaw, and all the overdue dividends must be paid by the company whenever it is in a condition to pay them. It must be understood, of course, that all dividends are contingent on being earned; and no dividend — no matter how preferred or guaranteed — can ever become anything but a claim on the profits. They do not exist as a liability against the assets of the company in case of failure or dissolution. 298. All stock certificates, where there is more than one kind, should have the name of the stock which they represent printed on the face thereof; that is, "preferred stock," "guar- anteed stock," or whatever it may be. This designation is usually tinted on the certificate in very bold type. Increasing the Preference. 299. If a corporation be very successful the common stock may pay better dividends' than the preferred or other favored stock ; that is, after the preferred dividend has been paid there may be sufficient profits left to pay a much larger dividend on the common stock ; but to guard against this, and as an extra inducement to the purchaser of preferred stock, some com- panies insert a clause in their by-laws to the effect that: "In addition to the preferred or guaranteed dividend, the preferred or guaranteed stock shall also receive an amount equal to one- half of the dividends' paid on the common stock" or some such or even greater concession. Deferred Stock. 300. This is the antithesis of preferred stock. As pre- ferred stock has the preference in the profits of the company, deferred stock has no claim on the profits for a certain period of time, until the happening of a certain event, or until the common stock shall have received certain dividends. Non-Assessable Stock. 301. This means that the stock shall not be assessed for any purpose after the par value of the shares shall have been *Soinetimes "holding companies" guarantee dividends on the stock of subsidiary companies. Vide paragraph 468. 128 CORPORATION ACCOUNTING paid. The phrase, however, is a misnomer in this and some other states,* as the stock can be assessed at any time to pay the just debts of the company ; moreover it is better to submit to an assessment for that purpose than to become defendant in a lawsuit for one's share of the debts. This stock should have the phrase "Full-paid Non-assessable" printed in bold letters on the face of the certificates ; that is, in those states where stock is non-assessable when the par value is paid ; then the purchaser for value and in good faith can not be held for assessments in case the stock was not fully paid for; nor can he be held liable by the creditors of the company in case of failure. Treasury Stock. 302. There is no class or sub-division of stock so much and so ill defined as "Treasury Stock. ' Following is a list of the generally accepted definitions : 1. The unsubscribed stock of a corporation, after the sale of stock closes, or the amount remaining after the incorpor- ators have received their stock. 2. The amount of stock that the incorporators or promot- ■^ ers reserve to be sold at some future time as the needs of the company may require. 3. Stock donated or given as a bonus to the company by one or more members to be sold for the purpose of increasing its working capital. 4. Stock forfeited to the company. For example, if stock is sold on the instalment plan and the purchaser fails to pay his instalments he forfeits his stock subject to the conditions laid down in the by-laws, (that is where the state law author- izes the insertion of such a provision) ; this then becomes treasury stock. 5. Stock repurchased by the company; this, however, is ' unlawful, as corporations are not allowed to speculate in their own stock ; they may, however, and must, in order to acquire legal title to it, purchase their own stock at delinquent sales provided there is no other bidder. 6. Some accountants go so far as to designate the unpaid subscribed stock treasury stock. 303. These are the generally accepted definitions ; now for an analysis: The theory of "treasury stock" is that it is in the treasury of the company or the hands of the treasurer. The term, as applied to stock, is not exact but analogous. A good *Vide paragraph 156. AND CORPORATION LAW 129 definition of "treasury'* is a repository of treasure or wealth ; and if we apply this definition we must exclude from the fore- going definitions all those that are not in themselves a treasure or asset of the company. It is clear that one and two are not of this class ; they are not an asset out are issued against what becomes an asset ; their issue involves the creation of a liabil- ity in proportion to the asset exchanged for them: Number three is clearly an asset ; it was issued against an asset in the first place, but the liability thus created was extinguished when it was donated back to the company ; therefore the com- pany has acquired the equivalent asset for nothing, and this stock can be sold and the company's treasury replenished without increasing the capital liability beyond its original amount ; in other words, it is a clear gain to the company. In numbers four and five there is a gain proportionate to the lia- bility extinguished and the company acquires the stock for the purpose of sale again. The actual asset value of this stock is the amount above par which the company receives on the two sales, (if the stock is resold.) 304. Number six can not in any sense be classed as treas- ury stock. It is neither unissued, donated nor forfeited. The deduction to be drawn from the foregoing analysis is : Treas- ury stock, properly speaking, is that portion of the paid up stock of a company which reverts to the "Treasury" and thereby reduces the company's liabilities wtihout impairing its assets; hence it is that "donated" stock is unqualifiedly treasury stock; and that "forfeited" stock and "repurchased" stock are, in a measure, treasury stock. The proper way to do with these latter two classes would be to take into Treas- ury Stock Account a sufficient number of shares to equalize, at par, the actual gain to the company, the balance going back into Capital Stock Account. The reason for this is : All stock is supposed to be sold for not less than par; liability exists in every case up to that amount, as to creditors, but stock once sold and paid for, (as the treasury stock just described) can be sold next time at a discount if desired. Another reason is that this stock is considered issued and outstanding, and as such is subject to taxation in some states. 305. Supose that a company received a bonus of $10,000 worth of stock from the stockholders, for the purpose of sell- ing it to acquire new capital, what should be the procedure, and what the entries? 306. The donors should assign the stock to the treasurer of the company in his official capacity; then the company ac- quires title to it, places it in the treasury, so to speak, and has 130 CORPORATION ACCOUNTING it for sale. In double entry bookkeeping every debit must have a credit or every asset a corresponding liability, there- fore the entry would be : Treasury Stock Dr. $10,000 To Working Capital or Stock Donation Account $10,000 for 10,000 shares donated to raise working capital. 307. As this stock is sold the treasury stock is credited, and when it is all sold the Treasury Stock Account will bal- ance and the Working Capital Account will represent the same asset in a new form, viz : Cash ; that is, if the treasury stock has been sold at par. If the treasury stock has been sold at a discount of, say, 10%, make this entry to close Treas- ury Stock Acocunt : Working Capital Dr. $1000 To Treasury Stock $1000 for 10% discount on stock sold to raise working capital. If it has been sold at a premium make this entry : Stock Premium Account Dr. $1000 To Working Capital $1000 Treasury Stock sold at a premium of 10% to increase working capital. 308. Now we see from the foregoing that the company has come into possession of $9000, $10,000 or $11,000, as the case may be, for which it actually gave nothing in exchange. This is a clear gain to the company, but it must not be cred- ited to Profit & Loss, for the reason that the company has not earned it. It is no part of the revenues of the business. It is a capital accretion rather than a revenue accretion and it must not show in the Profit & Loss Account or the Balance Sheet as a profit ; because this would be very misleading, in- asmuch as it has not been earned. The best way to do then is this : Allow "Working Capital" to stand on the books until the close of the fiscal perior, distributing all disbursements under proper "account headings," so as to show the correct cost of operating, and then make this entry: Working Capital $10,000 To Surplus Account $10,000 for sale of donated stock. *Vide paragraphs 688 to 692. AND CORPORATION LAW 131 309. This will show that the gain was an extraordinary- one and not a profit on operating. If the Profit & Loss Ac- count shows a loss, charge it against Surplus Account thus: Surplus Account To Profit & Loss. Net loss on operating for the fiscal period. The company will still be solvent to the amount of the Sur- plus Account. 310. Some may object to closing Working Capital into Surplus, as it might appear to some of the stockholders that this surplus was available for dividends when the earnings of the company would not justify a dividend. There is no real merit in such an objection. In the first place, the law inva- riably provides that dividends shall be paid only out of sur- plus profits, and in the next place a good surplus should al- ways be maintained to guard against losses and insure the solvency of a company. Watered Stock. 311. This is an increase of the capital stock of a corpora- tion without a corresponding increase in the assets of the company. It is usually distributed among the stockholders pro rata, and is done for the purpose of defrauding the state or municipality. Some states and municipalities require cer- tain corporations to pay all of their excess of profits, over a certain fixed rate, to the state or municipality or they are compelled to reduce their charges. In other words the state fixes the limit of their earnings, and in order to defraud the state or municipality and reap all the profits they water the stock, e. g., suppose a water company with an authorized cap- ital of $100,000 is earning 10 per cent profit when the law al- lows it to earn but 5 per cent. It simply increases its capital stock to $200,000, after which its earnings will appear but 5 per cent on its* capital of $200,000. By this simple process the state or municipality is defrauded of its share and the stock- holders are correspondingly benefitted. These corporations are required to make a public statement of their earnings, and, by the watering process, the dear people are led to believe' that those much abused corporations are earning but small dividends on their investment. The public is enlightened as to their receipts and expenditures, but is kept in the dark as to their actual percentage of profit. 312. A terse and exact definition of "Watered Stock" is: 132 CORPORATION ACCOUNTING Stock acquired for less than an equivalent exchange of value. This makes promoters stock and the stock of the fellows v^ho get in on the "ground floor/'* as well as the stock that is issued against inflated values, "Watered Stock." 313. Some of these people who get in on the ground floor assert that it is just as legitimate to capitalize the earning ca- pacity of a business as it is to capitalize its tangible assets and they resent designating this over-capitalization as "Watered Stock," e. g. If a company with tangible assets of $1,000,000 is capable of earning 10% on this capital, and 5^ is regarded as a fair return on capital, they consider it proper to capitalize the company for $2,000,000. There may be times when this is justified but more frequently it is not and if the speculative earning capacity does not materialize and the company should be forced into liquidation, or forced to reor- ganize, the pressure will force the water out sure enough be- cause the assets can not support the stock. Vide paragraph 842. Clandestine Stock. 314. This is a secret increase of the capital stock with- out the authority of the state. It differs from watered stock in two ways. In the latter case the stock is increased by legal process, to serve an illegal purpose. In the former case, an increase of stock is not legally sought, for obvious reasons. Watered stock as we have seen is' issued for the purpose of defrauding the state or municipality and sometimes the pur- chasers ; while clandestine stock is issued solely for the pur- pose of defrauding its purchasers and enriching certain indi- viduals, e. g. A corporation is known to have a good surplus and it is paying good dividends, its stock is valuable and easily commands a premium; the directors being daring and unscrupulous men decide upon a secret issue of stock which is distributed among themselves and then offered for sale ; the stock easily sells on its reputation and the thieves pocket the spoils. This is a risky business, but men have been known to engage in it ; and, there is the case of certain railway mag- nates in New York some years ago who, upon finding their stock being bought up by a rival company for the purpose of controlling or absorbing them, issued stock as fast as a print- ing press could run, until the trick was discovered. It is hardly necessary to say that a company found guilty of this would forfeit its charter to the state, and the directors and of- ficers who participated in such a fraud would be held jointly and severally liable. *See chapter XXVn: AND CORPORATION LAW 133 Assenting and Non-Assenting Stock. 315. There is an old saw that "necessity is the mother of invention," and indeed these terms are the offspring of necessity. When the Westinghouse Electric and Manufac- turing Co. was reorganized about fifteen years ago, it was necessary to obtain the assent or consent of the stockholders- to the plan of reorganization. The vast majority of. the stock- holders consented to the plan, but there were a few who either could not be located or who refused or neglected to give their written consent to the reorganization. In order tO' avoid delay and to legally carry out the reorganization, it be- came necessary to issue two classes of stocks, one designated ^'Assenting Stock" and representing those who had con- sented, the other designated "Non-assenting Stock" and rep- resenting those who had not consented. In all other respects' these stocks are identical and may be compared to what is- known as common stock. Out of $21,000,000 worth of stock there is at this time (August i, 1905) only outstanding $3,650 worth of non-assenting stock. Founders' Shares. 316. The general corporation act of New Jersey author- izes the issue of what are known as "founders shares." This phrase and classification is borrowed from the English. A corporation is formed having a certain number of shares of preferred and common stock. Of the common stock a fixed percentage is set aside, designated as above and issued to the "founders'" of the enterprise or to some eminent financiers or titled gentlemen for the use of their names in connection with the enterprise. These shares, by regulation, have enormous dividend rights after the preferred dividends are paid — some- times 50% of the entire' common stock dividend. But few companies have been organized in this country on such a basis and their legality has never been adjudged by an Amer- ican court. Bonds. 317. It is one of the functions of a corporation to issue bonds. The difference between a corporation issuing bonds and a government issuing bonds lies in this: A government issues and sells its bonds on the faith the purchasers have in the stability of the government; but corporation bonds are usually issued against tangible assets. The' simplest defini- tion of a bond is "an obligation," and the outstanding bonds- 134 CORPORATION ACCOUNTING of a corporation are so much outstanding obligations which it has contracted to meet at certain times. These future ob- ligations are sold as of the present, bearing interest until date of maturity. The amount of the obligation is the face value of the bonds (regardless of what they sell for), plus the pe- riodical recurring interest. To secure the payment of these obligations or bonds the corporation must execute a mortgage or trust deed, or collateral trust agreement, to some trustee or trustees, to be held by them as security for the payment of the bonds at maturity and interest at stated periods. If the bonds are not paid at maturity, or if default be made in the payment of the interest, the trustees foreclo"se the mort- gage or sell the securities, in accordance with the terms and conditions of the deed of trust, for the benefit of the bond- holders; unless the corporation can successfully float another issue of bonds for the purpose of retiring these first or under- lying bonds. Issuing Bonds. 318. The statutory provisions governing the issue of bonds must be strictly complied with in every instance. Some states like New York and California require the consent of two-thirds of the stockholders in interest to legalize a bond issue; others like New Jersey vest that power in the Board of Directors. 319. Assuming that a corporation is in need of funds to develop its properties, extend its business, or discharge its unfunded debts, and for this purpose it desires to issue bonds, what is the procedure? First, comply with the statutory pro- visions as to the proper assent of stockholders or directors; next, pass resolutions of the stockholders or directors author- izing the issue of bonds and defining the amount, denomina- tion, classification, interest rate, and term of the' bonds; also the security which the corporation is to give to guarantee their payment, the name of the trustees to whom the security is to be delivered, or executed, etc. ; then execute a "Deed of Trust" and have the bonds prepared. For forms of "Consent to Mortgage," "Certificate of Consent," "Resolution Author- izing Bond Issue," "Deed of Trust," etc., see "Conyngton on Corporate Management," page 319. Bond and Bond Premium Accounts. 320. No entry is made on the financial books of the cor- poration until some of the bonds are sold. They are sold only for cash, and if they are a particularly good speculation and AND CORPORATION LAW 135 bear a good rate of interest they may be sold at a premium.. In this case two accounts are opened, a "Bonds Payable Ac- count" and a "Bond Premium Account"; the former is cred- ited with the amount of the bonds and the latter with the amount of the premium. The "Bonds Payable Account" may be treated exactly as the "Bills Payable Account" is treated in ordinary commercial accounting. If there be more than one bond issue an account should be opened for each issue, under properly designated headings, such as "First Mort- gage Bond Account," "Equipment Mortgage Bond Account." If the bonds are sold at a discount a "Bond Discount Ac- count" should be opened and charged with the discount. If some of the bonds are sold at a premium and some at a dis- count these two accounts may be consolidated under one heading, "Bond Premium and Discount." In every case the Bond Accounts must be credited with the par of the bonds as that is their redemption value. As to the propriety and utility of opening Premium and Discount Accounts, it is far better than crediting or debiting Profit and Loss with pre- mium and discount, for the reason that these items do not belong to the revenue of the' company, but have to do with the capital as explained in paragraph 308. 321. As to the disposition of Premium Account: It is a capital revenue and should be carried to the "Surplus Ac- count" or form the nucleus for a "Sinking Fund" for the ex- tinction of the bonded indebtedness. The entries to start a Sinking Fund (supposing the premium received was $1000) would be as follows : Sinking Fund, Dr. $1000 To Cash $1000 (This entry can be made in Cash Book.) Premium Account, Dr. $1000 To Sinking Fund Account $1000 322. Note the distinction and the difference between "Sinking Fund" and ''Sinking Fund Account." One is a debit representing a cash asset, the other is a credit representing a capital liability, which is' offset and counterbalanced by this corresponding cash asset. These entries reduce the cash bal- ance, establish the Sinking Fund and wipe out the Premium Account. As to the disposition of the Discount Account : This is a capital expense — an expense incurred in raising new capital — and may be charged against Surplus' for the same reason that Premium is credited to Surplus ; there is this dif- 136 CORPORATION ACCOUNTING ference, however, and this justification for charging it against "Revenue Expense" ; the funds raised by the sale of the bonds are necessary to carry on the business or to place it in a po- sition to increase its revenues, hence the expense involved in increasing the revenue earning capacity of the business may be charged, with propriety, against the revenue earned; but, inasmuch as this expenditure is not for any one year or fiscal period, it should be written off against the earnings of a num- ber of years, and the residue considered as an investment for the benefit of the future. If the bonds were issued for con- struction purposes, or for permanent improvements, some ac- countants would charge this discount to Construction Account or Plant Account as a necessary part of the cost of construc- tion or plant. -At first glance this seems reasonable and pro- per, but as a matter of fact it is not a part of the cost but only incident thereto. It is, of course, the simplest way of dis- posing of the discount, but not the best. Book values should be as nearly actual values as possible, and the actual cost or value is the amount at which it could be duplicated with am- ple funds to finance it. The full earning capacity of any busi- ness is the amount it is capable of earning with sufficient cap- ital. For this reason the expense of acquiring sufficient cap- ital to carry on its operations should be kept out of Profit & Loss Account, in order that the Profit & Loss' Account may show the full earning capacity of the business. It is very important to the corporation to know this, and to show this, if it ever wants to interest new capital or consolidate with another corporation. Selling the Bonds. 323. Usually the Trust Company holding the ''Trust Deed" acts as Registrar and undertakes the sale of the bonds. Sometimes one of the great Underwriting Companies under- writes the entire bond issue, that is, for a certain percentage of the face value of the bonds, or other consideration, they undertake the sale of the entire issue, — they assume all the risk of placing the bonds, agreeing to purchase at a certain minimum price all that the public will not take. Bonds so underwritten are sold, as far as the corporation is concerned, and this commission is treated as discount would be treated; but in many cases there is no such commission to be con- sidered, the rate of interest being so high and the securities so -satisfactory that the bonds easily sell at a premium, in which AND CORPORATION LAW 137 case the underwriters take the whole issue at par, or even above par, and derive their profit out of the excess premium obtained. First Mortgage Bonds. 324. Bonds secured by a first mortgage on a company's property take their name from the mortgage and are called ^'First Mortgage Bonds." They are a first lien on a com- pany's property, excepting Receivers' Certificates, as hereafter explained. Second or subsequent mortgages are subject to the satisfaction of the first; and others in the order of their number; hence, first mortgage bonds are the best security, and the bond holder is usually in a better position than the stockholder, for the bond holder is bound to receive his inter- est, whereas the holder of ordinary stock, or even preferred stock, may or may not receive dividends. Of course if a com- pany is in a prosperous condition the stockholder may receive more in dividends than the bond holder does in interest. Coupon Bonds. 325. Bonds with interest coupons attached to them and payable every three, six, or twelve months are called Coupon Bonds. The number of coupons depends upon the number of years the bonds are to run and the number of interest periods. When a coupon falls due it should be detached and presented for payment, as it does not bear interest after due date. The coupons are preserved by the company as vouchers' for the interest paid. A "Bond Interest Account" and sometimes a "Bond Interest Due Account" is opened for these coupons; (vide paragraph 327, et seq.) this serves the purpose of show- ing the total interest accrued, and the amount paid, on the bonds. Such companies' as carry a Bond Interest Account should always make an entry like this in their annual state- ment of disbursements : "Interest Paid on Bonds." This is a good practice, as many stockholders want to know in detail 'Vhere all the money goes." Besides, this interest is a part of the penalty a company pays for want of sufficient capital of *its own, and should not be deducted from the earnings but from the profits of the company. We must always differ- entiate between earnings and profits. These bonds and cou- pons are payable to bearer and title passes' by delivery; for this reason they are more convenient for speculative purposes or short time investments. It frequently happens that com- panies provide for the conversion of Coupon Bonds into Reg- 138 CORPORATION ACCOUNTING istered Bonds — United States Coupon Bonds may be so con- verted. Registered Bonds. 326. These bonds differ in many respects from Coupon Bonds. They are called Registered Bonds from the fact that the number, denomination, payee and address, etc., are regis- tered in a ''Bond Register" kept by the corporation issuing them. The name of the payee or owner is written on the face of every bond and they can only be transferred by assignment duly acknowledged and witnessed and by re-registry. The Treasury Department of the United States government keeps a ledger account with every such bondholder, particularizing every bond held by each. When interest falls due on these bonds checks are mailed to the owners or holders as the names and addresses appear on the Register or Ledger before the books are closed against transfers. They possess these advan- tages over coupon bonds : The owner is more secure in their possession since the title does' not pass to the mere holder, he does not have to look out for the interest periods, nor dread the loss of coupons. Accounting for Bond Interest. 327. The matter of accounting for registered bond interest is very simple. The interest is supposed to be paid at matur- ity. The checks are drawn, charged up to Bond Interest, re- corded on the Register and mailed to the bondholders. A spe- cial form of check is used, something like the following: 328. 4-» m (U u ^^ 'dO a W First Mortgage 6% Gold 'Bonds, maturing- 190. . %.. .. Date Pay to the order of Dollars quarterly interest on Registered Bond No for quarter ending No Signed 329. These checks are preserved as vouchers for the pay- ment of the interest, and their return should be looked for and examined into by the Auditor, to see that the endorsement compares with the signature on file. AND CORPORATION LAW 139 330. Accounting for coupons is not so simple. As the in- terest is a liability of the company, when it falls due a charge should be made against "Bond Interest" account and "Bond Interest Due" account credited with the amount thus : Bond Interest Dr. To Bond Interest Payable for quarterly interest now due and payable, etc. 331. This Bond Interest is the amount of the expenditure as distinguished from the amount of the disbursement. It is to be paid, and is a charge against the profits of the period. The "Bond Interest Payable" is a liability that has to be met as the matured coupons are presented for payment. When presented they are paid and charged to ''Bond Interest Pay- able" and the balance of this account is the existing liability on accrued interest. 332. The coupons should be cancelled in such a way that they can not be run in a second time ; and the date of payment should be stamped on them, or cut into them ; this will facili- tate the work of the auditor in checking disbursements by date, and prevent what is known as ''lapping." A count of the coupons in, obviously shows the number out; and these should equal the balance of the "Interest Due Account." There are many ingenious ways of filing these coupons, perhaps the very best is a scrap book arranged a page to a bond, the pages being divided into squares equaling in size and number the coupons of each bond, and then superimposing the coupons cashed in these squares thus : 333- Coupon No. 1 Coupon No. 2 Coupon No. 3 Coupon No. 4 with proper heading. Equipment Bonds. 334. These bonds are peculiar to railroad companies. They are secured by a mortgage on the rolling stock or equip- ment of the company, hence the name. Car Trusts. 335. Car Trust Certificates relate also, as their name im- plies, to railroad financeering. This is a form of bond issued by some railroad companies' in payment for equipment, and 140 CORPORATION ACCOUNTING they constitute a first lien on locomotives, freight and passen- ger cars. They are given to secure say 75 or 80 per cent of the cost and are issued in serial form covering a period of ten years, one series falling due each year. They admit of a rail- road company paying for its equipment on the instalment plan. The title to the equipment remains in the certificate holders' until the last series is paid, so that their security increases each year in the same ratio as the company's equity. This, and the usually high rate of interest they bear, makes them a very valuable security and is the chief reason why they are so little known. They are held by a few of the big investors and never, or at least rarely, offered on the market. Usually they have coupons attached, and while they are in the form of a bond they are called "Equipment Notes" or "Car Trusts." Collateral Trust Bonds. 336. These bonds also belong to the railroad class. Some of the great railway companies' like the Southern Pacific Com- pany own large blocks of the stocks and bonds of smaller sub- sidiary companies or proprietary lines. These securities are used as collateral by the proprietary company and form the basis of security of collateral trust bonds, a "Collateral Trust Agreement" being executed and delivered with these securi- ties to a Trustee to secure the payment of the bonds. The securities given are usually in excess of the bond issue, and the income therefrom in dividends' and interest is applied by the Trustee — first to pay the interest on the bonds, and the balance goes toward making up a Sinking Fund for their redemption. I Land Grant Bonds. 337. When the Central Pacific Railroad Company built the first line of railroad to and through the West it received large grants of land from the government. These lands formed the basis of security for bonds issued against them, hence ''Land Grant Bonds." This was' first class security as the land constantly increased in value, and as it was sold certain of the bonds were retired — this is a typical illustration of this class of bonds in general. Prior Lien Bonds. 338. These are bonds having a prior lien on all the assets of a company. To this class belong ''Receivers Certificates." When a railroad company passes into the hands of a Receiver, it is practically in the hands of the Court, and the Court may AND CORPORATION LAW 141 authorize the issue of Receivers Certificates to meet emerg- encies, or for maintenance purposes. In other words, the Court mxakes use of extraordinary means to protect the cred- itors and prevent unnecessary loss or waste of assets. As funds are urgent a sure and speedy means of raising them is provided by the sale of Receivers Certificates. These certifi- cates have a priority over First Mortgages Bonds', and all other claims, hence their purpose is easy of accomplishment. When the road is in the hands of a Receiver the other bond- holders are sometimes forced to make a settlement and this leads to the issue of "Adjustment Bonds'." Atchison Adjustment Bond. 339. These bonds were authorized at the time of reorgan- ization of the Atchison Company in 1895, when the old First Mortgage Bonds were retired and the new General Mortgage Adjustment Bonds were authorized and issued under the plan of reorganization, in exchange for the old First Mortgage Bonds. They are in one sense a Second Mortgage Bond being subject to the lien of the General Mortgage Bond of the Atchison Company, and in another particular they resemble an Income Bond inasmuch as they carry no fixed rate of in- terest. Interest on these bonds is limited to 4% but the pay- ment of interest is dependent on the earnings of the com- pany. Owing to the present financial condition of this com- pany and the market value of its stocks, the investing public regard these as' a desirable bond. Consolidated Mortgage. 340. Sometimes companies get top-heavy in their bond issues, business becomes more or less stagnant, or trade is intermittent, and they are not able to pay all the fixed charges out of the income, so that some kind of reorganization is necessary. In such cases it frequently happens that the va- rious bond issues are consolidated into one, bearing a lower rate of interest. The bondholders accept these in exchange on a certain agreed basis, because the company is crippled and it is the best way out of a bad fix. Sometimes consolidated bonds are issued with a view to raising new capital or to unify or retire the various outstanding issues, bearing various rates of interest and maturing at different times. Other bonds is- sued by railroad companies are "Division Bonds" and "Exten- sion Bonds" which, as their names imply, cover certain di- visions of a road, or are used to fund certain extensions. 142 CORPORATION ACCOUNTING Refunding Bonds. 341. It not infrequently happens that Sinking Funds are wholly inadequate for the redemption of maturing bonds. In such an exigency a new issue of bonds is financed to fund the old ones. The consolidated bonds and adjustment bonds pre- viously defined are classes of Refunding Bonds. Income Bonds. 342. Income bonds are somewhat in the nature of a cross between preferred stock and debenture bonds, possessing some of the characteristics of both. They are not issued against any special tangible security like other bonds, but de- pend, both as to principal and interest, on the income of the company. The interest is payable only out of income — after all other fixed charges have been paid. In this they resemble preferred stock. In the matter of security they resemble de- bentures. Like preferred stock they may be cumulative or non-cumulative. In the latter case the coupons are worthless for any year in which the company fails to earn sufficient net revenue to meet them. Debenture Bonds. 343. The term Debenture is derived from the latin word debentur, meaning "they are due" and logically speaking any written acknowledgement of a debt is a debenture. In rail- road finance a Debenture Bond is an old form of bond given without the formality of a mortgage or collateral security. They are written evidences of the company's indebtedness to the holders, signed and executed by the officers of the com- pany. They are promises to pay without any special pledge of the corporation property to secure them and in this sense they are unsecured promissory notes. In the matter of secur- ity they stand between the stock and the secured bonded in- debtedness. 344. Some financial corporations issue what they call "de- bentures" based on a collateral trust agreement and secured by the deposit of bonds and mortgages which they own. 345. In England the term "debenture" has a more ex- tended meaning. It is applied to a Deed of Mortgage given by railway companies, to municipal bonds and other securities for money borrowed. The English classification is Mortgage, Trust, Simple, Registered, Unregistered, Redeemable and Irredeemable Debentures. AND CORPOEATION" LAW 143 Deferred Bonds. 346. These are somewhat in the nature of an indefinite or perpetual loan, which may or may not be redeemed at their face value. Interest on these bonds is sometimes contingent on the happening of some event, and sometimes they receive a graduating rate of interest up to a certain point, at which time they are converted into "Active Bonds." Bottomry Bonds. 347. This is a form of bond peculiar to shipping. When the owner or master of a ship pledges the keel or bottom of his ship, or in other words mortgages his ship to secure some obligation, the instrument of conveyance is called a Bottomry Bond. It is a risky sort of bond ; for, in case the vessel is lost the bondholder loses all that he had to secure him. Respondentia Bond. 348. This is a bond based on the cargo of a vessel, as dis- tinguished from a bond based on the vessel itself. Convertible Bonds. 349. Convertible bonds and convertible stocks are fre- quently issued by corporations. I will explain the subtle pur- poses of these conversions. A corporation having an issue of 7% preferred stock provides for the conversion of this into, ^ay, 5% bonds. Now, on the face of this it would appear fool- ish on the part of the holders of 7% stock to exchange it for 5% bonds; but there are two important and sometimes vital considerations. As previously explained, all dividends are contingent on being earned ; while interest on bonds is a fixed charge and must be paid; it therefore resolves itself into a change from expectancy to certainty ; but there is a more pow- erful reason, especially in some of those high finance corpora- tions. The student must know by this time that the stockholders of a corporation are not its creditors, but the bondholders are, and although these bonds are in the debenture class, they come in ahead of the stockholders, and their equitable rights are adjudicated before the stockholders get a show — in case the balloon collapses. It is also unfortunately true that some- times the highly watered preferred stock of a corporation is deposited in a supposedly reputable Trust Company as the sole basis' of security for an issue of bonds, and the magic 144 CORPORATION ACCOUN'liNG name of bonds is the medium through which the pubhc, on this slender security, furnishes the money to finance the sick corporation. 350. As to converting bonds into common stock, the pur- pose at first sight does not seem very clear. This is done for the benefit of the corporatioi^, and to strengthen its credit. In- asmuch as the bondholders are creditors and the stockholders are not, the conversion of bonds into stock is a reduction of the company's direct or trade liabilities; therefore the com- pany's credit is strengthened to the amount of the bonds so converted. Gold Bonds. 351. Gold bonds, as their name implies, are bonds, the principal and interest of which are payable in gold coin of equal weight and fineness of the present coinage, or its equivalent. Government Bonds. 352. United States Government Bonds are bonds issued by ithe government under authority of Congress for the pur- pose of replenishing a depleted treasury, the redemption of Legal Tender Notes, the carrying on of war, the prosecution of some public work and the like. As previously stated they are issued on the credit of the government, and as the credit of our government is exceedingly good, there is not merely a ready sale for them, but, they almost invariably sell at a pre- mium. The authorizing Acts invariably provide that the bonds shall be sold at not less than par in coin. The present classification of U. S. Bonds is as follows : 2% Consols of 1930 3% Bonds of 1908-18 4% Bonds of 1907 4% Bonds of 1925 353. The 2% Consols were created by an act of March 14, 1900, and the Secretary of the Treasury was authorized to exchange them at par for the 5% loan of 1904, the 4% funded loan of 1907 and the 3% loan of 1908-1918. This is why they are called "Consols," the term being an abbreviation of "Consolidated," and the purpose being to consolidate these issues into one. AND CORPORATION LAW 145 State Bonds. 354. State bonds are bonds issued by the state for public improvements, such as dredging rivers, improving harbors and erecting pubHc buildings. Municipal Bonds. 355. Municipal bonds are bonds issued by cities for the acquisition of public utilities, such as' gas or water works, or the making of public improvements, such as street paving or sewering; these are usually considered good securities. Pur- chasers, however, are very careful in investigating the issue, as the least irregularity in the holding of the Bond Election, or the advertisement thereof, will invalidate the issue. Values of Stocks and Bonds. 356. Stocks and bonds have three distinct values : First — Par value, or nominal value, which is the face value, or amount expressed on the face of the certificate or bond, which may or may not be its actual value. Second — Market value, which is the value the stock has in the open market, or when offered for sale on exchange. This value is not fixed or staple and may vary from day to day, according to present conditions, future prospects, or, according to supply and demand as in- fluenced by the action of the "bears" and the "bulls." Third — Intrinsic value, which depends on the assets or securities of the company at the time of liquidation, and is the actual amount which the stockholders or bondholders receive when the affairs of the company are wound up. Ordinarily speak- ing, the market value is the mean between the "asked" and "bid" price. The usual par value of railroad and industrial stock is $100 and the usual denomination of bonds is $1000 although there are some $500 bonds, or half bonds. There are four elements that enter into the value of a bond, viz : the suf- ficiency of the security, the rate, the interest periods and the time the bond has to run. 357. Plere is a little problem that will serve to illustrate how the last three factors enter into the value of a bond, as- suming the first to be satisfactory : 358. "A" has an S% bond (interest payable half-yearly) with 5 years to run. He wishes to sell this bond and I am willing to purchase it at a price that will yield me 6% per an- num (payable half-yearly). How much will I have to pay for this bond? 146 CORPORATION ACCOUNTING 360. We observe that this bond has ten $4 coupons at- tached to it. The 1st coupon compounded for 9 terms at 3% The 2d coupon compounded for 8 terms at 3% The 3d coupon compounded for 7 terms at 3% The 4th coupon compounded for 6 terms at 3% The 5th coupon compounded for 5 terms at 3% The 6th coupon compounded for 4 terms at 3% The 7th coupon compounded for 3 terms at 3% The 8th coupon compounded for 2 terms at 3% The 9th coupon compounded for i term at 3% The loth coupon compounded for o term at 3% 5.219092 5.067080 4.919492 4.776208 4.637096 4.502032 4.370908 4.243600 4.120000 4.000000 Total of coupons compounded to time of redemption 45.855508 Face value of bond at time of redemption 100.000000 Total of coupons, int. on coupons and face of bond to time of redemption $145.855508 361. What we receive on the bond and coupons is $140. What w^e want to make is this and the interest at 6% yearly (compounded half yearly) or 3% half yearly; and this amounts to $5.885508. The payment of the loth coupon synchronizes with the payment of the bond itself. 362. Now the problem arises : What sum invested at 6% per annum compounded half yearly will amount to $145,855 at the end of 5 years? One dollar invested on these terms will amount in 5 years to $1.343916; dividing this into the above total 145.855508 we obtain the quotient 108.53; 2.nd this' is the value of the bond or the price I will have to pay to realize 6% interest on my investment (compounded half yearly). In other words, $108.53 is the "present worth to yield an income of 6% compounded semi-annually," a phrase used by bond brokers in quoting their offerings. 363. But the foregoing method while elucidative of the principles of calculating bond values is too long for frequent use, so we avail ourselves of a shorter method. 364. The 10 coupons with accruing interest at 3% form a geometrical series. Here we have three known quantities and the problem is to find the fourth. A the first quantity is the coupon $4.00 R the second quantity is the ratio (to the buyer) . . . 1.03 N the third quantity is the number of terms 10 S the fourth quantity is the sum of the series ; and we find this by the following formula: AND CORPORATION LAW 147 A Rn _ A =S; or to express it in words and figures': R — I We multiply the first term (which is 4) by the ratio 1.03 raised to the power indicated by the number of terms (which is 10), then from this product we subtract the first term, the remainder we divide by the ratio 1.03-1 or .03. 365. I will endeavor to explain the formula and give the reason for the rule. By raising 1.03 to its tenth power we ob- tain the value of $1 at compound interest for the 10 periods; multiplying this by 4 we arrive at the value of one coupon for the 10 periods ; and by deducting the coupon the interest stands by itself; or to put it in another way: By raising the ratio to its tenth power we get the value or amount of $1 at compound interest for ten periods, deducting the principal $1 we have the interest on a series of $1 investments which is .343916. Multiplying this by 4 the amount of the coupons we get the total interest on the series of coupons, which is .343916 X 4=1.375664. Now, this interest is 3% of the prin- cipal, or of the sum of the series ; and as there are 33 1-3 times 3 in 100 it follows that we obtain the sum by multiplying the interest by 33 1-3, and multiplying by 33 1-3 is equivalent to dividing by .03 thus : 1.375664 X 33 i-3=$45.855+. Of course the physical labor involved in work of this kind can be reduced to a minimum only by the use of logarithms. Funds. 366. It is not my purpose to enter into an academic or ■philosophic discussion of the nature and uses of funds. Prof. Frederick A. Cleveland, Ph. D., in his admirable work, ''Funds and their Uses," has completely covered this- field ; it is per- tinent, however, to make a few general remarks on the subject before proceeding to define the various funds created by cor- porations both for specific and unspecified purposes. 367. A fund in the sense in which it is used here is an ac- cumulatiion of money or quick assets easily convertible into money. To "fund" any enterprise is to provide a fund or revenue to carry on the enterprise. To "fund" a debt or a loan is to provide the funds necessary to liquidate the debt or repay the loan. These funds may be provided by the sale of solvent credits; that is, credits secured by lien on the assets of a company, such as real and chattel mortgages. 148 COEPORATION ACCOUNTING Funded Debt. 368. Funded Debt means the amount of debts of a com- pany secured by bonds, which in turn are secured by mort- gage, or by Treasury Securities in excess of the amount of the debt. To meet this maturing obHgation when due a fund is created out of the revenues' of the company. The student will note the difference between a "funded enterprise" and a "funded debt." We fund an enterprise by the sale or pledge of credits in the shape of bonds and mortgages. We fund this debt or obligation, in turn, by providing a fund out of the revenues of the "funded enterprise" to redeem these pledged credits at maturity; hence the name given to this class of debt to distinguish it from "floating debt," which is the unfixed, undetermined or unfunded debts of a company. Sinking Fund. 369. This is the name usually given to a fund set aside or created out of the revenues of a company into which we sink the funded debts of a company at the time of their maturity. This definition would vary slightly where the Sinking Fund is created for the purpose of wiping out premiums on bond pur- chases ; as in such cases' it is created out of the interest on the bonds, the balance of interest going to Revenue Account, as explained in paragraph 386. 370. A Sinking Fund to liquidate a bonded indebtedness is created in one of three ways : We factor the amount of the indebtedness by the number of years to maturity, and place equal amounts each year in the Sinking Fund, crediting the interest on the investment of this fund to Revenue Account each year; or, we ascertain what sum of money set aside and invested each year would with accumulated interest amount in the given number of years to the given amount of the debt; or, we find the amount which if paid in equal instalments each period will extinguish both principal and interest at the end of the last period — this latter is called the instalment or annunity method. In such cases compound interest is always calculated. Illustrating First Method. 371. Suppose we have a bonded indebtedness of $20,000 that we wish to wipe out in 10 years from now. We divide 10 (the number of years) into 20,000 (the amount of the debt) and we get the quotient 2000; therefore, if we set $2000 aside AND CORPORATION LAW 149' for lo years at the end of that time we will have a fund suffi- cient to pay off the bonded indebtedness ; and as it is our plain duty to have this fund invested, the interest from such an in- vestment should be credited to Revenue Account. Now, we can readily see that we are only apparently setting aside $2000 a year out of the earnings, inasmuch as it is bringing in some revenue in the shape of interest, so while the above method may answer our purposes, and is the simplest, it is by no means the best. Illustrating Second Method. 372. What we want to know is' the exact sum necessary to set aside each year and keep invested so that this yearly or periodical sum and its accumulation will exactly liquidate the bonds at maturity. In order to make this as simple as possible I will illustrate this method of creating a Sinking Fund with the previous bond problem ; prefacing the illustra- tion with a few clarifying remarks. Money set aside for Sink- ing Fund purposes is, as we know, taken out of the business and invested, at least theoretically, in securities paying semi- annual dividends. We also know that Sinking Funds are created out of revenues, hence the starting of the Sinking Fund is not coetaneous with the bond issue, as that would be starting it out of the proceeds of the bonds instead of out of the earnings of the proceeds, and would be somewhat anal- ogous to paying a dividend out of capital. The Sinking Fund, therefore, has its beginning six months after the bond issue, or when the first coupons fall due. It is then we begin to set aside a sum which if improved at a certain rate of compound interest (in this case 3% semi-annually) will equal the amount of the bonds at their maturity. Now, suppose we had ascer- tained that the amount necessary to produce such a fund was $1 every six months till the maturity of the bonds and that we invested the first dollar six months after the bond issue, we would then bring about a condition illustrated by the follow- ing diagram : ^Z^' $1 $1 $1 $1 $1 $1 $1 $1 SI $1 9 8 7 6 5 4 3 2 1 S 1 2 3 4 5 6 7 8 9 374. "S" represents the starting point of the Fund. The lower line of numerals represents the distance in time (reck- 150 CORPORATION ACCOUNTING oned by the interest periods) each one is removed from the starting point; the middle Hne represents the number of pe- riods each $1 in the upper hne is' invested. We set aside $io toward the Fund; the first dollar earns interest for 9 periods and the last one earns no interest, as we see by the lower line that there are only 9 interest periods from the starting of the Fund. While these periods are equi-different as to time they are equi-rational as to amounts ; that is to say, in value they have an equal ratio, one to the other, hence they form an equi- rational or geometrical series with i as the first term and 1.03. as the ratio as follows : i.03«+i.03«+i.03^+i.03«+i.03^+i.03*+i.033+i.032+i.03-|-i or i+i.03+i.03-+i.03"+i.034+i.03s+i.036 -|-i.03^+i.03«+i.03« Here we have a series' of 10 terms, and we obtain the sum of the series by the formula : 1.0310— I that is, by dividing the compound interest on $1 1.03 —I for ten terms by the interest on $1 for one term; which is equivalent to multiplying by 33 1-3. 376. But, the question is asked why do we find the com- pound interest for 10 terms when the dollar compounds only 9 times? This I will try to explain by analysis. 377. One dollar at 3% compound interest for 9 terms' amounts to 1.304773, subtracting the principal the interest amounts to .304773. Now the interest is 3% of the principal of $1 invested 9 times, and 33 1-3 times this will be 100% on the principal, but we want 103% of the principal, and to ob- tain this we add 3% of the sum obtained to itself. We then have the sum of the nine $1 investments and their accumulated interest, and to this' we add the $1 which does not earn any interest. This gives us the complete sum of the series thus : .304773 X 33 1-3=10.159100 -f 3% or .304773=10.463873 + i=ii.463873=the sum; and if we took the 9th power of 1.03 which is 1.304773 and multiplied it by the ratio 1.03 that is raised it to the tenth power, and multiplied the interest so found by 33 1-3 we would get the same result, from which we conclude that the compound interest of $1 at 3% for 10 terms is' equal to 3% of the sum of a geometrical series of 10 terms with 1.03 as the ratio. 378. To further prove this formula we will develop it in :another and perhaps a more lucid way. Let ''S" represent the AND CORPORATION LAW 151' sum and equal all the terms of the series set down in order; then multiply both the sum and every term by the ratio 1.03 thus : S=l+1.03+1.03+1.03+1.03+1.03-f 1.03+1.03+1.03+1.03. 1.03S= 1.03+1.03+1.03+1.03+1.03+1.03+1.03+1.03+1.03+1.03. .03S=(1.03io)— 1. S =:(1.03io)— 1. .03 Here we see that by multiplying the sum and all its terms by the ratio we get 1.03 of the sum and 1.03 of all its terms. We place 1.03 of the sum under ''S" and 1.03 of I under 1.03 and so on. We then subtract the upper line from the lower to get the difference between the sum and 1.03 of the sum., and we observe that by the arrangement of the products in the lower line all the terms except the first and last cancel each other. Now we observe that the difference between **S" and 1.03S is .03S; since SXi-03=S.03. We fur- ther observe that there is nothing in the lower line under the I in the upper line, hence the difference is minus i ; and as there is nothing in the upper line to subtract from the last term in the lower line the difference here is 1.03^^ from which we subtract the minus i, leaving 1.03^^ — i to be divided by .03; •showing again why the ratio is raised to its loth power. It follows then that if $1 invested on the above terms and con- ditions will amount to 11.463873 the sum necessary to produce a Sinking Fund of $20,000 can be found by dividing 11.463873 into 20,000. We do this and find the quotient to be $1744.61 and this is the amount of our periodical contribution to the Sinking Fund. Illustrating Third Method. 379. The third method is what is known as the instalment or annuity method and applies more especially to municipal bonds, which are advertised for sale and the entire issue sold to the highest bidder; in which case the city or school district, as the case may be, instead of accumulating a Sinking Fund which might be manipulated by unscrupulous politicians pays equal periodic instalments to the bondholders', which instal- ments will, in the given number of periods pay both the prin- cipal and interest on the bonds. This method may be applied in any case where the whole issue has been taken by one man, one set of men, or an Underwriting Company.* 380. Here the Sinking Fund problem resolves itself into *Vide paragraph 323. 152 CORPORATION ACCOUNTING this : We issue $20,000 worth of bonds bearing 3% compound interest for 10 periods ; in other words, we borrow $20,000 at .3% compound interest and we agree to pay back both prin- cipal and interest in 10 equal periodic payments; what must be the amount of each instalment, the first one to be paid at the end of the first period ? This we observe is a purely annuity proposition. We are given the present value, the time, and the interest rate and we are asked to determine the amount of the instalments. 381. $20,000 is the present value of the annuity; that is, $20,000 paid at present would liquidate the debt; so we find out first what the present value of ten $1 payments would be, then by simple proportion we learn the periodic instalment necessary to discharge the $20,000 debt and interest thus : 382. If a $1 instalment pays a debt of the present value of $8.530201, what instalment will pay a debt of the present value of $20,000? (Note — all problems in proportion are proved by comparing the product of the means with the product of the extremes, and where the third term is i, as in this case, we do not need to state our proposition, but simply divide the present value of $1 for the 10 periods into $20,000, the quotient is the required instalment). 383. We obtain the present value of an Annuity of $1 for 10 periods at 3% by dividing the amount of an Annuity of $1 for 10 periods, by the amount of $1 at compound interest for 10 periods, hence the formula : 1.03^^ — I 1.03^° — I 1.03^^ .03 1. 03^" X. 03 Working this out we find that the loth power of 1.03 is '$1.34391619; subtracting i and dividing by .03 we obtain (as previously shown) $11.463873. This is the amount of an An- nuity of $1 for 10 periods at 3% comopund interest, and $1.343916, as we have seen, is the amount of $1 at 3% com- pound interest for 10 periods; therefore, we divide 1.343916 ino 11.463873 and obtain the quotient 8.530201. This quotient is the present value of ten $1 instalments estimating the value of money at 3% compound interest for each period; that is to say, Ave can discharge a debt of $8.530201 and the accruing in- terest thereon by paying 10 periodic instalments of $1 each, and as $20,000 = $2344.61, we see that by paying $2344.61 every 8.530201 AND CORPORATION LAW 153 period for lo periods we pay off the bonds of $20,000 and in- terest. Now, the interest on $20,000 for six months at 3% is' $600 and if we subtract this from $2344.61 we get $1744.61 as the amount of our Sinking Fund for the first six months ; but instead of investing it as in the previous example we turn it over to the bondholders to invest as' they please; and as money is theoretically worth 3% to either party, neither side loses by this method of payment. The amount of our contri- bution the second period would be $1744.61 plus the interest on this at 3%, because the principal has been reduced by the first payment; and less of the second instalment goes to interest and more to principal and so on to the end. Now if we mul- tiply the instalment by 10 we get $23446.10 as the total amount we pay the bondholders and deducting the principal thus $23446.10 — $20,ooo=$3446.io; the total interest we pay. Note that by either of the last two methods the Sinking Fund is the same. 384. Following is a table showing the present value of $1 from one to ten periods' at 3% compound interest: $1 I I I I I I I I I Total $10 ue I period hence at 2 3 4 5 6 7 8 9 10 3% Present Value - .970873 = .942596 = .915141 = .888487 -- .862608 = .837484 = .813092 = .789409 = .766417 = .744094 $8.530201 385. This table proves the formula as we see by the addi- tion of the ''present value" column. The present value of $1 for any number of periods' may be found by dividing $1 by the amount of $1 at compound interest for the number of periods, and the compound interest may be found by the use of a logarithm table thus : the log. of 1.03 is .0128372 ,the log. of the loth power is found by multiplying by 10, that is,. 0128372 X 10^.1283720 and the natural number corresponding to this is 1.343916. 386. Another phase of the Sinking Fund problem is this : If I purchase $100,000 4% bonds with 5 years to run at 106., 154 CORPORATION ACCOUNTING that is, if I pay a premium of 6%, or $6000 and I shall get only $100,000 on the bonds' at maturity I must provide a Sinking Fund to wipe out the premium by that time. Suppose again that I can invest this Sinking Fund at 3% : Hbre v^e have another geometrical series of 10 terms, and as we know by this time the loth power of $1 at 3% is $1.343916 and the sum of the series is $11.463873, which divided into $6000 gives us as the quotient $523.37, or the amount to set aside and invest for Sinking Fund purposes. Now, we get $2000 interest on the bonds every six months ; so when we get the interest we debit Cash for the $2000, crediting Revenue Account or Interest with $1476.63 and ''Sinking Fund Account" with $523.37. We then credit Cash and charge ''Sinking Fund" with $523.37,. which we invest as above. At the end of the 5 years we have a Sinking Fund of $6000, and we balance "Sinking Fund" into "Sinking Fund Account," convert the Fund and the bonds into cash, debit Cash for $106,000 and credit our "Bond Invest- ment"; wiping out the bond and premium and closing the whole transaction. 387. Where bonds are not all sold within the first six months the Sinking Fund for those sold later must be con- structed on a different period basis. 388. The foregoing should convey to the student at least an elementary knowledge of the principles involved in con- structing a Sinking Fund. These principles mastered he can construct a Sinking Fund for any number of terms ; taking ad- vantage, if possible, of a table of logarithms to find the nth power of I. Funds vs. Accounts. 389. A "Fund" is created out of the cash assets of a busi- ness (a) for the purpose of amortizing a known and existing liability such as a bonded indebtedness, (b) for the purpose of providing an available or quick asset to meet a specific obliga- tion of the future such as the renewal or betterment of a plant or (c) for the purpose of meeting a possible embarrassing con- tingency ; (a) is in a sense a matured obligation and is there- fore a fixed charge against revenue, (b) is a deferred obliga- tion, therefore not a fixed charge and need only be made when conditions justify it, (c) is only a potential obligation and need only be provided for when there are abundant cash assets' avail- able for investment. Where a corporation is obliged to set aside from the earnings of each year a certain amount of cash for a "Sinking Fund" investment, it rarely creates other funds. AND CORPORATION LAW 155 as this would be withdrawing from active employment in the business a portion of its working capital. Instead it creates' reserve accounts to support diminishing assets^or to meet con- tingencies ; that is, after ascertaining the net profits it transfers a portion to certain accounts, such as ''Reserve for Deprecia- tion," "Reserve for Contingencies" and the balance is trans- ferred to Surplus Account where it is available for dividends. In this way sufficient of the Surplus Assets are reserved to offset depreciation and provide against contingencies. Briefly then, Funds are Cash Assets set aside from the earnings of the business and invested in Securities. Reserves are apportion- ments of the earnings withheld from the surplus and carried on the books as a liability. This Hability is of course a capital liability and joined with surplus and capital -is' the correlative of the Excess Assets of a concern over its liabilities to credit- ors. With this explanation we will proceed to a definition of various Funds and Accounts. Redemption Fund. 390. This term might with propriety be applied to a Sink- ing Fund, as a fund accumulated to redeem outstanding obli- gations at the end of a certain time. The term as' used by the Treasury Department of the United States has a different meaning. It is a Fund of 5% of a National Bank's circulation which every National Bank is required to deposit with the United States Treasurer for the purpose of redeeming its worn out, or unfit currency, when the same comes into the Treasury Department for exchange or redemption — treated more fully in chapter on The National Banking System. Reserve Fund. 391. This may be created out of revenue and invested same as a Sinking Fund ; but instead of being accumulated to meet an outstanding obligation it is reserved for some specific purpose such as the purchase of additional property, the en- largement of the plant, or the erection of a new building — in this latter case it might be called a Building Fund. Contingent Fund. 392. This may be created in the same way as the preced- ing funds ; but instead of being created for some specific pur-^ pose or reserved for a particular occasion, it is set aside tO' meet unforeseeable contingencies. It is' a quick asset that can- be levied on to meet emergencies ; a friend to be relied on in 156 CORPORATION ACCOUNTING case of stress and under certain conditions a wise provision against extraordinary losses and serving to maintain the sta- bility and integrity of the Sinking Fund in o& years. Depreciation Fund. 393. This is a fund set aside periodically from the earn- ings of the company, corresponding in amount to the decrease in value of fixed assets caused by wear and tear of machinery, etc. The amount of the fund should at all times be sufficient to restore a plant to its original efficiency. Philosophy of Depreciation. 394. Machinery commences to depreciate the moment the wheels start moving; friction alone causes wear, and buildings and other improvements are imparied by the effluxion of time ; and as this is caused by the actual employment of these things in producing revenues the loss occasioned is, as a matter of course, a charge against Revenue,''' hence this fund is taken out of revenue before ascertaining the profits and is set aside for the purpose of renewing or bettering the Plant — not for the purpose of repairs as explained further on. There are three ways of providing for this depreciation. First, by revaluing the plant every fiscal period and increasing the Depreciation Fund by the amount of the shrinkage in value. Second, by estimating the life of the plant and writing off a percentage of the cost equal to the number of years (of estimated life) di- vided into 100; that is to say, if the life of the plant is esti- mated at 5, 10 or 20 years the percentage would be 20, 10 or 5, respectively. Third, by writing off a percentage on diminish- ing values instead of on cost. 395. The first method seems logically correct, if we as- sume that the appraisement is intelligent and just; that is", if the appraisers have technical knowledge, are disinterested in the showing as the result of their appraisement, and are free from bias, prejudice, or influence in their conclusions. 396. The second method is unsound, unscientific, and mathematically, if not morally wrong. By taking off a per- centage of the cost each year we would eventually arrive at a time when the value would be zero — a condition which cannot exist in anything having tangible qualities. There must be a residue. There must be left at least scrap of the machinery, and salvage of the building; and further, it is a known fact *Vide paragraph 405. AND CORPORATION LAW 157 that depreciation or decay, like disease, makes greater ravages in its final stages, and by writing off equal allowances in the early and later life of the Plant and Machinery we make an incorrect showing on the Balance Sheet.^ 397. The third method is generally conceded to be safe and scientific. Take for example a machine whose estimated period of usefulness is limited to 5 years on a basis of $100 valuation. The first year its book value would be reduced to $80, the second year to $64, and the fifth year to $32.77. The first year we would write off $20 and the fifth year only $8.19. This would make an average of 13.45%, against 20% by writ- ing off the percentage on cost. Now the question may be asked, why do we not write off 13.45% each year as' it would be more equitable and leave the same residual value, that is, $100— (13.45 X 5)=$32.75? At first glance, or suggestion, this might appear the most equitable way of charging lost capital against revenue, but it is not. The element of repairs enters into our calculations here. Everybody knows that re- pairs are necessary to keep up the standard of efficiency, and, barring accidents, the cost of repairs is smaller during the early life of a machine than toward the close of its period of usefulness; therefore, while we charge off more for deprecia- tion in the beginning and less toward the end, we equalize this by charging off less for repairs in the beginning and more to- ward the end ; for it should be clearly understood that repairs are a revenue expense, and should be charged against revenue and in no case should they be charged up to plant or ma- chinery, excepting that in the case of serious accident where the cost of repairs is great, the burden need not be borne by the revenue of the period in which the accident occured, but may be distributed over a number of periods. As a matter of fact, in the actual running of a plant, depreciation and repairs will not work out with the same mathematical nicety with which we can evolve theories; yet, by having an intelligent theory and system to proceed on, and by study and care, we can come so near the truth as to be able to say that our Balance Sheet is approximately correct, that it is honest; and that is the most we can say in any case ; for even the most skilled and most expert appraisers only estimate values. There are two other points to be considered in this connection : Different machines and different items of a Plant have different longe- vity, and it is better to figure these parts separately than to figure the plant as a whole in estimating depreciation. Again, improved machinery and improved methods often cause far iVide paragraph 440. 158 CORPORATION ACCOUNTING more depreciation than wear and tear; and sometimes it may be more profitable to throw out good machines than to com- pete with them against better ones. In such cases our calcu- lations may go awry and a "Contingent Fund" or ''Reserve for Contingencies" may save us from serious embarrassment. The income on all funds, with the exception of "Sinking Fund" may be credited to revenue. 398. The second way of treating depreciation is to debit Profit and Loss and credit a "Depreciation Account" for the amount of the depreciation. This would charge revenue for the amount of the depreciation and as Depreciation Account would appear as a liability it would offset the book value of the plant to that extent and make a correct showing of the "Plant" on the ''Balance Sheet" thus: Plant Dr. $1000. Depreciation Account Cr. $100, or Plant $1000 Less depreciation 100 $900 399. The third way of treating it is to debit "Profit and Loss" and credit "Plant and Machinery" for the amount of depreciation. This will also show the proper charge to reve- nue, and the Plant Account will also show correctly on the Balance Sheet; but in neither of these last two cases will a fund have been set aside for the inevitable time when the plant will need renewing, and the inexorable law of depreciation and decay shall call for the purchase of new machinery, etc. Of course it may be argued with good reason, that this money can be more profitably employed as "Working Capital" instead of "Invested Capital" ; or that the company would have an in- creasing cash surplus every year ; or that bonds could be is- sued or money borrowed. If we admit the first argument, the money would be converted into some other form of asset, and would not be available as a quick asset for our purposes', al- though it might form the basis of security for a loan. For the second argument: Idle money is wasted money; and there is always a temptation to pay out such money in dividends. For the third argument : We would be discounting the future, burdening our enterprise with a debt on which we have to pay interest as well as to provide for the payment of the principal , both of which would cut down dividends; therefore, the safest, most conservative, and most equitable method is to establish 3 Depreciation Fund, providing the business can afford the withdrawal of assets for this purpose. If, however, it prevents the development or extension of the business a Depreciation Account should be carried instead. AND CORPORATION LAW Depreciation Account. 400. There is a confusion of ideas in the minds of many good book-keepers regarding the use of the terms "Fund" and ''Account." * A 'Tund" always represents an asset ; hence, it is always a debit. An "Account" may represent either an as- set or a liability ; but a credit balance can never be designated a ''Fund." Depreciation Account represents the amount which a plant has depreciated since purchase. Where this account is kept the original cost or value of the plant always shows on the books, — many preferring that the cost of plant should al- ways' show on the books, the difference between cost and de- preciation showing present value. This present value is re- stored to original value by the addition of the Depreciation Fund or the inclusion of the assets equivalent to Depreciation Account. "Depreciation Fund" is an asset; "Depreciation Account," a liability, which is offset by a corresponding amount of assets employed in the business, instead of being withdrawn as in the case of Depreciation Fund. This liability has nothing to do with creditors, but exists only as to stock- holders, therefore Depreciation Account is a capital liability. Reserve Account. 401. Every well regulated business institution takes" into consideration the self-evident truth that book accounts are never worth their face as an asset; that even if they should all be collectible it costs something to make these collections, and that deferred money is not as valuable as money in hand. For these reasons they should never be stated at their full book value on the "Balance Sheet" ; but a certain percentage should be credited to a "Reserve Account" as an offset against their book value, under the caption "Reserve for Collections," "Reserve for Bad and Doubtful Accounts," or some such title. The accounts would then appear on the Balance Sheet in this way: Accounts' Receivable — book value $10,000 Less 2% reserve for contemplated losses 200 $9,800 402. The last figures would be the asset value of the ac- counts. Of course, it goes without saying that no hard and fast rule can be laid down for estimating this reserve. As in *Vide paragraph 389. 160 CORPORATION ACCOUNTING Other cases, study and experience can alone determine this amount. EHminating from consideration the cost of collec- tions, which in a going business is constant and as constantly charged against revenue, we can compare period by period, the losses sustained with the losses estimated, and thus find an average reserve to meet ordinary conditions. Secret Reserve. 403. The propriety of creating a secret reserve is a matter of disputation and discussion among the highest authorities". A "Secret Reserve" is created by the undervaluation of fixed assets, or the writing off of excessive depreciation on those assets. It is secretly concealing and withholding from the Balance Sheet or Statement of Assets and Liabilities a certain amount of the earnings of a company, for the ostensible pur- pose of strengthening it by making an ultra conservative state- ment of its resources. It is a sort of "tuck" taken in in times of prosperity, that can be let out in times of adversity to cover trade losses' and show a company in a sound condition notwithstanding reverses. Mr. Francis W. Pixley, F. C. A., one of Great Britain's foremost accountants and authors, in a paper read before the Congress of Accountants" at the World's Fair at St. Louis in 1904, makes use of the following remark- able language: 'T am of opinion that what are known as ''secret reserves" are right and proper, and tend toward the maintenance of the company as a permanent institution, and that, in fact, without these secret reserves it is quite impossi- ble, having regard to the fluctuation of both financial and trad- ing operations, for any company to exist beyond a very fimited period. At the same time these reserves must be honestly made and in the interests" of the company. For Directors to create secret reserves with the object of withholding profits legitimately earned from distribution to the shareholders, so as to induce them to dispose of their holdings * * * is as flagrant an act of dishonesty as" can be conceived." I confess the highest respect for Mr. Pixley's opinion, and yet it is not merely the privilege of every man to hold single opinions on any subject, but it is his duty to defend those opinions that appeal to his convictions ; and notwithstanding the preponder- ating weight of Mr. Pixley's" opinion, "I am of opinion" that ''secret reserves" are not necessary to the existence of any company; further, that they are always ethically and fre- quently morally wrong. First as to their necessity: Every well balanced board of directors will provide a "fund" or "re- serve" of some kind to meet contingencies that may arise dur- AND CORPORATION LAW 161 ing periods of business depression ; and certainly no competent board of directors will reduce their surplus below a safe level by paying it all out in dividends. A Contingent Fund and a good margin of surplus or a "Reserve for Contingencies" with- out the fund will answer the purpose of a secret reserve. It will be there in plain sight, as an emblem of security, a be- getter of confidence and it can be drawn on in emergency more easily and more gracefully than an awkwardly resur- rected ''secret reserve." Secondly, as to the ethics of it: It is a commonly accepted principle of the practice of auditing and investigation to see that neither the assets nor liabilities are overstated nor understated on the Balance Sheet, so called; that is, that the statement as taken from the books is not merely correct, but that the facts and conditions (physical and otherwise) on which the book accounts are based are also cor- rect. The company books should represent existing conditions as nearly as possible. To deny this is to pave the way for a dangerous code of ethics ; for if it be wrong to swell an asset it is also wrong to shrink one, and if we permit the books to be falsified in one particular, we may wake up to the fact, some time, that the deceivers have themselves been deceived. Thirdly, as to the morals of it : Mr. Pixley has himself raised the question of fraud. He adds "Should auditors have any reason to believe that reserves are being created through im- proper motives they should protest against this, and, if neces- sary, so report to their stockholders." Now, auditors, like de- tectives, though skilled in the methods of deception are never- theless fallible men, and plausible reasons are not always cor- rect ones. The auditor lacks the omnispective eye that pene- trates the motives of men and is limited in his conclusions by the bounds of finite wisdom, therefore he is constrained to judge by acts and not by motives; but laying aside the ques- tion of fraud as a remote one, the stockholders are deceived as to the actual condition of their company and its true earning capacity, and they may part with their stock at a lower figure than if they knew the true condition of affairs. In such a case the directors may not be the beneficiaries, but the stockholders' are the losers, and the men chosen to represent them and con- serve their interests are responsible. Surplus Account. 404. This is the account into which the net profits of the business are carried, either before or after the declaring of dividends'. It ordinarily represents the "Net Capital" or "Present Worth" of a company. Dividends are rarely if ever 162 CORPORATION ACCOUNTING declared for the full surplus. This account should represent, as its name indicates, the company's net surplus over and above all debts, reserves, and fund accounts, therefore the balance should always be on the credit side of the account. If, however, the debit balance carried from Profit and Loss ac- count should, from any cause, more than offset the credit side of the account, an "Impairment of Capital" account should be opened, debited for the difference and the Surplus Account closed. The "Impairment Account" will then show the amount for which the capital is impaired, which is the net insolvency of the company. In some classes of business, property ac- counts, or franchises are inventoried at more than their value, to prevent such a showing as the above ; this is done simply to delude the stockholders, or the creditors of the company; for, it is the privilege of creditors, in many instances', as well as stockholders, to examine the books of a corporation.* Of course, if a company is carrying a contingent or emergency fund in such a case, the "Contingent Fund Account" can be closed into the Surplus Account and the "fund" called in to make good the impairment. Revenue Account. 405. Revenue, in a commercial sense, is that which comes back to us as returns' on our investments. Broadly speaking, the capital of a company is invested in an enterprise, and the returns on this enterprise is revenue. Revenue Account then, is an account of the revenue derived from the business in which we are engaged ; in other words an account of our gross gain or profit. Revenue Receipts. 406. Revenue Receipts are the receipts derived as the di- rect result of our trading, as distinguished from Capital Re- ceipts resulting from the sale of Capital Stock, or the proceeds of bonds, mortgages, etc. Revenue Expense. 407. Revenue Expense, or revenue expenditure, is the ex- pense necessary or incident to the producing of revenue. For instance, the depreciation of plant and machinery is' caused by the employment of these in producing revenue ; hence de- preciation is a revenue expense ; and when we say a "charge against revenue," we mean an offset to, or reduction of the gross revenue or profits. *Vide paragraphs 32, 82, 123 and 163. AND CORPORATION LAW 163 Income Account. 408. Income is the remuneration derived from skill or labor (professional or otherwise), or the gain or profit arising from property, invested capital, business" or commerce ; hence when we speak of one's income, we mean the revenue derived from his skill, labor, property, or investments, whether re- ceived or due and accrued ; and Income Account is an account of this. Income Expense. 409. The acquiring of an income always involves an ex- pense. The laborer has his living expenses ; he must be fed and clothed to enable him to earn an income. The business man has his commercial expenses ; the property owner taxes and up-keep of property; all these are income expense. Profit and Loss. 410. This is an account into which are carried at the end of each fiscal period the balances of all accounts representing revenue or profit, and all accounts representing expenditure or loss.^ Fixed charges, Sinking Fund apportionments, deprecia- tion, and current expenses are charged to this account; and profits arising from manufacturing, trading, or operating, and all profits directly incident thereto, are credited to it ; the dif- ference between the two sides representing the net gain or net loss for the period. If the credit side is the largest it should be carried to Surplus Account, and if the debit side is the largest it should be carried to an Impairment or Deficiency Account. This account is the adjustment account of the period, and should appear on the books only during the time the adjustment is being made. In banks and financial institu- tions this' account is called "Undivided Profits." In these in- stitutions dividends are declared out of this account; and un- like business corporations, the balance is not closed into sur- plus, but only a portion of it — a sufficient amount of profits being allowed to remain in this account to charge possible losses against, as it is desired that the surplus, so called, should be maintained intact in order to inspire public confi- dence. The very name of the account "Undivided Profits" suggests to the public that it belongs to the stockholders, and they are not alarmed at its being reduced ; but it is diflferent with "Surplus." iVide paragraph 453. 164 CORPORATION ACCOUNTING Suspense Account. 411. This is an account into which is carried all items whose ultimate collection is doubtful, whether notes or ac- counts. Accounts of bankrupt firms or individuals, accounts of deceased persons whose estates are involved in litigation, accounts of those temporarily embarrassed, accounts in dis- pute or on which suit is pending, deficiency or unexecuted judgments', accounts of those who are "all right" but just can't pay, all these should be taken into suspense account for final adjudication. At the close of each fiscal period these accounts are appraised, and a certain percentage written off to Profit and Loss, the balance being carried as an asset. Only such accounts, or parts of accounts, as are considered absolutely lost should be carried to Profit and Loss, and then only at the close of the fiscal period. By proper arrangement of this ac- count all doubtful items can be kept in view until their fate is settled or until hope has fled. Expense Account. 412. This is a very general term and includes every classi- fication of current expense : Expense account is usually sub- divided under many heads, such as Rent, Fuel, Freight, In- terest, Wages, Insurance, Taxes, Administration, etc. These are all specific items of Expense, and then there is a ''General Expense" account for those items that are generic and not spe- cific. In a bvisiness divided into many departments each de- partment has its own expense account, and the General Ex- pense, and Management Expense, are pro-rated at the end of each period, or distributed over all the departments on the basis of wages paid ; this is considered by the best authorities the most equitable way of distributing General and Adminis- trative Expense. Now, it is desirable to have the number of accounts in a General or Private Ledger as few as possible consistent with good accounting, and having proper regard for the classification and details of a business. This is done to enable one to review the general ledger more easily, and close it with greater facility; hence it is considered good practice to keep but one expense account in the ledger, and one expense column in the Cash Book; and instead, to keep an "Expense Book," columnated for each subdivision of Expense. Here all the items and details which go to make up "Expense" are set forth by themselves, in the same manner that a voucher record is kept, and the aggregate of all the columns must agree with the "Expense Account" in the General Ledger. This method AND CORPORATION LAW 165^ has many advantages. It reduces the number of accounts to be kept, affords quick and easy reference for audit and review,, and can be gone over and inquired into any time without in- terfering with the book-keeper's work; besides, all the totals are under the reviewer's eye at the same time. Expense Prepaid. 413. This account is sometimes called 'Trepaid Charges," and contains those items which have been paid in advance, the amount so paid being an asset. This is an item that is but little thought of by the average proprietor or manager, and yet, where short fiscal periods is the rule it is an important consideration. Take for instance the item of Insurance, and let us suppose that a merchant pays $1200 premium on the first of January to cover his stock to the 31st of December. Now, it would be obviously wrong to charge all the $1200 to Expense in January, since January's portion of it is only $100; but you say, — "he has paid it out and he must charge it up" — true, but he should do it in this way : Debit it to "Expense Prepaid," and, at the close of January debit Expense for $100, and credit "Expense Prepaid" for $100; this leaves an asset value of $1100 in the last named account, owing to him, so to speak, by the insurance company. By repeating this every^ month the "Expense Prepaid" is closed out at the end of the year. Expense Anticipated. 413. This is antithetic to "Expense Prepaid." There are certain expenses connected with every enterprise which, in- stead of being ever present and ever pressing in their demands; steal along with sedulous and noiseless tread, growing all the while they march and finally making preemptory demand on us. To this class belong taxes, bond interest, etc. Let us suppose that we have $600 taxes, or bond interest, falling due in six months from now, this would be an everage of $100 per month. Let us suppose further that w^ are now in January, and this charge falls due in July. Should we wait imtil July to make this charge? Certainly not! The expense is current and continuous, the payment is merely postponed to a certain date. The proper way to do is to make each month bear its proportion and thus make a correct statement of expenses for each month, instead of showing a false gain for five months and an abnormal loss on the sixth. How do we make each month show its proportionate expense? We simply debit ex- .166 CORPORATION ACCOUNTING pense each month for its proper percentage of expense and credit "Expense Anticipated" for the amount. At the end of the period the ''Expense Anticipated" will equal the amount we have to pay, and the payment will close the account for the time being. Now, "The critic eye, that microscope of wit (which) Sees hairs and pores, examines bit by bit" may say that this condition, of even months and even hun- dreds, would not manifest itself in any business ; and that the fiscal periods would not be co-terminal with the periods cov- ered by prepaid and anticipated charges ; but, the principle is applicable (by the simple use of the ''Unitary Method") to any number of dollars or months. This account is frequently designated "Reserve for Fixed Charges," "Reserve for Accru- ing Expenses," etc. Fixed Expense. 414. "Fixed Expenses" or "Fixed Charges" are the fixed, periodic, recurring expenses of a business, such as rent, taxes, insurance, bond interest, etc. They are charges against which we cannot introduce economic measures or methods, and whose payment we cannot evade. Franchise Account. 415. A franchise is a privilege granted by a state, county, or city to individuals or corporations to do a certain specified business, such as to operate a street car line, or railroad, for a term of years. Franchises are granted by special act of the Legislature, or special ordinance of the city or county within whose territory the road or other enterprise operates. They are advertised for sale and sold to the highest bidder, but of course the party seeking the franchise is the invariable pur- chaser. Franchises have a distinct value in themselves, apart from the real or personal property of the owner thereof. Pur- chasers of such enterprises' should always bargain for the fran- chise. A franchise account should be opened and charged with the purchase price of the franchise. This account having an intrinsic value in itself, stands on the books as an asset; but, a certain amount of it is written off each year, as' it be- comes less valuable as the term of its existence draws to a close, and when the franchise expires the account is closed. While this is the generally accepted method of treating "Fran- chise Account" it does not follow that it is the correct method. AND CORPORATION LAW 167 In a growing city, a street car franchise becomes more valuable with increased population ; still, as it is a limited privilege and there is no certainty of its renewal, some method has to be determined on by which its asset value will disappear from the books at the time the franchise expires. Of course, in the sale of a franchise its' cost or book value has nothing to do with determining its market value; and, in reorganization, franchises may be capitalized for many times their book value. Goodwill Account. 416. Goodwill is that intangible quality of patronage that attaches to an established business and is presumed to attach to it regardless of change of ownership. A business is built up by years of effort and expenditure, a certain trade attaches to it, it is a going business, a demonstrated success; it has the goodwill or patronage of a large number of customers. The proprietor wishes to retire, or perhaps to incorporate, and he wants certain returns' on his effort and expenditure in addition to his trade profits. You are willing to pay for this, because you buy an established business with reasonable assurance that the old customers will continue their patronage. You are saved from spending large sums of money in advertising and building up a competitive business. You buy the "Goodwill,"* you get value received. Goodwill is a legitimate asset; its value depending on many circumstances, such as location, du- ration of lease, annual profits, etc. For instance, the goodwill of a candy store in the neighborhood of a large school, or of a saloon near a large rolling mill, would be much more than one located in a residence neighborhood. There is no uniform method of valuing goodwill, and no uniform method of ac- counting for it. In some instances it is allowed to stand on the books at what it cost; in other instances it is gradually written off. In the case of corporations, it is best to write it off ; regarding it not as a permanent asset of the corporation, but as a part of the cost of acquiring the assets, a premium paid on them to be distributed over a number of years ; and if ever the company goes into enforced or voluntary dissolution, there will be no large nominal asset to swallow up the surplus or absorb the capital. This, I admit, is a conservative view and one that will not be generally accepted, as there is ^ real wrong in allowing Goodwill to remain intact, letting each year bear its own burdens and pay no tribute to the past. 168 CORPORATION ACCOUNTING Patent Account, Etc. 417. Patents, trademarks, leaseholds, and such like, are to be treated very similar to franchises. They are all special privileges for limited periods'. The particular conditions gov- erning- each must determine the method of treating them on the books. A patent on a novelty may be valuable only for a season, whereas, a popular demand may increase the value of a patent every year. 418. Patents are frequently the progenitors of "Parent Companies." An individual secures a valuable patent. He capitalizes the prospective profit of his patent for a large amount, organizing a corporation under the laws of some state which permits the holding of stock in other corporations. Sub- sidiary corporations are then organized in other states and ter- ritorial rights sold or licensed in consideration of a majority of the stock of these subsidiary corporations. These com- panies operate within their allotted territory but are under the control of and tributary to the parent company. Parent com- panies are a variety of Holding companies. Vide paragraph 468. Trading Account. 419. The Merchandise Account is the Trading Account of a mercantile company. Its design is to show the ''gross profits on trading." As ordinarily kept the Merchandise Ac- count has no value for statistical purposes, for the simple rea- son that it has two sets' of values on each side and its balance represents neither inventory, purchases nor sales'. To illus- trate : We charge this account for the cost of merchandise, and if we return some of our purchase we credit it with re- turns — this gives us a set of cost values on each side, and when we sell merchandise we also credit it with the sale, which is cost price plus profit; If our customer sends back some of his purchase we debit it for the return at selling price, which is also cost plus profit, thus giving us cost and selling price on both sides, or two sets of values. To be of any service for statistical or comparative purposes we must divide it into at least two divisions' — "Purchases" and "Sales" — the return pur- chases are credited to purchase account, and return sales debited to sales account, and the balances represent definite things, viz : net purchases, and net sales. Now, as a matter of course, the freight and cartage on a bill of goods are a part of the cost of acquisition and must be charged to merchandise account to give us the true cost of the goods laid down; but the merchant says I want to know how much freight and AND CORPORATION LAW 169 cartage I pay. He can know this and still charge merchandise every time for these items in this way : When freight is paid charge it through the Cash Book in the ordinary way to freight account, then mark it on the invoice, and when enter- ing up the invoice debit merchandise for first cost plus freight, creidt the jobber for the amount of his bill, and freight ac- count for amount of freight — this will balance the books, show actual cost of merchandise, and either side of freight account (which is always in balance) will show what has been paid in freight.* If the merchant has kept track of his trading pro- fits for a number of years he knows about what his average profit is, and if we suppose that it is 15% on total cost, he may obtain his approximate profit at any time by dividing 115 into the amount of sales, the quotient being the cost of the goods sold, the balance the profit earned. Having found this make an ordinary entry in the General Journal, debiting sales with the cost as shown by quotient, and crediting Purchases with the same amount thus : Sales Account Dr. $ To Purchase Account $ for approximate cost of goods sold during month of 420. The balance of Purchase Account will then show the inventory, and as before stated the balance of Sales Account the gross or "trading profits." By grouping the current and proportion of fixed expenses on the "Trading Statement," and deducting them from gross profit we arrive at net profit. 421. This method is by no means an absolute cost system; nor is it any part of my purpose to deal with "Cost Account- ing" in this work, but it is a step in the right direction, an im- provement on the old method, and, although only approxi- mately correct, it can, by intelligent application, be made so nearly correct as to advise a merchant when he is steering right and safe as to margin of profit, and to warn him when he is running on the shoals. Consideration must be given to ex- traordinary events in the business, such as enforced sales from overloading, severe competition, or unusual expense. Manufacturing Account. 422. This account is debited for all purchases of material used in manufacture ; for "freight in," wages, superintendence, manufacturing expense, all direct and indirect expense. At *See paragraphs 523, 524 and 527. 170 CORPORATION ACCOUNTING the end of each period it is credited for raw material on hand and partly manufactured goods, and the balance is transferred to Trading Account; this balance is the cost of the manufac- tured goods. Controlling Account. 423. This is a summary account representing and controll- ing the entire sales or the entire purchases', and showing in one account the amount that we owe, or the amount that is owing to us. Where there are a number of ledgers a separate ac- count controls each ledger. A controlling account is con- structed in this way : For our sales we have a ''Sales Ledger'* column on each side of our Cash Book and Journal, and every item posted to the Sales Ledger (or Customer's' Ledger) is entered in one of these columns ; then perhaps we have a Sales Book. We post all the items in the Sales Book and in the special columns in Cash Book and Journal (both debit and credit) in the ordinary way, then at the end of the month we take the footing of our Sales Book into the General Journal making this entry : Sales Ledger Account Dr. $ To Merchandise Sales $ posting both these to their respective accounts in the General Ledger. We then post the totals of the ''Sales Ledger" col- umns in both Journal and Cash Book to the same account and the balance of this account must show the amount due from our customers in one sum. To illustrate let us suppose the books show this' condition : Dr. Cr. Sales as per Sales Book $10,000 00 Returns, per Return Book 100 00 Cash received from Customers 5,000 00 Cash refunded Customers 100 00 Balance due from Customers 5,000 00 $10,100 00 $10,100 00 424. These totals are supposed to be the totals of "Sales" and "Returns," also the totals of the special columns in Cash Book (the individual sums are posted to the customers ac- AND CORPORATION LAW 171 counts), therefore if the posting has been done correctly the *'Trial Balance" of the Sales Ledger will be exactly $5000, hence we know absolutely that (our additions being correct) the Controlling Account shows the total due ; and we can take a statement off our General Ledger before finishing the post- ing of the other ledgers, or waiting to prove them. In other words, the head bookkeeper knows the totals of the other ledgers before the posting is done, and he has control of the situation, as the balance submitted to him by the ledger keep- ers must agree with his' balance, as proved by the totals. The columns in the Journal can be used where no Sales Book or "Return Book" is kept, and also for adjusting errors in posting to wrong accounts, etc. Impairment Account. 425. When the liabilities of a company (including its paid- up capital) exceed the assets of a company its capital is said to be impaired; because the capital, which is in effect a trust fund* for the protection of creditors, has been eaten into by expenses or losses, and an "Impairment Account" is opened and debited with this amount — this then is the net insolvency of the company. The only proper way to restore such a com- pany to solvency is to levy a voluntary assessment, where a legal assessment can not be levied, or to seek a reduction of capital by legal means. Deficiency Account. 426. Deficit, in a commercial and financial sense, means shortage; the amount we lack or fall short of being solvent. Deficiency is therefore the state of being deficient or impaired, and "Deficiency Account" is practically the same as "Impair- ment Account" ; with this difference, that it is opened only in connection with the process of winding up in insolvency pro- ceedings, and is extracted from a "Statement of Affairs and Condition"^ as made up by the Receiver. Such an account can be constructed in this way so as to show just how the defi- ciency occurred : 427. Credit it for the surplus capital of the company at the close of the last fiscal period; that is, the surplus over and above all reserves. Credit it for gross profits as shown by the Trading Account. Debit it for dividends paid, if any; for to- tals of all expenses paid and incurred, and for shrinkage in *Vide paragraph 289. iVide paragraph 441. 172 CORPORATION ACCOUNTING values as exhibited by "Statement of Affairs"; then credit it with the difference between the two sides, which will be the deficiency as shown by the "Statement of Affairs."* This ac- count will then show whether the deficiency was created by a falling off in profits, an extraordinary increase in expenses, or a withdrawal of capital by paying a dividend when the com- pany was not in a position to stand it. 428. Form of Deficiency Account. Dr. Cr. (3) Paid in dividends (4) Total expenditure (5) l/ost through failures (6) Shrinkag-e in value as shown by statement of affairs $ 5,000 10,000 5,000 2,000 00 00 00 00 (1) Surplus at close of last period (2) Gross Profits as shown by trading % (7) Deficiency $10,000 7,000 5,000 $22,000 00 00 00 $22,000 00 00 429. This shows, first of all, that the expenses were not merely out of all reasonable proportion to the profits, but, vastly in excess of them; second, that the paying of a $5000 dividend reduced the surplus below a safe margin, and that if it had not been paid the company could have stood for the heavy losses and shrinkage and still be solvent ; third, that the heavy failures were the direct cause of insolvency. This of course is not a bad case — not a typical one. The creditors claims' Avill be satisfied, and the stockholders will lose only $5000 and the cost of liquidating. Realization and Liquidation Account. 430. The best way to get a clear understanding of the functions of this account is to regard it as an individual. Its name implies its functions — to realize on the assets, and liqui- date the liabilities of a com^pany that has ceased to be "a going concern." We charge it with all of the assets' of a company and credit it with all of the trade liabilities ; that is, with all liabilities except Capital Stock. We then credit it with the amounts realized on the assets as we proceed, and debit it with the amounts expended in discharging liabilities ; also with all the costs and charges incident thereto ; the balance then being carried to Capital Stock Account. If a loss results it is charged against the capital, and shows the residue available for distri- *Vid€ paragraph 441. AND CORPORATION LAW 173 bution among the stockholders. If it should possibly be a gain it is credited to Capital, and shows that the stockholders will receive more than their original contribution to the busi- ness. The distribution of this (as we would pay a dividend on the basis of shares held), winds up the concern; presuming of course that the legal costs of discharge and dissolution have been included in the expense. Now for the "why" of this : We debit it for the assets be- cause it has" received them in trust. We credit for the liabili- ties because they are offsets to the assets. We credit for the sums reaHzed because so much of the assets have been parted with, and cash being received for same, cash is debited. We debit for liabilities discharged because they are no longer off- sets to assets, and because cash is credited when they are dis- charged or paid . We debit for Realization Expenses, Re- ceiver's Commission, etc., for the same reason that they have become liabilities in the process of liquidation and are paid out of, and have to be credited to the cash realized. To illus- trate, let us take the case of a company with $20,000 capital, having $18,000 worth of assets, and trade liabilities amounting to $5000. Deducting five from eighteen we find that it has $13,000 net assets, against $20,000 capital liability; in other words, its capital is impaired by $7000. 432. We open a Realization and Liquidation Account and charge and credit as follows : Realization and Liquidation Account. Dr. Cr. (1) Assets Received (4) Iviabilities discharg-ed (5) L CLOSING OF CORPORATION BOOKS, PARTNERSHIP CONVERSIONS, CON- SOLIDATION OF CORPORATIONS, BANK ORGANIZATION, Etc. CHAPTER IX. General, Commercial and Financial Books of a Corporation — Forms and Uses of Cash Books, Journals, Ledgers, etc. — Antiquated vs. Modern Methods — Labor Saving Devices — Direct Road to Results — Absolute Proof of Posting — Use and Abuse of Columnar Books — Simple System of Department Accounting — Daily Statement of Liabilities. 508. The general books of a corporation are the same as the general books of a firm or partnership. The auxiliary books differ according to the nature of the business ; but there are modern and ancient books in accounting same as in liter- ature, and there are modern and ancient methods of keeping them too. Direct posting and the use of columnar Cash Books and Journals' were unknown some years ago, now they are known to every modern book-keeper. Formerly everything was journalized — even the cash — now, only a moss-back would journaHze his cash; and the up-to-date bookkeeper makes all his postings from books of original entry, whether they be Sales Books, Blotters, Invoice Books, Journals or Cash Books. The object is to economize time in his" work and space in his books, and to avoid the wholly unnecessary trou- ble of writing and explaining things twice. In some of the very large houses where a great many checks are drawn, they post direct from the check book ; and in others where the num- ber of bills Receivable and Bills Payable is many, these ac- counts' are taken out of the Ledger altogether and kept in the Bill Books ; just the same as the cash is kept in the Cash Book. Goodwin's Bill Book is arranged for this purpose, and it is the best Bill Book obtainable ;* then there is the modern voucher method of payment, another economizer. In this way the Journal is but little used, comparatively, and the explanation column in the Ledger is narrow and but seldom used. The Ledger gives the folio of the book from which the posting is made, and if any explanation of the entry is required it is only necessary to turn to the page of the book of original entry to find the full and complete particulars. Besides saving time, this method also renders the bookkeeper less liable to make *See Goodwin's Improved Bookkeeping and Business Manual, pages ^94 and 295. AND CORPORATION LAW 199? mistakes", and makes the work of locating and correcting er- rors but half as laborious, since he has but half as much work to go over. For example, under the old way he would make his first entry in the Sales Book, then he would Journalize it,. and then post it to the Ledger, and perhaps make another ex- planation of it. The reader can see what a waste of time this is, and that nothing is really gained by it. Again if he sold a bill of merchandise for cash, the "old school" bookkeeper would make an entry like this in his Journal : Cash To Merchandise Dr. $. $, And he would debit cash and credit merchandise, and tell you? "this is the only way to make a double entry," or he would make two entries like the following: John Jones To Merchandise Dr. $, $. Debiting Jones and crediting merchandise, and then a second: entry : Cash Dr. $ To John Jones $ Debiting cash and crediting John Jones. The modern bookkeeper would make the following entry in his' Cash book for a cash sale : 509. CASH BOOK. Dr. Date 1905 Names Particulars Miscel- laneous Credits Merch- andise Credits Totals Oct. 1 f Mdse, Sold J.Jones for cash 100 00 510. Merchandise column is headed "Merchandise Credit" for the reason that the amounts in this column are credited to Merchandise Account, but the items are not credited sep- arately ; instead, they are carried along in this column till the end of the month, when merchandise is credited in one entry for the total cash sales. This saves perhaps* hundreds of en- tries and keeps the Merchandise Account in the Ledger from 200 CORPORATION ACCOUNTING occupying half the Ledger; and what is true of this column is true of all extra columns in the Cash Book and Journal. These books may contain as many columns on debit and credit sides' respectively as there are accounts of revenue, and ac- counts of expense; or they may contain extra columns for every department of a business ; or they may contain a column for each Ledger where more than one Ledger is used. Their use is of course limited, but as many as ten on a side may be used without experiencing the least confusion. Where there are many extra columns in a Journal the debits' can be put on the left hand page and the credits on the right, instead of all on one page. In this way thousands of postings are saved every month in a moderately large business ; and if it becomes necessary to check one's postings, in order to locate some er- ror in the Trial Balance, the saving of physical and mental exertion becomes obvious even to the very blind. Abusing Extra Columns. 511. It must be admitted that the extra columns can be abused, same as any other good things and where there are a great number of departments in a business it would be absurd to have a column for each department in a Cash Book or Jour- nal. In such cases ''Department Sales Registers" and "De- partment Expense Registers" are used for classification and distribution of department credits and expenses. In the case of sales, every department would receive credit from the Sales Register, and the payments would be entered in the Cash Book under proper ledger headings. In some of the highly systematized department houses, the Cash Book has been abolished altogether, also the Journal, and a system of cash and transfer vouchers substituted. 512. DR. JOURNAL. CR. Total Mdse. Debits Miscel - Debits Particulars Miscel- Credits Mdse. Credits Total 513. The old style of Journal has gone out of date, with its debit and credit columns on the same side. The modern style of Journal, here illustrated, has debit columns on the left side of the page, and credit columns on the right side, or it AND CORPORATION LAW 201 may be a "Folio Journal" with debits on one page and credits on the other page. This form not only admits of carrying extra columns on each side, but it is economy in book space, as a complete entry can be made on one line instead of two; and it lessens the ■danger of posting to the wrong side of an account^ since all items on the left or debit side are posted to the debit side of accounts in the Ledger, and all on the credit side to the credit side of accounts in the Ledger. The extra columns are of course posted only once a month. 514. There are many forms of Ledger rulings such as re- verse, double reverse, horizontal and balance ledgers. Space will not permit a description of all of them, and only two, the Balance Ledger and Horizontal Ledger, will be described.* 515. Balance Ledger. JOHN SMITH JOHN JONES Date 1905 Explanation fa Debit Cred. Bal. Date 1905 Explanation Debit Cred. Bal. Oct Nv 1 10 Jl 05 10 00 5 00 10 5 00 00 Oct Nv 1 Note No. 7 Jl 100 00 100 00 516. This is the most economical of all ledgers. Two ac- counts are kept on a page and there is only one date column for both debit and credit sides ; this makes the debit and credit entries follow each other, and in this way every inch of space is used. Where the balance column is used to show the bal- ance at every entry, considerable time is lost in posting, but, the admirers of this style of ledger claim that the time saved in taking oil the Trial Balance more than makes up for the time lost in posting; besides the proprietor or manager can see the standing of any account at a glance, without having to wait to figure it up. Horizontal Ledger. 517. This is a development of what is known as the Bos- ton Bank Ledger. The account headings or names of accounts are written down the left hand margin of the page, and the accounts extended horizontally opposite the names in the space alotted to them. One line, or one page, may be allotted to an account, according to its activity. 'See Goodwin for varied ledger rulings. 202 CORPORATION ACCOUNTING p hi < H « o W o o O 1 H 1 o o O 1 IP o •O 1 p ^ ^ S a;Ba »o Tf a^ s 8 8 ! O U5 1 rH 1 8h pq ro ro 1 S 8 8 1 ^ lO M (H VO o ■«J Q •* p n g a^BQ CO rH ■♦a 8 8 8 8 Q O O lO ^ 5 U5 vO ro Q o r-f c^ «| "* 1/3 -1 i> 00 1; S O) ;3 •n jq 3 > H o a a OS C3 fl O O hr T5 ^ fl XJ 3 bo S a »4 S M J O) ;;, T) '"2 O 'O '* ,; aj hn GO (3 a •r-i a -o •— < -d (U ;^ Trt •a >■ a; a> >■ u o Q. fl W) 00 -o 0} 0) ■■^ •o T) a: Wl > a ^ ft '^ a OJ ^ r ?? p^ a 0) d .2 '^, g .u o a -o 00 O « o S .^ o 3 CI < 2 •V -d ^ 3 a 0) O d bo in o a . O) JS ^ «S o 0) J^ -o OJ xa S^ T) *^ (U S -o a GO a AND CORPORATION LAW 203 519. The illustration opposite shows the manner in which the accounts are kept in a horizontal ledger. The balances are always extended on the same line as the names, and show how the balances vary from month to month. The mathematical accuracy of each page is proved by adding the total of the debit column to the total of the balance column for the pre- vious month, and then subtracting the total of the credit column. If the remainder agrees with the total of the bal- ance column for the current month, it proves that the exten- sions are correct, and there is no need to go over this part of the work to locate an error in the Trial Balance. The abso- lute accuracy of the postings are as easily proved by the use of a proof book, and in this way errors are localized. Of course it is necessary to transfer this ledger every year, and this would make it objectionable to the devotees of the loose leaf ledger, but there is no system against which objections can not be raised and the question to decide is, which system offers the greatest advantage with the least expenditure of time and worry? 520. Speaking of accuracy in posting, the only way to in- sure against posting to wrong accounts is by use of the "Proof by Balance System of posting." Department Store Accounting. 521. On account of the great number who are interested in department accounting the author has thought it well to digress somewhat further from his subject to give a simple method of Department Accounting, and as purchases must al- ways precede sales, the Purchase Department will be taken up first. Inasmuch as Department Accounting would form the subject of quite a volume in itself, it is necessary to pass over many of the details, including the order System and Re- ceiving Department and to start in with the accounting for purchases. Invoice Record. 522. An invoice having been checked up, as to quantities, quality, extensions, footings and freight, and segregation hav- ing been made of the items for each department (if the invoice covers more than one class of goods) it is handed into the of- fice and here it is entered on the "Voucher Record" or "Invoice Journal." Now, unless the Voucher Record is properly kept and bills are promptly paid, the voucher system will be found more of a nuisance than a service, but if properly kept, and 204 CORPORATION ACCOUNTING bills are discounted or promptly paid, it will be found a source of great convenience and a labor saver as well. There are some houses that discount most all their bills, but have a few chief creditors with which they wish to keep open accounts. For this class a special form of Voucher Record has been de- signed and is herewith presented. See form on opposite page. 523. The names of all creditors are entered in the column headed "In favor of." If goods are purchased on time, and the amounts are to be credited to open accounts, the amount of the invoice is placed in the ''Oipen Acocunts Payable" column, and the distribution made in the proper department columns. If the goods are to be paid for promptly the amount of invoice is entered in the ''Audited Vouchers Payable" column, and the proper extensions made in the department columns. The total of ''Open Accounts" is posted at the end of the month to a "Controlling Account"* under that heading in the General Ledger, and the total of "Audited Vouchers" is posted also to a "Controlling Account" in the General Ledger. When a freight bill is paid it is entered in the "Freight Column" and distribution made in the department columns, and at the end of the month the total of this column is posted to the credit of Freight Account, and offsets and bal- ances the total of the "freight" column posted from the Cash Book to the debit of Freight Account — this adds the freight to the cost of the goods.*^ The totals of all department col- umns are posted to department merchandise accounts in the General Ledger, and as the totals of all department columns must equal the totals of the "Open Accounts," ''Audited Vouchers" and "Freight" columns, the General Ledger will be in balance. 524. When an open account is paid it is entered in the column adjoining "Terms," and the difference between this and the first column shows the amount owing on open ac- counts — assuming all invoices to be entered. When a voucher payment is made the amount is entered in the extreme left column, and the difference between this and the "Audited Vouchers column shows the amount due on Audited Vouch- ers. In this way the proprietor can tell his liability for mer- chandise at any time from this' single record. Expense Voucher Record. 527. The Expense Voucher Record is kept in the same *Vide paragraph 423. *2Vide paragraph 419. AND CORPORATION LAW 205 Q O U W u o > y o > 1^ II II 1" 1- 1-= II Is. T3 9) IIS < a 111 1 1 o 1 s. a > 5 ^ Q P4 O U W pi! W U ID o > CO X II 1" 1- 1* il 2i 5t5 II c42 0^ o 1 > c > 1 206 CORPOKATION ACCOUNTING way as the Invoice Record. The difference between the first two columns on the left, and the extreme right column being the balance due. The first three distributive columns are for items that do not belong to any one department — the third column being for items that become a Permanent Asset.* 527. If desired the "Freight" column could be kept in this record instead of in the Invoice Record, but inasmuch as freight is a part of the cost of buying, and not a part of the cost of selling, it is logically correct to keep it in the "Invoice or Purchase Record," and to post it to Merchandise instead of to Expense. The "Fixtures and Furniture" column might be put in the Invoice Record, but then the balance of that record would not show merchandise liability, and if we enter this class of invoice in the General Journal, it would necessitate an "Accounts Payable" column in the General Journal, so we compromise the matter by putting it in the Expense Voucher Record. Sales Register. 529. We will now commence to record sales made. Every sales person is furnished with a book of sales tags', or perhaps with two books of different colors, one for cash sales and one for credit sales. These books are so well known and under- stood that a description is* not considered necessary. With every sale, one of these slips or tags goes to the office. The cash and credit sales tags are kept separate and they are as- sorted by departments, and also by "sales persons." At the close of each day's business, the sales of each person are to- talled on an adding machine, compared with the recapitulation sheets in their sales books, as to numbers and amounts, and then entered on a "Daily Abstract of Sales" sheet. 530. This Abstract Sheet is one the loose leaf plan, and there can be as many lines as there are sales people in the highest employing department. The sales are all collected here by departments; the returns, as shown by the returns book, deducted and the "Net Sales" recapitulated on the right hand margin. Charge sales are either charged to cus- tomers direct from the tags, or charged once a month by means of one of the many carbon billing systems'. 531. Next we have a monthly record of cash and credit sales with 31 lines on it — one for every day in the longest month. The word "Sunday" or "Holiday" is written oppo- *Vide paragraph 443. AND CORPORATION LAW 207 1 1 1 a < m u P Tl.Cash Total Credit «3 0^ a a. W Q CO J w Q 1 3 W 1 a to 5 Is 1 w « fO ■*• I 1dS ^3 Wi O o O o CO P W (^ u Q CO '5 CO <^ 1 u •S V U 0) u 1 M « ^ 1 a "3 a a 1 oq a a < 1 Q 1 - - ro U 1 "3 1 a 1 208 CORPORATION ACCOUNTING site the dates on which they fall. This is made up from the recapitulation on the right hand margin of the "Daily Ab- stract of Sales/' and the recapitulation on the right hand mar- gin of this record, shows at a glance the total of every depart- ment for every day, and also for the month ; both as' to cash and credit and total sales, and will be found very valuable for statistical and comparative purposes. The total sales of each department are posted at the end of the month, the folios be- ing written on the line opposite "posting" and under each de- partment heading; this reduces the posting to the extreme minimum — one posting a month to the credit of each depart- ment — in the same way that the "Invoice Voucher Record" makes necessary only one posting a month to the debit of each department. 534. CASH RETURNS BOOK. Date Credit Cash returned as follows No. CB. Page Refund Exchange Department. 535. When goods are returned by a customer, they are taken either to a department manager, or an exchange depart- ment. If the purchase tag accompanies the goods and they are identified and exchangeable, a credit voucher is issued to the customer. This voucher should be in triplicate, one given to the customer, one sent to the office, and one retained in the exchange department. All are of course numbered, and the office cannot take nor give credit for more vouchers than the Exchange Department records call for. If the sale was a cash sale, and the return calls for a cash refund, the customer takes the voucher to the office and gets the cash for it. The Cashier enters this in the "Cash Refund Book" placing the amount in the Refund column, giving the name of the person and num- ber of the refund; then the amount is distributed under the proper department headings. The total of the refund column in this book must agree with the total of all the other columns. These columns are footed up every night and deducted on the "Daily Abstract of Sales" sheet, the net cash sales being en- tered in the first column of the Cash Book, the total of which at the end of the month will correspond with the total of the same column in the monhly sales register. To prevent fraud AND CORPORATION LAW 209 in the matter of refunds, all refund vouchers issued by the Ex- change Department should be O. K.'d by the department man- ager to whose department the goods are returned and also by the clerk who puts the goods back into stock. 536. CREDIT RETURN BOOK. Date Credit the following: persons No. Ledg &F0I. Amount 537. When goods are returned by a customer who has an open account, they are entered in the ''Credit Returns Book" in the same manner in which the entries are made in the "Cash Returns Book" and the totals of the department columns' are deducted daily from the department columns on the "Daily Abstract of Sales." The customers may be credited in one of several ways ; (a) direct from this book, giving the ledger and folio of their accounts as' — "A — K" 100; (b) direct from the voucher slip ; (c) entered on the billing book in a credit col- umn, deducted from the bill and the net amount charged at the end of the month. Where there is more than one "Sales Ledger," and there is a controlling account for each Ledger, we would have to put in a ledger column for each Ledger, or to segregate the amounts for each Ledger and debit the con- trolling accounts for proper amounts at the end of the month ; or if we had a billing system for each Ledger we could follow the method suggested in (c). 538. The keeping of the cash book is very simple. All cash sales are entered in the first column. All payments re- ceived on open accounts are entered in the proper ledger col- umn, and any money received for credit of an account in the "General Ledger" is entered in the general ledger column. The totals of the "Sales Ledger" columns are posted at the end of the month to proper controlling accounts. — See defini- tion of Controlling Account, paragraph 423. 539. The total of "Voucher Payable" column is posted at the end of the month to the Voucher Payable Account, and the balance of this acocunt is the amount due on Audited Vouchers. The total of the "Accounts Payable" column is posted to "Open Accounts Payable" account at the end of 210 CORPORATION ACCOUNTING CO < Q > s u w CO < 2« o bl 1 ^1 is 42 c 3 § < 1 la ^ Mo w-a 2 i 1 1-^ uJ5 1 o o CO biO Oh bo C B u O u O G the month, and the balance of this account is the amount due on open accounts — the sum of these two is the total of trade liabilities. The re- maining columns in the Cash Book suggest their purpose. In addition to the foregoing books we would have a Petty Cash Cook for petty disbursements, a Transfer Journal for transfers of debits or credits made to wrong departments or to wrong ledgers, besides other aux- iliary books', such as ''Mail Order Record," ''C. O. D. Sales Record," etc. The General Ledger would contain all the Real, Nominal, Con- trolling and Representative ac- counts. It would have its accom- panying Journal and the accounting of the entire business would con- verge toward it and rest in it. It would be the heart and nerve center of the entire business. It would throb and vibrate in unison with every department, and the weal and woe of every department would be reflected in its pages and the mer- chant who studied it carefully and watched its pulsations, would be in close and constant touch with his business. 541. The form on the opposite page is an illustration of a Petty Ledger designed by the writer about eight years ago for a business that had a great many petty ac- counts. Since that time it has been used by a number of bookkeepers with much satisfaction. AND CORPORATION LAW 211 a S O eS oi Q a < — o 6 2; prea 6 S5 tH «N ro ^ >/5 VJD t^ 00 a 3 O a < n So, i 1 a 212 CORPORATION ACCOUNTING 543. The object of this design of Petty Ledger is to minimize the time required to take a Trial Balance from petty accounts and reduce a page or section of a petty ledger to the simplicity of a single account. The distinguishing feature of this method from anything now in use, is the system of numbering each entry on a page and making all the credits by number, thereby affording a com- plete check on every entry; thus, instead of crediting each debtor opposite his name, and having a straggling credit col- umn, with blanks and credits alternating, the first credit is placed at the top of the column regardless of what account it pays, and is preceded by the number of the account it liqui- dates. When the credit is made a check mark is placed in the "paid" or checking column, indicating that that item is paid. A glance down this column shows at any time the paid and unpaid accounts, and the numbers checked should corre- spond with the numbers entered in the credit column. Pro- vision is also made for partial payments. It will be noted that there are two lines on the credit side for every line on the debt side, these we call primary and secondary lines', the through or blue lines are primary lines,'^ on which all full pay- ments or balances are entered. The short (red) or secondary lines are for partial payments. When a partial payment is made we first enter the number of the item on which the pay- ment is made on the first red line below the last credit entry, and place a "P" indicating partial in the column headed *Tar- tial or Balance," and the amount in the money column; then we place the balance due in the balance column on the debt side. We do not check this* in the "Paid" column yet, as it would show a false statement. As the "Paid" column shows the accounts paid in full, so the "Balance" column shows the balances due on the partially paid accounts. When the balance is paid on any account we enter the number on a blue line followed by a "B," indicating balance, and then we check the account in the "Paid" column to show that the item is settled. Bear in mind that we find out the accounts paid and unpaid by glancing down the "Paid" col- umn and the balances due on partially paid accounts by glanc- ing down the *'Balance"column. So much for the utility, now for the labor-saving features. You will observe that at the end of any month, after the first month, it is only necessary to add to the pencil footings of the previous month, on debt *Inasmucli as the colors can not be reproduced here it is necessary to- say that the blue lines run clear across the page and the red lines are represented by the short lines on the credit side. AND CORPORATION LAW 213. 544. DAILY STATEMENT OF LIABILITY. 1905 Oct. Nov. 31 Due on open accounts and vouchers Purchases received today Paid by Cash Paid by Note $10,000 1,000 00 00 $11,000 5,000 oa- 00 Nov. 3,000 2,000 (( Balance due on open accounts 6,000 oo Oct. Nov. 31 Due on Bills Payable New notes g-iven Notes paid off 5,000 2,000 00 00 7,000 1,000 00 00 (( Balance due on Bills Payable 6,000 00 Oct. Nov. 31 Contra Accounts Receivable Credit Sales for today Payments received on open accounts Balance Accounts Receivable 15,000 1,000 00 00 16,000 3,000 00 00 (( (( 13,000 00 Oct. Nov. 31 Bills Receivable New notes received Notes paid 2,000 0,000 00 00 2,000 500 00 00 (( (( ' Balance Bills Receivable 1,500 00 Oct. Nov. 31 Cash on hand Cash received Cash paid out 3,000 1,500 00 00 4,500 4,000 00 00 (( Balance on hand Summary 500 00 Cash on hand Accounts Receivable Bills Receivable Total Current Assets exclusive of Mdse. 500 13,000 1,500 00 00 00 15,000 00 Due on Open Accounts " " Bills Payable 6,000 6,000 00 00 Total trade liabilities 12,000 00 Balance $3,000 oa 214 CORPORATION ACCOUNTING and credit sides respecively, and the difference between the two sides is extended into the ''Monthly Balance" column, as the balance of that section of the work for the month, from whence it can be transferred to the Trial Balance Book same as any ordinary ledger account. This is a very simple opera- tion and saves a great deal of time, besides reducing the possi- bility of making mistakes to a minimum, and making the de- tection of mistakes easy by the use of the numbers. There is no segregating of unpaid accounts, no going back over the credit side month after month to locate or include some item sandwiched in somewhere, and no risk of taking a partial pay- ment for a settlement — in fine it is a neat, simple, practical and common-sense method of keeping "Petty Accounts." Daily Statement of Liability. 545. The method illustrated on the preceding page may be employed by any firm or company to learn its daily liability to creditors, and also what there is available to meet it : 546. The balance shows a margin of $3000 for bad debts, reserves, etc., and the fixed assets and merchandise remain to offset Capital Liabilities. A printed statement like the forego- ing can be filled in in a very short time every day, and will more than repay for the labor. This form is more suggestive than pretentious. It can be further detailed to include either the approximate inventory or the actual inventory of merchan- dise on hand, where a cost system is" in use. In fact it is very important to the merchant to know at all times the amount of stock he is carrying and by the addition of the Capital Assets and Liabilities and a reserve for depreciation, etc., he can have a going Balance Sheet and Profit and Loss Statement. CHAPTER X. Illustrating a Set of Books for a Gold Mining Company — A Symposium on Capital Stock Account — Paying for Stock on the Instalment Plan — Treasury Stock as a Negative — Opening and Closing the Books — The First Annual Statement. 547. The Books for the mining company incorporated in Chapter VI of this book will now be opened and the style of account books illustrated in the beginning of Chapter IX will be used,* but before commencing, a few general remarks on the opening of the books may not be out of order. 548. Some accountants' aver that the Capital Stock Ac- count in the General Ledger should be credited with only the paid-up capital of the company; others state, with equal posi- tiveness, that it should be credited with just the "subscribed capitar'of the company, and a third class assure us', that the correct way is to credit the Capital Stock Account at once with the "authorized capital." Now these statements are all too dogmatic. Circumstances connected with the organiza- tion of a company and the manner of selling or disposing of its stock, must determine in individual cases which plan is the most practical. If the organizers of a company take up, or otherwise dispose of all the stock they wish to place at the time of organization, and they pay for it in cash or other ex- change of value, the first method is undoubtedly the best. If, on the other hand, they subscribe for a greater amount of stock than they pay for, it will be found more convenient to credit the Capital Stock at once for the subscribed capital; besides they are bound by their subscriptions,* and the unpaid balance is* an asset. To find the "paid-up capital," it is only necessary to find the amount due on subscription and sub- stract it from the subscribed capital. If a certain amount of the capital stock is subscribed for, and the balance is placed in the treasury, so called, or in the hands of trustees to be sold, it will be found necessary to credit capital stock with the full capital, since the amount not already subscribed for is con- verted into treasury stock, so called, and there are no further *Vide paragraph 244. 216 CORPORATION ACCOUNTING entries to be made to the Capital Stock Account, unless the stock is either increased or decreased, — of course this kind of treasury stock will be a negative to capital stock, and it should be deducted from the "Nominal Capital" when making up a statement. 549. When stock is sold on the instalment plan there are various ways of entering the sale and the payments on the books of the company. One way is, where the number of stockholders is limited, and the number of instalments few, to open a Subscription Account and write the names of each subscriber thereon, debiting the subscriber with the amount of his subscription, and leaving as many blank lines opposite his name as there are instalments to be paid, and then credit- ing Capital Stock with the full subscription. As the instal- ments are paid credit Subscription Account, each subscriber opposite his name. When they are all paid Subscription Ac- count will balance, and the subscribed capital will then be the paid up capital of the company. 550. Another way is to open Instalment Accounts for each instalment, and designate them by number. Just before an instalment falls due, open one of these accounts, charge it with the amount of the instalment and credit Capital Stock; then as the instalments are paid credit it ; the balance on any one of these accounts will show the amount still due on a par- ticular instalment. Sometimes instalment scrip* is issued for these instalments, and an Instalment Book is kept of which the following is an illustration : 551. INSTALMENT BOOK. Instalment No. 1 of 10 per cent, due Oct. 1, 1905. Payable Oct. 1 to 30. Folio Names of Subscribers John Smith Paul Jones Albert Brown No. Shrs. Amount Instal- ment When Paid Amount Paid 100 50 50 100 50 50 00 00 00 Oct. 1 2 100 60 GO 00 Remarks 552. This form explains itself. The payments as made are entered opposite the names of those making the payments, and the record always shows the names of those who have not paid. The Stubs of the Scrip Book are footed up every night and the total payments for each day are entered in one sum in the Cash Book and posted to the credit of the Instal- ^Vide paragraph 251. AND CORPORATION LAW 217 tnent Account. The Instalment Account shows the amount due at any time on instalments, and the Instalment Book gives the names of those who are owing. The ''Folio" column is only used where the method of crediting each stockholder on his acocunt in the Stock Ledger, for the amount he pays on his stock, is adopted. 553. Still another way is, where the number of instal- ments are many, say from ten to twenty, and they are due on the first of every month and payable any time within the month, (with a possible extension of time), and the payments are coming in every day, the most practical way is to open an account with each stockholder, debit him for the amount of his subscription, and credit Capital Stock in one entry for the aggregate. He then becomes the company's debtor and his account is credited for payments the same as any other personal account. 554. Some object to this method and say, that there should be no accounts in the General Ledger with stockhold- ers, but that such accounts should be in the Stock Ledger, and the Stock Ledger only. The writer fails to see any good argument in this. The stockholder is the company's debtor, or the creditor's debtor, in the amount of his unpaid subscrip- tion, and this amount being collectible at law, it becomes an asset of the company, and properly belongs in one shape or another on the general books of the company. Of course it is a negative asset, as far as the company is concerned, being negatived or offset by the Capital Liability"^ its issue created ; but it is a positive asset as regards the claims of the creditors. Whether this amount stands on the books of the company as Subscription Account, Instalment Account,^ or as so many personal accounts, it makes no difference in law, and no dif- ference as far as correct accounting is concerned ; it is simply a matter of practicability and convenience. 555. Here, however, arises a new question. When Treas- ury Stock is debited, it has to stand on the books of the com- pany as an asset, and it is contended that as nothing of value has been received for it, it is not properly speaking an asset.^ Others contend that the charter of the company gives a value to its stock. Now as before stated, this class of treasury stock is merely a negative^ asset, and in making out an annual, or other periodiCafstatement, the amount of the treasury stock can be left out of the list of assets, and an equivalent amount *Vide paragrahp 448, *iVide paragraph 459. *2Vide paragraph 304. 218 CORPORATION ACCOUNTING taken off the capital stock as a liability; this would make the net liability to stockholders appear correctly on the statement. For the other claim the charter of the company only authorizes the company to sell so many shares of stock at a certain nom- inal value, but it does not give these shares an active or real value ; that value must be originally based on the property of the company against which the shares are issued, and subse- quently on the property and prospects of the company. Neither the capital stock nor treasury stock are ever appraised or inventoried ; they stand on the books at their nominal value, and the respective accounts are credited for sales at nominal value, whether the stock sells at a premium or at discount. Some few accountants do not take the amount of the paid up capital into the statement as a liability, but add it to the sur- plus and call the sum the "Present Worth" of the company. This method is wrong, as it is very apt to mislead, and by it the company might be made to show that it was worth a cer- tain sum, when it was really insolvent, as it is when its capital is impaired. BOOKS AND ACCOUNTS OF 'THE GOLD AND SILVER MINING COMPANY." 556. In every well regulated business* of goodly propor- tions there are at least two Journals, and two Ledgers, namely, a Sales Journal, and Purchase Journal, and a Sales Ledger and Purchase Ledger. The first set contains all the sales, and the second set all the purchases. Sometimes* one bookkeeper keeps the Sales Ledger, and another the Purchase Ledger, and they each have their own Journal, and never interfere with each other in posting. When one keeps both Ledgers it is equally convenient for posting purposes ; and where the busi- ness is not large enough to justify the use of two sets, the Journal and Ledger can be divided into two, by keeping all the sales in the beginning of the books, and all the purchases in the back of them. A General or Private Ledger should be kept for all the Private and Representative Accounts of the company. This is kept by the head bookkeeper, and he is the only one, outside the proprietors or manager, who has any knowledge of the private affairs of the company. This* Ledger contains its own Index and Journal, and carries accounts with the other Ledgers as if they were individuals ; and in this way is an epitome of the entire business of the company. It is fre- quently made with a neat little spring lock to it and is assess- able only to the man who carries the key. By this means AND CORPOKATION LAW 219 a knowledge of the private affairs of a concern is kept from subordinates. 557. In the set which follows, the only object aimed at is to show the working of the books, and the handling of some of the accounts. In the ordinary course of business many more accounts would be carried, which are omitted for sake of brevity. The manner of closing Resource, Expense and Property Accounts, can be illustrated as well with a few as with a great number. Accounts have been purposely opened with the stockholders to show that it is practical to do so, and to show that there is no harm in doing so ; inasmuch as they will soon be closed, and will never appear on any but the first Ledger. Description of the Cash Book. 558. The company in this case derives revenue from three sources — the stockholders, the mill customers, and the mine itself. The product of the mine is called ''bullion," when it has reached that stage in the process of reduction that fits' it for shipment to the Mint. The Mint coins it, making a slight charge therefor, which is called ''Mint Charges." An entry is then made in the Cash Book for the amount realized, and the Bullion Account is credited at the end of the month for the month's "clean-up." All other items on this side are posted from day to day. The extra columns on the credit side are posted only once a month, and the miscellaneous column from day to day. The Cash Book is closed every month as illus- trated. Vide pages 225 and 226. Explanation of the Journal. 559. The first part of the Journal is used for entering the sales of stock ; after that it is used as' a General Journal. The extra columns for capital stock and treasury stock are to pre- vent too frequent posting to these accounts. These columns have been used in this way for the purpose of showing their utility. Ordinarily, only the total of each day's sales would be extended into the credit column of Capital Stock. In the Purchase Journal, individual accounts are credited in the "Mis- cellaneous Credit" column ; and Machinery and Tools, and Stores and Supplies debited in their respective columns. For rebates or returns the individual would be debited in the "Mis- cellaneous" column, and the other accounts credited in their respective columns. The total debits and credits of the extra columns are posted at the end of the month. Vide pages 227 and 228. 220 CORPORATION ACCOUNTING Closing Entries in the Journal. 560. It will be observed that in the closing entries some new accounts have been opened. The reason for doing so is, that all the assets and liabilities of the company should appear on the books at the time of closing, otherwise the books do not show the true standing of the business.* The Bullion Account is credited for only the Mint returns, but at the time of closing the books, there is a certain amount of ore in that state of re- duction known as "Amalgam." This has an intrinsic value, and is a part of the assets of the company. It is therefore ap- praised, and its value placed on the books in the manner shown. It is credited to Profit and Loss for the reason that it is a part of the company's product, same as Bullion. The next year, or the next time of closing the books, this Journal entry is not necessary. The Amalgam Account is carried on the books as an asset until the next time of closing, when the amalgam is again appraised, and its appraised value written on the Amalgam Account as "Inventory," the difference be- tween the two sides of this account after the entry, is carried to the debit or credit side of the Profit and Loss Account ac- cording as' it is greater or less, and then the accotmt is closed and the "Inventory" value carried down. The following is an illustration. 561. AMALGAM ACCOUNT. 1905 Dec. 1006 Dec. 31 31 To Inventory " Profit & Loss To Inventory 1,000 500 00 00 00 00 1906 Dec. 31 By Inventory / 1,500 00 31 1.500 1,500 1,500 00 1906 Dec. 562. The above account shows that there is an increase in the Amalgam Account of $500 over last year, and this in- crease is taken to Profit and Loss and the inventory carried down on the debit side of the account. If the mine should be shut down between periods, the books should be closed, and the present value of amalgam shown on the books. 563. Another way, and a better way, is : Credit all ex- penses at the end of every month, and debit a ''Development, *Vi(ie paragraph 439. AND CORPORATION LAW 221 Ore and Bullion Account." This will give us the cost of de- velopment, ore, etc., and it will be an asset to this extent. Credit "Bullion Sales" for sales of bullion, and debit cash for same. At the end of each period, credit "Development Ore and Bullion Account" with the amount of development and ore, or ore and amalgam on hand, at cost of production, and with the bullion on hand at its worth, and bring this down on the debit side as "Inventory" or "Asset value." Credit it with the difference between the inventory and cost, and debit Bul- lion Sales ; the balance of the Sales Account will then repre- sent profits on operating. We inventory ore and amalgam at cost, because we must not figure profits on the future. Vide paragraph 567. We inventory bullion at what it is worth, be- cause it is a "cash asset"* and the profit on it belongs to the present. We debit Bullion Sales for cost of production, so as* to get the difference between cost and selling price, which is profit. 564. We owe for labor at the time of closing, for say, the December pay roll, and as it is one of the company's obliga- tions, it must appear on the books as a liability.^ We therefore debit Profit and Loss Account for this amount, for the reason that our apparent gain is that much less, and we open a new account which we call "Accrued Wages" or, it would be better to debit "Expense Labor" for the amount, so that this account might show the entire cost of labor; and afterwards close this account into Profit and Loss Account. In the first case the Accrued Wages Account stands on the company's books as a liability until the next time of closing, when it is treated in a manner similar to the Amalgam Account. In tTie latter case it is debited for the December pay roll when it is paid, and the account closed. 565. ACCRUED WAGES. 1905 Dec. 31 To Inventory (red ink) " Profit & Loss / 500 500 00 00 00 1905 Dec. 1906 Dec. 31 81 Dec Pay Roll By inventory 1,000 00 1,000 1,000 00 500 00 *Vide paragraph 445. iVide paragraph 439. 222 CORPORATION ACCOUNTING 566. This account shows that we owe $500 less for labor at the end of the second year, consequently we have gained $500 on this account (in that we do not owe as much), which amount we credit to Profit and Loss Account, and we bring down the "Inventory" on the credit side for the amount we still owe for labor. Still Another Way. 567. If it was a crude petroleum oil business instead of a mining business, we would have a Production Account to rep- resent the product, and a Sales Account to represent the sales ; or we could combine the two in one "Product and Sales Ac- count," and treat it as we would a Merchandise Account. As a matter of correct accounting, the product should be charged at what it cost to produce it; for to inventory it for what we think it is going to sell for, is to figure in profits that have not yet been earned, and will not be earned until the sale is made — the product is of the present, the profits of the future, and the profits of what remains on our hands at the close of the period belong to the next period, when it is sold. If we were in the refining, as well as the producing business, the crude product would be the first item in our ''Manufacturing Ac- count* — the Raw Material. 568. It is not necessary that the closing entries be made in the Journal, but it is considered by competent accountants to be the best and most fitting way to close the books. Explanation of the Ledger. 569. Some account or accounts have to be opened in the Ledger to represent the property owned by the company. In this case the only property the company has at the outset is the mine. This mine was owned by some of the promoters of the company, who assigned their title and interest therein to the company at the time of its organization, the consideration being a certain number of shares of the paid-up stock of the company. The account to be debited in this instance is a "Mine Account," which is' debited for the par value of the stock issued for it; and the assignors or vendors are credited for a corresponding amount. Then the promoters are debited for the stock issued to them, which balances their accounts, and Capital Stock is credited. It goes without saying, that the promoters reserve enough stock for themselves to compensate them for the property they turn over to the new company. *Vide paragraph 422. AND CORPORATION LAW 223 An account is then opened for Machinery and Tools, which is debited for all the machinery and tools purchased by the com- pany, or a "Plant Account" is opened which is debited for ma- chinery, tools, lumber, buildings, horses, wagons, etc. An ac- count is also opened for stores and supplies' which is charged for powder, fuse, caps, candles, oils, mercury, quicksilver, fuel, etc., etc. The expense account can be subdivided as fine as one pleases, or it may be all kept under one general head — "Expense," but this general term, like charity, covers a multi- tude of defects' sometimes, and it is more satisfactory to know how much was expended under the different heads.* In this way the stockholders are better informed of the internal af- fairs of the company, and it affords them as well as the di- rectors, an opportunity of demanding retrenchments in certain directions. Vide pages 229 and 230. Closing the Ledger. 570. Before the "Machinery and Tools," or "Plant Ac- count" are closed, they are first inventoried, or a Depreciation Fund^ is started, or a Depreciation Account opened,- a certain amount being written off to Profit and Loss for wear and tear. The amount it is inventoried for is written on the credit side in red ink, and the difference between the two sides is written "Profit and Loss," immediately under it, also in red ink. Profit and Loss is debited for this difference, and then the inventor}^ is brought down on the debit side of the account. 571. The "Stores and Supplies" is also inventoried. What- ever supplies are on hand are valued, and the amount written on the account as "Inventory," this account is then treated in the same manner as the foregoing account. 572. If any account of expense has anything of value re- maining in it, it is also inventoried and closed same as the "Stores and Supplies Account," for example, Fuel Account, if a separate account is kept for it. We should also inventory Insurance Account and Taxes Account, for the amount of in- surance and taxes which are paid in advance. These accounts are inventoried by writing the amount of the unexpired insur- ance and unexpired taxes on the credit side, and then carrying the difference between the two sides to Profit and Loss, and bringing down the amount of the inventory on the debit side as an asset. Only the expired amount of Insurance and Taxes *Vide paragraph 412. iVide paragraph 393. 2Vide paragraph 400. 224 CORPORATION ACCOUNTING is a part of the losses of the year's business — the same is true of "Rent" Account and all such similar accounts. Vide para- graph 413. 573. Read paragraphs on Depreciation, Reserves, Expen- diture, Prepaid Expense, etc., in Chapter 8, for other and fur- ther methods of closing accounts. 574. All accounts that are wholly loss are carried to the debit side of Profit and Loss Account, and all accounts that are wholly gain are carried to the credit side of Profit and Loss. This account is then balanced, and the balance carried to Surplus Account, or to Surplus Account and Dividend Ac- count, or to whatever accounts the directors' order. Before this is done, a Trial Balance is taken to make sure that the books are in balance before we attempt to close them, and after that the ''Statement of Assets and Liabilities" is taken off. 575. Form of Pay Roll. PAY ROLIy OF BIG LUCK MINE For the Month of 190. . We, the undersig-ned, acknowledge having- received the amount set opposite our respective names, and each one for himself hereby certi- fies that the net amount for which he has signed is in full payment for services for the time hereinbelow specified and in full for all claims ag-ainst the Goi^d an» Sii^ver Mining Company, to and including- the day of 190 Names No. of Days Rate Gross Amount Deduc- tions On Acc't of Net Amt. Due Signatures Total Pay Roll Deductions , Net amt. due for labor Remarks Supt. 576. This form of loose leaf pay roll is made out in dupli- cate, the superintendent keeping the original and sending the duplicate to the office of the company v^here it is checked over, and from whence the check or checks are made out. The su- perintendent has the original signed and returns it to the office of the company where it is filed away same as a voucher in a regular "pay roll" binder. AND CORPORATION LAW 225 577. CASH RECEIVED. Date 1905. Folio Accounts Particulars Misc. Credits Bullion Acc't. Total Oct. 1 16 William Glass J. J. Rahill Geo. Babcock M. S. Hutchison G. W. Lister W. A. Bloodgood J. W. Short Chester H.Rowell Balance on hand William Glass J. W. Short Bullion Account J. J. Rahill Geo. Babcock G. W Lister Chester H Rowell W. A. Bloodgood M. S. Hutchison Bullion Account Balance on hand Chester H. Rowell William Glass M. S. Hutchison J. J. Rahill Bullion Account G. W. Lister Geo. Babcock Bullion Account Bullion Account Balance on hand 1st Installment, 20 Shs. << On Account In full for 500 Shares 1st Installment, 500 Shs. 2d Installment, 20 Shs. 1st " Treas.lOO" Prem. on " Stock October clean-up 2d Installment 500 Shs. On Account 2d Installment 3d In. 500, 2d on 100 Shs. 3d " 3d " 3d " Clean-up 3d Installment << For Clean-up 20 20 20 20 20 15 9,000 500 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 '0 00 00 00 00 00 1,000 00 00 00 00 00 20 100 400 20 20 20 500 150 20 1,000 1 2 3 15 20 25 <• 30 9,615 00 6,008 2,250 50 Nov. 2 1,000 1,200 1,150 00 600 20 20 20 20 20 2,350 8,258 50 7,408 3,050 Dec. 1 2 10 25 31 1 1 1 1 1 1 1 2 50 2,350 00 1906 10,458 50 9,722 Jan. oO N. B.— The first method described, that of making no entry of product until the bullion is sold, is the method employed here. 226 578. CORPORATION ACCOUNTING CASH PAID. Date 1905 .2 1 1 2 Accounts Particulars Misc. Debits £x. General Ex. Labor Total Oct. 1 12 20 31 3 Wm. Glass Trip of Directors Assays $10, Ex pre Freight on powde Demerest & Fullen Express on tools Expense General, Balance on hand For money advanc'd to defray expenses of incorporation, per vouch, on file to mine ss on ore samples $5 r, C. P.W. on account from J. T. & Co. for Oct. (red ink) 3,500 106 00 50 30 50 15 10 1 00 00 00 00 50 50 3,606 6,008 106 50 50 9,615 00 Nov. 1 1 3 10 15 30 1 1 1 Pay Ro 11 for Octo Telephone Bills Freight on comp C, T. Cearley, Boo Fresno Republic'n Cal. Powder Works Expense General, " Labor.for Balance on hand ber ressor ks & Stationery Adv. and Printing for Nov. Nov. (red ink) 250 100 500 00 00 00 10 25 40 25 00 00 00 00 00 500 00 850 7,408 100 500 00 00 50 8,258 50 Dec. 1 1 10 31 31 31 81 31 1 1 1 Telephone Bills Assays Pay Roll for Nove John Taylor & Co. C. H. Riege Attorney's Fees Expenses General, " Labor.for Balance and mber on account Dividend Book 1st Quarter for Dec. Dec. 15 71 650 00 00 00 12 5 3 50 50 00 50 00 00 650 00 00 736 9,722 71 650 00 50 10,4 50 The narrow compass of a page will not permit the amplification of a proper system, hence I have charged freight, etc., to current expense, but would direct the readers' attention to paragraph 419, headed "Trading Account," for correct method of charging freight. AND CORPORATION LAW 227 579. SALES AND GENERAL JOURNAL. OCTOBKR 1, 1005 Treas'y Stock 28,000 28,000 00 Capital Stock Misc. Debits 400 00 400 00 400 00 400,00 400 00 25,000 25,000 10,»00 10,000 15 1,000 2,400 150 2,400 28,000 105,965 00 00 00 00 Particulars Gold and Silver Mining Co , organized this day, under the laws of California, with a Nominal Capital of 1100,010, divided into 5,000 Shares of |20 each Sundries Dr. To Capital Stock Wm. Glass 20Sh8. J. J. Rahill 20 " Geo. Babcock 20 " M. S. Hutchison 20 " G. W. Lister 20 " Wra. Glass J. J. Rahill 1250 Shs. 1250 " 10 Chester Rowell 500 Shs. J. W. Short 500 " Treasury Stock To Capital Stock Sale of Stock closed and balance placed in Treasury, as per reso- lution of Board of Di- rectors. Minute Book page 15 W. A. Bloodgood To Custom Wk. Ace. Milling 10 tons of ore @ 1.50 per ton Discount Account To J. W. Short 10 per cent dis. for cash November 1 J. W. Short To Treasury Stock Stock Prem. Acct Short buys 100 Shares of Treasury Stock at a premium of 20 per ct , as per resolution of Board of Directors. Minute Book page 10 W. A. Bloodgood To Custom Wk.Acct. 100 tons ore at 1.50 per ton December 1 Chester Rowell To Treasury Stock " Premium Acct. He buys 100 Shares of Treasury Stock at Prem. of 20 per cent. Treasury Stock (total) To Cap. Stock (total) " Treas.Stock(sold) Misc. Credits 15 1,000 400 150 400 00 00 00 Capital Stock 2,000 00 25,000 00 25,000 00 10,000 10,000 28,000 00 00 100,000 00 4,000 00 105,965 !~0 100,000 Treas'y Stock 2,000 2,000 4,000 00 00 00 It will be noticed that Premium Account and Discount Account are entered to Profit and Loss inclosing this set. This is given as one way— not the best way— of closing these accounts. See paragraph 320-2 for best method of disposing of Premium and Discount. 228 CORPORATION ACCOUNTING 580. SALES AND GENERAL JOURNAL. December 31, 1905. Treas'y Stock Capital Stock Misc. Debits 600 750 ,027 ;,350 165 800 10,572 50 50 Particulars Closing Entries. Ex Labor to Accrued Wages amount due labor, as per December Pay Roll Amalgam Account To Profit and Loss Amalgam on hand, as per inventory Profit and Loss To Expense, General " Expense, Labor " Discount Account Bullion Account Custom Work Premium Account To Profit and Loss Profit and Loss To Surplus Account " Div Acct., 1 per cent For disposition of net gain per resolution of Board of Directors Misc. Credits 600 750 277 1,750 1,000 4,315 880 1,000 10,572 Capital Stock Treas'y Stock 581. PURCHASE JOURNAL. October 1, 1905. Mach'y & Tools Stores & Suppli's Misc. Debits 1 Particulars I Misc, Credits Stores & Suppli's Mach'y & Tools 50,0TO0( ) 1 Mine Account to Wm. Glass J.J Rahill For their title and interest in Big Luck Mine 25,0TO 25,0TO TO TO 7,500 00 250 TO Machinery and Tools To Demerest & Fullen 10 S. Mill, per contract Stoses and Supplies To Cal Powder Works Ton of Giant Powder 18 Machinery and Tools To J. Taylor & Co. Invoice 10-15-05 7,5TO 250 TO TO 15 00 15 TO TO 00 TO TO 4,0TO0( 7,515 250 ) 1 ) Demerest & Fullen To Bills Payable Notes 1, 2, 3 and 4, B. B. 1 31 Mach. and Tools for Oct. Stores and Supplies for Oct. Dec. 15 Machinery and Tools Stores and Supplies. To John Taylor & Co. Invoice of December 13 2 1 4,0TO TO "0" 00 — 7,515 250 25 61,765 0( 61,765 175 200 TO 20 TO TO 45 0( 175 Stores and Supplies To Cal. Powder Works Fuse and Caps 31 Stores and Supplies for Dec- Machinery and Tools " 1 20 00 TO - 175 45 220 0( 220 AND CORPORATION LAW 229- 582. SALES AND GENERAL LEDGER. Capital Stock I J. W. Short Date 1905 Oct. 31 Oct. 31 Dec. 31 Oct. 1 1 1 1 Nov. 3 Dec. 1 Oct. 1 1 1 I Nov. 3 Dec. 1 Oct. 1 1 Nov. 3 Dec. 1 Oct. 1 1 Nov 25 Dec. 1 Oct. 1 1 Nov. 3 Dec. 1 Ex- plan - Sund's Jl Debit Credit 100,000 00 Treasury Stock Balance 100,000 00 J 1 28,000 00 Jl 4,000 00 William Glass 20Shs Jl CI 400 00 20 1250 Sh. J 1 J2 CI CI 25,000 00 25,000 20 20 J. J. Rahill 20Shs. 1250 Sh. Jl 400 00 01 20 Jl 25,000 00 J 2 25,000 CI 20 CI 20 Geo. Babcock 20 Shs. Jl 400 00 CI 20 CI 20 CI 20 M. S. Hutchison 20 Shs Jl 400 00 CI 20 CI 20 CI 20 Q. W. Lister 20 Shs, Jl 400 00 CI 20 CI 20 CI 20 28,000 24,000 400 380 25,380 360 340 400 380 25,380 340 400 340 400 380 360 340 400 340 Date 1905 Oct. 10 15 15 Nov. 1 Oct. 10 15 Nov.15 Dec. Oct. 1 Oct 31 Dec. 31 Oct. 31 Dec. 31 Dec. 31 Oct. 15 15 Nov. 10 20 Oct. 15 Dec. 31 Ex- plan- ation 500 Shs. 100 Shs. $4001100 Debit 10,000 2,400 Credit 9,000 1,000 500 C. H. Rowell 500 Shs. Jl CI CI 10,000 00 500 500 100 Shs. Jl CI 2,400 00 600 00 Bal'nce 10,000100 1,000 00- 00 00 2,400 00 1,900 00 Mine Account BigLM J3 50,000 Machinery and Tools J 2 7,515 00 J 2 175 00 Stores and Supplies J2 250 00 J 45 00 137 J2 157 137 50 Inv'try 137 50 P & L. J 2 157 50 To Inv. W. A. Bloodgood Jl 15 00 CI 15 Jl 150 00 CI 150 Discount Account J.Short J 1 P. & L.J 2 1,000 00 1,000 00 10,000 9,500 9,000 11,400 10,800 50,000 7,515 7,< 250 295 157 00 "137 1,000 00 N. B.— Credit Balances on Debit Accounts, and Debit Balances on Credit Accountsy should appear on the ledger in red ink— otherwise Cr. and Dr. should be placed before the balance, to indicate which it is . 230 CORPORATION ACCOUNTING 583. S. & G. LEDGER. 2 Custom Work Date 1905 Oct. 15 Nov. 10 Dec. Oct. 18 Oct. .SI Nov. 30 Dec, 31 31 Nov. 1 Dec. 1 31 Nov.30 Dec. 31 31 Nov.30 Dec. 31 31 31 Dec 31 31 31 31 31 ©60.31 Dec 31 Dec. 31 Dec. 31 Ex- plan- Rl'dg'd Bl'dg'd P. & L. Debit 165 Credit 15 150 Bills Payable 1, 2, 3, 4 J 2 4,000 00 Expense, General CI 106 50 Cl 1(K) 00 CI 71 00 p. & L. J2 2 ■■' Premium Account J.Short Jl 400 C Ro'll J 1 400 P. & L. J2 800 00 Bullion Account P. & L. CI 1,000 CI 2,350 J 1 3,350 00 Expense, Labor p. & L. CI 500 00 CI 650 00 .7 2 600 00 J2 1,750 Profit and Loss Amalg. J2 750 Sund's J 2 3,027 50 Sund's J 4,315 8. & S J2 157 50 Sund's J 1,880 00 50 Amalgam Account Inv'try|J2| 7501 I I Accrued Wages |J2| I 1 600100 Surplus Account P. & L.|J2| n 880100 Dividend Account p. & L J 2 1,000 00 Balance 4,000 106 206 277 400 800 1,000 3,350 500 1,150 1,750 C 750 D 2,277 C 2,037 C 1,880 D 750 C 600 CI, 000 00 00 PURCHASE LEDGER. Demerest & Fullen Date 1905 Oct. 10 20 20 Oct 10 Nov.15 Dec. 15 Oct 18 Dec. 10 15 Ex- plan- ation lOSMill Bills p. Debit 3,500 4,000 Credit 7,500 00 Cal. Powder Works 250 00 250 20 John Taylor & Co. 15 200 Bal'n 7,500 4,000 N. B.— The foregoing accounts have been opened without reference to any particular order or system. The best order in which to open a General Ledger is: Capital Ac- counts, Resource Accounts, Liability Accounts, Profit Accounts, Loss Accounts, or in the order of quick and slow Assets, Preferred and Unpreferred Liabilities, Capital Liabilities, Profit Accounts, Loss Accounts. AND CORPORATION LAW 231 584. TRIAL BALANCE. January 1, 1906. Cash on Hand, C. B. 1 9,722 SO Capital Stock 100,000 00 William Glass , 340 00 J. J. Rahill 340 00 Geo. Babcock 340 00 M. S. Hutchison 340 00 G. W. Ivister 340 00 J. W. Short 1,900 00 Chester H. Rowell 10,800 00 Mine 50,000 00 Machinery and Tools 7,690 00 Stores and Supplies 295 00 Discount Account 1,000 00 Custom Work Account 165 00 Bills Payable 4,000 00 Expense, General 277 50 Premium 800 00 Bullion Account 3,350 00 Eixpense, I^abor 1,150 00 Cal. Powder Works 20 00 John Taylor & Co. 108,535 ^ 200 00 108,535 E 585. This is the simplest and the very best form of Trial Balance, that of giving only the balances of the accounts. I have seen Trial Balances taken giving both the Debit and Credit sides of the account, and some carry this even further, giving the Debit and Credit sides of the accounts and the Debit or Credit balance of each as the case may be. The reader can see what waste of time and what folly this is. It means simply double or treble work which ever course the plodding book- keeper takes. Just imagine what it means where there are a thousand accounts or over, it means a thousand extra sets of figures to be transferred, and as many extra to be added up, and as many more to be gone over in case the balance does not come out right at first. 586. Note : As stated in the opening of this set, it is merely illustrative, many accounts and items being intention- ally omitted so as not to be too prolix. It suggests' a simple method of keeping a set of books for a mining company and at the same time points out the way to more complete and bet- ter methods, the details of which would take up too much space. 232 587. CORPORATION ACCOUNTING FIRST ANNUAL STATEMENT. Gold and Silver Mining Company. January 1, 1906. Assets. Due from Subscribers Machinery and Tools, per inventory Stores and Supplies, per inventory Amalgam, per inventory Mines, per inventory Cash on hand and in Bank Total Assets Liabilities. Capital Stock |100,000 Less Treasury Stock 24,000 Accrued Wages— December Pay Roll Bills Payable Personal Accounts we owe Dividends Unpaid Surplus Account— Present Worth Total Liabilities OR Liabilities. Accrued Wages— December Pay Roll Bills Payable Personal Accounts we owe Dividends Unpaid Working Capital Working Capital. Capital Stock $76,000 Surplus 880 14,400 7,690 137 750 50,000 9,722 76,000 600 4,000 220 1.000 880 600 4,000 220 1,000 76,880 00 82,700 82,700 82,700 00 00 587 a. REOESIPTS AND DISBURSEMENTS, PROFIT AND LOSS Receipts. Received for Stock Subscriptions " " Custom Work " " Bullion Total Receipts Disbursements. Expense, General Expense, Labor Paid for Machinery, Tools, Etc Total Disbursements Balance on hand (red ink) . . Profit and Loss. Profit Account. Bullion Sales Amalgam on hand Premiums collected Custom work done Total Gains Loss Account. Expense, Labor Expense, General Discounts Stores and Supplies Total Losses Net Profit (red ink) Distribution op Profit. Dividend Declared Transferred to Surplus Total 11,400 165 277 1,150 3,765 5,192 9,722 3,350 750 800 165 1,750 277 1,000 157 3,185 1,880 1,000 800 14,915 14,915 5,065 5,065 1,800 00 00 00 00 00 CHAPTER XL Opening the books of a Copper Mining Company — Stock Subscribed for in Full and Paid for in Cash — Mine Purchased and Paid for in Cash — Two Methods of Recording the Open- ing Entries. 588. A company is formed for the purpose of operating a copper mine. The stock is placed at $100,000, divided into 1000 shares of $100 each; the stock is to be paid for in full and a mine known as The Verdigris Mine is to be purchased out- right for the sum of $35,000, and improvements thereon for an additional $10,000. The incorporators and the amount of stock for which each one has subscribed is as follows : W. A. Fitz- gerald, $30,000; W. F. Pitts, $30,000; H. F. Briggs, $20,000; B. R. Walker, $10,000; H. H. Doyle, $10,000. What are the opening entries? 588 (a). This being a cash transaction the simplest and best way is to record the entries in the Cash Book in this man- ner: 589. CASH BOOK. Capital Stock 100,000.00 For 1,000 Shares of Capital Stock @ $100 as follows: W. A. Fitzgerald $30,000 W. F. Pitts 30,000 H. F. Briggs 20,000 • B. R. Walker 10,000 H. H. Doyle 10,000 Verdigris Mine 35,000.00 Plant, Machinery, &c 10,000.00 Per Deed, and Bill of Sale on file in the office of the County Recorder, &c. 590. This Opens the general books of the company. Capital Stock is credited with $100,000, Mine is debited with $35,000 and Plant with $10,000, and the Cash Book shows a balance of $55,000, which balances the books'. The proper entries are then made in the Stock Ledger. 234 CORPORATION ACCOUNTING 590 (a). Another way would be to make the opening en- tries in the Journal in the following manner : Debit Subscrip- tion Account and credit Capital Stock with the amount of the subscription; and when the stock is paid for, credit Subscrip- tion and debit Cash in the Cash Book. CHAPTER XII. Opening the Books for an Oil Company — Capital Fully Subscribed — Payments on Subscription Made in Equal Instal- ments of 10% — Five Methods to Choose From. 591. An oil company is formed on a basis of $100,000, di- vided into 1000 shares of the par value of $100 each, fully sub- scribed ; the stock is to be paid for in equal instalments of $10 each per share until fully paid; what are the opening entries? First Method . 592. Treat as outlined in mining set of books in Chapter X. Second Method; 593. Dr. Cash Book. Cr. To Capital Stock $10,000.00 1st Instalment of 10 per cent, per Instalment Book pg Third Method . 594. Instalment Account No. i $10,000 To Capital Stock $10,000 For first instalment of 10 per cent, etc. After which credit Instalment Account No. i through the Cash Book as fast as the instalment payments are made. AND CORPORATION LAW 235 Fourth Method. 595. Debit ten instalment accounts for 10 per cent of the Capital Stock, and credit Capital Stock account for "100 per cent; then treat each instalment account as explained in third method. Fifth Method. 596. Subscribed Capital Dr. $100,000 To Capital Stock $100,000 Capital Stock fully subscribed. 596 (a). Then credit Subscribed Capital for future pay- ments, as shown by the Instalment Book, writing on the credit side of this account the instalments in the order of their num- ber until the account balances. Note : These entries can only be made where the stock is all subscribed for. CHAPTER XIII. Paying for an Oil Claim Partly in Stock, Partly in Cash, and Agreeing to Pay a Royalty on All the Oil Produced — An Issue of Preferred Stock and Common Stock Authorized — Only Preferred Stock Issued at the Outset — Accounting for the Royalty and Premium — Four Different Methods of Open- ing the Books — Paying a Dividend on "Preferred" and "Com- mon" Stock and Creating a Reserve Fund — Decreasing Capital Stock and Reducing Preferred Stock to Common Stock. 597. Smith and Jones own an old claim in a well known oil district, but they have not sufficient capital with which to develop their claim ; they wish to form a company for this pur- pose, and they interest several of their friends in their plan, which is as follows : They propose to organize a company on a basis of $200,000, divided into 20,000 shares of $10 each, 10,000 shares of which are to be preferred stock and the re- maining 10,000 shares common stock. The preferred stock is to be 8 per cent preferred and is also to participate equally in the dividends paid on the common stock.* These inducements are offered to the purchasers of preferred stock in order to *Vi(ie paragraph 299. 236 CORPORATION ACCOUNTING place it quickly and acquire money for operating purposes at once.* Smith and Jones are to receive for their claim $10,000 cash, $50,000 in preferred stock and a royalty of 20 cents a barrel on the product of the wells, payable quarterly. The 10,000 shares of common stock are to be placed in the Treas- ury, so called, to be sold for the purpose of creating additional working capital, should further capital be required. The pre- ferred stock is to be sold for spot cash. What are the opening and subsequent entries ? 598. When a permanent organization is effected, Smith and Jones assign their claim to the company, after which the instrument of assignment is properly recorded or filed in the Recorder's office. A resolution is then introduced at the di- rectors meeting, wherein they resolve to purchase this certain claim from Smith and Jones for the consideration before speci- fied. Then the following entry is made in the Journal : First Method. 599. Oil Claim Dr. to Sundries $60,000 Preferred Capital Stock $50,000 Smith & Jones $10,000 For 5000 shares of preferred stock at $10 per share, and $10,000 to be paid in cash to Smith and Jones for their title and interest in a certain oil claim as per articles of assignment. 599 (a). Note: The name of the above debit account can be varied, such as Wells, Plant, Real Estate, or any other ap- propriate or suggestive name. 600. When the balance of the preferred stock is subscribed for, the following entry may be made : Sundries Dr. Subscription Account $50,000 White, 1000 shares $10,000 Black, 1000 shares $10,000 Brown, 1000 shares $10,000 Gray, 1000 shares $10,000 Green, 1000 shares $10,000 Treasury Stock $100,000 For 10,000 shares of stock placed in the Treasury. To Preferred Capital Stock $ 50,000 To Capital Stock $100,000 ^Vide paragraph 292. AND CORPORATION LAW 237 6oi. When the subscriptions are all paid, the Subscription Account or Subscribed Capital Account will balance, and the Treasury Stock Account will represent the unsubscribed stock of the company. The unsubscribed stock of a company is so generally referred to as Treasury Stock that the term is used in that sense here. It must be said, however, that the term is inexact and inappropriate. The unsubscribed stock of a company (if it appears on the financial books of the company at all) should appear under the heading "Unsubscribed Stock." There is no ambiguity nor equivocation in this latter term. It can convey only one meaning and that the true one. 602. Two stock accounts have been opened in the General Ledger, because it is better, though not necessary, that the pre- ferred stock and the capital stock should be kept separate in this ledger. It is' strictly necessary, however, to keep them separate in the Stock Ledger. 603. The foregoing entries show Oil Claim debited for the amount it cost the company in stock and cash; show the amount still due Smith and Jones on their assignment; show Preferred Capital Stock credited for the full amount of pre- ferred stock, and Capital Stock credited for the full amount of common stock; show Subscription Account debited for the full subscription, with the names' and amount for which each one has subscribed ; and show Treasury Stock debited for the amount of stock unsubscribed, and finally show the books in balance. As soon as the money is received on subscriptions, Smith and Jones' are paid $10,000, which balances their ac- count, and the company has $40,000 left for development pur- poses. Second Method. 604. First Entry. Oil Claim Dr. $60,000 To Smith and Jones $60,000 For that certain oil claim, etc., to be paid for in 5000 shares of preferred stock at $10 per share, and $10,000 to be paid in cash. 605. Second Entry. Smith and Jones Dr. $50,000 To Preferred Capital Stock $50,000 For 5000 shares of preferred stock issued in part payment for their claim. 238 CORPORATION ACCOUNTING This leaves' a balance of $10,000 in their account which is to be paid in cash. 606. Third Entry. Subscribed Capital $50,000 To Preferred Capital Stock $50,000 (With names and explanations) 607. Fourth Entry. Unsubscribed Stock $100,000 To Capital Stock $100,000 (With explanation) As soon as the subscriptions are paid the Subscription Ac- count will balance, and then Smith and Jones are paid $10,000, which balances their account. Third Method. 608. Sundries Dr. Oil Claim $ 60,000 Subscription Account 50,000 Treasury Stock (unsubscribed) 100,000 To Sundries Credit Smith and Jones $ 10,000 Preferred Capital Stock 100,000 Capital Stock 100,000 609. Smith and Jones assign all their right, title and in- terest in and to that certain oil claim, etc., in consideration of the issuance to them of $50,000 full paid preferred stock of this company, the payment of $10,000 cash, and a royalty of 20 cents a barrel on all the oil produced from this claim. The re- maining $50,000 preferred stock is subscribed as follows : (here name subscribers) and the balance $100,000 common stock is placed in the Treasury. 610. Credit Subscription Account with payment on Sub- scription, out of which pay Smith and Jones $10,000 cash, clos- ing these two accounts. Fourth Method. 611. Same as any one of the other three, with the excep- tion that no account is opened for the unsubscribed common stock. As this stock is sold, debit cash and credit Capital AND CORPORATION LAW 239 Stock. If subscribed for to be paid later, debit Subscription Account, or Subscribers Account, or Subscribed Capital, whichever you prefer to call it. 612. A preamble something like the following should pre- cede the opening entry. 612 (a). The Gusher Oil Co. incorporated under the laws of on the day of ■. . . .190. ., with an authorized Capital of $200,000, divided into 20,000 shares of the par value of $10 each — 10,000 shares of which are 8% preferred, and 10,000 shares common stock — has this day been organized and commenced business as follows : 613. We will presume that at the end of the first quarter the wells have produced 10,000 barrels of oil, and Smith and Jones are entitled to a royalty; what is the entry? Royalty Account $2,000 To Smith and Jones $2,000 For royalty of 20 cents a barrel on 10,000 barrels of oil. 613 (a). Or if the royalty is paid at once it is best to make the entry through the Cash Book direct to Royalty Account. When it is not paid at once the entry should be made through the Journal so that the books may show the company's obli- gations. 614. The questions may be asked : What shall we do with Royalty Account at the close of the fiscal period? Is it a Cap- ital or a Revenue Expense ? Do we not pay so much in stock and so much in cash for the claim we purchased, and is not the royalty a further part of the purchase price ; and being a part of the purchase price, should we not charge it to Capital Expense or Investment, instead of to Revenue Expense or Profit and Loss ? The answer is, it is a Revenue Expense, and should be charged to Profit and Loss ; and the reason is this : The payment of the royalty is contingent on the claim pro- ducing oil, and as the oil produced is' a source of revenue to us, every expense connected with its production is a Revenue Ex- pense.* Now this expense is directly connected with the pro- duction of revenue, for it exists only by virtue of us having a revenue. It is simply a case of no revenue, no royalty. This same doctrine holds true of all royalties. Selling Stock at a Premium. 615. At the end of six months the $40,000 having been spent in developing their claim, purchasing machinery and ex- *Vide paragraph 407. 240 CORPORATION ACCOUNTING tending the scope of their enterprise, the directors decide by resolution to sell $10,000 worth of Unsubscribed Stock for the purpose of sinking another well, and for other purposes. They have struck oil, their prospects are good, and they have no trouble in placing the stock at a premium of 25 per cent. What are the entries ? First Method. 616. Sundries Dr. Subscription Account $10,000 Stockholders 2,500 To Sundries Cr. Treasury Stock (unsub- scribed stock) ' $10,000 Stock Premium 2,500 For 1000 shares of unsubscribed or treasury stock sold at a premium of 25 per cent to the following subscribers, per reso- lution of the Board of Directors, adopted 190. . . (Here give the names of subscribers and the amount for which each one has subscribed.) Second Method. 618. Sundries Dr. Subscribers Account $10,000 Accruing Premium 2,500 To Sundries Cr. Unsubscribed Stock $10,000 Premium 2,500 For 1000 shares of common stock sold at a premium of 25%, per Minute Book page See Subscription Book or Stock Journal for names of subscribers. 619. Then write the names of subscribers and amounts in Petty Ledger* form on Subscribers Account, and also on Ac- cruing Premium Account, crediting both these accounts through the Cash Book as payments are made. Third Method. 620. Make no Journal entry, but when the subscribers pay for their stock make the following entries in the CasH Book: *Vide paragraph 542. AND CORPORATION LAW 241 Cash Book. Treasury Stock $10,000.00 For 1,000 shares of Treasury stock sold at a premium of 25 per cent, as per reso- lution, etc., to the follow- ing subscribers: (Here give the names) Stock Premium Account ... $2,500 For 25 per cent premium on 1,000 shares of Treasury stock as above. . . J Creating Reserve Fund.* 621. At the end of the first year the books of the company show a gain on the Profit and Loss Account of $22,000, an amount equal to 20 per cent on the outstanding stock of the company, thereupon the directors declare a dividend of 10 per cent on the preferred stock, and a dividend of 3 per cent on the preferred and common stock, and order $2500 placed in a Re- serve Fund; the balance to remain in Surplus Account; what are the entries ? First Method. 622. First Entry. Profit and Loss Dr. $10,000 To Preferred Dividend No. i $10,000 For dividend of 10 per cent on $100,000 Preferred Stock. 623. Second Entry: ^oss Dr. $12,000 ries Profit and Loss Dr. $12,000 To Sundries Dividend No. i For dividend of 3 per cent on $110,000 preferred and com- mon stock. Reserve Account $2,500 Surplus Account $6,200 For balance of net gain. All as per resolution of Board of Directors adopted ^Vide paragraph 391. 242 CORPORATION ACCOUNTING 624. Third Entry : Reserve Fund Dr. $2,500 To Cash $2,500 625. This entry is made in the Cash Book and estabHshes the Reserve Fund by actually withdrawing it out of the Cash and investing it.* The Reserve Account remains open on the books as the corresponding and counterbalancing Account of the Reserve Fund. The Dividend Accounts are closed by the payment of the dividends. Second Method. 626. Profit and Loss Dr. $22,000 To Sundries Preferred Dividend No. i $10,000 Dividend No. i 3,300 Reserve Account 2,500 Surplus Account 6,200 (With proper explanations). This method creates a ''Reserve Account" instead of a "Re- serve Fund" ; no part of the assets being withdrawn from the business, but merely held out of the Surplus. — Vide paragraph 389. Reducing Preferred to Common Stock.* 627. At the end of the second year the company is in a still more prosperous condition, and the directors desire to reduce the capital, so that the capital of the company may be fully paid up ; they also desire, for some reason, to reduce the preferred stock to common stock, so that all the stock may be of one kind and that it all may share equally in the profits ; the percentage to be limited only by the profits of the company and the wisdom of the directors in maintaining a sufficient Reserve Fund to meet unforseen reverses or casualties ; what are the entries? 628. Capital Stock Dr. $90,000 To Treasury Stock (unsubscribed) $90,000 Capital Stock reduced as per vote of stockholders. Minute Book, page *Vide paragraph 295. *iVide paragraphs 389 and 391. AND COKPORATION LAW 243 629. This entry balances the Treasury Stock or Unsub- scribed Stock Account and reduces the Capital Stock Account to $10,000. 630. Second Entry. Preferred Capital Stock Dr. $100,000 To Capital Stock $100,000 Preferred capital stock reduced to common stock, per reso- lution, etc. 631. This entry closes the Preferred Capital Stock Ac- count, and the Capital Stock Account now stands xredited with $110,000, which represents the full paid-up capital; and the nominal capital is now the actual capital of the company. The old preferred and common stock certificates are surrendered, and new ones are issued showing the new capitalization. The Treasury Stock Account in the Stock Ledger is now closed into the Capital Stock Account; also the Preferred Capital Stock Account, and the transaction is complete. 632. Note I : All stock certificates other than common stock have designated on their face the particular kind of stock they represent.* 633. Note 2: The Subscription Account should have written on the debit side the names of all the subscribers and the amounts of their subscriptions. As they pay their sub- scriptions they are credited opposite their names, and in this way the Subscription Account will show those who have, and who have not paid ; and when they have all paid, it will, as previously stated, balance. Instalment Accounts may be treated in the same way provided the names are not too nu- merous. *Vide paragraph 298. CHAPTER XIV. Issuing Stock in Full Payment for Property — Selling Stock at a Discount to Raise Working Capital — A Dissertation on Discounted Stock — What to Do With the Discount — What Constitutes Paid-up Stock — Over Capitalization a Weakness — Paying a Stock Dividend — Paying the Discount Out of Profits — Paying for Water Rights in Stock — The Requisites and Functions of a Public Accountant. 634. Black and White own an oil claim and they propose to organize a stock company to develop it. It is to be one of those popular companies, and the stock is to be placed so low that there can be none so poor as to be unable to speculate in it. The company is to be organized on a basis of $200,opojdi- vided into 20,000 shares of the par value of $10 each. The promoters are to receive 10,000 shares of paid-up stock for th^r claim, 5000 shares are to be sold at 50 per cent of the par value to create a ''Working Capital" of $25,000, and the re- maining 5000 shares are to be held by the company ; what are the entries? First Method. 635. First Entry : Oil Claim Dr. $100,000 To Capital Stock $100,000 For 10,000 shares of stock of the par value of $10 per share issued to Black and White for assignment of their title and in- terest in a certain oil claim to this company and deed to which is on file and of record in the office of the County Recorder, etc 636. Second Entry: Unsubscribed Stock Dr. $50,000 To Capital Stock $50,000 For 5000 shares of stock reserved for the future, per Ar- ticle of the by-laws. AND CORPORATION LAW 246- 637. ,Third Entry. Subscribers Account Dr To Capital Stock 638. Then debit subscribers and credit Capital Stock for future subscriptions, posting the totals at the end of the day, the end of the month, or the foot of each page as* desired.* If a Stock Ledger is kept with money columns, each stockholder may be debited for the par value of his subscription ; and as the subscriptions are paid credit Subscribers Account from the Cash Book, and also individual stockholders accounts in the Stock Ledger by a single entry. When all subscribers' have paid, the Subscribers Account will show 50 per cent paid, and the stockholders accounts in the Stock Ledger will show that they have paid 50 per cent of par for their stock. If the stock set aside for sale should not all be sold, and it is desired to have the Capital Stock Account show the full capital, an. entry like this may be made for the balance : 639. Unsubscribed Stock Dr. $ To Capital Stock $. . . . for balance of unsubscribed stock. Second Method. 640. First and second entries same as foregoing. 641. Third Entry. Subscribers (by name) Dr. $ To Capital Stock $ 641 (a). That is, debit each subscriber individually in Petty Ledger form for his subscription, and credit Capital Stock in one amount for total subscription. Credit payments opposite names and this will show a balance of 50% on each subscription. Third Method. 642. Have a Cash Book ruled with a special column headed "Capital Stock." Whenever stock is sold and paid for, the amount is entered in this column, with proper explanation,, and the total is posted to the credit of Capital Stock Account at the end of the month. *Vide Journal page 227. 246 643- COKPORATION ACCOUNTIisG Form of Cash Book — Debit Side. Date 1905 Name Particulars Capital Stock FoL Miscellaneous Total Oct. 1 A. Smith B. Jones 50% on 20 Stiares 50% on 10 Shares Posted to Cap. Stock 100 50 oo 00 00 150 Subsequent Entries. 644. The foregoing entries open the books, but show that there is 50% due on all subscriptins ; and how to dispose of this and show the stock all paid for is the next problem that confronts us. The following entry will dispose of the balance on subscriptions, as far as the mere bookkeeping of it is con- cerned. 645. Rebate or Commission or Discount Dr. $ To Subscribers Account $ For 50% rebate or discount on thousand shares of -stock, as per Article of the By-Laws. 645 (a). If individual accounts were debited instead of 'Subscribers Account of course the entry would have to be varied. 646. The trouble with this entry is that it does not dispose of the balance ; it merely shifts the debit balance from the sub- scribers account to a nominal account; and the question re- mains, "what are we going to do with this when we make up a statement or balance sheet?" It is an elementary lesson in bookkeeping that all debit balances are either assets or losses ; and as a rebate or discount can not possibly be an asset, it must be a loss; hence we have an immense loss to wipe out, and if we close this into Profit and Loss we shall probably show an insolvency. In any case it will cut down profits, and as dividends can only be legally paid out of profits, this must be figured out of profits before a dividend can be paid. Some companies dare to carry this' account on their books and state it as an asset, under some fancy name such as contingencies, franchise, or other cloudly title; but Auditors should frown upon this practice and report the true nature of it. There is another side to this question for the favored stockholder to AND CORPORATION LAW 24T consider. He can only pay for his stock by paying for it, and no mere trick in bookkeeping can make his stock paid-up, as ta creditors. All by-laws bind or release, constrain or liberate only in as far as they conform to, and are consistent with the State laws ; and the stockholders are liable to the creditors of a company for the difference between the par value of the stock and what they paid for it. This thing of stock discount has been carried to an absurd extreme; cases are common all over this state where dollar stock has been sold for lo cents. It has been simply used as a bait to catch the unwary and many of the precipitate purchasers have found themselves loaded up with cheap stock on which they had to pay assess- ments, or perhaps do the wiser thing of letting go what was lost, instead of sending good money after it in the foolish ex- pectancy of bringing it baek. 647. The natural inference to be drawn from an offer to- sell stock at a discount is that the incorporators have set a value on the property they have turned into the corporation,, from two to ten times its worth. 648. Now let us suppose a time when the Surplus Account stands credited with a balance of $10,000 and the unsubscribed stock is still debited with $50,000, and the directors decide to balance the Surplus Account by declaring a stock dividend* of $5000 and a cash dividend of $5000 ; what are the entries ? 649. First Entry. Surplus Account Dr. $5,000 To Unsubscribed Stock $5,ooo For 500 shares of stock issued pro-rata to the stockholders as a stock dividend, per resolution of the Board of Directors, etc. 650. After this', issue the stock pro-rata to the stockholders and make the proper entries in the Stock Ledger. 651. Second Entry. Surplus Account Dr. $5,000 To Dividend Account $5,ooo For cash dividend of one-third of i per cent on the sub- scribed capital. 652. As the cash dividends are paid, debit Dividend Ac- count through the Cash Book. *Vide paragraph 497. li^L.i.i. 1 248 CORPORATION ACCOUNTING 653. These two entries could be made in one resultant entry thus : Surplus Account Dr. $10,000 To Unsubscribed Stock $5,ooo To Dividend Account $5,ooo (With proper explanations). Rebate or Discount 654. Some companies insist on carrying the Rebate or Discount Account (or whatever account represents the differ- ence between the par value of the stock and the price it was sold for) as an asset on the books. In this case 50 per cent of $5000 is allowed to stand on the books as a resource, until such time as the Profit and Loss Account or Surplus Account has a sufficient credit balance to wipe it out, after which the Capital .Stock Account represents the actual instead of the nominal capital of the company. The following is the entry to make ior this purpose : 655. Profit and Loss or Sur- plus Account Dr. $25,009 To Rebate or Discount Account $25,oo(^ (or as much of it as the earnings will stand for is wiped out each year.) 656. Now there is nothing to be gained by this method of selling stock at a discount. The company can not pay a divi- dend until it has earned enough to pay the discount. The stockholders liability exists up to the full payment of the stock, and the company's earnings as compared with its actual cap- ital, are much greater than when compared with its nominal capital; and if the company can earn a maximum revenue on the smaller capitalization, there is no apparent reason for in- creasing that capitalization ; and if it is desired to let the earn- ings accumulate, it looks better and sounds better to have them appear as' a surplus ; therefor it is better to sell half the number of shares of stock at twice the price, than twice the same number of shares at half the price. It may be said that on the larger capitalization the company's creditors have a larger measure of protection, and that the company's position is strengthened thereby; this is only a half truth. Over capi- talization is a weakness. It is* the company's surplus that really gives it strength. It is the fact that it is a paying con- cern that gives it stability and permanency on which to base a credit; and it is the dividend earning capacity of the stock. AND CORPORATION LAW 249 coupled with the stability of the company, that gives its stock a value ; and if a company is over capitalized the dividends on the larger capitalization will necessarily be small, and each share of stock will have a smaller claim on the surplus assets of the company. 657. There is one reason for selling this first issue of stock at a discount, and it is at least a questionable reason. The promoters get, or take, their own stock at a fraction of its par value. They let in the first batch of purchasers at 50% of the par value, and they expect to get 100% from subsequent purchasers.* Now let us see how this works out, supposing that the incorporators' got their $100,000 of stock at 50% by setting a double value on their claim, and that the first pur- chasers got their $50,000 of stock at 50%, and the remaining $50,000 of stock was sold at par. The last purchasers would have paid $25,000 too much on the real basis of value. Sup- pose now that the company was suddenly thrown into insol- vency (it is insolvent) and that in the wind-up the company had but this $50,000 left for distribution among its stockhold- ers; these last stockholders would have a claim to one-fourth of this, since they own one-fourth of the stock. They would receive $12,500, the others $37,500. In other words, the pro- moters and first purchasers would get back 50% of their actual investment, and the last ones, (those who made even this pos- sible) would get back but 25%. Suppose again, that the com- pany went on and prospered, it would have to earn $25,000 (equal to the stock discount) before it would be even solvent. If it did not have this deficit to make up it would have $25,000 possibly available for dividends. Of this $25,000 the last pur- chasers (on the basis of their holdings) would be entitled to $6250. Oh the basis of their contribution to the real paid-up capital they would be entitled to two-fifths or $10,000; and still there is not a cent coming yet. Let us go on until they have earned another $25,000 for dividends. Of this they get one- fourth or $6250; by right of their contribution to the original capital they should get $10,000 ; here again they lose $3750 or 7K% 01^ their investment, which the others make. Putting it in another way, suppose the company pays a dividend of 5% on its nominal capital, that would be $10,000. If it paid the same amount on the basis of its actual capital it would amount to 8% ; here the purchasers at par, lose 3% ; and so it goes, they lost money at the start, they lose on every dividend, and they lose in liquidation ; because then nominal values shrink to actual or intrinsic values. *Vide chapter XXVn. 250 CORPORATION ACCOUNTING 658. No set of promoters, with an elementary knowledge of the principles of moral philosophy, will thus rob the unwary purchaser, and they will not attempt to excuse or defend this practice; and yet when these same people are victimized by a dishonest bookkeeper or other trusted employee, they will vir- tuously denounce him as a rascal and moral pervert, closing their eyes to the obvious fact that they themselves set him an example in the practice of fraud, duplicity and mendacity. In an age when embezzlement and defalcation are so common and so menacing, employers can not be too careful in setting up a standard of business integrity and morality for the ex- ample and emulation of their trusted employes ; for inasmuch as the creature can not be greater than the creator, we need not be surprised if the servant is not more honest than the master. 659. This may seem like a lot of moralizing, but, it is dwelt on it at length for the benefit of the student. Moral char- acter is one of the requisites of a public accountant. He must be well vouched for before he can obtain a certificate. It is a part of his business to expose and denounce fraud, and he must have character and courage to do it. His work is synthetic, analytic, inquisitorial, advisory and supervisory, and in addi- tion to his expert training he must have a keenly appreciative sense of his duties in order to discharge them properly. Paying for a Water Right in Stock. 660. Suppose this company buys a water right and pays for it in unsubscribed treasury stock ; what entries ? 661. First Entry. Water Right Dr. $1,000 To Fresno Canal Co. $1,000 For twenty year water right, etc., to be paid for in treasury stock. 662. Second Entry. Fresno Canal Co. $1,000 To Treasury Stock $1,000 For 100 shares of treasury stock issued to F. C. Co. in pay- ment of water right. Or one entry like this : 663. Water Right Dr. $1,000 To Treasury Stock $1,000 For 100 shares of stock issued to F. C. Co., in payment for water right. AND CORPORATION LAW 251 664. This water right becomes as much a part of the as- sets' of the company as anything they possess, and it is to be accounted for in the same way as franchises, leaseholds, etc.* CHAPTER XV. Opening the Books of a Water Company That Has Issued Its Entire Capital Stock in Payment for Land and Water Rights — Receiving Stock Donations — Accounting for Same — Selling Donated Stock at a Discount to Pay for Franchise and Raise Working Capital — Three Methods of Opening the Books — A Treatise on Donated Stock — How to Obtain a Franchise — How to Treat Forfeited Stock — Forfeited Shares Account. 665. The Springfield Water Company is incorporated for the purpose of supplying water to the new town of Springfield. Its capital stock is placed at $100,000, divided into 5000 shares of the par value of $20 each. The incorporators are A. B. Water, C. D. Pumper, E. F. Piper, G. H. Faucett, I. J. Wetter. The understanding among themselves is that they are to take all of the stock of the company in payment for the land and water rights which they own, and which they turn over to the company at the time of its organization. They will each do- nate to the corporation 20% of their stock as a bonus, to be sold at 75 cents on the dollar of its par value, to raise money to purchase a franchise and supply a working capital.*^ The stock is to be paid for in three equal instalments, and on pay- ment of the third instalment paid-up certificates are to be is- sued to the stockholders. The franchise will cost the com- pany $5,000. What are the entries ? First Method. 666. Real Estate and Water Rights Dr. $100,000 To Capital Stock $100,000 For 5000 shares of stock of the par value of $20 per share, issued to the incorporators for land and water rights, per etc. *Vide paragraph 415. *2Vide chapter XXV. 252 CORPORATION ACCOUNTING 667. Second Entry. Treasury Stock Dr. $20,000 To Working Capital $20,000 For donation of 20% of the capital stock by the incorpor- ators, to be sold for working capital. 668. Third Entry. Subscription Account Dr. $20,000 To Treasury Stock $20,000 With explanations'. 669. Fourth Entry. Working Capital $5,ooo To Subscription Account $5,ooo For discount of 25% on 1000 shares of treasury stock. 670. The third entry is not made until the treasury stock is sold, and the fourth entry is not made until after the 75 per cent of the par value of the stock has been paid. Instalment scrip* is issued for the first and second payments and these are taken up and certificates issued when the third instalment is paid. Opposite each subscriber's name on the Subscription Account is left four Blank lines to admit of entering the three instalments as paid, and the fourth line is for entering the dis- count; or if instead of a Subscription Account, individual ac- counts are opened, they are debited and credited through the Journal instead of the Subscription Account. Second Method. 671. First Entry. Same as first entry in first method. 6'J2. Second Entry. Treasury Stock Dr. $20,000 I To Real Estate and Water Rights $20,000 For 20% of the purchase price of land and water rights do- nated back to the company, in stock, by the incorporators, to be sold for the benefit of the company.^ 672 (a). This entry reduces the cost of the land and water rights to $80,000. *Vide paragraphs 250 and 251. *2Vide paragraphs 306 et seq. AND CORPORATION LAW 253 673. Third Entry. Sundries Dr. To Treasury Stock $20,000 Instalment Account No. i $5,ooo Instalment Account No. 2 $5,000 Instalment Account No. 3 $5,ooo Rebate or Discount $5,000 For 1000 shares' of treasury stock sold at a discount of 25%, and payable in three equal instalments. 673 (a). Of course this entry can only be made where the treasury stock is all subscribed for. Where it is not all sub- scribed for, Subscription Account or individual accounts are debited for the amount subscribed, and the following entry made for the rebate or discount : 674. Rebate or Discount Dr. $ To Subscription or in- dividuals John Jones, 25% dis. on 100 shares at $20 $500 John Brown, 25% dis. on 50 shares at $20 $250 And so on. Third Method. 675. If we examine closely into the first two methods' we will find they are both faulty. In the first method Real Estate & Water Rights appear as having cost the company $100,000, when, as" a matter of fact, they did not ; and there is an appar- ent gain of $15,000 to the credit of Working Capital Account. In the second method. Real Estate & Water rights appear as having cost the company $80,000; when, in fact, tney cost- the company $85,000, inasmuch as the donated stock only realized $15,000, and there is a debit of $5000 on Rebate or Discount Account which has to be wiped out by future earnings. The best entries to make are : 676. First Entry. Same as first entry in preceding methods. 677. Second Entry. Treasury Stock Dr. $20,000 To Real Estate and Water Rights $15,000 . To Rebate or Discount 5,ooo V 254 CORPORATION ACCOUNTING The incorporators donate back 20% of their stock (equal to 20% of the price of Real Estate and Water Rights), which is to be sold at a discount of 25% for the purpose of raising money with which to commence business. See Minute Book, Page 678. Third Entry. Same as third entry in second method, reference being had to explanation following same. 679. This last method shows that the Real Estate and Water Rights cost just $85,000; that is $100,000, less $15,000 realized on the donated stock; which is in fact a discount of $15,000 on the purchase price. The rebate or discount is wiped out and there is no handicap at the start, neither is there a fictitious gain to fondly cheat them into the belief that they have made $15,000 out of nothing. 680. Some prefer to open a Donation Account for the amount donated to the company; but inasmuch as they part with the stock and the company acquires" it, it becomes the company's stock to be sold for the benefit of the company's treasury; and as the capital stock has all been issued and paid for, it follows that this is "Treasury Stock" and should appear so on the books. Some may argue that as it is a donation it should appear on the books as a donation ; there is some plausi- bility in this, but it is a donation of what? — stock of course; and the original entry on the Journal explains the donation; but is it really a donation? If you buy an article for $1.00 less 20%, you don't say it cost you a dollar, you say it cost you 80 cents; and you don't call the 20 cents a donation. The incor- porators issue all the stock to themselves simply to have the capital fully paid-up, and to start out with a surplus by means of the donation ; but this is such a shadowy surplus that it dis- appears like darkness with the advent of light. 681. Again, some accountants prefer not to make any entry of the donated stock on the books until it is sold, at which time a Working Capital Account is credited. 682. Notwithstanding some good authority on these last propositions' it is contended that, inasmuch as the company has acquired 5000 shares of stock previously sold and ostensibly paid for, the books of the company should show it. This kind of treasury stock has some latent or market value in it, and to this extent it is an asset of the company, and all the assets of the company should appear on the books of the company; therefore, it is not only good accounting, but it is good practice and good ethics that the donated stock appear on the books. This stock before it was surrendered or donated back to the AND CORPORATION LAW 255 company had a 20% interest in the assets of the company, such as they were ; when it is* re-issued it again has a 20% interest in the assets of the company; and these assets are increased by just the amount reahzed on the donated stock, in this case $15,000; and as the capital HabiHty has not been increased by the re-issue it follows that this' $15,000 is a "capital gain"; and so if we have opened a Working Capital Account as in the first method, and it stands credited with $15,000, we debit this and credit Surplus Account when the treasury stock is all sold, thus acquiring the desired $15,000 surplus at the start. But inasmuch as the Real Estate and Water Rights have been placed in this instance on the books at an inflated value, we really have no surplus, and the third method is, strictly speak- ing, the proper way to open the books. Obtaining a Franchise.* • 683. This' is obtained in a circuitous way. First there is a petition, then it is advertised for sale, and then there is an or- dinance passed granting it; after it is passed it has to be pub- lished a certain number of times before it becomes law, that is before the franchise carries with it the legal right to operate. When it is finally obtained and paid for. Cash is' credited and Franchise Account is debited for the amount, and this account is treated as explained in paragraph 415, Chapter VIII. Forfeited Stock. 684. As before stated, the stock is to be paid for in three equal instalments. Now suppose that the by-laws provide that any subscriber who fails to pay his instalments within a certain prescribed time shall forfeit all right and title in and to the stock he has subscribed for, and all claim to the money he has paid thereon, and he has subscribed subject to the by- laws; and suppose further that John Jones has paid the first instalment of 25% of the face value of 100 shares of stock, and failing to pay any further instalments has forfeited his stock and the money he paid, what would be the proper entry in this' case?*^ 685. Treasury Stock Dr. to Sundries $2,000 Instalment Account No. 2 $500 Instalment Account No. 3 500 Rebate or Discount 500 Surplus Account 500 For 100 shares of stock forfeited by John Jones after pay- ment of first instalment. *Vide paragraph 415. *2Vide paragraph 302, sec. 4. 256 CORPORATION ACCOUNTING 686. The reason for making this entry is obvioiis. The forfeited stock* is returned to the Treasury. Instalment Ac- count Nos. 2 and 3 are credited for the reason that there is that much less due on them now. 687. Rebate or Discount is credited for the reason that the rebate is reduced in proportion as the subscribed stock is re- duced, and Surplus Account is credited for the reason that the amount forfeited is a clear gain to capital. It is credited to Surplus instead of to Profit and Loss for the reason that it is a capital gain and not a trading or operating profit. Rebate Account will have a credit balance of $500 which will be offset and balanced by the rebate on the $2000 Treasury Stock when it is re-sold. 688. If Smith only forfeited his stock and 50 per cent of the cash payment, and was to receive the remaining 50 per cent in paid-up stock. Treasury Stock would be debited for 87^ per cent of the shares he held. Instalment Accounts Nos. i and 2, and Rebate Account credited for 25 per cent each, and Profit and Loss credited for 12^/^ per cent of his' shares* he would then have the remaining 12^ per cent left, an amount equal to 50 per cent of the money he paid. 689. Such an entry can be varied according to conditions. For example if this had not been treasury stock, but the orig- inal issue of capital stock, and it had been sold payable in four instalments of 25% each, the best entry to make would be : 690. Sundries Dr. Treasury Stock, 25 shares $ 500 Capital Stock, 75 shares' 1500 To Sundries Cr. Instalment No. 2 $500 Instalment No. 3 500 Instalment No. 4 500 Surplus Account 500 John Jones forfeits 100 shares of capital stock after paying first instalment of 25%, equal to 25 full paid shares, which amount is placed in the Treasury, the remaining 75 shares' being debited to capital stock as an offset to original issue. 691. We debit Treasury Stock Account for 25 shares be- cause it is a real acquisition to the Treasury. The amount it represents is" a real gain to us, and the stock obtained in this way is an asset. We debit Capital Stock Account for the 75 shares because our outstanding capital is reduced that much *Vide paragraph 692. AND CORPORATION LAW 257 (stock once issued and paid for is regarded as outstanding), and because as we have received nothing for it, it is in the same position as though it were never issued. Its return has reduced our Contingent LiabiHties* to the extent that it has reduced our Contingent Assets, and its re-issue will bring about the original condition. Forfeited Shares Account. 692. Some accountants debit a Forfeited Shares Account for all the stock forfeited, but it is thought to be better prac- tice to debit Treasury Stock Account for the number of shares equal at par to the amount paid on forteited stock, and to debit Capital Stock Account for the balance, since this balance is a negative to the original issue. The principal object in debiting a Forfeited Shares Account is to enable the company to resell this stock below par, it being perfectly legitimate for the com- pany to sell this stock at a discount equivalent to the amount received on it in the first instance. This is a consideration sometimes', and circumstances may make this latter method preferable, although it should be borne in mind that ''real" treasury stock may also be sold at a discount. See paragraphs 302 to 305. CHAPTER XVL Issuing Entire Capital Stock of $1,000,000 Shares to One Individual — Chief Consideration, Undivided Interests in Min- ing Claims — Individual Donates 460,000 Shares to Treasury — Paying for Property, Leases and Services With Treasury Stock — Opening and Closing the Books — Circumventing the Law — Analyzing the Scheme — A Lucent Example of "Wild Cat" Finance, and its Legitimate Counterpart. 693. It frequently happens these days that a corporation is organized for the purpose of taking over certain inventions"^- or properties and the entire capital stock is issued fully paid-up *Vide paragraph 450. *2Vide paragraph 418. 258 CORPORATION ACCOUNTING in exchange for said inventions or properties — the company relying on the sale of donated stock* to develop its patents or properties, as the case may be; some times there is a little variation to the proposition, the vendor offering a certain amount of cash in addition to his properties, in consideration of the full issue of stock to him. One of these companies was organized in a certain mining district in Colorado a couple years ago and the writer was asked to formulate entries for the opening of the books. Following are extracts from the minutes of this' corporation (fictitious names being substituted for the real names of persons and properties). 694. Minutes of October i, 1903. To the Stockholders and Directors of: The Dore Mining and Milling Co. Gentlemen : I offer to convey by mining deed to your company an undivided one-half interest in the Buck Horn Lode Mining claim, an undivided three-fourths interest in the Ocean Spray Lode Mining claim, an undivided three-fourths interest in the Adelaide Lode Mining claim, all situated in Clear Creek Min- ing District, Unison Co., Colo, ; and to pay into the Treasury of your company the sum of $7500 in gold coin, in considera- tion of your issuing to me the entire capital stock of your com- pany — one million shares of the par value of $1,000,000 fully paid and non-assessable. In the event of your accepting this offer, I agree to lodge with the company four hundred and sixty thousand (460,000) shares of the said capital stock, to be sold for the benefit of the company, for either money, prop- erty, leases, bonds or options ; at such price, and upon such terms, and in such amounts, as the Board of Directors of said company may from time to time determine; empowering the said Board of Directors to dispose of said stock for the interest of said company in any manner and upon such terms as they may deem best. Yours* very truly, Charles Johnson. 695. "The Board after due consideration of the foregoing offer accepted same, Johnson not voting, but the other mem- bers voting unanimously," (It would appear from this that Johnson was a director) ''thereupon, the said Johnson deliv- ered to the Board a mining Deed running to this company con- veying the aforesaid properties, which deed upon the approval of the company's counsel was accepted as sufficient, and or- *Vide Chapter XIV. AND CORPORATION LAW 259 dered recorded. Johnson then paid over to the treasurer for use of this company $7,500 in gold coin, and thereupon the president and secretary were authorized and directed, by reso- lution, to issue to Mr. Johnson the entire capital stock of this company consisting of 1,000,000 shares of the par value of $1.00 per share — fully paid and non-assessable, — in one or more certificates as Mr. Johnson might desire. 696. "Pursuant to the foregoing, the president and secre- tary issued to Mr. Johnson two certificates, one for five hun- dred and forty thousand (540,000) shares; and one for four hundred and sixty thousand (460,000) shares of stock, fully paid and non-assessable; whereupon Mr. Johnson assigned to the secretary of this company four hundred and sixty thou- sand shares, to be held by him and his successors in office, in trust, for the benefit of this company, in accordance with the terms of Mr. Johnson's offer. 697. "An offer was then received from Mr. H. L. Winslow, to convey by Mining Deed to this company the remaining un- divided one-fourth interest in the Adelaide Lode Mining claim, for a consideration of 10,000 shares of treasury stock. On motion, the board accepted Mr. Winslow's offer, and the presi- dent and secretary were instructed to issue to Mr. Winslow a certificate for 10,000 shares of treasury stock, on his delivering to this company a satisfactory deed to the aforementioned one- fourth interest in the Adelaide Lode Mniing Claim." 698. On October 6th, 1903, the following resolution was passed : "Resolved, that the treasurer of this company is em- powered, and is hereby instructed, to offer for sale 200,000 shares of treasury stock at one and one-half cents per share, and stockholders of record are entitled to subscribe for the same in proportion to their holdings." 699. On January 6th, 1904, a similar resolution to the fore- going was' passed, and other resolutions distributed the re- mainder of the treasury stock as follows : H. M. Simmons, for services rendered as director, 1000 shares. E. P. Longwell, for his undivided one-half interest in the Buck Horn Lode Mining Claim, 10,000 shares. F. J. Spangle, for his undivided one-fourth interest in the Ocean Spray Lode Mining Claim, 4,000 shares. J. K. Charing, for his services in procuring a lease of the Big "I" Mining Claim (including all expenses incident thereto), 6,000 shares. G. L. Brownlee, for services as secretary for the first year, 10,000 shares. 260 CORPORATION ACCOUNTING Allotment No. i, per resolution of the Board passed Oct. 6, 1903, 200,000 shares at i>^c. Allotment No. 2, per resolution of the Board passed Jan. 6^ 1904, 200,000 shares at i>^c. Balance in Treasury 19,000 shares. 700. There are a number of irregularities in the foregoing proceedings. A corporation can act only through its repre- sentatives — the Board of Directors ; and these directors must of necessity be stockholders' or subscribers to stock of the cor- poration, and Mr. Johnson's offer requires of the corporation something which it does not possess, viz., the stock already issued. Furthermore, the issuance to Mr. Johnson of the en- tire Capital Stock, would leave the corporation without stock- holders, and consequently without any directors — a condition under which no business corporation can exist. The offer should be made then in this way (the suggestion is by Mr. Conyngton). 701. *Tn exchange and full payment for the entire capital stock of the Company, including with the consent of the incorporators, the shares subscribed for by them, T hereby offer etc. * * * *Tf the above proposition is accepted, the entire capital stock of your company, excepting the shares already sub- scribed for, is to be issued to my order against the delivery to your representatives of etc." 702. Or the incorporators' might make a conditional as- signment of their subscriptions to Mr. Johnson ; the condition being the acceptance of his proposition. If they make an ab- solute assignment of their interests, they might disqualify themselves from acting as directors to accept Johnson's propo- sition. In this latter case the offer would read. 703. 'T hereby offer, in exchange and full payment for the entire capital stock of your company, including the shares sub- scribed for by the incorporators thereof, (their subscriptions having been conditionally assigned to me), the property de- scribed as follows." 704. For complete and model forms of "Proposals to ex- change property for stock" see Conyngton on Corporate Man- agement, pages' 218 and 219. Form of Assignment (Conyngton) 705. We, the undersigned, being all the incorporators of the Company, in consideration of the sum of one dollar to each of us in hand paid, the receipt whereof AND CORPORATION LAW 261 is hereby acknowledged, and for other good and valuable con- siderations, do hereby sell, assign and make over unto Chas. Johnson all of our subscription rights in the said company, conditioned, however, upon the acceptance by said company of his proposition of this date, to take the whole capital stock of said company, and to go into effect only upon due tender by him of payment for such capital stock, according to the terms of his said proposition. Witness our hands & etc." 706. It will be seen that under the last two outlined pro- posals the stock was to be issued to Mr. Johnson or his order ; there is nothing to prevent Mr. Johnson paying for anybody's subscription, an issue to his order is legally an issue to him; so in order to preserve the directorate of the corporation Mr. Johnson has one or more shares issued to each director. 707. The stock should be assigned to the treasurer of the company and not to the secretary. The use of the term "Treasury Stock," presupposes that the stock is in the Treas- ury or hands of the treasurer ; but while it is theoretically in his hands, it is bad practice to issue it to him, as this would enable him to dispose of it without the knowledge of the di- rectors or officers ; and in the hands' of a purchaser for value and in good faith, the company might be compelled to recog- nize such purchaser as a stockholder. Opening Entries. 708. Assuming that the corporation was regularly organ- ized, and that all the foregoing formalities were complied with,- the following would be the opening and subsequent entries : 709. First Entry. Subscription Dr. $50 To Capital Stock $50 Chas. Johnson 10 shares H. L. Winslow 10 shares H. M. Simmons 10 shares E. P. Longwell 10 shares F. J. Spangle 10 shares 709 (a). This is sufficient to organize the corporation,, give it a Board of Directors, and place it in a position to entertain Mr. Johnson's proposition. 710. As soon as Mr. Johnson's proposition is accepted,, and the deed passes, we make the :262 CORPORATION ACCOUNTING Second Entry. Subscription Dr. $999,950 To Capital Stock $999^95© Chas. Johnson subscribes for 999,950 shares. 711. Mr. Johnson could not subscribe for the entire cap- ital stock, because the incorporators had already subscribed for 50 shares and capital stock was credited for the amount of their several subscriptions; but there is nothing to prevent him paying for the entire subscription. 712. At this stage of the proceedings' the corporators as- sign their subscriptions to Mr. Johnson, but record of this is not yet made on the Transfer Book and Stock Ledger; or if a conditional assignment was made, it now becomes absolute and effective, and the transfer is made accordingly at the pro- per time. 713. Third Entry. Sundries Dr. Mines and Mining Rights' $992,500 Cash 7,500 To Subscription Account $1,000,000 Chas. Johnson pays $7500 in cash, and assigns his interests etc., in full payment of entire subscription, as per tender and resolution of acceptance. See minutes of first Directors Meeting. 714. The entire capital stock has now been paid for by Mr. Johnson, and its issue is subject to his order; so he directs the issue of one share, or one thousand shares, to each of the directors', according to a pre-arranged plan. As soon as this stock is issued to them, the previous transfers are recorded on the books. The reason for not recording them before, is to have the directors appear as stockholders of record during the process of change, and thus prevent the raising of any ques- tion as to their qualifications ad interim. Care must be taken not to do anything that would forfeit the charter. 715. Fourth Entry. Treasury Stock Dr. $460,000 To Surplus (or Donation) $460,000 Chas. Johnson donates 460,000 shares to be sold for the benefit of the company. 716. The next entry would depend on the order in which events took place. We will suppose that order to be as follows': AND CORPORATION LAW 263- 717. Fifth Entry. Mines and Mining Rights Etc. Dr. $24,000 To Treasury Stock $24,000 E. P. Longwell receives 10,000 shares of treasury stock for an undivided half interest in the Buck Horn Lode ; F. J. Spangle receives 4000 shares treasury stock for an undivided one-fourth interest in the Ocean Spray Lode, and H. F. Winslow receives 10,000 shares treasury stock for an undivided one-fourth interest in the Adelaide Lode. 718. This gives the Dore Mining & Milling Co. complete title to the whole of the three mining claims. 719. Sixth Entry. Organization Expense $6,000 To Treasury Stock $6,000 J. K. Charing receives 6000 shares' of stock for his services- in procuring lease of Big "I" Mine, and perfecting organiza- tion. 720. Seventh Entry. Sundries Dr. Cash $3,000 Stock Discount 197,000 To Treasury Stock $200,000 200,000 shares' of treasury stock sold at a discount of 98^%, per resolution etc. 721. It is legitimate to sell treasury stock that has been paid for once, at any price the directors may determine ; pro- vided the stockholders are allowed to subscribe as in this case. 'J22. Eighth Entry. Same as seventh entry. 723. Ninth Entry. Expense Dr. $11,000 To Treasury Stock $11,000 H. M. Simmons receives 1000 shares treasury stock for his services as director, and G. L. Brownlee receives 10,000 shares- of treasury stock for his services as secretary for the first year. 264 CORPORATION ACCOUNTING 724. When all these entries shall have been posted there will be a balance of $19,000 (representing 19,000 shares) in Treasury Stock Account. This will stand on the books as an as- ,set. The balance on Stock Discount Account amounting to $394,- 000 should be closed into Surplus or Donation Account. Organ- ization Expense under ordinary conditions might be written off in periodical instalments, but under these circumstances it is best to charge it into Surplus Account. This would leave a bal- ance in Surplus Account of $60,000. Expense Account still stands debited for $11,000, but as this represents $1000 in stock paid one director, for some unexplained reason, and $10,000 paid to the secretary for the first year's services, it could be carried until the end of the year as a part of the current operat- ing expenses of the year, and then charged into Profit and Loss; but inasmuch as these payments are largely in the na- ture of gifts, and as the surplus is in fact a fictitious one, there would be but little violence done to the ethics of accounting if this too was charged into Surplus Account. If this was done all the accounts would be closed excepting Mines, Capital Stock, Treasury Stock, Surplus and Cash ; and the following statement would represent the Assets and Liabilities of the company as taken from the books : 725. Assets. Mines, etc. $1,016,500 Treasury Stock 19,000 Cash 13,500 $1,049,000 Liabilities. Capital fully paid $1,000,000 Surplus 49,000 $1,049,000 726. Here we have a company with a paid-up capital of $1,000,000; a Surplus of $49,000 and a working capital of only $13,500, — the treasury stock at past prices is worth only $385. This is a mere bagatelle for the development of four or five quartz claims, and the directors would have to resort to the alternative of donating more stock, selling some claims, or borrowing money on their inflated and doubtful assets. The scheme looked wild and woozy to the writer and he set a value on his services, cash in advance, which scared them oflf; how- ever he worked the problem out for his own edification and he presents it here as an example in wild and illegitimate finance. It is more than likely that no attempt would be made to de- velop these properties, but that an attempt would be made to AND CORPORATION LAW 265 boom them and sell them; the company could then reduce its capital and declare a dividend. 'J2'j. As stated in the opening paragraph of this chapter many companies issue their full capital to an individual against property or patents.* The vendor, of course, brings about the organization of the company and it is often legiti- mate enough. They simply capitalize the goodwill or future profits; and the prospects and the outcome frequently justify and legitimize their appraisements. The foregoing formulae v^ill suffice to illustrate the manner of starting off any such a company. The principal is the same, the application can be varied to conform to varying plans and conditions of organi- zation. CHAPTER XVII. Opening the Books for a Mercantile Business — Crediting Capital Stock with Subscribed Capital Only — Paying 50% at the Time of Subscribing and 50% on Call — Calling Balance of Subscription at End of First Year — Reducing Capital Stock — Making up Statement. 728. Subscription Account Dr. $100,000 To Capital Stock $100,000 A Shares $20,000 B Shares 20,000 C Shares 20,000 D Shares 20,000 E Shares 20,000 Capital Stock Subscribed for as above, payable 50% dov^n and 50% on call. 730. Write the name of each stockholder on the Subscrip- tion Account, leaving two lines opposite each name for pay- *Vide paragraph 418, also paragraph 313. 266 CORPORATION ACCOUNTING ments. Credit each one's payment opposite his name on Sub- scription Account. This account will then show a balance of 50 per cent owing on the Subscribed Capital. Take no ac- count of the Unsubscribed Capital Stock on the General Ledger. The Stock Ledger, the Minute Book, the By-Laws or even the certificates will show the authorized capital. Calling in Subscriptions. 731. Supposing that at the end of the first year the direc- tors decide to call on the stockholders for the balance of 50 per cent due on subscription, and also decide to reduce the Cap- ital Stock* to $100,000; what are the entries? 732. Note that the stockholders have been charged on the Subscription Account for the full amount of their subscrip- tion, hence there is no Journal entry to make, simply a Cash Book entry like the following: 732. Cash Book. Subscription Account $50,000 For balance of 50 per cent on subscription acct. as follows : A. B. C. D. and E. 733- Or if they pay at odd times, credit Subscription Ac- count as payments are made. Reducing Capital Stock. 734. As will be observed, capital stock has not been cred- ited for the full capital on the general books and therefore there is no entry to be made on the general books at the time it is reduced. Simply make the entry on the minutes, take up the old certificates, and issue new ones showing the new cap- italization, and make the proper entries on the Stock Ledger. *Vide paragraph 474 et seq. AND CORPORATION LAW 267 735. In making up a statement, the condition of Capital Stock may be expressed in either of the following way s : On the Liability side, Subscribed Capital $100,000 On the Assets side, Due on Stock Subscriptions 50,000 or on the liability side alone. Subscribed Capital $100,000 Less due from Stockholders 50,000 Paid-up Capital $50,000 736. In no case should the Stockholders liability be omitted from the statement. This liability exists both as to the Corporation and its creditors, and its appearance on a statement adds an element of strength to it. CHAPTER XVIII. Opening the Books of a Company Showing Only the Paid-up Capital on the Ledger. Stock Paid for in Two Instal- ments — All Subscriptions Paid in Cash — Unpaid Subscription . as a Resource — Reducing Capital Stock to Create a Surplus — y Dividends not Affected by Reduction of Capital. 737. A. Wood, B. Cutter, C. Sawyer, D. Planer and E. Trimmer desire to go into the business' of manufacturing doors and sashes, and they organize a company to be known as the Sash and Door Factory Company. The capital stock is placed at $75,000, 750 shares of the par value of $100 per share. They desire that the capital stock shall be credited for only the paid-up capital. They are to pay cash for the stock, and they each subscribe for 100 shares payable in two instalments; what are the entries ? 268 CORPORATION ACCOUNTING First Method. 738. Cash Book. Capital Stock $25,000 For 50 per cent of the par value of 500 shares of stock as follows : 739. Here write in the names of subscribers and the amount paid by each. This is a complete record in itself. It shows that two-thirds of the stock has been subscribed, that one-third is paid in cash, and that the company starts out with a paid-up Capital of $25,000; and that it has as a resource $25,000 more on call. This latent resource is not expressed on the books, for the reason that it would involve the expression of a corresponding liability ; and it is desired that only the net Capital and net liability should show on the books. The cred- itors of the company are, we may be assured, aware of the existence of this resource, and of its potential value. Second Method. 740. Subscription Account $25,000 To Capital Stock $25,000 For 50 per cent of subscription due and payable as per the following list of subscribers : 740 (a). Here give names and amounts; and as the sub- scriptions are paid credit Subscription Account. Third Method. 741. Instalment Account No. i Dr. $25,000 To To Capital Stock $25,000 For first instalment of 50 per cent on subscribed capital as follows : A. Wood, 100 shares $5,000 B. Cutter, 100 shares 5,ooo C. Sawyer, 100 shares 5,000 D. Planer, 100 shares 5,ooo E. Trimmer, 100. shares 5,000 • $25,000 AND CORPORATION LAW 269 741 (a) As payments are made debit cash and credit in- stalment account. Reducing Capital Stock to Create a Surplus.* 742. Suppose that at the end of the first year the capital stock is fully subscribed and paid for, for the purpose of in- creasing the capacity of the factory, and the company goes along prospering and paying dividends for a number of years, when they strike a dull year or two and the books show an im- pairment of Capital amounting to $20,000; the directors do not wish this showing to appear on the books and in order to wipe it out they decide to reduce the Capital Stock to $50,000, and show a balance of $5,000 in the Surplus Account; what entry ? 743. Capital Stock Dr. $25,000 To Impairment $20,000 To Surplus 5,000 Capital Stock reduced per resolution of the Board of Di- rectors. Minute Book, page on authority issued from the office of the Secretary of State. 743 (a) This entry reduces the Capital Stock to $50,000, balances the Impairment Account and shows a surplus of $5,000. 744. The stock of the company is now reduced from 750 to 500 shares, the old certificates are surrendered and each stockholder's account is balanced in the Stock Ledger; then they are issued new certificates for two-thirds of the amount of the old certificates, and accounts are reopened with them in the Stock Ledger. They have less stock now of course, but it makes no difference as far as dividends are concerned; for instead of receiving a smaller percentage on a greater number of shares, they receive a greater percentage on a smaller num- ber of shares. *Read paragraphs 475 to 483. r ?| CHAPTER XIX. Organizing a Corporation on a Basis of Two-Thirds Stock and One-Third Bonds — Objects to be Attained, and Dangers Invited by This Method of Organizing — Opening the Books. 745. It occasionally happens that persons owning or con- trolling certain valuable property, or a certain well established business, which they wish to develop and extend, incorporate for an amount considerably less than the value of their tangi- ble assets, and issue bonds for the difference between that and the actual value of these assets. The object of doing this h if the business is successful the stock would earn more in divi- dends than would have to be paid in interest on an equal amount of bonds ; and this difference is a profit to the stock- holders'. For example, suppose a company was formed on a basis of $100,000 stock and $50,000 bonds, that would be an invested capital of $150,000. Now suppose that this company earned 8% or $12,000 the first year, on this investment, and that the bonds bore only 5% interest payable annually; the stockholders would make 3% interest on $50,000, or $1500, equivalent to 5^% on the capital stock. This form of incor- poration should only be resorted to where profits are very cer- tain; because interest on bonds must be paid, whether earned or not, or foreclosure proceedings will take place. 746. Opening the Books. roperty Dr. $1 : 50,000 (itemized) To Capital Stock $100,000 To Surplus 50,000 For $100,000 capital stock issued against tangible assets worth $150,000, the excess assets being credited to surplus to secure a bond issue of like amount. 747. The bonds are issued against these excess assets and when sold the usual entries are made. CHAPTER XX. Incorporating the Estate of a Deceased Person — Procedure When Separate Bequests are Left to Relatives and Also an Equal Undivided Interest in the Residue — When Division is "Share and Share Alike"— When Only the Undivided Inter- ests are Incorporated — When the Widow is Left a Life In- come — Incorporating at Less Than Real Values — At More Than Real Values — Interests of Minor Heirs — Adjustment of Interests. 748. It has become quite a popular custom of late years among the heirs to large estates, to incorporate these estates, and thus preserve their integrity and their income producing value. 749. For example, John Brown dies leaving an estate of uncertain value, consisting of real and personal property, stocks, bonds, securities, life insurance, etc. After making several minor bequests, he divides the remainder of his estate among the members of his family, one of whom is a minor; or perhaps he leaves certain specified properties to each, and divides the residue equally among all. The heirs decide to in- corporate their interests ; what is the procedure and what the entries for opening the books? It must be understood, of course, that the executors administer the affairs of the estate until the will is proved and a decree of distribution made by the probate court. The executors under the order of the court pay all expenses and bills against the estate, and sell so much property as may be necessary to pay such bills and expenses, and also the minor bequests to legatees; after this, the distri- bution is made among the beneficiaries. For duties of execu- tors and correct methods of executorship accounting see ''Ac- counts of Executors and Trustees' by Joseph Hordcastle C. P. A." 750. Now let us suppose that the heirs to the estate are: Mrs. Mary Brown, who was left certain property appraised at $75,000; John Brown Jr., property appraised at $52,000; Geo. Brown, property appraised at $48,000; Caroline Brown, prop- erty appraised at $46,000 and Martin Brown, a minor, property 272 CORPORATION ACCOUNTING appraised at $44,000. In addition to this, there was a residue of $85,000 after all debts and claims were paid, to be divided equally among each of them. These heirs decided to form a corporation to be known as "The John Brown Estate," with a capital of $300,000, and to subscribe for stock in proportion to their respective interests — the stock is to be $100 a share. What proportion of stock is each to receive, and what are the entries to open the books? 751. Table Showing Interests and Shares of Each. HEIRS Separate Bequests Propor- tion of Residue Total Interest Total Value of Shares Ratio of Apportion- ment Individ- ual No.of Shares Mary Brown 75,000 17,000 92,000 300,000 35:30::920 788 4-7 John Brown, Jr. 52,000 17,000 69,000 35:30: :690 591 3-7 Geo. Brown 48,000 17,000 65,000 35:30::6S0 557 1-7 Caroline Brown 46,000 17,000 63,000 35:30::630 540 Martin Brown 44,000 17,000 61,000 35:30: :610 522 6-7 Totals 265,000 85,000 350,000 300,000 3,000 752. The above table shows that the incorporated inter- ests are worth $350,000, and as the capital stock of 3000 shares' is only $300,000, it follows that the shares apportioned to each must bear the same ratio to their interests as the total shares bear to the total interests; and this ratio in its' lowest terms is : As 7 is to 6 (7 :6) ; therefore, if we multiply the interests of each by 6 and divide by 7 we obtain the nominal value of the stock to which they are entitled, and by pointing off two places to the left we have the number of shares; or we state the proportions as in the table, and the answer comes out in shares. 753. Now since the actual capital of the corporation is $350,000, and the nominal capital is only $300,000, it follows that the new corporation starts out with a surplus of $50,000 ; so we make the following entries to open the books : AND CORPORATION LAW 273 754. John Brown Estate Dr. Real Estate Residence property and con- tents located at 1000 Ches- nut St. $10,000. Brick business block located at 100 Market St. 40,000. Bonds. 5 Spr'g Valley 2nd Mtg. 4% $4,975- 4 Pacific El. Ry Co. 5% 3,600. Bank Stock. 50 shs. Farmers Nat'l Bank $15,000. Mortgages. First Mtg. on 7% 10,000. Industrial Stock. 2080 shs. Brown Bros. Mfg. Co., at 125. $260,000. Cash 6,425. To Capital Stock $300,000 Mary Brown, 788 4-7 shs. $78,857.14 John Brown Jr., 591 3-7 shs. 59,142.86 Geo. Brown, 557 1-7 shs. 55.714.29 Caroline Brown, 540 shs. 54,000.00 Albert Smith Trustee for Martin Brown, 522 6-"] shs. 52,285.71 $300,000.00 To Surplus Account $50,000 The heirs of the John Brown Estate turn over to the cor- poration against their subscriptions, assets $50,000 in excess of Capital Stock, creating a Surplus of $50,000. 755. In opening the ledger, it is best to open a separate account for each piece of property and for each class of stock, bonds, etc. This is the only practical way in which to account clearly and intelligently for accretion and depreciation, gains and losses on separate investments, purchases' and sales ; and it makes easy the arrangement of a schedule at any time. 756. It will be observed that the minor's stock is issued to a Trustee for him. If the testator has not named some one to act as trustee or guardian for the minor, the Court will ap- point some one to act in that capacity. 274 COKPOKATION ACCOUNTING Another Contingency. 757. If the property had been divided among the heirs "share and share aUke" we would open the books in this man- ner. The John Brown Estate (itemized) $350,000 To Capital Stock $300,000 Mary Brown 600 shs. $60,000 John Brown Jr. 600 shs'. 60,000 Geo. Brown 600 shs. 60,000 Caroline Brown 600 shs. 60,000 Albert Smith trustee for Martin Brown 600 shs. 60,000 , To Surplus Account $50,000 Still Another Contingency. 758. If the interest of each were as given in the first in- stance, and the estate was incorporated for $400,000, open the books with the following entry : John Brown Estate (itemized) Dr. $350,000 To Capital Stock $350,000 Mary Brown 920 shs. John Brown, Jr. 690 shs. Geo. Brown 650 shs. Caroline Brown 630 shs. Albert Smith, trustee for Martin Brown 610 shs. Total 3,500 shs. The John Brown Estate incorporated on a basis' of $400,- 000, of which $350,000 is subscribed and paid up, as per the above schedule. Various Contingencies. 759. It might be that the beneficiary to whom was left the family residence, did not wish to put it into the corpora- tion, and as a matter of fact there would be certain articles of personal property devised to certain members, or to all, for their personal use, which no one would think of putting into a corporation. In s'uch cases the heirs could reserve to them- selves such portions of their separate bequests as they pleased, and incorporate the remainder ; or the heirs might incorporate AND CORPORATION LAW 275 only their individual interests in the residue, or perhaps the widow might be left a life income from certain property, the property and income going to one or more members of the family after her death. In this latter case the stock might be issued to a trustee, who would pay over the income to the widow during her life-time, and surrender his trust after her death. Note : This suggests in a general way the methods of in- corporating the estate of a deceased person. The author pre- sumes, of course, that the heirs would consult their lawyers who are familiar with the probate laws affecting questions in- volved in a matter of this kind. CHz\PTER XXI. Ante-Mortem Estate Incorporation — Excluding Family Residence and Certain Personal Property From the Incorpor- ation — Shares Interest Makes Distribution Easy and Practi- cal for Testator — Name and Integrity of Estate Preserved — No Ambiguous Nor Uncertain Clauses to Wrangle About — Easy to Execute. 760. Some owners' of large estates with that business sagacity that has distinguished the accumulation of their es- tates, do not leave it to others to incorporate their interests when they are gone, but while the life current courses to the brain and their heads are clear, they plan to perpetuate their estates, solidify their interests, and make easy the distribution of those interest when the worker is summoned to rest. 761. In such a case the business man makes a schedule of the property he wishes to put into the corporation, similar to that given in the opening entry of the preceding chapter. He reserves, perhaps, the family home, and certain personal property which he desires to devise in a manner different from the remainder of his estate.. He then incorporates, allowing each member (or at least two members) of his family to sub- scribe for one share each, so as to complete the necessary num- ber of corporators. The corporation is then put under way; the capital stock, the number and par value of the shares, the paid-up capital, etc., having all been decided on by him, ^ or THE UNIVERSITY 276 CORPORATION ACCOUNTIISG and the books opened in accordance with these conditions. He has control of the corporation, he owns practically all of it, and when it comes to making a will, he bequeathes so many- shares to each. This is' simple, his will is very easily executed, his estate is an integer instead of a number of separate frac- tions — the man dies, but his name, his memory and his achievements live. N. B. See foot note to preceding chapter. CHAPTER XXn. Levying an Assessment — Form of Assessment Book and How to Keep It — Entries to be Made When Stock is Only Partly Paid For— When It is Fully Paid— Selling Stock to Pay Delinquent Assessment — Stock Forfeited for Failure to Pay Assessment — Accounting Methods Covering Every Con-- tingency — Increasing Capital Stock and Issuing Shares Against Assessments Previously Paid. 762. Having levied an assessment according to law, what are the proper entries to make of it on the general and aux- iliary books of a corporation ? 763. The entries to make depend upon the circumstances governing the levy of the assessment. In most states the stock can be assessed only up to its par value ; and in others like Cali- fornia, it may be assessed after it is fully paid up. In all cases where the assessments are not paid, so much of the stock as shall be necessary to raise sufficient money to pay the assess- ments and all incidental costs thereto, shall be sold, and such number of shares transferred to the purchaser. In California, if no bidders appear, the stock can be bid in by the corporation through one of its officers, and thereby forfeited. In Delaware, if no one appears to bid in the stock for the amount of the as- sessment and costs, and the amount can not be recovered by an action at law within one year, the stock and all payments which have been made thereon shall be forfeited. In New Jersey the Statute is silent on this subject. 764. The first thing to do when an assessment has been levied is to procure an Assessment Book something similar in AND CORPORATION LAW 277 design to the form here presented. Enter therein the names of all the stockholders either alphabetically, or in the order in which they appear in the Stock Ledger, and follow out the form with the number of shares, amount of assessment, etc. 765. ASSESSEMENT BOOK. Assessment No. Delinquent . . . . ..of. per Share. / Levied /. Day of Sale /. Names Cert. No. No. Shs. Amount Total Date of Paymenlt "j^^. This book gives a complete record of the assessment; it shows who have paid and who have not, and from it the De- linquent Sale Notice is made up. The costs can be pro-rated among the delinquents and entered in the "Costs" column, and the assessment and costs' extended into the "Total" column; and whoever offers the stock for sale can find out from this the total costs against it, also the costs can be journalized from, this. If it is desired, every alternate page may be left blank for the purpose of filing the publishers' affidavits and the auc- tioneers'. Having filled in this book, the assessment may be treated on the books in any one of the following ways : y^y. If the stock is not fully paid up and the Capital Stock Account is credited with only the paid-up capital, debit an ac- count called "Assessment No. i," and credit Capital Stock Ac- count with the amount of the assessment thus : 768. Dr. $ Assessment No. i To Capital Stock $ For Assessment, of. . . .% on the subscribed capital made, and payable, as per resolution of the board of directors minute book, page 769. Enter the names of stockholders on Assessment Ac- count, and credit them as they pay their assessments. When all have paid, the paid-up capital shall have been increased by the amount of the assessment. 278 CORPOEATION ACCOUNTING 770. If any of the stockholders fail to pay their assess- ments and the stock has to be sold, Debit "Assessment Ex- pense No. i" with all costs incident to the assessment and sale, and when the purchaser pays over the money, credit "Assess- ment No. i" with the amount of the assessment, and "Assess- ment Expense" with the amount of the expense, these entries will balance both accounts. Make the latter entries both on the Assessment Account and Assessment Book in red ink, to show that the payment was not regularly or ordinarily made ; then transfer the stock to the purchaser, who acquires all the equites the original holder had, or would have, if he had paid the assessment. 771. Suppose now that only a portion of the shares' were sold to pay the delinquent assessment. For instance, let us say that A has 100 shares of stock at $10 per share on which he has paid 25%, or $250. An assessment of 25%, or another $250, is levied, and A failing to pay this assessment, B bids in 60 shares for the assessment and costs; that is", he offers to pay the assessment and costs on the 100 shares for the transfer to him of 60 shares. What would be the method of treating this' transaction? Credit A's stock with the payment of the assessment, and Expense with the payment of the expense, then issue to B a certificate for 60 shares — 50% paid-up (or other evidence of his equity), and issue to A a like evidence for 40 shares — 50% paid-up. Now why do we do this ? A has 100 shares of stock on which he has paid $2.50 per share. The Company wants an additional $2.50 per share. B pays that $2.50 per share on 100 shares, or $250, in consideration of 60 shares of stock; he gets his 60 shares for $250 plus the costs, that is', it has cost him $4.16 2-3 per share and costs; it has cost the other stockholders $5.00 per share. Now we see that B has got his stock cheaper than the original subscribers, but the Company has received its assessment and costs, and is' out nothing — the loser is A, the man who failed to pay his assessment; but he didn't lose All; B paid his assessment for his equity in 60 shares, that leaves A entitled to 40 shares, and as B has paid the full assessment, these 40 shares have the -same equitable value as the others. Now we have seen that A paid $250 in the first place, and he has now a 50% equity in 40 shares, which amounts to $200; hence he has lost $50 by reason of his failure to pay the assessment; but inasmuch as the Company has not lost anything, we have another reason why he should not be further penalized, and why he is entitled to the 40 shares on the same basis as the other stockholders. AND CORPORATION LAW 27&^ 772. Now suppose that neither of the foregoing conditions prevailed, and that there was no one to buy in the stock, either in whole or in part, for the assessment and costs, and that it was forfeited to the Company, what would be the entries ? 773. First Entry. Capital Stock $250 To Assessment No. i $250 John Smith fails to pay assessment previously credited to Capital Stock. 773 (a) This entry will balance the Assessment Account and reduce Capital Stock to its paid-up value. 774. Second Entry. Treasury Stock Dr. $250 To Surplus Account $250 John Smith forfeits the equivalent of 25 shares of paid-up stock, for failure to pay assessment. 774 (a) This entry shows 25 shares of Treasury on hand — stock once paid for, and that there is added to Surplus the amount that Smith paid and forfeited. 775. Third Entry. Surplus Account Dr. $? To Assessment Expense No. i $? for expense connected with advertising Smith's stock for sale. 775 (a) This entry balances Assessment Expense and re- duces Surplus Account to the actual Capital gain on the for-^ feiture. In this' case the delinquent stockholder loses all his stock, because the Company loses the subscription; and the Company is damaged thereby, inasmuch as there is no one to take up where he left ofif. "jy^y. Alternative Entry. Forfeited Shares Account $1000 To John Smith $750 To Surplus Account 250 John Smith forfeits 100 shares of stock on which he paid first instalment of 25%. 280 CORPORATION ACCOUNTING jyj. This forfeited stock could be offered for sale at a dis- count of 259^. Vide paragraph 689 et seq., chapter XV. When Stock is Fully Paid-up. 778. In this, and some other states, an assessment may be levied on paid-up stock for the purpose of paying a corpora- tion's debts, or for making necessary improvements, and it does not appear that there would be anything wrong in the stock- holders of any corporation consenting to a voluntary assess- ment for the purpose of acquiring either necessary capital or a surplus. In such cases, or under such conditions, any one of the following methods may be applied : First Method. 779. Debit individual stockholders for the amount of their respective assessments', and credit Assessment Account for the aggregate. The two-fold object of this form of entry is to show the amount levied in assessments, and to show who paid and who failed to pay the assessments. For the latter, the Assess- ment Book shows all the particulars, but some insist on it ap- pearing on the Ledger ; besides delinquents are to be charged with the cost of advertising and expenses of the sale, and as' these costs and the delinquent assessments are to be paid by the parties purchasing the stock, the accounts of delinquents '.are credited through the Cash Book by writing the names' of the purchasers thereon ; the necessary transfers are then made on the Stock Books, and the incident is closed. Assessment Account remains credited with the amount of the assessment until the books' are about to be closed when it is written off into Surplus Account as a Capital Accretion.*^ 780. Note — One collective account might be opened for all the stockholders, headed Stockholders Assessment Account, and two lines allotted to each Stockholder, one for the amount of assessment, and one for costs if necessary; this would be very much less trouble than opening and indexing individual accounts. Second Method. 781. Debit same as above, and credit the assessment under the heading "New Working Capital,"*^ and allow this to stand on the books as a Capital Liability,*^ and if ever the capital *Vide paragraph 447. *Vide paragraph 830, et seq. *Vide paragraph 448. . AND CORPOEATION LAW 281 stock is increased, dispose of assessments by .the following entry : 782. Dr. $. New Working Capital To Capital Stock $ For shares of paid-up stock issued to the stockholders in proportion to their holdings, this being the amount of as- sessments paid over the par value of the stock. 783. This amounts to refunding in the shape of stock, all that the stockholders have paid in the way of assessments. This method is to be recommended where there is a probability of the stock being increased. Third Method. 784. Make no entry on the books at the time the assess- ment is levied, but credit each on individual account for the amount they pay, also on the Stock Ledger if it has money columns,* writing on their accounts at the time "Assessment No. i" and so on. Then if the capital stock is increased, debit them for an amount equal to the amount they have paid in as- sessments and credit Capital Stock for the aggregate. Issue each one the stock they are entitled to, and make the proper entries on the Stock Books. While this may serve the purpose of bookkeeping it is not good ethics, nor correct accounting. The financial books do not show that an assessment has been collected or even levied, but show a certain amount of advances or private loans by the stockholders. These appear on the books as liabilities, when as a matter of fact, the Company is not obliged to pay them.'''^ Fourth Method. 785. Rule a special column in the Cash Book for the pur- pose of entering all sums collected on assessments; explain each entry and carry the total forward until the end of the month, at which time credit Assessment Account or Working Capital. 786. Dr. Cash Book With Special Assessment Column. Date Name Particulars Assess- ment Folio V V Misc. Total Nov. 1 10 John Smith John Jones 10 per ct. on 10 Shs, 10 per ct. on 50 Shs. 20 20 00 00 *Vide paragraphs 286 and 287. *2Vide paragraphs 290 and 292. 282 CORPORATION ACCOUNTING Fifth Method. 787. Make no entry until the full assessment is collected, when one entry like the following is made in the Cash Book : Assessment Account $20,000 For Assessment No. i of 10 per cent on the Capital Stock. See Minute Book, etc. 788. As assessments of this kind are levied for the pur- pose of paying debts or furnishing additional Working Capital, the account of credit may be called Working Capital instead of Assessment Account; however, that is' merely a choice of terms. Some accountants dispose of the credit on this account by charging it with all sums drawn out for any purpose and then debiting the account for which they are drawn, and credit- ing profit and loss with the amount, e. g. Suppose that $1000 was drawn out for the purpose of buying machinery, here would be the entries : 789. Cash Book. Cr. Working Capital $1,000 Amount drawn out to purchase Machinery. 790. Journal. Machinery Account To Profit and Loss (With explanations.) Dr. $1,000 $1,000 791. This method may be said to be faulty in its premise and false in its conclusion. The assessments usually string out over a period of 30 days, and as they come in they should ap- pear in the Cash Book. Keeping memoranda is not keeping books. If the money collected is put into the cash and not on the Cash Book, cash will not balance ; and if it is withheld out of the cash it is positively wrong, and should not be tolerated. In the next place. Profit and Loss should not be credited with AND CORPORATION LAW 283 an accretion of capital like this.* It is no part of the profits earned, as so often explained. In the third place, the method of charging withdrawals to Working Capital is wrong in prin- ciple and round-about in practice. It is, as will be seen mak- ing work for no good purpose, a practice that should never be indulged in. As a matter of fact nothing has been given in exchange for the cash received on assessments, and the whole amount will finally go to the credit of Surplus,*^ but there is no necessity for it going in piece-meal. The money drawn for each account should be drawn from the cash without any refer- ence to Assessment or Working Capital, and Surplus credited for the full amount at the closing of the books as shown in the first method. Note : — The exception to this is of course where the assess- ment is treated as a liability, as shown in second and third methods. CHAPTER XXIII. A Corporation Bids in Its Own Stock at a Delinquent Sale — Entries Showing Reversion of Stock to Corporation — Pay- ing the Costs and Accounting for Same — Two Different Methods of Recording the Purchase — Purchased Stock Dis- tributed as a Dividend. 792. A California mining company having purchased a number of shares of its own stock at a delinquent assessment sale, the par value of which had previously been paid, wishes to distribute the same among its stockholders, what are the entries and what the procedure? 793. After the stock is bid in by the company ,the first thing to do is to make the entries showing the reversion of the stock to the company and its title thereto. The next thing is to show the cost of acquiring the stock by purchase; that is, the costs of advertising and expenses of sale apportionable to the shares bid in. *Vide paragraph 308. *2Vide paragraph 835. 284 CORPORATION ACCOUNTING Entries for the Purchase of a Company's Own Stock. 794. Sujipose that John Brown owns 10 shares of stock at $10 per share and it is sold to pay a dehnquent assessment of 10% and the cost of advertising, etc., which amount to an ad- ditional $10, and the company is the purchaser, what are the entries ? 795. First, debit Brown with amount of assessment, cred- iting Working Capital or Assessment Account. Then debit him with costs, crediting Delinquent Assessment Expense, or in this way : 796. John Brown Dr. $20.00 To Working Capital $10.00 To Delinquent Assessment 10.00 For assessment of 10% on 10 shares, and costs of selling stock for failure to pay assessment. If there are a number of delinquents, open an account in Petty Ledger form, allowing two lines to each name, one for assessment, the other for costs. 797. Second Entry. Treasury Stock Dr. $100 To Surplus Account $100 The company bids in John Brown's certificate for 10 shares at delinquent sale and places it in the Treasury. See minute hook, page 798. Third Entry. Surplus Account Dr. $20 To John Brown $20 For assessment and costs paid by the company. The company now pays the costs connected with the de- linquent sale, and the following entry is made in the Cash Book. 799. Fourth Entry. Delinquent Assessment Exp. $10 For exp. attached to sale of John Brown's Stock. AND CORPORATION LAW 285 800. Now there is one apparent discrepancy left. Working Capital is credited with $10 which was not really received, and Surplus Account is debited with $10 more than was actually paid out; but when the Working Capital Account is closed into the Surplus Account, it again receives credit for this $10 with which it was charged in closing out Brown's account, and the nominal gain to the company on this sale is $90. If this treasury stock was sold, the actual gain to the company would be what it sold for less $10. 800 (a). While the foregoing method is detailed it is also very round-about, so we seek a shorter way in the Second Method. 801. Make no credit to Working Capital or Assessment Account for the amount that has gone delinquent, but when the costs and expenses of sale are ascertained make this entry and explanation : 802. CASH BOOK. Delinquent Assmt. Exp. $10 The company buys Brown's 10 shares at delinquent sale, paying costs against same. 803. Second Entry. Treasury Stock Dr. $100 To Delinquent Assmt. Exp. $10 To Surplus Account 90 The company purchases, for costs and expenses John Brown's stock, placing same in the Treasury. See Record of Sale, minute book page et seq. 803 (a). This entry balances Delinquent Assessment Ex- pense, shows the company possessed of $100 treasury stock, and shows a nominal gain of $90 in the Surplus Account, the company having acquired $100 worth of stock for $10. This case is, of course, far fetched, but it illustrates in an easy man- ner the way to record the purchases of a company's own stock bid in at a delinquent sale. 286 CORPOEATION ACCOUNTING 804. After these entries have been made on the financial books, the stock is transferred on the Stock Ledger, and the company having acquired title to it is prepared to dispose of it again. A petition and resolution similar to that outlined in Chap- ter XXIV is now prepared and passed, the stock pro-rated and issued to the stockholders. The entries for the re-issue are also illustrated in Chapter XXIV, this stock being distributed as a stock dividend. 805. N. B. — The first and third entries in the first method are supposed to comply with the literal meaning of the Cali- fornia Code on this subject, which reads, "and the amount of the assessment, costs, and charges due, must be credited as paid in full on the books of the company." CHAPTER XXIV. A Going Corporation Buys a Patent for $10,000 Cash and a One-fifth Interest in Its Paid-up Stock — Stockholders Have Option of Transferring One-fifth of Their Holdings, or Issuing Unsubscribed Stock to the Patentee in an Amount Which Shall Give Them a One-fifth Interest— Four Methods of Mak- ing the Entries — Pro-rating the Unsubscribed Stock Among Existing Stockholders — Distribution of Stock vs. Stock Divi- dend — Bonus Account and How to Dispose of It. 806. The Occidental Gas and Electric Light Company has an authorized capital of $75,000, and a paid-up capital of $50,- 000, and E. L. Lighter owns a patent on a combination Gas and Electric Stove which he sells to them for $10,000 and a one-fifth interest in the company; what entries? 807. The first thing to be decided is how he is to obtain the one-fifth interest. He may obtain it by the old stockhold- ers transferring to him one-fifth of the stock which they hold, that is $10,000 worth; he would then have one-fifth of the present paid-up capital ; or he might receive $12,500 of the un- sold or treasury stock — in either case he would have one-fifth AND CORPORATION LAW 287 of the paid-up stock, and the old stockholders would have four-fifths. If he obtained it by the first process, the old stock- holders, and not the company as an artificial person, would be theoretically paying for what the patent cost in excess of the $10,000 cash; but inasmuch as they would have four-fifths of the paid-up capital in either case, it would make no material difference as long as the paid-up capital was not increased; but if it were increased to $75,000, their original interest would be reduced to 8-15 instead of 2-3, which would make a differ- ence in their share of the dividend. In the first case the stock would be transferred to Lighter in the usual way of making transfers and the following entry made on the Cash Book : 808. CASH BOOK. Patent Right $10,000 Paid E. L. Lighter for assignment of his patent on com- bination G. & L. Stove. Second Method. 809. If obtained by the second and more likely process, the following entry could be made in the Journal. Patent Right Dr. $22,500 To Treasury Stock $12,500 To E. L. Lighter 10,000 For Patent Right purchased from E. L. Lighter, to be paid for in $12,500 worth of treasury stock and $10,000 cash. 810. Open an account with Lighter in the Stock Ledger, issue the stock to him, then pay him the cash, debiting his ac- count in the General Ledger and crediting cash in the Cash Book, and the incident is closed. Third Method. 811. First Journal Entry. Patent Right Dr. $22,500 To E. L. Lighter $22,500 (With explanations as in previous entry) 288 CORPORATION ACCOUNTING 8 1 2. Second Journal Entry. E. L. Lighter Dr. $12,500 To Unsubscribed Treasury Stock $12,500 For stock issued to Lighter in part payment for his patent right. 813. Dr. CASH BOOK. Cr. E. L. Lighter $10,000 Cash balance on his patent right. Fourth Method. 814. Journal Entry. Patent Right Dr. $12,500 To Unsubscribed Treasury Stock $12,500 For shares of Unsubscribed Treasury Stock issued to E. L. Lighter as part payment for his patent, per resolution of the Board of Directors, etc. 815. CASH BOOK. Patent Right $10,000 Paid E. L. Lighter balance on his pat- ent, per etc. 816. There are now 12,500 shares of unsold or unsub- scribed treasury stock in the company, and the directors decide at the end of the year to distribute this stock among the pres- ent stockholders ; accordingly they prepare a petition similar in form and substance to the following : 817. Date To the Board of Directors of the Occidental Gas and Elec- tric Light Company. Gentlemen : — We, the undersigned, being all of the stockholders of the O. G. & E. L. Company, do hereby petition and request that the Board of Directors resolve and decree that the unsub- AND CORPORATION LAvV - 28» scribed treasury stock of the company amounting to $12,500, or 16 2-3 per cent of the capital, be distributed among the pres- ent stockholders of record in proportion to the shares held by each. Signed, Then follows Notary's Certificate. 818. The petition is brought up at a subsequent directors meeting, and a resolution to the above effect is adopted ; after which the stock is distributed as ordered. 819. This' is not a stock dividend, and should not be treated on the general books as such. As no exchange of value is received for the stock, a nominal account could be opened to balance the unsubscribed Treasury Stock Account. For example : 820. Bonus Dr. $12,500 To Unsubscribed Treasury Stock $12,500 Unsubscribed treasury stock distributed among the stock- holders per resolution, etc. 820 (a). As this Bonus Account would either have to be carried as an asset (which it is not), or carried into Profit and Loss or Surplus Account (which would reduce the assets and amount to declaring a dividend) a way must be found by which the stock can be distributed without impairing the assets. 821. First Way. Patent Right Dr. $12,500 To Unsubscribed Treasury Stock $12,500 Unsubscribed Treasury Stock distributed among stock- holders on account of increased value of Patent Right. 822. Second Way. Appraise or inventory Patent Right for $12,500 more than it stands on the books', close the books, then Profit and Loss will show an additional gain in proportion to the increased value of Patent Right; then debit Profit and Loss and credit Unsubscribed Treasury Stock and make the proper explana- tion. 823. Profit and Loss Dr. $12,500 To Unsubscribed Treasury Stock $12,500 Increase in profits (due to increase in value of Patent) ap- 290 CORPORATION ACCOUNTING plied to the payment of unsubscribed treasury stock, and stock pro-rated among stockholders, as per petition and resolution etc. 824. Note — In this way the extraordinary gain credited to Profit and Loss shall have been immediately charged out of it, and will not show in the profits of the period. Concerning Stockholders Liability. 825. This is another one of those cases where action should be taken only on the advice of an attorney. The book- keeping part of it is easily adjusted, as we have seen; but here is involved one of those fine points of legal jurisprudence con- cerning the stockholders liability — whether or not the stock- holders have paid for their stock, and whether they are still liable to pay for it. One thing appears certain, unless the in- crease in the asset value of Patent Right was justified by facts and conditions, they have not paid for their stock by a mere trick in bookkeeping. If it was justified, it would be better to distribute the stock as a stock dividend thus : 826. Patent Right Dr. $12,500 To Surplus Account $12,500 For increase in Surplus, due to increase in value of Patent right. 827. Surplus Account $12,500 To Dividend Account $12,500 Dividend of 20% on outstanding capital payable in unsub- scribed treasury stock. 828. Dividend Account Dr $.12,500 To Unsubscribed Treasury Stock $12,500 Unsubscribed stock distributed as a dividend, per resolu- tion, etc. 829. The merit in the last method lies in this : The di- rectors are authorized to pay dividends out of the surplus, and if this surplus is an actuality and not a myth, they would be acting within their powers in paying a dividend; and if they decide to pay the dividend in stock instead of in cash, they will be strengthening the company to the extent that they do not impair its cash assets in the payment of the dividend. The test to be applied in this case is : Has the collateral value of the patent increased to the extent claimed? CHAPTER XXV. A Thesis on "Working Capital"— Various Ways of Treat- ing Working Capital Acocunt — Divergent Opinions on the Subject— How to Close This Account and Why — Some Ele- mentary Principles Expounded. 830. A company whose capital stock has been fully sub- scribed and paid for by the incorporators. (See chapter XV), is in need of additional funds for working capital, and in order to raise the necessary funds, the stockholders transfer to the company a certain number of shares each, to be sold for the purpose of obtaining the desired working capital. What entry should be made at the time of such transfer? Why should this entry be made and what are the subsequent entries? 831. The proper entry to make on the transfer of the stock to the company would be Treasury Stock Dr. $ To Working Capital $ 831 (a). The reason for this entry (as explained in the definition of treasury stock) is, (a) there has been received into the Treasury of the company, something of value for which no exchange has been given ; (b) stock once issued and paid for is regarded as outstanding stock; hence this transfer should be debited to Treasury Stock Account, and not to Cap- ital Stock Account, because to debit the latter would be to re- duce the paid-up capital, something which can only be done by the authority of the State; (c), once the Capital of a com- pany is issued it becomes fixed, and the liability existing against it, both as to stockholders and creditors, is also fixed ; and no transfer to the company would relieve a stockholder from liability to creditors where that liability exists, and that liability may exist (i), where a stockholder in a limited lia- bility company has received his stock for a nominal or insuffi- cient consideration to the injury of the creditors; (2), in an equitable or full liability company, where the stockholders are liable to creditors for the debts, or a portion of the debts, in excess of the par value of the stock; (d), to debit Capital Stock 292 CORPORATION ACCOUNTING with the shares surrendered and credit it with subsequent sales, would show a varying condition in the capital stock of the company, and would not accord with the facts'. 832. The subsequent entries to make would be, credit Treasury Stock Account for Sales, and close Working Capital Account into Surplus Account — even if the treasury stock is not all sold. If any loss should be made in the sale of this treasury stock, it should be charged to Surplus Account, be- cause its nominal value, (Working Capital Account) was cred- ited to Surplus as a Capital Accretion. 833. Some accountants make no entry of the surrendered stock until it is sold, when they credit Working Capital Ac- count. The objection to this is, that the books do not reveal the exact position of the company, viz. : that it has a certain number of shares of treasury stock for sale. And when a sale is made, it is necessary to explain a condition that, as far as the financial books are concerned, does not exist; and further, it is only by delving and inquiry that one can learn the extent of this hidden source of revenue. This treasury stock is an as- set, at least of potential value, and should positively appear on the books. 834. There are other accountants who allow this Working Capital Account to stand on the books of the company until the liquidation of the company, when it is closed into Profit and Loss Account as a gain ; and they reason thus on the sub- ject : "Since the proceeds realized on the sale of the stock that gave to Working Capital its credit, are to be retained and used as a working or operating capital, the account should not be closed when a dividend is declared, but should remain on the books as a credit until the company goes into liquidation.'^ Now there is no argument in this. The fact that an account which would swell the surplus, is closed before declaring a dividend, does not demand nor imply that the working capital must be reduced by the payment of an enormous dividend, simply because the surplus would admit of it. If a minimum standard of working capital is fixed, it can be maintained without fencing it in, in a separate account ; however, we have no quarrel with those who persist in making Working Capital Account, in season and out of season, the guardian angel of a company's stability. But while it may be "an elementary principle of alienistic practice never to denounce the illusions of the patient," on account of the value of psychic influence as an aid to medical science, we can not, in this wise, tacitly endorse illusions that involve the fundamentals of bookkeep- ing. It is an elementary principle of double entry bookkeep- AND CORPORATION LAW 293 ing, that all credits are either liabilities or gains, and that all accounts representing loss and gain should be closed out at the end of a fiscal period. 835. A capital gain or profit should be closed into an ac- count representing net capital; and a trading gain should be closed into an account representing trading profits. Working Capital in this instance is a "Capital Gain/' because it is out- side, and independent of, trading or operating; hence it should be closed into Surplus at the end of the period. 835 (a). As a matter of fact the company is operating on all its capital invested, and not merely on a part of it ; and for the reasons given in a preceding chapter and the ones adduced here, there does not appear to be any logical purpose in carry- ing Working Capital Account along year after year. If v^e accept the dogma laid down in the foregoing quotation ''work- ing capital" is a fixed quantity, and must remain so whether the company is prosperous or insolvent. Vide paragraphs 308, 309 and 310. CHAPTER XXVI. Watering Stock to Keep Down Dividends — Showing How Stock is Increased and Profiits Reduced — Net Worth of Com- pany Not Affected — Income of Stockholders Not Impaired in the Least — Nominal Assets and Liabilities as Negatives. 836. As previously stated in this work, some States fix or limit the profits of certain public service corporations; and if they make a profit in excess of the limit fixed, they are required by law to reduce their rates or charges — to prevent this they water their stock.* For example, a railroad company or street railway company with a capital of $10,000,000, is earning a profit of 9 per cent, when the limit is fixed at 6 per cent. On' finding this out, it increases its Capital Stock to $15,000,000, so as to bring its earnings within the limit of the law; and *Vide paragraph 311. 294 CORPORATION ACCOUNTING then it distributes this stock among its stockholders, pro rata, on the basis of shares held by each. What entry? 837. "Franchise," or "Right of Way" and "Franchise" $5,000,000 V To Capital Stock $5,000,000 For increase in capital stock distributed among the stock- holders per resolution of the Board of Directors. See page. . . . of Minute Book. 838. By this" entry an equal amount is added to the nomi- nal assets and liabilities of the company and the net worth of the company is not disturbed in the least; neither are the profits. Instead of making 9 per cent on $10,000,000, they make 6 per cent on $15,000,000, which is the same thing. Wa- tering stock is just like watering milk. As in the latter case a milkman dilutes and extends his supply of milk so as to have more lacteal fluid for sale ; so in the former case a company dilutes and expands its capital so as to have more capital stock for distribution; but just as the milkman could obtain as much butter from two pints of pure milk as from three pints of watered milk, so will the stockholders receive as much in divi- dends from two shares of legitimate stock as from three shares of watered stock. 839. This is another instance where the purpose of the law is defeated; where it is not merely disrespected, but con- temptiously ridiculed. If these corporations were made the subject of investigation by honest and competent public ac- countants, this method of issuing stock without consideration would soon be stopped; and laws that are in effect dead and inoperative, would become active, restraining and salutary. There is a field here for the public accountant, and if nobody >else will, he should develop it. CHAPTER XXVII. A Chapter in Trickery — One of the Ways in Which the Promoters of Speculative Corporations Obtain Their Stock at a Fraction of Its Par Value — How the Subsequent Pur- chasers Who Contribute a Majority of the Capital Own Only a Minority of the Stock. 840. There are many ways by which the promoters of stock companies feather their own nests, so to speak, at the expense of stockholders. Stockholders are often aware of this, or at least they are suspicious of it, but they cannot prove it even by an examination of the books. Indications of fraud may be plenty, but proof there is none — so neatly and so skill- fully is the job executed. For this reason people should not rush into speculative corporations without knowing something, about them, and of the character of the men back of them. Here is one of the simplest methods by which the trick is done : 841. Brown has some oil lands which are worth $5000, he enters into a private understanding with Gray, Black, White and Green by which they are to form a corporation with a capital of $50,000, divided into 50,000 shares of the par value of $1 each. Brown is to receive $35,000 worth of stock for his oil lands, or seven times their worth, with the understanding that he is to transfer to his associates three shares' of stock for every share they buy. His associates then purchase 1250 shares of stock each, paying cash therefor, and Mr. Brown thereupon transfers 3750 shares of stock to each, for a nominal consideration, whereupon they have 5000 shares each at a cost of $1250, or at the rate of 25 cents on the dollar. After trans- ferring the stock to his four associates, Mr. Brown has left just 20,000 shares for his $5000 worth of oil lands, so that he too has his stock at 25 cents on the dollar. Now we see that Brown received 35,000 shares of stock and that the other four pur- chased between them 5000 shares, this leaves a balance of 10, 000 shares' to be sold, and this is to be sold at par, to furnish working capital — the purchasers paying therefor $10,000. By this arrangement the promoters furnish one-half the capital and own four-fifths of the stock; while the rest of the stock- 296 CORPORATION ACCOUNTING '■» • '■; holders furnish the other half of the capital and own only one- fifth of the stock. The transfer of the stock appears on th^ books of the company at an opportune time, 'but the consid^f ' -. eration does not have to appear, and as far as the books are .• concerned they do not reveal anything fraudulent in the trans- ^ action. Of course honest men will not engage irl^this kind of . business, hence the admonition in the beginning of this para- graph — before investing in any of those schemes where they ..^ have "just so many shares of stock to sell,"* be sure you in- ; vestigate the value of the property against which the stock has :\ been issued, as well as the men back of the enterprise ; and ^ later on you will not find out that you have oply a fifth interest *' in a business for which you furnished one-half of the capital. This is no exaggerated picture. It is a matter oi frequent oc- currence, differing only in extent, ratio of inflation and method of execution; and again shows the necessity of State super- vision over this class of corporations. 842. This class of corporate organization is sometimes called a two-floor corporation — the "ground floor" and the "second floor." There are others with so many floors that you have to take an elevator to reach the top. The promoters of these corporations' justify this on two grounds; first, that they are simply capitalizing the future profits, and that inasmuch as they "saw it first," and they are giving outside investors an opportunity to make a fair percentage on their investment, they are doing them no wrong;* second, that as the pro^spects of the company increase the value of its stock increases'. This might be all right if it were true, but a company that is so much over capitalized can not make a fair return on its nom- inal capital ; anyhow, the theories of large profits are all against the top-floor fellows ; and again, the increase in the prospects of a new company is mostly, if not solely, the result of clever booming and advertising. *See paragraph 313. CHAPTER XXVIII: Stock Purchased and Paid for in Notes — Notes Discovered to be Worthless — Stock Held as Collateral to Secure Notes — Securities Declared Forfeited — Stock Resold — Who Gets the Dividend? 843. The following problem appeared in the query column of an office magazine in January 1902. It seems that nobody answered it, and the querist sent it to me for solution. It came from Gainesville, Texas. Corporation Problem. 844. Editor Home Study: Some years ago a company was organized with what they called and treated a paid-up capital of $25,000 and authorized capital of $50,000. This $25,- 000 was paid up in following manner : A put in mdse. accts. and notes to amount of $1,500 B put in merchandise to the amount of 5,000 C gave his note for 1,000 D gave his note for 1,000 E gave his note for 1,000 F gave his note for 1,000 G gave his note for 1,000 845. Stock was issued to each of these $1,000 parties, which stock was attached as collateral security to said notes with an agreement by which they were to pay so much each month on notes. Two of these parties failed to pay for their stock, and it was transferred to the Company; and the two notes of $1,000 not being worth anything were charged off on the loss and gain account at annual settlement and thus the profits of the concern showed up less by $2,000 than they should have been. After the annual meeting a party came along and bought the $2,000 stock which had been returned to the Company. What entry should be made? Should loss and gain account be credited with this $2,000, and held until next dividend is declared, and should the party now buying it par- ticipate in the profits? 298 CORPORATION ACCOUNTING Answer. 846. Loss and Gain, or Profit and Loss, should not have been debited for the par value of the forfeited stock. This for- feiture had nothing to do with the profits earned. Inasmuch as the two parties mentioned received, in fact, nothing in ex- change for the notes which they gave the company, the loss of these notes was no direct loss to the company,* but simply meant a reduction of its outstanding capital. The company retained an equitable right to the stock, inasmuch as it was given to the company as collateral security ; and the interest which it represented in the assets of the corporation, viz : 2-25 could not be transfered to third parties. All the two parties received was dividend rights*^ and voting rights. It must be presumed that at the time the notes were given Bills Receiv- able was debited and Capital Stock credited; and when the notes were found uncollectible and the stock was forfeited. Bills Receivable should have been credited and Capital Stock debited for $2,000. This entry would cancel the notes, reduce the outstanding stock to $23,000, and leave the company as though it had never issued this stock. If the stock had not been put up as collateral, and was sold to innocent parties, the company would lose $2000, because it would be compelled to recognize the transferees as stockholders. 847. When this stock was sold a second time. Capital Stock should have been credited with the nominal value, and the paid-up capital restored to its original amount. 848. Ordinarily, the purchaser would participate in the profits, as these shares could not summarily be deprived of a dividend declared while they were outstanding. If they were purchased near to a dividend period, a premium might be charged to offset the dividend. *Presuming the company collected interest on the notes. *2The interest might equal or exceed the dividend. In any case it should be a fair return on capital. CHAPTER XXIX. Conversion of Partnerships — Issuing Stock to Partners for Their Partnership Interests — Formal Tender of Rights and Interest to the New Corporation — Acceptance by the Corpor- ation — Bill of Sale — Closing the Partnership Books — Opening the New Corporation Books — Complete Formula for Transfer. 849. Technically speaking, a partnership cannot be changed into a corporation. A partnership is not subject to transmutation. Change means death, and a corporation is a new creature whose sole progenitor is the law. A partnership is ''without pride of ancestry or hope of posterity." What we mean then, by changing or converting a partnership into a cor- poration, is transferring the assets, liabilities, business inter- ests of every kind, and goodwill, to a new corporation organ- ized for the purpose of taking them over; which corporation issues to the members of the late partnership share certificates, giving to them an interest in the corporation equal in value to the interests they held in the late partnership. 850. Usually the conversion of a partnership is a simple matter. If the old partners are to be all of the stockholders, it will not be necessary to inventory goodwill, trademarks, etc., but only the tangible assets, inasmuch as they are entitled to all of the profits, no matter what the basis of capitalization. If stock is to be sold to outside parties, goodwill and other intangible assets should be capitalized. If a silent partner in the firm goes into the new corporation he may be provided for by an issue of preferred stock or non-voting stock, or bonds. If the partners' interests vary, a special classification of stock designated A., B. and C. may be issued to each partner, with certain voting privileges attached. This may be varied to any extent under the laws of some States — only such portion of the assets of the partnership as may be desired need be trans- ferred to the corporation. 851. A. B. Smith, C. D. Jones and G. E. Brown are en- gaged in the grocery business under the firm name of Smith, Jones & Co., and they desire to incorporate under the name of "The Staple and Fancy Grocery Co." The capital stock is 300 CORPORATION ACCOUNTING placed at $25,000 — 250 shares of $100 each. They are to receive paid-up stock in the new corporation, at par value, for their in- terest in the business; and G. H. White and I. J. Black, em- ployes, are to be sold 5 shares of stock each for cash, to give them an interest in the new corporation. Capital stock is to be credited for the paid-up capital only. What are the entries necessary to close the books of the old concern and open the books of the new? 852. First take a Trial Balance off the books, next take an inventory, then close all the accounts of loss and gain and all losses and gains on fixed and active assets into the Profit and Loss account; after which close the private accounts of the partners into their respective stock accounts (if a stock account has been kept with each), lastly balance their private stock accounts, and you will have the net investment or net worth of each partner; then prepare a balance sheet or state- ment in the following form : 853. Assets.. Merchandise on hand per inventory $15,000 Store and Office Fixtures , 1,500 Horses and Wagons 500 Accounts Receivable 5,ooo Bills Receivable 1,000 Cash on hand and in bank 1,000 $24,000 Liabilities. A. B. Smith, Stock Account 10,000 C. D. Jones, Stock Account 6,000 E. F. Brown, Stock Account 5,000 Accounts Payable 1,250 Bills Payable i,75o $24,000 Having reached this stage of the proceedings, the partner- ship should make a regular offer to the new corporation some- thing after the following: AND CORPORATION LAW 301 854. October i, 1905. To the president and stockholders of The Staple and Fancy Grocery Co. Gentlemen : — We the undersigned, being all of the members of the firm of Smith, Jones & Co., do hereby submit the following offer for your approval and acceptance : In consideration of the issuance to us of $21,000 of the paid- up capital stock of the Staple and Fancy Grocery Co., and the assumption by it of our outstanding trade liabihties amounting to $3000, we offer to convey to said company by sufficient bill of sale and warranty, all our right, title and interest in and to all of the stock of goods, wares, merchandise, notes, accounts and books of account, trademarks, brands, formulas, horses and wagons, leasehold and goodwill, and all and singular every chattel and thing of value, tangible and intangible, of which the aforesaid firm is now possessed or has lawful claim to. In witness whereof, we have hereunto set our hands and seals the day and year first above written. Signed Seal Seal 855. A meeting of the stockholders of the new company is now held, the foregoing tender is read by the secretary, and a resolution somewhat similar to the following introduced and adopted : 856. Whereas, this company has been organized for the purpose of engaging in the staple and fancy grocery business and Whereas, the firm of Smith, Jones & Co. doing business at Street, has offered to convey to this company all its right, title and interest in and to (here enumerated its chattels) in consideration of $21,000 of the capital stock of this company and the assumption by this company of its indebted- ness amounting to $3000, and Whereas, it appears to be to the best interests of this com- pany to accept said offer, now therefore be it Resolved, that we the stockholders of the Staple and Fancy Grocery Co., in first meeting assembled, accept the offer of Smith, Jones & Co., and that upon their executing a sufficient bill of sale of the aforementioned chattels to this corporation, the president and secretary be, and they are hereby authorized on behalf of this corporation to issue to the members of the 302 COKPORATIOX ACCOUNTING firm of Smith, Jones and Co. $21,000 of the paid-up capital stock of this corporation, in such individual amounts as they shall agree upon and stipulate in said bill of sale. Bill of Sale. 857. Know all men by these presents that in consideration of $21,000 of the paid-up capital stock of the Staple and Fancy Grocery Co. a corporation, the receipt whereof is hereby ac- knowledged, atid other good and valuable considerations to-wit ; the assuming of this firm's indebtedness amounting to $3000 by the 'aforesaid corporation, we the members of the firm of Smith, Jones & Co. by these presents do bargain, sell and convey to the said Staple and Fancy Grocery Co., its suc- cessors and assigns, to have and to hold unto the same forever, all our right, title and interest in and to (here enumerate). And we jointly and severally covenant with the grantee, that we are the lawful owners of the said goods and chattels, that they are free from incumbrance with the exception of the $3000 indebtedness aforementioned, that we have a right to sell the same, and that we will warrant and defend the same against the claims of any person or persons whomsoever. We jointly and severally, by these presents, bind our- selves, our heirs, executors, administrators and assigns forever. We also covenant and agree, one with the other, and with the Staple and Fancy Grocery Co., a corporation, that the in- dividual amounts of stock to which we are entitled, and which we hereby severally acknowledge having received is as fol- lows : A. B. Smith $10,000 C. D. Jones 6,000 E. F. Brown 5,ooo In witness whereof we have hereunto set our hands and seals this first day of October in the year of our Lord 1905. A. B. Smith (Seal) C. D. Jones (Seal) E. F. Brown (Seal) Signed, sealed and delivered in the presence of Witnesses. 885. This bill of sale is read and ratified by the stockhold- ers, and must be sworn to before a notary if it is to be recorded. 859. We are now ready to close the books of the old firm and open the corporation books. AND CORPORATION LAW 303 Closing Entries. 860. First Entry. The Staple & Fancy Grocery Co. Dr. $24000 To Merchandise $15,000 Store and Office Fixtures 1,500 Horses and Wagons 500 Accounts Receivable, per Ledger 5,ooo Bills Receivable, per Bill Book 1,000 Cash, per Cash Book 1,000 This entry closes all the accounts of resource on the old books and opens an account with the new corporation in the old ledger. 681. Second Entry. Sundries Dr. to "The Staple and Fancy Grocery Co." $24,000 A. B. Smtih, Stock Account $10,000 C. D. Jones, Stock Account 6,000 E. F. Brown, Stock Account 5,ooo Accounts Payable, per ledger 1,250 Bills Payable, per bill book i,75o 862. These two entries close all the accounts of resource and liability on the old books and also the account opened with the new company, and they show that the new company has taken over all the assets and all the liabilities of the old concern. 863. Note : The personal accounts aggregating the amount of "Accounts Receivable" and "Accounts' Payable" are closed on the old ledger by a red ink entry, and reopened on the new ledger, giving the page of the old ledger from which they are taken for reference purposes. Opening the Corporation Books. 864. A new company should always mean a new set of books. Following are the Journal entries to open the books. October 1,1905. 865. The Staple and Fancy Grocery Co. capitalized for $25,000, on a basis of 250 shares of the par value of $10 per share, has this day been organized under the laws of Califor- nia, and commenced business by purchasing the stock, fix- tures, goodwill, etc., of the grocery firm of Smith, Jones & Co. 304 CORPORATION ACCOUNTING (See minute book) for $21,000 net, payable in an equal amount of stock at par value as follows : 866. First Entry. Subscription Account Dr. $21,000 A. B. Smith, 100 shares $10,000 C. D. Jones, 60 shares 6,000 E. F. Jones, 50 shares 5,000 To Capital Stock $21,000 For the several amounts of stock subscribed for and issued to the members of the firm of Smith, Jones & Co. in payment of their joint and several interests. 867. Second Entry. Sundries Dr. Merchandise $15,000 Store and Office Fixtures 1,500 Horses and Wagons 500 Accounts Receivable (personal accounts) 5,000 Bills Receivable, per bill book 1,000 Cash 1,000 To Subscription Account $21,000 Smith, Jones & Brown pay their sub- scription by assigning their interests in the old firm for stock in the new corporation. Accounts Payable (personal Accounts 1,250 Bills Payable, per Bill Book 1750 868. When these entries are posted, and the assets and liabilities of the old firm are transferred to the books of the new company. Capital Stock is credited for the amount of stock issued to the old partners. Subscription Account is in balance, and so are the books. When White and Black pay their subscriptions the following entry is made in the Cash Book : 869. Cash Book. Capital Stock $1000.00 G. H. White, 5 shs. $500 I. J. Black, 5 shs. 500 870. Or instead of the Cash Book entry. Subscription Ac- count may be debited through the Journal and Capital Stock credited, and when the stock is paid for. Subscription Account will be credited and balanced. CHAPTER XXX. Organizing a Corporation to Take Over a Partnership Business — Partners Receive Stock at Par for Their Interests — ■* Other Subscribers Pay 50% Cash, and Give Their Notes for Balance — Only Paid-up Capital Appears on Ledger — Reserve for Doubtful Accounts of Partnership — Understanding in Case the Reserve is Insufficient or Excessive — Can Notes be Taken for Stock? 871. A. B. Steele and C. D. Irons are partners in the hard- ware business, and they desire to form a corporation, interest new capital and enlarge their business. The ney company is to be capitalized for $100,000 divided into 1,000 shares of $100 each. Steele and Irons are to take stock in even shares in the new company, for their net investment in the old firm; and E. F. Nutt, G. H. Hammers and I. H. Mower are each to sub- scribe for $10,000 worth of stock, for which they are to pay 50% cash down, and give their notes' for the balance; and the remainder of the stock is to be held for the present. The new investors appraise all the assets of the old firm, and cause all depreciation and worthless accounts to be carried into Profit and Loss Account before the books are closed, with the under- standing that if any of these accounts are subsequently col- lected, Steele and Irons are to have the option of taking stock for the amount; and if any further accounts are lost, they are to have the option of paying the amount of such losses to the corporation or surrendering stock to that amount. A state- ment is then taken off the books : 872. The following statement shows the net value of the sev- eral partners interests in the firm, after making allowance for depreciation, and bad and doubtful accounts. The closing en- tries are the same as in the last example, after depreciation and allowance for bad debts have been carried to Profit and Loss. 306 CORPORATION ACCOUNTING Resources. 873. Merchandise $50750 Fixtures and Office Furniture 2,225 Horses and Wagons 1,000 Accounts Receivable $11,000 Less reserve for doubtful Accounts 500 10,500 Bills Receivable 2,450 Real Estate (store buildings and lots) 3,000 Cash 3,500 Liabilities. A. B. Steele, Stock Account $25,315 C. D. Irons, Stock Account 22,450 Accounts Payable 18,310 Bills Payable 7,350 $73425 $73,425 874. Note — It is a general principle of corporation law that all stockholders shall be treated alike in the sale of stock ; that is, that no stock shall be sold for less than par, and then only for cash or its equivalent; but where all of the stock- holders consent to the taking of notes, there can be no subse- quent complaint on the par^t of the stockholders ; and where the notes' are sufficiently secured, it is presumed that the law would regard them as a cash equivalent. If the stock is at- tached to the notes as collateral it would, ordinarily, be suffi- cient security. Opening the Corporation Books. 875. Before making the first entry, it must be understood that Mr. Steele subscribes for and takes 253 shares of stock, which leaves him a credit balance of $15; and Mr. Irons sub- scribes for and takes 224 shares, which leaves him a credit of $50. This arrangement may be included in the resolution and Bill of Sale. AND CORPORATION LAW 307 876. First Entry. Subscription Account Dr. A. B. Steels, 253 shs. $25,300 C. D. Irons, 224 shs. 22,400 E. F. Nutt, 100 shs. 10,000 G. H. Hammers, 100 shs. 10,000 I. J. Mower, 100 shs. 10,000 To Capital Stock Total Stock Subscription to date. Substitute Entry. $77,700 $77,700 877. Where it is required of the bookkeeper to show the full capital on the ledger, and also the unsold stock, make the following entry: Sundries Dr. to Capital Stock Subscription Account $77,700 A. B. Steele, 253 shs. $25,300 C. D. Irons, 224 shs. 22,400 E. F. Nutt, 100 shs. 10,000 G. H. Hammers, 100 shs. 10,000 I. J. Mower, 100 shs. 10,000 Treasury Stock $22,300 223 shares unsold. 878. Second Entry. $100,000 Sundries Dr. Merchandise Fixtures and Furniture Horses and Wagons Accounts Receivable Bills Receivable Real Estate Cash To Subscription Account — paid by S. & I. as per terms of sale A. B. Steels, bal. after paying his subscription C. D. Irons, bal. after paying his subscription Accounts Payable Bills Payable Reserve for doubtful accounts $50,750 2,225 1,000 11,000 2,450 3,000 3.500 $47,700 15 50 18,310 7,350 500 308 CORPORATION ACCOUNTING The foregoing items represent the assets and liabilities of the firm of Steels & Irons transferred to this corporation as per terms of Bill of Sale and resolutions — see minutes of first meeting. 879. Note — Reserve for doubtful accounts is an offset to "Accounts Receivable" reducing them to $10,500, the amount for which they were taken over. Another Substitute Entry. 880. Instead of the last half of the second entry, the fol- lowing entry may be substituted : To A. B. Steele, credit from old firm's books $25,315 To C. D. Irons, credit from old firm's books 22,450 Accounts Payable 18,310 Bills Payable 7,350 Reserve for doubtful accounts 500 Then another entry like this in the Journal : Sundries Dr. to Subscription $47,700 A. B. Steele $25,300 C. D. Irons 22,400 For amount of their subscription to the Capital Stock of the Company. 880. In either case the old partners would have a credit balance on the new books, which would be closed out by pay- ing them the amount in cash. 881. Subscription account now stands debited for $77,700, the full amount subscribed, and credited for $47,700, the amount paid by Steele and Irons, leaving a balance of $30,000 which is to be paid by the remaining stockholders of the Com- pany. As soon as they pay their 50% in cash, Subscription Account is credited through the Cash Book, and the following Journal entry is made for the balance : 882. Bills Receivable Dr. $15,000 To Subscription Account $15,000 Nutt, Hammers and Mower give their notes for $5000 each in payment of balances due on their subscriptions — see Notes , Bill Book, page 883. This last entry balances the Subscription Account and shows the company with a paid-up Capital of $77,700. AND CORPORATION LAW 309^ Collecting Bad Debts and Issuing More Stock. 884. Suppose that the corporation collects $200 of the old firm's accounts which were called doubtful, and that Steele and Irons arrange between themselves to take one share each therefor; what entry?? Here the reserve for Doubtful Ac- counts has been reduced $200 by the actual payment of some of the doubtful accounts ; so after crediting the accounts paid, through the Cash Book, we make the following 885. Journal Entry. Reserve for Doubtful Accounts $200 To Capital Stock $200 Steele and Irons receive one share of stock each, on account of doubtful debts collected, and for which reserve was made. 886. If no more doubtful accounts are collected, the re- maining ones are balanced into "Reserve" and the account closed. 887. This entry could be varied if Capital Stock was' al- ready credited with the full capital, and a so-called Treasury Stock Account debited for the unsold portion. Losing More Accounts and Forfeiting Stock. 888. Suppose that the new company loses $200 more of the old firm's accounts, arid that according to agreement the old partners decide to forfeit one share of stock each to the company, what entry? 889. Capital Stock Dr. $200 To Profit and Loss $200 Steele and Irons forfeit one share of stock each to make up for bad accounts turned over to the Company as an Asset. 890. The reason for crediting Profit and Loss is that this account has, or will be debited for the accounts lost. 891. The reason for debiting Capital Stock Account is that the paid-up Capital has been reduced, and this $200 stock is as though it were never issued. 892. If Steele and Irons decided to exercise the alternative option, they could pay the accounts that were lost, and let their subscriptions stand. This would be the simplest and best way, and would obviate the necessity of them transferring two shares back to the company. ;310 CORPORATION ACCOUNTING Doubtful Accounts. 893. In transferring the Accounts Receivable from the old j ledger to the new, the doubtful accounts should also be trans- *i ferred, so that they may not be lost track of, and that diligent effort may be made to collect them, and the interests of the ■old firm's members be protected. Accounts that are consid- ered worthless should not be transfered. The doubtful ac- counts could be itemized in a suspense account. CHAPTER XXXI. Partners Organize a $100,000 Corporation — Sell Their Firm's Interest to the Corporation for $75,000 in Stock — Cor- poration Sells Remaining $25,000 Stock for Cash — Two Ways of Opening the Books. 894. A partnership with a net capital of $75,000 is con- verted into a corporation with a capital of $100,000. Paid-up stock is issued to the partners for $75,000, and the remaining $25,000 worth of stock if sold for cash to increase the working capital ; what entry? 895. After the old books have been closed, and the assets and liabilities of the old firm have been transferred to the books of the new corporation, some accountants would make the following Journal entry: 896. Subscription Account $100,000 (Here give names.) To Capital Stock $75,000 To Working Capital* 25,000 897. This is given simply to illustrate a rather peculiar method of dividing the capital. The inference is that the com- pany has' an operating cash capital of $25,000 over and above its plant, material, etc., but as the company operates on its plant, material, etc., just as much as on its cash capital, and as its cash capital will in all likelihood be, at least partially, *Vide chaBter XXV. AND CORPORATION LAW 311 converted into material, etc. ; there is no good reason for open- ing a separate account for it. As long as the capital is fully paid up, as in this case, it should be represented by one ac- count, and no good, but only confusion, can come out of di- viding it. Furthermore, the Capital Stock Account does not represent either the nominal or actual capital of the company, and this fact alone should condemn the method. The Capital Stock Account must under no circumstances be less than the paid-up capital. The correct entry would be : 898. Subscription Acocunt Dr. $100,000 To Capital Stock $100,000 giving names of all subscribers to the Capital Stock, and the separate amounts of their subscriptions, or, to make the entries for the partners subscriptions through the Journal, and the Cash Subscriptions through the Cash Book, as illustrated in Chapter XXX; or if partners receive credit on open account for their respective equities in the net assets turned over, then let the entry be: 899. Sundries Dr. To Capital Stock. CHAPTER XXXII. A Legerdemain Performance — Converting a Partnership That Was Barely Solvent Into a Corporation With a Paid-up Capital of $10,000 — Not An Additional Dollar Invested in the Enterprise — Transferring the Business — Opening the Corpor- ation's Books — Entries in Detail — An Actual Occurrence. 900. The facts leading up to this rather novel and singular proposition were substantially as follows : Two men engaged in partnership in a certain mercantile business — one an urban youth with experience and presumed ability, the other a rustic gentleman inexperienced but wealthy. The young man's capital consisted of his" experience, so the older gentleman took him into partnership, and on the 312 CORPORx^TION ACCOUNTING strength of his credit at the bank, borrowed $10,000 for the partnership, with which to commence business. The young man managed the business, obtained quite a credit, and got pretty well into debt. The older gentleman learned this, and knowing that the firm's liabilities would have to be met by him, he proceeded to investigate with a view to protecting himself. He discovered that the liabilities of the firm were about $18,000, and the assets were appraised for just an equal amount. The liabilities, of course, included the note hereto- fore mentioned. This left the firm in the same financial con- dition in which it commenced business — possessing and owing equal amounts, — assuming the appraisement to be correct. The old gentleman was naturally a little bit scared at the pros- pect. His partner had placed large orders for goods, and he de- sired to dissolve the partnership, incorporate the business, limit the young man's powers, and reduce his personal liability. He proposed to countermand the orders placed by the firm, form a corporation with a paid-up capital of $10,300 — he and his partner to buy and pay for $10,000 worth of stock in cash — $5000 each, and three others to take $100 worth of stock each. He then proposed to take over all of the assets and assume all of the liabilities of the partnership, to pay off the firm's note for $10,000, and yet not put another dollar into the business, nor get another dollar from the bank. How did he do it and what were the entries ? 901. First the corporation was formed — the partners and three others being named as directors in the Articles of Incor- poration — the partners subscribing for $5000 each and the others for $100 each of the capital stock. Next the partnership offered to the corporation all of its assets in consideration of the nominal sum of $1.00 and the assumption of its liabilities; this offer the corporation accepted, acquiring the partnership business. The writer happened to represent the bank and the old gentleman through the next stage of the business. The old gentleman drew his personal check for $10,000 which he turned over to the corporation in payment of 100 shares of stock which he had immediately issued (50 shares each) to liimself and partner. He then took his partner's note for $5000, with the stock attached to it as collateral security. Next he drew the corporation's check for $10,000 in favor of the bank, and also signed a note for $10,000. His check, the cor- poration's check and the note were all handed to the writer after being properly endorsed. I made out a deposit tag to his credit for $10,000, attaching his note thereto, another one to the corporation's credit for $10,000, attaching his personal AND CORPORATION LAW 313 check thereto. I then offered his note to the manager of the bank, which he immediately accepted, giving him credit there- for, then deposited his check to the credit of the corporation, and handed the manager the corporation's check for $10,000 to cancel the old firm's note which it had assumed. In this way the partners paid for $10,000 stock without investing an additional dollar, the old partnership note was liquidated, and the bank and our rustic friend stood in exactly the same rela- tion to each other as before incorporating. Opening the Corporation Books. Journal. 902. First Entry. Sundries Dr. Subscriber No. i $5000 Subscriber No. 2 5000 Subscriber No. 3 100 Subscriber No. 4 100 Subscriber No. 5 100 To Capital Stock $10,300 The above represents the total subscription to the Capital Stock of this company. 903. Second Entry. Sundries Dr. Merchandise $10,000 Fixtures, Furniture, etc. 1,000 Bills Receivable 1,500 Accounts Receivable 5,ooo Goodwill I Cash — see cash book 500 To Bills Payable $10,000 To Accounts Payable 8,000 To Partners' Stock Acct. i The above schedule of assets and liabilities were taken over from the firm of ''blank," per Bill of Sale and resolution — See minutes of first meeting. 904. Have substituted numbers for the names of the cor- porators, and "Partners' Stock Account" for the old firm name. The subscribers were all charged in one account, a line to each name and amount. 314 COEPOKATION ACCOUNTING 905. Dr. Cash Book. Cr. Cash on hand received from old firm $ 500 Subscriber No. i 5000 Subscriber No. 2 5000 Subscriber No. 3 100 Subscriber No. 4 100 Subscriber No. 5 100 10800 To balance on hand 799 Partners in Payment for Goodwill Bills Payable— Paid old firm note Balance $ I 10,000 799 10800 906. When the foregoing entries were all posted, Sub- scribers Account, Bills Payable, and Partners Account were all balanced; and a statement taken off the books for the credit agencies showed the following condition : 907. Assets. Merchandise $10,000 Furniture, Fixtures, etc. 1,000 Bills Receivable 1,500 Accounts Receivable 5,000 Goodwill I Cash on hand 799 Liabilities. Accounts Payable $ 8,000 Capital Stock 10,300 $18,300 $18,300 908. This made a good showing for the new corporation. It showed assets amounting to $18,300 and trade liabilities of only $8,000. In other words, it had an unimpaired capital of $10,300. The old gentleman's position is this : He can not lose more than $10,000 until the assets shrink below the trade liabilities, and even if they do (under the California law) he can lose only AND CORPORATION LAW 315 his proportion of any further loss. If the corporation succeeds he has stock to secure him for one-half the amount borrowed, and his old partner is paying him interest on this. CHAPTER XXXIII. Merging Two Partnerships Into a Corporation — Newspa- per and Job Printing Business Consolidated — Assets Turned Over at Appraised Valuation — Depreciation and Bad Debts Written Off, and Reserve Created for Doubtful Accounts — Bonus of $1000 in Stock Paid to Promoter — Statement and Entries in Detail — Closing Reserve Account. 909. A. D. Webb and C. D. Pressley are engaged in pub- lishing a daily and weekly newspaper, known as the "Daily and Weekly Reflex" and E. F. Ashland, G. H. Argyle and I. J. Sterling are partners in the Book and Job Printing business. K. L. Bond, manager for Webb & Pressley, brings about an understanding between the two firms by which they agree to consolidate their plants and their capital, and form a corpora- tion to be known as ''The Reflex Publishing Company." The Capital Stock is placed at $150,000, divided into 3,000 shares of $50 each. The members of the respective partnerships' are to receive stock in the corporation in proportion to their hold- ings in the old firms, and Mr. Bond is to receive a bonus of 20 shares of paid-up stock for his services in forming the new company. No more stock is to be sold for the present. Webb & Pressley have had their business divided into departments, each department having its own account of income and ex- pense, and they desire that this system shall prevail in the new company. An advertising ledger has been kept, and separate subscription ledgers for the divisions of the circulation into departments; what are the entries? 316 CORPORATION ACCOUNTING Statement of Webb & Pressley. 910. Assets. Plant Machinery, etc., appraised at $40,000 Associated Press Franchise 5,ooo Materials and Supplies 3,000 Horses and Buggies 1,000 Furniture and Fixtures i>50o Advertising Ledger (due on advertising) 10,500 Subscription Ledger-Routes (inventoried) 3,000 Subscription Ledger-Mail (inventoried) 1,000 Subscription Ledger-Weekly (inventoried 1,500 News Agencies • 1,000 Cash 8,000 $75,500 Liabilities. A. B. Webb, Stock Account $40,000 C. D. Pressley, Stock Account 32,000 Accounts Payable 3,ooo Reserve for doubtful accounts 500 $75,500 911. N. B. The parties to the consolidation agree that, inasmuch as no outsiders are coming into the corporation, no account shall be taken of the goodwill of either firm. Statement of E. F. Ashland & Co. 912. Assets. Plant, Machinery, etc., appraised at $25,000 Raw Material and partly completed work 4,000 Accounts Receivable 3,200 Bills Receivable 1,000 Cash 2,000 Liabilities. E. F. Ashland, Stock Account $12,000 G. H. Argyle, Stock Account 10,000 I. J. Sterling, Stock Account 10,000 Accounts Payable 2,000 Bills Payable 1,000 Reserve for doubtful accounts 200 $35,200 $35,200 913. Close the partnerships books as in Chapter XXIX. AND CORPORATION LAW 317 In this case any subsequent gain or loss on account of doubt- ful accounts is to accrue to, or be borne by, the new company. All worthless accounts, and depreciation of every kind, were written off before the foregoing statements were made up. Opening the Books of the Reflex Publishing Company. 914. First Entry. Sundries Dr. Subscription Account, Subscribed Capital $104,000 Unsubscribed Capital 46,000 Plant turned over by Webb & . , Pressley $40,000 By Ashland & Co. 25,000 65,000 Press Franchise — Webb & Presley 5,000 Materials, etc. — Webb & Presley 3,000 Ashland & Co. 4,000 7,000 Horses and Buggies — Webb & Presley 1,000 Furniture and Fixtures — Webb & Presley 1,500 Accounts Receivable — Webb & Presley 10,500 Ashland & Co. 3,200 13700 1,000 Bills Receivable— Ashland Co. Subscription Accounts — Routes, Webb & Presley 3,000 Sub. Daily Mail— Webb & Presley 1,000 Sub. Weekly " " " 1,500 News .igents " " " 1,000 Cash " '' " 8,000 Ashland & Company 2,000 10,000 To Capital Stock $150,000 To Subscription Account 104,000 A. B. Webb 800 shs. $40,000 C. D. Presley, 640 shs. 32,000 E. F. Ashland, 240 shs. 12,000 G. H. Argyle, 200 shs. 10,000 I. J. Sterling, 200 shs. 10,000 Accounts Payable W. & P. 3,000 Accounts Payable A. & Co. 2,000 5,000 Bills Payable A. & Co. 1,000 Reserve for doubtful accounts 700 $260,700 $260,700 318 CORPORATION ACCOUNTING 915. The above entry places all the assets and liabilities of the two firms on the new company's books. It shows the subscribed capital of $104,000 paid up. It also shows the un- subscribed capital, and the full capital of the company. This, as so often explained, is not necessary, but is frequently de- sired by directors. In making up statements, this negative entry of $46,000 does not appear, but is simply deducted from the authorized capital and the difference stated as "Paid-up Capital." 916. The "Accounts Receivable" represent the advertis- ing and Job Printing Accounts. These may be kept in the same ledger and governed by one Controlling Account. It is not desirable to have two ledger accounts with the same customer. The segregation of the items to the credit of the separate de- partments can be made in the posting mediums. A Controlling Account is also kept for each subdivision of the Subscription Department. The manner of accounting for the subscription department is, from the very exigencies of the case, radically different from the others; but in no department can greater economic methods of accounting be introduced. 917. Second Entry. Incorporating Expense $1,000 To Unsubscribed (Treasury) Stock $1,000 K. L. Bond receives a bonus of 20 shares of paid-up stock for his services in bringing about the formation of the new company. 918. Some states permit of stock being issued against ser- vices performed ; others do not, for the reason that the services are too frequently incommensurate with the price paid, and that service is an intangible contribution to the capital stock or trust fund of a corporation. 919. This "Incorporation Expense" must necessarily stand on the books as an asset until the close of the first fiscal period, when it may be written off in whole, or in part, into Surplus Account. 920. N. B. A "Lost Accounts" book should be kept, and when an account is lost, it should be examined to ascertain the proportion of it belonging to each department. These pro- portions are then entered under department headings in the ''Lost Accounts" book, and at the end of each period each de- partment is ch.arged for its share of the loss. AND CORPORATION LAW 319 Closing Reserve Account. 921. All losses on account of bad debts may be closed into ''Reserve for Bad and Doubtful Accounts/' and the balance of this account closed into Profit and Loss. A new Reserve based on past experience can then be created for the ensuing period, by debiting Profit and Loss and crediting Reserve Ac^ count; or losses may be carried direct to Profit and Loss Ac- count from whatever account or accounts they repose in at the close of the period, and the Reserve Account adjusted with Profit and Loss Account for the next period — the adjustment being based on whether previous reserves have been too high or too low, extraordinary circumstances being left out of con- sideration. CHAPTER XXXIV. Consolidating Two Mining Companies — Consolidation As- sumes All the Assets and Liabilities of Constituent Companies — Issuing Consolidated Stock at Intrinsic Value of Old Com- panies' Stock — Arriving at This Value — One Company Gets Preferred, the Other Ordinary Stock — Closing the Old Books and Opening the New — Comprehensive Statement of Assets and Liabilities — Principles Extended and Applied to Any Number, or Any Class of Corporations. 922. There are two ways in which a consolidation of two corporations may be formed; one is by dissolving one of the old companies and amending the charter of the other; the other way is to dissolve both constituent companies and form a new company. 923. The Mascot Mining Company and The Columbus Mining Company own contiguous properties, and they desire to consolidate for the purpose of operating under one man- agement and with one set of stamps. The Mascot Mining Company is capitalized for $100,000 — 1,000 shares of $100 each — $80,000 of which is subscribed and paid for, and no entry 320 CORPOEATION ACCOUNTING appears on the books for the balance and The Cohimbus Min- ing Co. is capitaHzed for $150,000 — 15,000 shares of $10 each — $100,000 paid up and $50,000 in so-called treasury stock. They are to consolidate under the name of the Consolidated Mascot Mining Company. The capital stock is placed at $250,000, 2,500 shares of $100 each, and the stockholders are to receive stock in the new company in proportion to the appraised value of their property in the old companies ; the unsubscribed stock is to appear on the books as Treasury Stock. In addition to this, the stockholders in the Mascot Mining Company are to receive 5 per cent cumulative preferred stock, instead of ordi- nary stock, on account of the advanced state of development of the Mascot and the better shape of the company. The Con- solidated Company is to assume all the liabilities of the old companies. What are the entries to close the books of the old companies and open the books of the new company? 924. Statement of the Mascot Mining Company. Resources Book Value Appraised \ 'alue Mine— "The Mascot" $50,000 $75,000 Machinery and Tools- 40,000 30,000 Stores and Supplies 1,500 2,000 Buildings and Lumber 1,500 2,000 Water Rights 1,000 1,000 Real Estate — Timber Land 1,000 1,000 Amalgam and Ore 3,000 3,000 Cash 6,000 6,000 $I04,( DOO- $120,000 Liabilities Accounts Payable $5,000 $5,000 Wages Due 5,000 5,000 Capital Stock, paid up 80,000 80,000 Surplus Account 14,000 30,000 $I04,( DOO- $120,000 925. It will be seen from the above statement that the company has' a net surplus of $30,000 over its original invest- ment, on its appraised valuation; in other words it has $1.37^ for every $1 invested, and it is to receive $1,375^2 worth of stock in the consolidated company for every dollar's worth of stock in the old company. AND CORPORATION LAW 321 926. To put it in another way : Paid-up Capital $80,000 Surplus over all Liabilities 30,000 Actual Capital, payable in Consolidated Stock $1 10,000 Entries to Merge This Company and Close Its Books. 927. First Entry. The Consolidated Mascot Mining Co. Dr. $120,000 To Mine Account $75,ooo " Machinery and Tools 30,000 " Stores and Supplies 2,000 " Buildings and Lumber 2,000 " Water Rights 1,000 " Real Estate 1,000 " Amalgam and Ore 3,ooo " Cash 6,000 Assets of this company transferred to the Consolidated Mining Company, per resolution of Stockholders' Minute Book, page This entry opens' an account with the Consolidated Com- pany and balances Water Right, Real Estate, Amalgam and Cash Accounts. Mine Account, Stores and Supplies, and Buildings have credit balances of $25,000, $500 and $500 re- spectively, and these are balanced by the 928. Second Entry. Sundries Dr. to Profit and Loss $26,000 Mine Account $25,000 Stores and Supplies 500 Buildings and Lumber 500 For increase in valuation per appraisement. This' balances all the resource accounts excepting Machin- ery and Tools, on which there is a debit balance of $10,000. This is closed by the 929. Third Entry. Profit and Loss Dr. $10,000 To Machinery and Tools $10,000 For depreciation on machinery and tools per appraisement. 322 CORPORATION ACCOUNTING 930. Fourth Entry. Sundries Dr. to the Consolidated Mining Co. $120,000 Wages Accrued $ 5,000 Accounts Payable 5,ooo Capital Stock 80,000 Surplus Account 30,000 For liabilities of the Mascot Mining Company transferred to and assumed by The Consolidated Company. 931. It will be noted that in the second entry, Profit and Loss Account is credited with a gain of $26,000; and in the third entry it is debited with a loss of $10,000, leaving a credit in this account of $16,000. It will also be noted that before making the closing entries Surplus Account had a credit of $14,000 and in the fourth entry it is debited with $30,000, leav- ing a debit balance on this account ot $16,000, so we make a 932. Fifth Entry. Profit and Loss Dr. $16,000 To Surplus Account $16,000 For net gain in the surplus of The Mascot Mining Com- pany, per appraisement. 933. This closes all the accounts on the books, and shows that the assets and liabilities' of the company have been trans- ferred to the Consolidated Company. It only remains now for the stockholders to surrender their stock and have all the accounts closed on the Stock Ledger. 934. All the details of the transfer should be spread on the minutes of both companies — the tender of the Mascot Com- pany to the Consolidated, the resolution of the Consolidated Company accepting the tender, the Bill of Sale conveying all the property and chattels and so forth. For outline of these forms see Chapter XXIX, paragraph 854 et seq. in conversion of partnerships. The Bill of Sale should either be recorded, or filed in the archives of the Consolidated Company. AND CORPORATION LAW 323 935. Statement of the Columbus Mining Company. Resources Book Value Appraised Value Mine— "The Cohimbus" $90,000 $75,000 Machinery and Tools 25,000 24,000 Stores and Supplies 2,500 2,500 Buildings and Lumber 2,000 1,500 Water Rights 1,500 1,000 Amalgam and Ore 1,500 1,500 Cash 2,500 2,500 Treasury Stock 50,000 Impairment of Capital (Red ink) 5,000 ^1*7 tf ,000 $113,000 H>^7b> Liabilities Book Appraised Bills Payable $ 5.000 $ 5,000 Wages Accrued 8,000 8,000 Capital Stock 150,000 100,000 Surplus Account 12,000 /-v/-v/-i Cb T T -^ r^r\r^ 936. It will be observed from the above statement that capital stock was credited for the full capital and that treasury stock? was debited for the unsold stock. In making the ap- praisement treasury stock was not figured as an asset, neither was its equivalent in capital stock figured as a liability — these amounts negative each other. It will be further observed that the books' showed a surplus of $12,000, but the assets shrunk $17,000 on appraisement, so that instead of the assets exceed- ing the liabilities by $12,000 they fall short of the liabilities by $5,000, hence the capital is impaired in the amount of $5,000, and this explains the last entry on the statement of resources — it simply took that much to balance the liabilities. We now deduce the following statement : 937. Authorized Capital $150,000 Treasury Stock? (unsold) 50,000 Paid-up Capital 100,000 Impairment of Capital 5,ooo Actual Capital (payable in Consoli- dated Stock) $95,000 From this v/e see that the stockholders will receive 95 cents on the dollar for their stock, or 95 cents worth of new stock for every dollar's worth of the old stock. S24 COKPOEATION ACCOUNTING Entries to Close the Books of the Columbus Mining Company. 938. First Entry. The Consolidated Mascot Mining Co. Dr. $108,000 To Mine Account $75,000 " Machinery and Tools 24,000 " Stores and Supplies 2,500 Buildings and Lumber 1,500 " Water Rights 1,000 " Amalgam and Ore 1,500 " Cash 2,500 For appraised value of assets transferred to The Consol- idated Mascot Mining Company as per bill of sale and reso- lution, etc. 939. Second Entry. Profit and Loss Account Dr. to Sundries $17,000 To Mine Account $15,000 " Machinery and Tools 1,000 " Buildings and Lumber 500 " Water Rights 50a For loss on above resources as shown by appraisers, state- ment: (This entry balances these four accounts). 940. Third Entry. Sundries Dr. to Sundries. Capital Stock $150,000 Surplus Account 12,000 Bills Payable 5,000 Wages Due 8,000 To Treasury Stock $ 50,000 " Profit and Loss 17,000 " The Consolidated Mascot M. Co. 108,000 This balances all the accounts on the Columbus Mining Company's books. AND CORPORATION LAW 325 941. It will be noticed that the Consolidated Company was to assume all the liabilities of the Columbus, and these liabili- ties are : Bills Payable $5,ooo Accrued Wages 5,ooo Capital Stock, appraised value (due stockholders $95,000 Total Liabilities $105,000 942. Substitute for Third Entry. Instead of the Third Entry, the following entries may be made. First. Capital Stock Dr. $150,000 To the Consolidated M. M. Co. 95,ooo Appraised value of stock. Treasury Stock 50,000^ Formerly credited to Capital Stock. Profit and Loss' 5,ooo Impairment of Capital now charged to Capital Stock Account. 943. This entry balances the Capital Stock and Treasury Stock Accounts, and credits the account opened with the con- solidation for the amount of stock it is to issue for the net capital of the Columbus Company and it reduces Profit and Loss Account to $12,000. 944. Second. Sundries Dr. to Consolidated M. M. Co. $13,000^ Bills' Payable $5,ooo Accrued Wages 8,000 945. This entry balances all the liabilities and also the ac- count opened with the Consolidated Company; the only ac- counts now open are Surplus Account, which is credited with $12,000, Profit and Loss which is debited with $12,000, and these are closed by the following entry : Surplus Account $12,000 To Profit and Loss Account $12,000- 326 CORPORATION ACCOUNTING Entries to Open the Books of the Consolidated Mascot Mining Company. 946. Statement of Assets and Liabilities at commence- ment of business. ASSETS APPRAISED. Company- Mines Mach'y Stores Build- ings Water Right Real Estate Amal- gam Cash Total Mascot Columbus $75,000 75,000 130,000 24,000 ?2,000 2,500 12,000 1,500 $1,000 1,000 $1,000 $3,000 1,500 $6,000 2,500 $120,000 108,000 150,000 54,000 4,500 3,500 2,000 1,000 4,500 8,500 228,000 LIABILITIES. Company Capital Stock Accounts Payable Bills Payable Wages Due Totals Mascot $110,000 95,000 $5,000 $5,000 $5,000 8.000 $120,000 108,000 205,000 5,000 5,000 13,000 228,000 947. A statement in this form can be made up for any number or class of constituent corporations entering a merger. The headings vary with the nature of the business. It is from this statement that the opening entries are formulated. 948. Condensed Statement Mascot Mining Co. Appraised value of assets of The M. M. Co. $120,000 Liabilities, exclusive of Capital Stock 10,000 Value of stock to be used to stockholders $110,000 949. Condensed Statement Columbus Mining Co. Appraised value of assets of C. M. Co. $108,000 Liabilities exclusive of Capital Stock 13,000 Value of stock to be issued to stockholders $95,000 AND CORPORATION LAW 327 950. First Entry. Sundries Dr. to Capital Stock $250,000 The Mascot Mining Company $110,000 The Columbus Mining Company 95,000 Unsubscribed Treasury Stock 45,ooo For 1,100 shares and 950 shares issued respectively to The Mascot Mining Company and The Columbus Mining Com- pany, for property of said companies transferred to The Con- solidated Columbus-Mascot Mining Company, per deeds, etc., on file, etc., and minutes, page. . . ., also 4,500 shares reserved to be sold as the directors may order. 951. Second Entry. Sundries Dr. to Sundries. Mines The Mascot $75,ooo The Columbus 75,ooo $150,000 Machinery & Tools By Mascot Co. By Columbus Co. Stores & Supplies By Mascot Co. By Columbus Co. Buildings Etc. By Mascot Co. By Columbus Co. Water Rights By Mascot Co. By Columbus Co. Real Estate By Mascot Co. Amalgam and Ore By Mascot Co. By Columbus' Co. Cash By Mascot Co. By Columbus Co. To Accounts Payable — Mas- cot Company Bills Payable — Columbus Company Wages Accrued — Mascot Co. Columbus Co. The Mascot Mining Co. 110,000 Net value of property transferred. The Columbus Mining Co. 95.000 Net value of property transferred. 30,000 24,000 54,000 2,000 2,500 4,500 2,000 1,500 3,500 1,000 1,000 2,000 1,000 3,000 1,500 4,500 6,OOQ 2,500 8,500 $5,000 5,000 5,000 8,500 13,000 328 CORPOEATION ACCOUNTING For Assets and Liabilities of The Mascot Mining Company and The Columbus Mining Company transferred to The Con- solidated Mascot Mining Company as per Bill of Sale, Reso- lution, etc., see minutes of first meeting. 952. Note I. The usual preamble would of course pre- cede the first entry. 953. Note 2. If the stock coming to the companies form- ing the Consolidated Company should not come out an even number of shares, and it is not desired to issue fractional shares, an understanding may be arrived at whereby one would receive the fraction more and the other the fraction less than it was entitled to, the one paying and the other receiving the cash difference; a similar arrangement could be made re- garding the distribution of stock among the stockholders. Another but more laborious method would be to credit each stockholder, or pay them in cash pro rata in excess of the even number of shares issued to them. 954. Now open the new company's Stock Ledger, keep separate accounts for the preferred and common stock. Issue certificates to the owners of common stock and preferred cer- tificates to the owners of preferred stock; in other respects treat all acocunts same as in any ordinary corporation. 955. Another way to open the books of the Consolidated Mascot Mining Company, showing Assets and Liabilities same as in the foregoing example : Sundries Dr. to Sundries. Subscription Account, amount subscribed $205,000 Unsubscribed Treasury Stock 45,ooo Mines — of both companies $150,000 Machinery and Tools — both companies 54,ooo Stores and Supplies — both companies 4,500 Buildings and Lumber — both companies 3,500 Water Rights — both companies 2,000 Real Estate, The Mascot Company 1,000 Amalgam — both companies 4,500 •Cash — both companies 8,500 To Capital Stock $250,000 Accounts Payable Mascot Co. 5,ooo Accrued Wages — both companies 13,000 Subscription Account, paid in prop- erty of both companies 205,000 $478,000 $478,000 AND CORPORATION LAW 329 956. This method is the shortest, but the first method is the most explanatory, and as the books are to be opened but once it is best to make the opening entries as plain and as ex- planatory as possible — this is one case where economy should not be carried too far. 957. N. B. As noted so many times, the unsubscribed stock does not have to appear on the books, and it would be better to leave it out and drop an equal amount off the credit to Capital Stock. 958. Sometimes the names of all the stockholders and the amount of their subscriptions are written on the Journal, but in a case of this kind such a practice is not to be commended, and where the names are numerous it is to be condemned. The subscribed stock is fully paid, the names and number of shares are given on the Stock Ledger and it is wholly unnecessary to repeat them here. CHAPTER XXXIV. Two Companies Consolidate Their Assets — Consolidation Assumes No Part of the Liabilities — Issuing $250,000 Stock Against $228,000 Assets — Excess Pro-rated on Basis of As- sets — Liquidating Liabilities With Consolidated Stock — Clos- ing the Old Corporations' Books and Opening the Books for the Consolidation. 959. Suppose that The Consolidated Mascot Mining Com- pany had taken over all the assets of the two companies, but did not assume any part of their liabilities, that each of the old companies had to liquidate its own liabilities and that the Consolidated Company was to issue its full capital to the old companies in consideration of the assets turned over by them ; what are the entries to open the books of the new company and close the books of the old, it being understood that the old companies will liquidate their liabilities with stock of the Consolidated Company? 330 CORPORATION ACCOUNTING 960. The first thing to do is to find out how much stock each of the old companies is to receive for the assets' it turns over, and this we find by the following method : Par value of Consolidated Stock $250,000 Appraised value of old companies assets 228,000 Stock to be issued in excess of assets 22,000 This is an increase of 9 37-57 per cent and as the increase of each company is proportionate we arrive at the following statement by simple proportion. 961. Constituent Companies Par Value of Stock Appraised Value of Assets Excess of Stock Over Assets Amt. of Stock to be Issued Mascot Co. Columbus Co. $100,000.00 150,000.00 $120,000.00 108,000.00 $11,578.95 10,421.05 $131,578.95 118,421.05 Totals $250,000.00 $228,000.00 $22,000.00 $250,000.00 962. We now have the amount of consolidated stock to be issued to each of the old companies, but it will be observed that it does not come out in even shares ; and as all of the stock is to be issued we give the odd share to the company whose balance above an even number of shares is the largest percent- age of one share — in this case to The Mascot Company, whose balance above 1,315 shares is $78.95. 963. Some captious critic may object to this on the ground that each company should receive its exact proportion ; but the proportion of each stockholder in a fraction of a share is so infinitesimal as not to be worthy of consideration, much less the labor and trouble involved ; for by dispensing with this fractional share we have an even number of shares' to divide among the stockholders of each company, and in the division each stockholder's portion terminates in a decimal fraction in- stead of a vulgar fraction. This makes the division easy and also makes easy the apportionment of dividends; further no stockholder loses a cent, as we shall see later on. 964. The following table will show the basis of distribu- tion of the consolidated stock to the several stockholders of the old corporation. AND CORPORATION LAW 331 965. Constituent Companies Capital Issued by Old Corporation Capital to be Issued by Mew Corporation Percentage of Increase Mascot Columbus $ 80,000.00 100,000.00 $131,600.00 118,400.00 64M% 18 2-5% Totals $180,000.00 $250,000.00 966. That is, the holder of every dollar's worth of Mascot stock gets $1.64^ in Consolidated, and the holder of every dollar's worth of Columbus stock gets $1.18 2-5 in Consoli- dated; or on a share basis, for every share of Mascot stock there is issued 1.645 shares of Consolidated and for every share of Columbus stock there is issued 1.184 shares of Consolidated. Opening the Consolidated Co. Books. 967. First Entry. $250,000 Sundries Dr. to Capital Stock Mascot Mining Co., 1,316 shares at $100 $131,600 Columbus Mining Co., 1,184 shares' at $100 118,400 Consolidated Company's stock issued to the above com- panies in payment for respective assets of said companies. 968. It will be noted that the Mascot Company has re- ceived $21.05 worth of stock more than it is entitled to, and The Columbus Mining Company has received $21.05 worth less, so The Mascot Company pays over $21.05 fo^ "the excess of stock received, which amount is in turn paid over to The Columbus Company. 970. Note : The above entry transfers all the assets of the old companies' to the books of The Consolidated Company, balances the accounts opened with the old companies and credits capital stock with the full capital. The debit on Good- will or Bonus Account* is carried on the books' until the sur- plus is large enough to wipe it out, or it is gradually written off. *Vide paragraph 418. 332 CORPORATION ACCOUNTING 969. Second Entry. Sundries Dr. Mnies Mascot Columbus Mascot Columbus Mascot Columbus Mascot Columbus Mascot Columbus Mascot Mascot Columbus Mascot Columbus fining Co. [ining Co. $75,000 75,000 $150,000 Machinery 30,000 24,000 54,000 Stores 2,000 2,500 4,500 Buildings 2,000 1,500 3,500 Water Rights 1,000 1,000 2,000 Real Estate Amalgam 3,000 1,500 1,000 4,500 Cash 6,000 2,500 8,500 Goodwill or Bonus To Mascot } Columbus M 22,000 $131,600 $118,400 [. $250,000 $250,000 For tangible assets and goodwill of the Mascot and Colum- bus Mining Companies transferred to The Consolidated Com- pany in full payment for consolidated stock. Second Method. 971. Suppose that the directors do not wish a Goodwill or Bonus Account to appear on the books, for the reason that it has to be carried on the books as an asset and must eventu- allly be written off into Surplus Account, what then? 972. In such an event they have to place an increased or fictitious value on the assets of the company equivalent to the amount of the Goodwill or bonus. We will now suppose that they place this increased value on the mines, and then we have the following statement : AND CORPORATION LAW 333 973- The Mascot Mine The Columbus Mine Appraised Value $75,000.00 75,000.00 Increased Value $86,578.95 85,421.05 $150,000.00 $172,000.00 First Entry same as first method. 974. Second Entry. Sundries Dr. Mines — both companies $172,000 Machinery — both companies 54,ooo Stores, etc. — both companies 4,500 Buildings — both companies 3,5oo Water Rights — both companies 2,000 Real Estate — The Mascot Co. 1,000 Amalgam — both companies 4,500 Cash — both companies 8,500 To Mascot Mining Company To Columbus Mining Company $131,600 118,400 $250,000 $250,000 (With explanations.) Closing the Mascot Books. 995. Following are the book values of all accounts" stand- ing open on the books of the Mascot Mining Company : Assets. Liabilities. Mine Machinery, etc. Stores, etc. Buildings, etc. Water Rights $50,000 40,000 1,500 1,500 1,000 Capital Stock Accounts Payable Wages Due Surplus Account $80,000 5,000 5,000 14,000 Real Estate 1,000 Amalgam Cash 3,000 6,000 Total Total 104,000 104,000 334 CORPORATION ACCOUNTING 967. First Journal Entry. Consolidated Stock Dr. $131,600 To Mine Account $50,000 Machinery and Tools 40,000 Stores and Supplies 1,500 Buildings and Lumber . 1,500 Water Rights 1,000 Real Estate 1,000 Amalgam 3,000 Cash 6,000 Columbus Mining Co., balance due on fractional part of share 21.05 Profit and Loss 27.578.95 For excess of Consolidated Stock received over all resources. $131,600 $] [31,600.00 977. Second Journal Entry. Sundries to Consolidated Stock $10,000 Accounts Payable $5,ooo Accrued Wages 5,ooo For accounts and wages' paid with Consolidated Stock at par. 978. If it is found impractical to liquidate with stock, or, if the creditors of the company insist on cash, the company will be obliged to sell sufficient of its stock to pay its obliga- tions ; or if the creditors insist on taking the stock at a dis- count, Consolidated Stock will have to be credited for the amount of stock so paid and Profit and Loss debited for the par value of the amount paid over the liabilities. 979. Third Entry. Sundries to Consolidated Stock $121,600 Capital Stock $80,000 Surplus Account 14,000 Columbus Mining Co., cash col- lected from stockholders and paid over for fraction of share 21.05 Profit and Loss 27,578.95 To balance Profit and Loss Ac- count for net gain of the Mascot Mining Company: $121,600.00 $121,600.00 AND CORPORATION LAW 335 This balances all the accounts of The Mascot Mining Com- pany and the company is merged into The Consolidated Com- pany and ceases to exist. 980. The debit and credit to the Columbus Mining Co. for fractional share are necessary to balance the books. As this is less than 2 cents a share, either way, on the new issue of stock it matters little whether it is actually collected and paid. Closing the Columbus Books. 981. Following are the book values of all accounts stand- ing open on the books of The Columbus Mining Company : Assets. Liabilities. Mine, $90,000 Capital Stock $150,000 Machinery, etc. 25,000 Bills Payable 5,000 Stores, etc. 2,500 Wages Due 8,000 Buildings, etc. 2,000 Surplus Account 12,000 Water Rights 1,500 Amalgam 1,500 Cash 2,500 Treasury Stock 50,000 175,000 175,000 982. First Journal Entry. Capital Stock Dr. $50,000 To Treasury Stock $50,000 For 5,000 shares of unsold stock. This entry balances the Treasury Stock Account and re- duces the Capital Stock Account to $100,000, which is the paid-up capital of the company. 983. Second Entry. Consolidated Co.'s Stock Dr. $118,400.00 For 1,184 shares received. Cash — received from Mascot Co. 21.05 Profit and Loss 6,578.95 For depreciation in assets. To Mine Account $90,000 Machinery, etc. 25,000 Stores, etc. 2,500 Buildings, etc. 2,000 Water Rights 1,500 Amalgam 1,500 Cash 2,500 $125,000.00 $125,000 Assets turned over to Consolidated Co. 336 CORPORATION ACCOUNTING 984. The $21.05 ii^ cash received from the Mascot Com- pany must now be distributed among the stockholders. When this is done the Cash Account will balance and also all the Resource accounts. 985. Inasmuch as the above amount is incommensur- able with the labor involved in its collection and distribution the work may be theoretically performed without cavil or criticism. 986. Third Entry. Sundries to Consolidated Co.'s' Stock $13,000 Bills Payable $5,ooo 50 shares of Consolidated Stock issued to redeem Company's notes. Accrued Wages 8,000 80 shares of stock issued (or sold) to pay wages due. 987. Fourth Entry. Sundries to Sundries. Capital Stock $100,000.00 Surplus Account 12,000.00 To Consolidated Co.'s Stock $105,400.00 Balance after paying lia- bilities. Cash distributed to stock- holders 21.05 Profit and Loss' 6,578.95 To balance Profit and Loss Account for net loss of Columbus Co. $112,000.00 $112,000.00 This' closes the books of The Columbus Mining Company and the company goes out of business. All the work connected with this fractional share could be eliminated by adjusting the appraisement so as to have the stock come out in even shares to each company. 989. While the number of companies and the number of accounts involved in the preceding examples have been lim- AND CORPORATION LAW 337 ited for convenience sake, it is thought that the principles in- volved in consolidation are so clearly set forth by explanation and illustration as to make it, to him who masters them, not a question of skill but of labor in consolidating any number of corporations with more varied divisions of assets and liabili- ties. CHAPTER XXXVI. ... A Merging of Interests Vv/^ithout a Merging of Capital — Co-operation vs. Competition — Interests of Forty Corpora- tions Unified in One — Individual Corporate Entity Preserved — Ends Accomplished by Means of Selling Agency — Organiz- ing a Selling Agency — Pro-rating Sales — Accounts of Consti- tuent Companies. 990. It is an old proverb that "Competition is the life of trade," but we know from experience that it frequently makes for the destruction of the traders. When a number of persons engaged in the same line of business are all hunting for .the buyer, the buyer usually gets what he wants for what he wishes to pay for it. A knowledge of this condition and its' destructive tendencies has resulted in bringing competitors together for an understanding and an agreement to protect their joint and several interests'. Take for instance the oil producers of California. A few years back when a number of oil producing properties came into the market with their pro- duct, they were all so anxious to sell their product to the rail- roads and other large consumers, that the price of fuel oil dropped to a profitless point. It was then that a co-operative selling agency was formed somewhat on these lines. 991. Some thirty-five or forty oil companies" formed a new corporation whose purpose is "to secure a stronger and more stable market for fuel oil, by selling through a common agency the product of many oil yielding properties ; to lessen the cost of producing, storing, handling, shipping and selling such product, etc." 338 CORPORATION ACCOUNTING 992. Every subscriber to the stock of this new corporation must be a bona fide producer of oil, and subscriptions may be made directly in the name of the beneficial corporation, or in the name of designated trustees for said corporations. Every subscribing corporation is to be represented on the board of directors, and new members can be admitted, or transfers made, only on the approval of the Board. Each constituent corporation shall own one share of stock in the composite and no more. A share is issued to each component stockholder on the payment of the par value, and its executing to the sell- ing corporation a lease of its properties, and a contract to de- liver its product to said selling agency. The lessee then issues' to each lessor, for a consideration, a license to operate its prop- erties, and the product of these properties is delivered to the selling corporation, the board of directors of which ''shall have power to apportion and divide all orders received by the cor- poration among the various oil producers holding licenses * * * and such apportionment shall be based upon the 'oper- ators pro-rata' fixed upon and agreed between the corporation and such operator." A new pro-rata may be fixed from time to time according to the demands of the market. It is pre- sumed that the Selling Agency shall charge a fixed percentage to each beneficial corporation. In this way they all pay in proportion to the service received. 993. Suppose the capital stock of the selHng corporation to be $50,000, divided into 50 shares of $1,000 each, and that forty companies subscribe for (i) share each, what are the opening entries? 994. Subscription Account Dr. $40,000 To Capital Stock $40,000 40 shares subscribed as follows : Gusher Oil Co. i Share. Big Flow Oil Co. i Share. and so on to the end of the list. 994 (a). As the individual companies pay for their stock, credit Subscription Account from the Cash Book. 995. This $40,000 forms the Working Capital of the sell- ing corporation, and enables it to provide storage facilities, equip offices ,establish trade relations, and generally serve the best interests of its stockholders. If it should need additional capital at any time, to protect its interests or develop and ex- tend its trade, it can obtain it by levying an assessment. Its' accounting with its stockholding corporations can be done in AND CORPORATION LAW 339 one of three ways. It may treat all deliveries as consign- ments, rendering an "Account Sales Statement" as sales are made, and charging the usual commission for its service; or it may keep a record of deliveries, that is, of the number of barrels delivered by each corporation, and also a record of the number of barrels sold for each corporation, so as to be able to teir the number of barrels on hand for account of each. This record or account would deal with quantities only — not with values. As sales are made for account of any particular member; that particular member is credited with the proceeds' and charged with the usual commission ; or if all the oil was of the same test, that is the same specific gravity, etc., one sales ac- count might be kept for the proceeds of all sales, and from time to time there could be a distribution of these proceeds in the ratio that the sales bear to the quantities delivered. 997. For example, let us suppose that 5000 barrels of oil were delivered to the Selling Agency and 1000 barrels sold, and that these deliveries were made in the following propor- tion : A 2000 barrels. B 1500 " C 1000 " D 500 '' Total Delivered 5000 barrels. Total sold 1000 barrels. 998. This means that 1-5 the delivery was sold, and that each delivering company's proportion of the sale was 1-5 of its delivery. A 400 barrels. B 300 " C 200 " D 100 " Tota 1 1000 barrels. 999. The selling corporation distributes the proceeds of sales in one of two ways. It debits Sales Account and credits ekch member for its proportion, in turn debiting each of them and crediting Commission Account for commission; or it debits Sales Account and credits Commission Account in one 340 CORPOKATION ACCOUNTING sum for the total commission, and then debits Sales Account and credits each member for its proportion of the balance thus : looo. Sales Account Dr. To Commission Account, for Commission of. . . .% on lOOO barrels of oil sold at per barrel. looi. Sales Account Dr. To Sundries, (here give names). for their respective proportions of the proceeds of sale of lOOO barrels of oih 1002. It should be understood that the directors fix the pro-rata sales of each company, and the companies regulate their deliveries accordingly. 1003. The Commission Account becomes the Trading Ac- count* of the Selling Agency, and if its revenues are in excess of its requirements, it can distribute its surplus in dividends to its stockholders'. Accounting for Constituent Companies. 1004. When a company purchases stock in the Selling Agency it makes the following entr37^ in its Cash Book. Stocks $I,CXXD I share of stock in Selling Agency. 1005. When it delivers oil to the agency, it can treat its delivery as a consignment, and sales as consignment sales ; or it can treat its delivery as a "Manufactured Product Ac- count,"*^ and credit "Sales Account" for the proceeds of sales. It is best to credit sales v^ith the gross proceeds, and to debit a Commission Account for the commission paid the agency — this commission is a selling expense, and the gross sales and selling expense*^ should be kept track of for statistical and comparative purposes. *Vide paragraph 419. * 2 Vide paragraph 422. *3Vide paragraphs 407 and 409. CHAPTER XXXVIL A Mining Corporation Going Into Partnership With An Individual — Opening the Books — Entries Made By Mining Company — Adjusting Profits — Increasing Investment. 1006. Suppose that the Gold Hill Mining Company desires to go into partnership with J. B. King in the cattle business, under the name of J. B. King & Co. ; Articles of partnership are drawn up in the usual form, and after Mr. King's affairs have been inventoried, the partnership books are opened by the following entries in the Journal: (Usual preamble). 1007. Mr. King's Investment. Assets. Live Stock $10,000 Personal accounts owing to him 5,000 Bills Receivable 3,000 Cash 2,000 Goodwill 2,500 Liabilities. Accounts Payable $2,000 Bills Payable 3,000 J. B. King (net investment 17.250 Reserve for bad debts 250 22,500 22,500 1008. Gold Hill Mining Company's Investment. Cash $17,500 To Gold Hill Mining Company $17,500 (Net investment.) 1009. Cash is now ''checked" in the Journal and entered in the ''Total Column" in the Cash Book. The other accounts are posted to the Ledger, a Stock Account being open for each partner, and the partnership books are now open. 342 COKPORATION ACCOUNTING loio. The following entry is then made in the mining company's Cash Book: Cash Book. Partnership investment $17,500 Invested with J. B. King & Co., in the cattle business, per resolution of the Board, etc. loii. An Investment Account is now opened in the min- ing company's Ledger, and debited with the amount of the in- vestment. Vide paragraphs 434-35. 1012. In a business like this there is, of course, only one active partner, and he is allowed a salary for his services. A Private Account is opened for each partner in the partnership books, aside from their stock accounts, and these accounts are charged for all sums drawn out by the partners, and bal- anced at the end of the year into their respective stock ac- counts. When the mining company draws out any money, it is drawn against prospective profits, and is not supposed to reduce its original investment. In this case the mining com- pany debits cash on its Cash Book and credits the partnership. It is best not to credit Profit and Loss until the actual result of the partnership trading is determined, and the profit or loss arising from the partnership should be separately stated on the mining company's annual statement. 1013. Suppose that at the end of the first year the partner- ship books show a profit of $5000, of which the mining com- pany's share is 50%, that it has already drawn out $1000, de- sires to draw out an additional $500, and increase its invest- ment in the partnership by $1000; what are the entries on the books of the mining company? First Entry. 1014. Cash Book. J. B. King & Co. $500 Received from partner- ship on account of profits. This leaves a credit of $1500 on the account of J. B. King ,&Co. AND CORPORATION LAW 34a Second Entry. 1015. Sundries' Dr. J. B. King & Co. $1,500 Partnership Investment 1,000 To Profit and Loss $2,500 Profit from investment in the firm of J. B. King & Co.,. $1500 of which has been withdrawn, and $1000 reinvested. 1016. Note: Partnership Investment Account is one of the resources of the Gold Hill Mining Company, and as such appears in their Statement of Resources. 1017. Many partnership articles stipulate that a certain percentage shall be paid or credited to each partner on his in- vestment, before an apportionment of the profits are made. In such cases the Private Stock Account, or Investment Ac- count, of each partner is carefully examined for investments and withdrawals, and the average investment calculated for the period. It is on this average that interest is figured. Other articles provide that the partners shall pay or receive interest according as their average investm.ents vary below or above their relative investments at the start; certain it is that when their withdrawals differ in point of time or amount, the only equitable way to adjust the division of profits is to find out the average investment of each partner, those whose investments have fallen below the proportionate sum on which the division of profits was originally based, pay interest. In this way the rdtio of investment is maintained. For example, A, B and C are in partnership. A's investment has averaged $1500 below his original contribution, on which he was entitled to 1-3 of the profits ; this is equivalent to him drawing out $500 of his own, and borrowing $500 each from B and C. By loaning this to A, they equalize their investments' again, and if A pays them interest on this sum, he is entitled, in equity, to 1-3 of the profits. He can either pay them interest on $1000, or pay the firm interest on $1500 and receive back 1-3 of it in the di- vision of the profits. CHAPTER XXXVIII. Dissolution of Corporations — Liquidating the Trade Lia- bilities and Redeeming the Capital Stock — Involuntary and Voluntary Liquidation — Redeeming Stock for Less Than Par — For More Than Par — Liquidators Buying Up the Stock — Liquidation Companies and How They Operate. 1018. The ways and means' by which corporations are dis- solved, are provided for in the codes and statutes of the dif- ferent states. If the stockholders of a corporation wish to dissolve and go out of business they may obtain permission to do so, providing they have first discharged all the liabilities of the corporation. Again, some corporations find themselves in such financial difficulties that they are not able to continue in business, and they ask the Court to appoint a Receiver to wind up their affairs ; and sometimes the creditors of corpora- tions ask for the appointment of Receivers to protect their in- terests. The Receiver supersedes the officers and directors, and takes charge under the direction of the Court of all the affairs of the corporation. He makes his reports to the Court, and receives his salary by order of the Court. 1019. As the assets of the corporation are converted into cash, the liabilities of the corporation are liquidated, the cre'd- itors sometimes receiving partial payments on a pro rata basis' — preferred claims are paid first. When all the outsanding debts of the company are paid, then the redemption of the stock begins. 1020. Some corporations provide in their by-laws for the manner in which the corporation is to liquidate at the expira- tion of its charter. For instance, the by-laws may provide for the appointment of a committee by the Board of Directors in office at the time, to liquidate the corporation's liabilities'. They proceed in the same manner as the Receiver, except that they are employd by the directors instead of appointed by the Court, and they receive their salaries from the directors and make their reports to the directors or stockholders. After having satisfied the claims of creditors, they turn their atten- tion to the redemption of the certificates of stock. What the sockholders' will get for their stock depends on the value of the AND CORPORATION LAW 345 remaining assets of the corporation, and the cost of liquidating, and this is called the "Intrinsic Value" of the stock. 102 1. Sometimes the liquidators buy up the stock of the company after its debts are paid, at a premium or a discount as the case may be, debiting the Capital Stock Account for the par value of the stock purchased, and debiting or crediting ''Premium and Discount" Account, or Profit and Loss Ac- count, for the gain or loss. In such a case, the stock is re- deemed at once, and the stockholders and corporation cease to exist as such — the liquidators forming a partnership for the sale or conversion of the remaining assets. 1022. For illustration, let us suppose that the capital stock of a corporation was $1000, that all its trade liabilities* were discharged, and that it still had on its books assets amounting to $2000; this would mean a surplus of $1000. The liquidators offer to the stockholders $150 a share or $1500 net cash, for their stock, which they accept. They pay into the company this $1500, debiting cash and crediting asset ac- counts, or Realization and Liquidation Account; the balance of $500 being debited to Profit and Loss. The stockholders then surrender their stock, and as they receive the money therefor Capital Stock Account is debited for the par of the stock, the Premium Account for the premium paid. When all the stock has been surrendered, the Cash Account will balance ; the Capital Stock Acocunt will balance, and there will be a debit balance in Premium Account of $500. There is also a debit balance of $500 in the Profit and Loss Account. These two debits of $500 each are balanced into the $1000 Credit in Surplus Account, and with this, all the accounts on the books are closed. If on the other hand the Capital Stock was $2000 and the assets on the books were $1500, this would mean a deficit of $500, and if the liquidators paid $1000 for the sur- render of the stock, or 50c on the dollar of par value, cash would be debited for $1000; this would be an additional loss of $500 in liquidating, which would be carried to Profit and Loss Acocunt. Supposing this condition to exist, cash should be credited when the stock is surrendered, and Capital Stock debited. When the stock has all been surrendered the Cash Account will balance, but there will still be a credit on Capital Stock Account of $1000. A Journal entry is then made debit- ing Capital Stock and crediting a Discount Account for $1000 on acocunt of the discount at which the stock was purchased. There will then be a credit of $1000 in Discount Account against a $500 debit in Deficit Account,* and an equal debit Vide paragraph 426. \ 346 CORPORATION ACCOUNTING in Profit and Loss Account, (unless they are both in one ac- count) and a simple Journal entry, or transfer entry, will close these accounts and wind up the business. 1023. Sometimes the stockholders are paid "capital divi- dends" from time to time as liquidation progresses, and some- times there is no distribution until all the assets are disposed of, at which time the stockholders are paid there pro-rata of the amount realized — unless there is a class of stock having a preference in liquidation.* As the stock is redeemed and paid for, cash is credited and Capital Stock Account debited. 1024. If the amount realized on the stock is less than par, a Journal entry should be made, debiting Capital Stock with the balance, and crediting Profit and Loss or "Impairment" account, or whatever other account represents the net loss. This last entry will close all the accounts on the books. For example, let us suppose that the capital stock of a company is $100,000, and the Profit and Loss or "Impairment of Cap- ital"* account shows a debit balance of $100,000 at the time of closing the books, and in liquidating they lose another $5,000, that is, the net realization on their assets, after all their debts are paid, is $15,000 less than the capital stock. In this case Profit and Loss or "Impairment Account" is charged with the loss of $15,000, the stockholders are paid the $85,000, and this is charged to Capital Stock Acocunt, leaving a credit balance of $15,000 on this account; and we have seen that there is a debit balance of $15,000 on Profit and Loss or Impairment Ac- count, so a simple Journal entry closes the books. 1025. Capital Stock $15,000 To Profit and Loss (or Impairment) $15,000 1026. Suppose on the other hand that at the closing of the books there was a credit of $15,000 in Surplus Acocunt, and that the shrinkage and costs of liquidating were $5000, there would be left in the Surplus Account a balance of $10,000. This means that the stockholders would receive 110% on their stock. When this $110,000 is pro-rated among the stockhold- ers', cash is credited and Capital Stock is debited. There would then be a debit balance of $10,000 in the Capital Stock Ac- count, which would be offset by the $10,000 credit in Surplus Account, and the books would be closed by this entry : 1027. Surplus Account Dr. $10,000 To Capital Stock Acocunt $10,000 *Vide paragraph 49. *2Vide paragraph 425. AND COKPORATION LAW 347 1028. In any event the stockholders should be required to surrender their certificates endorsed in some such form as the following : 1029. Surrendered by this day of A. D. i Signed 1030. At the present time there are many "Corporation Liquidation Companies," whose business is to buy up the as- sets of defunct and insolvent corporations and liquidate their liabilities, including the Capital Stock. They are heavily cap- italized, employ a corps of skilled accountants and appraisers, and relieve corporate directors and trustees of the delay and worry incident to liquidation. In effect, they pay the stock- holders so much for their stock and take over everything. 103 1. For further particulars as to liquidation and realiza- tion see paragraph 430 et seq. CHAPTER XXXVII. Origin of Banking — Functions of a Modern Bank — How Banks Develop a Community Foster Industries and Promote Trade and Commerce — The Foundation of International Comity — Foreign and Domestic Exchange — Letters of Credit — The Balance of Trade and International Settlements — Or- ganization of National Banks — Bonds and Currency — System of Reports to Comptroller — Statement of Earnings and Divi- dends — Bank Examinations — Lawful Reserve and How to Compute It — Profits on Circulation — Commercial and Accu- rate Interest — Short Interest Rules — Compound Interest — True and False Discount. Origin of Banking. 1032. Some of the historians of finance tell us that the word bank is derived from the Italian word ''Banco," meaning bench ; the most primitive attempt at banking being made by the Jews of Lombardy in the twelfth century, who had 348 CORPORATION ACCOUNTING benches in the market places at which they loaned money, or sold credit. Others claim that it was applied to a pile or heap of money in the same analogous sense in which we say, a bank of earth, a bank of clouds, a bank of snow ; however that may be, everybody in this age knows what a bank is, and knows at least some of the functions of a modern bank. A Brief Review. 1033. This' chapter must necessarily be a very brief review of some of the functions of a bank, the manner in which it serves the public and conserves their interests, the care with which it attends to its customers business, the safeguards it throws around their funds' and, generally, its indispensibility to trade and commerce. Classification of Banks. 1034. Banks in this country are divided into two main classes — National Banks and State Banks. The former are chartered by the National Government, governed by the Na- tional Bank Act, and are under the immediate supervision of the Comptroller of the Currency. The latter are chartered by the States, governed by State laws regulating the business of banking, and are under the immediate supervision of a Board of Bank Commissioners. Besides the ordinary commercial banks, State laws provide for the creation of Savings Banks and Trust Companies, and also Private Banks. Influence on Civilization. 1035. It is not too much to say that there would be no modern civilization without banks. Banks are the chief agency in the development of a community ; they are the means of the promotion of industry and commerce; they are the medium through which the world's commerce is conducted, through which great industrial enterprises employing millions of men are sustained. The needs of these millions are supplied by the product of their labor and their very needs create new enterprises for their supply, such as stores, factories, schools, colleges, churches, other banks and savings institutions. Com- merce links the ends of the earth together and forms a federa- tion of the whole. Without commerce the world would be stagnant, unprogressive. Without banks there could be no commerce in the sense in which modern civilization under- stands it. It is' the ramifications of trade that makes the world AND CORPORATION LAW 349 cosmopolitan. It was the development and protection of this trade that formed the foundation for international comity and international fellowship. Foreign Bills of Exchange. 1036. Suppose a New York man makes a shipment of wheat to London, how does he get his money? Does he have to wait until the wheat arrives in London and is paid for, and the money brought back to him ; or if it is sold on 60 or 90 days time, does he have to wait those 60 or 90 days for his money? No indeed. He simply draws a bill of exchange to his order, either on his customer or an authorized bank, and takes this to one of the banks doing a foreign business. This bank dis- counts his bill and he gets his money at once. The bank then sends' it to its London correspondent, which correspondent presents it to the consignee or drawee and gets the money, crediting its New York correspondent. The New York im- porter buys goods in London and the exporter draws a bill of exchange on New York. The New York correspondent of the London bank collects this bill of exchange and credits the London bank. Balance of Trade. 1037. If there was only one bank in London and one in New York doing a foreign business these bills would offset each other, and only their difference would be owing from one bank to the other. Through the delicately adjusted machinery of international clearing, these reciprocal relations between all the New York and all the London banks are reduced to two units — London and New York. Either London owes New York or New York owes London; and when we say New York and London we mean the two nations. This dif- ference is called the balance of trade, and it regulates the course of exchange between the two countries". Par and Course of Exchange. 1038. When New York is importing heavily there is a plethora of English Exchange in New York, and the price of exchange in Sterling goes up. When New York is exporting heavily there is a plentitude of American bills in London, and Sterling can be bought in New York below par. The par of exchange is $4,866, and when sight bills drop much below $4.85 New York imports the gold at a cost of less than 2 cents per pound sterling. It is only when there is an actual need 350 CORPORATION ACCOUNTING of gold, or when the banks on either side find it more profitable to ship than to sell bills too much below par, that international balances are settled in gold; and it is said that a profit of 1-36 of one per cent is sufiicient to start a movement in gold ship- ments. International Settlements. 1039. When Sterling is cheap in New York the foreign banks buy heavily so as to lay up a credit in London against which to draw when their customers wish to send money to the "old country." What is true of the United States and England is true of the United States and any other country, excepting that instead of these settlements being made direct between the respective countries they are more frequently made through London, which is the world's clearing house. For example, if St. Petersburg owes New York and New York owes London, instead of St. Petersburg paying New York and New York paying London, St. Petersburg pays London for account of New York. Foreign Exchange. 1040. So highly is this international exchange business developed, that here in a provincial city on the edge of the Western Continent, The Farmers National Bank of Fresno, of which the writer is an officer,* can sell exchange on hundreds of cities and towns in all parts of the world, and these checks drawn by it will be cashed for their full face value at the points on which they are drawn ; and for this service it charges the purchaser but a few cents. In the same way it pays foreign checks drawn on any city in this country. Letters of Credit. 1041. Issuing foreign and domestic letters of credit is an- other way in which the banks serve the travelling public, by placing funds at their disposal in any part of the world in which they may be travelling. If it wasn't for these letters of credit, with their system of identification, the traveller would have to carry gold with him and exchange it by weight for coin of the country in which he was travelling. The danger and inconvenience of this are too apparent to need dwelling on. Various Functions of a Bank. 1042. But to come nearer home, as the saying goes : If a merchant wants to pay a bill in New York or San Francisco, *The writer was a resident of Fresno at the time this was written. AND CORPORATION LAW 351 the bank sells him money there for five cents, or ten cents a hundred. It takes' his checks on deposit from all parts of the country, pays out the money on them and attends to their col- lection without cost to its customer. It collects drafts, notes, insurance premiums, coupons, bonds, etc., protests commer- cial paper, pays taxes at distant points, handles escrow mat- ter, buys and sells bonds and performs a hundred and one kinds of service, better, more accurately, and more promptly than if the customer attended to it himself at great expense and inconvenience ; and for this service it charges from ten or fifteen cents on small matters, to one-tenth of one per cent on large matters. Banks execute commissions and place their fa- cilities at the service of their customers cheaper, and do more accommodation business than any other class of institution in the world. Banks and Progress. 1043. Truly the world could not progress without banks. If there were no banks to discount commercial paper and ex- tend credit on collaterals, the world instead of being one vast trading mart, the most remote comers of which are accessible to everybody, would be made up of numberless local trading camps, exercising but limited relations and exerting but little influence outside their respective localities. Handling Bills of Lading. 1044. The shipper can take his bill of lading to his bank, attach it to a sight draft on a responsible consignee, deposit it as' he would a bank draft and have the use of the money while his goods are in transit across the continent. In this way the shipper is enabled to continue buying and shipping on a limited cash capital, and the producer is benefitted quite as much as the shipper, for he gets the cash the shipper obtains from the bank on his bills of lading. Discounting Notes and Acceptances. 1045. The manufacturer or jobber sells goods to the re- tailer and takes notes or acceptances at 60 or 90 days'. It would be quite impossible for him to carry all his customers in this way, so he discounts their acceptances at his bank, or puts them up as collateral security for an extension of credit, and through the agency of the bank the manufacturer or jobber is enabled to extend credit to the retailer and develop his busi- 352 CORPORATION ACCOUNTING ness. In this instance the consumer is benefitted, because the retailer could not give credit to his customers if he did not get time on his purchases. Crop Mortgages. 1046. The farmer needs money to seed his fields or to har- vest his' crop, he goes to his banker, gives him a crop mort- gage and receives the desired and necessary funds. Fountain Source of Credit. 1047. Sufficient has been said to show that the bulk of the world's business is done on credit, and that the fountain source of credit is the bank. Banks are essentially credit in- stitutions ; the buy and sell credits, they are trusted and trust- ing. The depositors place their funds with them because they have faith in them, and the banks loan these funds to borrow- ers, because they have faith in their ability to repay them ; but the banks must give evidence of responsibility before they are trusted, and this leads' us up to the formation and organization of banks. Bank Organization. 1048. The chief business of a bank is to make loans, but it requires other than its own capital in order to make its busi- ness profitable. It is the function of a bank to gather together the scattered and idle capital in the hands of the many, and make it available to those who can profitably employ it in pro- duction — not merely to their own advantage but to the ad- vantage of the entire community. A number of men have money, but they have not the opportunity to invest it, or the amount is too small for profitable investment ; other men have the opportunity, but lack the funds. The latter represents demand, the former supply. Supply without demand means inaction, stagnation. Demand without supply means famine, starvation. Demand supplied means activity, health, progress, prosperity; and the banker is the medium through which de- mand and supply are joined in an active working partnership, and production and trade promoted, stimulated, multiplied; hence it is that the first business of a bank is to receive deposits and increase its loan funds, so as to have sufficient funds avail- able for lending, and at the same time maintain a proper re- serve of capital for the protection of its depositors ; but it must give evidence of strength, stability and responsibility before it can expect to be entrusted with the funds of others. In AND CORPORATION LAW 353 other words, it must have sufficient capital of its own, and its business be so regulated by law, and managed by men of known ability and responsibility, as to inspire public confi- dence in it. Incorporating a National Bank. 1049. I"^ order to acquire this capital and come under these laws it incorporates. To incorporate under the National Bank Act it is necessary that at least five persons (contemplative stockholders) sign an application to the Comptroller of the Currency for a charter, giving the title, location, and proposed capital of the prospective bank. They must also furnish a statement of the business and financial standing of said ap- plicants, and have the endorsement of a United States Senator, Representative, Judge of Court or other prominent official as to the character and financial responsibility of the applicants. Minimum Capital. 1050. The minimum capital required for organization is $25,000 in towns of 3000 population ; $50,000 in towns of 6000 ; $100,000 in cities of 50,000 and $200,000 in all other cities. Payment of Capital. 105 1. At least fifty per cent of the capital must be paid in before a National Bank shall be authorized to commence busi- ness, and the remainder of the capital must be paid at least in instalments of ten per cent on the whole capital at the end of each month succeeding the month in which it was authorize'd to commence business. Liability of Stockholders. 1052. National Banks are what is known as ''double lia- bility corporations;" that is, each and every stockholder is re- quired not only to pay the full face value of his subscription, but he is liable in case of failure for just as" much more; this gives to the depositors a larger measure of protection than that given to the creditors of any other class of corporation. If a bank with $1,000,000 paid-up capital goes into liquidation, and its entire resources are insufficient to liquidate its liabili- ties, the stockholders can be called upon to pay in another million dollars if such a sum be necessary; and this liability is imposed upon the transferrees of stock as well as on original subscribers. 354 CORPORATION ACCOUNTING Reserve Requirements. 1053. Every National Bank must keep in its vaults, or in the hands of approved reserve agents, a certain percentage of its deposits, both general and bank deposits ; i. e., in the Cen- tral Reserve cities, of which there are only three, a cash re- serve of 25% of all deposits must be kept in the vaults of the bank at all times. In the reserve cities, of which there are about 22, a reserve of 25% must be maintained on all deposits, but it is allowed to keep 50% of this reserve in Central Re- serve Banks approved by the Comptroller of the Currency. Outside of the reserve cities, all national banks' are required to maintain a reserve of 15%, two-fifths of which must be kept in cash in the banks' vaults and the remaining three-fifths may be kept in the hands of approved reserve agents. Computing Reserve. 1054. Reserve must be maintained and computed on gen- eral deposits and bank deposits. General deposits include those subject to check, demand and interest bearing certificates, cer- tified checks, dividends, overdrafts, U. S. deposits and deposits of U. S. disbursing officers. The reason for including certified checks is that although they reduce the balance of the depos- itors ledger the amount they represent is still on deposit, and the bank in certifying those checks has specifically obligated itself to pay them. 1055. Overdrafts are included, that is, added to the net balance of the depositors ledger, because being debits they re- duce the gross deposits, and it is the gross amount the bank owes its depositors — not the difference between that and what the depositors owe the bank — that must enter into the calcu- lation. 1056. Bank deposits include all amounts due to State, National and other banks, after the balance due from such banks is deducted. If the reciprocal accounts with banks show a net balance due to banks, it must be included in the deposits requiring reserve; but if these reciprocal accounts show a net balance due from banks, it must be omitted alto- gether in figuring reserve. This excess cannot be used to de- crease liability for general deposits. Balances due from banks' can be used only to ofifset balances due to banks, except in the case of "reserve banks," and then any excess in the hands of reserve banks over the one-half or three-fifths reserve al- lowed, does not count as reserve, but this excess may be used to reduce bank deposits when the reciprocal accounts with banks show more due to, than due from banks. $ Form for Computing the Lawful Money Reserve of National Banks not in Reserve Cities, Items on Which Reserve is Required. General Deposits. Individual deposits, viz.: Deposits subject to check, — Demand and Time ctfs., Cashiers cks.. Certified cks., &c. . . . Dividends unpaid United States Deposits Deposits of U. S. Disbursing Officers . . . ... Less Deductions Allowed, Exchanges for Clearing House . . . . . . . . Checks on other banks in same place National Bank Notes (other than own issue) . . . Net General' Deposits •. . . Bank Deposits. Due to National Banks Due to State Banks and Bankers Less. Due from National Banks Due from State Banks and Bankers ...... $ $ $.... *Net Bank Deposits (Net balance due banks if any) [If net balance is due from banks, then there are no bank deposits requiring reserve, and as such balance cannot offset any other deposits, omit it entirely.] The sum is the total Deposits on which reserve is required, viz Deduct 6|- times the five per cent. {S%) fund (i. e, the amount of deposits covered by this fund as reserve) ^ Net Deposits requiring reserve is .....,,.. 15% of this is the total Reserve required, viz. I $ Proportion of Reserve to be in bank is |th, viz. | $ ;„., Any e;$cess with Reserve Agents above the proportion allowed to be with them as Reserve, can be counted as dw6/rom banks, so if the Home Reserve is short, and there is a balance due banks, the excess with Agents can be used to lessen Reserve required. The following are short methods of applying it. Rule C. — If the excess is evidently considerably less than the net bal- ance due banks, subtract from the net deposits^ * the entire net balance with Reserve Agents, ^ viz i ■g^jSt or, unless exact amount is needed, approximately say -^^ of the remainder is the Home Reserve required, viz. Rule D. — If the excess is apparently near the amount of net. balance due banks,' from the net balance due from Reserve Agents, ^ viz Subtract 9% of the net deposits requiring Reserve.^ viz %.... $ $.^ $ $^ $ Increase the remainder by yf ^ or say -j*^ of it ...... . The .total is the exact excess that can be applied, viz and is applied as follows : If this excess equals or is less than the net balance due banks,2 si< per cent, of it can be applied to reduce Home deficiency, but if the excess is larger than the net balance due banks,2 only an amount of the excess equal to six per cent, of said net balance can be so applied. Items Composing the Net Reserve and Distribution of the Same. Three-fifths of the Net Reserve required is items making up the same may consist of* Net Balances with approved Re- serve Agents,' viz : 3Total net balance t Excess with Reserve Agents . Deficiency with Rtserve Agents Two fifths of the Net Reserve required is Items in Bank's possession to make up the same, viz : Gold Coin Gold Treasury Certificates . . C.H. Certificates for Coin or Legal Tenders Silver Dollars - Silver Treasury Certificates . . Fractional Silver . Legal-Tender Notes ..... U. S. Certificates of Deposit for Legal Tenders Excess in items held by the Bank Deficiency in items held by the Bank Excess in the entire Reserve held, $ • Deficiency in the entire Reserve held, $ *If reciprocal accounts are kept with reserve agents, only the nei amount due from such agents is available for reserve. t Any excess with reserve agents can not be counted as reserve, and is available only to reduce or cancel net balance due to banks and bankers. 356 CORPORATION ACCOUNTING Exchanges for Clearing House. 1058. We observe that from the total deposits, exchanges for the Clearing House and checks on other banks in the same place are deducted. The reason is this : All the banks in the United States are called on for a Statement of Condition on the same day. These calls come unexpectedly five times a year, are made by telegram, and are required for a day already passed. At the time the call is made every bank has checks on other banks, but if they could be instantly cleared there would be none outsanding; they v^ould all be charged up to depositors, and consequently the aggregate deposits would be reduced by the aggregate amount of these checks. The same reason applies for deducting the notes of other National Banks. Every bank has notes of other banks, and in the aggregate they become a neutral quantity. 5% Remeption Fund. 1059. The object of deducting 6 2-3 times the 5% fund is, the 5% fund in the hands of the U. S. Treasurer is allowed to count as reserve, and as every fifteen cents constitutes a reserve against a dollar, and as 6 2-3 times 15 cents is equal to a dollar, it follows that the 5% fund forms a reserve against 6 2-3 times its amount, therefore this amount is deducted from deposits to ascertain the amount on which reserve must yet be calculated. The form for computing reserve, given on the preceding page is taken from Pratt's Digest of National Banking Laws. N. B. The author is indebted to Messrs. Pratt & Sons, Washington, D. C, for their courtesy in allowing him to use this and the following tables. AND CORPORATION LAW 357 Rules for Figuring Reserve. 1060. Rule for figuring reserve when the home reserve is- close, and there is an excess over the permitted three-fifths- with reserve banks, and when the balance due to banks is greater by the amount of this excess than the balance due from banks — (Pratts Digest.) EXAMPLE 3- Illustrating Rule <5, page 262, Individual Deposits Dividends Unpaid . . * . . U. S. Deposits Dep. U. S. Disbursing Officers Less — Exchange for Clearing House, Checks on local Banks . . Other National Bank Notes . . Due to Banks . . Due from Banks . Total Deposits 1360 000 150 10 000 3000 - 500 — 80 000 10 000 Less 6^ times 5% fund (2250) Total net Deposits . , • • Subtract — Net balance with Reserve Agents •g\st or say y^th of this remainder Is the |th' Home Reserve required — viz: Total of items (cash, etc.) in Bank to count as Reserve 360 15 344 70 414 15 399 45 354 23 23 150 500 650 650 000 650 000 650 643 746 103 Approximate Excess .*..,. (Or by taking exactly -g^st of the $354650, gives the Exact Excess^— viz: $363.) Three-fifths added to the above two-fifths gives the total minimum Reserve necessary to have, three-fifths of which may be with Reserve Agents. ;358 CORPORATION ACCOUNTING 1062. Rule for figuring reserve when the home reserve is close, and there is an excess over three-fifths with reserve agents, and it does not appear that this excess added to amount due from banks will exceed amount due to banks. (Pratt's Digest.) EXAMPLE 4- Illustrating Rule 7, page 262. Individual Deposits - Dividends Unpaid U. S. Deposits Department U. S. Disbursing Officers Less — Exchanges for Clearing House . . Checks on Local Banks, Other National Bank Notes , . . $244'ooo 430 Due to Banks . Due from Banks 000 21500 I koo 52'ooo 28;000 244 430 000 Total Deposits Deduct 6^ times 5% fund ($2,250) Total net Deposits 232 24 256 15 241 430 430 000 430 15% of this is the total Reserve required— viz : ........ Amount required at home 6% (fths of 15%) . . ^ If amount of Home Reserve by this estimate Is short, and con- ditions admit, the Excess with Reserve Agents may be applied. Total of items (cash, etc.) in Bank to Count as Reserve Short on first estimate . . ^ Net balance — With Reserve Agents • • • Amount with Reserve Agents allowed to Count as Reserve 9% The remainder is -^^^ of Exact Excess . [Add yf ^ or say j^h of this. For Exact Excess jf 5th] Approximate total Excess » . 6% (i. e. I of 15%) of this, is amount that can be applied on Home Reserve . » -Making Homei Reserve in Excess of requirements 14 214 485 257 42 21 000 728 20 2 272 027 22 299 228 ^337 •I 109 AND CORPORATION LAW 359* Daily Reserve Statement. 1064. It is customary in all the large banks to figure the reserve every day, and when a statement is called for it is only necessary to average it for the thirty days preceding the call.. A National Bank may be put into the hands of a receiver for failure to maintain its percentage of lawful reserve. Further Restrictions. 1065. A National Bank may not loan money on its own stock. One-tenth of the net profits of every six months' must be added to surplus until the surplus shall have reached 20% of the capital. It may not loan more than an equivalent of 10% of its Capital Stock to any one individual, firm or corpora- tion. This latter provision, as it now stands, works a hard- ship on all banks with a large surplus, and an effort is being- made to have it amended so that banks may loan 10% of their working capital; that is their capital, surplus and undivided profits combined. 1066. Discounting bills of exchange in good faith against actually existing values, and the discount of commercial paper actually owned by those negotiating the same, are not regarded as loans'. 1067. National Banks may not loan money on Real Es- tate mortgages. The reason is that all its assets are supposed to be "quick assets," and money can not be realized quickly on real estate. 1068. LOAN LEDGER- -SPECIAL DESIGN. Name, John H. Brown Rating Business Maximum Credit $ , Date Endorsed by Direct Liability j Endors'd for Indirect Liability Total Rt. Tm Dr. Cr. Bal Rt Tm Dr. Or. Bal Nov. 1 A 7 Id 1000 1000 John Brown 8 Id 500 500 1500 10 John Smith B 7 Id 1500 ?.m 3000 10 500 2500 N. B. The classification *'A" and "B" represent secured and unsecured loans. There should also be a "checking" col- umn after each debit column, to check off notes paid. A "number" column should also follow the date. 1069. The following four pages illustrate the form of Re- port required to be made under oath by every National Bank five times a year. 360 CORPORATION ACCOUNTING Form of Report Required by No. of Bank, . Report of the condition of *' The ," at , in the State Dr. Resources. Dollars Cents 8. 9- lO. II. 12. 13. 14. 15. 16. 17. 18. 19. Loans and discounts on which officers and direct- ors are liable (see schedule) . % Loans and discounts on which officers and directors * are not liable % Overdrafts, secured, | , unsecured, $ , (see schedule) United States bonds to secure circulation (par value), -4 — percents, percents United States bonds to secure United States deposits (par value), percents United States bonds on hand (par value), percents . . Premium on bonds for circulation, % ; premium on other United States bonds, $ Stocks, securities, etc., including premium on same (see Schedule) . . . Banking house $ ; furniture and fixtures % .... Other real estate and mortgages owned (see schedule) . . Due from National banks (not approved reserve agents) . Due from State and private banks and bankers Due from approved reserve agents (see schedule) .... Checks and other cash items (see schedule) Exchanges for Clearing-house ' Bills of other National banks . Fractional paper currency, nickels, and cents Lawful money reserve in bank, viz. : Gold coin Gold Treasury certificates . . Gold clearing-house certificates Silver dollars Silver Treasury certificates Fractional silver coin . . . Specie, viz.: . . $. Total Specie $ Legal-tender notes $ United States certificates of deposit (see section 5193, Revised statutes) , $ Redemption fund with United States Treasurer (not more than 5 per cent, on circulation) Due from United States Treasurer Total I, of ♦' The do solemnly swear that the above state- ment is true, and that the schedules on back of the report fully and correctly represent the true state of the several matters therein contained, to the best of my knowledge and belief. , Cashier, Correct. Attest : [SEAI,.] State of County of Sworn to and subscribed before me this day of ■ -, !■ Directors. 189-. AND CORPORATION LAW 361 ihe Comptroller of the Currency, of , at the close of business on the day of- ■*i8q-^ Cr. s. 6. 7. 8. 9. lo. II. 12. 13. 14. 15. 16. 17. 18. 19. Liabilities. Capital stock paid in . . Surplus fund Undivided profits ......$ Less current expenses and taxes paid $ Circulating notes received from Comptroller. . . , $ Less amount on hand and in Treasury for re- demption or in transit $ State bank circulation outstanding Due to National banks (not approved reserve agents) Due to State and private banks and bankers .... Due to approved reserve agents (see schedule) . . Dividends unpaid Individual deposits subject to check $ . Demand certificates of deposit $ . Time certificates of deposit . . $. Certified checks $ • Cashier's checks outstanding $ . United States deposits Deposits of United States disbursing ofiicers Notes and bills rediscounted Bills payable, including certificates of deposit representing money borrowed Liabilities other than those above stated . . . • Total Dollars. Cents. Note i. — This report is to be made at such times as may be designated by the Comptroller of the Currency; to be sworn to by the president or cashier, not by any other officer; attested by not less than three directors, and for- warded to the Comptroller of the Currency without delay. Each day's delay, after five days, will subject the bank to a penalty of one hundred dollars. See Sections 521 1 and 5213, Revised Statutes of the United States. Note 2.-TBe careful to make full entries— writing No, after any item, for which there is no amount to enter. 362 CORPORATION ACCOUNTING SCHEDULES. Fill all schedules, writing in the word "none" wherever no amount is to be entered. Loans and discounts. {Including loans and discounts on which officers and directors are liable.^ On demand paper with one or more individual or firm names $ On demand, secured by stocks, bonds and other personal securities % On time, paper with two or more individual or firm names . $ On time, single-name paper (one person or firm) without other security % On time, secured by stocks, bonds, and other personal se- curities • • • % On time, on mortgages or other real-estate security (see schedule) • % Total % Included in the above are — Bad debts, as defined in sec. 5204 R. S., % » . Other suspended and overdue paper . . $ . . Liab's of direc's(indi' land firm) as payers $. . } Enter amount in each of these three items, or write in word "none" if no amount to enter. Loans exceeding the limit prescribed by section 5200 of the Revised Statute s^ including a^nounts which exceed this limit due from. State and private banks and bankers. Name of borrower. Enter full amount of loan. Name of borrower. Enter full amount of loan. Overdrafts. Secured : Standing twelve months or over Standing six months or over Standing three months or over Temporary Officers and directors . . . Unsecured : Standing twelve months or over Standing six months or over Standing three months or over Temporary Officers and directors .... StockSj Securities J etc., {Stocks y Bonds ^ Claims, Judgments, and similar items- should be. included under this head.) Enter number shares of stock or face value of bonds. Name of corporation issuing stock, bonds, etc. Amount at which carried on books. Estimated actual market value. State whether taken for * debts previously contracted " or other- From- AND CORPORATION LAW Balances due from or to approved reserve agents. To— 363 Enter nain*! arid location of bank. Amount. Enter name and location of bank. | Amount. Checks and other cash items. Checks and drafts on banks, etc., in this city Checks and drafts on other banks Average reserve and interest. Average reserve for last thirty days (in bank or with reserve agents) was per cent, of deposits and bank balances. The highest rate of interest paid by the bank on deposits is per cent., on bills payable is percent., on notes and bills rediscounted is per cent. Other Real Estate and Mortgages Owned. • Describe property, state form of con- veyance, and from whom obtained. Amount at which carried on books. Amount of prior lien on prop- ' erty, if any. Estimated actual value of property. Date when acquired. State whether ta- ken for " debts pre* viously contracted," or otherwise. Loans and Discounts ^ Secured by Mortgages or other Real Estate Seczirity, Describe property, state form of convey- ance, and from whom obtained. Amount at which carried on books. Amount of .prior lien on prop- erty, if any. Estimated actual value of property. Date when, acquired. State whether ta- ken for-" debts pre- viously contracted," or otherwise. Certificates of Deposit represefiting money borrowed. To whom issued Amount. Demand. Time. Rate of Interest. Liabilities of Officers and Directors, Names of Officers and Directors. X.iability (individual or firm) as payors. Liability (individual or firm) as indorsers or guarantors. Overdrafts. No. Shares Stock Owned, 364 CORPORATION" ACCOUNTING 1074. In addition to the foregoing statement the following statement of earnings and dividends is also furnished under oath twice a year. Jih. of Bankf No. of Div Report of Earnings and Dividends of *^The , ' located at , in the State of. for the period of Jiionths endingyiSg , Declared. j8g . Payable j8g Dr. Cr. 3. Premiums on bonds charged f off since last report (if I. Gross earnings since last any) report ' '.,.••• 4. Losses sustained through bad debts, decrease of values, etc., since last re- 2. Other profits realized since port last report ... 5. Expenses and taxes paid since last report .... 6. Net earnings and profits or loss of past six months carried down Total Total 9. Carried to surplus fund (not — *6, Net earnings and profits or — less than one-tenth of item loss of past six months 6, unless surplus is al- brought down ready 20 per cent, of 7. Undivided profits or loss capital) , . brought forward from last 10. Dividend of. per cent. report (item 11 of that (on capital ^ ) . . report) ......... II. Amount of net profits un- divided or loss to be car- 12. Amount withdrawn from ried forward surplus (if any) .... ... Total Total ,'- . — — 15. Total surplus fund proper at date of this report . . 16. Total dividends since or- ganization as Nat'l Bank 17. Total other profits on hand (same as item il of this report) Total 13. Total profits as National Bank since organization (less expenses, premiums, losses, etc.) 14, Add profits of old organiza- tion at date of conversion to the national system . Total State of- -.} County of- Sworn to and subscribed before -me this- •day of- 189 — I, ■, Cashier of the above named bank, do solemly swear that the above statement is true to the best of my knowledge and belief. , Cashier, « la case the loss exceeds the profits for the six months, amount should be entered in red ink. AND CORPORATION LAW 365 Bank Examinations. 1076. A National Bank Examiner visits every National Bank twice a year ; he comes without warning, and makes an exhaustive examination of the banks resources and liabilities. He first counts the cash, then lists and classifies the loans and discounts, examines collaterals, bonds and securities, sees that all notes are signed, that none are past due, that interest is paid up, that no loans exceed the prescribed limit. He looks into the liability of officers and directors on loans and over- drafts, if any exist. He verifies by the books the last statement made to the Comptroller, and also the statement of earnings and dividends. He audits the last statement received from every other bank, and reconciles' it with the books. He pays particular attention to "certified checks" account to see that' there were funds against every check certified. He requests the cashier to have the following list prepared for him: 1077. Office of the National Bank Examiner. To the Cashier: Please have the following lists prepared, as at the close of business of 1. List of overdrafts, name and amount. State all that are secured and all that are six months outstanding. 2. List of certificates of deposit, number and amount, with rate of interest paid, if any. 3. List of Cashier's checks, number and amount. 4. List of certified checks, name, date and amount. 5. List of collections or items in transit, name, date of letter and where sent. Please hold out all return advices until I have checked the account. 6. List of balances due to and from banks', with rate of in- terest paid or received. 7. List of bills payable, rediscounts, certificates of deposit issued for borrowed money, or any other obigations upon which the bank is liable. 8. List of balances due to state, county or municipal offi- cers, either on open account or certificate of deposit, with rate of interest paid, if any. Also state if the bank is liable, directly or indirectly, upon the bonds of any public officer. 9. List of officers and employees, with the respective po- sitions and salaries ; with the amount of official bond of each, and state whether the bonds are personal or made by surety company. If the latter, give name of company. 10. List of shareholders, name and number of shares held by each. 366 CORPOKATION ACCOUNTING 11. Copy of profit and loss for one year. 12. Average reserve for thirty days. If any of the information called for above does not apply to your bank, please indicate it by the word "none" and return this sheet with the remaining schedules when completed. Yours respectfully, JOHN W. WILSON, Examiner. Accounts Verified by Correspondence. 1078. On receipt of these lists he proceeds to verify them. All collection items in transit, all balances due to and from banks, and balances due to state, county and municipal officers are verified by correspondence. Large loans are also verified by correspondence, and when he gets every account and item verified, he makes a complete report to the Comptroller. If he finds anything irregular in reports previously sent to the Comptroller he requires a full explanation of it, and he advises the Comptroller whether the explanation is satisfactory. It will be seen that these examinations are not perfunctory, but searching and rigorous, conducted by men familiar with the law and skilled in accounting and financial matters. Bonds and Currency. 1079. Banks with a capital of $150,000 and less are re- quired to purchase and deposit with the U. S. Treasurer bonds equal to one-fourth of their capital stock. All other banks must deposit at least $50,000 in bonds. The deposit of bonds is mandatory. The issue of circulation is optional. All Na- tional Banks are entitled to issue circulating notes to the amount of the par of the bonds deposited, but in no case must they issue circulation in excess of their capital stock. These bonds are held by the government to secure the circulation and guarantee its redemption. This makes national currency (National Bank Notes) as stable as the government itself. Redemption Fund. 1080. In addition to this deposit of bonds, every National Bank is required to deposit at least 5% of its circulation in the United States' Treasury. This is called the 5% Redemption Fund, and is used to redeem the currency of each bank as it comes into the Treasury. Immediately on a portion of any bank's currency being redeemed, it is asked to make good this amount at once, so as to maintain its 5% Fund. The redeemed AND CORPORATION LAW 367 notes fit to circulate are returned to the issuing bank, and all unfit are mutilated or destroyed, and new circulation sent as soon as' it can be printed. From this it may be seen that a bank has at no time the use of more than 95% of its circula-. tion, and rarely that much. Tax on Circulation. 1081. ''Section 13 of the Act of March 14, 1900, imposed a tax of one-fourth of one per cent each half year, or one-half of one per cent a year on the 2% consols; and 1% on the 3% and 4% bonds. This' makes the 2% consols the best on which to base circulation, and they are the most generally used. The following table, being one of a series of tables pre- pared by Mr. Joseph McCoy, Actuary of the United States Treasury Department, for the National City Bank of New York, will give a good idea of the profits of circulation. In this instance money is considered worth 4%. At a higher rate the figures would decrease slightly. Profits on Circulation. 1082. Two per cent consols of 1930 Purchased at 108^ on January i, 1903. $6,000.00 Maximum Circulation $100,000 Receipts. Interest on Bonds 2,000 Interest on Circulation, 4% 4,000 Gross Receipts Deductions. Tax 500.00 Expenses 62.50 Sinking Fund 173-63 Total Net Receipts Int. on cost of bonds at 4% 736.13 $5,263.87 $4,340.00 Profit in excess of 4% on investment 923.87 Per cent. 0.851 Average Circulation. 1083. Inasmuch as the circulation tax is payable only on the average circulation outstanding, and does not apply on cir- culation in the bank, which may be unsigned or in transit from 368 COEPORATION ACCOUNTING the Comptroller's office, an accurate record of outstanding circulation should be kept for each business day, and the total divided by the number of business days in the six months to obtain the average. Opening the Books. 1084. The opening entries' for the Capital Stock of a bank are so simple as not to require any special explanation. It is a cash proposition. The subscribers may be charged with the amount of their subscriptions and Capital Stock credited, or all the entries may be made through the Cash Book. See example No. i in part II. Commencing With Surplus. 1085. Many banks and financial corporations desire to commence business with a surplus ; e. g., they pay in $125 on every $100 stock. For such make the opening entry in this way. 1086. Sundries Dr. John Smith $12,500 John Jones 12,500 Wm. Brown 12,500 James Green 12,500 Sam White 12,500 To Capital Stock $50,000 To Surplus 12,500 The Subscribers to the capital stock, by mutual agreement. pay a premium of 25% in order to commence business with a surplus. System of Bookkeeping. 1087. It is impossible to demonstrate in this chapter a system of bank bookkeeping, or to illustrate the books gen- erally used. The usual accounts carried in the bank's General Ledger, (excepting accounts of income and expense) are shown in the Statement of Resources and Liabilities illustrated on pages 360 and 361. Figuring Interest. 1088. The chief source of revenue to a bank is the interest collected on loans and discounts, and while interest tables are largely used in banks, a knowledge of the principles involved in calculating interest is not merely important but very es- sential. AND CORPORATION LAW 369 What is Interest. 1089. Interest is the premium paid per centum, or per hundred, for the use of money borrowed. The rate is usually stated by the year, and when interest is charged only on the principle or sum loaned, regardless of time, it is called simple interest. When deferred or overdue interest* is added at stated periods' to the original principle to form a new principle on which to calculate interest, this process is called compounding the principle, or compound interest. 6 Per Cent Method. 1090. The two things to be considered in figuring interest are accuracy and speed. Commercial usage in the United States having divided the commercial year into 360 days, makes possible the use of many short methods of figuring in- terest. The methods most generally in use are the 6% method and the 36% method. For even months, that is, 60, 90 or 120 days, the 6% method is simplicity itself. To find the interest on any sum of money for 60 days at 6%, we have only to re- move the decimal place two points to the left; e. g., the in- terest on $1175.80 for 60 days at 6% is $11.76. The reason for this very simple rule is, that 6% for 60 days is equivalent to 1% for 360 days; and we obtain 1% of the principal by remov- ing the decimal two places. For 90 days we add one half; for 120 days we double it and so on. For 5% interest we sub- tract 1-6; for 7% we add 1-6; for 8% we add 1-3; for 9% we add 1-2; for 10% we add 2-3. Thirty-Six Per Cent Method. 109 1. To figure the interest on any amount for any num- ber of days the 36% method is the quickest and most accurate. This method is based on the principle that any sum of money will reproduce the principle in 1000 days at 36% interest. The philosophy of this is' very apparent. One thousand days at 6% is equal to 360,000 days at 1% and as there are 100 times j 360 in 360,000 it follows that 1% for 360,000 days is equal to / 100% for 360 days, or i year; and as 100% is a reproduction of the principle it proves our premise. Any Number of Days. 1092. Having before us the interest for 1000 days we ob- tain the interest for 100 days, 10 days, or i day, by removing the decimal one, two, or three places to the left; thus the in- 370 CORPORATION ACCOUNTING terest on $1055 ^o^ 100 days at 36% is $105 ; for 10 days $10.55 J for I day $1.05. For an odd number of days, say 75, we add 7 times the interest for 10 days, and 5 times the interest for one day. For small amounts it will be found more convenient to multiply by the number of days; thus $10 for 75 days should be figured $750 for i day. Any Rate Per Cent. 1093. Having found the interest at 36%, we obtain the interest at any per cent by simple division. For 6% divide by 6; for 7% divide by 6 and add 1-6; for 8% divide by 6 and add 1-3; for 9% divide by 4; for 10% divide by 6 and 9 and add both quotients together; for 11% di- vide by 3 and subtract 1-12; for 12% divide by 3; for 5% divide by 6 and subtract 1-6; for 4% divide by 9; for 3% divide by 12; for 2% divide by 18 or the factors of 18 successively. A little practice will make one very rapid in this. To convert commercial interest into accurate interest deduct 1-73, because the difference between 360 and 365 days is 5-365 or 1-73. 2% Accurate Interest. 1094. It is customary for city banks to pay their country correspondent 2% interest on daily balances, and as a rule accurate (365 days) interest is figured. The simplest way for the city bank to figure this, and for the country bank to prove it, is to multiply the total by 4, divide by 73 and point off 3 figures. This is equivalent to multiplying the total by 2 and pointing off two figures to get 2% for a year, and dividing by 365 to get 2% for a day. Compound Interest. 1095. The compound interest on any sum for any number of periods may be found by adding the simple interest for the first period to the principal, and then adding the simple interest on this new principal to itself, and by continuing this process for the number of periods. The difference between the final principal and the original will be the compound interest. This method while accurate is altogether too laborious. By Involution. 1096. Inasmuch as the interest is a certain per cent of a hundred, it is obvious that the principle will be increased each period in the ratio of 100: 100 + the rate for each period, and by repeating the ratio for each period we obtain the AND CORPORATION LAW 371 amount of the principle at compound interest. The interest itself is obtained by subtraction; e. g., take $ioo for 3 years at 6%. The interest for the first year is $6, the total $106 or 1.06 of the original principle, hence the ratio of increase is 1.06 for every period. For the three periods it is' 1.06 of 1.06 of 1.06=1.06^; therefore by raising the ratio 1.06 to its third power, and multiplying this by 100, we obtain the amount of $100 for 3 years at 6% compound interest; subtracting 100 from the total we have the interest. If the interest com- pounded half yearly the ratio would be 1.03, if quarterly 1.015. 1097. In general : to ascertain the amount of any sum for any number of periods, at any given rate of compound interest. 1098. Find the amount of $100 for the first period, divide this by 100, that is, point off two places to the left, then raise the quotient so obtained to the power indicated by the number of terms, multiply the principle by this number and the pro- duct will be the amount of the principal at compound interest for the number of periods. By Aliquot Parts. 1099. Another way of figuring compound interest, and sometimes a simpler way, is to find the successive interest by means of aliquot parts ; thus the interest on $1000 for 4 years at 10% would be. 10=1-10 $1000 ioo=first year's interest. 10=1-10 1 100 I io=second year's interest. 10=1-10 1210 I2i=third year's interest. 10=1-10 1331 i33.io=fourth year's interest Total 1464.10 1 100. Deduct the principal and the remainder is the com- pound interest for four years'. This method can be easily ap- plied when the divisor is a decimal fraction of 100, such as 2, 2^, 5 and so on. 372 CORPORATION ACCOUNTING Discount. iioi. Discount is the abatement made when a sum of money is paid before it is due. Bank Discount is simple in- terest on the face of a note or acceptance deducted in advance. It is correctly called "false discount" by the Mathematicians, because interest is collected not on the sum loaned but on this sum plus the discount charged; that is, when a Danker or broker discounts an acceptance at 6^^, he collects more than 6% interest. Present Worth. 1102. The present worth of a note or acceptance is* the principle which if put at interest for the given time and at the given rate would amount to the face of the note, draft, or ac- ceptance; and ''true discount" is the interest on the "present worth"; e. g., the false discount on $ioo due 6 months hence at 6% is $3.00; the true discount is $2.91; i. e., $97.09 for 6 months at 6% would amount to $100. "True Discount." 1 103. What would be the true discount on a note for $5000 for 3 months at 6%? The present worth of $101.50 three months hence is $100, hence the formula : 101.50 : 100 :: 5000 : $4926. lo^present worth. . • . true discount = 73-90 True vs. False Discount. 1 104. Suppose a man wishes to discount his 3 months note at 6% so as to net him $5000 ; for what amount would he have to draw the note? Ans. $5075. Instead of deducting a false discount of $75 off his note and receiving $4925, he adds a true discount of $75 to his note and receives $5000. Proof: $100 now, at the above rate, is worth $101.50 three months from now ; hence the formula : 100 : 101.50 :: 5000 : $5075. 1004 (a). This chapter closes the practical accounting part of this work, and while it is impossible to illustrate every con- ceivable form of organization, and every vagary of manage- ment and combination the author believes that the book- keeper or accountant who studies the foregoing pages in- telligently and applies himself diligently to his task can successfully handle the books of any corporation. CHAPTER XXXIX. Stock Exchanges — How Organized and Conducted — Their Functions and Purposes — Cost of Membership — Methods of- Operation on 'Change — Rules Governing Delivery of Stocks and Bonds — Defintions of Technical Terms. 1 105. A Stock Exchange is a regularly organized body of brokers acting under a Constitution and By-Laws and a well, defined set of rules and regulations, a violation of which on the part of any member renders him liable to severe penalties- Stock Exchanges are something more than mere gambling: places, they are economic institutions and play a large part in. the world's commercial and financial enterprises. There are- exchanges of various kinds, such as mining, oil, produce, cot- ton, etc., and most every large city has one or more of these exchanges. The New York Stock Exchange, which is not only the largest institution of its kind in this country, but in the world, deals in a variety of stocks, bonds and securities, such as' U. S. Government Bonds, State and Municipal Bonds, Rail- road Stocks, Industrials, etc. An idea of the magnitude of the business done may be gained by a study of the sales on ex- change for the year 1904, reported by Henry Clews & Co. in. their Investment Guide, as follows : Railroad and Miscella- neous Stocks $187,312,065, Railroad and Miscellaneous Bonds' $1,008,928,380, Government Bonds $25,869,180, State Bonds- $2,012,000, and these figures do not include unlisted stocks, such as Bank Stocks and Trust Certificates. In this country membership in exchanges is limited and seats are sold at prices depending on the nature of the exchange, the amount of busi- ness transacted, the prosperity or depression of the times, the activity of business, etc. In London the membership is not limited. An entrance fee of $2,000 is charged and this is not transferable. In the Berlin Bourse an entrance fee of $750 is charged, not transferable. The Paris Bourse is a government institution, membership being subject to the appointment and control of the government. Membership can be transferred or bequeathed, but the transferee or beneficiary must be ap- proved by the government. In New York and San Franciscq. a solvent member can transfer or sell his seat, but the pur- 574 CORPORATION ACCOUNTING chaser must be acceptable to the committee on membership. Som.e of the wealthiest men in the United States have been l)arred from membership in the New York Stock Exchange, so it will be seen that these great institutions are ethical as well as financial. Besides the cost of seats the members are obliged to pay an annual membership fee. 1106. There are two classes of members in all exchanges — the first class do business exclusively for themselves. They are 7 the big guns, the bulls and the bears, the shrewdest, the sharp- est and most daring. The second class do business on com- ^ mission for others, for only members of the exchange can do business on the floor of the exchange. 1 107. Not every exchange confines itself to legitimate bus- iness and not every broker is a man of nicest honor, therefore too much care cannot be exercised in the selection of a broker iDy the contemplative investor. Prices of stocks often fluctuate during the day and brokers have been known to charge their clients a point or two above the purchase price and deprive them of a like amount on the sales, thus giving them what the politicians call "the double cross." The broker's legitimate profit is his commission, which is different in different ex- changes and which is a certain per cent each way, that is, on purchases and sales. The broker takes no chances for his client, the client puts up a certain margin and as all sales are made for cash the broker has to put up the balance which he iDorrows from his banker, putting up the stock as collateral se- curity, and charging his client interest on the money borrowed. If the stock drops dangerously near the margin he reserves the right to demand more margin or sell the stock. In New York the members who deal on their own account are known as scalpers or room-traders. In London they are called jobbers. In Paris they are not allowed to deal on their own account. The fact that stocks are listed on exchange is an indication that they are at least legitimate. Before stocks or bonds of any kind are placed on the official lists, their genuineness' is -established by the investigations of the listing committee, and by this means the patrons of the exchange are nominally pro- tected. 1 108. By listing is meant the entering of the name of the stock on the official list of stocks dealt in and offered for sale by the board. A fixed sum is charged for listing for the first year and a certain yearly fee thereafter, if the stock is to re- main on the list. AND CORPORATION LAW New York Stock Exchange. 1 109. The New York Stock Exchange is located on Walt street with an entrance on Broad and one on New Street. It dates back as far as 1792, and to those who would like to know its interesting history, its historic characters, its National and International influence, its effect on trade and commerce, on war and peace, on civilization and finance I commend them to a study of "28 years in Wall Street" by Henry Clews. The brokers congregate on the main floor of the building or palace,, where the exchange meets and gather in groups about the va- rious posts that are placed thereon at about equal distances apart. Each post bears the name of one or more stocks that are dealt in, and the broker desiring to buy or sell a certain stock (say Erie, New York Central, or Lake Shore), proceeds to the spot where the name of that stock is painted conspicu- ously on the post. Hfe then offers to sell or bids to buy the stock and sometimes the scene about one of these posts is quite animated. Shouting brokers are climbing over each other in a frantic effort to sell or crowding with all their might to get a chance to buy. Dealing may go on at these posts or corners' at any time while the exchange is open, as in the New York Exchange stocks are not called as they are in San Francisco and elsewhere — trading commencing simultaneously in all stocks listed when the Exchange opens for business. mo. Memberschip in the New York Stock Exchange is limited to 1,100. Seats were worth in January 1905 $80,000 each, which is much more than in any other exchange in the world. I will give some of the rules of the exchange which affect outsiders in their dealings with members of the Ex- change. Rules Regarding Commissions. ARTICLE XLIII. mi. Section i. Commissions shall be charged and paid under all circumstances, and upon all transactions', both pur- chases and sales or upon contracts for the receipt or delivery of securities. Such commissions shall be calculated in all cases upon the par value of securities, and shall be at the rates here- inafter named ; and such rates shall be in each case the lowest commission that may be charged by any member of the Ex- change, and shall be absolutely net and free from all or any rebatement, return, discount or allowance in any shape or man- ner whatsoever, or by any method or arrangement, direct or indirect. And no bonus, percentage or portion of the com- 576 COKPORATION ACCOUNTING mission so established shall be given, paid or allowed, directly or indirectly, to any clerk or person for business sought or pro- cured for any member of the Exchange. Sec. 2. On all business for parties not members of the exchange, including joint account transactions in which a non- member is interested, transactions for partners not members of the Exchange, and for firms of which the Exchange member or members are special partners only, the commission charged shall not be less than ^ of i per cent. Sec. 5. Any member offering to do business for less than the foregoing rates violates this Article, and is subject to the penalty for so doing. Sec. 7. The penalty for a violation of this Article shall be, for the first offense, suspension for a period of from one to five years, the term to be fixed at the discretion of a majority of the Governing Committee present at a meeting thereof. For the second offense the penalty shall be expulsion and the mer- bership of the party expelled shall be disposed of forthwith by the Committee on Admissions. 1 1 12. It will be observed from Section i that commissions are charged on the par or nominal value of all stocks and se- curities, that is to say, New York Central Stock is worth at par $100 a share but it may be worth in the market only $90 a share. Now suppose a man wants to buy 100 shares of this stock, the par value of which is $10,000, he puts up a margin -of $1,000. His broker credits him with $1,000 and buys the stock for his account for $9,000, charging his account with $9,000 and $12.50 commission, which is one-eighth of i per cent on $10,000. He then puts up the balance of the purchase price $8,000, either out of his own funds or funds secured from his banker. His' client then orders him to sell, he does so and then charges him another $12.50 commission and interest on the "$8,000 he borrowed or advanced for him at the prevailing rate of interest, the balance then stands to the client's credit unless the account is to be closed. It often happens that the broker makes something on the interest charged. For example the prevailing rate of interest may be 6 per cent, but the broker may be able to borrow money at 4 per cent so he makes the difference of 2 per cent. Of course in putting up collateral se- curity the broker has to put up collateral away in excess of the amount borrowed, from this it will be seen that the broker has to have a large capital of his own on which to operate. If a broker buys or sells stock at a premium he gets his commis- sion on the par value only, so it will be seen that the rule works both ways. AND CORPORATION LAW 377 1 1 13. The broker has other opportunities of making money without taking the risk of buying or selHng on his own account. For instance, it often happens that one customer sells and another buys a given number of shares of the same stock. In this case the broker neither buys nor sells' a single share, but simply charges to the account of the purchasing customer the amount that would be required to buy the stock, and on the other hand, he credits the selling customer with the amount which the shares would bring if really sold on ex- change. The purchasing customer's account then shows a debit balance on which interest is charged at the ruling rate. At the same time the selling customer is charged a bonus for the use of the shares of stock which it would have been neces- sary for the broker to borrow in order to make good his de- livery had he really sold the shares on 'change. Thus the broker is protected from loss no matter which way the market goes, while he gets his commission for buying and selling, his in- terest on money supposed to have been borrowed, and his ijLU bonus on stock certificates supposed also to have been bor- rowed, when as a matter of fact he has neither bought, sold nor borrowed but simply made a few entries on his books. Rules For Delivery of Stocks and Bonds. 1 1 14. The signature to the assignment upon a certificate of stock must be technically correct, i. e., it must correspond with the name as written updn the face of the certificate in every particular, without alteration or enlargement, or any change whatever. "Mr.," ''Messrs." or "Esq.," however, need not be prefixed or affixed to signatures. "Brothers must be endorsed exactly as drawn, not "Bros." and vice versa. All prefixes and affixes, such as "Judge," "Major," "Hon.," "Right Hon.," "Doctor," "D. D.," "L.L. D.," etc., must appear in the endorsement. "And" may be written "«Sz;," and vice versa. "Company' may be written "Co." and vice versa. 1 1 15. Certificates in the name of married women are not a good delivery while the transfer books are open; v^hen the transfer books are closed a joint execution of the assignment, by the husband and wife and a joint acknowledgment before a Notary Public will make the certificate a delivery only dur- ing the closing of transfer books. 1 1 16. Powers of attorney or of substitution or assignments 378 CORPOEATION ACCOUNTING signed by Trustees, Guardians, Infants, Executors, Adminis- trators, Agents or Attorneys, are not a good delivery. 1 1 17. When transfer books are closed by any legal impedi- ment, so as to render their being open again uncertain. Powers of Attorney must be acknowledged before a Notary Public, with seal and date. 1 108. An endorsement by a number of the Exchange, or a firm represented at the Exchange, on a Certificate, is consid- ered a guarantee of the correctness of the signature of tKe party in whose name the stock stands. In all cases where Powers of Substitution are used, the original assignment and Power of Attorney, and each Power of Substitution, must be guaranteed by a member or a firm represented in the Ex- change, resident or doing business in New York. 1 1 19. A detached Power of Attorney, or of substitution must contain a full description of the Stock or Bond by name of Company, and number of certificate, and must be acknowl- edged or proved before a Notary Public, with seal and date. A separate power and acknowledgement must accompany each certificate. 1 120. Certificates in the name of an institution, or in a name with title affixed, as Cashier, President, or other official designation, are not a good delivery, unless assignment is ac- knowledged before a Notary Public, with seal and date, who must certify that he knows the person signing, and knows him to be the person authorized, and that he has seen the minutes of the institution, authorizing said person to make the assign- ment. Some Companies require, in addition, a certified copy of the resolutions of the Directors of the Company in whose name the stock stands authorizing the assignment, as Western Union Telegraph, the Companies having their Transfer Agen- cies at Grand Central Station and American Sugar Refining Company, etc. 1 121. The several Companies having Transfer Offices at Grand Central Station, Forty-second street, require Power on Certificate, in the name of a foreign resident, to be acknowl- edged before a United States Consul, or before J. S. Morgan & Co., London. 1 122. A certificate for more than 100 shares is not a good delivery. Certificates for less than 100 shares are a good de- livery in lots of 100 shares. The receiver may in all cases re- quire delivery by Transfer, provided there be ample time to make it and transfer books are open. AND CORPORATION LAW 379 1 123. When a claim is made for a dividend on stock after the transfer books have been closed, the party in whose name the stock stands, may require from the claimant presentation of the Certificate, and a written statement that he was" the holder of the Stock at the time of the closing of the books, and also guarantee against any future demand for the same. 1 124. Coupon Bonds issued to bearer, having an endorse- ment upon them not properly pertaining to them as Security, must be sold specifically as ''Endorsed Bonds" and will not be regarded as' a good delivery under a sale not so qualified. — Resolution of Governing Committee, adopted May 23, 1883. 1 125. Bonds with a stamp or endorsement stating that they have been deposited with States as security for Bank cir- culation or insurance must be released and acknowledged be- fore a Notary, and then are a good delivery only as "Endorsed Bonds." 1 126. If a definite name, such as John Smith, John Brown, Bank of America, Canton Company, appears upon a bond, it is regarded as implying ownership which must be released, with acknowledgement before a Notary. The Bond is then a good delivery only as an "Endorsed Bond." 1 127. Bonds with assignments or releases executed by Trustees, Guardians, Infants, Executors, Administrators, Agents, or Attorneys, are not a good delivery as' "Endorsed Bonds." 1 128. Coupon Bonds — Delivery must be of the denomina- tion of $1,000 or $500. Large Bonds (over $1,000) or Small Bonds (under $500) good only in special transactions. 1 129. Registered Bonds — Deliveries must be in certificates not exceeding $10,000. 1 130. Coupons on a bond must be those which properly belong to it, of the corresponding number. In case of absence of any Coupon, its full face amount in money is a good substi- tute, unless special notice is given to the contrary; provided, however, that in case of absence of a past due coupon from a bond of which any of the past due coupons' have been paid with interest, its full face value in money, with interest thereon to date of delivery, is only a good substitute. 1 137. Coupon Bonds which can be registered in a name or to Bearer, and which have been registered in a name, must be registered to Bearer to be a delivery. When transfer books are closed, if registered in a name, a Power of Attorney, ac- knowledged before a Notary, in name of, witnessed or guar- anteed by a member, must accompany each Bond. 380 CORPORATION ACCOUNTING Government Bonds (Registered.) 1 132. The execution and acknowledgement of U. S. Regis- tered Bonds, when not made at the Treasury Department, must be before a U. S. Judge, U. S. District Attorney, Clerk of a U. S. Court, Collector of Customs, Collector or Assessor of Internal Revenue, U. S. Treasurer or Assistant Treasurer, or the President or Cashier of a National Bank or, if in a foreign country, before a U. S. Minister, or Consul. In all cases the officer must add his official designation, residence and seal, if he has' one. 1 133. When the assignment is made by a corporation it must be named as the assignor ; when by a Guardian, Trustee Executor, Administrator, an Officer of a Corporation, or any one in a representative capacity, proof of his authority to act must be produced to the officer before whom the assignment is made and must accompany the bond. 1 134. In all the large cities of the world large private banking institutions buy and sell stocks and bonds on commis- sion. In New York there are many such institutions members of the New York Stock Exchange and they execute orders for investment or on margin and act as fiscal agents for corpora- tions. On account of its acknowledged authority we quote the following from Henry Clews & Co.'s Investment Guide for the value of the information it contains. 1 135. Securities are often invalidated by the improper writing thereon of foreign matter by persons not familiar with the forms and technicalities to be observed in making transfers and deliveries. For instance any writing on a coupon bond (other than that made by a duly authorized agent of the com- pany issuing it) makes what is technically termed an ''en- dorsed" or "unclean" bond, and its value in the market ever after is greatly diminished thereby. Serious inconvenience, sometimes accomplished by a loss of money, also frequently happens where a certificate of stock or a registered bond has* been improperly signed or filled in on the back. Some Technical Terms Used on Exchange. 1 136. Bulls. The term "Bull" is derived from the ten- dency of a bull to raise up with his horns obstacles that come in his way. It is applied to brokers who being ''long" on cer- tain stocks try to advance the price in order to compel others to buy, who have contracts' to fill, hence bulling the market on certain stocks, means scheming on the part of the holders of AND CORPORATION LAW 381 such stocks to inflate or increase the market price of those stocks. 1 137. Bears. The term "Bear" is derived from the char- acteristic of the bear to tear down, hence the bear on change is the broker who, being short on stocks or wishing to buy stocks to fill his orders, seeks to tear down or depreciate the value of the stocks he desires to purchase. The bears achieve their purpose by various methods — one being to offer the stock they wish to "bear" away down, causing a scare among others holding the same stock, who also oft'er it, and the uears buy it up and gain their point. 1 138. Long of Stocks: When an operator buys a large amount of stock and holds it in the hope of a raise in prices he is said to be long on stocks. 1 139. Short of Stocks: When an operator sells more stock than he controlls or possesses, in the hope that he can buy it at a less figure and thereby reap a profit, he is said to be "short of stocks" or to have sold short. 1 140. A Point: By a point is meant i per cent on the par value of the stock or bond, as the case may be, not on the mar- ket value. 1 141. Puts: A written or printed agreement or contract with a broker by which he agrees or contracts to buy a certain number of shares of specified stock at a stipulated price any time within thirty days. It is understood that he is to have one day's notice excepting on the expiration of the time limit. For this privilege you pay your broker a certain sum, a sort of in- surance for the risk he takes. The word "put" in this instance is controvertible with "sell," as to put a man stock means to sell him the stock. 1 142. Calls: A call is opposed to a "put," being a con- tract with your broker giving you the right to call on him in- side of thirty days for a certain number of shares of a certain specified stock at a stipulated price. You also pay him for this privilege, as he is obliged to deliver the stock to you within the specified time at the price agreed upon, no matter what the market price may be. Usually the man who has' the "call" wants to get that particular stock and not having available funds he enters into a contract, so that he may obtain it at the call price when his funds are available. "Call' is controvertible with "buy." 1 143. A Spread: A contract with a broker giving you the privilege to put him a certain number of shares of a certain stock at a stipulated price within thirty days, or to call on him 382 CORPORATION ACCOUNTING for a like amount under like conditions is called a ''spread.'* For this privilege you pay him twice the sum paid for a ''put" or a "call" contract. 1 144. A Straddle: When a broker is "long" of one op- tion and "short" of another, or when he buys in one market for future delivery and sells in another he is said to have straddled the market. 1 145. Spread Eagle: This is the term given to the trans- action of a broker who sells a certain number of shares on a certain time, and buys a like number of shares on the same time at a lower figure. For example a broker may sell 100 shares of stock at $100 a share to be delivered thirty days from date, and he may then turn around and buy 100 shares of the same stock at $95 a share to be delivered to him in thirty days. If both deliveries occur on the same day he makes a profit of $5 a share, but if he was obliged to deliver the stock he sold before he could obtain the stock he purchased, he would be compelled to purchase sufficient stock to fulfill his contract, no matter what the market value of it was. 1 146. Wash Sale: This is a fictitious sale between two brokers for the purpose of influencing further sales in a par- ticular stock. The object may be either to increase or decrease the price of a particular stock, by creating a false impression as to its market value. 1 147. A Regular Sale: A sale made one day and payable before 2 o'clock the next day. 1 148. A Cash Sale: A sale where the stock is to be de- livered and paid for the same day. 1 149. Making a Turn: Selling for cash and buying the same stock on regular sale is called "making a turn." 1 1 50. Milking: This is a form of "bearing." It is worked by a clique, one or more of whom reduce the price of a certain stock for the purpose of inducing holders to sell, when the clique steps in and buys. 1 151. Busy Bees: This is an apellation given to cliques or combinations of brokers who unite for the purpose of in- fluencing the price of certain stocks. 1 1 52. A Syndicate is a union of capitalists who combine their resources for the accomplishment of some financial ob- ject, such as the purchase of an issue of Government Bonds, certain railroad or steamship bonds or some other large finan- cial enterprise. 1 153. Curbstone Brokers : Men who do a brokerage busi- ness outside of the exchange or on the curb are called curb- AND CORPORATION LAW 383 Stone brokers. Many good and honorable men are curbstone brokers, but their financial circumstances will not permit them to be brokers on 'change, many others are of course mere spec- ulators who have no capital invested. They are not bound by any set rules like the members of the exchange, and often buy and sell after regular exchange hours. A s tajsr is another name for the man who does business on the outside. 1 1 54. Bucket Shops: These establishments pretend to do a Stock Exchange business, but as a matter of fact they never transfer or deliver the stocks in which they nominally deal. They are mere gambling places where they take and register small bets on the rise and fall of stocks in which they are nominal dealers. 1 1 55. A Boom: A large increase in value and a corre- sponding expansion of credit is described as a boom. 1 1 56. A Flurry: Is a small or undeveloped boom. 1 157. A Panic: This is a contraction or collapse of credit, following a scare among speculators which causes a reduction in prices. 1 1 57. A Pool: Sometimes a number of brokers pool or put into a common fund a large sum of money for the purpose of manipulating certain stocks to their advantage, and then the profits are divided pro rata. It sometimes resembles a syndicate. 1 1 58. A Corner: When a heavy operator or combination of operators buy and hold all of a certain kind of stock for the purpose of creating a scarcity, and artifically raising the price, he or they are said to have cornered the market. They often know before hand that certain brokers have sold short on this particular stock and by getting a corner on it they compel the "shorts" to buy at their own prices. 1 1 59. Sellers or Buyers Option or Future Sales: This is a privilege given to either party, of delivering the stock any time within the number of days specified. 1 160. Fill or Cover: When an operator sells more stock than he has, he is said to have sold short, when he buys stock to cover the shortage which enables him to meet his contract he is said to fill or cover. 1 161. Lame Duck: An operator who has lost heavily, and is consequently crippled, but who has not failed in his contracts, is called a lame duck. 1 162. A Dead Duck: A broker who is unable to meet his contracts is called a dead duck. 384 CORPORATION ACCOUNTING 1 163. Sell Buyer 3: This is the exchange way of express- ing a transaction where the buyer has the option of taking his purchase either on the day of purchase or on any one of the three following days, free of interest. 1 164. Sell Seller 3: This is the same as the preceeding transaction with this difference, that the option rests with the seller instead of the buyer. Of course the number of days must not necessarily be three. 1 165. Dividend on: Means that the dividend goes to the purchaser. 1 166. Ex. Dividend: Means that the dividend does not go to the purchaser. 1 167. Ex. Coupon: Means that the coupon does not go with the sale. 1 168. Interest: This means that the purchaser gets the interest. 1 169 B Flat: This means that the purchaser does not get the interest. 1 170. 90@9i : Means that 90 is offered and that 91 is asked, or in other words, if you want to sell you can get 90 and if you want to buy you will have to pay 91. CHAPTER XL. Brief Summary of the Corporation Laws of All the States and Territories — Number Necessary to Incorporate — Terms of Corporate Existence — Stockholders Liability — Various Privileges and Restrictions — Legal and Contract Rates of In- terest — Penalties For Usury. Alabama. 1 171. Three or more persons' may form a corporation un- der the general laws of Alabama. The liability of stockholders exists only up to the par value of the stock. Beyond any bal- ance due on stock there is no further liability. Stock can be issued only for money, labor performed or property actually AND CORPORATION LAW 385 received, and all fictitious increase of stock or indebtedness shall be void. Preferred stock can be issued only on the con- sent of tv^o-thirds of the stock in interest. Private corpora- tions have a lien on the shares of their stockholders for any debt. The right to sue and defend is the same as that of nat- ural persons. Foreign corporations doing business in this State must have at least one place of business and an authorized agent. When such foreign corporations are empow^ered by their char- ters, they may own and hold stock of corporations created in this State. Under this provision a New Jersey holding com- pany could gain control of an Alabama corporation. 1 171 (b). The legal and contract rate of interest in this State is 8%, and usury is punishable by the forfeiture of all interest. Arkansas. 1 172. A Corporation may be formed in this State by three or more persons subscribing to articles of association setting forth its purpose, its capital stock, the number of shares, amount actually paid in etc. The Capital Stock must be di- vided into shares of $25 each. The Capital Stock may be in- creased or reduced and the name and number of directors changed, but there must not be less than three directors ; and the Secretary and Treasurer, who must be directors, are required to reside in the State. The President and Secretary are re- quired to file annual statements, showing financial condition, with the County Clerk. Corporations may take land in pay- ment of debts. Stockholders are liable only for amount of un- paid subscription, and stock may be sold to pay delinquent assessments. Foreign corporations must have a resident agent in this State upon whom summons can be served. Failure to appoint a resident agent renders all their contracts void as to them, but enforcible against them. 1 172 (a). The legal rate of interest is 6%. By contract 10%. Penalty for usury, forfeiture of both principle and in- terest. Colorado. 1 173. Every corporation for profit formed in this State except the business of banking, must commence its name with "The" and end with ''Corporation." Three or more persons may organize a corporation in this State for a term not to ex- 386 CORPORATION ACCOUNTING ceed twenty years. Corporations may sue and be sued same as individuals. Stock shares must not be less than $i.oo nor more than $ioo. Stockholders liability is limited to the pay- ment for their stock. Stock may be issued in payment of prop- erty, and it is quite usual in case of mining companies to issue their stock in payment for a mine and file a certificate of paid- up stock. All Stock is personal property. Persons holding stock as collateral are not liable for corporate debts, providing they appear on the books of the corporation as pledgees. As pledgees they may vote this stock at corporate meetings. Foreign corporations must file a very comprehensive state- ment with the Secretary of State ; they must have a principal place of business and designate an authorized agent ; and they shall be subject to all the liabilities and restrictions imposed upon domestic corporations. 1 173 (^)- The legal rate of interest is 8%. By contract, any rate. No grace allowed. Connecticut. 1 174. Three or more persons may form a corporation in this State. The par value of the shares shall be $25, $50 or $100. Articles of association must be published in a news- paper. The certificate filed with the Secretary of State must set forth the names and residences of subscribers, the amount of their subscriptions, the amount actually paid in cash, and the amount paid in property. At least 20% must be paid in cash, and subscriptions must be in the names of bona fide sub- scribers, not dummies. The name of every corporation must commence with ''The" and end with "Co." or "Company." The name of a corporation may be changed on application to the Superior Court, and the purposes of a corporation may also be changed by a two-thirds vote of all the stock and the filing of amended articles. Corporations may not commence busi- ness in this State until all the stock is subscribed for, and at least 20 per cent paid in cash. The capital may be increased or decreased, and the par value of the shares changed by a two- thirds vote of all the stock. A corporation may sell the stock of any stockholder to satisfy any debt he may owe the com- pany, by giving proper notice of such sale. The liability of stockholders is limited to the amount of their subscriptions ; but if any of the capital stock is withdrawn or refunded to any stockholder, such stockholder is liable for the amount so with- drawn. Any stockholder who votes to reduce the capital stock, when such reduction will make the corporation insolv- ent, renders himself liable for all debts then due, and directors AND CORPORATION LAw 387 who vote dividends when a corporation is' insolvent, or when such dividend will make it insolvent, are liable for all debts then due, the directors voting against such dividends are ex- empt from this liability. If application is made to the State legislature for a charter to do business chiefly outside the State, a fee of $ioo must be paid into the State Treasury, and before commencing business a franchise tax must be paid, the amount of which may range from $ioo to $5000, to be fixed by the State Board of Equalization, and a like sum upon increasing its capital stock. 1 174 (a). The legal and contract rate of interest is 6%. Usury is not penalized. No grace allowed. District of Columbia. 1 175. The laws of the District are said to be the queerest in the world. Under the general corporation laws from three to twenty persons may organize a corporation, the number de- pending on the class of corporation, of which there are seven classes'. The certificate of incorporation, duly verified, must be filed with the Recorder of Deeds within thirty days after the final instalment is paid. Manufacturing and mercantile corporations belong to the fourth class. Until the entire au- thorized capital shall have been paid, the stockholders in this class of corporation are jointly and severally liable for an amount equal to the stock they hold, for all corporate debts. The law requires the making of annual reports'. These reports must state the authorized and paid-up capital and the amount of the corporation's debts. 1 175 (a). The legal rate of interest is 6%; contract rate 10%. Penalty for usury forfeiture of all the interest. Florida. 1 176. Corporations are usually credited under the general corporation law. Three or more persons may form a corpora- tion. After filing articles with the Secretary of State the in- corporators must publish a notice of their intention to apply for a charter once a week for four weeks in a local paper, set- ting forth the purpose of the corporation, etc. The fee for fiHng is $2.00 per thousand, with a minimum fee of $5.00 and a maximum of $250. Stockholders are liable for only unpaid balance of subscription. Foreign corporations are entitled to all the privileges of domestic corporations, but are required to have a resident agent on whom process may be served. 388 CORPORATION ACCOUNTING 1 176 (a). The legal rate of interest is 8%; by contract 10%. Penalty for usury being forfeiture of interest. Georgia. 1 177. The power to create private corporations (outside of Banking, Insurance, Railroad, Canal, Navigation, Express and Telegraph Companies) is vested in the Superior Courts of the several counties. Charters are granted on petition set- ting forth the objects etc. Charters are limited to 20 years. Petition must be published once a week for one month. Ten per cent of the Capital must be paid in before charter becomes operative. Foreign corporations are recognized in Georgia courts, only by comity. 1 177 (a). The legal rate of interest is 7%; by contract 8%. The penalty for usury is forfeiture of amount in excess of 7%. Idaho. 1 178. It requires the association of five or more persons, one of whom must be a bona fide resident of the state, to form a corporation. Corporations are chartered for a period not to exceed 50 years. Individual liability for corporate debts is limited to the full payment of subscription and no more. Foreign corporations may enjoy all the rights and privi- leges of domestic corporations by filing copy of Articles' of Incorporation in the office of the Secretary of State and also with the clerk of the district court where their principle busi- ness is located and by designating some person, resident in such place, on whom process may be served. 1178 (a). The legal rate of interest is 7%; contract rate 12%. For usury the lender forfeits the interest and the bor- rower pays 10% to a school fund. Illinois. 1 179. Business corporations are formed under the general corporation act. From three to seven persons may join in signing articles of association. The duration of incorporation shall not exceed ninety-nine years. The Secretary of State first issues a license to open subscription books, and when the subscription is complete and an election of officers takes place he issues a complete organization certificate. Stockholders' are liable for any unpaid balance on their subscriptions and they are not relieved of this by transfer, but are held jointly liable AND CORPORATION LAW 389- with the transferee until the stock is fully paid. Shares must not be for less than $10.00 nor more than $100. If indebted- ness exceeds the capital stock the directors and officers as- senting to this are personally liable to creditors. Annual re- ports must be made to the Secretary of State. Foeign corporations must designate a resident agent upon whom legal service of process may be made. They are subject to all the liabilities' and restrictions of domestic corporations and may have no greater powers, nor can they engage in any business not authorized by their charters. 1179 (a). The legal rate of interest is 5%; contract rate- 7% and the penalty for usury is forfeiture of entire interest. Indiana. 1 180. Parties wishing to form a corporation in this State may, by filing articles with the Secretary of State, or in some cases with the Recorder of the county in which it is desired to have the pincipal place of business, organize under the gen- eral laws of Indiana. There is no fixed or uniform liability in this State, the nature of the business or other circumstances determines the liability of stockholders and there are some cor- porations where the liability of stockholders is not yet fixed by statute. Corporations are divided into three main divisions, and the liability varies from a single liability, to a single lia- bility plus liability for wages due, to a double liability. The agent of a foreign corporation must file with the County Clerk his power of attorney or other evidence of au- thority. 1 180 (a). The legal rate of interest is 6%; contract rate 8%. The penalty for usury is forfeiture of excess interest. Indian Territory. 1 181. This territory has adopted that portion of the laws of Arkansas which relate to corporations. Vide paragraph 1 172. The legal rate of interest is 6% ; by contract 8%. Penalty for usury forfeiture of principle and interest. Grace on all but demand drafts. Iowa. 1 182. All corporations are organized under general laws. The constitution prohibits the granting of special charters. Any number of persons may associate themselves together for the purpose of forming a corporation. Corporations may en- 390 CORPORATION ACCOUNTING gage in any lawful business. The articles of incorporation must fix the highest indebtedness which the directors may incur and this must not exceed two-thirds of the capital stock, except in case of Insurance Companies, they also fix the ex- tent to which the private property of stockholders shall be subject for corporate debts, but in no case can the liability be less than the balance due on subscriptions. Tansfers to es- cape this liability do not relieve, and executions may be levied on private property for balance due on transferred stock. 1 182 (a). The legal rate of interest is 6%; contract rate 8%. The penalty for usury is forfeiture of interest and costs'. Kansas. 1 183. Five or more persons may associate themselves to- gether for the purpose of forming a corporation, at least three of these must be citizens of the State. The application must be filed with a Charter Board composed of the Attorney Gen- eral, Secretary of State and Bank Commissioner. The appli- cation fee is $25. The Board examines into the application and decides whether to allow or reject it. In addition to the application fee, there is a charter fee ranging with the amount of the Capital Stock. Annual statements must be made each year to the Secretary of State, and the Secretary of State may demand supplemental statements at any time. Change of ownership of stock must also be recorded in the office of the State Secretary. Corporation stock is* liable for corporate debts and is regarded as personal property. Liability to cred- itors can now only be enforced through a receiver. The credit- ors can not maintain action. Corporation may increase their stock by vote of the stockholders, but such increase must be made by actual bona-fide cash subscriptions to the amount of such increase. No water in Kansas Stock. 1 183 (a). The legal rate of interest is 6%; contract rate 10%. Penalty for usury forfeiture of excess interest and an amount equal to that contracted for in excess of 10% to be de- ducted from the principle. Kentucky. 1 184. There is no restriction as to the line of business in which corporations may engage in in this State. Individuals may associate themselves for the purpose of engaging in any lawful business and form a corporation under the general laws. Stockholders are liable for corporate debts to an amount equal to that which they owe the corporation on the stock they have AND CORPORATION LAW 391; subscribed for, and stockholders in corporations not organized for educational, religious, charitable, or benevolent purposes,, or for the purpose of building, constructing or operating turn- pikes or bridges', lines of railroad, telegraph or telephane, or developing or improving lands, mines or waterways, or con- structing or operating water, gas or electric plants, or operat- ing for petroleum, natural gas or salt water, are indiivdually responsible equally and ratably, and not one for the other, for all contracts and liabilities of such corporations, to tne extent of the amount of their stock at par value, in addition to the amount of such stock. Foreign corporations may not enjoy greater privileges than those given to domestic corporations in the same class. 1 184 (a). The legal and contract rate of interest is 6%, and interest in excess of this can not be recovered at law. No^ grace. Louisiana. 1 185. The Civil Code of this State specifies a list of en- terprises, for the carrying on of which corporations may be formed by any six or more persons. The number necessary to incorporate a banking institution shall not be less than five^, and there are certain other lines of business such as mechani- cal, mining and manufacturing which may be incorporated by three persons. For this last schedule the capital stock must be between $5,000 and $1,000,000. The manufacture or dis- tilling of intoxicating liquors is excepted from this last list. The liability of stockholders is limited to the amount due on their subscriptions. Charters must state among other things the time and manner of payment on stock subscribed, and the mode of liquidation at termination of charter. Charters may also contain agreements for consolidation, dissolution or liqui- dation. There is also a "limited corporation" law in this State under which corporations may be formed to carry on any kind of lawful business', except stock jobbing. These corporations may be formed by three or more persons, must have a capital stock of not less than $5,000 and must on every occasion use the word "limited" after their name. The liability is limited to the amount of the subscriptions. Any corporation making a fictitious issue of stock shall forfeit its charter. Foreign corporations (excepting mercantile) must file with the Secretary of State a declaration of domicile and appoint a resident agent on whom process may be served. 1 185 (a). The legal rate of interest is 5%; contract rate 8%. Penalty for usury forfeiture of entire interest. No grace.. .392 CORPORATION ACCOUNTli\G Maine. 1186. In 1901 the State of Maine placed upon its Statute books a set of corporation laws that are not only broad and liberal but in many respects singularly unique. Here are some of the features, not a few of which are dangerous : Three persons may form a corporation under the general law. Corporations may be chartered with a minimum capital of $1000. Corporations may commence business and continue with no capital paid in. Stockholders liability is limited to the par value of the stock. Stock may be paid for in property or services and, as in New Jersey, the judgment of the direct- ors is conclusive in determining the value of such property or service ; and stock so issued is fully paid and free of liability. Maine corporations are not required to file any kind of state- ment. They are exempt from tax while franchise is unused. Corporate organization can be effected in three days without any of the incorporators coming to the state, and not any di- rectors or officers with the exception of a clerk need be a resi- dent of the State, and inasmuch as meetings can be held by proxy, not any of the stockholders are ever required to come to Maine. Meetings may be held outside of the State and business may be conducted and offices maintained in any part of the world. A married woman may be a stockholder, di- rector, or officer. Two or more classes of directors may be chosen and elected for terms longer than one year. Corporate powers are practically unlimited; consolidations or mergers may be formed and holding companies organized. In most States corporate powers are limited to those expressly granted or implied, but in Maine, corporations can not only do what the Statute expressly grants, but also whatever it does not forbid. Foreign Corporations may do business in this State. The} may be subject to suit and attachment. 1 186 (a). The legal rate of interest is 6%; contract rate any rate agreed upon. Maryland. 1 187. Corporations are usually formed under the general corporation Act by the association of five or more persons, citizens of the United States, and a majority of whom must be citizens of this State. Stockholders are liable to the amount of their subscriptions. The certificate of incorporation must be approved by a judge of the Superior Court or Circuit Court. Officers assenting to a loan made to a stockholder are liable AND CORPORATION LAW 393 for double the loss in case of insolvency. This does not apply to Building and Loan or money lending corporations. Foreign corporations must file certified copy of charter with the Secretary of State and name a resident agent on whom legal service can be made. 1187 (a). The legal and contract interest is' 6%. For- feiture of excess interest is the penalty for usury. Massachusetts. 1 188. Three or more persons may form a corporation un- der the general laws. The certificate of incorporation must be approved by the commissioner of Corporations who files the same with the Secretary of State, and the latter issues the charter. Shares of stock may range from $5 to $100. Stock may be paid for in money or property — real or personal — but the president and treasurer and a majority of the directors must make a sworn statement that the valuation is fair and reasonable, and this statement must be approved by the Com- missioner of Corporations and filed in the office of the Secre- tary of the Commonwealth. Stockholders who have paid in full for their stock are not further liable for corporate debts. Corporations may be dissolved on petition of a majority of the stockholders to the Superior Court. A Corporation has the common law right of winding up its affairs. 1 188 (a). The legal rate of interest is 6%; by contract any rate. Michigan. 1 189. In this State corporations are formed under general laws. Manufacturing and mercantile corporations are formed under a law known as the manufacturing act. These corpor- ations are required to file with the Secretary of State in Jan- uary or February of each year a duplicate statement of their condition, setting forth the actual capital paid in, the resources and liabilities, the names of stockholders and number of shares held by each, etc. The Secretary of State furnishes Dlanks on which these reports must be made, and such reports must be sworn to by the secretary and signed by a majority of the directors. A penalty of $25 is imposed for failure to make re- port and an additional penalty of $5 per day for each secular day after the first of March until report is made. Other classes of corporations, while required to make re- ports, are not obliged to make as complete reports' as the fore- going. The liability of stockholders is limited to the amount 394 CORPORATION ACCOUNTING of their subscriptions excepting for labor performed for the corporation, in which case there is an additional personal Ha- bility. Minority stockholders may combine their votes so as to elect one director. Corporations must at time of organiz- ing pay to the Secretary of State a franchise fee or tax of half a mill on every dollar of their capital; that is, one cent on every $20, and no contract made by a corporation shall be valid until this requirement of the statute shall have bee.- complied with. The same provision applies to foreign corporations seeking entrance into this State, and such corporations' upon compli- ance with the statutes shall have the same rights, privileges,, prerogatives and responsibilities as domestic corporations. 1189 (a). The legal rate of interest is 5%; contract rate 7%. Penalty for usury forfeiture of all interest. Minnesota. 1 190. Three persons may form a corporation in Minne- sota, excepting corporations authorized to take private prop- erty for public use, in which case the number of incorporators must not be less than five. Stockholders are liable for the par value of the stock which they hold excepting manufacturing and mechanical corporations). Owners of bank stock are liable for double the amount of their stock. Persons holding such stock as collateral security are equally liable and no owner or holder of bank stock is released from liability for one year after the sale or transfer of his stock, provided the bank goes into insolvency within the period specified. Foreign corporations must file certified copy of charter or Articles of Incorporation and must maintain an office and have a resident agent at such office. 1 190 (a). The legal rate of interest is 6%; contract rate 10%. The penalty for usury is forfeiture of entire interest. Mississippi. 1 191. Corporations are formed under general laws, but with the exception of railroads and insurance companies they may be specially granted a charter by the Governor on ad- vice of the Attorney General. Stockholders are liable for only the balance unpaid. on their subscriptions. Directors are liable for debts incurred in excess of the capital stock. Foreign corporations are not required to file copy of char- ter. They may do business in conformity with the State laws governing domestic corporations. AND CORPORATION LAW " 395 1 191 (a). The legal rate of interest is 6%; contract rate is 10%. Penalty for usury, forfeiture of all interest. Missouri. 1 192. Five or more persons' may form a corporation. All corporations are created under general laws, none under pri- vate charter. The business of the corporation shall be limited to the charter provisions. Every corporation must have at least three resident directors. The minimum capital permitted is $2000 and the maximum $10,000,000. Stockholders are liable for only the par value of their subscriptions. Stock can be issued only for money, property or service actually performed. The State tax is $50 for the first $50,000 capital or less, and $5 for every additional $10,000. In addition there is a tax of twenty-five cents on every $1000 of capital stock, which goes to the school fund. Domestic corporations, excepting rail- roads and insurance, are required to make an annual report to the Secretary of State. Preferred stock may be issued with the consent of the stockholders. Foreign corporations must maintain an office in the State and appoint a resident agent on whom process may be served. 1 192 (a). The legal rate of interest is 6%; contract rate 8%. Penalty for usury forfeiture of all interest with costs. Montana. 1 193. The number of persons who may form a corporation in Montana shall not be less than three nor more than nine. A certificate of incorporation, reciting the objects of the cor- poration, amount of capital stock, proposed term of existtence, etc., must be filed with the County Clerk of the county where the principle place of business is located, and a duplicate copy with the Secretary of State. Twenty years is the limit of cor- porate existence. Stockholders are personally liable for only the balance due on their subscriptions'. The debts of a cor- poration must never exceed the amount of the capital stock; if they do, the directors are jointly and severally liable for the amount of such excess ; that is, such of the directors as know- ingly assent to it. The articles of incorporation may provide for assessing the stock, otherwise it is non-assessible. Corporations are required, annually, within twenty days after the first of September, to publish in some newspaper printed nearest the place Avhere the business of the company is carried on, a verified report stating the amount of the cap- ital stock, the proportion paid in, and the amount of the exist- 396 - CORPORATION ACCOUNTING ing debts of the company ; and file the same in the office of the clerk of the county where the business of the company is car- ried on. P'ailure to do so renders all the trustees of the com- pany jointly and severally liable for all debts of the company then existing, and for all that may be contracted before such report shall be made ; but if the board shall cause a report to be filed in the office of the County Clerk, although it is not published, the liability ceases. The name of every corporation must indicate the nature of its business, and the last word of such name must be either "Company" or ''Corporation." There is special legislation affecting foreign corporations doing business in this State. 1 193 (a). The legal rate of interest is 8%; but contract any rate. Nebraska. 1 194. Any number of persons may form a corporation for the transaction of any lawful business. All corporations are organized under a general statute. Notice of incorpora- tion must be published, stating nature of business, capital stock and time and condition of payments, etc. Statement of liabilities must be published annually. Stockholders are not liable beyond the par value of the stock for which they have subscribed. Foreign corporations may become domestic corporations by complying with certain statutory requirements. 1 1949 (a). The legal rate of interest is 7% ; contract rate 10%. Penalty for usury forfeiture of all interest and costs. : ; Nevada. 1 195. Three or more persons may form a corporation for the transaction of any lawful business, under the General Cor- poration Act. There is no personal liability for corporate debts. Stockholders and directors meetings may be held out- side the State, if desired ; provided an office and resident agent is maintained within the State. Consolidations and mergers may be formed. Corporate existence may be made perpetual. Non-assessable stock may be issued. There is no franchise tax in Nevada. Votes may be cast by proxy and cumulative voting is permitted. All stock is personal property. Stock may be issued for labor or property, and when so issued is paid-up stock. Two or more kinds of stock may be issued. Preferred stock may be converted into bonds, or bonds may AND CORPORATION LAW 397 be made convertible into common stock. Corporation may hold stock of other corporations. 1 195 (a). The legal rate of interest is 7%; but contract any rate. New Hampshire. 1 196. Corporations may be formed under general laws. Stockholders are liable to the corporation and its creditors up to the par value of the stock; but there is no further individual liability for corporate debts provided the Statute has been complied with. Foreign corporations may do business same as domestic corporations. 1 196 (a). The legal and contract rate of interest is 6% and the penalty for usury is forfeiture of three times the amount paid over the legal rate. New Mexico. 1 197. Three or more persons may associate themselves for the purpose of forming a corporation. They may incor- porate under general laws for a period of 50 years. There must not be less than three directors in any company, and at least two of these must be citizens' of the United States, and one a resident of New Mexico. Stock is regarded as" personal property. There is no personal liability for corporate debts unless such debts exceed in amount the capital stock. Special regulations govern railroad corporations. Foreign corporations must file articles' of incorporation and designate a resident agent. 1197 (a). The legal rate of interest is 6%; by contract 12%. The penalty for usury is forfeiture of twice the excess and a fine of from $25 to $100. New York. 1 198. Corporations are created under general laws. Three or more persons may incorporate. The corporators must be adults, and two-thirds must be citizens' of the United States, and one a resident of the State of New York. Two directors must reside in the State. Stock may be issued only for money or property actually received. Stockholders are liable to cred- itors for corporate debts contracted while they were stock- holders, to an amount equal to the balance remaining unpaid on their subscriptions. At the time of subscribing, stockhold- ers must pay 10% of their subscription in cash. At least two- 398 CORPOEATION ACCOUI^TING thirds vote of the stock in interest is necessary to create a mortgage indebtedness, and this must not exceed the total paid-up stock, or two-thirds the value of the corporate prop- erty. The term of corporate existence is 50 years, but cor- porate existence may be extended for a like period on the con- sent and application of stockholders representing two-thirds of the stock. Directors are personally liable for unauthorized dividends, unauthorized debts, an over-issue of bonds, or loans to stockholders. In case of insolvency, the directors shall act as trustees for creditors and stockholders, unless a receiver is appointed. Foreign corporations may obtain permission to do busi- ness in this State. 1 198 (a). The legal and contract rate of interest is 6%, Usury voids a contract and is a misdemeanor. North Carolina. 1 199. Corporations are formed under a general Statute or created by special Act. The liability of stockholders depends upon the provisions of the Articles of Incorporation. Unless the articles so provide there is no personal liability on the part of the stockholder. Corporations may purchase, hold and dis- pose of the stocks and bonds of other corporations. Cor- poration shall be post-existent for three years for the purpose of winding up their business. Foreign corporations must file certified copy of charter or Articles of Incorporation, and have an ofiice or authorized agent in the State. 1 199 (a). The legal and contract rate of interest is 6%. North Dakota. 1200. Three or more persons may form a corporation for the purpose of carrying on any lawful business. The amount paid upon stock must be endorsed on the certificate by the Secretary, and when it is fully paid it must be endorsed ''fully paid up." Stock may be issued for money, propetry or labor, at its true money value. No note or other obligation can be accepted in payment of stock. Stockholders are personally liable for corporate debts to the amount of their unpaid sub- scriptions. Dividends can be paid only out of surplus, and directors can not create debts in excess of the subscribed cap- ital stock. It requires a vote of two-thirds the entire capital stock to create a bonded indebtedness. The same vote is re- quired to increase or decrease the capital stock. AND CORPORATIOIS LAW 399 Ohio. 1201. Five or more persons may form a corporation un- r ^ s. ooo §;- s^§ CO 1— r €«■ §g £ t- CO OQ €©• >» s 3 g TllS o O 3 ncJ «4H * 2 ali go 3 i Accts Accts Accts J DO tn ^ g S £ 2 'S (U o 0) (u S 5 Cj CO Si-S ?3 S |as 1- '2 *c o Q o o Cash Secu Secu Bills Cust Cust Cust 2 -f^ o o o o o o o o • o Ud o o o o n ''^ t^ CO kO lO o 1 nH CO lO b- 00 w (M r-i •^ ' €«■ €«■ p (M(M o o Q 1 lO o 1 CO^O^ CO 00 o" 00 1—1 l-H e«- ^ ^ s OJ ,— . ^'S . ■Tj U 02 a "■ >H ^^ Ol Oh-P ,§ CS o o .1^^ o ^ . Ph >»rt mo H ;?; p (^ ^ <5 h o ^ o ,_. Q yj o 10-. Q lO w c^ o lO^ co^ HH <=5 o co" CO o ee- U- H ?3S o o o P'^ <=> P it o o o t§s ^ co^'^ TjT €©• -2 1 CO -? {:} en oi h PI a a 5 1 Ol 2 ^4 i o >. .__ ^ H- ^ u ^ "* ;3 -2 ^ o CO AND COEPOEATION LAW 429 ♦ ment of the indebtedness, which the Bank accepts and re- ceives on June i, 1904. The Directors of the Bank subsequently learn that of the loans made to Trickey, the sum of $250,000 was paid by Trickey to the Cashier upon a personal indebtedness, then re- pudiate the loans of $250,000 as to Trickey, and claim same as against the Cashier personally. The interest upon these loans of $250,000 at 10 per cent per annum, compounded monthly, amounts to $145,000, while the interest thereon at the legal rate of 7 per cent per annum, applicable in the absence of agreement, amounts to $110,000. The Directors demand of the Cashier the payment of $395,- 000 for the transfer to him of 3,950 shares'; the Cashier refuses, but offers to pay $380,000 as of June i, 1904, for the transfer of the entitlement to stock therefor. How many shares of stock should the Cashier receive for the payment of $380,000? The Cashier offers to pay $380,000 which is $20,000 in ex- cess of the amount he can be sued for on $250,000 plus interest at 7% per annum ($110,000) amounting in all to $360,000; therefore as the Company have settled with Trickey on the basis of interest at the rate of 10% per annum, compounded monthly, the Cashier is entitled to participate in the increment pro rata ; that is, for the amount owing by him viz : $360,000, he is entitled to 395-900, representing principal $250,000 and interest $145,000. Again, as he offers to pay an added sum of $20,000 over and above all legal claims that could be sued for as against him, he is further entitled ^ 20-900 shares addi- tional, making altogether 4150 shares due to the cashier. $360,000=395-900 or 3,950 Shares Plus 20,000= 20-900 " 200 Due to Cashier 4.150 III. Brown, Green, Black and White form a partnership on June i, 1903. Capital is contributed by Brown, $20,000; Green, $18,000; Black, $12,500, and White ,$9,500. The Profits and Losses are to be divided in the ratio of these contributions. On May 31, 1904, the Trial Balance shows as follows: 430 CORPORATION ACCOUNTING Brown, Capital $20,000.00 Green, Capital 18,000.00 Black, Capital 12,500.00 White 9,500.00 Cash $3,480.28 Merchandise 52,190.05 Fixtures 2,940.00 Accounts Receivable 24,082.75 Patent Right 2,000.00 Real Estate 9,000.00 Accounts Payable 16,308.64 Demand Notes Payable 25,000.00 Mortgage Note (on the Real Estate) 4,000.00 Wages and Salaries 4,560.00 Discount on Sales 1,240.90 Discount on Purchases 1,392.80 General Expenses 3,800.44 Commission 2,755.40 Interest 792.00 Brown, Personal Drawings 1,980.00 Green, Personal Drawings 1,242.00 Black, Personal Drawings 2,148.50 $109,456.84 $109,456.84 Merchandise Account represents Purchases of $142,784.30; Sales, $89,542.28; Rebates on Purchases, $2,472.10, and Allow- ances to Customers, $1,420.13. Inventory Value May 31, 1904, is $73,669.37. Office rent, $100, has been paid in advance for June, 1904. Unexpired insurance premiums amount to $74.00. Accrued interest on Demand Notes to May 31, 1904, is' $375.00. It is agreed that depreciation of 25 per cent on Fixtures shall be charged, that valuation of Patent Right shall be increased to $3,000.00, that a Reserve Fund of 2^ per cent of the Ac- counts Receivable shall be created to provide for loss' in col- lection, that interest shall be allowed to all partners on Capital Accounts at 3 per cent per annum, and that a salary shall be allowed to White of $1,200.00. Prepare a Trading Account, Profit and Loss Account, and Balance Sheet as of May 31, 1904; also separate statements of the Partners' Accounts'. Present the Operating Statements in all detail possible with the information at hand, and show the percentage of Gain or Loss per Trading Account, and of Gain or Loss per Profit and Loss Account on the basis of the cost of the Merchandise sold. AND CORPOEATION LAW 431 CO Oi CM 1— 1 o ^ O < o ^ m fl S^ o; o >A CO CO GO Cq CD GO^ CD O" CO (M !>. CD •TjH^CD^ (M^co" r-i '^ ® 5 "2 Pco 2 CD 03 » CC !» CD cd -M DO fl 55 O CS O t^ tH m CO S^8§ t^ in oj o § ^ to _ S O) C rd T3 S 'm ^ Ph OO S o rt tn S J3 cj Sh O rEH c8 OOPPh Ir- U5 O CD CO O r-H t- * Ol CO CO ^ ■* 05 CO lO (M Ol (M lO Tti O (M CO CD 1— 1 1— 1 ee- ^ § ss Tt^ . CO :2S „ m 5 a» JS ^p:!.g tn C5 aj tw oj 5-1 Qj a> So S I- p::i 432 CORPORATION ACCOUNTING W O O lO U5 O rJH t^ CO O O CO -t r-t 00 00 CO r-l a» o CO wo 00 lO nn^ 00 CO CO of f-H ©3 O] (M (M CD CD CO CD Ci OS OS OS CO CO CO CD q-l C4H «4-l <4H O O O O O 00 . . : t- 00 O O OJ Oi I— 1 O CO oo "* "^ O CO T** of ^ ^ (N l-H li r-l l-H r-* €©• ^'S CO o t-^n S -eo a"PH: it- O* CO OD 00 r-i o O lO tH^ i-Tca TjT e©^(M * eS ;^ O O CO CO CO pO CO 00 00 O O CfO 00 CO o ^ o Tjl o o o o o^ <» 00 CO 05 1— 1 (N €©- ^ €©■ (M l-H U CO s§ J^rn" -S^ ^•s CO ^ ^o -pr-fCO g^ob a'&" ■+3 cs - Inves on C Lose -P<^ ?, «-H 03 CS (U^J) o d «i 5.a£ COS Tt< op P -^-'"■*^" ^J^ CQ CO cc -"^^ I— 1 II -? O CO O 00 cq CO Tf< O (M OO l-H O 3 O O 00 ooco O »0 CO o t-co W5 CO ■* (M (N e©^ 00 100 to i-j i-H CO i-H CD CO i-J^ lO co" ^^ CO OS CJ o .— ( 02 O ^-< "^ CO ;2? op CO is- a (=1 O 00 U3 r-H 00 CO Tj< CD of CO l-H Is O O OS p S O lO I-H o O 00 O O CO »C^(M QO^C^ cents. But does pay : Instalment No. 6, 5 cents. AND COEPORATION LAW 437 How many shares is "B" entitled to, and in the aggregate how much do "A" and "B" pay to the Company? "A" having paid the first and second intsalments amount- ing to I73^c per share on looo shares' to be sold at the value of 35c per share, it is self evident that if neither he, nor his successor in interest paid any more instalments, he would be entitled to receive from the company 500 shares, as being the equivalent of what he had paid, there being a stipulation that there should be "no forfeiture of any money paid in," conse- quently when the third instalment of 2i^c is called for, there would be due $25.00 on 1000 shares, which with the amount already paid in, viz., I7%c would make the stock worth 20c per share. This amount divided into $25.00 would represent 125 shares, and "B" having failed to pay the instalment, for- feits that number of shares" to the company, which had been previously debited to him at the rate of 35c per share — he would of course then have to receive a corresponding credit to his account at the same rate, viz: 125 shares at 35c per share=$43.75. The same amount by Journal entry would be then debited to Forfeited Shares Account and any further disposition of forfeited stock would be to the credit of this account and the debit of subsequent purchaser at the full rate of 35c per share; but naturally the purchaser would only be called upon to pay the aggregate amount of instalments paid up to date of his purchase, and he would be liable for the bal- ance as called for, consequently "B's" account would now rep- resent 875 shares, on which he would owe $131.25. The fourth instalment of 23/^ c due by ''B" would be levied on his 875 shares and amount to $21.87%, ^^^ the stock would now be worth 225^ c per share. Following the same methods as before described, this amount, viz: 22^ c divided into $21,871^ would forfeit 97 2-9 shares to the debit of Forfeited Share Account at the rate of 35c per share=$34.02 7-9 to the credit of "B," the remaining shares due to him being yyy 7-9. The fifth instalment at 7>4c per share on yyy 7-9 shares= $58.33, stock at that time being worth 30c, which divided into- 438 COBPOEATION ACCOUNTING the foregoing amount would forfeit 194 4-9 shares which at 35c=$68.04 5-9 deibetd and credited as before. "B" would now have forfeited 416 2-3 shares representing $145.83 1-3 and there would remain to "B" 583 1-3 shares upon which he pays the 6th instalment at 5c amounting to $29.16 2-3. In this way the books are always kept in balance and the Forfeited Stock comes back for further disposition at the same price it was originally disposed of. In illustrating this problem ,the answer has been worked out to fractions of cents and also of shares, but of course in a business way, it would be sufficiently accurate to dispose of all fractions where the amounts exceed one-half and consider it as a whole number. Second Method. "A" has paid $175 on the total purchase price owing by him of $350, consequently he is entitled to 500 shares without any further payment. The third instalment of 2I/2C being de- linquent, acocrding to the terms of the subscription a propor- tionate number of shares must revert to the company equal to the amount of the delinquent instalment, consequently he could not hold any more stock than represents the equivalent of the instalments paid and due, therefore the levy of the third instalment makes the stock 20c in value, and as he has already paid $175.00, equal to 875 x 20c, he has remaining to his credit 875 shares, and consequently must forfeit 125 shares to the company. When the fourth instalment is levied, the price of the stock becomes worth 22I/2C which divided into $175^777 7-9 shares, which he is entitled to retain, and results in a further for- feiture by him of 97 2-9 shares. Again when the fifth instal- ment of 7^c is levied the value becomes 30c which divided into $175=583 1-3 shares and a further forfeiture of 194 4-9 shares is necessary. When the last instalment is called for at 5c per share, he has only remaining to his credit 583 1-3 shares', upon which he pays $29.16 2-3 and this amunot plus $175 equals $204.16 2-3 or the value of the last number of shares at 35c per share. AND COKPOEATION LAW 430^ pq CD 1— 1 .— 1 1 €©• m- a a 3 ^ m ^ 2 ^ c fl o •S "^ -iJ ^ OJ «- PQ m m PQ 440 COEPOEATION ACCOUNTING 05 Ci CO t>. lO 0^1 JO (M >-0 CO «>: O p r-H £2 "* 00 oi ■* eo «o (M «3i 05 CO ^ (N -* ^ CM 1>. Tj< CO I— I 05 Ci 00 CJ P) C g QJ 2 fl -M -M -M -P 1^ •W ^ 0) a> ao OS 05 p (M lO *>: o o £2 '^ 00 n< CO CO OS OS CO 125 97 2 194 4 cq CO 1— 1 we^« ri d d 01 > > OJ O)