To Increase or Reduce the Value of Assets Before Declaring a Dividend. Ex. 275. The Plant and Quarry of the Berkshire Marble Co. of Boston, have fairly increased in value $20,000, owing to the discovery of limestone on another part of their land. What entry is necessary on the books? The correct way would be to make a new Inventory of the Plant, for the new valuation. When closing the books credit the account by Inventory, and close it into Loss and Gain, bringing the Inventory down for new account. If it is desired, however, the entry could be made thus: Plant....... $20,000.00 To Loss and Gain........ $20,000.00 If this entry is used, then the Inventory must include the increased value. Suppose the Plant has decreased in value since the last dividend was declared, say $10,000, owing to heavy operating and reduced prices; what entry would you make? Inventory the Plant for $10,000 less than the last, and close into Loss and Gain; or— Loss and Gain................ To Plant $10,000.00 $10,000.00 The company owns 300 shares of The N. Y. & N. E. Ry. Co. stock, par value $100, which has decreased from 125 to 115, a decrease of 10 points per share. What entry should be made in the books before declaring a Dividend, to show the actual condition of the company? Loss and Gain (old acct.)........ $3000.00 To Loss and Gain (new acct.)...... $3000.00 Note. Post the debit entry; then close the books. After the books have been closed, post the credit entry. This entry first shows a Loss on this stock, which has been declared as a Loss, for this Dividend. Now, if this stock had been sold at the time it would have been an actual Loss; but the credit to Loss and Gain new account holds it as a Gain until the next Dividend, or until the stock is sold. Many corporations inflate the value of their assets instead of writing off the depreciation. National Banks are compelled by law to correctly value their assets, and we trust that all corporations will be required to do likewise at an early date. CHAPTER SEVENTEEN. Reduction of the Capital Stock of a Bank. Ex. 276. The Buckeye Banking Company of Lima, Ohio, have lost $230,000 Speculating in Oil. The Capital Stock is $500,000. At a meeting of the Stockholders an entire new Board of Directors was elected. It was decided to reduce the Capital Stock to $250,000, and the Directors were instructed to confine the business to the regular lines of Banking. If cash is not paid at the time of reduction, then credit stockholders, and as payments of cash are made to them debit them and credit Cash. When they have all been paid Stockholders' account will close. It is not meant by this that each stockholder will be credited, but that an account with Stockholders be opened. All the old stock certificates must be taken up and canceled and new stock issued. Debit the Stockholders in Stock Ledger for certificates returned and credit them for the new ones issued. The bank whose Directors and officers, from the President downwards, are prone to indulgence in stock speculations, and who seem tɔ be currently more taken up with the occupation of studying the vibrations and revolutions of the Stock Exchange, than with the business of banking-the business which is nominally their sole profession,-cannot be considered an institution that is managed with due prudence and safety. Defalcations are liable to be the outcome of such a situation. The bank which is managed without a due regard for the laws of banking, and with an open disregard of the principles of strict honor and honesty, equity and fairness, is surely in a bad way, and also particularly open to losses from the irregularities of employes who are demoralized by their surroundings-who live under the influence of bad example. A Manufacturing Company. Ex. 277. A manufacturing company has been organized with a Capital Stock of $80,000. There are eight stockholders, each holding $10,000 of paid up stock. The amount of cash actually paid in is $16,000, and machinery $4000, making a total of $20,000, the balance of $60,000 representing nominal or fictitious value, with nothing to offset it. Each stockholder stands credited on the books of the company with his investment of $2500, some having paid cash, others having put in machinery, etc., to cover same amount. What are the proper entries to make that the books may show $10,000 stock held by each stockholder, and a credit to Capital Stock of $80,000? This is a very simple operation, but it has puzzled many readers of "The Bookkeeper," having appeared in its columns in November, 1893. The solutions given by the readers are amusing, to say the least. Before making the entries, let us understand the conditions, which are as follows: The company was incorporated for $80,000, eight stockholders taking $10,000 each, receiving their stock by paying $2500 for it, the balance of $7500 being allowed to each as a Bonus for organizing the company, probably, hence their stock is paid up. The only entry necessary to open the books would be: Cash.......... Bonus...... To Capital Stock........ $16,000.00 4,000.00 60,000.00 .$80,000.00 Instead of Bonus, you may charge Franchise, or any other account of fictitious value. Then credit each stockholder in the Stock Ledger for the shares, and debit Capital Stock. Should the stockholders ever be called upon to pay this balance of $7500, then debit Cash and credit Bonus. If they are not called upon, carry Bonus as a fictitious asset, which can do no harm. Some of the entries and explanations given in answer to the above in "The Bookkeeper" would fill a page in an 18-inch Journal, and then not be correct. It is evident that the solutions and entries are from those without Joint Stock Company experience, or who have been through some of our so-called Business Colleges, Stock Forfeited for Non-Payment. Some companies incorporate in their Charter that subscribers who fail to pay their Installments when called upon shall forfeit their stock to the company, and that they shall be held liable for the discount or be paid the premium, if sold for more or less than the par of the unpaid balance. Many companies also provide that, if any Installments are due and unpaid, the Installments already paid shall be forfeited, as well as the stock, without legal action. When stock is subscribed under such provisions, no legal action is necessary, because it is a part of the contract. A company can dispose of forfeited stock in any manner it may see fit. Suppose J. R. Ressler subscribes for 20 shares of stock in a company at $50, and has paid two 12 per cent. Installments. Failing to pay the other Installments, he surrenders or forfeits his stock to the company. The Installments paid are to be credited to him. The Capital Stock was all subscribed. Capital Stock was credited for full authorized capital, and stock certificates issued in full to each subscriber upon the payment of the first installment. Under these conditions what entry would you make to receive the stock from Ressler? Ressler is credited for the Installments paid on his subscription. Subscription account is credited because, when Ressler paid his Installments, Subscription was credited, and now that he has forfeited his stock, the balance of his subscription is thereby canceled. Treasury Stock is debited, as it is held by the Treasurer for sale. Suppose Ressler had forfeited both Stock and Installments, what would be the entry? Loss and Gain is credited for the amount of Installments paid by Ressler. It is his loss and the company's gain. However, it is not this class of Loss and Gain that a company should seek. J. B. Roberts subscribes for 20 shares of stock in a company at $50, and has paid four 12 per cent. Installments. Failing to pay the other Installments, he forfeits the Stock and Installments paid. When the books were opened the Capital Stock account received credit only for the Installments paid. What entry when Roberts forfeits his Stock and Installments? Capital Stock............ To Loss and Gain........ $500.00 $500.00 Debit Capital Stock, because the amount paid in has been reduced. If a Treasury Stock account had been kept and Capital Stock had credit for full authorized capital, you would then debit Treasury Stock. Suppose that the books were opened with the full authorized Capital credited, and Roberts, instead of forfeiting his Stock and Installments, sells it to Tarbell for cash; that is, Tarbell pays Roberts $500, the amount of his Installments, and the Stock is transferred to Tarbell, who pays the balance in cash; what entry? Cash.... To Subscription...... $500.00 $500.00 Tarbell paying the balance of Roberts' subscription in cash is the same as though Roberts had paid it himself Debit Roberts in the Stock Ledger for the Stock returned, and credit Tarbell for the amount taken by him. Suppose, again, that Roberts forfeits his stock under the above conditions, and it is credited for Installments paid, and the stock is sold to Tarbell for $800 cash; what entry? Treasury Stock........ To Subscription...... "To Roberts.... $1000.00 $500.00 500.00 Roberts is credited for Installments paid. Subscription is credited because the stock has been returned and is no longer subscribed for. What entry when Tarbell buys the stock for $800 cash? Roberts is charged for the $200 loss on the sale of his stock. |