CHAPTER ELEVEN. A Mining Machine Company. Ex. 204. J. H. Brown has Invented a Mining Machine of great value, which he has Patented, and has interested several capitalists, who incorporate a Joint Stock Company for the purpose of manufacturing the Machine. Brown agrees to take 100 shares for his Patent Right. The Capital Stock is $200,000, 2000 shares, par value $100. The incorporators subscribe for as many shares as they like. What entry? Brown's Patent Right........ For the amount of the nominal value of For the amount of 100 shares of the nom- To Capital Stock...... For the amount of 1400 shares, of the B. C. Hurst, 400 shares. J. E. Hannon, 400 shares. A. M. Thomas, 100 shares. F. L. Dyke, 100 shares. To Working Capital........ For the amount of 500 shares, of the nom- purposes. $200,000.00 $10,000.00 $140,000.00 $50,000.00 The following entry will also open the books:= $10,000.00 190,000.00 $150,000.00 $140,000.00 10,000.00 50,000.00 $200,000.00 In the preceding entries, "Brown's Patent Right" is charged in the first case $200,000, being the nominal value given; while in the second and third entries it is charged $10,000, the apparent cost. The company can, however, without violation, value it as it may choose; but it must not be understood by this that a company can place nominal and fictitious values on the Speculative Resources, Positive Liabilities or Expense accounts, but in opening the books a nominal value may be given to such properties as Mine, Plant, Franchise, Steamer, Machinery, Land, etc., either to increase or decrease. As stated above, nominal and fictitious values cannot be given to Speculative Resources or Positive Liabilities, because they would affect the Loss and Gain. The Law requires that Dividends must be paid from the profits of the business. To make profits by inflating values is unlawful in reality. The last entry given should be used under conditions of this kind. It is the simplest, because when the subscriptions are all paid the subscription account will close, and when the Treasury stock is all sold, that account will close, leaving the books opened without any fictitious accounts, which should be done when it is possible to do so, that those not versed in accounts may understand them; but when the conditions require fictitious entries, use as many as need be to get real values upon the books. A Lumber Company. Ex. 205. J. L. Woods is the owner of a Lumber and Planing Mill Business, the Ground and Buildings of which are valued at $100,000; Machinery, Tools, Etc., $79,000, and the Lumber $93,500. He proposes to Jenks, Gray, Bell and Cartright to organize a Joint Stock Company with a Capital Stock of $1,000,000, 10000 shares, par value $100, under the following conditions: J. L. Woods is to receive 1000 shares for the ground and buildings, 790 shares for the machinery and tools, and 935 shares for the lumber, all full paid stock. Jenks subscribed for 1500 shares, Gray 1500 shares, Bell 1500 shares, and Cartright 775 shares, 1000 shares to be held in the treasury for future sales, and 200 shares to be given each incorporator for extra services rendered in organizing the company, they to pay 10% of the nominal par value of the shares thus given, for which they are to receive full paid stock. They are then to donate to the company 100 shares each, to be put on the market and sold, the proceeds to be used as operating capital. What are the entries? The incorporators have subscribed for 8000 shares, or $800,000, Y00 shares held as Treasury Stock; then they each receive 200 shares by the payment of 10% for organizing the company. the Cash received, also Bonus $90,000, which has been paid in stock, and Credit Capital Stock for full authorized capital, $1,000,000. This entry brings the property, as listed, upon the books, to the credit of subscription, being the value of said property for which J. L. Woods receives his stock; therefore it closes the amount of his subscription. When the other subscribers pay their subscriptions, the Subscription account will close. Credit them in the Stock Ledger for their respective shares. Now they donate to the company 100 shares each. Treasury Stock....... $50,000.00 To Working Capital....... $50,000.00 When the stockholders donate the stock to the company Debit each stockholder in the Stock Ledger for the shares donated, and Credit Treasury Stock in the Stock Ledger for the same. The following is another form that may be used to open the books: When the subscribers pay their subscriptions, Debit Cash and Credit Contingencies, etc. The first entry is the plainest; therefore I would recommend it. The books having been opened as illustrated in the first entry, we will suppose now that the company sold 100 shares of the Treasury stock at par for cash. What entry? Cash......... $10,000.00 $10,000.00 To Treasury Stock.......... ....... One hundred shares sold at 5% discount for cash. What entry? One hundred shares sold at 5% premium for cash. $10,000.00 What entry? Here we have sold stock at par, at a premium and at a discount, Treasury Stock account receiving credit for full face value every time. Had this been the original capital stock, it would have been credited for full face or par value also. A company handles its own stock, in its own books, only at the par value. Stock sold above and below par is an apparent gain and loss. This is true, but it is not this class of Loss and Gain that should affect the legitimate gains of the business. Working capital, when created as shown in the Third Journal Entry, represents a fictitious Liability, and is therefore a gain. This account must not be closed when dividends are declared. It should remain a permanent credit until the company winds up its affairs, and then it should be closed into Loss and Gain, because the proceeds which were received for the stock that gave credit to this account produced this gain. The Loss or Gain on the sale of Treasury stock belonging to Working Capital is to be carried to the Working Capital account. The Working Capital account must be debited or credited, as the case requires, when Treasury Stock belonging to it is sold at a loss or gain. Ex. 206. Review. Describe a corporation. Ex. 207. How many kinds of corporations are there? Ex. 208. Define a Public, Private, Civil and Quasi Corporation. Ex. 209. How are Private Corporations formed in your State? Ex. 215. Ex. 216. Ex. 217. Ex. 218. Ex. 219. Ex. 210. Ex. 212. Ex. 213. Ex. 214. What is a Limited Liability Company? What is Treasury Stock, and how is it created? What is Watered Stock? When is Stock at par, premium and discount? What is Guaranteed Stock? Ex. 221. Ex. 222. What is the Market Value of Stocks and Bonds? Ex. 226. Ex. 227. What is a Fictitious Dividend, and how is it created? Ex. 232. What is a Bond? How many kinds are there, and how do they get their names? Ex. 233. Ex. 245. What is a Mortgage? What do you understand by Collateral Securities? What is a Bonus and what is a Rebate? What is a Minute Book, and how should it be kept? What is an Installment Book? Show one filled out. Post and Kirkwood have been conducting a stove manufacturing business as partners. Dec. 31, 1893, they close their books and find the following statement of Assets and Liabilities : |