No. 4 and place it on the books for future distribution, the following entry is made : : Dividend No. 4, 1894........ To Surplus Fund....... $1000.00 $1000.00 If Treasury Stock is credited for the Dividends, as is done by many bookkeepers, would it not be fair for the person who should buy the Treasury stock to receive its Dividends? Why should the purchaser receive Dividends on his stock as soon as he buys it? The established custom is to declare Dividends on the amount of stock issued. Say the Capital Stock is $100,000, and $50,000 paid in or stock issued, and the net gain $10,000. On the Capital Stock this would pay 10%, but on the paid up capital it would pay 20% Dividends; therefore Dividends should be declared on the paid-in capital, because the $50,000 produced the gain, instead of $100,000 being required to do it. Treasury Stock should be credited by Inventory for the value of the unsold stock. There are a great many points regarding Dividends, Stock account, etc., which should be determined by the Board of Directors, leaving the accountant to do as they direct, whether it be in accordance with good accounting and correct principles, or not. You will be expected to obey. Be careful; do not be made a scape-goat or a tool. Sacrifice your position rather than your honor and reputation by doctoring the accounts and carrying out the unlawful cussedness of a lot of knaves. Many corporations are formed and innocent stockholders fleeced by unscrupulous organizers, who then lay the blame on the ignorance of the bookkeeper. Be master of the situation; know your duty and do it, regardless of the consequences. In the end you will succeed. CHAPTER THIRTEEN. A Printing and Publishing Company. Ex. 260. Credit and Stock Dividend Declared under Special Conditions. Gibbons, Bayne, Kneale, Hatch and Caldwell formed a Limited Partnership Company for the purpose of conducting a Printing and Publishing Business. The Capital Stock is $75,000, 750 shares, par value $100. Gibbons subscribed for 100 shares, Bayne 100 shares, Kneale 200 shares, Hatch 150 shares, and Caldwell 100 shares. They were to pay for their stock in Machinery, Type, Paper, etc., of the old partnership. At the end of the year there was a net gain of $16,500. The company declared a dividend for full amount of the net gain, payable in stock as far as it would go, and credited each stockholder for his respective share of the excess. What are the Journal Entries? This entry issues the Treasury Stock in part payment of the Dividend, and credits the stockholders in their personal accounts for their respective shares of the balance of the net gain. Then issue to them their stock and credit them in Stock Ledger. Each stockholder's proportion of the Treasury Stock is equal to 15% on $65,000 Capital Stock. The balance of the net gain is $6500, or 10% on $65,000; 15% of $10,000 Treasury Stock results in uneven amounts. The stock is divided as nearly as possible, but none issued for less than one-fourth shares, while the stockholders arrange among themselves for the amounts over the value of one-fourth of a share. A Mining Company. Ex. 262. The Westmoreland Coal Co. was incorporated in Pittsburgh, Pa., Jan. 1, 1888, with a Capital Stock of $1,200,000, 12,000 shares, par value $100 each. All the shares were subscribed and paid for in Cash; entries shown. Stock sold for Cash; mines and plants bought for Cash. Capital Stock reduced under various conditions. Common Stock changed to Preferred Stock. Preferred Stock issued. Dividends declared on Preferred Stock and Common Stock. Stock watered, and entries to inflate values, etc. The whole amount of Stock being subscribed and paid in Cash, the first entry would be in Then as the subscriptions are paid enter in the Cash Book :— Cash Dr. To Subscriptions. The company then bought of the H. C. Frick Coke Co. two Mines and Plants-the Hecla Mine at Mt. Pleasant, Pa., with Land, Buildings, Machinery, etc., for $550,000, and the Broadford Mines at Broadford, Pa., with Plant complete, for $600,000,-paying for them in cash. What entry? Hecla Mines......... (Full history and Deed.) Broadford Mines....... To Cash...... $550,000.00 600,000.00 $1,150,000.00 At the end of the year the net gain was $162,000, and a Dividend of 10% was declared. What entry? To Dividend No. 1, 1888........... $120,000.00 This leaves a Net Surplus of $42,000. The market value of the stock rose very high, and it was voted by the stockholders to water the stock and distribute pro rata among themselves $600,000 of full paid stock, and increase the value of the two mines and plants. What entry? This operation and declaration of the stockholders increases the capital stock of the company by watering, which can be done only by law; nevertheless, it is of frequent occurrence. However, when this entry is made, issue and deliver the stock to the stockholders pro rata, and post the same to Stock Ledger. Instead of inflating the value of the mines, the entry could have been Franchise, Contingencies, or any account that represents no value. Now, suppose that, instead of a net gain, the company had lost say $200,000, and in consequence the stockholders decide to reduce the capital stock to $900,000, and to pass the difference between the $200,000 net loss and the $300,000 reduced stock to the credit of Surplus. What are the entries in the General Books and Stock Books for the above transactions? In the General Books the entry to reduce Capital Stock would be: The Capital Stock having been reduced, the old certificates of stock must be taken up, and new certificates issued to the stockholders for the stock still owned by each. Debit each stockholder in the Stock Ledger for the shares surrendered. If the Capital Stock is reduced and the shareholders are to receive the par value in cash, the entry would be:: Capital Stock To Cash. Suppose there is Treasury Stock unsubscribed amounting to $50,000, and it is desired to reduce the Capital Stock for the amount of the Treasury Stock, the entry would be:— Capital Stock To Treasury Stock. Again, suppose that the Capital Stock is to be reduced, and the stockholders are paid a part in cash, what would be the entry when the certificates are surrendered? Capital Stock To Cash "" Loss and Gain After reducing the Capital Stock as shown above, the company find at the end of another year that practically they have not gained anything or lost anything, and to provide more Working capital they decide to issue $250,000 of Preferred Stock. The conditions are that the Preferred Stock shall receive an annual Dividend of 6% of the profits of the company before any Dividend shall be declared on the Common Stock. After declaring the Dividend of 6% on the Preferred, should there remain a sufficient gain to declare a Dividend on the Common Stock and Preferred Stock of 3% or more, then such Dividend should be declared; but should the gain be less than 3% it should remain to the credit of Surplus or Reserve Fund until another Preferred Dividend is made. Should the profits not equal a 6% Dividend, the same should be declared on the Preferred Stock as far as possible, or rather at as high a rate as possible. The above resolutions are in accordance with law. Preferred Stock receives Dividends |