The foregoing was the Balance Sheet of a corporation, December 31, 1916, incorporated January 1, 1910, and during the ensuing year the following transactions occurred: Notes payable have been renewed as they became due, $5,000.00 of 32% Liberty Bonds have $100,000.00 5,000.00 $2,000.00 has been donated to the Red 2,000.00 Notes: Depreciation on buildings, estimated life 47 years, beginning January 1, 1910. Depreciation on machinery, estimated life 27 years, Accounts receivable were $45,000.00, and accounts. payable $15,000.00 at the close of the year. There was accrued interest payable $2,500.00, Decem- Prepare Trial Balance and Balance Sheet as on Dec. 31, 1917. (Note. It will be necessary to set up skeleton ledger accounts to obtain a Trial Balance. No information is given as to the amount of interest paid during the year. The date and method of acquiring the Liberty Bonds is not shown. Since this information is not given in the problem, you may ignore the element of interest. You may assume that the same amount of insurance and taxes is to be deferred as at the end of the previous year.) C. LEGAL QUESTIONS I. How are negotiable instruments negotiated? 2. C. P. A. Mich. A note non-negotiable in form is executed and delivered. by A to B and endorsed by B to C. A refuses to pay it when due, claiming want of consideration. C brings suit against A averring that he was a holder in due course. Can A successfully defend the action if want of consideration is established? reasons. Give Inst. Ex. 1918. 3. A negotiable note executed and delivered by A to B passes in due course to and is endorsed in blank by B, C, D and E; F is the last holder and strikes out C's endorsement. What is the liability of C, D and E on their endorsement? Inst. Ex. 1918. 4. As an accommodation to B, A on June 1, 1918, endorsed B's note for $1,000 payable to C's order on July 1, 1919. On July 2, 1919, C endorsed and delivered the note to D. What rights, if any, has D against A? Inst. Ex. 1919. 5. New York, April 10, 1916. Thirty days after date I promise to pay to the order of C. D. One Hundred Dollars. Endorsed in blank "without recourse." (Signed) A. B. C. D. What does the endorser warrant by his endorsement? Inst. Ex. 1917. Chapter Twelve FIXED LIABILITIES "Any debt the maturity of which extends beyond the period adopted within that business for current liabilities will usually be grouped with the fixed liabilities, there seldom being an intermediate group."-Kester. In Chapter Two, page 27, we quoted from the Public Service Commission of New York on what comprised "Funded Debt.” Long-term obligations, usually in the form of mortgaged or bonded indebtedness, are called fixed liabilities-sometimes known as LOAN CAPITAL as distinguished from SHARE CAPITAL. Loan capital usually has as security some specific form of property, such as land, buildings, equipment, etc., which have been classified and included among the fixed assets of the conUnder these circumstances the general creditors can only claim the equity or difference between the realizable value of the specific portion of the assets, and the amount of the loan which has been secured by it. cern. When it becomes necessary or advisable to raise additional capital and it is not desired to increase the share capital, long time notes or bonds, usually secured by mortgages, are issued. In the case of an individual or a partnership, it is quite customary to issue notes secured by first or second mortgages on the fixed assets or real property owned, but in the case of a corporation it is more common to issue bonds. MORTGAGES Definition. A mortgage is a conditional title to property given by the owner to another to secure the payment of a debt or the discharge of some obligation. It is similar to a deed and conveys title to the property on which the mortgage is placed, but upon some condition. That condition is the failure to make prompt payment of an obligation or debt at maturity. The tendency is to regard a mortgage as a lien on the property and not as an actual conveyance. The mortgagor retains physical possession of the property and is entitled to the income therefrom and may use the property just as though it were his own. Of course, he must not impair its value and he must comply with all the conditions in the mortgage contract. The holder of a mortgage (the mortgagee) has practically no control over the property or over the operation of the concern involved. Real or Personal Property May Be Mortgaged. "In equity, whatever property, real or personal, is capable of an absolute sale, may be the subject of a mortgage.' Mortgages on chattel property are usually for a short period of time and are classed as current liabilities, but mortgages on real property as security for notes or bonds, due at some time in the future beyond that for which liabilities are classed as current, would be considered fixed liabilities. Kinds of Mortgages. Mortgages are known as either chattel or real estate mortgages, depending on the property which is the basis of the security. They are sometimes known as purchase money or building and loan mortgages, depending on the purpose of the mortgage. They may also be classified as to precedence as first mortgages, second mortgages, etc. A first mortgage takes precedence over a second mortgage and so on. In case of liquidation of capital assets, holders of mortgages stand in order according to the class of mortgage held. Chattel Mortgages. The only difference between a chattel mortgage and a real estate mortgage is in the kind of property conveyed as security. Chattel mortgages are placed on chattel or personal property. Real estate mortgages are placed on real property. Purchase Money Mortgages. These These are mortgages given for part or the whole of the purchase price of land. They take precedence over all claims of the general creditors. The mortgage may be given either to the person from whom the land is purchased or to a third person. Building and Loan Mortgages. These are frequently given to secure funds for erecting a building. The money is paid over as the building is constructed and reaches certain stages mentioned in the mortgage contract, or the entire amount may be delivered to a trust company to be held in trust and paid over as the installments fall due. If the money is held by the mortgagee and paid in installments, interest can only be charged from the date of the actual payment of the installments, but if placed in the hands of a trust company to be paid in installments, interest may be charged on the full amount. Of course, the trust company will also pay a low rate of interest on the amount deposited. Accounting Procedure. Mortgages used as security for notes are usually classed as mortgages payable on the books of account, while those used as security for bonds are classed as bonds payable. The usual procedure with mortgages payable is the same as with notes payable. The Mortgages Payable account is credited with each mortgage issued and debited when the mortgage has been paid. These transactions will usually be found recorded in the general journal and cash book. They are not sufficiently numerous to require special columns and, therefore, all items are posted individually. *Wright v. Shumay, 30 Fed. Cases, No. 18,093; 1 Biss. 23-26. Unlike bonds, mortgages are seldom sold at either a discount or a premium. The amount received is usually equal to the face of the mortgage, hence mortgages should be recorded, like notes, at their face or par value. In other words, the interest rate on mortgages is nearly always equal to the effective market rate for the particular type of equity involved. BONDS Definition. A bond is simply a long-term note an interest bearing, negotiable instrument, under seal, promising to pay a certain sum of money at a definite or determinable future date. It is usually secured by a pledge of certain properties, real or personal, as to either or both principal and interest. Bonds vs. Notes. A corporation may borrow money the same as an individual. If only a small amount is desired or it is wanted for a short time only, notes are usually given. These notes may be secured or unsecured. If unsecured, they are classed as current liabilities and are called notes payable on the books of account. If secured by a mortgage, they are usually called mortgages payable on the books of account and may be classed as either current or fixed liabilities, depending on the length of time to maturity. When the amount to be borrowed is large and is wanted for a long period of time, say from five to fifty years, then bonds instead of notes are given. There is said to be a bond issue. This consists of a number of bonds, which may vary in denomination, but which are all of like general tenor, and if secured are all secured alike under one "deed of trust". Deed of Trust. This is a mortgage on certain specified property placed in the hands of a trustee who represents the bondholders. The deed of trust states at length the terms and conditions under which the bonds are issued and under which the property for their security is held. In the bonds, reference is made to the deed of trust by which they are secured. It will be seen, therefore, that both the deed of trust and the bonds issued refer to each other in such a manner that all terms and conditions are clearly stated in both instruments. The trustee has the right to act in behalf of the bondholders and may bring foreclosure proceedings if it becomes necessary to do so. the trustee fails to do so, any bondholder may bring foreclosure proceedings for the benefit of all the bondholders. Of course, he must show the court that this action is necessary to safeguard the interest of the bondholders and that the trustee refuses to act. If Security. Formerly bonds were commonly supposed to be secured by real estate mortgages, except when otherwise specifically designated. In these times, bonds may or may not be secured at all. Often they are nothing more than promissory notes; in fact, are not so valuable because they do not mature for a longer time. It will be readily seen, therefore, that an |