both registered and coupon forms. The advantages of the coupon bonds is the ease with which they may be transferred. They are transferrable by delivery alone, while the registered bonds are transferrable by assignment only. A disadvantage of coupon bonds is that if lost or stolen, the finder or holder may dispose of them easily and once in the hands of an innocent holder they become valid. If a registered bond is lost or stolen, it is practically impossible to realize on it because it is payable only to the party named in the bond and could only be transferred by assignment which would require forgery.. This forging would, therefore, prevent a valid transfer. Both coupon and registered bonds are often issued under the same security or deed of trust. Coupon bonds are often subject to being registered if desired. A bond may be registered as to principal only and the interest may be payable in the form of coupons. In this event interest is payable to whoever holds the coupons, but the principal is payable only to the party registered and named in the bond.

Participating Bonds are bonds in which it is specified that the holder is to share in the profits of the issuing company. A certain rate of interest may or may not be specified and the holder may share in the net income the same as actual stockholders. These are sometimes known as income bonds. (See page 180.)

AS TO PAYMENT OF PRINCIPAL

Gold Bonds are bonds which expressly provide for payment in gold. Such provisions are legal and enforceable. If no medium of payment is specified, legal tender is assumed.

Convertible Bonds are bonds which carry the right of conversion into other securities of the same company. Usually convertible bonds may be exchanged for common or preferred stock within a certain time and at a fixed rate of exchange.

Example: American Telephone and Telegraph, 7-year convertible 6s, due August 1, 1925, convertible at par into common stock of the company at $106.00 per share after August 1, 1920.

Serial Bonds are bonds issued in series, one series payable each year until the entire issue has been redeemed or retired. It will be seen, therefore, that the security back of these bonds increases in proportionate value as each series of the bonds is redeemed. In some instances the terms of the issue provide for relinquishing a part of the security after certain redemption stages are reached.

Callable or Redeemable Bonds are bonds that may be redeemed by the issuing company before the maturity date fixed by the deed of trust. Often a sinking fund is established and the bonds are redeemed or called in and then cancelled. Sometimes the issuing company, instead of establishing a sinking fund, simply calls in a part of the bonds periodically and cancels them. Many bond issues contain provision to the

effect that upon any interest date (previous notification having been given) they may be redeemed, all or in part, at a stated price plus accrued interest.

Example: Chesapeake & Ohio, 20-year convertible 4 2s, due February 1, 1930. Callable for redemption after February 1, 1920.

Procedure in Issuing Bonds. The following is a brief outline in general of the various steps to be taken in a bond issue. Of course, a great deal will always depend upon the kind of bonds being issued, the purpose of the issue and the conditions of the issue. (It is understood that this outline is subject to statutory regulations in the various states and that a bond issue should always be made under the direction and supervision of competent attorneys familiar with the statutes.)

(1) Meeting of Directors. A preliminary meeting of the Board of Directors is held and a resolution passed recommending a bond issue. A special meeting of the stockholders is then called. The stockholders usually have the authority to authorize the bond issue, but even where the directors have that authority it is common and good practice to get the endorsement of the stockholders.

(2) Meeting of Stockholders. At this meeting a statement of the proposed issue is submitted for consideration. This statement stipulates all the conditions of the issue, the time the bonds are to run, the security, terms of payment, rate of interest, redemption conditions, etc. After due consideration a resolution is passed. Often this resolution is voted upon by submitting it to the individual stockholders after this meeting. In other words, the vote is obtained by mail.

(3) Bond Issue Authorized. After the bond issue is approved by the stockholders, the directors hold another meeting and pass a formal resolution authorizing the bond issue in due form by the officers of the corporation.

(4) Proposed Issue Submitted to Public Service Commission. In states where a Public Service Commission exists, bond issues of all corporations coming under its direction must have its approval before issuance.

(5) The Deed of Trust. A trustee is selected. This is usually a trust company. The proper officers of the issuing company draw and duly execute a deed of trust, conveying certain properties to the trustee, and setting forth all the conditions under which the bonds are issued. If real estate is conveyed, a copy of the deed of trust must be filed in every county where the real estate is located.

(6) Preparation of Bonds. The bonds are usually engrossed and coupons are attached, if the issue is of coupon. bonds. The trustee's certificate appears on the bonds. The form of certificate appearing on the back of the bonds of the United States Steel Corporation reads as follows:

"THIS IS TO CERTIFY that this bond is one of the issue of bonds of United States Steel Corporation mentioned in the indenture dated April 1, 1903, within referred to, executed by United States Steel Corporation to the undersigned as Trustee.

(7) Sale of Bonds. The bonds may be sold direct to the public or may be sold through some firm of bankers. Provision for selling the bonds is usually arranged for before the bond issue is authorized or soon thereafter.

(8) Provision for Paying Interest and for Redeeming the Principal. Some definite provision must be made for the payment of the interest and for the redemption of the bonds at maturity. This latter is usually provided for in the deed of trust, but a method of establishing a fund from which to meet these obligations must be arrived at.

1. ACCOUNTING THEORY

Bond Account. The object of this account is to show the amount of bonds authorized by the deed of trust. The account is charged for the par value of the bonds redeemed and cancelled, and is credited for the par value of the bonds authorized by the deed of trust. It will be seen that the difference between the two sides of the account represents the par value of bonds authorized and not yet cancelled.

Unissued Bond Account. The object of this account is to show the par value of the unissued bonds, that is, those bonds authorized but not yet sold. The account is charged for the par value of the bonds authorized and is credited for the par value of bonds sold and issued. The balance of this account deducted from the balance of the Bond account will show the par value of bonds outstanding

Bond Subscription Account. The object of this account is to show the total subscriptions for bonds on the installment plan. Usually the bonds are not issued until all installments have been paid in full; therefore, this account is credited for the par value of bonds subscribed for and is charged for the par value of subscribed bonds when issued. The balance of the account represents the par value of bonds subscribed for but not yet issued.

Bond Premium Account. The object of this account is to show the amount in excess of the par value realized through the sale of the bonds. When the bonds are sold above par the excess is credited to this account. The account should be written off during the life of the bonds.

Bond Discount and Expense Account. The object of this account is to show the cost of the issue. All expenses* incident to the bond issue and the difference between the amount realized and the par value of the bonds, when sold below par, are charged to this account.

If desired, separate accounts may be kept with "Bond Discount" and "Bond Expense." Bond discount is considered an addition to the amount of interest paid but should be prorated over the life of the bonds.

Bond Interest Account. The object of this account is to show the interest paid on bonds. At the end of each fiscal period, or oftener, this account is closed into the Profit and Loss

account.

Relation of Bond Premium or Discount to Interest. The premium received or the discounts allowed upon the sale of bonds is said to represent a deduction from, or an addition to, the interest paid on the bonds.† If the bonds sell at a discount, the borrower pays not only the interest but also the discount for the use of the money. If the bond sells at a premium, the principal borrowed is more than par; and since the borrower does not have to pay back the premium at maturity, the premium is really a deduction from the interest.

It will be seen, therefore, that the premium or discount should be written off over the life of the bonds by either crediting or charging a proportionate part to the Interest account and through this to Profit and Loss at the end of each fiscal period. The customary method is to credit the premiums or debit the discounts to Profit and Loss, periodically, during the life of the bonds. This is known as the Straight Line Method.

*"All expenses connected with the issue and sale of evidences of debt, such as fees for drafting mortgages and trust deeds, fees and taxes for recording mortgages and trust deeds, cost of engraving and printing bonds, fees paid trustees provided for in the mortgages and trust deeds, fees and commissions paid underwriters and brokers for marketing such evidences of debt, and other regular expenses." -Public Service Commission, New York.

"Premium or discount on bonds is a deduction from, or addition to, the nominal rate of interest which the bond carries; that is to say, there is a rate known as the true or effective rate, at which any corporation can place its bonds at par; if it elects to place them at any other rate, the bonds will sell at a premium or discount as the case may be; but the effective rate remains the same and this effective rate is the proper charge to Income account. Hence, the premium or discount should theoretically be spread over the term of the bonds, and the annual installment thereof credited or charged to the Income account each year."

-"Accounting Practice and Procedure," by A. Lowes Dickinson.

However, this is considered unsound accounting practice because it results in an erroneous statement of the operating costs. Proper accounting calls for a reflection of the actual interest cost spread over the life of the bonds, and this can be accomplished only by adjusting the Interest account.

Effective Rate Method. This is considered the best method of writing off bond premiums or discounts. The actual amount of interest paid is charged to the Bond Interest account. If the bonds were sold at a discount, the difference between the nominal rate (the amount actually paid) and the effective rate (the prevailing rate of interest) is also charged periodically to Bond Interest and credited to Bond Discount and Expense. If the bonds were sold at a premium, the difference between the effective and nominal rates is periodically charged to Bond Premium and credited to Bond Interest. It will be seen that this method scientifically writes off the Bond Premium or Bond Discount and Expense accounts during the life of the bonds.

2. INCOME TAX PROCEDURE

Amortization of Bond Premiums. The Treasury Department holds that the difference between the amount realized and the par value of bonds when sold at a premium, represents taxable income. It need not be rated as income for the year in which the bonds are sold, but may be prorated over the life of the bonds.

(Reg. No. 45, 1919, Art. 544, ¶2.) "If bonds are issued by a corporation at a premium, the net amount of such premium is gain or income which should be prorated or amortized over the life of the bonds. If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price minus any amount of premium already returned as income, the excess of the purchase price over the issuing price minus any amount of premium already returned as income (or over the face value plus any amount of premium not yet returned as income) is a deductible expense for the taxable year. If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price minus any amount of premium already returned as income, the excess of the issuing price minus any amount of premium already returned as income (or of the face value plus any amount of premium not yet returned as income) over the purchase price is gain or income for the taxable year."

Amortization of Bond Discounts. The Treasury Department holds that discounts, commissions for selling, and other expenses incidental to issuing the bonds, represent a loss and may be prorated over the life of the bonds.