taken up in this text, you should experience no difficulty in recording the following transactions in proper form and in preparing the necessary financial statements. Use ordinary journal and ledger paper. If you desire, you may use analysis paper for special statements such as the Working Sheet. As this practice data is continued in the next chapter, you should carefully preserve your working papers until you are ready to continue the work. You may now proceed by recording the following transactions in journal form.)

Transaction No. 1. The General Manufacturing Company was incorporated under the laws of the state of Ohio with an authorized capital stock of $4,000,000.00, consisting of 10,000 shares of 7% cumulative preferred stock of the par value of $100 each, and 30,000 shares of common stock of the par value of $100 each.

Transaction No. 2. Subscriptions to the capital stock were made as follows:

R. V. Williams-5,000 Shares Common and 5,000 Shares Preferred Stock.

A. B. Opfer-2,000 Shares Common and 1,000 Shares Preferred Stock.

H. W. Henry-1,000 Shares Preferred Stock.

C. H. Bowser-5,000 Shares Common Stock.

Maude E. Barnes-1,500 Shares Common and 1,500 Shares Preferred Stock.

Ruth E. Forry-2,000 Shares Common and 1,500 Shares Preferred Stock.

R. O. Wiggins-5,000 Shares Common Stock.

E. W. Atkinson-5,500 Shares Common Stock.

All of the stock was subscribed for at par, payment to be made upon demand.

To further the purposes of the new corporation, it is intended to take over the business owned and conducted by R. V. Williams under the name of the Williams Manufacturing Company. The newly organized company is to acquire all the assets, excepting cash, and to assume all the existing liabilities of the Williams Manufacturing Company. Williams is to be allowed a price equal to his present investment with no allowance for good will or other intangible assets. Therefore, Williams' subscription to the capital stock of the General Manufacturing Company is based upon this agreement.

Chapter Thirteen

NET WORTH

Business Organization. An auditor must be familiar with the different classes of business organization. A business may be conducted by an individual, an association of individuals known as a copartnership, or by an artificial body created by law and known as a corporation.

1. ACCOUNTING THEORY

The Sole Proprietorship. A business conducted by an individual is known as a sole proprietorship. The individual contributes the capital, is entitled to the profits and must stand the losses. The Balance Sheet must show the investment or capital and any increase or decrease in the investment. By reference to the formal Balance Sheet exhibited on page 41 of Chapter Three, it will be seen that the net worth of an individual should be shown thus:

(a) Capital. . . . .

XXXXX.XX

(b) Undistributed profits or deficit.... xxXXX.XX

Naturally, if the business shows a profit which has not been distributed, it constitutes an addition to the investment, but in the case of a deficit or net loss, there is a deduction from the investment.

The Copartnership. An association of individuals in business is known as a copartnership. In this class of business organization the capital may or may not be contributed equally and the profits and losses may or may not be shared equally. Hence, before the auditor can prepare the Balance Sheet he must ascertain the conditions of the copartnership agreement. It is needless to say he must also be familiar with Partnership Law. A special section of this course will be devoted to partnership accounting, therefore, we will confine this Unit to showing the classifications of partnership accounts in the Balance Sheet. This is not shown clearly in the formal Balance Sheet in Chapter Three. The following is a suggested classification of all partnership accounts for Balance Sheet purposes: (Assuming two partners and a net profit for the fiscal period.)

It must be remembered that this discussion is confined to a Balance Sheet prepared for credit purposes. Note that it is not necessary to show the distribution of the profits or losses although this may be shown if desired. One peculiarity of the Federal Reserve Board's requirements is that a partner's personal or drawing account, when a debit balance is shown, should be classified among the secured current assets, (see item 29, formal Balance Sheet, page 40, Chapter Three), and when a credit balance is shown, should be classified among the unsecured current liabilities. (See item 18, page 41, Chapter Three.) When the account constitutes an asset, it is classified as a current asset but not as a quick asset. This distinction is due to the fact that an account receivable from a partner may be slower and more difficult to realize upon than an account due from a

customer.

The Corporation. Due to the fact that the first fifteen Units of this course constitute instructions for a Balance Sheet audit of the Blank Manufacturing Company, which is a corporation organized under the laws of Indiana, we must give more space in this Unit to corporate organization than to either the individual or copartnership form of organization. No stress will be placed upon corporate law at this time, however.

Share Capital. In Chapter Twelve it was shown that there are two classes of capital, share capital and loan capital. Any capital borrowed, by means of mortgages and bonds, for a long period of time may be looked upon as loan capital, but capital contributed by the stockholders of a corporation is considered share capital. When a corporation is organized there is authorized a certain issue of capital stock. The capital stock is divided into shares and ownership of these shares is represented by stock certificates. Reference to the Chart on page 198 will show that, generally speaking, there are three classes of corporationsmunicipal, stock and non-stock corporations. We are concerned at this time with stock corporations.

Stock Corporations. Stock corporations may be classed as financial, business and public service. It will be seen that practically every corporation organized for profit can be classed as a stock corporation. By this is meant that the original capital for financing the business is raised principally by selling shares

of stock. A share of stock represents a proportionate interest in the net worth of a company. It will readily be seen that if a company, with an authorized capital stock of $100,000.00, sells 100 shares of stock (par value, $100.00) and receives therefor $10,000.00 in cash, each share outstanding would represent ownership of one hundredth of the net worth of the company, not one hundredth of the authorized capital stock.

Stock Issues. Stock may or may not have a specified value. If the value is specified, that value is known as its par value; if no value is specified, it is said to be stock with no par value. Most stock bears a specified par value which must be uniform for all the shares within a certain class. The par value may and does differ widely. In industrial and mercantile companies, it is generally $100.00, but in the case of mining companies the par value is more frequently $1.00. At any rate, the par value of any issue of stock is the amount specified in the stock certificate. A stock certificate also specifies the number of shares which it represents.

Stock of No Par Value. Stock of no par value may now be issued in the following states:

California
Delaware

Illinois

Ohio

Pennsylvania

Maine

Maryland
New Hampshire
New York
Virginia

When it is considered that in 1912, New York passed the first law granting the right to organize corporations with shares of stock of no specified value, there would seem to be many decided arguments in favor of capital stock without par value. Let us see what reasons are advanced in its favor. Louis Marshall recently expressed his opinion as follows:

"Eventually it will not only become a part of the jurisprudence of most of the states of the union, but in twenty years from now few corporations will be organized on any other principle.

"I believe it to be the only reasonable method of representing stock ownership in a corporation. The old method of placing an arbitrary dollar mark on a certificate of incorporation led to stock-watering, the creation of false values, and proved to be an easy medium for carrying out fraudulent schemes and practices. Under the new system every share of stock represents an aliquot interest in the corporate assets. Its value is dependent upon the actual value of the assets, and not upon any fictitious or imaginary value. That is the honest way of issuing stock. In the past a corporation which acquired undeveloped mining property issued shares of stock by the thousands and arbitrarily fixed the value of the shares at amounts which varied from $1.00 to $100.00 each. These corporations had capital stock to the amount of $1,000,000.00 or $100,000,000.00, which

had merely a potential value; but speculation was carried on with the idea that the par value had some relation to actual value. It is unnecessary for me to say that such practices are inimical to the public interest. It has now become the usual thing for corporations which are honestly managed to issue their stock without par value. The experiment has proven most satisfactory, and bankers who at first were skeptical are now found to favor the issuance of stock on this new and reasonable theory."

Accounting for Stock of No Par Value. From the standpoint of the accountant, his work is actually simplified to some extent. No account with Unissued Capital Stock is necessary. The Capital Stock account would simply be credited with the value at which the stock is issued. In other words, the Capital Stock account shows the value of the stock at time of issue. No accounts with stock discounts or premiums need be kept.

F. H. Hurdman,* C. P. A., in an address before the annual meeting of the Institute of Accountants, held in Cincinnati, Ohio, September 16, 1919, said:

"In recording stock of no par value on the books and setting up values in the statements of assets and liabilities, it does not seem that any difficulties are presented. The Capital account should reflect the value at which the stock was issued-whether for cash, property or services. The only other account representing a measure of value in the outstanding stock, outside of certain reserve accounts, would be the Surplus account. In my opinion this account should at all times represent undistributed net earnings of the corporation.

"Inasmuch as the Capital account will not generally reflect on its face the number of shares outstanding, it will be necessary to show in the Capital account itself the shares issued. It does not become necessary, as in the case of stock with par value, to carry any portion of the proceeds received from its sale to a Paid-In-Surplus account. Furthermore, the fact that stock may be issued at varying values for each share has no significance other than to raise or lower the unit or share value for every other share outstanding. Each share represents an aliquot part of the entire capital, other than that portion which may be allocated to one class of stock by virtue of preference.

"The number of shares authorized should be noted on the Capital Stock account. A separate account is, of course, unnecessary to record this fact.

"It is probable that very few cases will arise involving donated treasury stock, as that is one of the evil practices this form of legislation was designed to prevent. No reasonable object would be attained by issuing stock of no par value at a

*Of the Firm of Hurdman and Cranstoun, New York, N. Y.