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contract to pay absolutely thereon at specified intervals a specified return. It will be noted that such stock is similar to debenture bonds, see page 180, Chapter Twelve. Debenture stock is a debt of the corporation and does not resemble stock as used in this country, hence has not proven popular here. enture stocks on account of their being similar to debenture bonds should be classified among the fixed liabilities in the Balance Sheet.

Watered Stock has already been referred to as representing stock which has a higher nominal value than the true or actual value of the properties for which it was issued. It is usually given in payment of services or as a bonus with bonds. Stock which has been "watered" tends to mislead the public as to its actual value.

Donated Stock. Any stock donated by the stockholders back to the issuing company may be termed donated stock. The object in donating stock back to the company is to secure additional working capital through its sale. Donated stock is stock which has usually been issued as fully paid to holders at inflated values. At the time it is donated to the issuing company, usually a transaction is entered on the books at a nominal figure, charging Donated Stock account and crediting Working Capital account. This donated stock is usually offered as "treasury stock at less than par" and represents assets, the value of which has been inflated. It may be sold at par, or at a discount or premium, or may be given away as a bonus in connection with the sale of unissued stock or bonds.

Forfeited Stock. When subscribers to capital stock fail to make payment as per agreement, the stock may, in some cases, be declared forfeited. Payments already made on forfeited stock constitute a surplus of a permanent nature.

This is generally held not to be available for dividends as it does not represent an earned profit.

Bonus Stock. Any stock issued as a gift to purchasers of preferred stock or bonds constitutes bonus stock. It is usually treasury stock, otherwise the recipient would be liable for the par value of such stock which fact might make it an unwelcome gift, to say the least.

Treasury Stock, strictly speaking, represents stock which has been issued and later acquired through purchase by the issuing company or stock donated back to the issuing company by the stockholders. There should be a clear distinction between unissued stock and treasury stock. In some states unissued stock cannot be sold at less than its par value, but this can in no way affect the sale of true treasury stock because such stock has already been issued and may now be reissued as fully paid treasury stock at any price which it may command. Pro-Forma Journal Entries Incident to Capital Stock

Transactions Opening Entries. There is a lack of uniformity with regard to accounting practice in recording opening entries for corporate organizations.

Transaction No. 1. Let us assume that the A. B. Company has been formed under the laws of Ohio. A charter has been secured and there is an authorized capital stock of 10,000 shares with a par value of $100.00 each, being divided equally into common and preferred stock.

At this point the following entry should be made:
Unissued Capital Stock, Common... $500,000.00
Unissued Capital Stock, Preferred... 500,000.00
Authorized Capital Stock,
Common..

$500,000.00
Authorized Capital Stock,
Preferred....

500,000.00 (Explanation.) This entry is to set up accounts with the Authorized Capital Stock and with the Unissued Capital Stock. Some authorities do not open accounts with the Unissued Capital Stock except in case all of the capital stock has not been subscribed for. However, it will readily be seen that the method shown above is logical and practical-it enables anyone to determine readily from the ledger the amount of the authorized stock of each class, and by comparing the Authorized Capital Stock accounts with the Unissued Stock accounts, it is a simple matter to determine the amount of stock of each class actually outstanding.

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

A-1,000 Shares Common and 1,000 Shares Preferred Stock.
B-500 Shares Common and 500 Shares Preferred Stock.
C-1,000 Shares Common Stock.
D-100 Shares Preferred Stock.
E-25 Shares Common and 25 Shares Preferred Stock.

These subscriptions to the capital stock had all been secured at the time the corporation was formed, but the stock has not been paid for nor issued, hence the transaction may be set up as follows: Subscriptions to Capital Stock, Common...

$252,500.00
Subscriptions to Capital Stock,
Preferred...

162,500.00
Capital Stock Subscribed,
Common..

$252,500.00
Capital Stock Subscribed,
Preferred...

162,500.00 (Explanation.) Transaction No. 3. Upon call the subscribers to the capital stock make the following settlement:

A pays for his stock in full by giving title to certain real estate.

B, C and D pay for their stock in cash.

E gives a 30 day note in payment of his stock. Stock certificates are issued to all subscribers. This transaction may be recorded as follows:

(a) Real Estate

$200,000.00 Cash...

210,000.00
Notes Receivable.

5,000.00
Subscriptions to Capital Stock,
Common...

$252,500.00
Subscriptions to Capital Stock,
Preferred....

162,500.00 (Explanation.)

(b)
Capital Stock Subscribed, Common . $252,500.00
Capital Stock Subscribed, Preferred. 162,500.00
Unissued Capital Stock,
Common..

$252,500.00
Unissued Capital Stock,
Preferred...

162,500.00 (Explanation.) It will be seen from the above entries that as soon as the stock previously subscribed for has been issued, it is necessary to make an entry crediting the Unissued Stock accounts. This is necessary because the difference between the Unissued Stock accounts and the Authorized Stock accounts should always represent the exact amount of stock issued and outstanding.

2. AUDITING THEORY Quoting from the Federal Reserve Bulletin:

Capital Stock. "As a rule trust companies are the transfer agents for the capital stock of large corporations and for verification purposes it is sufficient to obtain letters from them certifying to the capital stock outstanding.

"Where companies issue their own stock, the stock registers and stock certificate books should be examined and compared with the lists of outstanding stockholders.

On the Balance Sheet each class, if more than one, of stock must be stated, giving amount authorized, issued, and in treasury, if any. In the case of companies with cumulative preferred stocks outstanding a note must be made in the Balance Sheet of the dividends accrued but not yet declared.

“If stock has been sold on the installment plan, the auditor should ascertain that the calls have been promptly met and whether any are in arrears. If special terms have been extended to any stockholder, approval of the board of directors is necessary and the minutes should be examined accordingly.

“If any stock has been sold during the period under audit, the auditor should verify the proceeds of the sales."

A. THEORY QUESTIONS 1. (a) Name the various forms of Capital Stock, with full explanation.

(b) What is the meaning of Watered Stock and how should it appear on the books?

C. P. A. Mich. 2. How is the value of capital stock determined?

C. P. A. Ark. 3. Mention and explain two common views concerning the treatment of donated capital stock.

Inst. Ex. 1918. 4.

In making up a Balance Sheet should the capital invested be included in the liabilitites? State your reasons.

C. P. A. Ohio. 5.

How should the losses on shares of stock issued at a discount be dealt with in the accounts of a corporation?

C. P. A. Ind. What is treasury stock, and state the difference, if any, between that and stock authorized but not issued. At what price may either be sold? How should they appear on the books of account?

C. P. A. Ind. 7. In its prospectus a corporation represents that it has an issue of "cumulative, non-voting, non-participating, six per cent preferred stock". Give your interpretation of this expression.

C. P. A. Mass. 8. What are organization expenses? How are they to be treated in accounts? At what point do expenses cease to be organization expenses and become operating expenses?

Inst. Ex. 1918. 9. To what extent may the “organization expenses” of a corporation be regarded as a permanent asset and how should this account accordingly be dealt with?

C. P. A. Me. 10. Is the deficiency in the early years of a corporation's activities (whether an actual loss or a deficiency between the earnings and the normal rate of return) similar to organization expenses? How should such deficiencies be treated in the accounts? To what extent is such a deficiency similar to interest paid during construction? Should such deficiencies be carried on the Balance Sheet? If so, should they be written off, and how and when? May the deficiencies representing the difference between actual earnings and normal rate of return be capitalized, in the strict sense of having capital stock issued to a corresponding sum? State clearly just who is affected, and how, by the different methods of treating the items mentioned above.

Inst. Ex. 1917. B. ACCOUNTING PROBLEMS 1. A Massachusetts corporation temporarily in need of funds makes the following arrangement with three of its directors. They individually pledge their stock, par value $15,000, $10,000, and $5,000, and receive loans of $7,500, $5,000, and $2,500, with which they purchase new stock at par. It is their intention, when the loans are paid by the corporation to return this $15,000 worth of stock.

(a) May this stock be purchased by the company?

(b) What should be the entries on the books of the corporation?

C. P. A. Mass. 2. A company organized with $1,000,000 capital stock which it placed at par, and $1,000,000 5 per cent bonds which it sold at 90, this being a 6 per cent basis. It paid to contractors, etc., for construction $1,800,000 and this amount of investment ran, on the average, for one year before the property was ready for operation. When operation began the company had therefore paid one year's interest on the issue of bonds. No dividends were paid on the stock. In addition to the sum named above the company also paid $10,000 for legal expenses in connection with incorporation and $5,000 for franchise and other fees.

How should the accounts appear when the property was ready for operation? Formulate journal entries and post to skeleton ledger accounts.

Inst. Ex. 1917. 3. A corporation having issued its capital stock at par buys 1,000 shares at 95. It later sells 500 of these shares at 98, and 300 at 85, and 200 at 101. Give the journal entries covering these transactions.

How should the items appear on the Balance Sheet immediately after purchasing the stock, and immediately after each of the sales?

Inst. Ex. 1917. 4. In auditing the Smith Manufacturing Company's books, you find in going through their minutes that a resolution was passed to give away one share of common stock with every share of preferred stock sold. At the end of their fiscal year, which period you are asked to audit, their books show as foll Real Estate and Buildings.

$ 83,872.88 Cash on Hand in Bank.

1,063.06
Machinery and Tools.

10,000.00
Fixtures..
Unearned Insurance.

160.94
Office Supplies...
Manufactured Goods on Hand. 10,000.00
Accounts Receivable....

16,840.62
Capital Stock, Preferred

$ 37,500.00 Bills Payable...

13,100.00 Accounts Payable..

14,601.43 Mortgage Loan on Real Estate.

35,000.00 Profit and Loss Account.

22,586.11

$122,787-54$122,787-54 What comments would you make to the Smith Manufacturing Company?

C. P. A. Ark.

452.18

397.86

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