Corporation accounting

Front matter

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Preface

Corporation accounting does not differ in its essentials from the accounting of any other form of business organization. There are, however, certain transactions, accounts, and entries employed in it which are either peculiar to the corporation or so seldom encountered elsewhere that they may properly be termed distinctive. It is with these distinctive transactions and their accounting treatment that the present volume concerns itself, and not with the general problems of accountancy.

As companies are formed; as stocks of differing characteristics are subscribed for, issued on varying terms, forfeited, donated, resold or cancelled; as bonds of different classes are issued, sold, purchased or redeemed at maturity ; as sinking funds and reserves are set up for the protection and redemption of these bonds; as dividends are declared or assessments are levied; as companies are reorganized, liquidated, or become insolvent, the accountant is confronted with difficult problems — problems which frequently, because of the magnitude of the amounts involved, or because of the legal consequences of error, call for a care and accuracy of treatment beyond the ordinary.

In all these matters the corporation accountant may well profit by the experience of those who have already grappled with and solved these problems, and it is the purpose of this volume to present such solutions and to set forth the established practice, wherever practice has been established. In this the author trusts he has been successful.

It must be said, however, that in the treatment of many corporate transactions, practice — and good practice — is not

VI

PREFACE uniform, though the final result is, of course, the same. Where this is true, the author has endeavored to give all the methods of treatment in good accounting use.

It may also be noted that most of the illustrative entries in the present work are, for the sake of clearness and simplicity, given in journal form even though many of them are cash entries that in practice would appear only in the cash book.

A considerable amount of space has been devoted to those details of corporate organization, practice, and procedure which more directly affect the work of the accountant. This information is so essential to the proper understanding and handling of the corporate accounts, that the author felt that it should not be omitted. Much of this has been taken from the works on corporate organization and management by Mr. Thomas Conyngton, to whom the author extends his sincere thanks.

The author also gratefully acknowledges the valuable assistance given by corporation officials, bankers, corporation accountants, public accountants and others, and especially by brother members of the Pennsylvania Institute of Certified Public Accountants.

R. J. Bennett.

Philadelphia, Pa.

October I, 191 6.

Part I— Corporation Organization And Procedure

I The Corporate Form ... i

§ i. Business Organization

2. The Corporation

3. Kinds of Corporations

4. Public Utility Corporations

5. Corporations Created by and Subject to

State Laws

6. Procedure for Incorporation

7. Nature of the Corporation

8. The Charter

9. The By-Laws

10. Management of the Corporation

12. Shares of Stock

13. Stockholders

14. Certificates of Stock

15. Voting

16. Advantages of the Corporate Form

17. Disadvantages of the Corporate Form

18. Summary of Taxes and Reports

19. The Corporate Records

II Kinds of Stock .... ,. : . 16

§ 20. Capitalization

21. Capital Stock and Actual Capital

22. Shares Without Par Value

23. The Functions of Corporate Stock

24. Nature of Stock

25. Issued and Unissued Stock

26. Full-Paid and Partly Paid Stock

27. Treasury Stock — Donated Stock

vii viii

Common and Preferred Stock

Dividends on Preferred Stock

Convertible Stock

Guaranteed Stock

Watered Stock

III Meetings; the Corporate Calendar

§ 33-

The Annual Meeting

Time of Annual Meeting

Preliminary Arrangements for Annual Meeting

Annual Meeting — Closing Transfer Books

" — Stockholders' List; Notices ; Proxies

" — Quorum

*' " — Opening Formalities

" — Election of Directors

" " — Cumulative Voting

" " — Reports

" " — Minutes

Directors' Meetings

Special Meetings

The Corporate Calendar

Contents of Corporate Calendar

Form of Corporate Calendar

Page

PART II— CORPORATION RECORDS AND ACCOUNTS IV The Books and Records of a Corporation

§ 49. Books of Accounts

50. Requirements

51. Inspection of Corporate Records

52. Corporate Books of Record

53. The Minute Book

54. Stock Subscriptions

55. The Subscription Book or List

IX

56. Instalment Receipts

57. Stock Scrip

58. The Instalment Book

Page

The Books and Records of a Corporation (Continued)

§ 59. Treasurer's Receipt for Subscription Payment

60. Stock Certificate Book

61. Assignment of Stock Certificate

62. Stock Transfer Book

63. Register of Transfers

64. Stock Register

65. Stock Book or Stock Ledger

66. Form of Stock Book or Stock Ledger

67. Dividend Book

68. Dividend Order

VI Distinctive Corporate Accounts .

§ 69. Accounts Peculiar to Corporate Bookkeeping

72. Capital Stock Authorized

74. Subscriptions to Stock

76. Instalment Account

79. Premium on Capital Stock

80. Capital Stock Without Par Value

83. Dividends

85. Bond Premium

87. Interest on Bonds

88. Accrued Interest on Bonds x CONTENTS

91. Sinking Fund Income

93. Investment in Stocks and Bonds of Other

PART III — SPECIAL ENTRIES RELATING TO TRANSACTIONS IN STOCK AND DIVIDENDS VII Stock of Original Issue .... 101

§ 94. General Conditions

95. Pro Forma Statement

06. Opening Entries — Stock Full-Paid (Plani) 97- " " - " ( " 2)

Ledger Accounts

101. Sale of Stock After Organization

102. Stock Sold Below Par

103. Stock Sold Above Par

104. Stock Issued at a Premium to Create a

105. Payment of Salaries in Stock

106. Payment of Commissions in Stock

VIII Treasury Stock and Stock of Other

Transactions in Treasury Stock

§ 107. Donated Stock

108. " " —First Method of Entry

109. " — Second Method of Entry no. Bonus Paid in Stock

in. Purchase and Sale of Corporation's Own Stock

112. Entries for Purchase and Sale of Corporation's Own Stock

CONTENTS xi

Transactions in Stock of Other Corporations

113. Purchase and Sale of Stock of Other Cor-

porations

114. Entries for Purchase and Sale of Stock of

Other Corporations

115. Entries When Stock is Exchanged for

Stock of Other Corporations

IX Dividends and Their Entry . . .133

§ 116. The Nature of Dividends

117. Directors' Powers as to Dividends

118. Informal Distribution of Corporate Profits

119. Surplus — Equalizing Dividends

120. Declaration of Dividends

121. Notice of Dividend

122. Ownership of Dividends

123. Payment of Dividends

124. Dividend Sheet or Book

125. Entries for Cash Dividends

126. Dividends Paid with Borrowed Money

127. Entries for Scrip Dividend

128. Entries for Special and Interim Dividends

X Dividends and Their Entry (Continued) 147

§ 129. Entries for Dividends Applied to Stock Subscriptions

130. Entries for Cumulative Dividends

131. Entries for Stock Dividends

132. Entries for Bond Dividends

133. Bank Dividends

134. Property Dividends

135. Unearned Dividends

XI Proprietorship Incorporated (New- York) 156

§ 136. Organization Procedure

137. General Provisions

138. Financial Details of the Incorporation

139. Certificate of Incorporation xii

Filing the Certificate of Incorporation

First Meeting of the Stockholders

Minutes of First Meeting of Stockholders;

By-Laws

Minutes of First Meeting of Directors; the

Stock Book

Journal Entries

Cash Book Entries

Other Entries

XII Manufacturing and Mining Corporations

§ 147.

Details of Incorporation

Statutory Records

The Books of Account

Journal Entries

Cash Book Entries

The Ledger Accounts

Mining Corporation

Details of Incorporation

Opening Entries

Entries for Donated Stock

Entries for Forfeited Subscription

Page

XIII Partnerships Incorporated .

158. Determination of the Value of Good-Will

159. Accounting Treatment of Good-Will

160. Conditions of the Incorporation

161. Agreement for Incorporation

162. Allotment of Stock

163. Underwriting Expenses

164. Balance Sheets of the Incorporating Firms

165. Statutory Requirements

166. Opening Entries

167. Closing the Partnership Books

168. Closing Entries on Books of Lowell, Ma-

son & Company

169. Closing the Books of Oliver & Dickson

170. Balance Sheet of New Company

CONTENTS x iii

PART IV— CORPORATE BOND ISSUES Page The Corporation Bond .... 197

§ 171. Nature of the Bond

172. Authorization of Bond Issues

173. Constitutional and Statutory Provisions Af-

fecting Bond Issues

174. Procedure in Issuing Bonds

175. Preparation of Bonds

176. Terms Used in Connection with Bonds

177. Issued and Outstanding Bonds

179. Sale of Bonds

180. Liabilities of Vendor

181. Rights of Holders

XV Classification of Bonds .... 208

§ 182. General Classification

183. Debentures

184. Mortgage Bonds

185. Coupon Bonds

186. Registered Bonds

187. Kinds of Bonds

188. First Mortgage, etc., Bonds

189. Junior Lien, etc., Bonds

190. Gold, etc., Bonds

191. Convertible Bonds

192. Serial Bonds

193. Redeemable Bonds

194. Profit-Sharing, etc., Bonds

195. Income Bonds

197. Guaranteeed Bonds

198. Consolidated, etc., Bonds

199. Interest Bonds

200. Terminal, etc., Bonds

201. Car Trust Bonds

202. Purchase Money Bonds

203. Short Term Notes

XVI Bond Forms 221

§ 204. Form of Bond

XIV

XVII

205. Form and Nature of Coupon

206. Trustee's Certificate

207. Deed of Trust

208. Recitals of Deed of Trust

209. Duties of Trustee

210. Execution and Filing of Deed of Trust

211. The Bond Register

212. Form of Bond Register

213. Payment of Coupons

214. The Coupon Register

§ 215. Selling the Bonds

216. Bond Issue Regulations

217. First Mortgage Bonds Sold at Par

218. Entry on Sale of Bonds

219. Bonds Sold at Par and Accrued Interest

220. Bond Subscriptions Paid for in Instal-

ments

221. Guaranteed Bonds

222. Entries for Collateral Trust Bonds

223. Entries for Short Term Notes

224. Entries for Equipment Trust Serial Bonds

Page

226. 227. 228.

XVIII Bond Interest

§ 225. Paying Bond Interest

Method of Handling Interest Coupons Interest on Registered Bonds Bond Interest Accrued Monthly Interest on Two or More Bond Issues Interest on Treasury Bonds Interest on Guaranteed Bonds Interest on Income Bonds Interest on Special Bond Issues Interest Charged to Construction Income from Investments

. 252

XIX Bond Discount and Premium .

§ 236. Bonds Sold Above or Below Par

237. Bonds Sold Between Interest Dates

238. Expenses of Bond Issue

239. Entries for Bond Discount and Expense

CONTENTS xv

240. Entries for Bond Premium

241. Nature of Bond Premium and Discount

242. Treatment of Bond Premium and Discount

243. Effective Rate Method

244. Varying Conditions Affecting Annual Charge

245. Methods of Determining Charge to Income

246. Operation of the Various Methods of De-

termining Annual Charge to Income

247. Determining Annual Charge when Pro-

portionate Discount Is Written Off

XX Sinking Funds 279

§ 248. Function of the Sinking Fund

249. Creation of the Sinking Fund

250. Sinking Fund Created Out of Profits

251. Safeguarding the Sinking Fund

252. Adequacy of the Sinking Fund

253. Annuity Method for Sinking Funds

254. Calculating Fund Annuities

255. Sinking Fund to Retire Preferred Stock

XXI Sinking Funds (Continued) . . . 289

§ 256. Sinking Fund Account

257. Entries for Sinking Fund Instalments

258. Entries for Sinking Fund Interest

259. Entries for Sinking Fund Investments

260. Entries for Investment in Issuing Com-

pany's Bonds

261. Entries for Bonds Cancelled Through Sink-

ing Fund

262. Entries for Sinking Fund Reserve

263. The Sinking Fund on the Balance Sheet

264. Entries on Books of Sinking Fund Trustee

XXII Redemption of Bonds 305

§ 265. Plans for Redeeming Bonds

266. (1) Redemption of Bonds Through Sink-

ing Fund

267. (2) Bonds Drawn by Lot for Redemption

268. Entries for Bonds Called for Redemption

269. (3) Refunding Bonds

270. Entries for Refunding Bonds xvi CONTENTS

271. (4) Redemption of Serial Bonds

272. (5) Entries for Convertible Bonds 2J2>- Redemption of Collateral Trust Bonds

274. Redemption of Short Term Notes

275. Redemption of Equipment Trust Bonds

276. Redemption of Guaranteed Bonds 2J7. Bonds in Default

278. Destroying Bonds

Part V— Corporation Reports And Statements

XXIII Closing the Books ; Reserve Funds and

§ 279. Closing the Books

280. Procedure in Closing the Books

281. Closing the Ledger

282. Reserve Accounts

283. Reserve Accounts and Reserve Funds

284. Secret and Hidden Reserves

285. Depreciation

286. Methods of Handling Depreciation

288. Operation of Reserve for Depreciation Ac-

count

289. Sinking Fund for Exhaustion of Mines

290. Insurance, Benefit, and Accident Funds

291. Surplus or Undivided Profits Account

292. Contributed Surplus

293. Investments of Surplus

XXIV Forms of Statements .... 338

295. Necessity for Reports

296. Form of Statements

297. Balance Sheets

298. Statements of Income and Profit and Loss

299. Statement of Cash Receipts and Disburse-

ments xvu

XXV

Page

Preparation of Statements — Manufacturing Corporation § 300. Trial Balance

301. Manufacturing Account

303. Trading and Profit and Loss Account

304. Closing Entries in Journal

305. Comments on Closing of Lake Manufac-

turing Company's Books

XXVI Preparation of Statements — Trading Corporation

§ 306. Trial Balance

307. Trading and Profit and Loss Statement

309. Closing Journal Entries

310. Comments on Closing of Bryant-Chase

Company's Books

XXVII

§ 311. Special Reports

Reports to Stockholders

Reports of Officers and Committees

Committee Reports

Auditor's Report

General Manager's Report

Treasurer's Report

President's Report

Statutory Corporation Reports

The Annual Report

Federal Corporation Report

Taxable Corporations

Exempted Corporations

Return Made for Either Calendar or Fiscal Year

PART VI— CORPORATE COMBINATIONS XXVIII Methods of Consolidation . . . 390

§ 325. Purposes of Corporate Combination xviii CONTENTS

326. Methods of Corporate Consolidation or

Control

327. Expert Investigations

Accounting Investigation Preliminary to Consolidation

328. Scope of Investigation

329. Report on Assets

330. Report on Liabilities

331. Revenue and Expense Accounts

332. Cost of Operation

333. Reports and Certificates

XXIX Consolidation by Merger . . . 403

§ 334« General Procedure for Merger

335. General Conditions of the Merger

336. Statement of Concerns to be Merged

337. Terms of Merger

338. Requirements for the Consolidation

339. Procedure for Consolidation

340. Opening Entries on Books of New Cor-

poration

341. (1) Entries for Issuance of Stock and

342. (2) Entries for Assets and Liabilities

Taken Over 343- (3) Entries for Retirement of Outstanding Bonds and Mortgages of the Merging Concerns

344. (4) Entries Relating to Sale of Securities

345. (5) Entry in Settlement of Intercompany

Obligations

346. The Conduct of the Branches

347. Closing Entries for Long Company

348. Closing Entries for Vine Company ; Bell &

Davis

349. Closing Entries for Bain Company

350. Balance Sheet for Bain Branch

351. Consolidated Balance Sheet of New Cor-

poration

352. Consolidation by Purchase

CONTENTS xix

XXX Consolidation by Lease .... 429

§ 353. Leases

354. Entries for Property Leased

355. Entries for Guarantees

356. Lease Terms

357. Entries for Lease of Mine

358. Entries for Lease of Railway

359. Entries for Improvements and Note Issue

360. Adjusting Entries at End of First Year

361. Entries for Union Mining Company

362. Balance Sheet of Union Mining Company

363. Entries for Wilson Transportation Com-

pany

XXXI Holding Companies 441

§ 364. Classification of Holding Companies

365. Controlling Corporations

366. Status of the Subsidiary Company

367. Legality of Holding Companies

368. Accounting Procedure of Holding Company

370. Operating Company Purchasing Controlling

Interest

371. Entries on Books of Purchasing Company

372. Entries on Books of Selling Company

373. The Consolidated Balance Sheet

374. Parent Companies

XXXII Consolidated Balance Sheets . . 456

§ 375- Purposes of Consolidated Balance Sheet

376. Contents of Consolidated Balance Sheet

377. Preparation of Consolidated Balance Sheet

378. Consolidated Balance Sheet with Inter-

company Details

379. Consolidated Balance Sheet without Inter-

company Details

380. Additional Illustrations of Consolidated

Balance Sheets

381. Consolidated Income Account

XX