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94 HASKINS & SELLS December Add One More Complication CAPITAL stock without par value no longer can be said to be a novelty. Since the State of New York first authorized its issuance in 1912, well-nigh countless corporations have availed themselves of the non-par stock laws existing in various states, now numbering over thirty. The principle has been applied to all kinds of corporations and all classes of stocks. In current stock offerings the assignment of par value seems to be the unusual procedure rather than otherwise. And yet withal, the entire gamut of non-par stock problems apparently has not been run. This seemingly simplest of devices, when applied to the complexities of modern financing, continues to create unanticipated situations, and to furnish abundant material for rumination. The following case, involving both common and preferred stock without par value—a frequent cause for confusion—is an interesting example. An individual was an original subscriber to the capital stock of a corporation recently formed to acquire the assets and purchase the good-will of a well-known large industrial concern. The authorized capital stock of the company in question consisted of preferred stock, without par value, entitled to cumulative dividends at the rate of seven dollars per share annually, redeemable in case of liquidation, or prior thereto at the company's option, at one hundred five dollars per share; and common stock, also without par value. The preferred stock was issued for one hundred dollars per share, and each share carried "as a bonus" one share of common stock. The entire capital stock was issued almost wholly against the company's earning capacity, as represented by its goodwill, since bonds were sold practically to the limit of the equity in its net tangible assets. The individual mentioned thus acquired an equal number of preferred and common shares on the basis described. Several months later he disposed of his common stock at a price of approximately thirty-six dollars per share. And now, in attempting to ascertain, for income tax purposes, the gain or loss resulting from the transaction, he finds himself confronted with a perplexing question: how much did his common stock cost him? The terms of the original offering, as stated, were a price of one hundred dollars per share of preferred stock, the purchaser of each preferred share receiving "as a bonus" one share of common stock. Under the circumstances, however, it manifestly is unfair to preserve this fiction, and to maintain that the subscriber's preferred stock cost him one hundred dollars per share, and that his common stock cost him nothing. The transaction should be regarded in its entirety. The subscriber paid one hundred dollars, and received therefor two shares of stock, one preferred and one common, without par value. The problem then is to apportion the purchase price between the two. Reference to the company's published balance sheet at the commencement of business proves unenlightening. As has been stated, the capital stock was issued almost entirely against earning capacity, as represented by good-will. In the balance sheet, however, apparently because of conservatism, good-will is shown at the nominal amount of one dollar. Correspondingly, preferred stock outstanding is stated nominally at one dollar per share, and common stock outstanding at ten cents per share. There remains a small capital surplus, after eliminating from the proceeds of capital stock sales all but one
Object Description
Title |
Add one more complication |
Author |
Anonymous |
Subject |
Stocks -- Accounting |
Citation |
Haskins & Sells Bulletin, Vol. 08, no. 12 (1925 December), p. 94-95 |
Date-Issued | 1925 |
Source | Originally published by: Haskins & Sells |
Type | Text |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Libraries. Accounting Collection |
Date-Digitally Created | 2009 |
Identifier | HS Bulletin 8-p94 |