Canfield problem;

              22 HASKINS & SELLS May
The "Canfield" Problem
T H E R E appeared in the April number of
THE BULLETIN the following problem:
"John Brockton offers to the Canfield
Company in consideration of all the
capital stock of the latter ($300,000)
his option on the physical property and
good-will of a going concern, with a
fairly well known trade-name. It is
further provided that the property
shall be taken subject to a mortgage of
$100,000.
"The offer is accepted. The stock is is­sued
to Brockton. The property is
taken subject to the mortgage. Brock­ton
donates the stock to the company
to be sold for working capital. The
stock is sold at $25 a share. The di­rectors
of the Canfield Company fix the
value of the physical property at $100,-
000.
"You are asked to open the books for the
Canfield Company."
The facts as set forth in the problem were
taken from an actual case. They are in
some respects unique. The statement in the
problem relative to the option is true to the
facts in the case, but what really happened
was that Brockton transferred the property
which his option gave him the privilege of
acquiring. It is somewhat unusual to have
the property taken subject to a mortgage
and then have the directors fix the value of
the property at an amount equal to the
amount of the mortgage, whereas the par
value of the capital stock issued for the
property was considerably in excess of such
amount.
Whether or not the Canfield Company was
ill-advised legally in transacting business
of this importance without duly qualified
directors is aside from the question which
confronts us as accountants. The facts are
as stated, namely, that all the stock was is­sued
for the property, etc. None was, un­til
later, issued to directors to enable them
to qualify as such.
The Canfield Company parted with in­struments
the face value of which was
$400,000. The mortgage of $100,000 was
a distinct liability. The capital stock had a
par value of $300,000. In exchange the
company received property, tangible and in­tangible,
which must of necessity be equal
in amount to the mortgage and capital stock.
If the directors fixed the value of the phys­ical
property at $100,000, the balance of
$300,000 must represent the trade-name and
good-will.
The entries covering the transactions as
they appear in the problem are as follows:
Plant and property. ..
Trade-name and good­will
Mortgage payable
Capital stock
To record the
purchase of the
physical property,
good-will and trade­name
of the Blank
Company acquired
by option through
John Brockton in
$100,000
300,000
$100,000
300,000