Some of the questions;

              58 HASKINS & SELLS August
NOTWITHSTANDING any belief
which may exist to the contrary,
the life of the public accountant is not free
of technical perplexities. Many of the
intricacies which puzzle the mind of the
layman are matters of almost perfunctory
routine to the accountant. But every
now and then questions arise which tax
the capabilities of anyone who attempts
to uphold technical integrity. The solu­tion
often, while beset with danger of
attack from sticklers for purity of tech­nique,
is found in broad, practical treat­ment,
the essence of which is fairness to all
concerned.
An example which will serve to illustrate
has to do with the accounts of a parent
and a subsidiary company. A certain
company, having put several hundred
thousand dollars into experimentation and
development of an automobile accessory,
decided at length to form a new subsidiary
corporation and turn over to the latter
all the physical assets, designs, and ex­perience
acquired, to the end that the
newly organized corporation might carry
on the work of manufacturing the product.
Along with the other acquisitions the
subsidiary inherited from its predecessor
the investment in experimentation and
development, together with a certain
theoretical good-will. Preferred stock of
the subsidiary was sold to outsiders for
the purpose of acquiring some new work­ing
capital, and along with every two
shares of the preferred stock went as a
bonus one share of common stock having
no par value. Common stock sufficient
to give control was issued to the predeces­sor
company, the tangible assets and
liabilities, including the liability to the
predecessor company for the excess of
theoretical value received over the capital
value of common stock issued, were prop­erly
set up, a certain value per share was
placed on the shares having no par value,
and the experimental expense and pur­ported
good-will were charged to an
account called cost of development.
In the books of the parent company
there appeared as an asset a charge against
the subsidiary, representing the difference
between the combined net tangible asset
valuation plus experimentation and good­will,
and the value at which the common
capital stock without par value of the
subsidiary had been accepted. It was
understood that this asset of the parent
company would be realized from time
to time as the subsidiary should make
profits and have surplus funds available
with which to make payment on the
indebtedness. Presumably the legal rela­tions
between the two corporate entities
made this an asset, questionable only as
to value, the value being dependent only
on the ability of the subsidiary to make
payment in full.
The question which arises is as to the
propriety of raising these accounts which
may possibly be claimed to show a fictitious
position. At least, they contribute to a
favorable showing with respect to the
parent company. That company is saved
the embarrassment of making a large
charge against surplus on account of
experimental expense, which obviously
would have been the only alternative had
the new company not been formed, since
there would be no excuse for deferring
Some of the Questions