Transfers of funds to trustees and accounting therefor;

              Bulletin HASKINS & SELLS 7
Transfers of Funds to Trustees and Accounting Therefor
CONSERVATIVE accounting theory
has consistently held that funds
turned over by a corporation to a trustee
to redeem bonds or to pay interest cou­pons
or dividends should be shown on the
balance sheet of the company as an asset
offset by the corresponding liability. Pro­fessional
accountants have quite rigidly
held to this theory in their practice. How­ever,
because of conflicting legal opinions,
what was heretofore thought to be estab­lished
accounting procedure may become
an addition to the present list of unsettled
questions before the profession.
Correct accounting for the transfer of
corporate funds to trustees must neces­sarily
depend upon the law involved. The
accountant's treatment of the problem is
based on the theory that the liability of the
corporation is not discharged at the time
the funds are transferred to the trustee,
that the trustee acts as agent for the cor­poration,
and that the creditors have a
right against the corporation rather than
against the trustee. In the event that a
trust company as trustee should fail (and
some did in the panic of 1907) after having
received corporate funds to discharge cer­tain
liabilities, the creditors entitled to re­ceive
payment would not be limited to
proceeding against the trustee but could
look to the corporation for payment.
Instances have come up, however, where
corporation attorneys objected to showing
a liability for bonds outstanding when the
company had deposited an equivalent
amount with a trust company, stating that
the liability of the company was dis­charged
at the time such funds were turned
over to the trust company.
On one occasion the trust agreement
contained a special provision concerning
the discharge of the corporation's liability,
as follows:
"The deposit with the trustee of the
sums necessary to pay said notes and