Vagaries of non-par stock;

              74 HASKINS & SELLS October
THE precise nature of capital stock
without par value and its correct ac­counting
treatment remain subjects pro­vocative
of much misunderstanding. The
following case which came to our attention
recently involves misconceptions concern­ing
the treatment of stock dividends and
methods of balance sheet preparation where
there is capital stock having no par value.
A certain corporation had outstanding
common stock without par value, in ad­dition
to several classes of preferred stock
with par value. More than two-thirds of
the common stock outstanding was issued
in a share-for-share exchange for an old
issue of common stock of $50 per share
par value, which had been retired. The
remainder was issued on a sliding scale of
prices to holders of bonds containing a con­version
privilege.
These facts were recorded in the books
in a rather unique way. An account was
maintained with common capital stock.
However, no money entries were made in
this account. Instead, it was kept as a
memorandum account only, for the pur­pose
of showing currently the number of
shares of common stock outstanding.
The amounts arising from the issuance
of the common stock—approximately $10,-
000,000—were credited to an account
called "Capital reserve." The title of this
account indicates the purpose to which it
was put. It was treated as a reserve.
Against it were charged discount and ex­pense
incurred in connection with various
issues of bonds, notes, and capital stocks
of the company and its subsidiaries,
amounting to nearly $7,000,000, approxi­mately
half of which applied to live issues
of securities. It had a credit balance,
therefore, of only about $3,000,000.
The surplus arising from operations was
kept in a separate account, and amounted
to $5,500,000.
In the balance sheet the common capital
stock was shown, following the preferred
issues, as consisting of a certain number of
shares outstanding, without par value. No
money value was extended, but reference
was made to the capital reserve. Under
this latter caption was shown a credit of
$10,000,000 arising from the issuance of
common capital stock without par value,
less $7,000,000 representing discount and
expense on bonds, notes, and capital stock,
with the difference of $3,000,000 extended
as the balance in the reserve. The surplus
was shown separately.
The directors of the company desired to
declare a stock dividend on the common
stock, there being a large quantity of un­issued
shares available. One share, without
par value, was to be allotted to each fifty
shares outstanding. This procedure was
adopted as obviating a large outlay of
cash, which the payment of a cash dividend
would require.
The directors further desired to maintain
the company's surplus intact, in order that
the market value of its preferred stock
would not be affected. Consequently no
money entry was to be made for the stock
dividend. This procedure was thought to
be appropriate, in view of the nature of
capital stock without par value, and the
way in which it was reflected in the ac­counts
of the company. The adoption of
this course aroused considerable discussion.
The chief consideration is the law. The
laws of Delaware, under which the corpora­tion
in question was organized, provide as
follows with regard to dividends:
"No corporation created under the pro­visions
of this chapter, nor the directors
thereof, shall make dividends except from
the surplus or net profits. Dividends may
be paid in cash or capital stock at par, or
in the case of capital stock without par
value, dividends in capital stock may be
paid at a price fixed by the board of di­rectors,
but otherwise the corporation
shall not divide, or in any way pay to the
stockholders, or any of them, any part of
its capital stock, except according to this
chapter."
Vagaries of Non-Par Stock