Subscriptions
Stock dividend due stockholders
used to off-set subscriptions.
The stock dividend is a device frequently used to conceal actual profits, or to cover up the fact that dividends are being declared in excess of a fixed rate. This is especially true of such public service corporations as lighting companies or street railways. In many cases a company will go through the necessary formalities to increase its capital stock for the purpose of absorbing surplus by means of a stock dividend.
37. Treatment of a Loss. If, during any year, the business has sustained a loss, it will, of course, appear as a balance on the debit side of profit and loss account. This will then be transferred to the debit of undivided profits or surplus, if any, remaining from previous years. For illustration, suppose the books show a surplus of $5,000.00, undivided profits $500.00, loss for the current year $2,500.00, the entry will be:—
| Undivided profits | $500.00 | |
| Surplus | 2,000.00 | |
| Profit and loss | $2,500.00 | |
| Loss for the year. | ||
If there is no surplus remaining from former years, the business is insolvent, in which case the capital is said to be impaired. This can be taken care of in either of two ways. First—by the stockholders subscribing to a fund to cover the deficiency. Second—by a reduction of the capital stock.
EXERCISES
1. David Francis and Henry Harmon own a large tract of timber land in Mexico. In connection with F. B. Walker—a promoter—they organize a corporation to build railways and mills for the purpose of developing the property and to market the timber. The company is capitalized for $1,000,000.00. The land is sold to the corporation for $1,000,000.00, stock for that amount being issued to Francis, Harmon, and Walker. Francis and Harmon each received $400,000.00 and Walker, $200,000.00. This $200,000.00 stock is issued to Walker as his fee for promoting the company. Francis and Harmon each donate 250 shares, of the par value of $100.00 each, to the treasury to be sold to produce working capital.
Make all necessary entries in general books.