The issue of No-par-value stock is authorized by thirteen different states. Very often in a corporation whose stock carries a stated par value, there is little real relationship between the actual value of the stock as indicated by the net assets of the corporation and its stated par value. The law requires that par-value stock be carried on the books at its stated par. If such stock has been sold or exchanged for assets of a lesser value, there is always the temptation to inflate the value of the assets in order to maintain it at the par of the stock issued for them. This tendency is not met in the use of stock carrying no par value. Such stock appears on the books at exactly the amount of the assets received in exchange for it. A purchaser of such stock, because of the fact that it carries no stated par value, is at once put on notice to investigate the values back of it. No-par-value stock may be either preferred or common. In the former instance, if the preference relates to the assets at the time of dissolution, each such share must state the amount of assets applicable to each share in case of liquidation of the corporation. This constitutes a preference claim, not over the creditors of the corporation, but only over the common stockholders.
Thus it is seen that there may be different classes of ownership of a corporation, the owners of one class having some advantages over the owners of the other classes. It should be understood, of course, that within each class the rights and duties of the owners are the same.
Opening the Books of a Corporation.—The opening entries of a corporation have to do with a correct treatment of capital stock, subscriptions, calls and instalments, payments by cash and by property, etc.
The charter to do business, granted a corporation by the state, gives it the right to sell shares of stock. These shares have no value in themselves and are worth only what the corporation can exchange them for, either in cash or other assets. There is, therefore, no reason for making a record on the books of account as distinguished from the corporation’s minute book, of the corporation’s right to issue stock and of the amount of the stock which it has a right to issue. Until the stock has been paid or subscribed for, no formal entry need be made on the books of account. Of course, full record of all deliberations and resolutions as to procedure and policy up to the time of the actual sale of the stock is carried in the minute book, and a concise narrative statement of the organization of the corporation, its purposes, the authorized capital stock issue, the number of shares, the par value of each share, if par value stock, and so forth, should always precede the formal opening entries in the journal. This record and that in the minute book should give all the information of this sort needed. There is a too prevalent tendency among bookkeepers to make all sorts of memorandum entries on the books of account. A memorandum entry is an entry which has no financial significance and is made merely as a reminder that transactions of financial significance may arise from that source.
Before a corporation can secure its charter it is necessary to make certain expenditures. These usually consist of fees paid to a lawyer for his services in assisting in drawing up the charter; fees for filing the certificate; the organization tax; the cost of the certificates of stock and stock records; and so forth. These expenditures must be met by the incorporators from their private funds but they are reimbursed from the funds received upon sale of the stock. It is, accordingly, customary in opening the books of a corporation to show first the sale of the stock before showing the expenditures for organization.
A number of different methods of opening the books are employed. The first of these does not make use of the memorandum entries referred to above, whereas the other two do use memorandum entries. The three methods will be illustrated by means of the problem given below. The entries are shown in journal form. It will be understood, of course, that those entries which involve cash will appear in the cash book only. All the other entries appear in the general journal.
Problem 1. The Smith-Brown Company is incorporated with an authorized capital stock of $250,000, of which $150,000 is subscribed and paid for at par; the balance remains unissued for the present. The organization expenses are $1,000.
First Method
The Smith-Brown Company
A corporation organized under the State of New York, with an authorized capital stock of Two Hundred and Fifty Thousand dollars ($250,000), divided into Two Thousand, Five Hundred (2,500) shares of the par value of One Hundred dollars ($100) each, with all powers necessary to carry on the business of manufacturing, selling, and distributing motors of all kinds.