Payment of Subscriptions by Property.—When payment of subscriptions is by property instead of by cash, the value at which such property shall be brought onto the books is entirely at the discretion of the corporation’s directors, and unless fraud can be shown, their valuations are final. No difficulties are involved in recording such a payment; the paid properties are debited under suitable account titles, and the Subscribers account is credited. The following problem illustrates the change from a partnership to a corporation, at the same time showing how the payment of subscriptions by property must be treated.

Change from Partnership to Corporation

Problem 5. A and B, partners, incorporate as the American Baking Company. The authorized capitalization is $250,000. Each partner subscribes for an amount of stock equal to his interest in the partnership, and C, an outsider, subscribes for the remainder of the stock at par. The corporation purchases the assets and assumes the liabilities of the partnership, paying therefor with stock as above. C pays his subscription in cash. The balance sheet of the partnership on that date was as follows:

Balance Sheet of A & B
Cash $ 20,000.00Accounts Payable$ 45,000.00
Accounts Receivable150,000.00Mortgage Payable80,000.00
Merchandise50,000.00A, Capital125,000.00
Plant130,000.00B, Capital100,000.00
$350,000.00 $350,000.00

Make the opening entries for the new corporation and also close the books of the partnership.

1. The entries to open the corporation’s books:

(a) Subscribers250,000.00
Capital Stock Subscriptions 250,000.00
 To record subscriptions to
 the capital stock as follows:
 A 125,000
 B 100,000
 C  25,000
(b) Cash20,000.00
Accounts Receivable150,000.00
Merchandise50,000.00
Plant130,000.00
A & B, Vendors 350,000.00
 To record the purchase from A & B
 of their partnership assets.
(c) A & B, Vendors125,000.00
 Accounts Payable 45,000.00
 Mortgage Payable 80,000.00
 To record partial payment to A & B
 for their assets by the assumption
 of their liabilities.
(d) A & B, Vendors225,000.00
 Subscribers 225,000.00
 To record full payment to A & B for the
 balance due them, by the cancellation
 of their subscription indebtedness.
(e) Cash25,000.00
 Subscribers 25,000.00
 To record payment by C of his
 subscription contract.
(f) Capital Stock Subscriptions250,000.00
 Capital Stock 250,000.00
 To record the issue of stock to all
 subscribers, who have paid in full.

Entries (b), (c), and (d) are sometimes combined in the following compound entry:

Cash20,000.00
Accounts Receivable150,000.00
Merchandise50,000.00
Plant 130,000.00
Accounts Payable 45,000.00
Mortgage Payable 80,000.00
Subscribers 225,000.00

Although this accomplishes the same result so far as the ultimate showing is concerned, it does not present the various steps of the transactions so clearly as the separate entries. The “A & B, Vendors” account in entry (b) indicates the liability of the corporation to A & B, arising from the purchase of their partnership properties. Entries (c) and (d) show the manner in which A and B are paid for this purchase, with consequent cancellation of that liability.