2. The entries to close the books of the partnership of A & B are:
| (a) American Baking Company | 350,000.00 | ||
| Cash | 20,000.00 | ||
| Accounts Receivable | 150,000.00 | ||
| Merchandise | 50,000.00 | ||
| Plant | 130,000.00 | ||
| To charge the American Baking Company with the assets purchased under contract of (date). | |||
| (b) Accounts Payable | 45,000.00 | ||
| Mortgage Payable | 80,000.00 | ||
| American Baking Company | 125,000.00 | ||
| To credit the American Baking Company under their purchase contract for the taking over of the firm’s liabilities. | |||
| (c) American Baking Company Stock | 225,000.00 | ||
| American Baking Company | 225,000.00 | ||
| To credit the American Baking Company for the payment of the balance due by the issue of its stock at par to the firm. | |||
| (d) A, Capital | 125,000.00 | ||
| B, Capital | 100,000.00 | ||
| American Baking Company Stock | 225,000.00 | ||
| To show the distribution of the stock. | |||
Where the stock is issued to each partner directly (instead of to the firm and then distributed to the vendors), sometimes the issue is not shown on the partnership books, entry (c) above carrying debits to the partner’s capital accounts in place of the debit to American Baking Company Stock. Whether the actual transaction follows one course or the other, entries as shown above seem to meet either requirement.
The student should make sure that the effect of the entries under (a) and (b) is thoroughly understood. It may be further noted that if good-will or shrinkage of values enters into the sale of a partnership, the necessary adjustments should be made in the partners’ accounts before the sale takes place, after which the closing entries are as shown above.
CHAPTER XL
CURRENT AND CLOSING ENTRIES
FOR THE CORPORATION
Relation between the Corporation and Its Owners.—It should be noted that the owners of a corporation are on a somewhat different basis in their relationships and activities to the business than are the owners of a partnership or single proprietorship business. The legal theory that the corporation is an entity, a person, separate and apart from its owners, necessitates a change in the status of accounts with owners as compared with similar accounts in the other types of organization. A charge against a stockholder as a customer of the corporation is on the same basis as a charge against any other customer. A stockholder may become a creditor of the corporation in exactly the same way as any other person. In a partnership, on the other hand, charges against a partner and credits to his account are looked upon as charges against and credits to his proprietary interest in the event of liquidation of the firm. This is not true in the case of a corporation, stockholders in such dealings being considered “outside” parties.
Current Record on Corporation Books.—After the corporation has been organized and the opening entries made on its books, the record of current transactions proceeds on practically the same basis as in all other types of business organization. Sales, purchases, cash receipts and disbursements, notes receivable and payable, and all the transactions arising out of them, are recorded currently in the same types of books and in the same manner as the similar transactions of a single proprietorship or a partnership.
While the record of current transactions is practically the same for all types of business organizations, there are some kinds of current transactions of a corporation which differ somewhat from those of the other types. They arise out of the nature of the corporation and are recorded under account titles peculiar to the corporate form. Some of these transactions and other accounting records will be discussed briefly.
Treasury Stock.—In some classes of enterprise and also under some methods of organizing and financing the corporation, no provision is made for the securing of a fund of working capital, all of the original capital being tied up in fixed assets—as a mine or some other plant. A similar condition is sometimes encountered even after a corporation has been operating for a number of years. Lack of business judgment and financial foresight sometimes brings about a condition in which the company has allowed an undue proportion of its current assets, and therefore its working capital, to become tied up in plant extensions.
In both such cases a frequent method of raising working capital is for the stockholders to donate to the corporation a pro rata portion of their holdings of stock to enable it to secure the needed working capital by selling the stock. When such stock comes back into the company’s treasury, it is termed “treasury stock.” Having once been issued and presumably fully paid for, it has this characteristic which does not attach to the original shares before their issue, viz., that it can be sold at a discount without the purchasers being liable to creditors, in case of bankruptcy, for the amount of the discount. Par-value stock which is originally sold at a discount or which is being sold on the instalment plan and has not therefore been paid for in full is subject to levy for the unpaid amount in the event of bankruptcy of the corporation. Thus, the man who buys a $100 share of original stock for $90, is subject to a $10 levy in the event that the assets of the corporation are not sufficient to pay its debts.