Property Exchanged for Stock
Where stock is issued for property, no more is supposed to be issued than has a par value equal to a fair market value of the property received therefor. In valuing the property the judgment of the directors is conclusive, unless fraud can be shown. Any stock issued for property becomes full-paid and the owner is neither subject to further call by the corporation nor liable to contribution for the benefit of creditors. In all statements and reports required by law to be published, stock issued for property purchased must be so reported.
Treasury Stock Donated
When treasury stock comes into the possession of the company by donation, the entries needed to show the transactions are somewhat as indicated below, some variations from the form shown being sometimes met with. Practice varies as to the value at which treasury stock shall be brought onto the books, some concerns booking it at an arbitrary value based on an estimate as to what it will probably bring when sold; others booking it always at par. Practice varies also as to the manner of showing treasury stock on the balance sheet, some listing it among the assets at the value at which it was brought on the books; others treating it as a deduction from authorized capital, a sort of valuation account for the capital stock. These points are discussed in [Chapter XXI] and will not be treated here except to state a conclusion on which the booking of the transactions depends. Manifestly, if treasury stock is to be treated as a deduction from capital stock, it will have to be brought onto the books at par. Such treatment usually results in an inflated showing of the surplus arising from the donation until that has been adjusted to the values realized from its sale—an adjustment which cannot be completed with accuracy until all treasury stock has been disposed of. If treasury stock is to be shown among the assets on the balance sheet, it is perhaps best booked at an estimated realizable price, a method which will show the donated surplus also at an estimated realizable figure. While authorities differ on these points, the weight of opinion seems to favor booking treasury stock at par and showing it as a valuation account on the balance sheet.
For the sake of illustration assume that the stockholders donated $100,000 par value of common stock to the corporation and that $50,000 of it is sold at 60 cents on the dollar. The entries to record the transactions would be:
| (1) | Treasury Stock, Common | $100,000.00 | |
| Donated Surplus | $100,000.00 | ||
| (With suitable explanation.) | |||
| (2) | Cash | 30,000.00 | |
| Discount on Treasury Stock, Common | 20,000.00 | ||
| Treasury Stock, Common | 50,000.00 |
Other titles for Donated Surplus are “Donated Working Capital,” “Donation Account,” etc. The account “Discount on Treasury Stock, Common” will ultimately be closed against Donated Surplus, and there is no objection to making the charge for discount directly to Donated Surplus instead of as shown above, although the method shown perhaps makes more easily available the information as to the discounts allowed on sales of various portions of the treasury stock. If it is sold at one price, the charge for the discount should be direct to Donated Surplus. A balance sheet drawn up at an intermediate period, i.e., before Discount on Treasury Stock is closed, should show Donated Surplus at its adjusted figure, viz., book value less discount. After all treasury stock has been sold, the Donated Surplus account, as adjusted, will show the true surplus arising out of the donation transactions. The proper disposition of this—as to whether it should be maintained as a permanent increase in capital, be transferred to general surplus and so be made available for dividends, or be treated as a deduction from plant values on the theory that they have been overstated as originally booked—is discussed in detail in [Chapter XXI].
Bonus Stock
Bonus stock is usually treasury stock for the very good reason that, if it carried a liability for contribution in amount up to its par value, recipients of such stock might not be overly appreciative of the gift. Instead of being an incentive to purchase the securities which it accompanies as a bonus, it might act as a deterrent. Bonus stock is a gift on the part of the corporation and is therefore an expense. While custom favors recording the expense under the title “Bonus”—or even including it with organization expenses—and treating it as a deferred expense for a number of periods, a correct analysis of a bonus stock transaction may dictate other method of record. If the bonus stock is given with an issue of bonds which could by themselves be disposed of only at a discount, the difference between the market value of the bonds alone and their par value should be charged to Bond Discount, and the rest of the loss on the transaction may be charged either to Bonus account or Discount on Treasury Stock. This distinction is important, as will be seen in Chapter XX where the true nature of bond discount is discussed. When data are available for making the separation it should always be done. Thus, if a $1,000 par bond has a market price of $950 but when sold with one share ($100) of treasury stock as a bonus brings $1,000, the record should be:
| (3) | Cash | $1,000.00 | |
| Bond Discount | 50.00 | ||
| Bonus (or Discount on Treasury Stock) | 50.00 | ||
| Bonds Payable | $1,000.00 | ||
| Treasury Stock | 100.00 |