| 50 | shares | at $125 | $6,250.00 |
| 5 | ” | at 100 | 500.00 |
| 55 | ” | at a cost of | $6,750.00 |
The average cost of one share is $122.73. Based on the former quotation of $125, the right is seen to be worth theoretically the difference, or $2.27. The quoted market price will usually be less.
Cost of Investments
In connection with the cost of temporary investments it may be well to point out that cost means full cost to the purchaser, including brokerage and other costs in connection with the purchase or subsequent thereto. If the investment is being carried on margin, the customary practice is to charge to the investment account the interest on the funds borrowed by the broker to finance the transaction and to credit thereto any dividends or interest received. The difference between the asset account kept with the investment and the liability account with the broker thus shows at any time the original equity in the investment. A credit to the investment account when the stocks are sold develops the net profit or loss on the entire transaction. There may be circumstances under which it will be desirable to separate from the asset account all charges and credits subsequent to the original purchase, carrying them in a suitable expense and income account.
Valuation of Bonds
In the case where bonds are held for temporary investment, purchased either at a premium or discount, it is not customary to take account of amortization, because the investment is temporary. The problem of amortization is postponed to Chapter XV, in which permanent or long-term investments are treated.
In brokerage firms, where stocks and bonds comprise the stock-in-trade, the same principle of valuation applies as with a merchandise stock except that the rule of valuation at cost or market, whichever is the lower, is applied to each individual holding. In this way, decreases in the value of one stock are not offset by increases in the value of others as would be the case if total market and cost values for the entire lot were first determined and then the valuation formula applied. In this chapter the principle of valuation of stocks and bonds as stock-in-trade is mentioned only by way of contrast.
Valuation of Unissued Stock
Under the head of temporary investments, the company’s unissued and treasury stocks or bonds are sometimes included. Such unissued stocks or bonds manifestly represent an inflation of asset values, offset, it is true, by an equal inflation of capital stock. In the first place, conceding for the sake of argument that the inclusion of unissued stocks among the assets is legitimate, the principle of equilibrium requires that they be valued at par on the balance sheet, a figure which is not cost and which may be very far from market. Again, the company’s unissued stocks may be in no sense current assets. Furthermore, stocks which have never been issued have no owners and so can command no proprietorship in the enterprise. The most that can be said about them is that they are contingent assets, showing that certain legal formalities have been met which authorize their issue if so desired. The remaining necessary procedure, viz., that the stock be placed on the market and sold, is, however, the condition which must be met to create a real asset and to create proprietorship. Until that has been done there is neither proprietorship nor asset. Reference to Volume I, Chapter XLIX, where the various methods of opening the books of a corporation are illustrated, will show that the method to be preferred is one which eliminates the account Unissued Stock from the books. However, where it is set up, correct classification would seem to require that it be treated as of the nature of a valuation or offset account for capital stock. In other words, the two accounts, Capital Stock and Unissued Capital Stock, must be read together to show the true status of the proprietorship stockholdings. The correct method of presentation on the balance sheet is here only indicated but will be illustrated in [Chapter XXI] where the problem of valuation of capital stock is treated.
Valuation of Treasury Stock