Pending Lawsuits
In the case of pending lawsuits, the contingent reserve is usually all that is necessary. If the case is on appeal, it might in addition be wise to create a fund which would provide funds for settlement if the decision is unfavorable. Here the item of costs, fees, and accruing interest is usually large and liberal provision must be made.
Stock not fully Paid
Where shares of stock are held which are not fully paid, a liability attaches for the unpaid portion contingent upon call being made for it. Showing the stocks at subscribed price with the offsetting liability for the unpaid amount as a deduction, is perhaps the best method, though there is no serious objection to omit mention of it if the stock has increased in value, or of using the method of a reserve. Where a double liability attaches to stock ownership in case of bankruptcy, no notice need be taken of the contingent liability so long as the business whose stock is held shows an entirely solvent condition. When such is not the case, whatever provision seems necessary should be made, even to the extent of liability to the full value of the stock held.
Accumulated Dividends on Preferred Stock
There is no liability on account of accumulated dividends on preferred stock until profits have been made out of which they may be paid. If the policy of management does not allow their declaration at the present time, although sufficient profits have been made, the accumulation of dividends should be shown as a liability. Where the company is unable to declare dividends because of insufficient profits, mention of the accumulating dividends should be made in a footnote as a possible future liability.
Signature to Surety Bond
The liability arising through signature to a surety bond is a contingent liability resting upon the good faith and honor of the bonded party. The practice of personal bondsmen is not so prevalent as formerly. Experience shows that the liability of the bondsmen may become very real, and not only should suitable provision be made for it but its existence should be shown on the balance sheet.
CHAPTER XX
FIXED LIABILITIES—BONDS
AND MORTGAGES
Nature of Fixed Liabilities