Accounting for liquidation may be simple or complex, depending upon circumstances, but it involves practically nothing new in principle. The main bookkeeping features for a liquidation which takes place because of bankruptcy or receivership are treated in Chapter XXXV where some specialized forms of statement are discussed and illustrated. Here it is purposed merely to point out the accounting procedure necessary in the case of a voluntary dissolution. Under a voluntary liquidation the same books of account are used as for the regular record of business transactions, and the procedure is merely a matter of recording the conversion of assets into cash. This involves taking into consideration, in the case of depreciating assets, the adjustment between the asset account, the depreciation reserve, and the loss or gain realized upon the final disposal of the asset. It may be desirable to separate these losses and gains on the sale of fixed properties from the losses and gains of the stock-in-trade, particularly if operations are continued up to the point of the final disposal of the merchandise stock on hand through the regular channels of trade. If, however, the sale of the whole property, including stock-in-trade, is effected, there is no occasion for the separation of the results of the liquidation of the two types of assets. But if this is desirable a separate clearing account, sometimes called “Liquidation Profit and Loss,” may be opened to summarize the losses and gains on fixed assets before transferring the net result of both into surplus. As the assets are sold and converted into cash the liabilities will be liquidated in due course, the accounting features here being the same as during the period of regular operation. After all assets have been converted into cash and all liabilities liquidated, only the cash and net worth accounts will remain on the books of the corporation. If the net result of the liquidation has been to encroach upon the original capital, the net worth accounts will consist of a deficit account and one or more capital stock accounts. If, however, a profit has resulted or if the resulting deficit is not sufficient to wipe out any previously accumulated surplus, the net worth accounts will consist of a surplus account and the various capital stock accounts.
The final step in liquidation will be the declaration of a liquidating dividend of the amount of cash on hand; this will be apportioned, just as all other dividends, on the basis of the stockholdings of the various shareholders. The books will be finally closed by charging the dividend and deficit, if any, to the various capital stock accounts in the one case; or by charging the dividend against the various capital stock accounts and surplus in the other case. In practice the closing of all accounts on the books is seldom carried out, the bookkeeping ceasing with the declaration of the liquidating dividend which disposes of the cash. Except as a matter of complete record, nothing is to be gained by closing off the accounts.
CHAPTER XXIX
COMBINATIONS AND CONSOLIDATIONS
Reasons for Combination
The primary purpose of the formation of a combination or a consolidation of two or more corporations, or of the taking over of a partnership business by a corporation, is to secure greater profits through unity of control. To this end the various parties to the consolidation agree to subordinate their own interests if the effectiveness of the larger unit is thereby increased. The main object in view is the control of any external or internal factors that affect earnings. Profit may be increased by economy of operation resulting from large-scale production, by economies in use of by-products, by the standardization of product and improvement of quality, and by the elimination of duplicate effort; or the control of sources of supplies or of a marketing organization, or greater ease in obtaining capital, or greater facility in dealing with labor, may be among the advantages obtained. In the past the most important of all factors has been the elimination of competition by the control of selling prices, thus securing a greater hold on the market and reducing selling expense. A consolidated enterprise enjoys the advantage of adding to its plant facilities and rounding out the scope of its activities without the expenditure of new construction or capital purchases entailing the raising of large sums of money.
Types of Consolidation
In the popular mind the terms, combination, trust, holding company, consolidation, and merger stand very much for one and the same thing. The end sought is generally the same, namely, the power to control in some degree the conditions surrounding a particular industry. The means used are dictated by the actual conditions governing the situation, such as the possibility of coming to an agreement, legal aspects, financial factors, etc.
Where the elimination of competition was the main consideration, the end sought was most easily achieved by arrangements variously termed a “gentleman’s agreement,” an “interlocking directorate,” a “community of interest,” a “pool,” or a “voting trust”—the results of which were generally referred to as “combinations.” Like the earlier form of the holding company, the “trust,” they are known in the federal courts as “combinations in restraint of trade,” are illegal, and are no longer entered into.
The trust derived its name from the fact that it was controlled by a board of trustees who issued trust certificates in lieu of the stock of the participating companies. Popular aversion to this form of control has led to the formation of another and better type of organization known as the “holding company.” While the holding company is generally classed among the combinations in restraint of trade and in a number of instances, like its predecessor, has come to grief through the enforcement of the anti-trust laws, its legality is recognized in those states where ownership of the stock of other corporations is allowed by law and where no restraint of trade or interference with competition is effected. A holding company organized in one state may control corporations organized under the laws of other states. The holding corporation can itself be controlled by the ownership of 50 or 51 per cent of its stock, and the control of its subsidiaries is obtained with stock ownership in the same ratio. Thus a relatively small capital investment may exercise a far-reaching control.
A holding company as a rule buys up the controlling stock interest of the companies in which it is interested, and elects its own men on the board of directors of the subsidiaries. Frequently the larger stockholders of competing corporations get together and form the holding company. In this case very little difficulty is experienced so far as financing is concerned, which is usually a matter of exchanging the stock of the various companies for the stock of the holding company.