Bonus Stocks or Bonds
Bonus stocks or bonds are stocks or bonds given as a bonus upon the purchase of other stocks or bonds. Thus, upon the purchase of a share of preferred stock, one share of common may be given as a bonus.
Accounting for Stocks
Accounting for the original issue of stock has been treated in Volume I. There several different methods of opening the records of the corporation were given and the manner of treating premiums and discount and instalment subscriptions was shown. Here some additional problems peculiar to corporation accounting will be discussed.
Discount on Stock
In the State of New York the stock of a corporation cannot be sold below par. Where sale below par is allowed, the proper booking of the discount requires consideration. The Interstate Commerce Commission requires that discounts or premiums be shown on the books under those titles, i.e., Discount on Capital Stock and Premium on Capital Stock. This method is to be commended as being true to fact and presenting a full and sufficient record of the facts. In the case of other concerns over whose accounting practices there is no regulation, that method is honored more in the breach than in the observance. A prevalent feeling is that the appearance on a balance sheet of such an item as discount on stock is a serious reflection on the standing of the corporation and is to be avoided in any way possible. Discount on stock is not an attractive item on a balance sheet, but there is little justification for such sentiment in those states where the sale of stock at a discount is a perfectly legitimate transaction. The balance sheet ought to represent facts as they are until they change; then the new conditions should be shown. So long as the discount on stock remains a fact it should be so shown. When the discount has ceased to exist through its absorption against premium on stock or the general surplus, it should no longer be reported because it is then a matter of ancient history with which the present is not concerned.
A favorite method of charging the discount on stock to organization expense is not approved, not because it is a misnomer, for discount may well be looked upon as one of the expenses of organization, but because it is an item of sufficient importance and interest to require separate record. Charging the discount to some asset account, when payment of stock is made by property instead of by cash, is to be severely condemned. Inflation of asset values to cover up such an item cannot be justified.
Premium on Stock
The premium on stock sold above par is best recorded in a premium account which should remain on the books as a part of the permanent capital and not therefore be transferred to surplus and returned as a dividend to the shareholder. It may be legitimately used to cancel any discounts.
In the State of New York a corporation cannot issue its stock “except for money, labor done, or property actually received for the use and lawful purposes of such corporation.” A broad interpretation has been given the word labor so that under the law it may comprise both manual and mental labor and services of almost any kind legitimately received at the time of organization of the corporation or at any subsequent time. Stock may thus be used to pay for organization expense, promoters’ fees, etc.