comes a stockholder when he has made any payments called for by terms of subscription. These terms may deprive him of his right to vote if he is in arrears, and may even forfeit what he has already paid, if he continues in default after due notice.

A person is not a full stockholder until he has paid for all his stock. Title to the stock consists of the credit on the stock ledger. The stock certificate is the receipt for that credit, and is not the stock itself. A person may own stock without having a certificate.

A dividend must be voted by the directors before any one has a right to it. Then it depends on conditions. If all the stock is being paid in instalments, the dividend may be made payable on the par value or on the amount paid by each one, and it may be paid in cash or may be applied on the unpaid instalments. Or the directors may declare a dividend payable only to those who are not in arrears.

There are so many different conditions governing the dividends as determined by the board of directors that it is impossible to note them all,

INTEREST AS AN ELEMENT OF COST

Editor, Students' Department:

SIR: I would appreciate very much your opinion on the following:

A firm I am interested in conducts chain stores (retail) and when purchasing stock and fixtures for them, gives notes in payment. It also purchases the real estate and building in most cases, giving notes in part payment, which sometimes extend over a period of 5 years.

The question at issue is: Should the interest on these notes, which is paid at the same time each note matures and is taken up, be charged to interest account as an operating expense, or be properly charged to cost of merchandise, store equipment and fixtures and real estate and buildings accounts?

The only way in which interest could be legitimately charged to the value of any articles mentioned would be to prove that the articles were more valuable because they were paid for with notes that bore interests than they would have been if they had been bought for cash. Of course, this is an untenable proposition.

In any event, interest is not an operating expense. Only those items are operating expenses which are necessities of the business. A concern with sufficient capital need not pay interest, therefore interest is caused by lack of capital, not by operating processes. After operating profit is ascertained, interest is deducted as a financial expense.

FUTURE VALUE OF REAL ESTATE

Editor, Students' Department:

SIR: A manufacturing corporation carries on its books at the present time land at $75,000 and buildings at $250,000. The location is unsuited to the company's present and apparently immediate future needs. A large tract of land has been acquired and modern buildings are now being erected thereon to house new equipment. The company has an opportunity at the present time to dispose of the old buildings and the ground

they occupy for $150,000 in cash and occupy the building for another ten years at an annual rental not to exceed ten per centum of the selling price plus the maintenance charges.

The company is sound financially and prosperous to the extent that a large portion of its earnings would be taxed at the highest rates of income and excess profits taxes. The management is divided as to which is the better plan, to sell now and sustain a loss of $75,000 or keep the property for a period of ten years and then try to dispose of it.

Assuming that the property could be disposed of at the end of ten years at its present book value, less the usual depreciation charge on the buildings, which would be the better plan: sell now for $150,000 in cash and pay rent or sell at the end of ten years at the figure above stated?

The writer has been asked to draw up a brief statement of both propositions and has done so from his point of view. I would be extremely grateful, however, if you would inform me either through the next issue of your JOURNAL or by direct reply of the correct solution from your point of view.

Yours truly,

T. W. L.

There are several elements in the question submitted about which no information is given, that would affect the answer. Some of them are: Is the proposed rental a fair one, or is it more or less than the property ought to yield?

Can the company use the old plan advantageously, in view of the fact that it is building a new factory?

If not, can it rent the property at the same rate it pays or at a higher rate?

Is the valuation of $250,000 placed on the buildings cost or has adequate depreciation been charged off?

What rate of depreciation is to be allowed on the buildings for the ten years?

Supposing that the rental is a fair one, and that the company can use the property, there would be no gain or loss in holding the property. If the rate of depreciation on the buildings is 5 per cent. on the diminishing value, the buildings would be carried at $149,684.24 at the end of ten years. The depreciation of $100,315.76 is not a loss. It is an expense for rent, being presumably included in the word "maintenance." If not so included, it should be added before answer is made as to the fairness of the rental.

Adding the land at $75,000 to the depreciated value of the buildings, $149,684.24, the amount realizable at the end of ten years would be $224,684.24.

The problem then resolves itself into deciding whether it is better to have $150,000 now or $224,684.24 at the end of ten years. This cannot be definitely answered, unless we know what rate of interest can be realized by present cash, if it is accepted, or what rate the company itself will allow, if the $150,000 is credited to property reserve and is credited with interest yearly on the increasing balance, the land and buildings accounts remaining as they are, less depreciation.

If interest on the reserve is at 5 per cent, the reserve or the invested funds at the end of 10 years will amount to $244,334.25. If the interest is 4 per cent., the accumulation will yield $222,036.60. In one case there is a profit of $19,650.01 and in the other a loss of $2,647.64.

As there is no certainty that the property can be sold at the end of ten years, and as the results of the lump sum if invested in Liberty loan 44 per cents are certain, I should advise the acceptance of the $150,000 provided the answer to the questions asked do not disclose conditions that would change the calculations.

At the same time it must be remembered that the question of future real estate values is one that must be left to individual judgment. No one can be positive about the future of such property.

DEPRECIATION RESERVE IN SALE OF FACTORY

Editor, Students' Department:

SIR: Will you kindly give me some information regarding the following transactions?

The company by which I am employed (we will call it the Jones Company of Illinois) has bought out a factory in the state of New York (the Jones Company of New York), which is a separate corporation entirely, although the stockholders of both companies are the same.

The books of the New York company have been turned over to me to close. The plant and equipment account is shown on the New York books at $47,320.27, and in the sale to the Illinois company, the price is shown as $31,349.69.

I have made the following entry to cover this.

Jones Company of Illinois, d.

To sundry gains

Sundry losses, dr.

To plan and equipment account

Is the above correct?

$31,349.09

31,349.69

47,320.27

47,320.27

Two years' depreciation have been entered on the New York books, $4,732.02 having been credited to depreciation reserve.

In closing the books, I have been also charged depreciation (which on the books in question is thrown directly into profit and loss) for onethird of a year, as the sale is dated as of April 30th, and I have credited depreciation reserve with $788.67.

Should any more depreciation reserve than for the two years and four months be entered?

It has been suggested to me that the depreciation reserve account must balance the plant and equipment account. If this is the case, should a further entry be made to make the balance of the depreciation reserve $47,320.27, the full amount of the original plant and equipment account? When the proper entries have been made for the depreciation reserve, all the accounts will be closed on the New York books except the following: Depreciation reserve. Capital stock

The accounts will be

their private ledger.

Undivided profits

Jones Company of Illinois.

transferred to our general officers to take care of on

Will you kindly advise me what is the final disposition of the depreciation reserve account when a business is closed out entirely?

I have tried to find the information desired in the text-books at my command, but none of them seems quite to fit the case. If this informa

tion is outside the jurisdiction of your department, perhaps you will be kind enough to refer me to some text-book which will help me. Very truly yours,

M. C. C.

You have made an error in stating the plant and equipment account as shown on the books. The value on those books was not $47,320.27 but $42,588.25. The depreciation reserve of $4,732.02 should have been charged and plant and equipment credited before any entry transferring the latter account was made. You have left the reserve account on the New York books without any excuse for its existence, since there is no asset to which it applies. An account of reserve for depreciation is only the credit side of the asset account, kept in a separate account for convenience, so that original cost may not be lost sight of. In view of the sale, there was no occasion for the entry of $788.67. If it is left as made, the value of the plant and equipment is reduced to $41,799.58.

You say that the Illinois company bought the New York factory. This is too indefinite a statement. As the New York books are to be closed, you may mean closed out, winding up the New York company, or only closed as to profit and loss. As you say that the stockholders of the two companies are the same, it is to be presumed that the Illinois company bought the New York company-that is, the stock of that company which still continues to exist. This is indicated also by the list of accounts still open on the New York books.

The entries for the sale of the factory mean that the Illinois company made a present of $31,349.69 to the New York company and that the latter company wrote off its plant and equipment as a loss of $47,320.27 in spite of the fact that $5,520.69 had already been written off.

The proper entries would have been:

We do not know what other entries there may be, because we do not know what was done. The above apply only in case the factory was bought, but they do not show any payment for it.

If, when you say that the depreciation reserve should balance the plant and equipment account, you mean that it should be the same amount, you are wrong. This would not be the case until the physical deterioration of the plant was equal to its total value-in other words, until the plant was all gone. Those who made the suggestion probably meant what we have said, that the reserve was part of the plant and equipment account.

Book Reviews

NEW COLLECTION METHODS, by E. H. GARDNER. Ronald Press Company, New York. 467 pp.

A public accountant can hardly be expected to undertake the task of installing a modern credit department, yet as his diagnosis of a moribund business may indicate "poor collections" to be the chief cause of the patient's alarming condition the prescription of Mr. Gardner's book, New Collection Methods, might well be in order. As in medicine, the business doctor may not always be able to work a cure but he can frequently' point out the way; after which it is up to the patient. All of which is to say Mr. Gardner's book is certainly worth a place in the public accountant's working library—if only to suggest ways of collecting his own bills. The fact that the book is in its second edition indicates sufficiently that it fills the need of a practical manual of procedure for the credit man. Mainly it is descriptive of methods and forms used by some of our most successful wholesalers and mail-order houses in making collections promptly and systematically. Ordinarily this would furnish dry reading to those not interested in the subject, but Mr. Gardner has succeeded in making it interesting to the general reader by his study of the practical psychology underlying the various methods of prodding reluctant debtors.

The only consistent thing about human life apparently is its inconsistency. Therefore, perhaps one should not be surprised by curious contradictions one encounters in the book, such as the statement "to go to a cash basis would set back the clock by centuries" (p. 26). The aim of the credit department being to shorten the terms of credit as much as possible, it would be logical to consider the cash basis as the ultimate goal to be attained. If it is argued that the retailer should have a reasonable time in which to turn over his stock, the obvious retort is that he should have either sufficient working capital of his own to tide him over or else look to the banks which are the proper purveyors of credit. Again, after reading the praises of high moral standing and frankness in commercial life, it jars a bit to note the instances of saying one thing while meaning something entirely different as shown in some of the form letters which Mr. Gardner quotes. This may be tact but it irresistibly reminds one of the cynical definition of tact-"the ability to lie like a diplomat." Still, if business is competition and competition is but a form of war, we must give the credit man his due for endeavoring in his field to eliminate the frightfulness of the verbal bludgeon in favor of the more skillful and no less deadly play of the rapier.

W. H. L.

NEW MODERN ILLUSTRATIVE BOOKKEEPING, by CHARLES F. RITTEN HOUSE, C. P. A. American Book Company, New York. 152 pp. Modern Illustrative Bookkeeping is the best kind of elementary text because it emphasizes principles and thus trains pupils to apply principles