Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

4. The exchange and issuance of new stock for the

657 words | Chapter 161

old stock of the constituent companies. The merger of a number of corporations is generally held to be a method of consolidating. The difference is that a consolidation is a fusion while a merger is rather an absorption. The constituent companies are merged into an existing one and no new corporation is formed. The rights, franchises, and interest are deemed to be transferred to, and vested in, the corporation into which the various companies have been merged without any deed or transfer, and the liabilities follow the rights. Formation of Consolidation and Merger In the formation of a consolidation or a merger the services of a promoter may be necessary. This is especially true if the various companies are direct competitors and deep-rooted jealousies exist. Under the circumstances an outsider has the best chance of effecting an agreement between the parties. The difficulty encountered in all consolidations and mergers is the exaggerated idea of officials regarding the importance and value of their own plant and organization as related to the rest. This difficulty is accentuated in effecting a merger because of the irrevocable nature of the compact and the almost complete disappearance of lines of demarcation as to the tangible and intangible assets of the various units. These difficulties are overcome in many instances by the promoter’s keeping the terms arrived at with each company a secret. Direct dealing is possible in the case of a merger when the various companies are supplementary to each other, such as would be the case where a selling organization is merged into a manufacturing corporation the product of which it distributes. Principles of Valuation of the Constituent Companies In all the foregoing cases the question at once arises as to the principles which should govern in arriving at a valuation. Should the value of the net assets comprising plant, equipment, etc., or the earnings for a number of years serve as a basis in arriving at the ratio of exchange in cash or stock? What relative weight should be given to the various items? A concern with large assets when not running its plant to full capacity would be averse to having the apportionments based on earnings. The corporation with relatively small assets but with large earnings on the capital invested would not want the value computed on net assets. If the net assets are an important factor of valuation, an appraisal should be made either through a committee or by independent appraisers. If such an appraisal cannot be made, the books should be examined to see that the valuation of each plant and equipment is correct. Great care should be exercised to see that capital additions represent actual additions to the plant or serve to increase its capacity or lower its cost of production. The method of handling improvement expenditures should be uniform. It is necessary to determine that proper entries have been made in respect of property abandoned or equipment removed from service. Another point requiring careful investigation is the provision of ample reserves for depreciation, and the same method of calculation and consideration of the different elements of depreciation and the conditions under which they are operative must be taken into account in all the companies. The main problem in using earnings as the basis for valuation is the determination of the number of years’ profits to be averaged. Care must be exercised to handle uniformly the earnings and expenses of the various companies. Fundamental Principle of Equalization of Conditions Before an intelligent estimate or computation can be made of the relative value of each unit in the proposed consolidation or merger, the various items that make up the assets and earnings of each company should be examined from the same point of view. Accounting systems and methods are so varied that a common basis of computation must be constructed or agreed upon before a comparison can be made. In general, the following points should be considered:

Chapters

1. Chapter 1 2. Introduction of System 3. 1. PROPORTIONAL METHODS 4. 2. VARIABLE PERCENTAGE METHODS 5. 3. COMPOUND INTEREST METHODS 6. 4. MISCELLANEOUS METHODS 7. 1. PROPORTIONAL METHODS 8. 2. VARIABLE PERCENTAGE METHODS 9. 3. COMPOUND INTEREST METHODS 10. 4. MISCELLANEOUS METHODS 11. Introduction 12. Introduction 13. CHAPTER I 14. 5. Debenture 15. CHAPTER II 16. Introduction of System 17. Chapter XXXVI, a cash discount is usually treated as a financial 18. 6. Indexing vouchers. 19. 4. It localizes responsibility by showing authority for 20. 5. It secures a receipted bill for all disbursements of cash. 21. 1. Clumsy provision for returns and allowances, partial 22. 3. The giving out of information about the business 23. CHAPTER III 24. CHAPTER IV 25. 2. Deferred Charges to | 2. Deferred Income 26. 5. Fixed Assets | 27. 4. For publication or report to regulating or 28. 6. For advertising purposes to float new issues 29. CHAPTER V 30. 12. Liquidation or forced-sale value, etc. 31. 1. For the current assets, the principle of valuation may be stated 32. 2. The principle of valuation involved in deferred charges to operation 33. 3. For the fixed assets, the principle of valuation generally 34. CHAPTER VI 35. 2. The managerial policy as to repairs, maintenance, 36. 3. The past performance and expected future performance 37. 4. All other factors locally present which may affect 38. Chapter XIII.) 39. CHAPTER VII 40. 5. Crystallization[25] 41. CHAPTER VIII 42. 2. Rates of depreciation and their relation to repairs, 43. 5. Financing depreciation and some related problems. 44. Chapter IX. 45. 4. Normal climatic conditions. 46. 5. Probable misuse and neglect brought about by the 47. 6. Probable change in ownership and consequent 48. 7. Probable change in the requirements of the market, 49. 2. Installed operating and generating machinery 50. 3. Fixed equipment including boilers and piping 51. Chapter X of the effect of the various methods used for calculating 52. CHAPTER IX 53. 4. Miscellaneous Methods 54. 4. Under some methods, an arbitrary interest rate 55. 1. PROPORTIONAL METHODS 56. 2. VARIABLE PERCENTAGE METHODS 57. 3. COMPOUND INTEREST METHODS 58. 4. MISCELLANEOUS METHODS 59. CHAPTER X 60. 2. Inadequacy, which is lack of capacity to do the 61. 3. Obsolescence, which represents the inability to 62. 1. PROPORTIONAL METHODS 63. 2. VARIABLE PERCENTAGE METHODS 64. 3. COMPOUND INTEREST METHODS 65. 4. MISCELLANEOUS METHODS 66. Chapter XI. 67. CHAPTER XI 68. 2. Estimate of life in periods, working hours, service 69. 5. Periodic appraisal value. 70. 3. Profits of the past may be reserved in the business 71. CHAPTER XII 72. Introduction 73. 4. Bank 74. 1. Cash deposited to cover breakage or damage to 75. 2. Moneys advanced to subsidiaries, salesmen, and other 76. 3. Claims against creditors for returned or damaged 77. 4. Prepayments on purchase or expense contracts, as 78. 5. Unpaid calls or instalments on stock subscription 79. 6. Claims against absconding officers for property 80. 1. In the case of a new concern where there is no past 81. 2. In the case of an outsider—a professional auditor 82. 3. Periodically, in any business, as a check on the 83. 1. The amount of outstanding trade debt at the time 84. 2. The amount of sales on credit made during the 85. 3. The total sales, both cash and credit, for the present 86. CHAPTER XIII 87. 1. Carry the market valuation, whether more or less 88. 2. In case market value is less than cost, set up a reserve 89. 3. Carry in an inner column in the body of the balance 90. Chapter XXVI of this book, where a full presentation of the case for 91. CHAPTER XIV 92. CHAPTER XV 93. 1. By practically full ownership of the subsidiary 94. 3. Through the agency of advances, particularly when, 95. CHAPTER XVI 96. Chapter IX, is the one most widely employed. It is to be preferred to 97. CHAPTER XVII 98. 1. If the building is purchased outright for cash, whatever costs 99. 2. If the building is bought by the issue of stocks or bonds, the 100. 3. When buildings are put up by the concern itself, full cost may 101. Chapter XVI, any increase or decrease in the value of the land cannot 102. CHAPTER XVIII 103. 1. _Time Lapse._ There is no such thing as wear and tear on a patent 104. 2. _Supersession._ If no other causes than time lapse were operative, 105. 3. _Obsolescence._ Akin to the element of supersession is that of 106. 1. Lump sum payments to the state or some division 107. 2. The full purchase price paid another company for 108. 3. Legal and other fees in connection with securing 109. 4. Any other legitimate expenses, such as the cost of 110. CHAPTER XIX 111. 6. Merchandise Inventory 112. Chapter XX, in the discussion of the liability, bonds. 113. CHAPTER XX 114. 1. The character of the issuing corporation under 115. 2. The security of the bonds under which come: 116. 3. The purpose of the issue, as: 117. 4. The conditions incident upon payment of principal 118. 4. A bond sold at par to be redeemed at a premium on maturity. 119. CHAPTER XXI 120. CHAPTER XXII 121. 2. Profits realized on sales of fixed assets should be first applied 122. 3. A sufficient surplus should be accumulated (in addition to the 123. CHAPTER XXIII 124. Chapter XXII, have their proper place of record direct into some margin 125. Chapter XXV on sinking funds for a full discussion of the merits and 126. 2. Reserves created to provide an additional capital 127. 3. Reserves created to provide for equalizing dividends 128. 1. Valuation Reserves 129. 5. Market Fluctuations Reserves, etc. 130. 2. Proprietorship Reserves 131. 3. Reserves for Working Capital, etc. 132. CHAPTER XXIV 133. Introduction 134. CHAPTER XXV 135. 1. The sinking fund, then, under suitable title, may appear only among 136. 2. The balance sheet may record the sinking fund status among the 137. 3. There may appear on the balance sheet as the only evidence of a 138. 4. There may be no record of the sinking fund transactions shown on 139. 1. Those dealing with the original and subsequent 140. 2. Those required to book the trustee’s periodic 141. 3. Those to show the redemption of the debt and the final 142. CHAPTER XXVI 143. 1. The difficulty of determining the rate at which 144. 2. Inasmuch as the amount of investment in current 145. 3. If interest is to be charged, how shall the offsetting 146. 4. The introduction in production costs of a more or 147. 5. As the business world is accustomed to consider 148. CHAPTER XXVII 149. Chapter XXIII on “Reserves and Surplus.” There the illegitimate use of 150. CHAPTER XXVIII 151. 1. To convey, transfer, conceal, or remove, or to permit 152. 2. To transfer while insolvent any portion of the property 153. 3. To make a general assignment for the benefit of 154. 4. For the debtor to admit in writing his inability to 155. 5. To suffer or permit, while insolvent, any creditor to 156. 1898. The courts of the Federal Government have jurisdiction in these 157. CHAPTER XXIX 158. 1. Agreement by the directors of the various companies 159. 2. Assent of the stockholders of each company to the 160. 3. Filing of certified copies of the agreement, with the 161. 4. The exchange and issuance of new stock for the 162. 1. A uniform accounting system for all the companies 163. 2. The reserves for depreciation should be based on 164. 3. Costs should be determined in the same way if the 165. 4. The apportionment of labor, factory expense, and 166. 5. Only real items of cost should be included under the 167. 6. The same methods of inventory-taking, both of 168. 7. The amount of orders on hand should be considered. 169. CHAPTER XXX 170. 2. A proper rate of turnover on the merchandise 171. 3. Economical management. 172. 3. Facilities for centralizing and comparing such

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