3. Through the agency of advances, particularly when,

because of poor credit, the usual money markets may be closed to the borrowing company. Valuation of Permanent Investments The problem of the valuation of investments under the three forms mentioned presents some interesting features. It might seem that, inasmuch as the investment is in the nature of a fixed asset, valuation should always be at full cost; that market fluctuations should have no effect. The last half of this statement is correct but the first part needs modification. It is to be expected that a concern in purchasing the stock of another will not pay more than it considers the stock to be worth. The price may be more or less than the face value of the stock, depending upon the existence of an element of good-will or the overstatement of the assets on the books of the vendee company; or again, where the stock is bought on the open market many other factors may cause a variance of purchase price from par value of the stocks. Were the investment simply an inanimate asset to be used, cost, perhaps less depreciation, would be the proper basis for valuation. Since, however, a corporation cannot remain stationary—it must usually record a gain or a loss from year to year—ownership in that corporation must accordingly suffer change from year to year. So many things can happen to an operating corporation that cannot befall an inanimate asset held for use that the proposal to value both on the same basis is hardly tenable. Furthermore, if proper principles of valuation are applied to the subsidiary concern, its true value can be determined with fair accuracy. Accordingly, a true basis is secured for valuing it as an investment on the books of the holding company. Any increase in value over cost is due to the profits made by the subsidiary enterprise, and in the case of its complete ownership by the holding company these profits belong in full to the holding corporation. If all the profits are disbursed as dividends to the holding company, the subsidiary enterprise suffers no change in condition and therefore no change in value. If, however, some of the profits are retained, this would result in an increased value which should be reflected in the valuation of the subsidiary enterprise on the books of the holding company. How this may best be shown also requires consideration. Holding Company and Subsidiary Enterprises A holding company may have but few assets aside from its holdings in subsidiary concerns. A balance sheet showing only these few assets and its investments in the other concerns does not usually give much useful information. Therefore, as the assets of the subsidiaries belong to the holding company and really comprise its operating plant, a more intelligent way of showing the investments of the holding company is to combine or consolidate the balance sheets of the subsidiaries and incorporate them in the balance sheet of the holding company in place of the item of investments. This method is known as the “consolidated balance sheet” and is given fuller treatment in a subsequent chapter. Here attention is called to it merely as a device for showing the valuation of permanent investments represented by substantially full ownership of the subsidiary companies. Controlling Investments Where ownership is not complete but still controlling, the method of the consolidated balance sheet is not so fully applicable and often is not used. In this case the investment will appear as such on the balance sheet with whatever adjustments in value may be necessary due to the success or failure of the subsidiary’s operation for the past period. Whatever profits are made enhance its value and in the enhanced value the controlling company has a pro rata share, the effect of which should be taken up in the valuation of its investment therein. The net amount of the enhancement in value is the difference between the net profit made by the subsidiary concern and that portion paid out in dividends—in other words, the portion reinvested in the business. This portion, i.e., such part of it as belongs to the controlling company, may be taken up directly by charging the investment account and crediting a proper income account; or the share of the entire net profit belonging to the controlling company may be charged to the investment and credited to an income account. In the event of dividends being paid by the subsidiary company, these would be credited to the _investment_ account of the controlling company, which account would then show, as in the first method, the new value due to the profits reinvested in the business. That this policy of increasing the value of the investment is conservative and sound is apparent when one considers that the holding company’s ownership of the subsidiary concern controls the latter’s policies, including the dividend policy. The profit taken onto the books of the holding company by the above method is a real, not a book, profit. Advances to Subsidiary Concerns Where control is secured through the medium of advances made on open account or by means of such advances together with ownership of stocks and bonds, a valuation must be made of these claims separately from the stocks owned. Where ownership is complete and valuation is shown by the consolidated balance sheet method, intercompany accounts and claims are, of course, eliminated and so do not show. In all cases, however, where claims against a subsidiary arise on account of advances, or even of sales, and these must be shown on the balance sheet of the owner of the claims, more than average care must be taken in placing a value on them. In the case of advances, frequently their exact status is not known at the time when made. The record is carried in a suspense account until its final status is determined, when record is made accordingly. The advance may be temporary, for the purpose, say, of enabling the subsidiary concern to take advantage of very favorable market conditions in the purchase of raw materials, in which case, of course, the claim is a current asset; or possibly the subsidiary company is about to make additions to plant and equipment and is financing the expansion temporarily by means of borrowings from the parent company. Whatever method of permanent finance is finally settled upon, this should convert the open-account claim of the parent company on account of advances, into the regular securities or obligations of the subsidiary concern. Again, it is unfortunately true that advances to the subsidiary company often become necessary to recoup it because of operation at a loss. This may continue with little hope of repayment for years to come, if ever. The parent company may ultimately lose all the funds advanced to the subsidiary company because of the latter’s financial instability. Rules for Valuation Because of the many factors involved, it is apparent that no absolute rule can be laid down for valuing the advances to a subsidiary enterprise. Each case will require careful investigation and must be settled on the basis thus established. If the investigation shows the loan to be temporary with good expectation of its full return, it should be shown at its face value among the current assets. If the advance is to be converted into the securities of the subsidiary concern and the latter is in good condition, the advance may be carried at par among the fixed assets. When the securities are received they should be valued as any other permanent stock investments, with due regard to the basis of conversion in comparison with the value of the securities given in settlement. If conditions upon examination are found to be serious, it may be necessary to treat advances made as expenses, i.e., they are of no realizable value. If the bankruptcy of the subsidiary concern seems probable, a question of financial policy and law arises, viz.: whether the interests of the parent company are best conserved by allowing its claims to remain on open account and so rank with other creditors, or to be converted into stock and rank with those of other owners. It may be necessary to take that phase of the matter into account when determining the value of claims against the subsidiary concern. Investments in Partial Holdings For the sake of business connections, prestige, and good-will, oftentimes more or less permanent investments are made of such a nature or in such amounts as not to secure a controlling interest. Here, because the reins of business control are not held by the investing company, manifestly such an investment is on a very different basis from those in companies whose control is held by the investor. In the one case, business policy can be determined and made effective; in the other case, success or failure is under the control of others. Accordingly, the valuation of these partial holdings differs from investments in companies entirely owned or controlled by the investor. Where the holdings of these minor interests are not particularly substantial in comparison with other properties owned, there is no serious objection to valuing them at cost. They are held to secure certain benefits, and so long as the real values of the companies concerned are being maintained or enhanced, there is little probability of the investment being disposed of. Market fluctuations, therefore, should be given little or no consideration. Where, however, partial or minor holdings form a comparatively large portion of the investments, it may sometimes be wise to value them on the same basis as temporary investments of a current nature. In this case the profit or loss attendant upon bringing market values into the books should be handled as with temporary investments. Where investments of this kind are shown on the balance sheet at cost, it is sound policy to call attention in a footnote or otherwise to their market values, as oftentimes the market gives some indication of the condition of the company. The savings banks of the State of New York, in reporting to the State Department of Banking, must show the market value of the securities held. Usually three values are shown, viz.: market, par, and so-called investment value, to be explained later. Where the securities held are not listed on any exchange or are held closely and not traded in extensively, it is often difficult to secure reliable market quotations for them. Here cost, unless known conditions demand otherwise, seems the best basis for valuation. Investments Producing No Income Some investments may be of a permanent type and yet of themselves produce no income. Such are memberships on stock and produce exchanges, boards of trade, and the like, which are valuable for the privileges and prestige accruing therefrom and the business associations secured thereby. They should usually be valued at cost, thus allowing the period in which they are sold, if disposal becomes necessary, to get the profit or loss incident thereto. Bond Values and Market Interest Rates In connection with the valuation of bonds, some additional considerations should be taken into account. Assuming that the margin of security for the mortgage covering the bonds is ample, the value of a bond, i.e., its price on the market, is largely dependent upon the prevailing interest rate in the money market. Thus, if a bond bearing 5% interest is offered for sale in a market where the rate is 6%, it can be sold only at a discount sufficient to provide approximately 6% on the money invested. Similarly, a 6% bond offered in a 5% market should bring something more than par. It is not intended to convey the impression that whenever a bond sells below par it is because the market is demanding a higher rate than that offered by the bond; nor when a bond sells at a premium need the entire amount of the premium be a reflection of money market conditions. An additional factor is oftentimes the credit standing of the issuing company. Thus, even though a bond may be amply protected, the poor credit rating of the issuing concern will be reflected in a downward tendency of the price of the bond, for under such circumstances foreclosure proceedings preliminary to sale and conversion of the security always loom large in the background. On the other hand, bonds of the United States are often above par because of the government’s credit standing. On the assumption that there is reasonable expectation that the bonds will be paid at maturity, their valuation on the balance sheet during the time they are held by an investor must have regard to the price paid as determined by the bond interest rate and the money market rate at the time of purchase. A bond bought at a discount and held to maturity is redeemed at par. If the bond is carried at cost until the period of redemption, that period would secure the credit for the difference between cost and par. Similarly for a bond bought at a premium, and carried at cost constantly, the period of redemption would bear the loss between cost and redemption price. Nature of Bond Discount or Premium To bring out more clearly the real nature of bond discount or premium, under the limitation stated above, consider a bond selling at 90 and bearing 4½% interest. This should be interpreted to mean that the issuing company, because of the low rate offered on the bond, will have to pay at maturity $1,000 for every $900 now received. It is, as it were, having to prepay $100 interest on every bond sold, in addition to its promise to pay the stipulated bond rate of interest periodically. It is selling a $1,000 security for $900 and is thus depriving itself of $100 which it might have had by contracting to pay the present market rate of interest. From the other (i.e., investor’s) point of view, he is willing to lend money at the bond rate only because he expects to be compensated by the $100 to be received in a lump sum at the maturity of the bond. The wisdom of fixing the bond interest rate so that the bond will command either a premium or a discount hinges upon the soundness of the forecast as to the money market in the future. It is, of course, a speculative transaction. Since, then, discount on bonds is, from the standpoint of the issuing concern, a prepayment of a portion of the interest in amount sufficient to make the income rate on the bond correspond with the rates prevailing in the market, this prepayment is applicable to the whole period of the life of the bonds and should be spread equitably over that period. To accomplish this it is necessary, every time bond interest is paid, to transfer to the Bond Interest account a portion of the Discount on Bonds account, thus gradually wiping off the Discount account and making the Interest account show every period the real amount (and real rate) of interest as distinguished from the amount paid as indicated by the bond rate. In the present discussion, the chief concern with the problem of bond discount and premium is from the point of view of the investor. Having established from the other point of view the true relation between premium and discount and bond interest, there will be considered the two additional problems as to the manner of carrying the record on the investor’s books and as to the method of valuing the investment at each balance sheet period. First, then, is the problem of making the record. Record of Bond Investments When bonds are purchased the record may be made in two ways. Accounts may be kept with the bonds at par, separate valuation accounts being carried for the discount or premium. An account with bond interest is also opened and sometimes one with prepaid interest on bonds, where, as is usually the case, the bonds are bought with accrued interest to date of purchase. The accrued interest, however, is more conveniently recorded as a charge in the bond interest account, thus automatically adjusting the income from the bonds when the first coupon after date of purchase is redeemed. As stated in Chapter XIV, the amount of the discount or premium is to be spread equitably over the life of the bond. The method of making an equitable distribution is a problem to which consideration will be given in later pages of this chapter. The entry to effect the distribution is a transfer entry between the premium or discount account and the bond interest account for the portion accrued as on the date of each payment on the coupons. The result of the transfer is to establish with the bond account at par a true valuation of the bonds held as on that date, and to secure the correct amount of income from bond interest to be credited to the current period. The second method of making record of the bond investments is to record the purchases at cost in the bond account, carrying there full information as to premium or discount, no separate accounts with these being opened. When the bond interest falls due, the bond account itself is written up or down for the amount of the discount or premium accrued during the current period. The contra entry is in the bond interest account just as above. This latter method does not commend itself when the only record kept of bonds is that mentioned above. If the investments are so numerous as to require a subsidiary ledger for their record, where with each kind of bond accounts will be kept with its par, discount or premium, and interest, there is no objection to handling the controlling account on the general ledger by making the discount or premium adjustment directly to the bond account. Fuller information is given and the record is less involved, however, when handled by the first method. Amortization of Bond Discount and Premium The equitable distribution (technically known as “amortization”) of the discount and premium on bond investments is the essence of the problem of their valuation. There are two methods of making this distribution, termed the “straight line” and the “scientific” method. Under the straight line method the amount of the discount or premium is divided by the interest periods the bond has yet to run, and the quotient is made the amount of periodic amortization. Although not scientifically accurate, the method commends itself because of its simplicity and consequent ease of operation. Its use is allowed by the Department of Banking of the State of New York for valuing the investments of savings banks. The scientific method is based upon compound interest calculations and will be best understood by means of examples. Under this method the discount or premium is looked upon as the amount of an annuity. The portion which must be written off for any period is the present worth of the annuity on that date, taking into consideration the rate of interest and the time in interest periods the bond has still to run. In practice, however, the amount of amortization is not found in that way. To find the periodic amortization, it is necessary to know the cost of the bond, its coupon interest rate, and the effective rate. By effective rate is meant the real income rate on the basis of the price paid for the bond. Assume that a 3% bond, interest payable January and July, has 3 years (6 periods) to run and is bought for $971.99 so as to yield 4% on the investment. At the end of the first semiannual period the actual interest received will be $15, but the real income on the investment is $19.44 because it was purchased on a 4% basis for $971.99 (2% on $971.99). Of the total discount of $28.01, $4.44 (19.44-15.00) is to be credited to the current period. The adjustment of discount brings about a new valuation of the bond, it being now worth $976.43 (971.99 + 4.44), because nearer by six months to maturity when it will be worth par or $1,000. So, for the next period the coupon is $15 and the effective income, $19.53 (2% on $976.43), hence the amortization is $4.53; and so on for the six periods, at the end of which the discount will have been completely distributed, i.e., amortized. The following schedule shows the periodic amortization and new values of the bond: 3% bond, par $1,000; bought on a 4% basis for $971.99; 3 years to run; interest January and July. ============+=======+=========+============+========+========= | | | | | Discount |Nominal|Effective| Periodic |Value of| Adjusted Date |Income | Income |Amortization| Bond | Amounts ------------+-------+---------+------------+--------+--------- Jan. 1, 1915|$..... | $..... | $..... | $971.99| $28.01 July 1, 1915| 15.00 | 19.44 | 4.44 | 976.43| 23.57 Jan. 1, 1916| 15.00 | 19.53 | 4.53 | 980.96| 19.04 July 1, 1916| 15.00 | 19.62 | 4.62 | 985.58| 14.42 Jan. 1, 1917| 15.00 | 19.71 | 4.71 | 990.29| 9.71 July 1, 1917| 15.00 | 19.81 | 4.81 | 995.10| 4.90 Jan. 1, 1918| 15.00 | 19.90 | 4.90 |1,000.00| ..... +------------+ | Total discount amortized $28.01 | | -------------------------------------------+--------+--------- A similar schedule for a bond bought at a premium immediately follows: 5% bond, par $1,000; bought on a 4% basis for $1,028.01; 3 years to run; interest May and November. ============+=======+=========+============+=========+========= | | | | | Premium |Nominal|Effective| Periodic |Value of | Adjusted Date |Income | Income |Amortization| Bond | Amounts ------------+-------+---------+------------+---------+--------- May 1, 1917|$..... | $..... | $..... |$1,028.01| $28.01 Nov. 1, 1917| 25.00 | 20.56 | 4.44 | 1,023.57| 23.57 May 1, 1918| 25.00 | 20.47 | 4.53 | 1,019.04| 19.04 Nov. 1, 1918| 25.00 | 20.38 | 4.62 | 1,014.42| 14.42 May 1, 1919| 25.00 | 20.29 | 4.71 | 1,009.71| 9.71 Nov. 1, 1919| 25.00 | 20.19 | 4.81 | 1,004.90| 4.90 May 1, 1920| 25.00 | 20.10 | 4.90 | 1,000.00| ..... +------------+ | Total premium amortized $28.01 | | -------------------------------------------+---------+--------- The problem of amortization is thus seen to be comparatively simple when the cost of the bond, its nominal rate, and effective rate are known, and successive valuations of the bond are equally simple. The crux of the whole calculation is thus seen to be the determination of the original purchase price of the bond. At the time of the purchase of the bond the following facts are known: the par of the bond, the time it has to run, its rate of interest, and the rate of earning desired on the investment. There are three methods or formulas by which this price can be determined and they will be explained in turn. However, the development of the formulas will be more easily understood if some points in compound interest and annuity calculations applicable to the three methods of valuing the bond are first explained. Formulas for Compound Interest In the determination of the present worth of a sum of money at compound interest due a certain number of years hence, the following symbols will be used: A = the sum which placed at interest at the given rate will accumulate to the given amount in the given time. B = the given amount accumulated r = given rate of interest per _period_ R = 1 + r n = the given number of periods The present worth of B is manifestly A, the sum which, when placed at interest, amounts to B. At compound interest the amount to which A will accumulate in n periods is given by the formula: (1) B = A(1 + r)(1 + r) ... to n factors, which reduces to = ARⁿ, whence solving the equation for A B B (2) A = ----, i.e., the present worth = ---- . Rⁿ Rⁿ 1 From this, the present worth of $1 is seen to be ---- . Rⁿ Formulas for Annuities An annuity is a given sum of money placed at interest usually at the end of each successive year or period, and allowed to accumulate at compound interest for a number of periods. For bond valuations it is necessary to know the amount of an annuity and the present worth of this amount. The following terminology will be used in the solution of the problem: A = the sum put at interest periodically B = the amount to which A accumulates r = the rate of interest per period R = 1 + r n = the number of periods P. W. = the present worth of the annuity The first sum, A, placed at interest at the end of the first period will accumulate for n-1 periods and, according to formula (1) above, will amount to ARⁿ⁻¹. The second sum, A, placed at interest at the end of the second period will amount to ARⁿ⁻²; etc. The last sum, A, will not accumulate and so is worth just A. The amount of the annuity is thus seen to be the sum of the amounts of the several periodic sums. Expressed as a formula: B = ARⁿ⁻¹ + ARⁿ⁻² ... + AR + A = A(Rⁿ⁻¹ + Rⁿ⁻² ... + R + 1), whence Rⁿ⁻¹ Rⁿ⁻¹ (3) B = A------ or A----- R - 1 r The expression in parentheses is a geometric series whose sum may be written in the fractional form shown. The present worth of B, i.e., of Rⁿ⁻¹ A-----, r is found from formula (2) above to be: Rⁿ⁻¹ A----- divided by Rⁿ. r Expressed as a formula: Rⁿ⁻¹ (4) P. W. = A----- Rⁿr Formulas for Bond Valuation The method of valuing a bond makes use of the formulas (1) to (4) just established. The symbols used in the bond formulas will be: P = the par or face value of the bond r = the effective rate c = the nominal rate—the rate specified in the bond C = Pc, i.e., the value or amount of a matured interest coupon, the nominal yield of the bond Pr = the interest yield on par at the effective rate V = present worth or value of the bond _First Method._ The present value of a bond may be looked upon as the sum of two present worths, viz.: the present worth of the face of the bond and the present worth of the annuity represented by the periodic interest payments, i.e., the coupons. The present worth of the face is, according to formula (2), P/Rⁿ. The present worth of the coupon annuity is, from formula (4), seen to be Rⁿ⁻¹ C-----. Rⁿr Hence the present value of the bond is the sum of these two present worths, i.e.: P C(Rⁿ⁻¹) Pr + C(Rⁿ⁻¹) (5) V = --- + --------- or -------------- Rⁿ Rⁿr rRⁿ _Second Method._ Here, the determination of the amount of premium or discount which is fair payment for a bond is the point of attack. That is, using par as a basis, how much above or below par is the bond worth? The fair premium is based upon the difference between the nominal yield of the bond and the interest return in the present money market. Stated otherwise, in the case of a bond selling at a premium, the nominal interest return may be looked upon as composed of two parts, viz.: (1) a portion representing interest at the _effective_, i.e., current money market rate on the par value of the bond, and (2) a portion—the difference between the nominal yield and (1)—which is of the nature of an annuity for the life of the bond. The present worth of this annuity is the fair premium on the bond. To illustrate: A 6% bond sold in a 5% market would have a nominal yield annually of $60. All that can be secured, however, on the par value is $50. Hence, on the basis of valuation at par there is a $10 excess of nominal over market yield which would be received every period. The present worth of this $10 annuity is the fair premium which the bond will command. With the use of the previous symbols, this annuity is expressed by the quantity (C-Pr) whose present worth, as determined by formula (4) is (C - Pr)(Rⁿ -1) --------------- . rRⁿ Therefore, the value of the bond is the face or par of the bond plus the present worth of this annuity, i.e.: (C - Pr)(Rⁿ - 1) (6) V = P + ---------------- rRⁿ This formula when simplified reduces to Pr + C(Rⁿ - 1) --------------, rRⁿ which is identical with formula (5) and, of course, values the bond at the same amount. _Third Method._ Valuation by either of the methods above is rather complex, requiring for easy solution the use of logarithm or compound interest tables. A third method, requiring only the ordinary arithmetic processes is sometimes used, although very burdensome when the periods are numerous. This is sometimes called the periodic method because working backwards from par, the value at the next preceding period is determined, and from that the next is found, and so on till the value at the desired period is reached. Reference to the second amortization schedule shown on page 270 will help in understanding the process. Using the same terminology as above and this additional: P₁ = the first preceding value above par ($1,004.90 in the schedule) P₂ = the second preceding value above par ($1,009.71 in the schedule) Etc. formulas 7 to 9 below may be developed. It was noted that any particular value of the bond is found by subtracting from the next preceding value the difference between the nominal and effective incomes. The nominal income is always based on par, and the effective on the value at the last interest period. For example, in the schedule referred to: $1,004.90-($25-$20.10) = $1,000, the $20.10 being the effective income, 2% on $1,004.90. Using symbols the above equation may be generalized as follows: P + Pc (7) P₁ - (Pc - P₁r) = P, whence P₁ = -------, and 1 + r P₁ + Pc (8) P₂ - (Pc - P₃r) = P₁, whence P₂ = --------, and generalized, 1 + r Pₙ₋₁ + Pc (9) Pₙ - (Pc - Pₙr) = Pₙ₋₁, whence Pₙ = -------- 1 + r This gives a working rule whereby it is possible to work back from the known value, par, by successive operations until any desired value is found. The calculation is somewhat as follows for the example used in the schedule: 1,000 + (1,000 × .025) 1,025 ----------------------- = ------ = 1,004.90 1.02 1.02 1,004.90 + (1,000 × .025) 1,029.90 ------------------------- = -------- = 1,009.71 1.02 1.02 Similar calculations will develop the other values in the schedule. In the case of a bond with, say, 30 periods still to run, the burdensome nature of the calculation by this method is apparent. While commercial houses rarely need to use the algebraic formulas for calculating bond values, it is the only really correct method of valuing bonds which are held for long-time investment, and the accountant should be conversant with it. For the balance sheets of savings banks, insurance companies, and other investment concerns, scientific valuation of bonds with the attendant amortization up and down of discounts and premiums is not only theoretically correct but practical considerations, in a market such as prevails in a time of marked but temporary depression, demand that it, or some approximation to it, be used. A discussion of the valuation of serial and short terminal bonds, or those carrying more than one rate of interest, or those redeemable by lot at various times, is beyond the scope of the present work. Valuation of Sinking Funds The section of the balance sheet under consideration usually includes the various funds representing the investment of reserves. Sinking funds, building funds, insurance, pension, endowment funds, and the like, are examples of this class of asset. The use of the term fund should be strictly limited to specific assets set aside for specific purposes. The problem of valuation in connection with funds will be considered under two sets of conditions, viz., when the funds are invested in a concern’s own securities and when invested in outside securities. The practical questions in connection with funds are those of finance rather than of accounting. The determination of a policy of investment as between the concern’s own and outside securities depends on many considerations, some of which do not come strictly in the purview of the accountant. It is argued that for the sake of immediate availability, investment of funds to be used for a specific purpose at a definite time should be in the securities of other concerns over whom control does not extend. In some cases, however, provision is made in the trust deed of a sinking fund to the effect that the funds set aside shall be used to purchase the bonds to retire which the funds have been created. These bonds may be canceled or held for the sake of their income in the fund till maturity. There would seem to be no choice between a concern’s own and outside securities, provided the same standards of moral obligation are observed in both cases. If the securities purchased for the funds are the concern’s own bonds, they should as a rule be valued at cost and the premium or discount amortized over the remaining life of the security. They may, of course, be carried on the books at par and the premium charged immediately against any income in the fund. The showing on the balance sheet should be in exact accord with the facts. If the bonds have been purchased and canceled together with their coupons, the amount of such cancellations should be shown as a deduction from the bond liability. The fund is thus serving its purpose _currently_ by reducing that liability. Any uninvested balance in the fund should, of course, be shown among the assets. When the bonds are purchased and held uncanceled for the sake of their income, it is probably better to carry them among the assets, indicating, if the information should be considered vital, that the securities in the fund are the concern’s own securities. If the funds are invested in outside securities, these should be valued on the basis of long-time investments. If bonds, their premiums or discounts should be amortized. If, however, the credit of the issuing concern is such as to cast doubt on its ability to redeem them at maturity, other bases for valuation should be taken. It might even be necessary to set up special reserves to replenish the expected shrinkage upon realization of the securities held in the fund. A final injunction may not be out of place, to the effect that all funds should be definitely labeled so as to show their purpose. Valuation of Investments in Land Investments of a more or less permanent nature sometimes take the form of investments in land. This may be for the purpose of securing an income; it may be of a speculative nature, as when land is held for appreciation in value; it may be to secure room for future expansion; or it may be for the purpose of preventing a competitor from securing favorable holdings as to trade location or facilities. For whatever purpose acquired, as here considered, the land is a permanent investment and should be separated in the records from land held for operating purposes. The manner of accounting for these investment holdings is somewhat dependent on the purpose for which they are held. In most cases, particularly if the land is income-producing, at least a land expense and income account will be needed in addition to the asset account or accounts with the land. As to the valuation of these holdings, full cost with no account taken of depreciation or appreciation in value is the correct basis. As stated in Chapter XVII, page 307, under certain conditions the carrying charges on non-income-producing lands may be added to the value of the holdings. If lands are held over a long period to secure appreciation in value, certainly all carrying costs should be loaded on to the asset account, offset, as shown in Chapter XVII, by a suitable reserve. Care must always be taken not to secure inflated values by these methods. If any of these holdings are disposed of, the profit or loss then actually realized must be taken into account; but no unrealized profit or loss should be brought onto the books—except, perhaps, as a balance sheet footnote.