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Surplus should be credited with earned profits from operations only, and of course the entire surplus is available for dividends unless a portion of it has been appropriated for some special reason, such as an appropriation of surplus for a sinking-fund reserve connected with a bond issue or an appropriation of surplus to conserve funds for an extension of the plant.

Realized profits of an extraneous nature and other extraneous increments to surplus should be credited to a capital surplus account. Profit on the sale of a fixed asset would be an earned profit of an extraneous nature; a premium on the issue of stock would be an extraneous increment to surplus although it is in no sense a profit. These realized extraneous items could be used for dividends without violating the law, although the stockholders should be informed that the dividends came from capital surplus instead of from operating profits.

Unrealized profits should not be credited to any surplus account, general or capital, because they are not realized increments of surplus and are not available for dividends. They should be credited to such an account as reserve for appreciation of real estate or reserve for appreciation of timber lands. · If the reserve is set up because of the revaluation of a fixed asset on the basis of an appraisal, it should be held on the books until disposition of the asset. At that time, if the price realized is less than the debit in the asset account, the difference is charged first to the reserve for depreciation and the remainder to the reserve for appreciation. Any balance remaining in the reserve for appreciation would then be a realized extraneous profit to be transferred to capital surplus. If the reserve is set up against timber lands which are being stripped, and the timber is being sold, the reserve would be gradually transferred into an earned operating profit by the sale of the timber, and it should be gradually closed to general surplus through the profit and loss account as sales are made.

It is not obligatory to keep a capital surplus account. As all realized profits are available for dividends whether arising from regular operations or not, all profits can be credited to surplus. But if a capital surplus is kept, it seems imperative to credit it with actually realized items only. When the account is credited with realized extraneous profits, which are available for dividends, and with unrealized profits, which are not available for dividends, the account will have to be analyzed to determine what dividends can be paid and charged to it.


Editor, Students' Department:

Sir: I submit for your consideration in the JOURNAL the following question: Is capital stock paid in Liberty bonds considered to be fully or partly paid? Liberty bonds at the present time have depreciated considerably in the market but the directors of a corporation have decided to accept them in payment for new capital stock at their face value.

Very truly yours, Waterbury, Connecticut.

H. G. The directors of a corporation are the judges of the value of the property which they accept for stock, and unless there is evidence of

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fraud a court will not go behind the values fixed by them. Hence they have a right to issue the stock for Liberty bonds at par, and the corporation itself would be estopped from claiming that the subscribers had not paid their subscriptions in full. In other words the corporation could not make another assessment on the stock if it had been issued as fully paid and non-assessable.

While the corporation itself could not claim that the stock had not been fully paid, the creditors might do so. Whether they could get a court to agree with them or not is another thing. In the first place they would have to prove fraud, and in the second place there would be a serious practical difficulty in determining the value of the Liberty bonds and thus fixing the liability of the stockholders to creditors.

ANONYMOUS LETTERS It seems necessary once more to call the attention of readers of this department to the fact that no letter will receive the attention of the editor unless it is signed. Only the initials of the correspondent will be printed in the JOURNAL if the writer requests that his name shall not appear.

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J. E. STERRETT and Henry Parker Willis. Fifth edition. The Macmillan Company, New York. 550 pp.

Like the visit of an old friend comes the fifth edition of Kirkbride and Sterrett's complete and authoritative manual, The Modern Trust Company. Longer ago than he likes to recall, the writer spent many evenings poring over an early edition of this book in a strenuous attempt to cover the whole field of accounting preparatory to taking the C. P. A. examination, and because the examination paper contained two questions on bank accounting he could not have answered otherwise, he has always felt warmly grateful to the authors. What he thought of the book at that time, however, was lately very succinctly expressed by the teller of his local bank to whom he had lent the book for home study: "I never knew before how much there was to know about trust companies." The reviewer feels that he cannot better that appreciation. Only by actual experience or long observation at close hand can one realize the immense amount of detail involved in running a trust company or writing a book about it.

The functions of a trust company, how it is organized, the duties of the officers, the division of the work among various departments, the methods of work, the duties of clerks and employees down to the night-watchman and cleaners—all these are fully and exhaustively covered. The accounting of each department is given in ample detail, and a chapter on "General accounting" describes how they are all "tied in" to the general ledger and internal auditing checks provided through the controller. In view of the traditional conservatism in methods of banks and trust companies one does not look for nor find any radical changes from former editions in these matters.

But since the last edition there has been a very important step taken by the country which materially affects trust companies—the passage of the federal reserve act. This act authorizes national banks to engage in trust functions, thus opening a field hitherto monopolized by the trust companies. It also permits trust companies to become members of the federal reserve system, thus bringing such companies for the first time under federal control. At the end of 1919 nearly half the two thousand and odd trust companies of the country had joined the system, and it is a pretty safe guess that in time they will all be in the fold. Naturally no textbook on trust companies can be considered complete without a study of the federal reserve system and its effect on the trust company. This element is supplied in this new edition by Mr. Willis, formerly expert advisor to the house committee on banking and later the first secretary of the reserve board. His chapters on the principles, methods and practice of the federal reserve system are interesting and instructive. Although eight years have passed since the system was established there is still considerable haziness in the minds of the general public on the subject.

The student of accountancy who wishes to be thoroughly up-to-date will do well to post himself by Mr. Willis's clarifying chapters.

For many years the trust companies have been engaging in general banking in competition with the national and commercial banks. Now we have the national banks taking on trust functions. The logical conclusion is, as Mr. Willis puts it, that “events are rapidly moving toward the development of a composite type of institution which will perform the functions of both the bank and the trust company.” We should say it is already here. The modern trust company seems to be doing about everything a national bank does except to issue its own notes. And does it not do even that indirectly?



and Floyd HURLBUT. The Macmillan Company, New York.

The Business Man's English is a convenient little manual of English as it should be spoken and written. The first half of it is devoted to drill-work for commercial high-school students and consists mainly of common errors in construction, pronunciation and spelling with parallel corrections. The authors appear to proceed on the two fundamental principles that the use of correct English is a matter of habit, and that a horrible example is more effective than any amount of memorizing of technical rules. The remainder of the book deals with office correspondence and procedure in more or less detail. While intended primarily for a school textbook it may be recommended as a quick reference book for the office worker who lacks thorough training or has become mentally careless.


JOHN ROBERT SPARROW John Robert Sparrow, member of the American Institute of Accountants, certified public accountant, senior partner of the firm of Sparrow, Harvey & Co., New York, died Saturday, April 9, 1921.

Mr. Sparrow was one of the leaders of the accounting profession and had been active in the work of the state board of accountancy and the New York State Society of Certified Public Accountants, as well as in the national organization. He was one of the outstanding personalities in the profession in New York.

Connecticut State Society of Certified Public Accountants

At the annual meeting of the Connecticut State Society of Certified Public Accountants at New Haven, April 13, 1921, the following officers were elected: President, Leonard M. Troub; vice-president, Charles F. Coates; secretary, Milon M. Stone; treasurer, Frederick W. Child; auditor, Edward J. Paul.

The secretary's report indicates that the society consists of 68 members, 15 of whom were admitted during the past year.

A resolution was adopted instructing the committee on state legislation to oppose any change in the status of the state board of accountancy which would interfere with the technical character of its work now under strict control of the accounting profession.

It was reported that there are now 36 certified public accountants in practice in Connecticut.

Arthur H. Holmberg and John A. Ryan announce the formation of a partnership under the firm name of Holmberg, Ryan & Co. with offices at 43 Tremont street, Boston, Massachusetts.

Ward, Fisher, Carpenter & Philbrick, Providence, Rhode Island, announce the withdrawal from the firm of Hamilton L. Carpenter and Arthur L. Philbrick.

Whitfield, Whitcomb & Co. announce the opening of offices at Main and Second streets, Walla Walla, Washington, and 112 East Court street, Pendleton, Oregon.

George Lormer announces that he is returning to Australia, where he will resume public practice after June 30th at 235 Collins street, Melbourne.

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