stated by a disregard of depreciation. Of course, the net revenue is the difference between the gross revenue and the operating expenses, the operating expenses being the technical name for what sometimes is called the cost of performing the service. Now, it is a well-established principle in manufacturing accounting, and, indeed, in sound accounting everywhere, that the wear and tear of the plant during the time that it is producing revenue shall be included in the cost before arriving at the full cost of producing that revenue. The depreciation account, therefore, aims by an orderly, regular method, and by a method which separates the depreciation charges from all the other charges included in operating expenses, and further by a method that permits of easy test as to whether the charge is too great or too light-I say that this depreciation account insists that there shall be put into operating expenses, month by month, and year by year, an amount equal to the wear of the property during that time.

There is another way in which the net revenue may be misstated. It may be that in especially prosperous times the manager of a railway desires to make certain improvements, and yet does not care to show that those improvements are made, nor does he care to borrow the money with which to make them. He issues an order that those improvements be made and called operating expenses chargeable to maintenance. Now, they are not maintenance charges. In order to guard against the understatement of the net revenue, which is just as bad as the overstatement of the net revenue, there is being worked out a careful classification of additions and betterments, the design being to draw a clean-cut line between what is the cost to operate and maintain the property and what does, in reality, better the property. It is not suggested that that betterment must be capitalized. That is a matter which certainly lies within the right of the board of directors to determine.

The solution of the problem requires that three somewhat divergent results must be attained through the agency of a single set of operating expense accounts.

It must, in the first place, be possible to combine the revenue and expense accounts of the several carriers without danger of duplication or omission. It must, in the second place, be possible to determine the cost of maintaining the property represented by the capital investment of a carrier, quite independently of the question of the revenue that accrues from the operation of the property. It must, in the third place, be possible to assign to the traffic revenue of each carrier the expenses incurred for earning that revenue. Any one of these requirements could easily be met, but it is a difficult accounting problem to make use of the operating expense account in such a manner as to realize all three of these results. The interstate commerce commission accounting system aims to do this by means of joint facilities, debit and credit accounts, the principle of which is to permit the owning company to charge all expenses in its primary accounts, and to bill foreign carriers for their proportion of such charges.

The question of the balance sheet, as also the analysis of the property accounts, and the rules by which the property accounts should be kept, are the questions which will claim the attention of the interstate commerce commission during the current year.

Legal Department.

Conducted by ALEXANDER MCCLINCHIE, of the New York Bar.

The purpose of this department is to present from month to month short, critical summaries of recent decisions, which affect accountants, and to furnish accurate information on legal questions. Inquiries from our readers will be welcome and will receive prompt attention.

Decisions of Interest.

Banking. In New York, the Court of Appeals recently rendered the decision in the case of Leo Schlesinger, as receiver of the Federal Bank of New York vs. Ludwig Lehmaier, to the effect that when a bank purchases negotiable paper for value and before maturity, without knowledge of its usurious character, the defense of usury is not available against the bank; but when the bank takes the paper with knowledge that the paper is usurious, it is not protected. In rendering this decision, the Court held that the bank purchasing before maturity is in the position of an innocent purchaser for value without notice, and according to the Negotiable Instrument Law, a bona fide purchaser takes a note free from the defense of usury which would have availed between the two original parties.

Bills and Notes. A represented to the plaintiff that B, a third party entirely ignorant of the transaction, had certain stock for sale. The plaintiff desiring to purchase such stock drew a check payable to B's order, and delivered the same to A. A indorsed the check in B's name to the defendant bank, a bona fide purchaser. The defendent collected the amount from the plaintiff's bank, which the plaintiff now seeks to recover.

Held, the defendent was not entitled to proceeds of check. The check in question was not payable to a fictitious payee, but to B, a person in being. Therefore A's indorsement was a forgery, and could pass no title.

Liability of National Bank Directors for Misrepresentation. A suit was brought by the plaintiff against the director of a National bank who had participated in an annual report as to the financial condition of the bank. In this report various false statements were published, and the plaintiff, acting upon such statements, had suffered damage. The Court held that the director was not liable unless he was aware of the falsity of such report.

Former decisions have held that a director is bound at his peril to know the truth of the statements to which he subscribes, and that negligence on his part is no defense; but according to this latest decision, scienter must be proved to maintain an action.

Embezzlement of Agent. An agent of an insurance company was working on a commission basis, with the understanding that he should deduct his commission from the gross proceeds. He converted all the proceeds

to his own use, and the court found him guilty of embezzlement. (Commonwealth vs. Jacobs, 104 S. W. 345-Ky.)

Former decisions held that an agent working under such conditions was a joint tenant of the whole amount collected, and that as such, he could not steal or embezzle the res.

State Bonds. In South Carolina, negotiable state bonds were issued, with the statutory provision that all bonds redeemed should be destroyed. A certain bond was redeemed, but through negligence was neither canceled nor destroyed. Stolen, it found its way into the hands of an innocent purchaser for value.

Held, Mandamus lies against the State Treasurer to compel him to pay the bond a second time.

Bankruptcy. A man assigned as security for a debt his wages to be earned subsequently in an existing employment. Shortly after, he secured his discharge in bankruptcy, but the former assignee still claimed the wages under the pre-existing agreement.

Held, the assignment of future wages was a lien, preserved by Section 67d of the Bankruptcy Act. Citizens' Loan Association vs. Boston & Maine R. R. Co., 82 N. E. 696 (Mass.)

The Law of Usury as Applied to Negotiable Instruments.

Usury has been defined as the corrupt agreement between the parties to a contract, by which more than lawful interest is to be paid for the loan or forbearance of money. There are certain banking customs which at first glance might seem to be tainted with usury, but which are only reasonable and legal; such as exacting interest upon commercial paper in advance, and charging a small fee or percentage, known as exchange, for transporting funds from one point of the country to another.

A loan upon evidences of debt, where the compensation for the use of the money until the time when the debt shall fall due is deducted by the lender, at the time of making the loan, is a discount. Choses in action, such as bills of exchange, promissory notes, bonds and other evidences of indebtedness, are recognized as a sort of personal property in the hands of the owner, be he maker or obligor, and he is permitted to sell them just as he would sell any other chattel, for what they will bring; and such sale, at a discount much greater than that permitted in the case of a loan, will not render the transaction usurious. The sale must be actual, however, and not merely a ruse to cover a loan at an usurious rate of interest. In such a case, when negotiable paper is executed in good faith between the original parties, without usury, the payee may sell it at any price, and the purchaser may recover the full amount from any party legally liable, on the theory that the note is a personal chattel.

The effect of usury upon the original contract varies with the jurisdiction. The rulings fall into three classes, viz.: (1) that an usurious contract is void as to both principal and interest, (2) that it is void as to interest but valid as to principal, and (3) void only as to the usury; the

excess over the amount of principal and legal interest. In New York the first ruling holds; usury invalidates the contract for repayment, and no action will lie by the lender to recover even the principal; while the borrower, if he has paid excessive interest, may recover such excess.

A negotiable instrument affected by usury between the original parties reaching the hands of a bona fide holder differs in effect according to the jurisdiction. In some states, a note void as between the original parties is void even in the hands of a bona fide holder. If it is merely avoidable, in the hands of an innocent purchaser for value before maturity it may be valid, unless the usury statute of the jurisdiction provides that such note shall be void, in which case the fact of the holder's being a bona fide holder avails him nothing. In New York, according to the latest decisions, it would seem that usury is a personal defense merely, and not good against an innocent purchaser for value.

If commercial paper is valid at its inception, no subsequent usurious indorsement can taint it with usury, for the subsequent usurious indorsement should be considered a separate transaction independent of the valid original contract. In such a case, ordinarily an indorsee may recover of his indorser the amount paid for the commercial paper, but the indorsee may recover of the maker only the face value of the paper with legal interest. The indorsee who buys a note at less than its face value can recover against the endorsee no more than the sum for which he bought the note. A promissory note not originally usurious cannot be made so by an agreement for an extension, subsequently entered into, in consideration of a payment of, or a promise to pay, usurious interest.

Coming to the question of accommodation paper, if a piece of commercial paper has no legal inception in that it was given purely for accommodation no liability shall attach to either the maker or to an accommodation indorser. To negotiate accommodation paper which had no inception prior to negotiation, at a greater rate of discount than the legal rate of interest, is usurious. It is a good defense to an action by an indorsee against the indorser of a note indorsed for the accommodation of the maker, that the indorsee received the note as security for the performance of an usurious contract between him and the maker. Nevertheless, where an indorser of a note has no interest in it, and makes no advance upon it, the fact of his making a charge for his indorsement will not render the note usurious in the hands of a purchaser for value from the maker.

The burden of showing that the agreement was for an illegal rate of interest is always on the defendant; the presumption is always that the transaction was according to law, and he who sets up as defense that the instrument was usurious, must establish the facts with reasonable certainty.

M. H. FISHER.

CONDUCTED BY LEO GREENDLINGER, B. C. S.

Criticism and exchange of ideas will clear many a doubt and at the same time improve shortcomings. To solve, compare, and criticise C. P. A. problems, and thereby to aid in bringing about a uniform American standard for C. P. A. examinations, is the object of this department. With the aid of suggestions and criticism from the professional brethren, it can undoubtedly be achieved. Inquiries will be cheerfully answered.

Following are the second, third and eighth problems in Practical Accounting, set by the State Board of Accountancy of the State of Washington, in the September, 1907, examination, with solutions.

QUESTION 2.

On December 31, 1906, the Trial Balance of the Mukilteo Shipbuilding Company was as follows:

Real estate

Buildings

Equipment

Goodwill

Cash

$300,000.00

158,000.00

847,500.00

50,000.00

46,474.20

Discount earned

$10,120.37

75,871.38

Depreciation reserve

58,272.00

Common stock

1,000,000.00

Preferred stock

500,000.00

Sales

1,371,491.17

5,300.00 35,000.00

900.27 100,000.00

26,520.50

$3,183,475.69

The inventory of raw materials and work in progress on December 31, 1906, is valued at $309,062.05. Before the books are finally closed it is determined to (a) make a reserve of 2% of $140,000 of the accounts receivable to provide for possible bad and doubtful accounts, (b) add $1,000 to the taxes accrued (estimated) account, (c) carry to depreciation reserve account a further sum of $5,000. Interest on the bonds to December 31st is also to be provided for.

It is found that bona fide renewals of equipment, costing $17,500, have been charged to operating expense; that repairs to equipment, amounting to $6,000, have been charged to equipment account; that $1,500, proceeds of old machinery sold, have been credited to sales account; and that a bill of $1,560.25 for raw materials received and used, has not been entered on the books. These items are to be taken into account before the books are closed. Three per cent. of the net profits for the year is then to be reserved for special compensation to management.

Make journal entries to give effect to the various adjustments above described, and prepare balance sheet and profit and loss account as they will finally appear.