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accounts on the ledger, representing the fixed assets, are made to show conservative cost values of reproduction, and these accounts are supplemented by a detailed appraisement made by a disinterested expert, showing the character of the construction in detail, the location and description of machines, the cost of installation, the probable depreciation based on number of years in service, as well as condition due to usage and degree of care exercised, the present cost of reproduction, etc., a proper condition of the books of account exists. Such an appraisement will be a sufficient basis for an entry made to adjust the values of any fixed asset. The condition of the company and the probability of any improper motive for the writing up of the book accounts should of course be taken into consideration in passing on the entry.

During the life of a going concern, the calculation of depreciation on assets is necessarily only an estimate based on the opinion of the expert who makes the estimate. Sometimes, in the absence of expert opinion, an arbitrary percentage is adopted and applied without discrimination to all classes of wasting assets. Only a short time since a manufacturer, thoroughly honest but desirous of making as good a showing as possible, said: "This thing of taking one-tenth off the machinery account for depreciation each year is all wrong. On that theory, such part of my machinery as was bought ten years ago would appear on my books at no value whatever, showing that this machinery is worth nothing; whereas every piece of it is right here in my factory doing service and in some cases better service than when I installed it." He claimed, not without reason, that the repairs to his machinery had maintained it in a high state of efficiency, so that at present it was doing more work and better work than when first installed and was consequently worth more than the book values, especially in that it was free from the accidents incident to new machinery.

While a provision should be made for depreciation, it is true, this should be made after an expert examination of the plant which will determine the kind and style of machinery, the use to which it is to be put, and the character of service, whether rough and constant, or moderate and careful. Because of the fact that all kinds of fixed assets are many times run under one account, and a rate of depreciation placed on this total account at a venture, it frequently happens that the book values are much below the proper values. A writing up of the account upon proper author

ity, while not strictly an appreciation, being merely the correction of an over estimate for depreciation, is legitimate.

The motives which may have influenced the interested parties to appreciate book accounts should be carefully studied and considered. In cases where the account is lower than the actual real value, the causes which may have produced this condition should be determined if possible. Were they within the control of the individual or company, and if so to what purpose or object did the secret reserve which existed because of the condition tend?

Certain assets are sometimes carried at the same figure for years. An illustration would be patterns and flasks in a foundry. As the company grew, and multiplied its sales and profits, there would naturally be an increase in the value of its patterns and flasks that were in use, to say nothing of new patterns and flasks. By adopting the method of valuing the patterns and flasks on a basis relative to the volume of sales, the patterns and flasks account would be increased in the proportion of the growth of the sales account. In a conservatively managed company a valuation was fixed fifteen years ago at 10% of the average sales for the three years previous, and subsequently all cost of new patterns as well as repairs to old patterns and flasks had been charged off annually to maintenance of patterns and flasks. The account did not represent one-third the real value of the patterns and flasks, and an adjusting entry was made writing up the value to about 7% of the average sales, the credit being placed in surplus account. While this appears proper, it should not be passed by the accountant without a knowledge of the purpose of the secret reserve. It would be well for him to determine if the stock has changed hands during the interval, and if so to whom. Is the management the same and are the profits of the current year in proportion to those of former periods?

A company with a capital stock of $500,000 acquired in proper manner 500 shares of its own capital stock. The price paid was much below par. It had been earning and paying a large dividend, and the surplus account stood at $150,000, and had been increased by the current year's profits after paying dividends to the amount of $50,000. An entry was made charging to treasury stock account an amount sufficient to bring it up to par and crediting surplus account. If the condition and earning power of the company had been less satisfactory the charge or

rather the credit to surplus would undoubtedly have been questionable, and it is a question which an accountant would have to face whether it is a legitimate writing up which raises no question regarding dividends to be declared.

In a company earning profits large enough to pay 20% to 30% dividends annually and accumulate a handsome surplus, on patented goods, as well as by reputable dealing and aggressive management, even the cost of making the first experiments, drawings, models, the taking out of patent papers, etc., had all been charged to expense. The manager did not care to show any book value on the patents. A reorganization took place, the new capitalization being on the basis of 10% of the net profits. A value was placed on patents and good will sufficient to cover the difference between the new issue of capital stock and the net assets.

As an improper way of handling a legitimate appreciation of an account the following illustration is given. The case of a telephone company is taken. This company, we will assume, had a considerable deficit. It had been carrying on its ledger a materials account. This account was charged with the inventory at the beginning of the period, and with all purchases, and credited with all requisitions. No actual inventory was taken for several years. When a physical count of stock was made and priced at cost prices, it developed that the total value of the stock on hand was very much above the book value. An adjustment was made and the materials account brought into conformity with the total value as shown by the detailed schedule. The credit being applied against the deficit, a small surplus was created. Inquiry into the matter by an accountant would very probably elicit a schedule properly certified as to quantities, prices, extensions and footings, and the accountant might verify the correctness of all these matters and satisfy himself that the inventory represented the true value of the stock on hand. An adjustment of this character should not be passed by until the cause of the discrepancy has been located. Requisitions may have been drawn for more material than was required, and when the excess material was returned to stock, no entry may have been made charging the materials account and giving credit to the account formerly charged with the material; or again, material such as telephones may have been taken out of use and brought back into stock with no entry of the transaction. It might even be found that the stock clerk

had included credits for material returned with the charges for material drawn out on requisitions. In a company of this character, especially during the period when there is a deficit, the distribution of the charges for material drawn out on requisition and credited to materials account will be found to be many times greater than the charges against construction accounts, for erecting new pole lines, installing subscribers' stations, etc., as against maintenance accounts to take care of repairs and replacements. A shortage in the account if not located in detail, would naturally be corrected by placing the credit to the construction accounts as well as the surplus account in the proportion which the charges for material as made against these accounts bore to the charges for repairs or maintenance. The investigation would very likely show, that while the inventory was correct and the materials account should, of course, be brought into conformity therewith, the deficit had not yet disappeared from the books.

An error of principle resulting in an improper method of appreciating values may be illustrated by the following case. A holding company bought the entire capital stock of the A. B. C. Company for $150 per share. The net asset value of the stock of the A. B. C. Co. was $125 per share, this price being based on figures appearing on the books of the A. B. C. Co. as of the date of sale and not on actual physical values. Extensive improvements were made by the A. B. C. Co., the money being advanced by the holding company, and the total expenditure was capitalized. Investigation of the books showed that depreciation on machinery, equipment, fixtures, buildings, etc., had not been considered for a number of years, that they had been allowed to run down, so that the improvements were nothing but the repairs and replacements which were necessary to place the A. B. C. Co. again on a permanent efficient basis. As a matter of fact the A. B. C. Co. had simply made good in this one year the errors or omissions of former years. The management explained that the expenditures had been charged against capital for the reason that if the stock was worth $150 per share before the "improvements" were made, it was increased in value by the amount of the money so expended, and further that it certainly was not right to charge these extraordinary repairs to profit and loss. Of course, it would not have been proper to have charged all the expenditures to the revenue accounts as expenses of the

current year, but a better method of handling the matter would have been to have had an appraisement made, placed these figures on the books instead of the values appearing on the accounts, and charged the difference against the surplus account. If it was not desired to have the plant and equipment appraised the correct value of the assets could probably be reached very closely by means of a careful estimate of annual depreciation.

There are two methods which may be adopted to write up book accounts. First, by a journal entry. This entry, when based upon proper authority, under proper circumstances and with full explanation, is a permanent record of the appreciation. Anyone entitled to examine the books and accounts may plainly see the character of the transaction. Nothing is hidden, it virtually invites investigation. The item being set out separately for all time in the account on the ledger is always capable of revision or correction.

The second method has been referred to above. It is the very improper practice of capitalizing revenue expenses. One of the most difficult things with which the accountant has to deal is the question of capital expenditures. It is the exception rather than the rule that capital expenditures are properly authorized, or that the vouchers, if any vouchers are found, contain any specific information to assist the auditor to form an intelligent opinion of the transaction. It is rare indeed that a company is found where the matter of capital expenditure is dealt with in a systematic way. Expenditures for all new construction or equipment, while calling for careful thought and investigation on the part of the accountant, are not so difficult to deal with as replacements or what may be called "part" construction. Accountants, by using their influence with their clients, may do much to improve this condition and establish a more thorough and systematic approval of capital expenditures. Invoice clerks or receiving clerks occupying inferior positions and also men of more trained judgment and with authority; superintendents, foremen or other officers, should be required to pass upon all expenditures, and discriminate between items which actually increase the capacity or usefulness of the plant, and those which merely maintain it in a proper state of efficiency. More than one person should pass on the question of charges to capital, and specific information should be furnished regarding the nature of the particular article, so that six months

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