Capitalization (accounting)

“ A and B, partners, incorporate as the American Baking Company. The authorized capitalization is $250,000. Each partner subscribes for an amount of stock equal to his interest in the partnership, and C, an outsider, subscribes for the remainder of the stock at par. The corporation purchases the assets and assumes the liabilities of the partnership, paying therefor with stock as above. C pays his subscription in cash. The balance sheet of the partnership on that date was as follows:
Make the opening entries for the new corporation and [Pg 349] also close the books of the partnership. ”

“ It would be theoretically possible, of course, to arrive at the total value of the business not by adding going-concern value obtained by capitalization of excess income to a valuation of the physical property obtained in some other way, but by capitalization of all income. ”

“ Fixed liabilities, as distinguished from current, are those issued distinctively for the purpose of raising capital. Due to insufficient original capitalization, funds may be needed for one or more of many purposes. ”

“ True enough, no direct relation between rates and capitalization exists; but that a positive incentive to higher charges in general may be found in the need of supporting a large capitalization seems reasonably clear in the light of experience. ”

“ The effective capitalization of any modern company, that is to say, the capitalization which is effective for current business purposes as distinct from the formal requirements of the charter, is given by the quotations of the company's securities, or by some similar but less overt market valuation in case the company's capital is not quotable on the market. ”

“ Sometimes the bolt comes out of the clear sky with prices at a maximum, sometimes it is only the last stage of a period of liquidation with progressively lower prices. But however unpredictable and seemingly inscrutable the actual course of events, the fundamental explanation is always the necessary readjustment of capitalization to actual earning capacity. ”

“ Thus, a corporation capitalized at one hundred thousand dollars ($100,000.00) , may elect directors and start business with only one thousand dollars ($1,000.00) actually paid in. The term, capital stock of a corporation, is used in many different ways. It is commonly used to designate the capitalization. Sometimes it is used to designate the amount actually subscribed. Strictly, it probably means the money actually paid in on subscriptions. A corporation's assets may be far in excess of its capitalization, or far below its capitalization. ”

“ The laws that have been most strict on the subject attempt to limit the capitalization to the "actual cash value" of the business, by that being understood at times simply the cost of the plant itself with the running cash capital needed. On the other hand, most business men think that it is a wiser plan, and on the whole equally just, to capitalize a business on the basis of its earning capacity, regardless of what the plant may have cost. ”

“ When, as has been frequently the case of late years, in addition to this cash value of the plant and the cash itself which may have been paid in, large sums of stock are issued also for properties which may be in themselves highly over-valued, and for the services of the promoter, the financier and others, we can see that the capitalization must be far above what may ordinarily be considered a paying basis. ”

“ The consequences of inaccuracy are reduced by confining the capitalization to excess income, but of course it is a question of fact whether future excess income can be predicted with certainty sufficient to persuade a purchaser of the business o pay for its capitalized value. ”

“ But further, the capitalization theory, as heretofore formulated, like the doctrines of supply and demand and cost of production, assumes money, and a fixed absolute value of money. This assumption must be made if we are to be able to predict, on the basis of the capitalization theory, that a given annual income, at a given rate of discount, will give a specified capital value. ”

“ If the capitalization is reasonable, there must be some way to demonstrate the fact, and it seems as if a properly made physical valuation, with due allowance for the intangible values, is at least a step in the right direction. ”

“ These new or rejuvenated concerns are not committed to a scale of fixed charges carried over from a higher interest level; and these are therefore carrying only such interest charges as the current effective capitalization of their property will warrant, whether effective capitalization be taken to mean cost of production of the equipment, earning-capacity of the concern, or market quotation of its securities. ”

“ If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalization ”

“ These details we will deal with fully in succeeding articles, and therefore now need only pause to say that the basis of capitalization strikes us as wonderfully advantageous to the fortunate public who are asked to participate in its vast prospective prosperity. ”

“ A corporation has no power, by reason of being a corporation, to increase or decrease its capitalization. The states generally provide by statute for the increasing or decreasing of the capitalization. The corporation must comply with these statutes, before its capitalization can be changed. In case the capitalization is increased, the purchasers of such stock are subjected to pay the full face value at the instance of creditors, the same as purchasers of an original issue. ”

“ But the increase is chargeable mostly to changes in the assignment of capital stock to one account instead of another; and one such change alone operates to increase the average capitalization $700 per mile for the entire United States. ”

“ Capitalization of earnings will not, because that implies continuance of earnings, and a continuance of earnings rests upon a franchise to operate the water-works. The original cost of construction cannot control, for original cost and present value are not equivalent terms. ”

“ It has long been recognized, as a general matter, that costs incurred in the acquisition or disposition of a capital asset are to be treated as capital expenditures. The most familiar example of such treatment is the capitalization of brokerage fees for the sale or purchase of securities, as explicitly provided by a longstanding Treasury regulation, Treas.Reg. ”

“ It is said that the tax computed on the number of nonpar shares at a flat rate may bear little relation to the property and business of the corporation within the state and consequently corporations having like property and business within the state, but with a different nonpar capitalization, may be required to pay a different tax. But this is equally true of corporations having par value stock, even though full value be paid in on its issue. Par value and actual value of issued stock are not synonymous and there is often a wide disparity between them. ”

“ Although the mere presence of an incidental future benefit—"some future aspect"—may not warrant capitalization, a taxpayer's realization of benefits beyond the year in which the expenditure is incurred is undeniably important in determining whether the appropriate tax treatment is immediate deduction or capitalization. ”

“ In this way it may be seen that an earning power not known to bidders in the market does not enter into capitalization; a fictitious earning power, however, is capitalized so long as the investors continue to be deceived. ”

“ In determining the amount of earnings or profits (whether of the taxable year, or accumulated prior to March 1, 1913) due consideration must be given to the facts, and, while mere bookkeeping entries increasing or decreasing surplus will not be conclusive, the amount of the earnings or profits in any case will be dependent upon the method of accounting properly employed in computing net income. ”

“ The essential characteristic of a crisis is the forcible and sudden movement of readjustment in the mistaken capitalization of productive agents. Capitalization runs through all industry. The value of everything that lasts for more than a moment is built in part upon incomes that are not actual, but expectative, whose amount, therefore, is a matter of guesswork, or "speculation." ”

“ It is true, as has been shown above, that the mere putting of an estimate on a durable good such as land involves the process of capitalization, which in turn implies a comparison of the values of the rents expected at different periods. Diminishing returns in the use of agents involves a loss of time to secure the usufructs emerging. ”

“ Any desired capitalization above a minimum of one thousand dollars may be fixed. Capital stock may be paid for in cash or by property. If it is paid for in cash, it may be paid for in full or by instalments, and a machinery has been created for protecting the corporation against the failure of the subscribers to stock to pay the balance of their subscriptions. If stock is paid for by property, the incorporators and not the State are to pass upon its value. ”

“ The specific example cited by the Senate Committee Report on § 501 of the Revenue Act of 1942 shows that Congress intended to limit the relief afforded by the amendment to cases where the deficit in question had not resulted from the capitalization of accumulated earnings and profits. [4] The majority finds a difference between capitalization of earnings in a non-taxable reorganization and capitalization of earnings by a simple stock dividend. The circumstances are different but the difference is not significant for the legal effect of the stock dividend on earnings and profits. ”

“ From the inherent character of the machine industry itself, therefore, it follows that the earning-capacity of any industrial enterprise enters on a decline from the outset, and that its capitalization, based on its initial putative earning-capacity, grows progressively antiquated from the start. The efficiency of the machine process in the "instrumental industries" sets up a discrepancy between cost and capitalization. ”

“ We think the assets transferred to petitioner by the community groups represented 'contributions to capital' within the meaning of § 113 (a) (8) (B) and required no reduction in the depreciation basis of the properties acquired. [10] The values which the taxpayer received were additions to 'capital' as that term has commonly been understood in both business and accounting practice; [11] conformably with this usage the pertinent Treasury Regulations have consistently recognized that contributions to capital may originate with persons having no proprietary interest in the business. ”

“ A discrepancy between accepted capitalization and current earning-capacity, similar to the discrepancy discussed above but of a progressive character, arises under modern conditions apart from a fall in the rate of interest. ”

“ They are: (a) that when the Board capitalized earnings as an index to value they took 6 per cent as a basis instead of 7 1/2 or 8 per cent, either of which is said to be a more proper rate upon the ground that, because of annual unproductive items of expense, amounting to nearly or quite 2 per cent of plaintiff's capitalization, the higher rate is necessary in order to yield a net 6 per cent return upon the investment; (b) that when the stock-and-bond method was employed as an index to value the highest instead of the average market prices were employed ”

“ The peculiarity, however, of an up-grade movement which rests on modern credit facilities is that we wear magnifying glasses or look at the future in too roseate a light. It is a natural tendency of human nature to capitalize one's hopes and expectations too liberally. If this is done on a continually larger scale, the capitalization becomes so great that actual earnings do not come up to our anticipations or the fear of a discrepancy between actual and estimated earnings begins to obsess us. ”

“ It is out of these variations in capitalization that the gains of the traffic arise, and it is also through the means of these variations of capitalization that the business men engaged in this higher finance are enabled to control the fortunes of the corporations and to effect their strategic work of coalition and reorganization of business enterprises. ”

“ In the first place, the whole mass of profits which are obtained by the adroit capitalization of a new business, or the reconstruction of one which already exists, have hardly any connection with production at all. When, for instance, a Lancashire cotton mill capitalized at £100,000 is bought by a London syndicate which re-floats it with a capital of £500,000—not at all an extravagant case—what exactly has happened? ”

“ The conflict between the capitalization theory and the quantity theory may be more simply stated. Assume that the prices of consumers' goods and services rise, quantity of money and volume of exchanges remaining unchanged. ”

“ All capital which is put on the market is in this way subjected to an interminable process of valuation and revaluation - i.e. a capitalization and recapitalization - on the basis of its presumptive earning-capacity, whereby it all assumes more or less of a character of intangibility. ”