Answer (e): Yes, subject to the proviso that responsibility for the accuracy of the amounts rests with the accounting company, and that if subsequently by further in!!vestigation and analysis, or otherwise, different amounts are determined as the correct "reserve requirement" applicable to the plant acquired, appropriate adjustment shall be made.

Question (f): Should the "original cost" of the telephone plant be credited to account 276 and charged to the appropriate plant act counts (100:1, “Telephone plant in service," 100:2, "Telephone plant under construction," and 100:3, "Property held for future telephone use"), and the amount then remaining in account 276 cleared to account 100:4, "Telephone plant acquisition adjustment," of the A Company?

Answer (f): Yes.

Case 12

FEBRUARY 10, 1941.

STATEMENT OF FACTS

A company formerly had outstanding 3,700 shares of 7 percent cumulative preferred stock (par value, $50 per share), which was callable at a premium of $2.50 per share. The company issued 3,700 shares of 6 percent cumulative preferred stock (par value, $50 per share), callable at a premium of $2.50 per share.

The greater portion of the new stock was issued in exchange for the old stock on a share-for-share basis. The remainder of the new stock was sold for cash at $52.50 per share, and the cash proceeds were devoted to reacquisition of the remainder of the old stock at $52.50 per share.

Question (a): Should the new stock which was issued in exchange for the old stock on a share-for-share basis be accounted for as though there had been no premium paid on the old stock and no premium received from the sale of the new stock, or should premiums in both instances be accounted for?

Answer (a): To the extent that the new stock was exchanged on a share-for-share basis for the old stock the appropriate amount included in one subaccount of account 150, "Capital stock" (7 percent preferred), should be transferred to another subaccount of account 150, "Capital stock" (6 percent preferred), for the reason that no call premium was paid on the shares of 7 percent preferred stock exchanged and no premium was received on the shares of 6 percent preferred stock issued in exchange therefor.

Question (b): Would it be proper, under the existing circumstances, to offset the premium paid on the old stock reacquired for cash against the premium received on the new stock sold for cash?

Answer (b): No. The premium of $2.50 per share received on the new stock sold for cash should be credited to account 152, "Premium on capital stock." The call premium paid on those shares of 7 percent preferred stock that were redeemed should be accounted for as provided in § 31.1-14(e).

Case 13

The Commission on June 26, 1969, deleted Case 13, effective January 1, 1970.

Case 14

FEBRUARY 10, 1941. Question: What should be the accounting by a telephone company to record the transactions under an agreement whereby an electric utility conveys to the telephone company title to a pole line, agrees thereafter to pay one-half of the cost of any poles installed therein as replacements, and receives as consideration the right to use the poles in this line?

Answer: The telephone company should debit to account 241, "Pole lines," the original cost (estimated if not known) of the poles acquired from the electric utility, with concurrent credits to account 171, "Depreciation reserve," for the accrued depreciation, and to account 174, "Other deferred credits," for the difference. The latter credit should be spread over the estimated remaining service life of the pole line by debits to account 174 and concurrent credits to account 524, "Rent revenues."

Subsequent amounts received from the electric utility in part payment for the poles installed in replacement should be credited to account 524 as received.

Case 15

FEBRUARY 10, 1941.

Question: What is the proper accounting for the pay of employees of telephone companies that is continued while the employees are in the military service or in other governmental service originating through the national emergency?

Answer: The pay of employees of telephone companies that is continued while the employees are in the military service or in other governmental service originating through the national emergency shall be charged to a separate subaccount under account 672, "Relief and pensions."

Case 16

The Commission on April 24, 1945, deleted Case 16, effective January 1, 1946.

Case 17

JANUARY 2, 1943. Question: What is the proper accounting under the Uniform System of Accounts for

33-168 0-85--23

golf club dues, social club dues, service club dues (Rotary, Kiwanis, etc.), "house charges," entertainment of employees and of members of employees' families and others, and items of a similar nature?

Answer: Such expenditures are chargeable to account 323, "Miscellaneous income charges." They are not to be charged to operating expenses of the company. This interpretation applies whether the expenditures are made directly by the operating company, indirectly through payments to an associated company, or are in the form of reimbursements to officers or other employees, or by any other direct or indirect

means.

NOTE A: Membership fees and dues in bona fide trade, technical, and professional associations are chargeable to the account appropriate for expenses incurred for the direct benefit of a particular department, or to account 675, "Other expenses," if the benefit is of a general character.

NOTE B: Only the reasonable expenses of bona fide educational and recreational activities conducted for the benefit of employees of the company are chargeable to the accounts appropriate for expenses incurred for the direct benefit of the several departments of the company, or to account 675 if of a general character.

Case 18-R-1 (Cancels Case 18)

FEBRUARY 14, 1952.

Question: Under arrangements with another party, sometimes the United States Government, a telephone company agrees, or is obliged, to remove, relocate, rearrange, reroute, or otherwise make changes in telephone property, other than for the purpose of rendering telephone service to the other party, for which the company is reimbursed for all or a portion of the costs incurred. What is the proper accounting for such property changes and the reimbursements received from the other parties?

Answer: The cost of plant retirements should be accounted for in accordance with the rules applicable thereto. The cost of new plant should be included in the appropriate plant accounts at actual cost of construction. The reimbursement received shall be accounted for (a) by crediting operation and maintenance expenses to the extent of actual expenses occasioned by the plant changes and (b) by crediting the remainder to the reserve for depreciation, unless contractual terms definitely characterize residual or specific amounts as applicable to the cost of replacement. In the latter event, appropriate credits should be entered in the plant accounts.

Case 19

JULY 14, 1944.

Question: Company A owns a section of outside plant for which it has no further use (e. g., because of rerouting the line or because of substitution of underground construction) and which becomes available for use of Company B. Company B has use for only a portion of the full capacity of the line or in case of jointly owned plant for only a portion of the full capacity of Company A's interest. Company B agrees to purchase the portion of A's interest for which it has use. Any of the remaining portion of the plant not removed by Company A is abandoned and the title thereto goes to Company B without cost. What should be the accounting by Company B?

Answer: Company B shall record the total units so acquired in its continuing property record and account for the proportionate interest actually purchased on the basis of the original cost of that interest and reserve requirements applicable thereto in accordance with section 31.2-21 of the system of accounts.

Case 21-R-1 (Cancels Case 21)

JANUARY 1, 1970. Question: When capital stock is sold at a premium, is it permissible to credit account 152, "Premium on capital stock," with the net premium, that is, the premium realized from purchasers of the stock minus expenses otherwise includible in account 134:2, "Capital stock expense"?

Answer: Account 152, "Premium on capital stock," account 134:1, "Discount on capital stock," and the respective capital stock accounts are intended to include the amounts received from purchasers of capital stock, but not expenses of issuing and selling the stock. For each class and series of capital stock there should be recorded separately in the prescribed accounts the par or stated value of the stock, discount or premium, and the expenses incurred in connection with the issuance and sale of the stock.

Case 22

JULY 17, 1946. Question: What is the proper account to be charged with non-promotional advertising of the type sometimes referred to as institutional advertising or as goodwill adver

tising, the purpose of which is to foster and maintain public goodwill rather than for any immediate and direct promotion of sales of service to subscribers?

Answer: Such advertising should be charged to account 642, "Advertising"; however, account 323, "Miscellaneous income charges," should be charged with the cost of any advertising for the purpose of influencing public opinion as to the election of public officers, referenda, proposed legislation, proposed ordinances, repeal of existing laws or ordinances, approval or revocation of franchises; for the purpose of influencing decisions of public officers; or having any direct or indirect relationship to political I matters.

Case 23

JULY 17, 1946.

STATEMENT OF FACTS

In probably all jurisdictions, upon the organization of a corporation, specified fees must be paid. These fees are measured in different ways, the method pertinent to the present inquiry being the amount of authorized stock. In this particular jurisdiction, if several corporations merge or consolidate, then the amount of the fees payable by the resulting corporation is the difference between that calculated on the entire authorized stock of the resulting corporation after the merger and that which was paid previously by the parties to the merger or consolidation. If additional stock is authorized at any subsequent date, a fee must be paid thereon. In the state in question, the minimum authorized capital stock is $5,000.

An additional characteristic of the fees is that they relate to the total stock authorized and not to respective classes of stock. Thus, no additional fee would be payable if one class of preferred stock is retired and replaced by another class, provided there is no increase in the amount authorized to be issued, or if preferred stock is replaced by common stock with no increase in the authorized amount. In the case of no par stock, the aggregate stated value of the shares authorized is the basis for the fees. Where no par stock has no stated value, the basis for the fees is the capital paid in attributable to such shares.

The charter or bonus fees herein considered are not to be confused with fees paid by a carrier to a public service commission or other authority for registration and permission to issue and sell an authorized amount of capital stock. This latter type of fee is chargeable to account 134:2, "Capital stock expense."

Question (a): What is the proper account to be charged with charter or bonus fees similar to those described above?

Answer (a): Such charter or bonus fees should be charged to account 201, "Organization." Attention is directed, however, to the above comments concerning fees paid by a carrier for registration and permission to issue and sell an authorized amount of capital stock, to which this interpretation does not apply.

Question (b): On the merger or consolidation of two or more companies where charter or bonus fees previously paid by the merged companies are permitted to be offset against the fees otherwise payable on the authorized capital stock of the continuing corporation, is it permissible to carry forward to the organization account of the continuing corporation the charter or bonus fees included in the merged corporations' organization accounts?

Answer (b): Under the circumstances described in the question it is permissible for a continuing corporation of a merger or consolidation to record in account 201, “Organization," so much of the charter or bonus fees previously paid by the merged corporations as is available for credit against the fees otherwise payable on the authorized capital stock of the continuing corporation or creditable against fees for future increases in the authorized capital stock.

Cases 24-R-1

The Commission on April 15, 1960, deleted Case 24-R-1, effective April 29, 1960.

Case 25

OCTOBER 18, 1955.

STATEMENT OF FACTS

Two telephone companies operate adjoining exchanges. An agreement between the companies is reached whereby the subscribers in an area which includes one or more exchanges of each company are given extended area service whereby all subscribers in the area have a service which permits local calls to any other subscriber of either company in that area. Each company bills its own customers in accordance with its own tariff. In certain situations, the expenses incurred by one of the companies in rendering the extended area service may be disproportionate due to differences in the amount of facilities furnished or operating functions performed in connection with the service. In such cases, payments to the one company by the other may be agreed upon as an adjustment therefor. The amount of such payments may be determined in various ways but is usually based on the relative facilities furnished by each company, the labor and other services performed by each, the number of customers in the exchange of each company, or a combination of those bases. However, in some cases the payments

are intended to cover a variety of costs, e.g., operating service, maintenance on plant, supervision, related social security taxes, relief and pensions, depreciation, house service, return on investment, etc.

Question: What is the proper accounting for the amounts billed to its customers by each company and for the payments by one company to another under arrangements for rendering extended area service?

Answer: The amounts billed by each company to its customers shall be credited by it to account 500, "Subscribers' station revenues," (account 3010, "Local service revenues," for Class C companies). The company receiving the payments from another company shall credit the amounts received to account 506, "Other local service revenues," (account 3010, "Local service revenues," for Class C companies). The company making the payment shall charge the amount of the payments to account 675, "Other expenses,' (account 4190, "Other operation expenses," for Class C companies). However, where the agreement between the companies specifically provides for a division of revenues, the accounting shall be on that basis.

Case 26

STATEMENT OF FACTS

JANUARY 1, 1969.

Certain groups of affiliated companies filing consolidated Federal income tax returns include both operating telephone companies and manufacturing companies. Pursuant to closing agreements with the Internal Revenue Service, effective January 1, 1966, the Federal income taxes on profits on sales by manufacturing and supply affiliates to the operating telephone companies are deferred and recognized over the life of the specific plant or equipment to which related. Under the terms of tax allocation agreements, the manufacturing companies pay, normally through a common parent, to their telephone company affiliates each year amounts equivalent to the income tax that would be payable on profits from sales to the telephone companies, in the absence of tax allocation agreements. The total amount of profit that is realized by manufacturing companies on sales to their affiliated telephone companies is excluded from the cost of plant on which depreciation is taken for Federal income tax purposes.

One method used by many telephone companies who are members of such groups to account for the payments received from their manufacturing affiliates is to credit plant with the amount of the payments received. The resulting annual increase in income tax expense due to disallowance of the profit element of plant cost as depreciation expense for tax purposes over the estimated life of the plant is offset by a compensating reduction in the annual book de

preciation charge due to the reduced depreciable plant base. The other method commonly used is for the operating telephone company to credit a reserve for deferred taxes with the amount of the taxes deferred and to amortize such amount to operating taxes over the estimated life of the plant which amount offsets the annual increase in income tax expense. Under the first method, for example, Company A is a manufacturing company which sells equipment to Company B, a telephone company affiliate included in the same consolidated Federal income tax return. Company A sells, among other items, $1,000 of central office equipment to Company B on which transaction Company A makes a profit of $100 and, assuming a 50 percent tax rate, refunds to Company B $50 which is the income tax effect of the intrasystem profit eliminated in the consolidated return. Company B initially charges the cost of the equipment of $1,000 to account 221, "Central office equipment," and when the $50 is received credits that amount to account 221 leaving a net balance of $950 in plant for the transaction.

Under the other method, Company C is another manufacturing company which sells $1,000 of central office equipment to Company D, its affiliate and refunds to Company D the $50 of deferred tax. Company D also charges account 221 with the $1,000 paid for the equipment. However, Company D credits the $50 received to a Reserve for Deferred Taxes under account 174, "Other deferred credits," and amortizes such amount to operating taxes over the estimated average life of the plant.

Either method of recording the payment received is acceptable to the Commission: Provided, however, That in no event shall a carrier make a change in its method of accounting without prior Commission approval.

For simplicity, it is assumed that, in each instance, no other amounts are capitalized for the equipment and that the equipment will have a service life of 10 years with zero net salvage. The annual depreciation expense recorded in its accounts by Company B is therefore $95 and for Company D is $100. In each case it is assumed that, after 5 years of service, the plant is sold to Company E, a nonaffiliated telephone company, for $500 and that the tax rate for the entire period of ownership and at the time of sale has remained unchanged at 50 percent. Under currently effective closing agreements with the Internal Revenue Service, the portion of deferred taxes that has not been eliminated through reduced depreciation charges (or amortized) at the time of the sale becomes payable as a tax by Company B and by Company D in the year of the sale.

Question (a): What accounting should be performed by Company B to record the retirement of the plant sold?

Answer (a): The plant accounts should be restored to the actual original cost of $1,000 before performing the retirement entry. The entry to be made to restore the actual original cost is a debit to account 221, “Central office equipment," of $50 and credits of $25 to account 171, "Depreciation reserve," and $25 to account 166, "Taxes accrued." This entry serves to (1) restore the actual original cost, (2) include in the depreciation reserve the amount that would have been accrued had depreciation been accrued on the basis of actual original cost, and (3) record the liability for the tax which becomes payable at the time of the sale. The sale price of $500 is credited to account 171 and that account is then charged and account 221 is credited with the $1,000 then recorded in account 221.

Question (b): What accounting should be performed by Company D to record the retirement of the plant sold?

Answer (b): Company D performs the same accounting that would normally be performed for a sale of plant and, in addition, the deferred taxes subaccount under account 174 is charged and account 166 is credited with $25. The latter entry clears the deferred taxes subaccount and sets up the tax liability which is payable in the year of the sale.

Question (c): What accounting should be performed by Company E for the purchase and what amount should be recorded by Company E as the original cost of the plant purchased?

Answer (c): Company E performs the accounting that would normally be performed for a purchase of telephone plant. The original cost of plant to be recorded by Company E in each instance is $1,000 the amount initially paid for the equipment purchased from Company A by Company B and from Company C by Company D.

NOTE: In the event that there is a change in the tax rate subsequent to the date of purchase the effect of such change, including that occurring at the time of sale, shall be reflected through the operating taxes account rather than through adjustment of the credit to the plant accounts or to the deferred tax reserve account.

Case 27

STATEMENT OF FACTS

In the State of Tennessee an excise tax based on taxable income earned in the State of Tennessee is levied on telephone companies, among others. In addition, a separate Tennessee statute imposes a gross receipts privilege tax which is based on gross receipts from Tennessee intrastate business. Thereunder, the intrastate portion of excise

taxes actually paid applicable to the preceding year is permitted to be used as a credit against the gross receipts privilege tax currently due. As a result of a company's use of accelerated depreciation in computing its excise tax, a lesser amount is paid currently resulting in a lower credit available to reduce the current gross receipts privilege tax. Accordingly, a higher gross receipts privilege tax is currently paid. In the future, as the amount of excise tax currently deferred reverses, a larger excise tax payment will be due and paid, and hence a larger credit against and a lower payment of the gross receipts privilege tax will occur.

Question: What is the proper accounting to be followed for the tax effects arising from the use of accelerated depreciation for excise tax purposes in the State of Tennessee and straight-line depreciation for book purposes and for the effect such use has on the Tennessee gross receipts privilege tax?

Answer: The provisions of Section 31.3-32 shall apply. Thereunder, if a company normalizes the tax effects arising from the use of accelerated depreciation, paragraph (f) provides, in effect, that the additional or secondary effects thereof shall also be normalized. Accordingly, if a company normalizes the tax effects arising from the use of accelerated depreciation for excise tax purposes, the company shall also normalize the effect such use has on the gross receipts privilege tax.

[28 FR 13039, Dec. 5, 1963, as amended at 28 FR 14324, Dec. 27, 1963; 34 FR 9867, June 26, 1969; 34 FR 11971, July 16, 1969; 40 FR 52728, Nov. 12, 1975; 48 FR 49851, Nov. 2, 1983]

APPENDIX B-STANDARD PRACTICES FOR THE ESTABLISHMENT AND MAINTENANCE OF CONTINUING PROPERTY RECORDS BY TELEPHONE COMPANIES HAVING INVESTMENT IN ACCOUNT 100:1, "TELEPHONE PLANT IN SERVICE," IN EXCESS OF $40,000,000

1. Accounting areas. (a) The continuing property record, as related to each primary plant account, shall be established and maintained by subaccounts for each accounting area. An accounting area is the smallest territory of the company for which accounting records of investment are maintained for all plant accounts within the area. Areas already established for administrative, accounting, valuation, or other purposes may be adopted for this purpose when appropriate. In no case shall the boundaries of accounting areas cross State lines. In determining the limit of each area, consideration shall be given to the quantities of