discount and development and promotion expenses (at page 28):

Intangible assets in the nature of capitalized costs of preliminary operations, discounts on outstanding stock, and costs of promotion, should be amortized in equal payments for such number of years as the management finds is consistent with the best business administration.

The systems of uniform accounts prescribed by the Public Service Commission of Maryland under date of June 12, 1911, to govern electrical corporations, gas corporations, street railway corporations, telegraph and telephone companies and water companies contain uniform provisions forbidding the charging of discount on securities to capital account and requiring the amortization of discount during the term of the bond. These uniform provisions are as follows:

Discounts upon securities. Discounts on securities or other commercial paper issued in payment for capital are to be provided for in other accounts and must in no case be charged to capital accounts..

Extinguishment of discount on securities. Charge to this account at the close of the year the proportion of the unextinguished discount on securities applicable to the period. This proportion shall be such an amount as will completely wipe out the discount on the debt during the interval between issue and maturity of the same. The corporation may, if it so desire, earlier wipe out such discount by charging all or any part thereof to the "Corporate Surplus or Deficit" account.

In the past corporations have quite generally charged discount on bonds to construction cost, but in view of the stand taken against this policy by the leading authorities on accounting and the action of the Interstate Commerce Commission and various public service commissions in excluding it from that account and the action of cer

tain corporations in voluntarily adopting the same policy, it seems that the amortization of bond discount will become the standard practice.

§ 322. Treatment in connection with capitalization.

The national commission appointed to investigate railroad capitalization in its report made in 1911 recommends the amortization of discount on bonds: 1

It seems to be generally agreed that no limitation should be placed on the price at which bonds can be sold, but any discount should be cancelled or amortized during the life of the bonds by the appropriation each year, out of annual income or surplus accumulated after the issue of the bonds, of not less than the proportionate amount of the discount.

Re Amortization Accounts of Third Avenue Railway Co., 3 P. S. C. 1st D. (N. Y.) 51, decided February 3, 1912, is a case involving the approval of issue of securities after reorganization, by the New York Public Service Commission for the First District. The existing statute as interpreted by the Court of Appeals permitted the reorganized company to issue new securities up to the amount of the old capitalization. The Commission, however, in approving such issue ordered the company to provide during the term of the bonds for the amortization of the difference between the actual value of its property and its total capitalization. The Commission argued that this difference was in the nature of bond discount. Commissioner Maltbie said (at pages 55-57):

The requirement that discounts shall be amortized is a generally recognized principle. The unanimous conclusion of the Railroad Securities Commission in its recent report to the President of the United States was to this effect. .

The Public Service Commission has approved the issue of

Report of the Railroad Securities Commission, November, 1911, p. 28.

Just what sum represents a fair amount for working capital is nearly always a matter of judgment. From the amount of working capital usually carried by such companies, and from the amount that is required by other similar public utility corporations, it appears that, as an average for the year, a sum equalling the accounts receivable and cash on hand less the accounts payable and consumers' advance payments, is a reasonable allowance. The cash on hand, however, should be considered as that which is ordinarily required for the operation of the plant and the conduct of the business, including contingencies and emergencies, and should not include the capital or ready cash necessary for the construction of extensions or enlargement of the plant, or balances resulting from the sale of bonds or stock, or in any case exceed the amount normally needed and used by the company as an operating property.

In many rate cases no mention is made of working capital and it does not seem to have been included at all except as covered by the allowance for stores and supplies. No rate case has been found, however, in which there is recorded a refusal to allow for working capital. The failure to give more attention to the matter is doubtless due to its comparatively small influence upon the total value.

§ 341. Capitalization of working capital.

Under the Massachusetts stock and bond law as it existed prior to 1909, the State Board of Railroad Commissioners refused to allow the issue of stocks or bonds to cover working capital. The Legislature of 1909 passed an act authorizing such issue by street railway companies. This act (Laws of 1909, chapter 485) authorizes a street railway company, after securing the approval of the Board of Railroad Commissioners to issue shares to an amount not exceeding 5% of the par value of its total share capital or to issue bonds to an amount approved by

that the bonds shall not be sold at less than par and accrued interest. The Massachusetts Railroad Commission on the other hand sometimes allows the issue of bonds at a discount. Chapter 536 of the Laws of 1910 provides that whenever the Commission authorizes the issue of bonds at a discount, it may in its order of approval or at any time thereafter require the company "to establish a sinking fund estimated to realize at the maturity of said bonds a sum equal to the difference between the amount or amounts for which such bonds were authorized or approved, and the face value of the bonds so authorized or approved therefor, and may designate some Massachusetts trust company as trustee and custodian of such fund, and may from time to time change such trustee." It is also provided that "the provisions of any agreement relative to said sinking fund made between the street railway company and the trust company selected as such trustee, shall be submitted to said Board and shall not be valid until approved by it."2 George F. Swain, engineer in charge of the valuation of the property of the New York, New Haven and Hartford Railroad Company for the purpose of testing the existing capitalization, says in his official report (at page 88): 3

3

It is recognized that discount on securities is not a proper charge to capital, but is simply an adjustment of interest, for if the securities can be sold at all, the rate of interest which they carry may be made such that they would sell at par.

2 An order in relation to the establishment of a sinking fund for bond discount is contained in the Commission's order of September 12, 1910, on the petition of the Shelburne Falls and Colrain Street Railway Company, 42nd Annual Report of the Board of Railroad Commissioners, p. 117.

Report to the Joint Board on the validation of assets and liabilities of the New York, New Haven and Hartford Railroad under Chapter 652, Acts of 1910, by George F. Swain, Engineer in Charge. Published in Report of the Massachusetts Joint Commission on the New York, New Haven & Hartford Railroad Company, February 15, 1911, pp. 51–154.

§ 323. Treatment in public purchase cases.

No court or commission decisions have been found that include bond discount or brokerage in valuations for public purchase. The decisions in purchase and condemnation cases have made no reference whatever to bond discount as a possible element of cost or value. Discount is fundamentally not an element of investment but of the apportionment of returns on the investment. The manner in which profits are apportioned between the partners in an enterprise does not affect the value of the enterprise. The manner in which the profits of a public utility plant are apportioned between bondholders and stockholders does not affect the intrinsic worth of the plant.

§ 324. Cleveland and Chicago street railway settlements. The Cleveland street railway settlement of 1909 fixes a valuation of the property of the Cleveland Street Railway Company which forms the basis for adjustment of rates and for possible municipal purchase. The valuation which was the original basis of this settlement was made by Judge Tayler, acting as arbitrator, December 17, 1909, and includes no allowance for brokerage or discount. The settlement ordinance contemplates a rehabilitation of the existing lines and provides for municipal purchase at any time on payment of the above original valuation and the par value of any stock or bonds issued to pay for the construction of additions to property plus a bonus of 10%. The stock, however, may not be issued at less than par and the bonds may only be issued at less than par with the consent of the city.

The valuations made during the period 1906 to 1910 for the purposes of the Chicago Street Railway Settlement include an item of 10% on the total estimated cost of reproduction to cover legal expenses, interest during construction, contingencies and brokerage. The settle