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ACCOUNTING

In the tentative valuation of the carrier we stated that the original cost to date of all of its common-carrier property could not be ascertained, as the necessary records were not obtainable. The carrier's books recorded an investment of $387,922,214.97 in road and equipment, including land, on date of valuation. If readjustments were made to conform with our accounting classification, this amount would be reduced to $379,853,103.95, of which $335,607,629.80, less an undetermined portion thereof assignable to offsetting items recorded at $42,549,039.12, represents considerations other than money, the cash value of which at the time of the transaction we are unable to report for lack of complete information. Some of the adjustments made in conditionally restating the investment accounts of the carrier and certain other companies involved in this proceeding have been protested and the issues thereby raised will now be considered.

The carrier protests that there should be added to the conditionally restated investment account $115,000 as representing the cost of acquiring the Gadsden and Attalla Railroad Company, which was conveyed to it by deed dated July 1, 1904, at the nominal consideration of $1. The protested amount has been increased to $118,082.30 by a stipulation filed in the record. It appears that the Gadsden and Attalla Railroad Company issued to a contractor in payment for the construction of its property $100,000 par value of first-mortgage, 5 per cent gold bonds, dated October 1, 1890, and due October 1, 1920, and $15,000 par value of capital stock. In order to provide funds for the construction of the property the contractor borrowed $15,000 in cash from the Alabama Great Southern on his promissory note for that amount, and also turned over to that company the bonds above mentioned at 85 per cent of par in payment for cash and materials and supplies aggregating $85,000. Later, the contractor paid the promissory note with the $15,000 par value of capital stock. Thus, the Alabama Great Southern became the owner of all the outstanding stock and bonds of the Gadsden and Attalla and operated the property of the latter as a proprietary line from the date it was placed in operation until its demise on July 1, 1904, expending in the meantime for additions and betterments, less retirements, the net sum of $8,353.30. By deed dated July 1, 1904, the Gadsden and Attalla and the Alabama Great Southern conveyed to the carrier the line of railroad and property of the former. In this instrument the Alabama Great Southern covenanted to cancel and discharge the lien on the property created by the first mortgage, and the carrier covenanted to grant and convey to the Gadsden and Attalla and the Alabama Great Southern, their successors and

assigns, the right to equal joint use, in common with the carrier, its successors, and assigns, of the several parties' railroads and properties between Gadsden and Attalla, now combined in title in the carrier. The first mortgage was accordingly canceled and discharged on July 1, 1904. On the same date the Alabama Great Southern and the carrier entered into an agreement providing for the continued joint use of the tracks formerly owned by the Gadsden and Attalla or the Alabama Great Southern and the tracks owned by the carrier which paralleled the above lines. In this agreement an appraisal of the property conveyed to the carrier is shown as $51,840.67 and of the property of the carrier as $95,130, the excess value in favor of the carrier being $43,289.33. This agreement further provided that in addition to the contribution to the combined property by the Gadsden and Attalla and the Alabama Great Southern the latter should pay to the carrier as rental a fair proportion of the interest at 5 per cent upon the excess valuation as well as a fair proportion of the cost of operation and maintenance of the lines of railroad and property to be jointly used. On July 1, 1904, the Gadsden and Attalla assigned to the Alabama Great Southern its right, title, and interest in and to the joint use of the lines described in the trackage agreement. By a journal entry dated April, 1905, the Alabama Great Southern charged off to its profit and loss account the book value of the securities that it had received from the contractor, which had been issued to him by the Gadsden and Attalla, or $15,000 par value of capital stock and $85,000 in first-mortgage bonds, the latter amount representing 85 per cent of the $100,000 issue.

From the foregoing it will be observed that the Alabama Great Southern had an actual investment in the property in question amounting to $100,000 which it expended in the acquisition of the capital stock and first-mortgage bonds of the Gadsden and Attalla, and in addition it expended $8,353.30 for improvements to the property prior to the time it was conveyed to the carrier. This, however, does not represent the investment of the carrier in the property of the Gadsden and Attalla, which is the question for determination here. The consideration given by the carrier for the property appears to have been the right of joint use by the Alabama Great Southern of the carrier's tracks and those formerly owned by the Gadsden and Attalla. The value of this right, however, can not be determined from the record. Under the circumstances the contention of the carrier for the inclusion in its restated investment account of the item of $115,000 is overruled.

The carrier asks for the inclusion in its investment account of $248,100 for part cost to it of the property of The Charlottesville and Rapidan Railroad Company conveyed to it by deed dated June 13, 1914, at the nominal consideration of $1 and not included in its invest115541°-32-37 VAL. REP.-2

ment account on valuation date. This company was incorporated under an act of the State of Virginia dated February 12, 1876. Under an indenture dated June 6, 1878, between John S. Barbour, receiver of The Washington City, Virginia Midland and Great Southern Railroad Company and the Charlottesville and Rapidan, the latter agreed to construct a railroad from Orange to Charlottesville, Va., before July 1, 1879, joining the two sections of railroad then owned by The Washington City, Virginia Midland and Great Southern, and to permit the receiver, and those claiming under him by virtue of certain court orders, to use it exclusively, for which the receiver agreed to pay $36,000 per annum for a term of 34 years. The annual payment was later reduced to $35,300. On July 2, 1879, the Charlottesville and Rapidan entered into an agreement for the construction of the railroad for $150,000 par value of capital stock and $500,000 par value of first-mortgage bonds. Accordingly, stock and bonds in the above amounts were issued, all of which were to be retired and canceled prior to July 1, 1913.

The property of the Charlottesville and Rapidan was operated by others from the date of completion to the date of demise. From July 1, 1894, the carrier operated it under the terms of the indenture of June 6, 1878, until it acquired ownership thereof on June 13, 1914. On July 1, 1894, the carrier, under an account styled "Cost of RoadLeasehold Estates," recorded on its books a debit amounting to $421,700, representing the par value of first-mortgage, 6 per cent bonds. Prior to July 1, 1894, $19,800 par value of these bonds had been drawn for retirement, leaving a balance of $401,900 par value for the unretired bonds.

The carrier contends that the Charlottesville and Rapidan acquired its property for stocks and bonds which it issued in the amount of $650,000 par value, and asks that the difference of $248,100 between this amount and the $401,900 charged to the investment in road and equipment of the carrier be added to the conditionally readjusted investment account. The cash value of the securities when issued to the contractor by the Charlottesville and Rapidan in payment for the construction of its road is not known and can not now be determined, nor is it now known, nor can it now be determined, what was the actual cash outlay by the contractor. After all the bonds were retired the property was conveyed to the carrier for a deed consideration of $1. The expenditures made by the carrier in obtaining an equity in this property through the retirement of these bonds is properly includible in its investment in road and equipment account. In this instance that equity is measured by the outlay made to retire the bonds which is shown by the carrier's records to have been $401,900 in cash. The contention for the inclusion of the additional $248,100 is overruled.

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We are asked to add to investment accounts of certain carriers involved herein as conditionally restated by us, and also to report as a part of the original cost to date of equipment, amounts of $1,111,467.45, $186,659, $19,334.79, $60,946, $55,223.75, and $185,098. The accounting records of the carrier, the Virginia and Southwestern, the Harriman and Northeastern, the Alabama Great Southern, the New Orleans and Northeastern, and the Cincinnati, New Orleans & Texas Pacific show that they received the respective amounts in cash representing profits realized by them from the sale of specialties to builders who were constructing equipment for them. These amounts were credited to the cost of acquiring the equipment, thereby charging the investment accounts with the net cost of the equipment after deducting these profits.

The various contracts made with the builders for the purchase of equipment provided, among other things, that the units were to be purchased at a flat price stated therein. Further, that they should be constructed according to the specifications of the particular carrier, which should be permitted to furnish the builder with certain standard specialties provided for in the contracts.

It appears that the various carriers were able to purchase these specialties from the manufacturers thereof at a lower cost than the builders of equipment. The prices at which they were sold by the carriers to the builders were the same as those included for them in the contract prices of the equipment but exceeded the prices at which they were purchased by the carriers. In this way the carriers realized profits of the above amounts.

It is obvious that the true investment of the carriers in the equipment in question is not represented by the contract prices, as they include commercial profits realized from the resale to the builders. The several primary accounts included in the general equipment account of our classification are designed to show the actual cost of the several classes of equipment. We conclude, therefore, that the foregoing amounts are not a part of the cost of equipment and should not be reported either as investment in equipment or as a part of the original cost.

The carriers, the Virginia and Southwestern, the Harriman and Northeastern, the Cincinnati, Burnside & Cumberland River, the Alabama Great Southern, the New Orleans and Northeastern, the New Orleans Terminal Company, the Carolina and Northwestern, and the Cincinnati, New Orleans & Texas Pacific Railway contend that we have erroneously deducted from the original cost to date of machinery and equipment amounts of $540,272, $22,614, $8,800, $5,564, $15,872, $20,139, $25,748, $79,816, and $2,402, respectively. In their responses to our valuation order No. 8, these companies included as the original cost to date of the machinery and equipment

herein involved the cost when acquired by the original purchaser or when acquired for its original service before any conversion or transfer to other service. Some of the machinery and equipment in question had been acquired by these carriers from other than predecessor corporations and the remainder had been transferred from the service for which it was originally purchased and had been converted or reconditioned for other service. In the tentative valuations we deducted the various amounts from the original costs reported by these carriers so as to make the returns reflect the recorded cost of the machinery and equipment as acquired secondhand, or in its converted state instead of the cost in its original state.

The carriers admit that it is proper, though not pertinent, to report as a separate fact that certain equipment, the original cost new of which has been reported, was bought by them in a secondhand condition, or if bought new for certain service was afterwards reappraised as secondhand and as refitted for other service. They urge, however, that it is improper to restate the returns on the latter basis, as it confuses investment or ledger value with original cost to date.

We have heretofore explained that we interpret original cost to date to mean the actual cost to a carrier of property at the time of its initial dedication to public use. New York, Philadelphia & Norfolk R. R. Co., 97 I. C. C. 273, 275. This may be the cost of the property to a predecessor of the reporting carrier or it may be the cost of the property acquired by the reporting carrier from a noncarrier and then dedicated to public use. In this case none of the machinery and equipment rated as secondhand was acquired by the reporting carrier new or from a predecessor in title, and the reconditioned equipment was set apart for a particular public use different in character from its original use. The dedication of this equipment to a particular public use took place upon its acquisition secondhand or when reconditioned and put into other service. Consequently, the deductions made in the tentative valuations are proper.

In conditionally restating the carrier's investment account we included in certain deductible items amounts of $300,000 and $362,093.61 as representing losses resulting from a reduction in the book value of investments in other companies and in notes of individuals. These deductions have been protested by the carrier, it contending that they are not in accordance with our present accounting classification. Through the reorganization whereby the carrier was formed it acquired $250,000 par value of certificates of indebtedness and $250,000 par value of common stock of the Baltimore, Chesapeake and Richmond Steamboat Company, which securities were recorded in June, 1895, at a book value of $300,000. The Baltimore, Chesapeake and Richmond Steamboat Company was

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