258 NATURE OF CAPITAL AND INCOME [Cmar. XV

INcoME ACCOUNT DURING YEAR 1900

 

 

 

Capital Source Income Outgo Net
Factory Product . $40,000 Running expenses
 . . $15,000 + $25,000
Bonds Interest . . 5,000 — 5,000
Capital and
Surplus Dividends . 20,000 — 20,000
$40,000 $40,000 000

From this table we see that the factory yields $25,000;
as it is worth only $300,000 (on a 5 per cent basis), by the
principles of Chapter XIV, it cannot yield more than
$15,000 without depreciating to the extent of the difference
 ($10,000); but, instead of setting aside something
for depreciation, t.e. to pay for future repairs, the company
 has declared larger dividends. Hence, corresponding
 to the depreciation of $10,000 in the value of the
plant there is an excess of $10,000 above the “standard”
income received by the stockholders. Instead of $10,000,
which is the normal interest on their capital and surplus of
$200,000, they receive $20,000. The extra $10,000 above
the standard thus corresponds precisely to the depreciation
of their property, which accordingly sinks in the course
of the year from $200,000 to $190,000.
During the next year we shall suppose that the factory
yields again $25,000. Since its value was, at the beginning
of the year, $290,000, it cannot, on a 5 per cent basis, yield
more than $14,500 without depreciating to the extent of
the difference (in this case $25,000-$14,500, or $10,500).
Its value at the end of the year exclusive of improvements
is consequently $290,000-$10,500, or $279,500. We shall
suppose that the entire depreciation for the two years,
$20,500, is made good by extraordinary repairs to that
amount. Since the factory yields only $25,000 and only
$20,000 after the bondholders are paid, it will be necessary,
in order to meet the $20,500 of repairs to assess the stockholders
 $500. The accounts will then stand as follows : —