Knowledge that Transforms

Reviews the book "What You Should Know About Estate and Gift Taxes," by J.K. Lasser.

The excess profits credit based on record of earnings and the excess profits credit, based on invested capital are fraught with variations applicable to different circumstances as to require individual treatment according to the individual case. The basic questions being asked daily relate in great measure to the numerous corporations which will be free from excess profits tax under the 1950 act. However, management needs an understandable explanation of why a corporation must file an excess profits tax return even though it has no such tax to pay. It needs to know what keeps the corporation free of such tax, and how high its current earnings can climb before incurring a liability. The following description applies to the multifarious small corporations whose incomes in the base period 1946, 1947, 1948, and 1949 did not exceed $30,000.00 a year and whose equity and borrowed capital does not exceed $200,000.00. If such corporations come into the advantageous position of having current net income considerably in excess of the $25,000.00, then their officers may have some guidance from this article, but should rely on tax advice patterned to fit the actual circumstances, using the information herein contained for approximations only.

Reviews the book "Economics of National Security."

Reviews the book "The Role of Measurement in Economics," by Richard Stone.

Reviews the book "Financial Reports of Labor Unions," by George Kozmetsky.

When goodwill is written off to income, it should appear as a charge in the operating section of the income statement. This author looks upon a payment for goodwill as a combination of deferred operating expense and payment for accrued interest on an investment purchased. It is the cost of future operating efficiencies as well as a payment for sales revenues to be received by the purchaser but earned by the seller. Accordingly, operating expenses must be increased and revenues decreased by the amount of the payment for goodwill. These ends are both accomplished when write-offs are made against income from operations. The annual charge should be dearly set forth as the last deduction before the amount commonly designated as "net income from operations." Concerning the method to be used in amortizing goodwill, that method would naturally be best which most nearly conforms to the actual decline in value of the intangible factors purchased. It is, of course, impossible to determine with any degree of accuracy the extent to which intangible factors are losing their effectiveness, especially when they are being replaced by new factors.

The question of the distinction between operating income and capital gains was raised at the recent meetings of the American Accounting Association. Capital gains or losses are a manifestation of imperfect income measurement and result because of the requirement of modern business for periodic computation of net profit or loss. Capital gains or losses are composites of imperfect estimates of depreciation, imperfect allocations of costs, imperfect separation of capital and revenue expenditures, disregard of or imperfect adjustment for price level changes. While there is no distinction in theory between capital gains and operating income, there is a legal distinction for income tax purposes. The legal distinction is important since the tax on capital gains is less. The maintenance of the real capital of an enterprise in the face of a rising price level requires the continual upward adjustment of owners' permanent equity accounts as long term assets are consumed. This is necessary in order to restore to the business real purchasing power equivalent to that used up.

Reviews the book "Specialized Accounting Systems," 2nd ed., by Henry Heaton Baily.

Reviews the book "Cost Accounting and Analysis," by Carl Thomas Devine.

The article presents some of the problems that were presented by the Board of Examiners of the American Institute of Accountants and were presented as the first half of the November 1950 Certified Public Accountant Examination in accounting practice. The candidates were required to solve any five problems. One of the questions that were asked in the examination was about a man who used to live his family. The person received some incomes on the cash basis. Students were asked to calculate the amount that person is entitled as a deduction for contributions in connection with the stock donated. In another question, Arthur Jacobs, a merchant, kept very limited records. Purchases of merchandise were paid for by check, but most other items of cost were paid out of cash receipts. Accounts receivable were recorded only by keeping a copy of the charge ticket and this copy was given to the customer when he paid his account. An inventory of merchandise taken on December 31, 1950 showed $16,710 of merchandise on a cost basis. Based on the information, the students were required to prepare a statement of profit and loss for 1950, supported by all computations necessary to determine the sales and purchases for the year.