The article examines the development of the stated capital concept in an attempt to gain better understanding of the legal view of permanent capital. The discussion begins with an investigation of the trust fund doctrine and extends to the major modifications in the concept of legal capital down to the present day. Stated capital is a legal limitation on stockholder withdrawals. As defined in law it is an absolute quantity, capable of direct computation, and not a residuum. Since only surplus beyond this amount generally is available for charges resulting from dividend declarations, creditors are provided a buffer which absorbs losses in asset values in the event of an insolvency. The stated capital concept is the cause of many differences between accounting and legal views of corporate net worth. In law, stated capital is determined by statutory formula and does not necessarily equal aggregate par or stated value of outstanding shares. In some instances, a stock split, reverse stock split or other similar capital readjustment does not result in a reduced stated capital, even though the aggregate par value of outstanding shares after the transaction is less than the former par or stated value aggregate.

Liberal legislative policy has resulted in the enactment of provisions in many states which allow corporations to declare dividends from sources other than earned surplus. Distributions to shareholders from these other sources are of three types: (1) current earnings dividends, which are permitted to the extent of all or a portion of current net income when a corporation has a deficit; (2) depletion dividends, which may be distributed to the extent of the increase in net income which results when the depletion charge against revenue is ignored; and (3) dividends charged to paid-in surplus. In those states which allow current earnings and/or depiction dividends, consistency requires that paid-in surplus be made available as a legal source for cash or property dividends since distributions from any of these sources result in an offset to or direct reduction of paid-in capital.

Accounting students often find it difficult to understand the allocation of combined net income of a parent company and its subsidiary to controlling and minority interests when a reciprocal affiliation exists. This difficulty may be attributed, in part at least, to two causes, first, the problem of accurately defining the symbols employed in the conventional algebraic solution, and second, in the selection of a two-step process for computation rather than a single-step process. The problem has been clarified with the help of an example in which company P owns 90% of company S, and company S owns 20% of company P. The net income figures for the current year for Companies P and S are $60,000 and $20,000 respectively. The purpose of this paper is to point out the limitations in the conventional algebraic solution to combined net income allocation problems in reciprocal affiliations, and to suggest a method designed to overcome these limitations. Modification of the conventional algebraic solution makes possible the use of a one-step process in which the interests of the controlling and minority stockholder groups in combined net income are directly computed.

Recognition in the corporate accounts of statutory provisions prescribing a permanent reduction in retained earnings for treasury stock purchases requires a major departure from conventional net worth accounting. The acquisition and disposition of its shares by a corporation are totally unrelated events. The purpose of the paper is to analyze statutory provisions of this type and to suggest applicable accounting procedures. The particular emphasis will be placed on the California statute. First, accounting for the acquisition of treasury shares will be discussed. It will be shown that a Treasury Stock account is not needed, and that charges arising from treasury stock purchases should be applied directly to retained earnings. Thus, treasury stock purchase and disposition transactions are completely divorced. The remainder of the discussion will be devoted to an investigation of the methods of accounting for the various treasury stock disposition transactions, i.e., sale, retirement, and reissue as a stock dividend.