Where the amount of bonds issued and outstand ing is less than the amount of the mortgage under- ' lying the issue, it is important to note the amount of the property pledged, so that any one who reads the balance sheet of the organization may be able to de termine what assets remain unp. 'edged.
Overissue of bonds is usually guarded against by clauses in the indenture providing for registration and certification. The fact that these requirements have not been followed does not alter the status of un issued bonds. VVhere part of the unissued bonds have been registered and part have not, the facts will usu ally be stated in the balance sheet. The necessity of showing the amount of the mortgage underlying the bonds compels this treatment to be applied to unis sued bonds.
Where, therefore, more than one mortgage or lien exists on the whole or any part of the property of an enterprise, it is important to have the mortgages and liens listed separately in the balance sheet, and to de scribe the property to which liens attach.
It will occasionally happen that the unissued evi dences of debt secured by a mortgage of a corpora tion may be given as collateral security for loans ob tained from banks. When this is the case, the loan from the bank should be stated as a current liability, if it has less than a year to run. A notation showing the amount of bonds which have been pledged as col lateral security for the loan should be appended.
The difference between the value of the property which is pledged and the amount of debt evidences issued against it, constitutes the equity of the pro prietor.
In those cases in which it is not possible to show conveniently the nature of the debt and the property pledged as security in a balance sheet, a separate schedule should be attached to the balance sheet dis closing this information.
3. Mortgage debts and bonds.—A concern may mortgage its property, in which case the mortgage is usually given to one individual on a single bond se cured by the mortgage. While the legal debt is the bond, and the mortgage is merely security for it, yet in the last analysis the real debt is the mortgage.
Real estate mortgages are conveyances of title on the condition that the title of the mortgagee shall be defeated when the debt is paid. They are executed, acknowledged and recorded like a deed. Chattel mortgages which cover personal property do not usu ally convey title. They are usually for shorter terms than real estate mortgages and for that reason are usually classified under the heading of current liabili ties. In the majority of cases, chattel mortgages are given as additional security for merchandise pur chased on credit or for movable property purchased on credit. Thus, for example, a man may sell mer chandise to a firm on open account, taking in exchange a chattel mortgage on the stock as additional secu rity. If such mortgages are not disclosed in the financial statement, one who is about to grant credit on such a balance sheet would be greatly misled, be cause the balance sheet would appear to show more tmpledged assets than the borrower had.
Interest on bonded debt or on mortgage debt should be accrued because interest accrues from day to day and at the time of stating the accounts,. the interest accrued should be shown in the balance sheet as a cur rent liability.
4. Notes under this head would be the promissory notes given by a firm to its creditors or issued as an accommodation to others. These are usually payable in less than a year, and therefore would be classified under the current liabili- ' ties. If the notes bear interest, the interest should be accrued up to the date of the balance sheet. If the firm has accepted a draft, a bill of exchange, or a trade acceptance, it may be handled in the same account, as the draft is the same as a promissory note for all prac tical purposes. Where it is desired to keep the two classes of instruments separate, this may be done by creating one account for notes payable, and another account for drafts payable.
5. Trade creditors.—Included under this caption would be the amount due for merchandise or property purchased, as well as the amount due for expenses of various kinds incurred in the ordinary course of busi ness.