11. Surplus from sale of fixed assets.—Surplus re sults from the sale of fixed assets when any portion of the fixed property is sold for an amount greater than the book value of that property. Sales of this char acter may be broadly grouped in two classes: sales of isolated units, and sales of ma,gnitude, in which the property disposed of consists of an. integral part of the operating equipment.
Before a decision is made in regard to the disposi tion of such profits it is necessary to inquire whether or not proper provision has been made for the de preciation of the remaining units of equipment. The fact that a profit has been realized upon the sale of an isolated unit of the plant equipment is not an indica tion that a true profit has been realized. The price paid by the new owner might represent elements other than true value. For example, an undertaking en gaged in the manufacture of war munitions might have paid a high price for a plant particularly suited to its needs, in order to fill a contract which it would be unable to accept without securing such a plant. But if investigation shows/ that the proper provision for depreciation on the remaining units has been made, the profit can undoubtedly be credited to the surplus account. It is, however, more 'conservative to credit the amount of the profit to the reserve for depreciation provided on the remaining units.
Sales of magnitude may be illustrated by the case of a company engaged in manufacturing office desks and chairs, which maintains a separate establishment for the manufacture of each article. Let us suppose that the company decides to discontinue the manu facture of desks and to concentrate its energies upon the manufacture of chairs. If the entire plant used in the manufacture of desks is disposed of at a profit, and if the accrued depreciation on the remaining equipment is adequate, the entire profit that is real ized may be properly credited to the surplus account. Such profits do not, however, constitute an addition to the current income account of the company, and should therefore appear as surplus adjustments.
12. Profits resulting from the sale of investments. —Business firms from time to time acquire invest ments in the securities of other companies. If such holdings subsequently are disposed of at a profit it is proper to credit the surplus account. It is assumed that the company will have provided a reserve for the decrease in the value of any other investments of this character that it may have. If this has not been
done, it would be better to credit the profit realized on the sale of investments to a properly designated reserve account, since in this way the loss sustained on other investments may be offset.
13. Profits resulting from revolution of fixed may be necessary or advisable for a board of directors to revalue the fixed assets. No matter how carefully a company may attempt to determine in advance the proper allowances for depreciation, the estimates are often incorrect. If the property has been revalued by a competent appraiser, there is prob ably no objection to showing _the increasing value on the books. On the other hand, conservative account ing practice often suggests another disposition of the matter. At times it is preferable to allow the values to remain unchanged rather than to swell the surplus account by credits due to revaluation. As the depre ciation charges for subsequent periods may be re duced, this method has all the advantages and none of the defects of the other.
Evidently, if the appraisal should reveal the fact that the property has been overvalued, the surplus account- should be charged with the amount of the overvaluation. It is also clear that the revaluation should be made in good faith, and not for the purpose of wiping out a deficit from operation. In some instances a corporation will acquire the physical prop erty of a business undertaking by giving in payment an amount of capital stock in excess of the value at which the assets stood on the 'books of the vendor. The difference between the cost price to the purchaser and the book value of the assets may be debited to the good-will account of the purchaser; or the board of directors may place upon the assets acquired, new valuations that will absorb the excess price paid.
The practice of concealing the value of the in tangible property purchased has been strongly con demned, and it is interesting to note that some cor porations have altered their accounts so as to disclose in their balance sheets the value of the intangible property. The subject is discussed in an interesting manner in an article in the Journal of Accountancy (August, 1916) in which the author gave a list of the corporations that then stated separately the values of intangible assets.