The Washington herald. [volume] (Washington, D.C.) 1906-1939, 1907-06-27

While officials Of the Rock Island seem
to have been willing to let the public be-
lieve that the abrogation Of the agree
ment with L. H. Hartman providing for
the Joint control OF the Alton resulted
from a broad hint that Federal authorities
considered the compact Illegal. and that
Federal action might result if it were
maintained, there is excellent reason TO
believe that another factor entered large
ly into the transaction. This was the dis
covery by Rock Island officials that the
Hartman bookkeeping methods in con-
nectiOn with the Alton were at least
unique-if. indeed, they could not properly
DO designated by a shorter and uglier
word" The effect OF these methods was
to transfer. approximately 100000 from
the liabilities TO the assets OF the road,
Partial facts concerning this curious
system Of accounting were brought out
February q. during the Hartman inves-
tlgation, when Mr.. Kellogg, one Of the
Interstate Commerce Commissions spe-
cial attorneys, was examining COmptrol-
Ter Hllliard. Of the Alton under the Rock
Island management Those facts. how
ever. did not seem % command atteD-
ton at the time No special notice was
given them in the newspapers, and the
financial world. with the exception Of.
some OF the magnatcs most closely con-
cerued, apparently overlooked them. So
far as the Rock Island was concerned
its officials seem TO have regarded the
irregular method Of accounting as afford
ing an excellent reason for getting from
under. regardless Of the attitude Of the
Interstate Commerce Commission and the
administration.
Change 81 1899.
Up to 1899 the books Of the Alton show
that the refunding OF bonded indebted
ness and tie payment Of interest were
very properly charged against the income
Of the road-that Is to say, were paid out
Of the earnings. IN 1901 there appeared
on the books a new account. called the
funded interest account" and on June
90. 1901. this account stood at $5g5.sl2. on.
June 30 OF the following year, when all.
the bonds had been retired, the account
stood al S973. AZ. The entry remained the
same for four years. or until June 80.
lg05. when the Rock Island under the re-
ciprocal agreement with Mr.. Hartman,
was about to take hold Of the road
Then the whole amount, approXimatng
a million dollars was transferred bodily
20 the cost OF road and equipment &C
90 vr-ha f.
ever
This IS the way the remarkable trans
action was explained by Mr. billiard. in
answer 10 questions by Mr. kellogg, on
February Is:
Mr.. KelIogg-Look at exhibit A your
exhibit l.
Mr. HIuard-Exhibit a is the general
condensed balance sheet from wear tOI
year, commencing with December 81. 1S9S.
Mr.. Kellogg-Yes: l notice on June 90.
1901. an item Of E939l2, bonded interest
account. The next year II amounts 20
1913. a.. and seems 10 have been carried
in the bonded interest account until Juue
30. 1905, when II was charged of. added 10
the assets Of the company and capitali-
lied in its statement Of the Chicago and
Alton Railroad Company. Win you please
explain that?
The OmciaI Explanation.
Mr.. Hillard-I have tried 10 get an ex-
PLANTATION Of that from my predecessor.
His explanation is that the 3 per cent re-
funding mortgage set aside sl5,ooocQ Of
bonds, the proceeds Of which were TO be
applied TO refunding all the prior lien
bonds, including the matured interest
bonds; that If any surplus remained from
the proceeds Of that Sl5,0o0,oo0 Of bonds,
they went into the next section. allowing
the expenditures Of money for additions
and improvements. They claim, OF they
considered. that under that mortgage
they had capitalized interest on bonds
So when these coupons became due they
set up an account as an asset upon the
books of the company. representing the
amount OF those interest coupons they
paid. and they carried that on the books
Of the company, paying the amount out
Of the proceeds OF these bonds, until some
time In the year ended June 80, 1895. when
they charged the amount to cost Of road
Mr. KellOgg-And capitalized it?
Mr.. Hnliard-WeIl. charging it to the
cost of the road is capitalizing Il.
Mr.. Kellogg-Is it proper for a r. lrOad
company to capitalize its debts or charge
its debts TO assets?
Mr.. Hilliard-Who is going to settle /
whether it is proper or not?
Mr.. Kellogg am asking you as an ex-
pert accountant whether that was "a I
proper entry?
Mr. Hillard-I am not exper, anything I
Mr. kPllOEg-Nou do no. want 20 give
any opinion on it2 Don't shake your 1
head. Answer so the St grapher can I.
take H.
Mr. HHiilrd-No, I would rather you /
formed your own conclusions.
What Really Was Done.
Although this may seem a trlfe intricate F.
to the average reader an analogy may
make it clear. mat transaction was as if |
one bought a store for IS 600. paying $4,000 /
in cash. and giving a mortgage for the |
remainder; then. instea II paving the in
terest on that deferred payment out Of
the earnings Of the business, had charged .
It 20 a separate account, called the fund
ed interest account and then, when I'M
dertaking to sell the store for its actual
cost. had said that it cost $4,000
If the transfer referred to had not been
made to the funded-interest account IN
the first place, the January dividend i'm
mediately following the opening Of the
new account necessarily would have been
reduced TO about / per cent. from ( per
cent, and the June dividend six months
later would have had 10 be passed alto