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Copyright © 2018 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Page 6-1
File: Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows,
and Other Issues
Multiple Choice:
[QUESTION]
1. On January 1, 2018, Riley Corp. acquired some of the outstanding bonds of one of its
subsidiaries. The bonds had a carrying value of $421,620, and Riley paid $401,937 for them.
How should you account for the difference between the carrying value and the purchase price in
the consolidated financial statements for 2018?
A) The difference is added to the carrying value of the debt.
B) The difference is deducted from the carrying value of the debt.
C) The difference is treated as a loss from the extinguishment of the debt.
D) The difference is treated as a gain from the extinguishment of the debt.
E) The difference does not influence the consolidated financial statements.
Answer: D
Learning Objective: 06-03
Topic: Intra-entity debt―Gain or loss for consolidation
Difficulty: 1 Easy
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
[QUESTION]
2. Regency Corp. recently acquired $500,000 of the bonds of Safire Co., one of its subsidiaries,
paying more than the carrying value of the bonds. According to the most practical view of this
intra-entity transaction, to whom should the loss be attributed?
A) To Safire because the bonds were issued by Safire.
B) The loss should be allocated between Safire and Regency based on the purchase price and the
original face value of the debt.
C) The loss should be amortized over the life of the bonds and need not be attributed to either
party.
D) The loss should be deferred until it can be determined to whom the attribution can be made.
E) To Regency because Regency is the controlling party in the business combination.
Answer: E
Topic: Intra-entity debt transactions―General
Difficulty: 1 Easy
Blooms: Understand
[QUESTION]
3. Which one of the following characteristics of preferred stock would make the stock a dilutive
security for purposes of calculating earnings per share?
A) The preferred stock is callable.
B) The preferred stock is convertible.
C) The preferred stock is cumulative.
D) The preferred stock is noncumulative.

Page 6-2
E) The preferred stock is participating.
Answer: B
Topic: EPS―Consolidated diluted EPS
Topic: EPS―EPS of subsidiary by itself
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
4. Where do dividends paid to the noncontrolling interest of a subsidiary appear on a
consolidated statement of cash flows?
A) Cash flows from operating activities.
B) Cash flows from investing activities.
C) Cash flows from financing activities.
D) Supplemental schedule of noncash investing and financing activities.
E) They do not appear in the consolidated statement of cash flows.
Answer: C
Topic: Consolidated statement of cash flows
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
5. Where do dividends paid by a subsidiary to the parent company appear in a consolidated
statement of cash flows?
A) Cash flows from operating activities.
B) Cash flows from investing activities.
C) Cash flows from financing activities.
D) Supplemental schedule of noncash investing and financing activities.
E) They do not appear in the consolidated statement of cash flows.
Answer: E
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
6. Where do intra-entity transfers of inventory appear in a consolidated statement of cash flows?
A) They do not appear in the consolidated statement of cash flows.
B) Supplemental schedule of noncash investing and financing activities.
C) Cash flows from operating activities.
D) Cash flows from investing activities.

Page 6-3
E) Cash flows from financing activities.
Answer: A
Difficulty: 1 Easy
Blooms: Understand
[QUESTION]
7. How do intra-entity transfers of inventory affect the preparation of a consolidated statement of
cash flows?
A) They must be added in calculating cash flows from investing activities.
B) They must be deducted in calculating cash flows from investing activities.
C) They must be added in calculating cash flows from operating activities.
D) Because the consolidated balance sheet and income statement are used in preparing the
consolidated statement of cash flows, no special elimination is required.
E) They must be deducted in calculating cash flows from operating activities.
Answer: D
Difficulty: 1 Easy
Blooms: Understand
[QUESTION]
8. How would consolidated earnings per share be calculated if the subsidiary has no convertible
securities or warrants?
A) Parent's earnings per share plus subsidiary's earnings per share.
B) Parent's net income divided by parent's number of shares outstanding.
C) Consolidated net income divided by parent's number of shares outstanding.
D) Average of parent's earnings per share and subsidiary's earnings per share.
E) Consolidated income divided by total number of shares outstanding for the parent and
subsidiary.
Answer: C
Topic: EPS―Consolidated basic EPS
Difficulty: 1 Easy
Blooms: Remember
REFERENCE: 06-01
On January 1, 2018, Riney Co. owned 80% of the common stock of Garvin Co. On that date,
Garvin's stockholders' equity accounts had the following balances:

Page 6-4
The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling
interest was $138,000. On January 1, 2018, Garvin Co. sold 10,000 shares of previously unissued
common stock for $15 per share. Riney did not acquire any of these shares.
[QUESTION]
REFER TO: 06-01
9. What is the balance in Riney’s “Investment in Garvin Co. Account” following the sale of the
10,000 shares of common stock?
A) $552,000.
B) $560,000.
C) $460,000.
D) $404,000.
E) $672,000.
Answer: B
Topic: Subsidiary stock―New issue-Percentage change
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
Feedback: $250,000 / $5 = 50,000 shares × .80 = 40,000 shares owned by parent
Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15)
$150,000 = Total Equity after Stock Offering $840,000 × 40,000 Parent / 60,000 Total =
$560,000 Parent’s Investment Account
[QUESTION]
REFER TO: 06-01
10. What amount should be attributed to the Noncontrolling Interest in Garvin Co. following the
sale of the 10,000 shares of common stock?
A) $288,000.
B) $101,000.
C) $280,000.
D) $230,000.
E) $168,000.
Answer: C
Blooms: Apply
Feedback: $250,000 / $5 = 50,000 shares × .80 = 40,000 shares owned by parent
Common stock ($5 par value) $ 250,000
Additional paid-in capital 110,000
Retained earnings 330,000
Total stockholders’ equity $ 690,000

Page 6-5
Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15)
$150,000 = Total Equity after Stock Offering $840,000 × 20,000/60,000 = $280,000
Noncontrolling Interest
[QUESTION]
11. Rojas Co. owned 7,000 shares (70%) of the outstanding 10%, $100 par, preferred stock and
60% of the outstanding common stock of Brett Co. Assuming there are no excess amortizations
or intra-entity transactions, and Brett reports net income of $780,000, what is the noncontrolling
interest in the subsidiary's income?
A) $234,000.
B) $273,000.
C) $302,000.
D) $312,000.
E) $284,000.
Answer: C
Topic: Subsidiary preferred stock
Difficulty: 3 Hard
Blooms: Apply
Feedback: $780,000 Net Income – Preferred Dividends (10,000 × $10) = $680,000 × .40 =
$272,000 Noncontrolling Interest
$100,000 Preferred Dividends × .30 = $30,000 Noncontrolling Interest
$272,000 from Income + $30,000 Preferred Dividends = $302,000 Noncontrolling Interest in
Income
REFERENCE: 06-02
Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par
value common stock and 2,000 shares of preferred stock outstanding. Each preferred share
received an annual per share dividend of $2 and is convertible into four shares of common stock.
Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each
of which is convertible into ten shares of common stock. Stoop's annual after-tax interest
expense for the bonds was $2,000. Knight did not own any of Stoop's bonds. There are no
excess amortizations or intra-entity transactions associated with this consolidation. Stoop reported
net income of $300,000 for 2018. Knight has 100,000 shares of common stock outstanding and
reported net income of $400,000 for 2018.
[QUESTION]
REFER TO: 06-02
12. What would Knight Co. report as consolidated basic earnings per share (rounded)?
A) $6.37
B) $6.40
C) $7.00
D) $5.68
E) $6.00
Answer: A
Topic: EPS―Subsidiary earnings for consolidated EPS
Difficulty: 3 Hard

Page 6-6
Blooms: Apply
Feedback: Sub net income (300,000) – preferred divs(4,000) = $296,000 x 80% = 236,800
included in consolidated EPS. Parent net income (400,000)+ portion of sub net income =
(400,000 + 236,800) / 100,000 shares = $6.37
[QUESTION]
REFER TO: 06-02
13. What would Knight Co. report as consolidated diluted earnings per share (rounded)?
A) $4.00.
B) $. 4.71
C) $8.71.
D) $5.89.
E) $6.37.
Answer: D
Topic: EPS―EPS of subsidiary by itself
Difficulty: 3 Hard
Blooms: Apply
Feedback: Sub Net income $300,000 + Interest saved $2,000 (no preferred divs)=
$322,000. New ownership percentage = 40,000 / (50,000 + if-converted preferred shares
8,000 + if-converted bonds 6,000 shares) = 62.5%. Consolidated DEPS = 400,000 +
(62.5% x 302,000) = 588,750/100,000 = $5.89 Knight Co.’s Consolidated Diluted
Earnings per Share
[QUESTION]
14. Campbell Inc. owned all of Gordon Corp. For 2018, Campbell reported net income (without
consideration of its investment in Gordon) of $280,000 while the subsidiary reported $112,000.
There are no excess amortizations associated with this consolidation. The subsidiary had bonds
payable outstanding on January 1, 2018, with a book value of $297,000. The parent acquired the
bonds on that date for $281,000. During 2018, Campbell reported interest income of $31,000
while Gordon reported interest expense of $29,000. What is consolidated net income for 2018?
A) $406,000.
B) $374,000.
C) $378,000.
D) $410,000.
E) $394,000.
Answer: A
Topic: Intra-entity debt―Effect on consolidated balances
Blooms: Apply

Page 6-7
Feedback: Income of the Parent $280,000 + Income of the Sub $112,000 – Difference in
Interest Income over Interest Expense on Intra-Entity Bonds ($31,000 - $29,000) $2,000
+ Gain on Bonds Purchase ($297,000 - $281,000) $16,000 = $406,000 Consolidated Net
Income
[QUESTION]
15. Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on
January 1, 2017, with a book value of $265,000. The parent acquired the bonds on that date for
$288,000. Subsequently, Vontkins reported interest income of $25,000 in 2017 while Quasimota
reported interest expense of $29,000. Consolidated financial statements were prepared for 2018.
What adjustment would be required for the retained earnings balance as of January 1, 2018?
A) Reduction of $27,000.
B) Reduction of $4,000.
C) Reduction of $19,000.
D) Reduction of $30,000.
E) Reduction of $20,000.
Answer: C
Blooms: Apply
Feedback: Bond Acquisition Price $288,000 – Bonds carrying amount $265,000 = $23,000 R/E
Reduction.
Intra-Entity Interest $29,000 - $25,000 = $4,000 R/E Increase
$23,000 - $4,000 = $19,000 R/E Reduction
[QUESTION]
16. Tray Co. reported current earnings of $560,000 while paying $56,000 in cash dividends.
Sparrish Co. earned $140,000 in net income and distributed $14,000 in dividends. Tray held a
70% interest in Sparrish for several years, an investment that it originally acquired by transferring
consideration equal to the book value of the underlying net assets. Tray used the initial value
method to account for these shares.
On January 1, 2018, Sparrish acquired in the open market $70,000 of Tray's 8% bonds. The
bonds had originally been issued several years ago at a price that would yield a 10% effective
interest rate. On the date of the bond purchase, the book value of the bonds payable was $67,600.
Sparrish paid $65,200 based on a 12% effective interest rate over the remaining life of the bonds.
What is the noncontrolling interest's share of the subsidiary's net income?
A) $42,000.
B) $37,800.
C) $39,600.
D) $40,070.
E) $44,080.
Answer: A
Blooms: Apply

Page 6-8
Feedback: Sub’s income $140,000 × .30 = $42,000 NCI’s Portion of Income (gain or loss
is assigned to the parent only)
[QUESTION]
17. A company had common stock with a total par value of $18,000,000 and fair value of
$62,000,000; and 7% preferred stock with a total par value of $6,000,000 and a fair value of
$8,000,000. The book value of the company was $85,000,000. Assuming ninety percent (90%)
of the company’s total equity is acquired, what amount must be attributed to the noncontrolling
interest?
A) $8,500,000.
B) $7,000,000.
C) $6,200,000.
D) $2,400,000.
E) $6,929,400.
Answer: B
Difficulty: 1 Easy
Blooms: Apply
Feedback: FV Common Stock $62,000,000 + FV Preferred Stock $8,000,000 =
$70,000,000 × .10 = $7,000,000 Noncontrolling Interest
[QUESTION]
18. Cadion Co. owned a controlling interest in Knieval Inc. Cadion reported sales of $420,000
during 2018 while Knieval reported $280,000. Inventory costing $28,000 was transferred from
Knieval to Cadion (upstream) during the year for $56,000. Of this amount, twenty-five percent
was still in ending inventory at year's end. Total receivables on the consolidated balance sheet
were $112,000 at the first of the year and $154,000 at year-end. No intra-entity debt existed at
the beginning or ending of the year. Using the direct approach, what is the consolidated amount
of cash collected by the business from its customers?
A) $602,000.
B) $644,000.
C) $686,000.
D) $714,000.
E) $592,000.
Answer: A
Blooms: Apply

Page 6-9
Feedback: Parent’s Sales $420,000 + Sub’s Sales $280,000 – Intra-Entity Sales $56,000 –
increase in A/R $42,000 ($154,000 - $112,000) = $602,000 Consolidated Cash Collected
[QUESTION]
19. Parker owned all of Odom Inc. Although the Investment in Odom Inc. account had a balance
of $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share.
On January 1, 2018, Odom issued 3,000 new shares to the public for $70 per share. How does
this transaction affect the Investment in Odom Inc. account?
A) It should be decreased by $210,000.
B) It should be increased by $210,000.
C) It should be increased by $168,000.
D) It should be decreased by $1,200.
E) It is not affected since the shares were sold to outside parties.
Answer: D
Blooms: Apply
Feedback:
Subsidiary’s unamortized fair value of prior to new share issue
(12,000 × $56) ....................................................... $834,000
Parent's ownership ................................................... 100%
Unamortized subsidiary fair value .......................... $834,000
Subsidiary unamortized fair value after issuing new
shares (above value plus 3,000 shares at $70 each) $1,044,000
Parent's ownership 12,000 ÷ 15,000 shares) ........... 80%
Unamortized subsidiary fair value after stock issue $835,200
Investment in Odom increases by $1,200 ($835,200 less $834,000).
REFERENCE: 06-03
These questions are based on the following information and should be viewed as independent
situations.
Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2016, when Cocker
had the following stockholders' equity accounts.
Common stock — 40,000 shares outstanding $140,000
Additional paid-in capital 105,000
Total stockholders’ equity $721,000
To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition
date fair value over book value being allocated to goodwill, which has been measured for

Page 6-10
impairment annually and has not been determined to be impaired as of January 1, 2019.
Popper did not pay any premium when it acquired its original interest in Cocker. On January 1,
2019, Cocker reported a net book value of $1,113,000 before the following transactions were
conducted. Popper uses the equity method to account for its investment in Cocker, thereby
reflecting the change in book value of Cocker.
[QUESTION]
REFER TO: 06-03
20. On January 1, 2019, Cocker issued 10,000 additional shares of common stock for $35 per
share. Popper acquired 8,000 of these shares. How would this transaction affect the additional
paid-in capital of the parent company?
A) Increase it by $28,700.
B) Increase it by $16,800.
C) $0.
D) Increase it by $280,000.
E) Increase it by $593,600.
Answer: C
Topic: Subsidiary stock―New issue-No percentage change
Difficulty: 1 Easy
Blooms: Apply
Feedback: No Adjustment is made to the APIC of the Parent as a Result of Sub’s Stock
Issue because the same Level of Ownership Interest is Maintained
[QUESTION]
REFER TO: 06-03
21. On January 1, 2019, Cocker issued 10,000 additional shares of common stock for $21 per
share. Popper did not acquire any of this newly issued stock. How would this transaction affect
the additional paid-in capital of the parent company?
A) $0.
B) Decrease it by $23,240.
C) Decrease it by $68,250.
D) Decrease it by $45,060.
E) Decrease it by $64,720.
Answer: E
Blooms: Apply
Feedback:
Consideration transferred ........................................................ $682,000
Noncontrolling interest acquisition-date fair value ............... 170,500
Increase in Sub book value (1,113,000-721,000) ..................... 392,000
Stock issue proceeds................................................................ 210,000

Page 6-11
Subsidiary valuation basis............................................................. 1,454,000
New parent ownership (32,000 shs. ÷ 50,000 shs.) ..................... 64%
Parent’s post-stock issue ownership balance.............................. $930,880
Parent's investment account ($682,000 + [80% × 392,000]) ........ 995,600
Required adjustment —decrease ............................................ $(64,720)
[QUESTION]
REFER TO: 06-03
22. On January 1, 2019, Cocker reacquired 8,000 of the outstanding shares of its own common
stock for $34 per share. None of these shares belonged to Popper. How would this transaction
have affected the additional paid-in capital of the parent company?
A) $0.
B) Decrease it by $32,900.
C) Decrease it by $45,700.
D) Decrease it by $23,100.
E) Decrease it by $50,500.
Answer: D
Topic: Subsidiary stock―Treasury stock acquired
Blooms: Apply
Feedback:
Adjusted acquisition-date fair value ($852,500 + $392,000) .................. $1,244,500
Less Stock repurchase................................................................... $ ( 272,000)
Adjusted fair value after stock repurchase................................... $972,500
New parent ownership (32,000 shs. ÷ 32,000 shs.) ..................... 100%
Fair value equivalency of parent's ownership ........................ $972,500
Parent's investment account ($682,000 + [80% × 392,000]) ........ 995,600
Required adjustment—decrease.............................................. $ (23,100)
[QUESTION]
23. If new bonds are issued from a parent to its subsidiary, which of the following statements is
false?
A) Any premium or discount on bonds payable is exactly offset by a premium or discount on
bond investment.
B) There will be $0 net gain or loss on the bond transaction.
C) Interest expense needs to be eliminated on the consolidated income statement.
D) Interest revenue needs to be eliminated on the consolidated income statement.
E) A net gain or loss on the bond transaction will be reported.
Answer: E
Blooms: Understand

Page 6-12
[QUESTION]
24. The accounting problems encountered in consolidated intra-entity debt transactions when the
debt is acquired by an affiliate from an outside party include all of the following except:
A) Both the investment and debt accounts have to be eliminated now and for each future
consolidated financial statement despite containing differing balances.
B) Subsequent interest revenue/expense must be removed although these balances fail to agree in
amount.
C) A gain or loss must be recognized by both parent and subsidiary companies.
D) Changes in the investment, debt, interest revenue, and interest expense accounts occur
constantly because of the amortization process.
E) The gain or loss on the retirement of the debt must be recognized by the business combination
in the year the debt is acquired, even though this balance does not appear on the financial records
of either company.
Answer: C
Blooms: Understand
[QUESTION]
25. Which of the following statements is true concerning the acquisition of existing debt of a
consolidated affiliate in the year of the debt acquisition?
A) Recognition of any gain or loss is deferred until the debt is extinguished for purposes of
reporting such debt on consolidated financial statements.
B) Any gain or loss is recognized in the year of acquisition on a consolidated income statement.
C) Interest revenue generated from the debt of an affiliate is recognized on a consolidated income
statement.
D) Interest expense recognized from carrying debt instruments is recognized on a consolidated
income statement.
E) Consolidated retained earnings is adjusted to take into account the difference between the
purchase price and carrying value of the debt.
Answer: B
Blooms: Remember
[QUESTION]
26. Which of the following statements is false regarding the assignment of a gain or loss when an
affiliate’s debt instrument is acquired on the open market?
A) Subsidiary net income is not affected by a gain on the debt transaction.
B) Subsidiary net income is not affected by a loss on the debt transaction.
C) Parent Company net income is not affected by a gain on the debt transaction.

Page 6-13
D) Parent Company net income is not affected by a loss on the debt transaction.
E) Consolidated net income is not affected by a gain or loss on the debt transaction.
Answer: E
Blooms: Remember
[QUESTION]
27. What would differ between a statement of cash flows for a consolidated company and an
unconsolidated company using the indirect method?
A) Parent's dividends would be subtracted as a financing activity.
B) Gain on sale of land would be deducted from net income.
C) Noncontrolling interest in net income of subsidiary would be added to net income.
D) Proceeds from the sale of long-term investments would be added to investing activities.
E) Loss on sale of equipment would be added to net income.
Answer: C
Difficulty: 1 Easy
Blooms: Understand
[QUESTION]
28. Which of the following statements is true for a consolidated statement of cash flows?
A) Parent's dividends and subsidiary's dividends are deducted as a financing activity.
B) Only parent's dividends are deducted as a financing activity.
C) Parent's dividends and its share of subsidiary's dividends are deducted as a financing activity.
D) All of parent's dividends and noncontrolling interest of subsidiary's dividends are deducted as
a financing activity.
E) Neither parent's nor subsidiary's dividends are deducted as a financing activity.
Answer: D
Blooms: Remember
[QUESTION]
29. In reporting consolidated earnings per share when there is a wholly owned subsidiary, which
of the following statements is true?
A) Parent company earnings per share equals consolidated earnings per share when the equity
method is used.
B) Parent company earnings per share is equal to consolidated earnings per share when the initial

Page 6-14
value method is used.
C) Parent company earnings per share is equal to consolidated earnings per share when the partial
equity method is used and acquisition-date fair value exceeds book value.
D) Parent company earnings per share is equal to consolidated earnings per share when the partial
equity method is used and acquisition-date fair value is less than book value.
E) Preferred dividends are not deducted from net income for consolidated earnings per share.
Answer: A
Topic: EPS―Consolidated basic EPS
Blooms: Remember
[QUESTION]
30. A subsidiary issues new shares of common stock at an amount below book value. Outsiders
buy all of these shares. Which of the following statements is true?
A) The parent's additional paid-in capital will be increased.
B) The parent's investment in subsidiary will be increased.
C) The parent's retained earnings will be increased.
D) The parent's additional paid-in capital will be decreased.
E) The parent's retained earnings will be decreased.
Answer: D
Blooms: Analyze
AACSB: Analytical Thinking
[QUESTION]
31. A subsidiary issues new shares of common stock. If the parent acquires all of these shares at
an amount greater than book value, which of the following statements is true?
A) The investment in subsidiary will decrease.
B) Additional paid-in capital will decrease.
C) Retained earnings will increase.
D) The investment in subsidiary will increase.
E) No adjustment will be necessary.
Answer: D
Blooms: Analyze
[QUESTION]
32. If a subsidiary re-acquires its outstanding shares from outside ownership for more than the

Page 6-15
noncontrolling interest valuation basis at the date of buying such treasury stock, which of the
following statements is true?
A) Additional paid-in capital on the parent company’s books will decrease.
B) Investment in subsidiary will increase.
C) Treasury stock on the parent's books will increase.
D) Treasury stock on the parent's books will decrease.
E) No adjustment is necessary.
Answer: A
Topic: Subsidiary stock―Treasury stock acquired
Difficulty: 3 Hard
Blooms: Analyze
[QUESTION]
33. If a subsidiary issues a stock dividend, which of the following statements is true?
A) Investment in subsidiary on the parent's books will increase.
B) Investment in subsidiary on the parent's books will decrease.
C) Additional paid-in capital on the parent's books will increase.
D) Additional paid-in capital on the parent's books will decrease.
Answer: E
Topic: Subsidiary stock―Stock dividend issued
Blooms: Analyze
[QUESTION]
34. Stevens Company has had bonds payable of $10,000 outstanding for several years. On
January 1, 2018, when there was an unamortized discount of $2,000 and a remaining life of 5
years, its 80% owned subsidiary, Matthews Company, purchased the bonds in the open market
for $11,000. The bonds pay 6% interest annually on December 31. The companies use the
straight-line method to amortize interest revenue and expense. Compute the consolidated gain or
loss on a consolidated income statement for 2018.
A) $1,000 gain.
B) $1,000 loss.
C) $2,000 loss.
D) $3,000 loss.
E) $3,000 gain.
Answer: D
Difficulty: 1 Easy
Blooms: Apply

Page 6-16
Feedback: Bonds Purchase Price $11,000 – Bonds carrying amount ($10,000 - $2,000) =
$3,000 Loss to Consolidation Income
[QUESTION]
35. Keenan Company has had bonds payable of $20,000 outstanding for several years. On
January 1, 2018, there was an unamortized premium of $2,000 with a remaining life of 10 years,
Keenan's parent, Ross, Inc., purchased the bonds in the open market for $19,000. Keenan is a
90% owned subsidiary of Ross. The bonds pay 8% interest annually on December 31. The
companies use the straight-line method to amortize interest revenue and expense. Compute the
consolidated gain or loss on a consolidated income statement for 2018.
A) $3,000 gain.
B) $3,000 loss.
C) $1,000 gain.
D) $1,000 loss.
E) $2,000 gain.
Answer: A
Difficulty: 1 Easy
Blooms: Apply
Feedback: Bonds Purchase Price $19,000 – Bonds carrying amount ($20,000 + $2,000) =
$3,000 Gain to Consolidation Income
REFERENCE: 06-04
On January 1, 2018, Nichols Company acquired 80% of Smith Company's common stock and
40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was
$1,200,000 for the common and $124,000 for the preferred. There was no premium in the value
of consideration transferred. Any excess acquisition-date fair value over book value is considered
goodwill. The capital structure of Smith immediately prior to the acquisition is:
[QUESTION]
REFER TO: 06-04
36. With respect to Nichols’ investment in Smith, determine the amount to be recorded and
identify which account should be adjusted to reflect such amount.
A) $1,324,000 for Investment in Smith.
B) $1,200,000 for Investment in Smith.
C) $1,200,000 for Investment in Smith’s Common Stock and $124,000 for Investment in Smith’s
Common stock, $10 par value (50,000 shares outstanding) $500,000
Preferred stock, 6% cumulative, $100 par value,
3,000 shares outstanding 300,000
Additional paid in capital 200,000
Total stockholders’ equity $1,500,000

Page 6-17
Preferred Stock.
D) $1,200,000 for Investment in Smith’s Common Stock and $120,000 for Investment in Smith’s
Preferred Stock.
E) $1,448,000 for Investment in Smith’s Common Stock.
Answer: C
Blooms: Apply
Feedback: FV of Consideration Recorded for Each Class of Stock in the Investment
Account
[QUESTION]
REFER TO: 06-04
37. Compute the goodwill recognized in consolidation.
A) $ 800,000.
B) $ 310,000.
C) $ 124,000.
D) $ 0.
E) $(196,000.)
Answer: B
Blooms: Apply
Feedback: 100% acquisition-date fair value: 100% Common Stock ($1,200,000 / .80 =
$1,500,000) + 100% Preferred Stock ($124,000 / .40 = $310,000): Total acquisition-date
fair value $1,500,000 + $310,000 = FV $1,810,000 – BV $1,500,000 = $310,000
Goodwill
[QUESTION]
REFER TO: 06-04
38. Compute the noncontrolling interest in Smith at date of acquisition.
A) $486,000.
B) $480,000.
C) $300,000.
D) $150,000.
E) $120,000.
Answer: A
Blooms: Apply

Page 6-18
Feedback: Common Stock Noncontrolling Interest at Acquisition = $1,200,000 / .80 = $1,500,000
× .20 = $300,000
Preferred Stock Noncontrolling Interest at Acquisition = $124,000 / .40 = $310,000 × .60 =
$186,000
$300,000 + $186,000 = $486,000 Noncontrolling Interest at Acquisition Date
[QUESTION]
REFER TO: 06-04
39. The consolidation entry at date of acquisition will include (referring to Smith):
A) Debit Common stock $500,000 and debit Preferred stock $120,000.
B) Debit Common stock $400,000 and debit Additional paid-in capital $160,000.
C) Debit Common stock $500,000 and debit Preferred stock $300,000.
D) Debit Common stock $500,000, debit Preferred stock $120,000, and debit Additional paid-in
capital $200,000.
E) Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in
capital $200,000, and debit Retained earnings $500,000.
Answer: C
Blooms: Apply
Feedback: BV is Debited in Consolidation Entry for Acquisition-Date Preparation of
Consolidated Balance Sheet
[QUESTION]
REFER TO: 06-04
40. If Smith’s net income is $100,000 in the year following the acquisition,
A) The portion allocated to the common stock (residual amount) is $92,800.
B) $10,800 preferred stock dividend will be subtracted from net income attributed to common
stock in arriving at noncontrolling interest in consolidated income.
C) The noncontrolling interest in consolidated net income is $27,200.
D) The preferred stock dividend will be ignored in noncontrolling interest in consolidated net
income because Nichols owns the noncontrolling interest of preferred stock.
E) The noncontrolling interest in consolidated net income is $30,800.
Answer: C
Difficulty: 3 Hard
Blooms: Apply
Feedback: $100,000 – Preferred Dividends ($6 × 3,000) $18,000 = $82,000 × .20 = $16,400
Income to NCI
Preferred Dividends $18,000 × .60 = $10,800 to NCI
$16,400 Income + $10,800 Preferred Dividends = $27,200 Income to NCI

Page 6-19
REFERENCE: 06-05
The following information has been taken from the consolidation worksheet of Graham Company
and its 80% owned subsidiary, Stage Company.
(1.) Graham reports a loss on sale of land (to an outside party) of $5,000. The land cost Graham
$20,000.
(2.) Noncontrolling interest in Stage's net income was $30,000.
(3.) Graham paid dividends of $15,000.
(4.) Stage paid dividends of $10,000.
(5.) Excess acquisition-date fair value over book value amortization was $6,000.
(6.) Consolidated accounts receivable decreased by $8,000.
(7.) Consolidated accounts payable decreased by $7,000.
[QUESTION]
REFER TO: 06-05
41. How is the loss on sale of land reported on the consolidated statement of cash flows?
A) $20,000 added to net income as an operating activity.
B) $20,000 deducted from net income as an operating activity.
C) $15,000 deducted from net income as an operating activity.
D) $5,000 added to net income as an operating activity.
E) $5,000 deducted from net income as an operating activity.
Answer: D
Blooms: Analyze
Feedback: Land Sale of $5,000 Reduces Net Income as Operating Activity in Cash Flows
[QUESTION]
REFER TO: 06-05
42. Where does the noncontrolling interest in Stage's net income appear on a consolidated
statement of cash flows?
A) $30,000 added to net income as an operating activity on the consolidated statement of cash
flows.
B) $30,000 deducted from net income as an operating activity on the consolidated statement of
cash flows.
C) $30,000 increase as an investing activity on the consolidated statement of cash flows.
D) $30,000 decrease as an investing activity on the consolidated statement of cash flows.
E) Noncontrolling interest in Stage's net income does not appear on a consolidated statement of
cash flows.
Answer: E
Blooms: Apply

Page 6-20
Feedback: NCI’s Income is NOT Reported on Consolidated Cash Flows
[QUESTION]
REFER TO: 06-05
43. How will dividends be reported in consolidated statement of cash flows?
A) $15,000 decrease as a financing activity.
B) $25,000 decrease as a financing activity.
C) $10,000 decrease as a financing activity.
D) $23,000 decrease as a financing activity.
E) $17,000 decrease as a financing activity.
Answer: E
Blooms: Analyze
Feedback: Parent’s Dividends $15,000 + NCI Dividends $2,000 = $17,000 Decrease in
Cash Flow for Financing
[QUESTION]
REFER TO: 06-05
44. How is the amount of excess acquisition-date fair value over book value recognized in a
consolidated statement of cash flows assuming the indirect method is used?
A) It is ignored.
B) $6,000 subtracted from net income.
C) $4,800 subtracted from net income.
D) $6,000 added to net income.
E) $4,800 added to net income.
Answer: D
Blooms: Analyze
Feedback: $6,000 Excess Amortization is not a Cash Item and therefore Added Back to
Net Income on the Cash Flow Statement
[QUESTION]
REFER TO: 06-05
45. Using the indirect method, where does the decrease in accounts receivable appear in a
A) $8,000 increase to net income as an operating activity.
B) $8,000 decrease to net income as an operating activity.
C) $6,400 increase to net income as an operating activity.
D) $6,400 decrease to net income as an operating activity.
E) $8,000 increase as an investing activity.

Page 6-21
Answer: A
Difficulty: 1 Easy
Blooms: Analyze
Feedback: The $8,000 Receivables Decrease is Added to Net Income and Classified as an
Operating Item
[QUESTION]
REFER TO: 06-05
46. Using the indirect method, where does the decrease in accounts payable appear in a
A) $7,000 increase to net income as an operating activity.
B) $7,000 decrease to net income as an operating activity.
C) $5,600 increase to net income as an operating activity.
D) $5,600 decrease to net income as an operating activity.
E) $7,000 increase as a financing activity.
Answer: B
Difficulty: 1 Easy
Blooms: Analyze
Feedback: The $7,000 Payables Decrease is Added to Net Income and Classified as an
Operating Item
REFERENCE: 06-06
Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones
was $1,000,000. There was no premium paid by Webb. Jones currently has 100,000 shares
outstanding and a book value of $1,200,000.
Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for
$10 per share.
[QUESTION]
REFER TO: 06-06
47. What is the adjusted book value of Jones after the sale of the shares?
A) $ 200,000.
B) $1,400,000.
C) $1,280,000.
D) $1,050,000.
E) $1,440,000.
Answer: B

Page 6-22
Difficulty: 1 Easy
Blooms: Apply
Feedback: Beginning carrying amount $1,200,000 + Add’l Shares Sold $200,000 ($10 ×
20,000) = $1,400,000 Current carrying amount
[QUESTION]
REFER TO: 06-06
48. What is the new percent ownership of Webb in Jones after the stock issuance?
A) 75%.
B) 90%.
C) 80%.
D) 64%.
E) 60%.
Answer: A
Blooms: Apply
Feedback: Shares Outstanding 100,000 × .90 = 90,000 Parent’s Shares
100,000 + 20,000 = 120,000 New Outstanding Shares
90,000 / 120,000 = 75% New Ownership Percentage
[QUESTION]
REFER TO: 06-06
49. What adjustment is needed for Webb's investment in Jones account?
A) $180,000 increase.
B) $180,000 decrease.
C) $ 45,000 decrease.
D) $ 45,000 increase.
Answer: D
Blooms: Apply
Feedback:
Adjusted acquisition-date sub. fair value

Page 6-23
Increase in Stamford book value.............................................. 200,000
New parent ownership (90,000 shs. ÷ 120,000 shs.) ................... 75%
Parent’s post-stock issue ownership balance.............................. $1,125,000
Parent's investment account ($990,000 + [90% × 200,000]) ........ 1,170,000
Required adjustment —increase ............................................. $45,000
REFERENCE: 06-07
Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones
was $1,000,000. There was no premium paid by Webb. Jones currently has 100,000 shares
outstanding and a book value of $1,200,000.
Assume Jones issues 20,000 new shares of its common stock for $15 per share.
[QUESTION]
REFER TO: 06-07
50. What is the adjusted book value of Jones after the stock issuance?
A) $1,500,000.
B) $1,200,000.
C) $1,350,000.
D) $1,080,000.
E) $1,335,000.
Answer: A
Difficulty: 1 Easy
Blooms: Apply
Feedback: Beginning BV $1,200,000 + Add’l Shares Sold $300,000 ($15 × 20,000) =
$1,500,000 Current BV
[QUESTION]
REFER TO: 06-07
51. After acquiring the additional shares, what adjustment is needed for Webb's investment in
Jones account?
C) $ 30,000 increase.
D) $ 30,000 decrease.
Answer: D
Topic: Subsidiary stock―New issue-No percentage change
Blooms: Apply

Page 6-24
Feedback:
New parent ownership (90,000 shs. ÷ 120,000 shs.) ................... 75%
Parent’s post-stock issue ownership balance.............................. $1,200,000
Parent's investment account ($990,000 + [90% × 200,000]) ........ 1,170,000
Required adjustment — increase ............................................ $30,000
REFERENCE: 06-08
Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was
$300,000. Ryan paid no premium. Chase has 50,000 shares outstanding and currently has a book
value of $400,000.
Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share.
[QUESTION]
REFER TO: 06-08
52. What is the new percent ownership Ryan owns in Chase?
A) 80.0%.
B) 87.5%.
C) 90.0%.
D) 75.0%.
E) 82.5%.
Answer: B
Topic: Subsidiary Stock Transactions
Blooms: Apply
Feedback: Shares Outstanding 50,000 × .80 = 40,000 Parent’s Shares
50,000 + 30,000 = 80,000 New Outstanding Shares
40,000 + 30,000 = 70,000 Parent’s Shares after New Issue
70,000 / 80,000 = 87.5% New Ownership Percentage
[QUESTION]
REFER TO: 06-08
53. What is the adjusted book value of Chase Company after the issuance of the shares?
A) $608,000.
B) $720,000.
C) $680,000.
D) $760,000.
E) $400,000.
Answer: D

Page 6-25
Difficulty: 1 Easy
Blooms: Apply
Feedback: Beginning carrying amount $400,000 + Additional Shares Sold $360,000 ($12
× 30,000) = $760,000 Current carrying amount
[QUESTION]
REFER TO: 06-08
54. After acquiring the additional shares, what adjustment is needed for Ryan's investment in
Chase account?
C) $12,188 decrease.
D) $12,188 increase.
Answer: D
Blooms: Apply
Feedback:
Subsidiary valuation basis............................................................. 797,500
New parent ownership (90,000 shs. ÷ 120,000 shs.) ................... 87.5%
Parent’s post-stock issue ownership balance.............................. $697,813
Parent's investment account
($270,000 + [80% × 100,000]+360,000) .......................... 710,000
Required adjustment —increase ............................................. $12,188
REFERENCE: 06-09
Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was
$300,000. Ryan paid no premium. Chase has 50,000 shares outstanding and currently has a book
value of $400,000.
Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share.
[QUESTION]
REFER TO: 06-09
55. What should the adjusted book value of Chase be after the treasury shares were purchased?
A) $400,000.
B) $480,000.

Page 6-26
C) $320,000.
D) $336,000.
E) $464,000.
Answer: C
Difficulty: 1 Easy
Blooms: Apply
Feedback: Sub carrying amount before Stock Repurchase $400,000 – Stock Repurchase
$80,000 (8,000 × $10) = Sub carrying amount after Stock Repurchase $320,000
[QUESTION]
REFER TO: 06-09
56. What is Ryan's percent ownership in Chase after the acquisition of the treasury shares
(rounded)?
A) 80%.
B) 95%.
C) 64%.
D) 76%.
E) 69%.
Answer: B
Blooms: Apply
Feedback: Shares Outstanding 50,000 × .80 = 40,000 Parent’s Shares before Treasury Purchase
50,000 - 8,000 = 42,000 New Outstanding Shares after Treasury Purchase
40,000 / 42,000 = 95% New Ownership Percentage
[QUESTION]
REFER TO: 06-09
57. When Ryan’s new percent ownership is rounded to a whole number, what adjustment is
needed for Ryan's investment in Chase account?
A) $16,000 decrease.
C) $46,000 increase.
D) $46,000 decrease.
Answer: A
Blooms: Apply

Page 6-27
Feedback: Investment balance = 270,000 + (80% x 100,000 increase in book value) =
350,000. Adjusted sub value = (400,000 – 80,000) = 320,000. 320,000 x new ownership
percentage 95% = 304,000. 350,000 – 304,000 = 46,000 decrease in investment account
[QUESTION]
58. A variable interest entity can take all of the following forms except a(n):
A) Trust.
B) Partnership.
C) Joint venture.
D) Corporation.
E) Estate.
Answer: E
Topic: VIE―Characteristics
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
59. All of the following are examples of variable interests except:
A) Guarantees of debt.
B) Stock options.
C) Lease residual value guarantees.
D) Participation rights.
E) Asset purchase options.
Answer: B
Blooms: Remember
[QUESTION]
60. Which of the following is not a potential loss or return of a variable interest entity?
A) Entitles holder to residual profits.
B) Entitles holder to benefit from increases in asset fair value.
C) Entitles holder to receive shares of common stock.
D) If the variable interest entity cannot repay liabilities, honoring a debt guarantee will produce a
loss.
E) If leased asset declines below the residual value, honoring the guarantee will produce a loss.
Answer: C
Blooms: Understand

Page 6-28
[QUESTION]
61. Which of the following characteristics is not indicative of an enterprise qualifying as a
primary beneficiary with a controlling financial interest in a variable interest entity?
A) The power to direct the most significant economic performance activities.
B) The power through voting or similar rights to direct activities, which significantly impact
economic performance.
C) The obligation to absorb potentially significant losses of the entity.
D) No ability to make decisions about the entity's activities.
E) The right to receive potentially significant benefits of the entity.
Answer: D
Topic: VIE―Primary beneficiary
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
62. Which of the following statements is false concerning variable interest entities (VIEs)?
A) Sometimes VIEs do not have independent management.
B) Most VIEs are established for valid business purposes.
C) VIEs may be formed as a source of low-cost financing.
D) VIEs have little need for voting stock.
E) A VIE cannot take the legal form of a partnership or corporation.
Answer: E
Blooms: Remember
[QUESTION]
63. Which of the following statements is true concerning variable interest entities (VIEs)?
(1.) The role of the VIE equity investors can be fairly minor.
(2.) A VIE may be created specifically to benefit the business enterprise that established it with
low-cost financing.
(3.) VIE governing agreements often limit activities and decision-making.
(4.) VIEs usually have a well-defined and limited business activity.
A) 2 and 4.
B) 2, 3, and 4.
C) 1, 2, and 4.
D) 1, 2, and 3.
E) 1, 2, 3, and 4.

Page 6-29
Answer: E
Difficulty: 1 Easy
Blooms: Remember
[QUESTION]
64. Which of the following is not a factor that indicates a business enterprise that establishes a
variable interest entity (VIE) should consolidate such VIE with its own financial statements?
A) The business enterprise establishing a VIE has the obligation to absorb potentially significant
losses of the VIE.
B) The business enterprise establishing a VIE receives risks and rewards of the VIE in proportion
to equity ownership.
C) The business enterprise establishing a VIE has the right to receive potentially significant
benefits of the VIE.
D) The business enterprise establishing a VIE has power through voting rights to direct the
entity's activities that significantly impact economic performance.
E) The business enterprise establishing a VIE is a primary beneficiary for the VIE.
Answer: B
Topic: VIE―When consolidation required
Blooms: Remember
[QUESTION]
65. A parent acquires all of a subsidiary’s common stock and 60 percent of its preferred stock.
The preferred stock has a cumulative dividend. No dividends are in arrears. How is the
noncontrolling interest in the subsidiary’s net income assigned?
A) The noncontrolling interest in consolidated net income is assigned as 40 percent of the value
of the preferred stock, based on an allocation between common stock and preferred stock.
B) There is no allocation to the noncontrolling interest because the parent owns 100% of the
common stock and net income belongs to the controlling interest.
C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the
preferred stock dividends.
D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the
subsidiary’s income before preferred stock dividends.
E) The noncontrolling interest in consolidated net income is assigned as 40 percent of the
subsidiary’s income after subtracting preferred stock dividends.
Answer: C
Blooms: Analyze

Page 6-30
[QUESTION]
66. A parent acquires 70% of a subsidiary’s common stock and 60 percent of its preferred stock.
The preferred stock is noncumulative. The current year’s dividend was paid. How is the
noncontrolling interest in the subsidiary’s net income assigned?
A) The noncontrolling interest in consolidated net income is assigned as 40 percent of the value
of the preferred stock, based on an allocation between common stock and preferred stock and
their relative par values.
B) There is no allocation to the noncontrolling interest because there are no dividends in arrears.
C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the
preferred stock dividends.
D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the
preferred stock dividends plus 30% of the subsidiary’s income after subtracting all preferred
stock dividends.
E) The noncontrolling interest in consolidated net income is assigned as 30 percent of the
subsidiary’s income after subtracting 60% of preferred stock dividends.
Answer: D
Blooms: Analyze
[QUESTION]
67. Wolff Corporation owns 70 percent of the outstanding stock of Donald, Inc. During the
current year, Donald made $75,000 in sales to Wolff. How does this transfer affect the
A) Included as a decrease in the investing section.
B) Included as an increase in the operating section.
C) Included as a decrease in the operating section.
D) Included as an increase in the investing section.
E) Not reported in the consolidated statement of cash flows.
Answer: E
Difficulty: 1 Easy
Blooms: Analyze
[QUESTION]
68. MacDonald, Inc. owns 80 percent of the outstanding stock of Stahl Corporation. During the
current year, Stahl made $125,000 in sales to MacDonald. How does this transfer affect the
A) Include 80 percent as a decrease in the investing section.
B) Include 100 percent as a decrease in the investing section.
C) Include 80 percent as a decrease in the operating section.

Other documents randomly have
different content

conditions. If the House of Commons tries again the experiment of
the Long Parliament, and by force or subterfuge abrogates the
second chamber, it will be largely due to the House of Lords refusing
changes in its mode of action. An Upper House which elected a
legislative committee, like the election of Scotch and Irish Peers,
would be in a far stronger position. The House of Commons at
present is too much like an elephant picking up pins; and if the
public become so much disgusted with its incapacity for business
that at some crisis they throw the reins of power to an able man like
Kitchener, it will be largely due to the fossilisation of the Rules of
Procedure. A Lower House which allotted its time strictly according
to the value of its votes of supply, or of the interests involved—which
registered its decisions instantly, as by the electric signals which are
now found in every hotel, and which employed diagrams in debate
by means of the lantern and screen which are now found in every
school—would stand a better chance of coping with its business in a
creditable manner. The fault of violent change, and all its damaging
consequences, rests in the first place on those who resist gradual
change.
It is therefore needful to leave the way open for gradual
changes. In every new law, the changes of circumstance which are
likely to arise should be anticipated, by leaving the way open for
them to begin to act gently and gradually. The principle of fixed fines
(based on income tax), regardless of any reflection on character, for
various infractions of a civil law (or even of some criminal laws)
should be always open, so that, as necessities arise, the prevalence
of such fines would call attention to the need of some change. An
excellent system has been found in allowing a department a large
latitude in interpreting a law, or a dispensing power in administering
it; and this system might well be extended so far as it was not
seriously abused by favouritism. Another mode of change is to
permit a variety of types in different places, as in local
administration, and then allow a large latitude for the adoption of
any type found to work well in another place. This is partly reached
by varying bye-laws; but this might well be extended higher in the

scale, and with local liberty to adopt any bye-law already sanctioned
elsewhere. The ways would thus be open for gradual movements,
which could extend until they produced such pressure on the larger
and more organic laws as to cause a serious legislative step.
We will now turn to observe the far-reaching actual and probable
effects of various laws, which at first might seem quite inadequate to
cause such changes. Some years have passed since the graduation
of death-duties, and we can begin to see the effects. The simple
action of a tax, without any compulsion, has produced a profound
change in a family system which centuries or thousands of years had
left unaltered. The notorious clinging to power and money among
the aged, has given way before the screw of the State. The custom
which left the control of large estates to men generally between fifty
and eighty years of age, and hampered their development by the
dying hand, has largely yielded to the Indian custom, of the division
of property among sons on their marriage or entry on public life. It is
becoming habitual for a father to establish his sons with the family
property, and only to retain such a portion of the estate as he may
wish to fill his declining activities. This is a very beneficial change,
though by no means a grateful one to the Exchequer which has
brought it about. In lesser properties the same action occurs; a
father will buy an annuity for himself, and distribute the remaining
capital, each son being at liberty either to place his portion at
compound interest, so as to replace at the probable date of his
father's death the full amount which he would have received
otherwise, or else to trust to replacing the amount when he may be
at his most remunerative age.
Not only is this a great social change, with far-reaching
consequences in the management of property, but it will also act in
other lines. When a man deals with his property in the unchecked
privacy of a will, he can neglect the pressure of personality of his
children in favour of the sentiment of leaving a powerful family name
in perpetuity. But primogeniture must more or less succumb before
the obvious personal claims of those who are joining in the daily life.
It requires not only a flinty heart but also a brazen face, to leave

younger sons penniless when personally distributing the means of
ensuring the happiness and the amenities of life. Hence it is
probable that estates will be much more sub-divided, and sons
encouraged to continue to live on corners of the paternal acres. In
short it will be a step toward the French infinitesimal splitting of
property.
This again will act in a fundamental manner on our colonising
ability. Primogeniture has made us a colonising race; no system is so
perfect for ensuring a supply of fit colonists. When each wealthy
house in the land educated two or three sturdy sons, with every
benefit of health and knowledge, and then sent them out to form
new centres, with a small capital to start with, and a reserve of help
at home for any dire emergencies, the most perfect colonising
machine had been evolved. Without these conditions England could
never have filled other continents as she has. When sons stay at
home on portions of the old estate, and have not enough wealth for
the high training of their families, all this colonising power will be at
an end. France cannot colonise because her domestic system does
not produce this type of man, fitted in person and in condition to
take up such a life. Our high death-duties are a certain way to stop
educated colonisation.
Another change is also seen resulting from these duties.
England, more than other lands, was rich in private treasure houses
of precious things—pictures, statuary, libraries, and other collections.
These represented a large amount of capital locked up, but it yielded
a rich interest in the home education of the upper classes, in
redeeming them from the dull, unimaginative, coarse, or sordid lives
of wealthy classes in some other lands. So long as a duty only equal
to a few months' or a year's interest was levied, the succession was
not too burdensome, and the state reaped a steady small return. But
when the possession of such means of amenity involves at each
generation a crushing tax on the productive part of an estate, they
must be sacrificed. The collections are vanishing to other lands,
where such short-sighted policy is unknown, and England will be left
bare. A far more profitable policy would have been to exempt all

artistic or historical collections from death-duties, if they were
thrown open to the public for a certain number of days in each year.
They would thus have become partly public museums, provided free
of all cost to the surrounding districts.
Another serious consideration is that 10 or 15 per cent., or even
20 per cent. in case of bequests for public purposes, is taken off
accumulated national capital and thrown into yearly income. The
estate duty is incessantly eating up the national reserves, and using
them for current expenses. We should call any family which did this
shameless spendthrifts, yet this is the immoral fashion of our
taxation.
The effect of income tax is one of the most serious economic
subjects, because it directly touches the production of wealth. There
is little objection to income tax for emergencies of war, because if
merely nominal (1d. in the pound) during peace, the true amount
taxable will be well known, and a sudden increase will be truly
collected and will not have distinct economic effects if only used for
a year or two. But treating direct tax on incomes as a large source of
revenue has very important effects on a commercial nation. A tax as
high as 1s. in the pound is practically a tax on all English enterprise
as compared with foreign. If a mill can be run at Calais to produce
non-dutiable articles, free of income tax on its dividends, while a mill
at Dover pays 5 per cent. tax on its dividends, that constitutes a
discrimination of 5 per cent. against the English manufacturer's
capital. The outcome of the whole is that all shares of English
companies will stand permanently at 5 per cent. lower value than
the shares of foreign companies. Or in other words £4 interest will
have to be paid by an English company for £95 raised by debenture,
while the foreign company will raise £100 for the same interest. The
immediate result is that investments will increasingly be made in
foreign governments and companies, whose dividends are payable
abroad, instead of in London. This is not merely an evasion of tax,
but it is perfectly legal if the dividends are spent abroad. No one
need pay tax on any cost of foreign travel or residence if they draw
the money from foreign sources, and do not let it be trapped in

London. Thus there will be an ever increasing demand for purely
foreign investment, according to the amount of tax on the
investments in England. If the proposal was carried out to tax all
investments much higher as "unearned income," it would cripple all
English manufacture for lack of the capital, which would be driven
abroad to escape the tax. It might be thought that other
governments will come into line, and tax equally with ours; but if
they see their own commercial advantage they will be very loth to
put this bar on English capital flowing into their land to gain
freedom. Even if France and Germany did as we do, it might be well
worth while for Monaco to become the financial centre of Europe by
having no income tax on companies centred there. The recent De
Beers decision illustrates this very clearly. A company with its work
abroad, and its investors largely abroad, is taxed on all its income
because it uses a few square yards of space in London as an office.
Obviously it will not remain. London will no longer be the centre of
commercial work of the world if 5 per cent. or perhaps 10 per cent.
is the price to be paid by all who use it. No company will remain in
England that is not fixed by its works being here, and all those who
are fixed here will work at a permanent disadvantage compared to
the foreigner. It is doubtless thought that the large income yielded
by the interest on the national debt is a safe and easy subject of
taxation; Italy indeed raises 20 per cent. income tax on its debt
interest. But this tax is purely nominal, as it is discounted in the
price of stock, and such a government is merely paying with the left
hand what it takes with the right. The case is seen clearly in Italian
stock which stands at 20 per cent. lower value than it otherwise
would; that is to say, that Italy pays say £4 for the loan of £80 now,
instead of for the loan of £100 which it would receive if this tax was
not imposed. The same is equally true of the tax as applied to
government salaries; it cannot be evaded, and therefore it is merely
a diminution of the salary, or a depreciation of the quality of men
obtained for the nominal salary. A government cannot tax its own
payments by any financial jugglery. Of course a government can
cheat like a private person; promise a certain payment, and then
break its word, and pay less by a tax. But that is only a transient

profit raised by the sale of its character, and is not a permanent
bargain.
Another effect of income tax will be seen if the proposed higher
grading of incomes is carried out. The same changes that we have
traced owing to the death duties will be produced by the life duties.
Property will be sub-divided wherever possible. Every child will have
a trust created for its benefit, every member of a family will have a
separate income, every large estate will be nominally the property of
a group of independent persons—a family club. This will tend, like
the death duties, toward equal shares, instead of the parent hive
system of primogeniture; and it likewise marks the end of educated
colonising. The effect of this may be good for family life, but it will
be disastrous commercially. There will no longer be the large
capitalists who can take the risks of great enterprises. To raise a
large floating capital for great undertakings will require the co-
operation of so many small capitalists, that it will not be worth while
for any one investor to give time to the affair. The lack of personal
concern and interest, and the cost of dealing with widely collected
capital, will all be a detriment to enterprises of large extent.
But the most disastrous as well as immoral kind of taxation will
be that proposed as additional upon all permanent investments,
under the guise of "unearned income." It is a fatally easy screw for a
government to put on; but the effect of it will be to penalise all
British manufacture in competition with foreign productions. All that
we have noticed about the effect of a 5 per cent. tax will apply far
more rapidly and decisively if a 10 per cent. tax should be put on.
Shippers would sail under another flag and transfer their offices of
registration; manufacturers would pass to a tax-free country; and a
larger proportion of persons living on fixed income would spend it
abroad. Beside the material disadvantages of such high taxation on
enterprise, it would be a grave moral detriment.
It is too often forgotten that in taxation the government wields
one of the greatest means of moral education. What does it say now
by its taxation? Suppose a man to have saved £100, and to consider

whether he will spend it on unremunerative pleasures, or on useful
public works. The government says, "If you will spend your money
on waste and luxury, paying for useless and monstrous rooms,
making men stand idle in your hall, or decorate your extravagant
food; if you will make women waste their eyes and lives on a fresh
absurdity of fashion, or sell their souls; or if you will pay boys to
become ne'er-do-weels on golf-links—in short if you will do as much
mischief as possible, we will take 5 per cent. of your money. But if
you spend it on benefiting the world, improving cultivation, building
railways, opening the waste places and making them blossom, we
will take 18 per cent., and leave you only £82 out of your £100."
That is to say 5 per cent. on the original earning of the capital, 5 per
cent. tax on investment income, and 10 per cent. on death duties,
as estimated on large capital by the Income Tax Commission, 1906.
And if the proposed higher taxing of so-called "unearned income"
were carried out, this government claim would rise to 23 per cent. or
even higher. In all reason, after money when earned has paid its tax
of 5 per cent. it should be free of all further claims, at least if
employed for public utility, and there should be no tax on dividends
whatever, nor any death duties on savings; all such taxation falls
eventually on the capital of the useful undertakings, and directly
cripples the industry of the country.
The only way to escape the deadly effects of income tax upon
home manufactures and produce would be to lay a countervailing
duty on all imports, and a bounty on all exports. Then, and only
then, would the manufacturer or farmer here be on exactly the same
footing as one abroad. Then, and only then, would free trade be
really carried out. So long as taxes fall on home production or home
capital, which do not fall similarly abroad, so long free trade cannot
exist.
Another highly immoral view of taxation is that of "plucking the
goose so that it feels it least." Such a maxim was appropriate and
excellent for an opportunist minister of an autocratic sovereign. But
the first necessity for the political health of a democracy is that the
individual shall feel every tax; such is the only way to prevent the

squandering of public money by the votes of ignorant taxpayers. It
would be very wholesome if the national expenditure was presented
as a series of personal bills, showing how much was spent on each
department by an average £50, or £100, or £200 householder. He
would then be as much ashamed of the smallness of some items as
of the largeness of others.
What is needed in place of the tax upon industry is a tax upon
extravagance. We are accustomed to taxes which far exceed the
prime cost upon tobacco and alcohol; and other luxuries should also
be similarly taxed. If instead of taxing income (which is often
requisite for reasonable living, or else usefully spent on
improvements of the world), we had the luxuries taxed, the only
people to complain (if the change were gradual) would be those who
wasted instead of using their income. Let all ostentation be taxed
very heavily, spacious rooms, large numbers of servants, costly food,
motor cars (not professionally needed), entrance money for
amusements, and tailors' and milliners' bills; and then a much
smaller amount of such extravagance will equally bespeak wealth,
and gain as much social consideration as at present. Such would be
a moral taxation in place of the present wholly immoral and
indefensible system of taxing industry and leaving waste unchecked.
We will now look to other eventual results of small continual
action. The effect of transferring little by little the property in Irish
land to the present occupiers has not been sufficiently noticed. For
the present generation such a transference was merry enough to the
tenant. But when he sells to another tenant what is to happen? Will
a future tenant enter and gradually expropriate the present tenant,
by treating him as a landlord? Certainly the present tenant will not
be so foolish as to be thus trapped, he will demand money on the
nail. How then is the future tenant to get his capital to buy the land?
In most cases he will have to get it by borrowing on mortgage. And
if the government is not prepared to always keep open a loan office
for every incoming tenant to the end of time, a loan society or
company must be his resort. Then if he should not pay this rent to
the distant intangible society, his mortgage will be foreclosed. In

place of a body of landlords, and landlords' agents who could always
be personally approached, Ireland will fall into the hands of a
landlordism of distant money-lenders without souls or feelings, and
whom neither blandishments nor bullets can affect.
The remedy for land difficulties and various ills, that has been so
often proposed, namely the State ownership of the land, is by no
means promising. The greatest objection that can be flung at a
landlord is that he is an absentee. No amount of agency, no
excellence in the subordinate, is thought to compensate for the
personal interest, the personal influence and care, of a good
conscientious landlord spending his life among his tenants. Yet the
State ownership would be worse than any absentee landlord. The
agent would be that of an impersonal government, and responsible
to nobody so long as he fulfilled a certain set of hard rules. He would
have no personality more or less pliable behind him, but would
blindly carry out the general dictates of a Parliament or a Revenue
office, which neither knew nor cared about any personal exceptions
or local details. We all know the ways of the Inland Revenue
already; the extortions which have to be tediously reclaimed at a
greater cost of time than the refunded money is worth; the starving
of the Post Office in order to wring a profit of 50 per cent. on the
whole correspondence of the country; the various illegal demands
which have had to be resisted by legal trial, and appeal over appeal,
at a ruinous cost to those who will not be cheated; we see in France
and Italy the atrophy of a railway system which is ruled by
government officials. And yet unobservant enthusiasts wish that
every field should be under some petty official tied by red tape, and
every farmer bound by laws and regulations which could never be
applied to even a small district without individual hardship. The
townsman cannot be allowed to play political experiments with the
largest industry of England, of which he is profoundly ignorant: it
must rest with the farmer only, to decide if he prefer to be under the
Inland Revenue or under his landlord. It is notorious that
government lands are administered more wastefully and less
remuneratively than any private property; and it would be ruinous to

tie up the whole country to such administration. It is useless to say
that these are mere abuses which must be rectified. Let them be
rectified in the minor scale first, before the system can be applied in
the major scale. There is no kind of government in the world that
would not ruin this country if it introduced State ownership. Human
nature does not allow of it, and only ignorance of human nature
could propose it.
Another large effect of trifles is seen in the cumulative character
of borrowers. Mr. Harold Cox, M.P., has reminded those who are in
favour of rather confiscatory proposals, that a loss of character of a
public body, so that their good faith is not certain, may easily mean
that they have to pay 4 per cent. instead of 3 per cent. for loans:
and hence that all rents of public works paid for by loans will have to
be 33 per cent. higher. This loss is far more than could be gained by
entire confiscation of ground values, and entire ruin of all landlords.
That this is by no means only a future risk may be seen in the stock
list any day. India is not entirely safe; there are risks of financial ruin
—by conquest, by ruinous wars against invasion, by ruin in
insurrection, by ejectment, or by having to drop India owing to a
collapse of the navy. Yet all these risks together are thought to be
less than the risk of bad faith on the London County Council. Their
stock stands at a lower price than India stock. Such is the large
result of the many little touches of folly and extravagance which
have lowered the financial barometer.
Another instance of remote changes is in the effects of the
steam engine and other cheap and rapid communication. The full
extent of the changes caused are yet far from being completed.
Externally the great change is that of the equalisation of land values
for agriculture all over the world, as the produce can be carried from
land to land for a small part of its value. Hence tropical lands with
rapid growth and high fertility will compete with others; and the
cheapness of labour there, owing to the smaller requirements in a
warmer climate, will react on all agricultural wages. There will also
be a demand for cheap labour to work tropical lands to their full
extent; and the facility for transportation of labourers will result in

constantly shifting energetic people from rather cooler climates into
the hotter land for a time, and withdrawing them again. The same
system we already carry out for governing classes in India; and
cheap transport will make it possible for an energetic race to hold
hot countries continuously, without decay due to enervation by
climate, as was the case in all earlier northern invaders.
Internally the changes owing to cheap communication are that
land of similar quality equalises in value; and hence the worst land
will fall to bottom price all over the country, and cannot be locally of
any higher value. Also it will be difficult to get people to live in
unpleasant districts, as they can easily shift about; hence wages will
need to be higher in such districts, and therefore the land will be still
lower. Thus the mobility of the inhabitants exaggerates the variation
of land values already due to differing quality. The more bulky
industries that need cheap land, and not much labour, will be fixed in
the unpleasant districts; and peasant proprietors will tend to the
worse land, as being abnormally low in value. Regarding movement
of population only, as capable men can move about freely to get
work that gives them full scope, the less capable will supplant the
capable in all work that they are able to do. Hence we shall no
longer find men of high quality leading simple lives in remote
districts. The gain to the whole community is clear, but we lose one
of the most interesting types of national character. The free and
rapid transit in cities will cause them to be much less crowded in one
mass. At Chicago men go to business from five miles out in five
minutes. Our cumbrous stoppages along the whole route must be
entirely given up for the outer districts of London. What is needed is
a series of new centres twenty to thirty miles out of London; joined,
some to the City, some to the West End, by non-stop trains, at sixty
miles an hour. Such is certainly the type of great city which will
finally be reached—a county covered with separate centres linked by
trains at the highest speed. As we shall note further on, the
development of great equatorial estates of European powers, and
the growth of immense permanent armaments are both the
inevitable result of rapid communication. We see thus how the whole

type of human life and conditions has been altered, and the whole
balance of circumstances readjusted, by the evolution of cheap
motor power.
We have already noticed another effect of this change, in the
increase of emigration draining the more capable persons from
England, and so leaving a residue inferior in energy, initiative and
self-reliance. This deterioration of the occupants of England and
Ireland is thus due to the purely mechanical contrivance of a steam
engine.
We have now traced the large effects of small economic causes,
and we see how such apparently insignificant alterations may be far
more effective and act far more beneficially than smashing the social
machine with a sledge hammer because it does not run smoothly.
We will now turn to look at some of the effects of favourite ideas of
the present time.
The compensation to workmen for accident seems at first sight a
righteous charge upon capital for the benefit of those who are
injured in their business. The immediate effect upon character is to
save the careless, thoughtless, and incompetent from the results of
their faults; this at once reduces largely the weeding and educational
effects of the bad qualities. No man would ever have become careful
if he did not find the necessity of being so. Even if a tendency to
malingering can be avoided, yet the teaching effect is done away. It
may be thought that it is better to save the individual from his
indiscretions rather than cure the race. Like most sentimentalism it
causes more misery in the long run. Another, and entirely separate,
effect is to prevent the employment of those who by age or bodily
defect are the more liable to accident; the immediate hardship of
loss of employment to these classes is, in the total, probably greater
than the hardship of loss of employment by accidents which it is
sought to compensate. We injure the individual as well as the race
by such grandmothering. A severe law demanding full and adequate
protection of workers, where they can be mechanically protected, is
the utmost that could be beneficially enforced.

The provision of old age pensions is another pleasing scheme. In
the first place it will diminish the need of foresight and of self-
restraint; it will thus weaken character by removing the great driving
force of self-interest. The burden will have to be borne by all,
including those who are already at the last gasp, and will tend to
push such over the border line. It will not discriminate between
those who have borne a large share in the cost of national renewal
by bringing up a family, and those who have selfishly squandered all
they received. And like outdoor poor relief, it will be discounted in
wages, and tend to lower the wage rate if no savings are to be
expected. A sounder plan would be to revert to the kind of
communal system of our forefathers, and make a legal demand for a
pension of, say, £2 a year from every child, and 10s. a year from
every grown up nephew or grandchild. Thus those who have done
most for the State by renewal would receive most in return, and the
greatest inducement would be given to bring up children to active
and capable lives. The idea of a right to maintenance would be the
knell of any State which undertook it. The endowment of wastrels,
the taxing of all the capable for the propagation of the incapable,
and the wholesale deterioration of character, would be utter ruin to a
nation. Nature knows of no right to maintenance, but only the
necessity of getting rid of those who need it by mending or ending
them.
There is another movement which seems most desirable and
humane at first sight, and irreproachable in its economic aspect: the
saving of infant life by greater care. A huge waste of life is going on,
and it has been proved that it is preventable. But however much we
must sympathise with it, we cannot shut our eyes to its meaning.
England produces over 300,000 excess of births over deaths yearly,
and perhaps a tenth more might be added to that by care of infant
life. But would that tenth be of the best stock or the worst? We must
agree that it would be of the lower, or lowest type of careless,
thriftless, dirty, and incapable families that the increase would be
obtained. Is it worth while to dilute our increase of population by 10
per cent. more of the most inferior kind? Will England be stronger

for having one thirtieth more, and that of the worst stock, added to
the population every year? This movement is doing away with one of
the few remains of natural weeding out of the unfit that our
civilisation has left to us. And it will certainly cause more misery than
happiness in the course of a century.
Lastly, let us look to the general question of the results of the
accumulation of wealth in the hands of different classes. Roughly we
may divide three classes of money-earners: the lower, who receive
weekly pay, and are tempted to spend it all by the certainty of poor
relief when needed; the middle, who receive yearly pay, and must
save if they are to avoid losing caste in late life; the upper, who
make large but uncertain profits by organising work, or by financial
manipulation, regular or irregular. During the last century we have
seen a great growth of wealth in England. At first it spread to
workmen and manufacturers, then to the middle classes generally,
and latterly much has accumulated in the hands of large operators
with trusts and financial dealings. What has been the result of the
wealth in the hands of each class, to that class, and to the whole
community? The rise of workmen's pay has mainly been used up;
there has been a great benefit by improving the conditions of life,
but perhaps half of the increase has been lost in mere waste; very
little has gone toward lifting families to a higher class, and but a
very small proportion has been saved. The whole property of the
poor is estimated now at nearly a year's income, the result of
savings in a century, or less than 1 per cent. saved. When we turn to
the middle classes there is a worse spectacle. There was, broadly
speaking, but little need to raise the standard of expenditure among
the middle classes. They were fairly comfortable, and need not have
spent more on themselves; their gains might have been spent on
profitable enterprises, or given for endowments to public purposes.
On the contrary, but a small part of their gains have been saved or
remuneratively spent, and far the greater part has disappeared in
ever-increasing ostentation. It has been turned into a curse by
creating an absurdly artificial standard of living and of sociality, so
burdensome that every man is ashamed to ask a friend to the leg of

mutton dinners of his grandfather's standard. It is thought mean to
spend less per head on a single dinner than the amount which ought
to keep a man in comfort for a couple of weeks. Real, genial sociality
has been uprooted and killed in the senseless race of ostentation.
And practically nothing has been done for public benefits by
endowments. As a manufacturer in a park, with a motor, remarked,
"you cannot expect anyone not to spend up to his income." The idea
of using what is really requisite for successful living, and not
squandering money beyond that, is entirely forgotten. The simplicity
of having nothing that is unnecessary, the pleasure of having a large
balance to use beyond the needs of life, and the comfort of never
needing to worry about money, are all unknown to those who spend
up to the hilt, and who turn their money into a grinding curse of life.
The distribution of surplus wealth among the middle classes has
proved an entire failure in national economics.
Now, lastly, the surplus is passing into a new class, the large
business speculator, the financier, and trust-man. So far as we can
yet see, this class is justifying itself far more than the middle class.
In fifty years the middle classes have not given as much to endow
education as the millionaires have given in five years. A man with a
gigantic income cannot spend more than a few per cent. of it on
himself. He must use it for large public enterprises which benefit
mankind. To put it in another form, a great dealer has organised a
method for taxing the community in such a way that they do not
notice it. And if he spends the tax on public improvements or
endowments—railways, new inventions, or universities—he is an
active benefactor to the whole community. He sponges up the
surplus which would otherwise be frittered away in ostentation or
luxury, and drops it out where it is a permanent benefit. As a
principle we may hate the trust-man and multi-millionaire, but he
may be a lesser curse than the extravagant middle or lower-class
man. War is hateful, but it may be a lesser curse than rotting in
peace. So long as the average man shows by his selfish luxury that
he is incapable of managing wealth, so long the private taxer—who
prevents some of the waste—will be a positive blessing to the

community. The evolution of the great money-manager type now
going on is a distinct step forward in the prevention of waste, and
the growth of a better system of expenditure. A million pounds a
year scattered over a hundred thousand men will be all eaten up in
luxuries or lost in folly; spread among a thousand men it will only
swell their wasteful pride of life; but put it in the hands of ten men
who have worked for it, and they will spend most of it in useful work
that will bear fruit. Until the education, moral and intellectual, of the
average man is on a higher plane, it will be well for the surplus
wealth to be in the safer hands of those who have proved their
capacity for avoiding waste. The evolution of society is not fitted at
present for a wealthy middle-class, or a proletariat domination.
We have now seen in many directions how great are the
changes in the constitution of society, which are brought about by a
succession of small movements, each of which imperceptibly bears
its share in the change. We see thus how carefully small tendencies
should be watched; and we learn how needless and often how futile
is a violent uprooting of institutions instead of a gradual growth.
Another lesson to note is that every attempt to interfere by
legislation in the natural working of causes is more likely to do harm
than good. The long lesson, which it took all the middle ages to
teach, was that legislative interference with trade always did harm;
we have come to believe that in a half-hearted way, but we are still
perpetually longing to tinker society by interfering with natural cause
and effect.

CHAPTER V.
THE NEED OF DIVERSITY.
A large part of the aims of government in all ages has been the
securing of uniformity, and much of the misery of mankind has been
caused by the enforcing of it. But when we look at nature we see
that a highly uniform species is the least likely to advance; and a
seedsman or a breeder will try to break up too uniform a strain by
exciting conditions which may lead to beneficial new varieties. It is
only in a fluctuating species in which new "sports" easily arise, or are
quickly developed by conditions, that we can expect to acquire new
qualities or beneficial advance.
It is therefore one of the essentials for an advancing species that
it should have full scope for diversity, so that any new varieties may
not be crushed out by a uniformity of conditions. Too uniform a type
of government is a deadly thing. Compulsory orthodoxy killed the
vitality of Spain, and—so far as it succeeded—that of France also. No
state was more brilliant or vigorous than the Norman rule in Sicily,
which equally patronised Muhammedan and Christian.
Diversity may be secured in two ways, either by large varieties
within a single great state, or by differences between homogeneous
small states. The diversity within a large state may be seen in
England or America; diversity between small states was attained
between the cities of ancient Greece or mediaeval Italy.
But we meet with limiting conditions in the necessity of
combination for mutual support; and in small states that can be
carried out by a vigorous intolerance which weeds out those who are
not conformable, and drives them into more congenial communities.
Intolerance, therefore, is a gain to a small community, though

detrimental to a large state where it excludes the neighbourhood of
variety.
In modern times it is with large states that we have mainly to
deal. They are a necessary development where communication is
sufficiently easy for the concentrated military pressure of the whole
to be brought to bear on a single point. If states are so small that
concentration on the border is too easy, the state will expand; if
concentration is difficult owing to size, the state will tend to fall apart
again. The size for states which is most successful is a function of
the facility of internal communication. Let those who deplore the
absorption of small states, and the growth of Imperialism in all
countries, ponder the tale of the North American Indians, who
resented the power of the white man, and considered how to rid
themselves of him. Their great council was rejoiced, when one sage
said that if they would do as he said, he would promise that no
white man should remain. "If the white man is to go you must give
up all that he brought, the horse, the gun, the blanket, the
firewater; if you will do this you may be free." They thought—and
then said, "No, he must stay." So, if we are willing to revert to
nothing quicker than a cob, we might get back to a Heptarchy.
The modern condition of great states being therefore forced
upon us by the railway and telegraph, the only practical question is
the form of life in such communities. Uniformity that is enforced,
either by law, or by custom or fashion, is certainly a detriment, as it
will suppress the useful variations when they arise. And the
objection to it bursts out in the form of anarchism, which is specially
a disease of great states. The amount of anarchism is very closely
related to the size of the state; and it is probably an exact measure
of the internal strain produced by repulsion of diverse types and the
pressure needed to keep them together.
It is only a very crude form of intolerance to expect many tens
of millions of people to agree in religion, morals, and government. A
degree of intolerance that may succeed, and even be useful, for

some thousands, will be disastrous if applied to as many millions of
men.
But here we run against another guiding principle of many
people. It is often assumed that possibly in government, probably in
religion, and certainly in morals, there is an absolute standard of
right and wrong, immutable and irremovable. To take the last
subject—that of morals—to the utilitarian they are the conditions for
the well-being of society, and may vary indefinitely with the
variations of society, and he recognises that there is perhaps no
action which may not belong to the best code of morality for certain
possible conditions. To the theologian morals are the Divine dictates,
which have varied immensely under different dispensations; and the
Patriarchal, early Jewish, Prophetic, or Christian codes are
represented as quite incompatible one with another. The subjects of
sister-marriage, concubinage of captives, lapidation, private revenge,
communal or individual responsibility, and others, all show how
entirely variable the presentation of the moral standard is for
different states of society. Hence we must always regard any given
moral standard as being rightly associated with some particular
condition of society and typical of it; much as the colour of red heat,
or yellow heat, or white heat, is typical of particular temperatures.
And instead of blindly reprobating those among us who do not
conform to our present theoretical standard, or even the present
normal standard, we should regard them as fragments of a different
society gone astray in time or space.
Thus we see that diversity should be tolerated up to the limits of
the laws that are absolutely necessary to avoid confusion and
misunderstanding between members of the same community: and
there is no constraining principle which would narrow the variability
allowable, short of permitting injustice, hardship, or unfair
competition between those who need to work together in mutual
confidence and good faith. It may truly be said that civilisation is the
means for giving scope to diversity.

Under stagnant and uniform conditions there may be a fossilised
form of civilisation; but any living form must yield opportunities for
individual effort, and every such opportunity is the making or
marring of the man who rises to it or who falls before it. The leading
tenth and the submerged tenth are equally the proof that a living
civilisation is doing its work of sorting out the best and getting rid of
the worst stock.
From another point of view, toleration is essential to completion.
The enormous variety of character, and ability for special work, is all
needed in a complete community. There are many "wrong paradises"
in a whole society. We see the necessity for mental diversity, from
the pure mathematician who is proud of the inapplicability of his
results, through all the successive stages of research work,
commercial work, administrative management, and mechanical
work, even down to merely automatic work which needs no more
mind than a cow's. And it is perfectly clear that such mental diversity
must have corresponding variety of external life to accommodate it.
The student or experimental worker finds the disturbances of
communal life almost insufferable, while the mechanical worker
would be miserable almost to suicide in the silence and lack of
excitement of a life devoted to abstract thought or to millionths of
an inch. If, therefore, the productions of the externals of life differ so
profoundly in a complete society, we must expect and allow equally
great differences in all the feelings, instincts, and requirements. One
man may have a physical repulsion to affecting his mind and
condition by stimulants and narcotics, a repulsion that extends more
or less to every one addicted to such drugging of the senses. But it
would be a misfortune to be without that variety, and the world
would be poorer by losing Falstaff, or even Bardolph. The utmost we
can say is that we should never be blind to the bad effects on the
community of a low type if it be too widely diffused.
So long as the extreme parties are but a small portion, and the
distribution of variation is normal, most in the middle course and
thinning away to the upper and lower limits, the society is stable and
benefits by its variations. But if the curve of variation is irregular, and

shows two large groups with fewer in the middle course between
them, the condition is dangerous. We had such a condition in
England in the seventeenth century, and after a long struggle of
each group to capture the middle party, the separation into two
communities took place. The spiritual ancestors of Clifford and Perks
and Byles were happy in their paradise of intolerant puritanism in
New England, while Old England had internal peace for a couple of
centuries. Another such process of fission now seems growing
imminent, and it is again the question as to which group will capture
the middle party. The positive danger of a diversity running into two
separate groups is notorious in history. The Copts invited the Arab
invasion to rid them of Byzantine bondage; the Britons invited the
Saxons to save them from their neighbours. The ideals of a County
Council which will not tolerate a quiet square in London, or of labour
members who promote marches of the unemployed and unlimited
taxation at their will, may drive the best thought in England to the
tranquillity of a well-governed capital abroad; and as there are many
people now who would prefer in England a Boer domination to that
of the party represented by Cecil, Halifax, and Riley, so there are
many others who would rather submit to a German government of
London than to a sacking by a hungry mob. The segregation into
two groups with an unstable link between them is fatal to the virtues
classed as Patriotism. A studious Englishman would sooner have a
Japanese or Russian professor for a neighbour, than have the
average drinking workman and rowdy family who may be his distant
cousins. And assuredly he would make no personal sacrifices to keep
out of England any people who were proved to be the moral or
intellectual superiors of the rest of his countrymen. We thus see that
diversity, however great, must vary about a single centre, if it is to
be favourable to society as a whole.
Looking at the general domination of modern law it is truly
astonishing how much uniformity is possible. But the fact of a
uniform law being in force must not blind us to the existence of a
great amount of diversity being now tolerated side by side with it.
For instance, we are so accustomed to think of only one type of

marriage that the various stages recognised in Roman law seem
astonishing. Yet in legal status in England there are ten stages
surviving, most of which are tolerated by the law. There is (1) royal
assent, needful in the royal family, just as it is needful in every family
in some African communities; (2) normal religious or civil marriage;
(3) marriage of divorced persons, only civil; (4) within prohibited
degrees, but tolerated socially, as deceased wife's sister, or (5) not
tolerated, as uncle and niece; (6) quasi-permanent connection with
full legal responsibility for children; (7) temporary license. Only in
case of lack of full consent does the law step in to punish, in (8)
marriage under age, (9) bigamy or (10) violence. Every one of these
stages has been normal in some conditions of society, and most are
normal in some countries even at present. We may, for example,
instance (1) normal in Benin; (2) religious marriage only normal in
England; (3) normal in Eastern Europe; (4) normal in our colonies;
(5) normal in Italy; (6) normal in Islam; (7) normal in Madagascar in
interregnum of sovereignty, and in other countries; (8) normal in
India; (9) normal in Islam; (10) normal in most warfare. And each of
these stages carries with it in England different legal and social
conditions. Again, as regards the period of the marriage ceremony,
the Church has had a long and hard fight to get it recognised as a
hymeneal ceremony and not a maternity ceremony; yet the latter
status is recognised in law as equal to the former, and it is still
prevalent among a third of marriages in some Australian colonies,
and very largely in England, both in the country from end to end and
in town life. On the whole some fifteen hundred years of church
pressure has not turned the scale very far against the older custom,
which we might well call approximation by trial and error. Such is the
diversity which is yet uncontrolled.
We must regard society, therefore, as in the above definite
subject, in the light of a mixture of many stages of evolution. We
may still sit at table with palaeolithic man, put into modern dress
and eating modern dishes it is true, but absolutely in the palaeolithic
stage of thought and intellect; he is entirely absorbed in the
interests of hunting wild animals, and devoted to his appliances for

the chase, while incapable of making or improving anything
belonging to a higher kind of civilisation. Crime and illegalities are
very largely merely survivals of different conditions of society, which
the law of the majority has not succeeded in repressing. As such,
the more reasonable and favourable mode of dealing with them
would be deportation to communities where such actions are still
normal. Instead of five years' sentence for bigamy, let us exile a man
to a Muhammedan country. If we were seriously to establish island
communities where theft, violence, anarchy, and other phases
incompatible with any passable diversity, were still normal and
unpunished, we might leave all those who preferred to practise such
conditions to work out their own life and views with kindred minds.
Regarding now the individual rather than the community, we see
in modern education a very serious force acting against that diversity
which is needful for progress. So far as it is a social force, owing to
the herding together of large masses of children, and so destroying
family types, it is mainly deleterious. The enforcement of trivial and
senseless regulations by boys themselves is entirely a detriment to
character, as destroying a habit of dealing with matters on their own
merits, and creating a terrible bogey of senseless public opinion. The
compulsory games and the ordering of the use of personal time, is
another detriment, for it certainly destroys some ability which might
find its footing in the character permanently. But beside the
detriment of the system of herding, there is the more direct question
of the influence of the teaching. Most children begin with a great
curiosity concerning the world and their experience of it, a curiosity
which when unguided leads to many unpleasant and inconvenient
results. Hence, instead of guiding it aright, and encouraging the
benefits of it, the selfish and lazy plan of elders is to destroy and
obliterate the reasoning interest in things, and try to enforce in its
place a knowledge of matters, which are generally less useful, and
certainly less interesting, than those which a child wants to know
about. The leading factor of character, the acquisition of knowledge
of benefits and injuries, of good and of evil, is mainly rooted out;
and the new plants of abstract ideas and bookwork require generally

many years to take good root, if they do so at all. This system lies at
the base of the unintellectual character of the average educated
Englishman, who takes no useful interest in anything. As an example
of this, there is a foreign land full of interest, scientific, historical,
and social; for a quarter of a century hundreds of Englishmen have
been there in comfortable official positions with reasonable leisure.
Yet there is not a single good memoir produced, not even a hundred
pages of original matter, outside of official work, by all this mass of
educated minds during nearly a generation. The possibility of what
might have been done in such grand opportunities has been
stamped out by the education which they have suffered. They are all
of regulation pattern, with as little variation as is possible between
different temperaments—amiable upright men, who will leave no
trace of anyone being the wiser in future for their existence. Such is
the product of the numbing chill of uniformity, and the weeding out
of the advancing power of diversity.
We are all familiar with the epigram of England having a
hundred religions but only one sauce; but we see a worse
misfortune in the absurd incongruity of now having two hundred
religions and only one system of elementary education. Amid the
great variety of minds, which is illustrated by the free choice of
religious belief and practice, we certainly require a great diversity of
education to bring out the best development of each type. We
require simultaneous experiment on a small scale, instead of vast
experiments of Acts which apply to the whole country for a
generation at a time. Every Act is only an experiment, and one
which is usually spoiled by attempting too much in a compromise,
which is neither fish, flesh, nor fowl. Had there been in 1870 a
hundred schools used for experiment, say five of twenty different
types in different parts of the country, the life-history of the pupils
would by now have given us a firm basis for rational adjustment of a
system. It is fatuous to suppose it possible to make one Procrustean
bed to fit children of the country, the mining centre, the
manufacturing district, the commercial town, or the fisher folk—of
the Yorkshire tyke, the Suffolk dumpling, or the Hampshire hog. Nor

is it merely the success of a system in producing examination results
that has to be attained. It is quite possible that the best workers in
after life may not be the best to cram with temporary bookwork.
Nothing short of twenty years of active life can test the value of the
education on which it is based.
Should we not at least try the effect of varying amount of control
by the central board, the local council, and the teacher himself? May
not some latitude in subject be allowed to a teacher, to follow lines
which his own mind is best capable of making useful? Should not a
great difference be made between the town, where an infant school
is needed, to keep children safe while parents are at work, and the
country where they can be left to play in the open? Should not
country teaching be adapted to making agriculturists? Might it not be
possible to leave children entirely in the fields till sixteen, provided
that they could pass in reading at nine, and in figures at twelve,
however it was learned? A solid two years' half-timing from sixteen
to eighteen, when they valued knowledge, might be worth all they
gain in the present way. Such are a few of the questions to which
answers are necessary, before we can begin to provide for the
diversity of education, which is certainly requisite if we are to make
it successful—a help instead of a detriment in after life.
And in more detailed education is it not possible to let a child's
mind grow on what is of interest to it—to further it on whatever
subjects are most attractive and easy to that type of mind, until the
habit of learning is so developed that it can be more easily levelled
up on the subjects which have been neglected? The mere habit of
learning and applying knowledge has to be acquired to begin with,
and surely the easier subjects are the best on which to practise the
power of concentration of mind. The trainer knows that his monkeys
cannot be taught unless they can concentrate attention on the
subject in hand. In every direction we need to gain diversity—in
types of society, in customs, in varieties of mind; and to gain this
basis for useful variation we must begin by cultivating diversity and
providing for its success, in place of attacking and crushing it
wherever it appears.

Fundamentals of Advanced Accounting 8th Edition Hoyle Test Bank

CHAPTER VI.
LINES OF ADVANCE.
Before we can imagine what may be lines of possible advance,
for the individual or the community, we should base our ideas on
observing what have been the means of advance in the past. Many
of the Utopian visions which have been sketched by different writers
are in flagrant contradiction of all history and human nature. It is at
least far more likely that gain in the future will be on similar lines to
those which have been successful in the past, rather than on lines
opposed to all previous growth.
The personal, rather than the communal, advance is the main
consideration, inasmuch as it is personal initiative of the most able
which helps the rest of the community forward. The greatest
improvements are the result of a single mind, animating perhaps a
small group of similar minds. We all know how such great benefits
as prison reform, the abolition of slavery, the restriction of child
labour, and similar movements of which the public are now proud,
were each originated by one mind, and worked by a small group in
the teeth of the bitterest opposition to start with. It goes without
saying that the same is the case in all inventions; it takes not only
an inventor, but also a commercial organiser (seldom one and the
same man), to help the public to any improvement. If ten thousand
men could be picked out of any one country, so as to remove the
most fruitful minds, that country would come to an entire standstill,
and would continue in mechanical repetition until a fresh generation
gave a chance of the rise of original minds. Probably not more than
one in a thousand minds causes useful advance among the others.
And the majority of men lead automatic lives, of which the reflexes
have been trained by teaching and experience to do what is
required, and the daily actions are performed without a single real

thought, but only in response to external stimuli of sights and
orders. It is therefore in the development of the able individuals, and
in giving every chance to such whenever they arise, that the hopes
of the great mass must lie.
It is perhaps not too much to say that all general popular
advance of the community at large is based on the prevention of
waste. Wherever waste exists improvement is possible; and we need
not trouble ourselves much about the construction of the social
organism, so long as we can lay our finger on the waste and check
it. As with a machine we know the amount of force that is put into it,
and can see what percentage is yielded up usefully in its output, so
it is with a community. The design of the nature and quality of work
done by the community or the machine is another matter; though
that again comes under the head of waste if the quality is bad. We
will now look more precisely at the gains by prevention of waste in
health, life, energy, and renewal.
The saving of health is one of the greatest steps that has been
made, as it has been suddenly performed within a generation. Man
had unconsciously conquered bacteria to a great extent by the
invention of cooking, and by the experimental learning of
cleanliness; but the scientific attack on bacteria and protozoa has
given the prospect of preventing all epidemic disease, and largely
increasing the efficiency of man in the most fertile countries. This
advance means the economic exploitation of the whole tropical
regions, which—with cheap transport—will provide an immense fresh
basis for the advantage of other lands. The gain in antiseptic
surgery, giving safety for operation on all internal organs, as it only
affects the small proportion of sick and injured, is not of so much
general importance as the conquest of the microorganisms, which
have hitherto ruled the best part of the world. It is in the complete
domination over all forms of life, however minute, that we shall find
one of the greatest lines for future advance. Only a small band of
workers, about one in a hundred million of the world's population,
has made this advance possible.

The saving of life is another great step which will give man far
higher power; not only in the mere hindrance of death, but far more
in the increased power of work per day. The power of continuity of
work is a growth of civilisation; and it is obvious that a man who can
do twelve hours' work per day, instead of six hours, not only lives
virtually twice as long, but costs the community only half as much
for what he does. This continuity of work, or industry, is seen in both
high and low classes of work. Some races can do more than twice as
much agricultural work in the day as others. The same is true of
scientific or commercial work. And there have been some of the
highest minds which could only work for two hours a day, while
others could work up to fourteen or sixteen hours daily. This power
of continuity of work is obviously then a matter improvable by
cultivation, both in the individual and in the race; and as it may
easily double a man's effective life it is certainly a line of great
promise for the future.
Another direction for saving a portion of life is in the rapidity of
thought and action. It is easy to find a difference of two or three
times the amount of work per hour between different men. All that
we have just said about the continuity of work applies to its rapidity;
and a large gain may be looked for in cultivating pace and vigour.
We need hardly note that trades-union ideals would destroy instead
of promoting these most promising and fruitful lines of advance.
In transport from place to place the movement at fifty miles an
hour instead of five means a gain of several years of life to most
men. But here we have probably reached the useful limits, as any
possible further saving would not yield much more time.
The saving of energy is another form of the question of
continuity of work. The ideal of work—as varied as possible, and as
interesting as possible—being the joy of life and the greatest good,
is an aim hardly yet grasped by more than a very few persons. To
the majority, work is a hateful thing, to be done solely in order to
get means for enjoyment in some other way. This essentially savage
and uncultivated ideal needs to be steadily rooted out by the better

adaptation of work to the individual. An education which started by
cultivating the natural interests, using them for mental development,
and only superadding what further knowledge was really requisite
for life, would greatly help to eradicate the false and low idea of
work which prevails. There is a common feeling that business cannot
be interesting in itself; but there are few, if any, businesses which if
intelligently followed will not yield scope for some real interest of
observation and study. The greater application of mind to the work
of life will leave far less scope for fruitless amusement and—as a
great painter remarked—"there is nothing of interest in life to be
compared with work."
To minds which are incapable of continuity of work, or of
relaxation by variation of work, mere amusements are needful.
Darwin's health prevented more than two hours' work a day, and the
flimsiest of novels was his needful relaxation. But the need of
amusement for this purpose must be taken as the index of
incapacity for continuity—as an unfortunate failure of mental and
physical health—as a disastrous defect when it occurs along with
great abilities which can only thus work at low speed. The same may
be said of athletics; the need of physical exercise outside of work is
an index of incapacity for physical health adapted to the work, an
unfortunate failure of those who are of defective condition. The idea
that no one can be too strong and robust is a wild exaggeration;
physical strength needs to be proportioned to the nature of work,
and a slender wiry man will do far better for indoor life than a
plethoric mass of brawn and muscle which needs much exercise to
keep in health. Unlimited robustness is not an absolute good, to be
pursued at all costs, or else we should make every schoolboy a Hun,
living without shelter, and feeding on flaps of raw meat which form
the only saddle of his horse. In brief, the need of athletics shows a
weakness of body to be remedied, or a physical over-development
unsuited to the person's work in life; it is the mark of unfitness, and
the need ceases so soon as a man is adapted to his work. The need
of spending any considerable time on amusement is the sign of an
incapacity, which has to be removed by strengthening the mind in

the individual or in the race. The passion for amusement is the sure
evidence of a defective education, which has left the mind incapable
of continuity, or bare of interests. An important advance therefore
lies in better use of the time which is at present wasted in fruitless
action of mind or body; better adaptation and education for the work
of life will gradually raise the standard so that this form of waste will
be avoided. We do not expect a uniform type of horse to be equally
adapted to draught or hunting or racing; and similarly we ought to
specialise on different types of men fitted for agriculture, or
mechanical work, or office work.
The great subject of the waste by renewal of the population in
each generation has an immense variety of aspects; but the
essential importance of it is seen when we reflect that about half the
labour of the world is swallowed up in this renewal. The burden of
production, of rearing, of education, and the waste and loss in the
process, exceeds that of any other activity, such as supply of food or
shelter, for the adult. Hence any possible saving in this great mass of
labour, or reduction of waste, is of the first importance to the
individual and the race.
Those who have proposed temporary marriage hardly seem to
have considered that one of the most important economies adopted,
perhaps dating from a pre-human period, was that of permanent
marriage. This saved at a stroke the enormous loss of time and
energy in the rivalries of repeated mating. The gain to the race by
leaving the members free for continuous work is greater than the
loss by reproducing inferior stocks. There is no need for the system
to have been intentionally adopted for this purpose; but merely a
race which economised the time of repeated mating would soon oust
a race in which it was customary. For this reason any fancied
reconstruction of society without permanent marriage is entirely
futile; even if it could be universal, yet the advantage given to the
lazy and emotional type of man above the continuous worker would
soon pull down the race. One frequent argument for a more
revocable union is the number of divorces effected or desired. But
nearly all such are among people whose judgment in any other line

of life would certainly not be trusted, and who habitually get into
trouble over other communal obligations. To abolish marriage for
their benefit would be as reasonable as allowing all debts to be
repudiated because such people cannot pay their I.O.U.'s. There is
moreover a great gain in permanent marriage when judiciously
effected, by the new mental pivot of a sense of permanent
ensurance of various of the conditions of life, which liberates the
attention of both parties from a large number of points, and leaves
each free to concentrate attention on a partial phase of feelings and
duties. It is a far higher and a spiritual counterpart of a successful
business partnership, where each member trusts the other to
manage a different part of the affair. All this mental economy and
help would be impossible without permanence.
Another wastage which has been greatly reduced in modern
times is that of high birth rate and high death rate. The allusions in
mediaeval times show a state much like that now described among
the Slovenes, where incessant maternity is only balanced by the
reduction of children due to filth, neglect, and bad conditions. The
modern ideal of a small family carefully tended is an immense
advance, both for the individual life and for the saving of waste. But
its benefits should be sought and not commanded. If the neglectful,
dirty, and wasteful stocks of low type in our midst let their children
die off, it is the only balance to their overgrowth, which would soon
outnumber the better class of population. The right end to begin at
is by insisting on hard work and tidy living, under penal enactments;
the saving of the children may then be left to take care of itself. To
begin at the sentimental end, as is now the fashion, is to degrade
the whole race by swamping it with the worst stocks.
The line of progress in invention is the remorseless "scrapping"
of poorer machines. The more serious the progress becomes, the
more scrapping needs to be done. We must not be surprised then if
a sign of human progress of mind and body should be the large
number of inefficients who are thrown out of work on the scrap heap
of society.

In another direction advance has been made by general
lengthening of the stages of life. The early marriage and early
deaths of past times brought the cost of renewal at every twenty
years, which was a much severer tax on the community than
renewal in thirty or forty years. There is probably also a great benefit
in the higher development of parents before each generation. It is
well recognised how the later children of a family are more able, and
of a more finished quality than the earlier; great examples of such a
view in older literature being Joseph and David, and in our own
history, Alfred. The longer growth of mind before each generation
appears to be a great gain of advance for the race. Among the lower
races, by far the most advanced are those like the Zulu, which have
a long period of hard training and active life before settling down to
family duties.
The often debated problem dealing with the human refuse of
bad stocks is one which presses most on an advanced civilisation.
We will not do like the Christian Norseman, when he put the ne'er-
do-weel family into a wide grave in the churchyard, and wiped his
hands of them. We will not even leave them to exterminate
themselves by their own follies, vices, and ignorance. But if the state
takes up the burden of such wastrels it must have an entire control
of them. Responsibility without rule is worse than rule without
responsibility. The only safe course is a rigorous enforcement of
parental duties; with the alternative of penal servitude in state
workshops, the mother and children together, the father elsewhere.
There is no middle course, of semi-maintenance by school meals,
which will not injure the children by their being correspondingly
neglected at home, injure the parents by lowering the spur of
necessity to work, and injure the state by flooding it with the worst
types.
Much more drastic treatment of the unfit has been advocated, as
by Dr. Rentoul. In a future period of civilisation a logical course of
treatment might have a chance of adoption; but in our age any
serious changes of the habits of thought and action will not be
tolerated, unless brought about very gradually under small

influences, such as we have noticed as acting through taxation.
What we need is to try to give effect to the gospel of giving to him
that hath, and taking away from him that hath not. The most likely
opening for such a line of advance would be giving partial state
maintenance to the best stocks, so as to ensure large returns from
them, and taxing down the worst stocks—exactly the opposite
course to the present craze. Let us try to realise if there be a
practical system for this advance.
We should need a Board of Health in each area of about 10,000
inhabitants, composed of three examining doctors. Every child on
leaving school, or at about fifteen, should be examined, merely by a
glance at the greater bulk of normal cases, but carefully in extreme
cases. The finest 5 per cent. both mentally (shown by school-leaving
certificates) and physically as well, should be premiated by assisted
higher education of suitable type. The worst 10 per cent. should be
remanded to a training school where physical and mental
development would be scientifically carried out, and as much profit
as possible made from their labour toward self-support. This would
reclaim the hooligan class effectually before they run amuck, and
help on those who need care and assistance to get a good footing in
life. No course could possibly be kinder for the weaklings. At the age
of twenty a further examination of both the best and the worst
classes should ensue. The best half of the most able should receive
a certificate granting them practically free support for all children
they may have after they have reached the age of twenty-five. The
worst half of the most incapable, or 5 per cent. of all, should be
required to report residence during their lives to the Board of Health
of their district, and informed that if they had any children they must
pay a heavy fine, or else go into servitude. This would practically
mean the segregation of the lowest class of the unfits under
compulsory work. It would be cheaper to the state to keep them
thus at work, than to pay poor rates to maintain this submerged
twentieth and their helpless families.
In all these proposals there would be no Socialistic constraint of
the great majority, which is normal in mind and body. But such

attention to the unfit would be merely adding a porch to the
poorhouse, the hospital, and the asylum, and there sorting over the
material which can be possibly saved from a bad end. The nine-
tenths of people who were ordinary would be thus left even more
free for individual growth than they now are, when hampered by the
inefficient residue.
We might not exclude the thought of another favourite idea of
some reformers which in a modified shape might be allowed to
gradually take root. Since Spencer Wells familiarised the world with
an operation for which he will always be remembered, hundreds of
women have gladly improved their health by a safe treatment,
which, if anything, threatened to become too fashionable. Every
woman who was, as above, required to report her residence as
being unfit, and being liable to heavy penalties on having children,
should be offered the option of perfect freedom if she chose the
operation. The marriage of such women, with men who were
condemned as unfit, would entirely free both parties from reporting
and inspection in future, and give the best prospect of happy lives to
the weakest and less capable of the community, free from what
would be only too truly "encumbrances" to such people. This course
might give a permanently safe line of improvement, without any
consequent stigma or hardship in the world around; and so gentle a
change—beneficial to the individual as well as the community—
seems not outside of future possibilities. At least such a course
would be the more practicable form of such a proposed change. Of
course, no such legislation would be complete in its action, and
evasions would often occur. But if it checked even one half of the
growth of bad stock it would be an enormous gain.
We now turn to other lines of advance from the communal point
of view. The old system of community, in which all the nations of
northern Europe lived, was based on each man being his brother's
keeper; every one was liable to fines if any relative committed a
crime, in proportion to their closeness of relation. To this succeeded
individual responsibility, both in property and in penalties. This raises
the question whether it is possible to separate property and penalty

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