Paid-In Capital and the Balance Sheet
From Chapter 12, Ethical Issue 12-1. Complete all parts of the case and respond to at least two of your classmates’ postings.
Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union. Sewell intended to sell individual franchises for the major language groups of Western Europe—German, French, English, Spanish, and Italian. Naturally, investors considering buying a franchise from Sewell asked to see the financial statements of his business.
Believing the value of the franchise to be $500,000, Sewell sought to capitalize his own franchise at $500,000. The law firm of St. Charles & LaDue helped Sewell form a corporation chartered to issue 500,000 shares of common stock with par value of $1 per share. Attorneys suggested the following chain of transactions:
a.Sewell’s cousin, Bob, borrows $500,000 from a bank and purchases the franchise from Sewell.
b.Sewell pays the corporation $500,000 to acquire all its stock.
c.The corporation buys the franchise from Cousin Bob.
d.Cousin Bob repays the $500,000 loan to the bank.
In the final analysis, Cousin Bob is debt-free and out of the picture. Sewell owns all the corporation’s stock, and the corporation owns the franchise. The corporation’s balance sheet lists a franchise acquired at a cost of $500,000. This balance sheet is Sewell’s most valuable marketing tool.
- What is unethical about this situation?
- Who can be harmed? How can they be harmed? What role does accounting play?
Effects on Retained Earnings and the Income Statement
Discuss cash dividends and stock dividends. How is each recorded? When each is issued, what is the affect on assets, liabilities and owner’s equity? Respond to at least two of your classmates’ postings.