Question

Nancy corporation agreed to sell all of its capital stock to Eddie Corporation for three monthly payments of $100,000. After Eddie made fhe first required payment, it ceased making other payments. The stock subscription agreement states that Eddie, thus, forfeits its payments and is entitled to no other future considerstuon.

In a minimum of 5 to 7 sentances, identify the key terms in your case and indicate why you believe that each one is relevant to your case.

Answer 1

Problem Identification: How should a company account for forfeited stock subscriptions? Moreover, do such payments constitute operating or other income?

Keywords: Stock Subscription; operating income; additional paid-in capital; owners’ equity; net income; operating income.

Conclusion: Per 505-10-25-2, capital transactions that incur no future corporate obligations should be excluded from calculating net or operating income. Thus, the forfeited cash should become part of additional paid-in capital about any required disclosures for such transactions.