Question

Wallace Computer Company is a small, closely held corporation. 80% of the stock is held by Derek Wallace, president. Of the remainder, 10% is held by members of his family, and 10% by Kathy Baker, a former officer who is now retired. The balance sheet of the company at June 30, 2014, was substantially as shown below:

- Assets: Cash $ 22,000, Other 450,000, Total $472,000.

-Liabilities & Shareholder's equity: Current liabilities $50,000, Common stock $250,000, Retained earnings $172,000, total $ 472,000.

Additional authorized common stock of $300,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued common stock with a par value of $100,000 to himself at par for cash. At the next stockholders’ meeting, Baker objected and claimed that her interests had been injured.

a) Which stockholder’s right was ignored in the issue of shares to Derek Wallace?

b) How may the damage to Baker’s interests be repaired most simply?

c) If Derek Wallace offered Baker a personal cash settlement and they agreed to employ you as impartial arbitrator to determine the amount, what settlement would you propose? Present    your calculations with sufficient explanation to satisfy both parties.

Answer 1

AMSWER:

1) To stockholder’s right to share proportionately in any new issues for stock of the same class has been ignored by Derek Wallace

2) The interests of Baker can be repaired with issuance of share that equal to 50% of her present holdings of $25,000 at present value or issuing stock with a present value of $12,500. Because Wallace purchased an additional $100,00 PV stock which is nearly 50% of his current ownership of $200,000. Any of the other holders must be offered the similar right for purchasing the shares to 50% of their company's current ownership. It will be easiest approach to solve any damage incurred during actions of Wallace.

3) The fair value accounting uses information specific for the time and current conditions in the market. It attempts to give the most relevant estimates possible thus holds a great informative value for a firm itself and encourages corrective actions promptly. But in the current scenario, we have not been provided any information specified to the stock’s fair value of the stock thus we can use the book value.

Baker’s Capital Stock Book Value (Before: New Shares)	$42,200
(25/250) * ($250,000 + $172,000)
Baker’s Capital Stock Book Value (After: New Shares)	$37,286
(25/350) x ($250,000 + $172,000 + $100,000)
Cash Settlement (Balance)	$4,914

Thus, can propose $4,914 for the settlement