Question

Distributions Worksheet At the organizational meeting of AID, Inc., Ashley, Ian, and Dallas, acting in their capacity as the Board of Directors, approved the issuance of 1,000 shares of $1 par common stock to each of them at a price of $5 per share (for a total issuance of 3,000 shares). Each of them paid the corporation $5,000 and received a share certificate evidencing 1,000 shares. 1. After the issuance of such shares: Assets $15,000 Liabilities 0 Equity Stated Capital (BOC 21.002(11)) Surplus (BOC 21.002(12)) 2. In year one, the corporation has net income of $10,000: Assets $25,000 Liabilities 0 Equity Stated Capital Surplus Maximum amount the corporation may pay as a dividend to shareholders at end of year one (See BOC 21.301(1)(B), 21.303(b)): $ (S per share) 3. In year two, the corporation loses $4,000: Assets $21,000 Liabilities 0 Equity Stated Capital Surplus 4. Ian wants out, and the other shareholders want the corporation to buy out Ian's shares. What are his shares worth? One valuation method (not necessarily a realistic value) is book value. The book value of his shares (i.e., the value of his shares based upon the net worth of the corporation as reflected on the books of the corporation) is $ May the corporation repurchase Ian's shares for this amount? (See BOC 21.002()(A)(ii), 21.301(1)(B), 21.303(b)) 1) 2) Would the corporation be insolvent (BOC 1.002(40))? Does purchase price exceed surplus?

Answer 1

1) Stated capital (3,000 shares $1) Surplus [3,000 shares* ($5-$1)] Shareholder's equity 3,000 12,000 15,000 2) Stated capital (3,000 shares*$1) Surplus (3,000 shares*($5-$1)]+10,000 Shareholder's equity 3,000 22,000 25,000 3) 3,000 Stated capital (3,000 shares*$1) Surplus (3,000 shares" ($5-$1)]+10,000- 4,000 Shareholder's equity 18,000 21,000 Dividends are paid out of profits/surplus by a corporation to its shareholders Hence, the maximum dividend is limited to the amount of surplus appearing in the balance sheet which is $18,000 or 5 per share Book value of the shares of lan= Shareholder's equity*Shares held by lan/Average shares outstanding = 21,000*1000/3,000 = $ 7,000 No, the corporation would not be insolvent if it repurchases lan's shares at the above calculated amount because this value is calculated as per books. No, the purchase price does not exceed the surplus because the balance of surplus is $18,000 and the purchase price is less than that. CS Scanned with CamScanner