Question

Kat Keiser is the president and principal stockholder of Kat's Kupcakery, Inc. The business is applying for a $100,000 bank loan for expansion. Keiser believes she is more likely to get approved for the loan if the business's balance sheet looks good. She is considering the following options for improving the owner's equity of the business in order to obtain the loan: 1. Issue $50,000 of common stock in exchange for cash to a friend who is interested in investing in the company. This would increase assets (cash) by $50,000 and increase owner's equity by $50,000.

OR

2. Transfer $50,000 of Keiser's personal land to the business and issue common stock to herself. After the loan is obtained, Keiser will transfer the land back to herself and zero out the common stock. This would temporarily increase assets (land) by $50,000 and increase owner's equity by $50,000. Discuss the ethical issue in this case. Analyze the alternatives from an ethical and a business point of view. Who are the stakeholders? What are the consequences? What would you do?

Answer 1

Answer:

The given circumstances will surely enable the balance sheet look great and help in acquiring the loan. The moral contemplations here incorporate misrepresenting the financials and furthermore mis-resentation of the financial circumstance of the business. Over the long haul, she will most likely be unable to repay the loan and run in to insolvency and when the loan recovery process is started against her and the business and the bank finds that she has concocted books may land her in to lawful difficulty. Additionally, she may always be unable to acquire the loan again. Additionally, different partners/stakeholders, for example, the bank, the overall population, suppliers, the representatives of the organization may not be profited if the extension plan doesn't work out. The suppliers won't be paid in time, representatives might be terminated and not satisfied of their dues and the banks may endure awful obligations or bad debts.

In this circumstance, I would unquestionably not misdirect the bank just to get a higher loan. I would prefer to hold up till my financial strength improves or search for different options, for example, investment, go into a partnership for extension needs.