Wallace Computer Company is a small, closely held corporation. Eighty percent of

Question

Wallace Computer Company is a small, closely held corporation. Eighty percent 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.

Additional authorized common stock of $282,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued common stock with a par value of $94,000 to himself at par for cash. At the next stockholders’ meeting, Baker objected and claimed that her interests had been injured.

(c)

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

Assets Liabilities and Stockholders’ Equity Cash $ 20,500 Current liabilities $ 47,000 Other 423,000 Common stock 235,000 $ 443,500 Retained earnings 161,500 $ 443,500

Explanation / Answer

He may propose to issue her capital plus percentage in retained earnings.

Total share capital = $235,000 + $94,000 = $329,000

Share of Baker = 10% ($329,000) +10% (Retained earnings)

=10% ($329,000) + 10% ($161,500)

=$49,050

Thus, the cash settlement made to her is $49,050.

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