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    CPA Equity Question

    OK CPAs, here's one which should be easy for you.

    Tennessee has "no par" stock. Client began S corporation in 1995, and the outstanding stock was by charter "no par" stock, but valued at $42,000. This is carried in the balance sheet caption "Capital Stock" and has not changed. Volume and activity of the corporation has quadrupled over last dozen or so years, but no change in stock structure.

    Stock, however, has been donated from original shareholders to children, to some extent. Don't see anything in the redistribution of stock which would change the $42,000 "capital stock" account.

    However, Corporation has purchased from one of the daughters some 20% of the outstanding shares. Purchase price is $350,000. Carrying this debit as "Treasury Stock" shows negative total paid-in capital, easily. In fact, carrying this line item as a debit could even threaten to convert the entire equity section to a net debit.

    YIKES!! Bank is consistently beating up client for certain trend items, one of them being "Debt to worth ratio." among other things.

    My questions: Can the repurchase for $350,000 be carried in the equity accounts in a different manner, and, can the corporate stock be re-organized via corporate resolution to present a balance sheet more realistic and compatible?

    This is a GAAP question, with obvious ramifications for the 1120S, page 4. Any CPAs out there? Old Jack, I'll even listen to you (for a change).
    Last edited by Snaggletooth; 01-27-2007, 01:39 AM.

    #2
    No "sheesh" but

    No "sheesh" (remember that one?) from me , but I did think I would resurrect the question one more time before the question gets buried.

    Realize this is more related to GAAP than to taxes. A good one for CPAs if they're so inclined...

    Comment


      #3
      Originally posted by Snaggletooth View Post
      Any CPAs out there? Old Jack, I'll even listen to you (for a change).
      Well... since you put it that way maybe I will contribute to your question. The accounts as you stated are correct as shown as the shares "issued" (including treasury shares) at no par was for the $42,000. The fact that outstanding stock was purchased for $350,000 is properly shown as treasury stock. Treasury shares could now be sold to anyone.

      If you were to reorganize the financial statement to "retire/cancel/void" the treasury stock it would be to net against the Retained Earnings account, also an equity account. The treasury stock account would disappear and the retained earnings account would be reduced along with 20% of the capital stock so that capital stock would reflect the current outstanding shares at the original cost per share. End result... the net equity section total doesn't change so why bother.

      Revaluing/reorganizing the corporation for assets to reflect fair market value is not normally considered allowable (not GAAP) and if so done is usually only for financial statement purposes as it is not allowed for tax purposes.

      Fact is the price paid to redeem the daughters shares was taking most of the earnings and capital out of the corporation so it is expected that there would be a net equity debt. It actually hurt the value of all the other shareholders ownership as they now can't redeem their shares since there is no money in the corporation.

      Although the price paid may have been a fair market value, it was including fair market value of assets not valued as such on the books per GAAP, and or it included future earnings. If the remaining shareholders were concerned with the financial strength of the corporation, they should have purchased all or a portion of the daughters shares personally. Truth is the bank has a right to be concerned with the ratio since now the corporation probably has to borrow funds, but most bankers look at more important rations and earning power.

      Comment


        #4
        Thanks

        Jack - great discussion. Thanks a bunch.

        Comment


          #5
          You are welcome Snag.... what? no arguments?

          Comment


            #6
            No Arguments

            Jack you give me too much credit.

            No arguments because I don't know enough GAAP to intelligently discuss it with anyone.
            Even you!

            Thanks for your help.
            Last edited by Snaggletooth; 01-27-2007, 02:00 PM.

            Comment


              #7
              Originally posted by Snaggletooth View Post
              No arguments because I don't know enough GAAP to intelligently discuss it with anyone.
              Thats no excuse!

              Likewise I don't know much about anything... I have been fooling people for years.

              Comment


                #8
                Gaap

                Originally posted by Snaggletooth View Post

                No arguments because I don't know enough GAAP to intelligently discuss it with anyone.

                .
                I know people who could discuss it intelligently -- they're contributing substantially to the TAX GAAAAAAAAAAAAP.

                Comment

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