Question

Nancy Corporation agreed to sell its common stock to Eddie Corporation for five monthly payments of $100,000. Eddie Corporation made the first payment but did not make any other payments. According to the stock subscription agreement, Eddie Corporation forfeits its payment and is entitled to no further consideration. How should Nancy Corporation account for the $100,000 forfeited payment?

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Answer 1

If capital stock is issued payable by instalments, and a stockholder refuses or neglects to pay an instalment for thirty days after the time limited for payment in the demand under section twenty-two, the treasurer of the corporation may sell such stockholder's shares by public auction, and, out of the proceeds of such sale, shall pay to the corporation all instalments then due from such stockholder with interest and incidental charges. A notice stating the time and place of such sale and the amount of the instalment due and payable and, if the shares are certificated, the number or numbers of the certificate or certificates and the number of shares of stock thus offered for sale shall be sent by the treasurer by mail not less than ten days prior to such sale to such stockholder and also the person who originally subscribed to the said delinquent stock. Upon the sale of such stock as aforesaid, the directors shall transfer the shares so sold to the purchaser. If the transfer is by delivery of a stock certificate therefor, such certificate shall be so stamped as to indicate the instalments paid. If the transfer is by registration of uncertificated shares on the books of the corporation, the initial transaction statement issued pursuant to Article 8 of chapter one hundred and six shall indicate the instalments paid. In either case the purchaser shall be liable under this section for all subsequent instalments. Upon such transfer any certificate or certificates previously outstanding with respect to the shares shall be void except as provided in said Article 8. The balance, if any, of the proceeds of such sale shall be held by the corporation for such stockholder, his representatives or assigns, and be paid to him or them at any time upon surrender and delivery to the corporation of his certificate. If no person offers an amount sufficient to pay all instalments due upon such stock with interest and incidental charges, it may or may not be sold, and the delinquent stockholder shall be liable to the corporation in an action at law for such instalments, interest and incidental charges, if the stock is not sold, or for the deficiency, if it is sold, and if a judgment rendered in such action remains unsatisfied for thirty days, the original subscriber shall be so liable. Instead of offering such stock for sale, the directors, at the expiration of the time limited in the notice for payment of such instalments, may proceed by an action at law against the delinquent stockholder, and, if a judgment rendered against him in such action remains unsatisfied for thirty days, against the original subscriber, for the recovery of such instalments, interest and incidental charges. The delinquent stockholder or the original subscriber, as the case may be, upon the payment of such instalments, interest and incidental charges, or of the judgment therefor, shall, if the shares are certificated, be entitled to a certificate of stock, so stamped as to indicate the instruments paid, whereupon the certificate outstanding for such shares shall be void, except as provided in said Article 8 and, if the shares are uncertificated, shall, if the payment is made by the delinquent stockholder, be entitled to a periodic statement reflecting such payment or, if the payment is made by the original subscriber, be entitled to an initial transaction statement reflecting such payment. If a judgment rendered in an action against the original subscriber remains unsatisfied for thirty days, said stock shall be forfeited to the corporation, an entry or transfer to it shall be made on its books, and, thereupon, if the shares are certificated, the certificate outstanding shall be void as aforesaid. While the stock remains the property of the corporation, no dividends shall be declared nor instalments paid upon it; but it shall remain subject to the control of the corporation according to its by-laws.