Question

Adam, Beth, Clayton and David are forming a bakery business, called ABCD Corp, and decided to organize as a corporation. Adam Beth and Clayton will each own 300 shares of the common stock and David will own 100 shares of the stock (there are 1000 shares total of the corporation). Adam is contributing cash of $200,000, Beth is contributing equipment from a prior business that was originally purchased for $300,000 and was depreciated for tax purposes by $120,000 (current FMV is $200,000). Clayton is contributing a store front that he purchased two years ago for $250,000, but is currently worth only $200,000. David is contributing his time and will work full time for the business as the manager for the first year to train all the staff and get the business running on its own (David’s services would cost $67,000).

E. What would be the result if two years after formation, a capital call is made and each shareholder is required to contribute $100 of cash for each share owned? What if Beth wanted to meet the capital call with appreciated property?

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Answer 1

Adam , Beth , Clayton and David forming a bakery business called ABCD Corp.

Holding of each members out of 1000 shares :

Adam = 300 shares

Beth= 300 shares

Clayton = 300 shares

David = 100 shares

1) Adam is contributing cash of $200,000

  Cash A/C .................Dr. $200,000

To Captial A/C (Adam)    $200,000

2) Beth is contributing Equipment whose FMV is $200,000 [we will record the FMV in the books ]

  Equipment A/C ................Dr. $200,000

To Capital A/C (Beth) $200,000

3) Clayton is contributing a Store front that he purchased two years ago for $250,000, but is currently worth only $200,000.

Store Front A/C ..............Dr. $200,000

To Capital A/C (Clayton) $200,000

4) David is contributing his time and will work full time for the business as the manager for the first year to train all the staff and get the business running on its own (David’s services would cost $67,000).

Manager Remuneration A/C ............Dr. $67,000

To Capital A/C (David) $67,000

( Here we consider the services given by the David as the manager is payable as Remuneration and Debited as an expense account )

(i) After 2 years capital call is made, and each shareholder required to contribute $100 cash for each share owned.

REQUIRED CASH CONTRIBUTION OF CAPITAL:

Adam = $100 * 300 shares = $30,000

Beth = $100 * 300 shares = $30,000

Clayton = $100 * 300 shares = $30,000

David = $100 * 100 shares = $10,000

- Since Adam had already given $ 200,000. Therefore he is not required to bring cash.

- Beth had given the equipment worth $ 200,000. He will bring cash $ 30,000 and equipment become the laibilty in the books of ABCD Corp.

- Clayton had given store front worth $ 200,000. He will bring cash $30,000 and Store front will become the liability in the books of ABCD Corp.

- David had served as manager for 1 year of services worth $67,000. He is not required to bring cash in ABCD Corp because he has already served to the company more than $30,000.

(ii) If the Beth wanted to meet the capital call with appreciated property.

Yes, Beth can do the same only if  the policy of the ABCD Corp allows for the same. In that case Property's appreciation will be adjusted against the capital call requirement