Question

(a) The directors of Happy Trails are keen to purchase a block of land next door to the company’s business premises for $150,000 which will allow the company to expand. They set up a subsidiary company to purchase the land with the intention that Happy Trails would become the sole shareholder of the subsidiary. Happy Trails contributed $10,000 capital as a deposit to the subsidiary with the intention that the balance of the purchase price would be raised by way of a bank loan. However, the bank wanted $40,000 deposit and Happy Trails did not have enough cash to make up the shortfall. The three directors of Happy Trails decide to contribute $10,000 each personally in order for the sale to proceed. By doing so, they became shareholders of the subsidiary. One year later Happy Trails decides that they don’t need to expand, and the land is sold for $300,000 and the directors who had put in their own money to finance the deal made a large profit. Miss Eli and Mr Wu argue that the whole of the profit belonged to Happy Trails and that the three directors should not be allowed to keep their profit. Advise Miss Eli and Mr Wu. (b) The three directors recently had a serious disagreement about the direction the company should take and as a result they are hardly speaking to each other. This means that it is very difficult for any business decisions to be made and the company is suffering financially. Mr Wu is very concerned as a shareholder. Advise Mr Wu.

Answer 1

a) Profit is returm to capital to owners of a company.

The company Happy trails has subsidiary which has shares distributed among three directors of happy trails and the corporation happy trails itself. Thus the ownership of the subsidiary was in hands of Happy trail corporation and the three directors of Happy trail corporation. Kindly note that haooy trail as being a company is separate entityt than its directors.

Now when a company winds up, after paying off the debts to outsiders, the company distributes remaining profits among the owners (shareholders) according to their respective share in the company.

Accotding to the share, dividend (return to captal as profit) is decided upon which the profit of subsidiary should be distribuuted among the owners who are the Happy trail co., and three directors of it.

Thus the opinion of  Miss Eli and Mr Wu that whole profit belongs to the holding company Happy trails rather it shoyld be distributed according to the shares they hold among the directors and Happy trails.