COMMON STOCK Issuance and TREASURY STOCK Question

The Cajun Fishing Company (“CAJUN FISH” as it was known) of StBernard’s Parish has been extremely successful since the BP oilspill. After that spill, many fishing companies went out ofbusiness – they did not have enough capital saved to make itthrough the period where Louisiana fishing was either notrecommended or outright prohibited. Still others did not qualifyfor short term government grants from the US government becausethey were found to have never filed taxes (they operated as purecash businesses and it was nearly impossible for the Federalgovernment to identify them so as to force them to pay taxes).

Cajun Fish had come out of the Oil Spill with plenty of capitaland they qualified for federal grants because they had compliedwith tax laws. They used their surplus capital to buy up the unusedboats of other fisherman, and many of them stayed in the businessby becoming CAJUN FISH employees.

It had been over ten years since the BP Oil Spill and CAJUN FISHhad grown and continued to do well. They were hoping to expandfurther when their owner, Jean-Claude, realized one way he could“make money” was to sell Common Stock to possible equityshareholders. Jean-Claude was also clever. He had a cousin inFrance, Pierre, who had done the same thing with the family’sfishing company in Brittany, but Pierre had kept enough shares tocontrol the publicly held company. Jean-Claude would keep 60% ofthe company and sell 40% of it to the public but he wanted CAJUNFISH to keep the cash proceeds for investment in future growth.

Jean-Claude called a meeting of the Board, consisting of hiscousins Marie, Helene, Claire, Maurice, Emile-Marie, Bertrand andEric. Eric was a lawyer and said the first thing Jean-Claude wouldneed to do is incorporate and then use his By-Laws to decide thenumber of authorized shares, how many to issue, and what their PARVALUE would be. Then they would decide what the Market Price pershare might be when the 40% of the shares were offered tooutsiders.

Jean-Claude and the Board decided, after incorporation, toauthorize 100,000 shares. He kept 60,000 shares representing hiscurrent interest in the company and planned to offer a new trancheof issued shares, 40,000 shares to be precise, to the public toraise cash. The Board decided to give each share a $ 20 Par Value.Jean-Claude’s shares and the new tranche of shares, the 40,000,would be the same class of Common Stock.

The company agreed to offer their 40,000 shares to the public ina “Louisiana only” offering at $ 200 per share. The shares wereoversubscribed and the operation was very successful. CAJUN FISHreceived $200 for each of the 40,000 shares.

a. Show the accounting for the issuance of the 40,000 shares andthe receipt of the cash.

b. One year after this successful offering Jean-Claude realizedhe did not like running a public company. His cousin Eric, thelawyer, suggested he could start to buy back shares that were soldthe previous year and eventually make the company private again.CAJUN FISH had had a successful year since the public offering andthey could afford a premium to convince shareholders to give uptheir shares. They offered $ 400 per share for each of the 40,000shares outstanding. They were only able to get 20,000 shares back.The holders of the remaining shares decided to hold on to theirinvestments. Show the accounting for the share buyback assumingthat the shares will not be destroyed so that they can be used inthe future for a reissuance.

c. The third year, one year after the buyback, and for the firsttime in its history CAJUN FISH realized it was losing money.Jean-Claude decided he would get an advantage from remaining publicand decided to resell shares to the public market.

i. In CAJUN FISH’s first attempt at reselling shares, theyreceived $ 500 per share for 10,000 shares. Show the accounting forthis reissuance.

ii. CAJUN FISH made a second attempt to sell its shares. Thistime it sold the remaining 10,000 shares meaning that it would holdno shares previously bought back. But JeanClaude authorized thissecond sale without evaluating the state of the equity markets andso while all the shares were sold, the price he receive was only $150 per share. Show the accounting for this second sharere-issuance.