Stan Sewell paid $50,000 for a franchise that entitled him to market
software programs in the countries of the European Union. Sewell
intended to sell individual franchises for the major language groups of
Western Europe—German, French, English, Spanish, and Italian. Naturally,
investors considering buying a franchise from Sewell asked to see the
financial statements of his business.
Believing the value of the franchise to be $500,000, Sewell sought to
capitalize his own franchise at $500,000. The law firm of St. Charles
& LaDue helped Sewell form a corporation chartered to issue 500,000
shares of common stock with par value of $1 per share. Attorneys
suggested the following chain of transactions:
a. Sewell's cousin, Bob, borrows $500,000 from a bank and purchases the franchise from Sewell.
b. Sewell pays the corporation $500,000 to acquire all its stock.
c. The corporation buys the franchise from Cousin Bob.
d. Cousin Bob repays the $500,000 loan to the bank.
In the final analysis, Cousin Bob is debt-free and out of the picture.
Sewell owns all the corporation's stock, and the corporation owns the
franchise. The corporation's balance sheet lists a franchise acquired at
a cost of $500,000. This balance sheet is Sewell's most valuable
marketing tool.
1. What is unethical about this situation?
2. Who can be harmed? How can they be harmed? What role does accounting play?
Click here for the solution: Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union
