Accounting Practices for Managers

Tammy is wealthy and owns 20 percent of TDS Corporation stock. She was looking over the corporation’s financial statements and saw that TDS Corporation was in need of a large loan. Furthermore, she knew that December sales were weaker than expected and that the yearly financial statements would show a lower net income than anticipated. She decided to lend the company $2 million at 6 percent interest and become a customer and purchase $280,000 of merchandise. By Tammy becoming a customer, it would increase the business’s December sales and net income and give the company sufficient cash to meet expenses. When approached with Tammy’s ideas, the CEO objected, stating that the “loan” would have to be recorded as additional paid-in capital because a stockholder could not lend money to a company. Tammy stated that as long as the money was treated as a loan with interest and with the expectation of repayment, it should be allowed. The CEO then stated that it would be unethical for the company to “borrow” money from a stockholder. Also, it would be unethical for the company to “sell” merchandise to a stockholder because it would be done merely to improve the December sales. Tammy suggested that the loan agreement and 6 percent interest would make the arrangement reasonable. She stated that if the interest rate was 25 percent, then the CEO might have a valid ethical concern. Tammy also argued that the sale of merchandise to her was completely ethical because she was not going to return it. She further contended that it should not matter whether she was a stockholder because, in these transactions, she would be a lender and a customer, which would not involve any ethical issues.

1. Can a stockholder lend money to a corporation?
2. What potential ethical issues would be involved?
3. Can a stockholder become a customer and make purchases just to improve sales and net income?
4. Does the amount of the purchase matter?
5. Why do you think the CEO was concerned?