ACC-250 Week 7 DQ 2 – Chapter 13 Critical Thinking

ACC-250 Week 7 DQ 2 – Chapter 13 Critical Thinking: Ethical Issue 13-1

Financial Accounting – Reporting and Interpreting Liabilities

Grand Canyon University

Respond to the following question, exercise, problem, or case in your textbook: “Chapter 13 Critical Thinking: Ethical Issue 13-1.” Use complete sentences, cite any sources used, and answer all required parts.

Ethical Issue 13-1

Note: This case is based on an actual situation.

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 $500,000. This balance sheet is Sewell’s most valuable marketing tool.

Requirements

1. What is unethical about this situation?

2. Who can be harmed? How can they be harmed? What role does accounting play?