Scruffy Murphy is the president and principal shareholder of Scruffy's Bar and Grill Limited. To expand, the business is applying for a $250,000 bank loan. The bank requires the company to have shareholders' equity of at least as much as the loan. Currently, shareholders' equity is $150,000. To get the loan, Murphy is considering two options for beefing up the shareholders' equity of the business:
Option 1. Issue $100,000 of common shares for cash. A friend has been wanting to invest in the company. This may be the right time to extend the offer.
Option 2. Transfer $100,000 of Murphy's personal land to the business, and issue common shares to Murphy. Then, after obtaining the loan, Murphy can transfer the land back to himself and cancel the common shares.
Requirement 1
Journalize the transactions required by each option.
Requirement 2
Use the Framework for Making Ethical Judgments in Chapter 1 (p. 27 ) to determine which plan would be ethical.