Wallace Computer is a small, closely held company. Derek Wallace, the president, holds 80% of the shares. Of the remainder, 10% are held by members of his family and 10% by Kathy Baker, a former officer who is now retired. The statement of financial position of the company at June 30, 2022, was substantially as shown here.

Additional authorized ordinary shares of £300,000 par value have never been issued. To strengthen the cash position of the company, Wallace issued ordinary shares with a par value of £100,000 to himself at par for cash. At the next shareholders’ meeting, Baker objected and claimed that her interests had been injured.

Instructions

a. Which shareholder’s right was ignored in the issue of shares to Derek Wallace?

b. How might the damage to Baker’s interests be repaired most simply?

c. If Derek Wallace offered Baker a personal cash settlement and they agreed to employ you as an impartial arbitrator to determine the amount, what settlement would you propose? Present your calculations with sufficient explanation to satisfy both parties.

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Assets Equity and Liabilities £ 22,000 Share capital-ordinary £250,000 Other 450,0o0 Retained earnings 172,000 £472,000 Current liabilities 50,000 £472,000