A closely held corporation sought to repurchase 25 percent of its outstanding shares from one of its shareholders. The corporation and the shareholder agreed that the corporation would purchase all of the shareholder's stock at a price of $500, 000, payable $100, 000 immediately in cash and the balance in four consecutive annual installments. The State's incorporation statute provides: "A corporation may purchase its own shares only out of earned surplus but the corporation may make no purchase of shares when it is insolvent or when such purchase would make it insolvent." At the time of the repurchase of the shares, the corporation had an earned surplus of $250,000. c. Which argument should prevail? Explanation Evidence supporting the argument that the corporation might have fulfilled the incorporation statute are: The provision of corporation states that the corporation might repurchase shares only when the corporation has surplus money. The corporation has earned the surplus amount of $250,000 and might have the ability to pay cash of $100,000. The corporation's members might perform the earned surplus test to check whether the corporation can earn surplus in the future so that another year's balance installment can be paid. Evidence supporting the argument that the corporation might not have fulfilled the incorporation statute is: As per the provision, the corporation should have earned surplus money to repurchase the shares. However, the earned surplus of the corporation is $250,000, whereas the value of the repurchased shares is $500,000. It shows that the surplus is not sufficient to repurchase the outstanding shares. The earning surplus of the corporation depends on various factors. The earning surplus test might give the corporation the potential ability to earn but cannot indicate the actual surplus earning of the corporation