case 3- Justified Wages - Statelmentui Ca1003 LuTput ilings Review View :-.-..-,
ID: 2797879 • Letter: C
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case 3- Justified Wages - Statelmentui Ca1003 LuTput ilings Review View :-.-..-, T | AaBbCcDdEe AaBbCeDdF AaB Normal Title No Justified Wages ified Wages Inc. (the "Company") is a privately held provider of cloud-based software platforms for the Internet of Things (lo). The Company enables product businesses to become loT, service businesses, and helps organizations launch, manage, and monetize the deployment of IoT worldwide. In November 2012, the Company secured financing of $40 million from an independent investor, Well-to-Do Inc. (WTD), in exchange for the following: $30 million for the issue of a new series of its Series E Preferred Stock (Preferred Stock), and $10 million for the sale of its shares of common stock (Common Stock") The purchase of the Preferred Stock and Common Stock were executed within the same transaction. Thus, WTD paid the same value per share for the Common Stock as it did for the Preferred Stock. This is a common practice among venture capitalists. The Company had previously awarded common stock to employees as share-based compensation. As required by the terms of the financing agreement, the Company conducted a tender offer to repurchase an aggregate of S10 million of common stock from its current employees at a per-share price of $4.68. The common stock reacquired from the employees was then sold by the Company to WTD for a like amount of $10 million. The purchase price of S468 was independently negotiated with WTD-The Company acted as a principal in both transactions with WTD and the employees. That is, the Company did not act as an agent to purchase shares from employees on behalf of WTD. On the basis of an independent third- party valuation, the Company concluded that the purchase price paid to the employees ($10 million) exceeded the fair value of common stock by $2.6 million ASC 718-20-35-7 states, in part: The amount of cash or other assets transferred (or liabilities incurred) to repurchase an equity award shall be charged to equity, to the extent that the amount paid does not exceed the fair value of the equity instruments repurchased at the repurchase date. Any excess of the repurchase price over the fair value of the instruments repurchased shall be recognized as additional compensation cost Pursuant to the guidance above, the Company recorded a debit to treasury stock and expense in the amounts of $7.4 million (representing the fair value of the common stock) and $2.6 million (representing the excess of purchase price over fair value), respectively, and a credit to cash. Required: 1. Should the $10 million paid to employees and the $10 million received from WTD be presented gross or net in the Company's statement of cash flows? 2. How should the Company classify the cash received and paid in its statement of cash flows?Explanation / Answer
Answer to both 1&2: The cash of $10M paid to employees should be shown gross in the cash flow statement as amount paid to repurchase shares from employees (should be classified as outlow under financing activities in cash flow statement). And the cash received from WTD as proceeds from issue of common stock and preferred stock total being $10M should be shown separately (should be classified as inflow under financing activities in cash flow statement).
The reason why both the transactions should be shown gross is because, the reader of the cash flow statement should understand the facts that there has been redemption of employees shares and same amount of issue of common stock from WTD. If it is not shown as gross then the reader of the cash flow statement will not be able to understand the set of events that has happenned during the year.
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