[bgau]

My client invested $105,000 into his company earlier this year. His bookkeeper coded it to his shareholders loan account and thoughtout the year it was reduced to approx. $50,000 by draws that he took. The draws have stopped as the the company is now short of cash. Can the balance in the shareholders loan account be reclassified as contributed capital as there are no terms for repayment and no interest is accruing? My thinking was that the original $105,000 should have been originally coded to contributed capital however there would now be a large receivable due from sharholder which I want to avoid. Thought this might be simpler and cleaner providing it complies with GAAP.

[unknown]

And what reason do you have to believe it is 'contributed capital'?

[David Blue]

Bert_Mulder_CGA, on Sep 26 2009, 12:36 AM, said:

And what reason do you have to believe it is 'contributed capital'?

Me thinks you need to get hold of the Minute book, to get the proper set up for the capital set up.

Why can terms of repayment and terms not be set up now for the shareholders loan ? or lack of a shareholders loan

Me thinks you need to start over on this account and revisit your train of thought

Why would you have to have large receivable ?

Start over,

[bgau]

Bert_Mulder_CGA, on Sep 25 2009, 04:36 PM, said:

And what reason do you have to believe it is 'contributed capital'?

He originallay put it back into the company to keep it going.

[JohnNP]

bgau, on Sep 25 2009, 09:59 PM, said:

He originallay put it back into the company to keep it going.

you should refer this to the corporation's accountant.

[David Blue]

JohnNP, on Sep 26 2009, 05:29 AM, said:

you should refer this to the corporation's accountant.

John, I think the guy asking the question is the ACCOUNTANT !

He said " My Client"

I think the advice I should have given and all should give is:

You need to seek out a more qualified Accountant to help you out. Pay for the expert advice and do it right the first time.

[bgau]

David Blue, on Sep 26 2009, 07:19 AM, said:

John, I think the guy asking the question is the ACCOUNTANT !

He said " My Client"

I think the advice I should have given and all should give is:

You need to seek out a more qualified Accountant to help you out. Pay for the expert advice and do it right the first time.

I think that's what I will be doing first thing Monday morning. Obviously this is not a common occurrence. Thanks.

[unknown]

Do you have any conscept what contributed surplus is?

[bgau]

Bert_Mulder_CGA, on Sep 26 2009, 01:51 PM, said:

Do you have any conscept what contributed surplus is?

Please enlighten me. So far my concept is capital invested in the company over and above share price. Can be shares purchased above par value and also donated capital or equipment.

[JohnNP]

bgau, I am assuming that you are a bookkeeping consultant for this corporation?

This issue should be referred to the corporation's Accountant.

Show the Accountant (all) the documentation, and he will advise how it is required to be treated for tax (and accounting) purposes.

Unfortunately, accounting and tax fictions cannot be invented out of thin air in arrears just because they may or may not look nicer in the eyes of some.
I dont know why you wish to try to change reality in this circumstance, but it would be better to take the Corporation's Accountant's opinion over mine.

[Marcello]

JohnNP, on Sep 26 2009, 01:29 AM, said:

you should refer this to the corporation's accountant.

The comment should be embedded into each new thread automatically. Would save you allot of time JohnNP

[unknown]

Marcello, on Sep 28 2009, 11:49 AM, said:

The comment should be embedded into each new thread automatically. Would save you allot of time JohnNP

At the risk of stating the obvious...

Are you questioning John's sound advice...

(please notice my trailer....)

Dictionary definition of contributed capital:

What Does Contributed Capital Mean?
An entry on the shareholders' equity section of a company's balance sheet that summarizes the total value of stock that shareholders have directly purchased from the issuing company.

Contributed capital is calculated by adding the par value of the shares to the value paid that was greater than par value.

http://i.investopedia.com/inv/092009/dictionary/inv_icon.jpgInvestopedia explains Contributed Capital
Shares that investors purchased from the secondary markets are not incorporated into the contributed capital. However, shares sold as a result of a secondary offering would count, as the proceeds of these shares go directly to the issuing company.


http://www.investope...ted-capital.asp


or, per my old accounting textbook, 'Principles of Accounting', by Metcalf, Titard:

Contributed capital is the total amount invested in the corporation by all stockholders. It is often referred to as "paid-in capital." A Corporation usually may have three types of contributed capital - common stock, preferred stock, and additional paid-in capital.

Which category would you place this 'donation to the company' in?

[Marcello]

How can I question his advice when all he posts is:

"you should refer this to the corporation's accountant"

Post something and I will comment on it.

[JohnNP]

Marcello, on Sep 28 2009, 11:27 AM, said:

How can I question his advice when all he posts is:
"you should refer this to the corporation's accountant"
Post something and I will comment on it.

I am sorry that you have not understood the problem.

Accountants do understand the problem indicated.

My suggestion was based on my own interpretation and assessment of the material posted to that point.

If you wish to post your solution suggestion to the problem indicated rather than merely posting off-topic personal attacks, the forum rules would permit you do do that.

[bgau]

JohnNP, on Sep 28 2009, 12:49 PM, said:

I am sorry that you have not understood the problem.

Accountants do understand the problem indicated.

My suggestion was based on my own interpretation and assessment of the material posted to that point.

If you wish to post your solution suggestion to the problem indicated rather than merely posting off-topic personal attacks, the forum rules would permit you do do that.

I've had the opportunity to ask a local CGA the question and although she did not give me a definitive answer she did indicate that if the shareholder were to forgive the loan and treat it as donated funds it would have to be taken in as some sort of revenue thus creating some tax consequences. Does this sound correct? Would it not just become part of retained earnings at that point?

[unknown]

- why would the shareholder forgive the loan?
- why do you seem to insist in adding it to capital?
- what segment of 'contributed capital' do you see it belonging to? and why?
- what is your relationship to the company, and why do you not simply ask the company's accountant as to the correct treatment?

All that said, from your opening post, seems to me it is a clearcut case of a loan from the shareholder to the company. Without interest. Period.

Reported on the balance sheet as other liabilities, probably long term. Due from shareholder. Period.

[bgau]

Bert_Mulder_CGA, on Sep 28 2009, 02:27 PM, said:

- why would the shareholder forgive the loan?
- why do you seem to insist in adding it to capital?
- what segment of 'contributed capital' do you see it belonging to? and why?
- what is your relationship to the company, and why do you not simply ask the company's accountant as to the correct treatment?

All that said, from your opening post, seems to me it is a clearcut case of a loan from the shareholder to the company. Without interest. Period.

Reported on the balance sheet as other liabilities, probably long term. Due from shareholder. Period.

1) Because he wants it to look like he was reinvesting his money back into the company and feels it should be shown in the equity section and not as a liability - he dod not intend to take the money out.
2) I'm not insisting on anything. I'm enquiring if it would be allowable and if there are any hoops that they need to jump thru in order to comply with any rules and regulations out there.
3) Contributed capital. It would not belong in retained earnings as it is not earned thru normal operatons and not in share capital as no shares were sold. There may be other areas I'm not aware of that would be a better fit????
4) Friend of owner and previous accountant retired last year.

I originally thought that it should be a shareholders loan. I was only enquiring to see if this type of reclassification was possible. If it isn't so be it. So far nobody has been able to give me a definitive answer.

[unknown]

it IS shareholders' loan...

He may want to invest it in shares, but that would unneccessarily restrict him down the road....

my advice, leave well enough alone.

[JohnNP]

As regards the Corporation, have the corporation's Accountant deal with it and be done with it.

I can see several potential tax traps so far, for the corp and for the individual, but I havent examined any books or any documentation of this corporation nor of this individual.

Nobody can deal with this adequately over a forum or telephone - and software will be of no help whatsoever.

It has been stated in the Original Post above that the individual shareholder is the "client" of some sort of bookkeeping service of the OP.
The individual shareholder probably could do with some tax advice on his investments.
The OP should discuss the issue with the corporation's accountant for best overall results.
It is unclear why the client should be interfering with another entity's books as there appears no basis.

Definitive answer regarding the Corporation? - Have the Corporation's Accountant direct what should be done. (And if he/she is wrong, his/her malpractice insurance will cover it).
Definitive answer regarding the Individual? - Have the Individual's Tax Accountant examine and advise on the documentation.

[bgau]

JohnNP, on Sep 28 2009, 05:04 PM, said:

As regards the Corporation, have the corporation's Accountant deal with it and be done with it.

I can see several potential tax traps so far, for the corp and for the individual, but I havent examined any books or any documentation of this corporation nor of this individual.

Nobody can deal with this adequately over a forum or telephone - and software will be of no help whatsoever.

It has been stated in the Original Post above that the individual shareholder is the "client" of some sort of bookkeeping service of the OP.
The individual shareholder probably could do with some tax advice on his investments.
The OP should discuss the issue with the corporation's accountant for best overall results.
It is unclear why the client should be interfering with another entity's books as there appears no basis.

Definitive answer regarding the Corporation? - Have the Corporation's Accountant direct what should be done. (And if he/she is wrong, his/her malpractice insurance will cover it).
Definitive answer regarding the Individual? - Have the Individual's Tax Accountant examine and advise on the documentation.

And the verdict is - do nothing and leave as is. Too much potential to create a mess complete with future problems. Thanks for all your advice.