Carl -
Looking at your example, I have difficulty because of the order of compensation, but it seems to me that the increase in profit is real, as evidenced by the increased dividend that is paid in the single year. However, I don't have a good feel yet.
Please try to tear apart the following example which has the compensation go from cash to cash plus, and tries to put all the costs where I THINK they should be.
MONYTREE.COM
Assume a company whose only asset is a tree whose leaves are $100 bills. It produces 10,000 leaves per year for a total of $1M. The company has a single employee, a college educated guard from DUKE who led the nation in scoring in his senior year, but was bypassed in the NBA draft because of injury, who is paid $200K per year to guard the tree during the day. The company has 80K shares outstanding and the entire $800K annual profit is paid out in dividends of $10 per share.
By mutual agreement, the shareholders and the guard decide that he shall pursue a Doctorate in Genetic Engineering at night with the hope that the tree can be genetically modified to produce $1000 bills instead of $100 bills. To facilitate this, the shareholders approve a 5:4 stock split to increase the number of shares to 100K. The new 20K shares that the shareholders receive are then signed over to the guard. The $800K annual profit is now distributed in dividends of $8 per share with $640K going to the original shareholders and $160K going to the guard.
Evidence is later found that the shares may not have been signed over to the daytime guard at all, but rather to his identical twin, who is really the potential night school Genetic Engineer and has no employment relationship to the company. If this turns out to be true, the $160K in dividends does not go to the guard who works for the company, but rather to his twin brother, who does not. How does this affect company accounting?
Thanks, Don |
