Question

Case Study

Rainbow Party Stores (RPS) operates in 60 different locations throughout California and Oregon. Due to the recent recession, the company ran into cash flow problems and had to borrow cash from an investment group called, Sound Investments Inc. (SII). In exchange for 35% of the company's outstanding common stock, SII injected $1.5 million dollars into Rainbow Party Stores.

SII is not familiar with retail operations nor merchandising. The owner of SII, Chris B. was willing to lend money to RPS because he used to date the founder of RPS, Lisa H.

1. How should it be reported- (The question did not ask for the entry).

2. What Criteria should be used. (Questions to ask or observations to document).

Answer 1

1. the transaction appears to be equity infusion by SII into RPS stores. Irrespective of the relationship, the transaction will be recorded as Investments in the books of SII and as equity infusion into RPS books.

2. Criteria: The criteria to record an equity infusion is very much similar to recording any other financial transaction. There is an exchange of money for stake. Ownership will change. Unless related by blood or marriage, dating relationships have no financial impact