Question

Read the following scenario and answer the question in 5-7 sentences.

You are an accountant working with a large corporation that manufactures functional desk supplies (staplers, hole punches, etc.). In a staff meeting with the Chief Financial Officer (CFO) and several other accountants, the CFO mentions that your company has found a company that produces office decorations (prints, paintings, clocks). The CFO mentions that your company would like to buy this decoration business but it has had a few hard years and has a tremendous amount of debt. Your company’s President does not want to merge with the decorating company because he does not want its debts to come with the purchase. Instead, he would like to buy the assets of the decorating company, disclaim the debt, and create a new subsidiary of your company to run that business. He wants to offer a small amount of stock in your company and in the new subsidiary as payment for the assets, but primarily will be giving the current management of that company jobs within the new company to pay for the assets. You’re concerned that this may not work and that your company will still have responsibility for the liabilities of the decorating company. Explain what could be problematic about your President’s desired approach.

Answer 1