Re: principal payment missing?

[Dellerman@worldbank.org]

We must remember the distinction between an income statement and a cashflow
statement.  In the non-ESOP firm, the principal payment is not an income
statement event (the cash outflow is a credit balanced by the debit to debt item
with no net effect to equity).  In the ESOP firm, the accounting is even more
difficult (due to the contra-equity loan balance account etc) but the essence is
that it is then a deductible expense which generates the tax break.  Thus the
accounting was correct as it stands.
Cheers, David




Dan Bell <dbell@kent.edu> on 10/19/99 10:37:56 PM

Please respond to ownership@cog.kent.edu


To:   Ownership@Cog.Kent.Edu
cc:

Subject:  principal payment missing?



In David Ellerman's comparision of the ESOP and non-ESOP
loan, he appears to leave out the $200 principal payment
of the non-ESOP company:

Non-ESOP Corporation
EBIT                 $1030
- Interest             -30
Taxable Income       $1000
- Income Tax (50%)    -500
Increase to Equity    $500
Principal payment     -200   This was left out
NET increase to EQ    $300

All of this $300 belongs to the owner of the non-ESOP corporation.

In the ESOP Corporation, there is $400 left to divide among the
original non-ESOP owner and the ESOP. Without knowing the
portion of stock acquired, we cannot compare this $400 and $300.





      _______________________________
      David Ellerman
      Economic Advisor to the Chief Economist
      World Bank, Room MC4-335
      1818 H St., NW
      Washington, DC 20433
      Ph: 202-473-6368
      Fx: 202-522-1158