I came across an old Three Stooges skit wherein $10 was used repeatedly to repay $60 owed between the characters. It seemed a little silly, but it got me wondering as to whether it held up.
Over-analyze the accounting implications of a 20 second joke? Yes, please!
The Skit
Moe, to Larry: “And speaking of money, how about the $20 you owe me?”
Larry, to Moe: “Well I only got $10, so here’s $10 and I owe you $10.”
Curly, to Moe: “Hey Moe, you owe me $20.”
Moe, to Curly: “Well here’s $10 and I owe you $10.”
Larry, to Curly: “You owe me $20.”
Curly, to Larry:” Here’s $10 and I owe you $10.”
Larry, to Moe: “Here’s the $10 I owe you.”
Moe, to Curly: “Here’s the $10 I owe you.”
Curly, to Larry, “Here’s the $10 I owe you.”
Larry: “Good, now we’re all even.”
Is This Legitimate?
Short answer: Yes.
Long answer: Before and after the repayments, the net value of all three characters remains the same. So as much as it might seem odd that the same $10 was used to repay a combined $60 between the three characters, it checks out.
In accounting parlance, here’s what’s going on. Prior to the rapid fire repayments, Moe, Larry and Curly each have a $20 loan payable (i.e., a liability, or money that they owe) and a $20 loan receivable (i.e., an asset, or money that they are owed). In addition, Larry have $10 cash (another asset). In terms of their personal net worth (assets less liabilities), Moe and Curly both have a net worth of $0 ($20 receivable less $20 payable). Larry has a net worth of $10 ($20 receivable plus $10 cash, less $20 payable).
After each repayment, the net worth of Moe, Larry and Curly has not changed:
- When Larry pays Moe the first time: Larry’s net assets are still $10: a $20 receivable to Curly and a $10 payable to Moe. Moe’s net assets also remain unchanged at $0: $10 cash, $10 receivable from Larry and a $20 payable to Curly.
- When Moe pays Curly the first time: Moe’s net assets are still $0: $10 receivable from Larry and a $10 payable to Curly. Curly’s net assets are still $0: $10 cash, $10 receivable from Moe, and $20 payable to Larry.
- When Curly pays Larry the first time: Curly is still $0: $10 receivable from Moe, $10 payable to Larry. Larry is still $10: $10 cash, $10 receivable from Curly, $10 payable to Moe.
- When Larry pays Moe the second time: Larry’s only asset is the $10 receivable from Curly. Moe’s still at $0 net assets with $10 cash and $10 payable to Curly.
- When Moe pays Curly the second time, both are still at $0 net assets. Moe no longer has any amounts receivable or payable. Curly has $10 cash and $10 payable to Larry.
- Final transaction, Curly pays Larry the second time. Curly has no receivable or payable, and Larry has the $10.
In theory, all three parties could have realized their joint collection status and cleared the amounts owed and due without having gone through the charade of having passed cash between them. But that’s not as much fun!
Cute, But Who Cares?
Accounting, finance and business types, or anyone who wants to do business with them. So… most people, actually. For example:
Banks: Most short-term lending agreements are secured using a company’s assets as collateral. For industries without significant tangible assets, trade receivables can be put up as collateral. If those receivables have been grossed up via dubious means, then additional value could be extracted from those sorts of lending agreements. And that can result in significant funds; Our Experts were involved in a case in the film industry where over $100 million was lent based on film ultimates (receivables) from related parties.
Bankruptcy Courts: There are multiple tiers in which debtors are repaid in bankruptcy court. It is possible for a bad faith actor to extract value in a bankruptcy proceedings by recording related party payables. This is what Alex Jones was alleged to have done following the billion dollar judgement in the Sandy Hook case.
Auditors and The SEC: The folks with whom the financial statements of publicly traded companies are reported. Because these issues are well known, publicly reported financial statements are carefully scrutinized by auditors, who are always on the look out for transactions that lack economic substance.
What Should I Do?
Facing accounting complexities in a case? Hire an expert witness (like us). As an expert, we will save you time and money because:
- We are intimately familiar with accounting and financial records these matters rely on for evidence.
- We can help you craft document request lists to get the correct documents from opposing parties.
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- Our Team have served as an expert in hundreds of matters across every imaginable industry.