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Concept explainers
Decision Case 13-1
Lena Kay and Kathy Lauder have a patent on a new line of cosmetics. They need additional capital to market the products, and they plan to incorporate the business. They are considering the capital structure for the corporation. Their primary goal is to raise as much capital as possible without giving up control of the business. Kay and Lauder plan to invest the patent (an intangible asset, which will be transferred to the company’s ownership in lieu of cash) in the company and receive 100,000 shares of the corporation’s common stock. They have been offered $100,000 for the patent, which provides an indication of the fair market value of the patent.
The corporation’s plans for a charter include an authorization to issue 5,000 shares of preferred stock and 500,000 shares of Si par common stock. Kay and Lauder are uncertain about the most desirable features for the preferred stock. Prior to incorporating, they are discussing their plans with two investment groups. The corporation can obtain capital from outside investors under either of the following plans:
- Plan 1. Group 1 will invest Si 50,000 to acquire 1,500 shares of 6%, $100 par nonvoting, noncumulative preferred stock.
- Plan 2. Group 2 will invest $100,000 to acquire 1,000 shares of $5, no-par preferred stock and $70,000 to acquire 70,000 shares or common stock. Each
preferred share receives 50 votes on matters that come before the common stockholders.
Requirements
Assume that the corporation has been chartered (approved) by the state.
1. Journalize the issuance of common stock to Kay and Lauder. Explanations are not required.
2. Journalize the issuance of stock to the outsiders under both plans. Explanations are not required.
3. Net income for the first year is Si 80.000, and total dividends are $30,000. Prepare the
4. Recommend one of the plans to Kay and Lauder. Give your reasons.
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Chapter 13 Solutions
Horngren's Accounting: The Managerial Chapters (12th Edition) (loose Leaf Version)
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- Scenario: Karen and Yanique are opening a jewellery store with no competition in the area from which they intend to operate their business. Their fundamental decision is how to organize the business. They anticipate super profits the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow and as such, they feel the corporate form of operation will be best for the long term. They seek your advice. Requirements: State three (3) of the main advantage they gain by selecting a corporate form of business now. Would you recommend they initially issue preferred or common stock? Why? If the corporation when formed sets a par value for its shares low and issue common stock for a price above par, what is this amount above par called? Can this amount be treated as a gain, income, or profit for the corporation? Please give the reason for your answer. Assume one year later…arrow_forwardScenario: Karen and Yanique are opening a jewellery store with no competition in the area from which they intend to operate their business. Their fundamental decision is how to organize the business. They anticipate super profits the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow and as such, they feel the corporate form of operation will be best for the long term. They seek your advice. Requirements: Would you recommend they initially issue preferred or common stock? Why? If the corporation when formed sets a par value for its shares low and issue common stock for a price above par, what is this amount above par called? Can this amount be treated as a gain, income, or profit for the corporation? Please give the reason for your answer.arrow_forwardPreincorporation. Cummings, Okawa, and Taft arerecent college graduates who want to form a corporation tomanufacture and sell digital tablets. Peterson tells them he willset in motion the formation of their corporation. First, Peterson makes a contract with Owens for the purchase of a pieceof land for $20,000. Owens does not know of the prospectivecorporate formation at the time the contract is signed. Second,Peterson makes a contract with Babcock to build a small planton the property being purchased. Babcock’s contract is conditional on the corporation’s formation. Peterson secures allnecessary subscription agreements and capitalization, and hefiles the articles of incorporation. (See Formation and Powers.)arrow_forward