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Chapter 13: Q39PGA_1 (page 718)

Organizing a corporation and issuing stock

Montel and Jeremy are opening a paint store. There are no competing paint stores in the area. They must decide how to organize the business. They anticipate profits of $350,000 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. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

1. What is the main advantage they gain by selecting a corporate form of business now?

Short Answer

Expert verified

The transfer of ownership does not affect the continuity of the corporation.

Step by step solution

01

Basic Introduction

A corporation is a legal entry working to earn the profit. Company is the group of the people who operate and manage the operations of the company.

02

The main advantage they gain

Perpetual succession is one of the major advantages of a corporation regarding its legal existence as separate from its owners or shareholders. This states that any change in ownership of a company does not influence the status of the company.

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Most popular questions from this chapter

Computing earnings per share, price/earnings ratio, and rate of return on common stockholders鈥� equity

Bianchi Company reported these figures for 2018 and 2017:

2018 2017

Income Statement鈥攑artial:

Net Income \( 34,380 \) 18,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet鈥攑artial:

Total Assets \( 285,000 \) 280,000

Paid-In Capital:

Preferred Stock鈥�11%, \(9 Par Value; 60,000 shares

authorized, 12,000 shares issued and outstanding

\) 108,000 \( 108,000

Common Stock鈥擻)2 Par Value; 60,000 shares

authorized, 50,000 shares issued and outstanding

100,000 100,000

Paid-In Capital in Excess of Par鈥擟ommon 14,000 14,000

Retained Earnings 60,500 38,000

Total Stockholders鈥� Equity \( 282,500 \) 260,000

Requirements

3. Compute Bianchi Company鈥檚 rate of return on common stockholders鈥� equity for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest whole percent.

What are the two basic sources of stockholders鈥� equity? Describe each source.

Match the accounting terminology to the definitions.

1. Factoring receivables a. A monetary claim against a business or an individual.

2. Debtor b. The party to a transaction who takes on an obligation/payable.

3. Accounts receivable c. Using receivables as security (collateral) for a loan.

4. Maturity date d. The right to receive cash in the future from customers for goods sold or for services provided.

5. Receivable e. The date when a note is due.

6. Pledging receivables f. Selling receivables to a finance company or bank.

Journalizing issuance of stock and preparing the stockholders鈥� equity section of the balance sheet

The charter of Evergreen Corporation authorizes the issuance of 900 shares of preferred stock and 1,400 shares of common stock. During a two-month period, Evergreen completed these stock-issuance transactions:

Mar. 23 Issued 230 shares of \(3 par value common stock for cash of \)15 per share.

Apr. 12 Received inventory with a market value of \(27,000 and equipment with a market value of \)19,000 for 320 shares of the \(3 par value common stock.

17 Issued 900 shares of 5%, \)20 par value preferred stock for \(20 per share.

Requirements

2. Prepare the stockholders鈥� equity section of the Evergreen balance sheet as of April 30, 2018, for the transactions given in this exercise. Retained Earnings has a balance of \)73,000 at April 30, 2018

Journalizing issuance of stock

Steller Systems completed the following stock issuance transactions:

May 19 Issued 1,700 shares of \(3 par value common stock for cash of \)10.50 per share.

Jun. 3 Issued 300 shares of \(9, no-par preferred stock for \)15,000 cash.

11 Received equipment with a market value of \(68,000 in exchange for 5,000 shares of the \)3 par value common stock.

Requirements

2. How much paid-in capital did these transactions generate for Steller Systems?
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