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Chapter 13: Q46PGB_2 (page 721)

Question: Organizing a corporation and issuing stock

Jimmy and Randy are opening a comic store. There are no competing comic stores in the area. They must decide how to organize the business. They anticipate profits of $550,000 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

2. Would you recommend they initially issue preferred or common stock? Why?

Short Answer

Expert verified

Answer

It is recommended to initially issue common stock to gain the growth advantage.

Step by step solution

01

Common stock definition

Common stock is an ownership share in a corporation that makes the stockholders owner of the company to the proportion of shares they hold. It allows the stockholders voting rights at meetings and the opportunity to receive dividends.

02

Recommendation-

They should initially issue common stock as they get the advantage of growth company as a corporation their major purpose is reinvestment of earnings in the business for expansion. Issuing preferred stock will lead them to pay mandatory dividend payment to the shareholders of the corporation that will lead to earnings distribution.

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Most popular questions from this chapter

Question: Organizing a corporation and issuing stock

Jimmy and Randy are opening a comic store. There are no competing comic stores in the area. They must decide how to organize the business. They anticipate profits of \(550,000 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

3. If they decide to issue \)3 par common stock and anticipate an initial market price of \(75 per share, how many shares will they need to issue to raise \)3,000,000?

Question: Journalizing a large stock dividend

Nelly, Inc. had 320,000 shares of \(2 par value common stock issued and outstanding as of December 15, 2018. The company is authorized to issue 1,300,000 common shares. On December 15, 2018, Nelly declared a 40% stock dividend when the market value for Nelly鈥檚 common stock was \)7 per share. The stock was issued on Dec. 30.

Requirements

1. Journalize the declaration and distribution of the stock dividend.

Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders鈥� equity

The balance sheet of Goldstein Management Consulting, Inc. at December 31, 2017, reported the following stockholders鈥� equity:

Common Stock鈥擻(10 Par Value; 350,000 shares

authorized, 32,000 shares issued and outstanding

Paid-In Capital:

160,000

\) 320,000

650,000

Retained Earnings

Total Stockholders鈥� Equity \( 810,000

Stockholders鈥� Equity

Paid-In Capital in Excess of Par鈥擟ommon 330,000

Total Paid-In Capital

During 2018, Goldstein completed the following selected transactions:

Feb. 6 Declared a 15% stock dividend on common stock. The market value of

Goldstein鈥檚 stock was \)25 per share.

15 Distributed the stock dividend.

Jul. 29 Purchased 2,300 shares of treasury stock at \(25 per share.

Nov. 27 Declared a \)0.10 per share cash dividend on the common stock outstanding.

Requirements

2. Prepare a retained earnings statement for the year ended December 31, 2018. Assume Goldstein鈥檚 net income for the year was $90,000.

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

Gullo Company reported these figures for 2018 and 2017:

2018 2017

Income Statement鈥攑artial:

Net Income \( 18,900 \) 24,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet鈥攑artial:

Total Assets \( 285,000 \) 200,000

Paid-In Capital:

Preferred Stock鈥�11%, \(9 Par Value; 60,000 sharesauthorized, 10,000 shares issued and outstanding\) 90,000 \( 90,000

Common Stock鈥擻)1 Par Value; 45,000 sharesauthorized, 30,000 shares issued and outstanding

30,000 30,000

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

Retained Earnings 51,000 42,000

Total Stockholders鈥� Equity \( 185,000 \) 176,000

Learning Objectives 3, 4, 6

2. Retained Earnings Dec. 31,

2018 \(218,280

Requirements

1. Compute Gullo Company鈥檚 earnings per share for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest cent.

2. Compute Gullo Company鈥檚 price/earnings ratio for 2018. Assume the company鈥檚 market price per share of common stock is \)9. Round to two decimals.

3. Compute Gullo 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.

Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders鈥� equity

The balance sheet of Cullins Management Consulting, Inc. at December 31, 2017, reported the following stockholders鈥� equity:

Common Stock鈥擻(10 Par Value; 200,000 sharesauthorized, 22,000 shares issued and outstandingPaid-In Capital:

163,000

\) 220,000

580,000

Retained Earnings

Total Stockholders鈥� Equity \( 743,000

Stockholders鈥� Equity

Paid-In Capital in Excess of Par鈥擟ommon 360,000

Total Paid-In Capital

During 2018, Cullins completed the following selected transactions:

Feb. 6 Declared a 5% stock dividend on common stock. The market value of

Cullins鈥檚 stock was \)25 per share.

15 Distributed the stock dividend.

Jul. 29 Purchased 2,000 shares of treasury stock at \(25 per share.

Nov. 27 Declared a \)0.20 per share cash dividend on the common stock outstanding.

Requirements

1. Record the transactions in the general journal.

2. Prepare a retained earnings statement for the year ended December 31, 2018. Assume Cullins鈥檚 net income for the year was $87,000.

3. Prepare the stockholders鈥� equity section of the balance sheet at December 31, 2018.
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