Problems: 8-18, 8-23

Recording and reporting stock transactions and cash dividends across two accounting cycles.

Davis Corporation was authorized to issue 100,000 shares of $10 par common stock and $50,000 shares of $50 par, 6 percent, cumulative preferred stock. Davis Corporation completed the following transactions during its first two years of operations.

2012

Jan.   2 Issued 5,000 shares of $10 par common stock for $28 per share.

        15 Issued 1,000shares of $50 par preferred stock for $70 per share.

 

Feb.  14 Issued 15,000 shares of $10 par common stock for $30 per share.

 

Dec. 31During the year, earned $170,000 of cash service revenue and paid $110,000 of cash operating

              expenses.

 

       31 Declared the cash dividend on outstanding shares of preferred stock for 2012. The dividend will

            be paid on January 31 to stockholders of record on January 15, 2013.

 

2013

Jan 31 Paid the cash dividend declared on December 31, 2012.

 

Mar 1 Issued 2,000 shares of $50 par preferred stock for $58 per share.

 

June 1 Purchased 500 shares of common stock as treasury stock at $43 per share.

 

Dec 31 During the year, earned $210,000 of cash service revenue and paid $175,000 of cash operating  

             expenses.

 

      31 Declared the dividend on the preferred stock and a $0.60 per share dividend on the common

            stocks.

 

Required

a.      Organize the transaction data in accounts under an accounting equation.

b.      Prepare the stockholders’ equity section of the balance sheet at December 31, 2012.

c.       Prepare the balance sheet at December 31, 2013.

 

 

Problem 8 – 23

 

Shawn Bates was working to establish a business enterprise with four of his wealthy friends. Each of the five individuals would receive a 20 percent ownership interest in the company. A primary goal of establishing the enterprise was to minimize the amount of income taxes paid. Assume that the five investors are taxed at the rate of 15% on dividend income and 30% on all other income and that the corporate tax rate is 30 percent. Also assume that the new company is expected to earn $400,000 of cash income before taxes during its first year of operation. All earnings are expected to be immediately distributed to the owners.

 

Required

Calculate the amount of after tax cash flow available to each investor if the business is established as a partnership versus a corporation.

Write a memo explaining the advantages and disadvantages of these two forms of business organization.

Explain why a limited liability company may be a better choice than either a partnership or a corporation.

 

 

Memo to Baku and Hanson

Read ATC 8-4 in Chapter 8 and write a memo describing the advantages and disadvantages of organizational forms. You may research other sources regarding accounting internal controls. The paper should be at least 400 words and should include your personal observations and conclusions.

 

ATC 8-4  Comparison of organizational forms

Jim Baku and Scott Hanson are thinking about opening a new restaurant. Baku has extensive marketing experience but does not know that much about food preparation. However Hanson is an excellent chef. Both will work in the business, but Baku will provide most of the funds necessary to start the business. At this time, they cannot decide whether to operate the business as a partnership or a corporation.

Required

Prepare a written memo to Baku and Hanson describing the advantages and disadvantages of each organizational form. Also, from the limited information provided, recommend the organizational form you think they should use.