accounting for corporations

Comprehensive Problem 4 Corporations

Part 1

JumpinJehosaPhats is a small business owned by JJ Phats as the sole proprietor. JJphats is incorporating the business.

On January 1, 2012 JumpinJehosaPhats Inc. has been authorized to issue 1,000,000 common shares with a Par Value of $1. In the process of incorporating, the sole proprietor owner’s equity accounts must be closed and the equity must now reflect a corporate stockholders’ equity account.

The books for the Sole Proprietorship indicate the following:

JJ Phats deposited $35,000 to start JumpinJehosaPhats

JJ Phats contributed $50,000 of equipment to start JumpinJehosaPhats

Retained Earnings December 31, 2011 = $150,000

Prepare the Stockholder’s Equity Portion of the Balance Sheet on January 1, 2012.

Part 2

JumpinJehosaPhats was incorporated on January 1, 2012 and a year later it needs $10,000,000 to expand operations. JJ Phats is the sole shareholder of the corporation.

The corporation is considering three methods to raise the capital:

· issuing common shares at FMV

· issuing preferred stock with par = $1000

· issuing 10 year bonds with par = $1000

You have been hired to determine the best way for the company to obtain the funds needed which might be a single method or combination of methods. Using the following information, discuss the pros and cons of each method and provide necessary calculations to support the position you recommend.

· The company is authorized to issue 1,000,000 shares with a par value of $1.00

· On January 1, 2013 an appraisal of the company indicates that it has a current value of $25,000,000.

· On January 1, 2013 current interest rates are 3.5% APR and rising.

· On December 1, 2012 the competition (LeapinLizards Inc) issued 10,000 ten year cumulative preferred shares with par = $1000 at 3.4%

Page 1