Kimberly Carlyle and Erron Friesen have written a spreadsheet program (Viacalc) to rival Excel. They need additional capital to market the product, and they plan to incorporate the business. They are considering the capital structure. Their primary goal is to raise as much capital as possible without giving up control of the business. Carlyle and Friesen plan to sell the Viacalc software to the corporation in exchange for 100,000 common shares. The partners have been offered $100,000 for the software.
The corporation's plans for the articles of incorporation include an authorization to issue 10,000 preferred shares and 1,000,000 common shares. Carlyle and Friesen are uncertain about the most desirable features for the preferred shares. Prior to incorporating, the partners have discussed 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 $100,000 to acquire 1,000 shares of $7.50, cumulative preferred shares and $72,000 to acquire 60,000 common shares. Each preferred share will receive 50 votes if preferred dividends are more than two years in arrears.
Plan 2 Group 2 will invest $150,000 to acquire 1,200 shares of $8.50 nonvoting, noncumulative preferred shares.
Required
Assume the corporation receives its articles of incorporation.
1. Journalize the issuance of common shares to Kimberly Carlyle and Erron Friesen.
2. Journalize the issuance of shares to the outsiders under both plans.
3. Assume that net income for the first year is $184,000, and total dividends of $34,800 are properly subtracted from retained earnings. Prepare the shareholders' equity section ofa the corporation balance sheet under both plans.
4. Recommend one of the plans to Carlyle and Friesen. Give your reasons.