Course Project 2: Incorporation: Case Analysis and Decision Making This course project deals with incorporating a partnership. This will help you in practicing your evaluation skills in assessing different ways of raising capital to fund business Objective/s: After finishing course project 2, the students are expected to have been able to: 1. Record incorporation of a partnership. 2. Evaluate alternative ways of raising fund for the business. 3. Defend the better alternative in terms of what has been learned in this course. Problem: Juan dela Cruz and Maria Clarita have developed an accounting program which they tagged ACTG1 that they believe can compete with the two current software in accounting. They are to market the product but they lack the funds to do so. They are considering the idea of converting their partnership into a corporation to raise the capital they need without losing control of the business. They intend to make the ACTG1 as their investment in exchange of 120,000 ordinary shares of the corporation. They are also offered P1, 200,000 for the rights to their program. Their planned articles of incorporation include the authorization of 50,000 preferred shares and 500,000, P10 par ordinary shares. Before the incorporation, the partners are discussing their project with two investment firms. They have formulated two different plans. Plan A. Group ABC will invest P1, 000,000 for 10,000 of P5, no -par preferred shares and P 800,000 for 80,000 ordinary shares. It was also agreed that ABC will be given five votes for every preferred share. Plan B. Group XYZ will invest P1, 650,000 for 10,000, 8% P100 Par value non-cumulative, non- voting preferred shares. Requirements: 1. Record the issuance of ordinary shares to Juan dela Cruz and Maria Clarita. 2. For each plans, record the issuance of shares to ABC and XYZ . 3 . Assuming the company earned P1, 800,000 net income on its first year and declared and paid P300, 000 dividends, prepare the shareholders' equity section of the corporation under each plan. Course Project4. Which of the two plans will you recommend to Juan and Maria? Give at least two reasons for your choice. If necessary, show supporting calculation. Solutions: Solutions/ Answers 1. Entry to record the issuance of shares to Juan and Maria Non-Cash Asset P 1,200,000 Ordinary Shares P 1,200,000 2. Entry to record the issuance of shares to Plan A (ABC) Cash 1,800,000 Preferred Shares 1,000,000 Ordinary Shares 800,000 Plan B (XYZ) Cash 1,650,000 Preferred Shares 1,000,000 Share Premium 650,000 3. Stockholders' Equity Section of the Balance Sheet for Plan A (ABC) Share Capital: Preferred Shares P 1,000,000 Ordinary Shares 2,000,000 Retained Earnings 1,800,000 Dividends (300,000) Total Shareholders' Equity P 4,500,000 for Plan B (XYZ) Share Capital: Preferred Shares P 1,000,000 Ordinary Shares 1,200,000 Share Premium-Preferred Shares 650,000 Retained Earnings 1,800,000 Dividends (300,000) Total Shareholders' Equity P 4,350,0004. Recommended Plan to Juan and Maria My Choice is Plan B, because of the these reasons: 1. The preferred shares fro Plan B are non-voting as compared to Plan A. 2. Plan B will give Juan and Maria a bigger share in the dividends and a higher earnings per share. If Juan and Maria considered Plan A, the dividend per ordianry share is P1.25 and they will be receiving P150,000 only as compared to Plan B which will give them P1.83 per share and a total of P220,000 dividends for them. The EPS under Plan A is P7.50 while for Plan B its P12.50 Supporting computation and analysis for number 4: Plan A (ABC) Plan B (XYZ) Total Dividends declared: P300,000 Allocation: Preferred Shares , 10,000 shares x P5 per share P 50,000 Preferred Shares, 10,000 x P100 par x 8% P 80,000 Ordinary Shares :( P300,000-P5,000)/200,000 shares=P1.25 per share for Plan A P1.25 x 80,000 100,000 for Juan and Maria P1.25 x 120,000 shares 1.50,000 for Plan B (P300,000-P80,000) 220,000 P220,000 dividends /120,000 shares of Juan and Maria = P1,83 per share P 300,000 P 300,000 Earnings per Share EPS =( Net income less Preferred dividends )/ number of ordinary shares issued and outstanding EPS (Plan A)=( P1,800,000 - P50,000) / 200,000 shares 7.50 EPS(Plan B) = (p1,800,000-P80,000) / 120,000 shares of 12.50 Juan and Maria Course Project