Exercise #2:In Good Company

The waitress set down a plate of nachos and two pints of beer in front of Stan and his old college buddy, Ron Ebbers. Ever since they'd run into each other at Stan's Subway restaurant, the two had rekindled their friendship over beer and nachos at a local restaurant.

"Sales still on the up and up?" Ron asked Stan. "Yep. It just doesn't seem to matter how weak the economy is," said Stan. "People will always want a sandwich that's healthy, great tasting, and a good value."

And now," Stan lifted a glass, " salua toastbecause as of today I'm a corporation!" "Cheers, Stan the Man!" exclaimed Ron and clinked Stan's beer mug. "But doesn't incorporating cost you more money in legal fees and taxes?" "Well, that may be true, but if I don't incorporate and anything goes wrong or some wacko sues me, it could cost me my shirt! Now I have limited liability, but I still pay wages to my employees, send in my royalty fees to Subway, andmuchos profits still go to me."

"Maybe I should buy stock in Subway," Ron interrupted. "I've been dabbling in the market lately and Subway seems like a good bet!" "Unfortunately, you can't buy stock in Subway," said Stan. "Doctor's Associates, the corporation that owns the Subway brand, is privately owned by the founders Fred DeLuca and Dr. Peter Buck.

"Doctor's Associates?" Stan exclaimed. "That's strange. I know the food has helped people lose weight and eat healthy, but is Subway run by a health-care outfit?"

"No, it's actually kind of interesting. In 1965 Fred DeLuca was just a teenager who wanted to go to college and become a doctor, but he didn't have enough money.

Then his family friend, Peter Buck, loaned him the money to start a submarine sandwich joint. DeLuca, of course, never did become a doctor, but Peter Buck holds a Ph.D. in nuclear physics, so they called themselves Doctor's Associatesthey're the 'doctors' and we franchisees are the 'associates.'"

"I guess we all have dreams that we don't carry out," Ron mused. "Hey, don't look sotriste, amigo. I know you're stuck in a dead-end job now, but maybe now is the time to think about new opportunities."

"Whaddaya mean?" Ron asked.

"There's a great space on Alameda Avenue on the other side of Los Palmosnear that fancy new apartment complex. I've been thinking of eventually opening up another store, but I don't want to go it alone. However, I might consider going into a partnership with you to own Subway number 2."

"Well, given the liability risks you just mentionedwhich I assume apply to partnerships as well as sole proprietorships, what about a corporation?" said Ron eagerly. "You could be the majority shareholder and I could have a smaller interest in the restaurant until I learn the ropes and eventually buy you out."

"Whoa there. Let's not talk about buying anyone out just yet," laughed Stan. "Before anythingif you're serious about being a Subway owneryou'll need to go to Subway University."

Ron raised his glass, "Salute."

"No man, salud," corrected Stan. "A toast. To opportunidades del futuro y amistad. To future opportunities and friendship."

Tasks

1. What are all the advantages and disadvantages of forming a corporation?
2. What do you think is the best way for Stan and Ron to own a Subway restaurant jointly? Partnership or corporation? Why?
3. From the following partial mixed list, select the appropriate titles and create a stockholders' equity section using the source-of-capital approachas shown in the Blueprint example for Ununoctium Corporation on July 31, 201X.

Office Equipment

$110,000

Land

215,000

Paid-In Capital in Excess of Par Value-Preferred Stock

85,000

Building

70,000

Accounts Receivable

135,000

Notes Receivable

38,000

Organization Costs

10,500

Common Stock, $8 par value (60,000 shares issued and outstanding; 85,000 shares authorized)

81,000

Retained Earnings

200,000

Subscriptions Receivable-Common Stock

81,000

Patents

12,000

Preferred 17% Stock, $49 par value (6000 shared issued; 8,500 shared authorized)

294,000

Common Stock Subscribed at Par

240,000

Paid-In Capital in Excess of Par Value-Common Stock

17,000

Figure 6

4. Perform the following:

a. Journalize the entries to record the stock subscription plan for Orange Co. On June 1, Orange received subscriptions for 500 shares of $24 par value common stock at $48 per share. The buyer will pay two equal installments on August 31 and November 30.

b. From the following, calculate the dividends for common and preferred stock:

• 8% fully participating preferred stock.
• The board declared a $210,000 dividend.
• Preferred stock 5,000 shares, $50 par value; common stock 10,000 shares,$100 par.

5. The partnership of Jackson, Rackley, and Surber is being liquidated. All gains and losses are shared in a 3:2:1 ratio. Before liquidation their balance sheet looks as follows:

Cash

$23,000

Liabilities

$7,700

Other Assets

15,000

A. Jackson, Capital

11,000

C. Rackley, Capital

18,100

J. Surber, Capital

1,900

Total Assets

38,700

Total Liability + Equity

$38,700

Figure 7

Journalize the entries needed in the liquidation process under the following independent situations and assume a date of July 1, 201X, for sale of assets and a date of July 15 to pay off liabilities and distribute cash to partners:

a. Situation 1: Sold other assets for $33,900.

b. Situation 2: Sold other assets for $6,900.

c. Situation 3: Sold other assets for $2,100. Surber cannot cover his deficit.