PART A

Simon and Tanya want to start a business as custom builders/renovators of homes. There are no other custom builders in their area and they need to decide how to organise the business. They expect that business will be very profitable as they are forecasting profit of $300,000 in the first year. They have no competition and operate in an area where development is occurring at a rapid pace.They have sufficient funds to form a partnership however they feel that as the business grows cash flow management will be an issue. They feel that the corporate form of business may be better for them in the longer term and they seek your advice.

Required:

1. What are some of the advantages they gain from selecting a corporate form of business now?

2. Would you recommend that they initially issue preference or ordinary shares? Why?

3. If they decide to issue ordinary shares and anticipate an initial market price of $3 per share, how many shares will they need to issue to raise $180,000?

PART B

Simon and Tanya incorporated their company on the 2 July, 2019, calling it Scofield Company Limited. Their Balance Sheet at 31 December 2019 showed the following shareholder's equity:

Ordinary share capital, 61,000 shares issued, fully paid $102,000

Preference share capital ($1.40 per share annual dividend), none issued -

Retained earnings 29,000

Total shareholder's equity $131,000

Required:

1. Were the operations profitable in the first six months? Give your reason.

2. At what price per share did Scofield Limited issue the ordinary shares?

3. During 2020 the company completed the following selected transactions. Record these transactions in the General Journal.

a. Received applications for 2,400 ordinary shares at a total issue price of $5 per share together with application money equivalent to of the issue price of the shares.

b. Issued 2,600 preference shares for cash of $20 per share.

c. Made a call on the partly paid ordinary shares for the balance of the issue price and received the full amount due on the call.

d. Profit for the year was $274,000, and the company declared no dividends. Make the closing entry for the profit.

4. Prepare the shareholder's equity section of the Balance Sheet for Scofield Company Limited as at 31 December, 2020.

5. How much in annual cash dividends will Scofield Company Limited expect to pay to its preference shareholders?