Question

Lena Kay and Kathy Lauder have a patent on a new line of cosmetics. They need additional capital to market the products, and they plan to incorporate the business. They are considering the capital structure for the corporation. Their primary goal is to raise as much capital as possible without giving up control of the business. Kay and Lauder plan to invest the patent in the company and receive 100,000 shares of the corporation's common stock. They have been offered $100,000 for the patent.
The corporation’s plans for a charter include an authorization to issue 5,000 shares of preferred stock and 500,000 shares of $1 par common stock. Kay and Lauder are uncertain about the most desirable features for the preferred stock. Prior to incorporating, they are discussing 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 $150,000 to acquire 1,500 shares of 6%, $100 par nonvoting, noncumulative preferred stock.
Plan 2. Group 2 will invest $100,000 to acquire 1,000 shares of $5, no-par preferred stock and $70,000 to acquire 70,000 shares of common stock. Each preferred share receives 50 votes on matters that come before the common stockholders.

Assume that the corporation is chartered.

Required:
a. Journalize the issuance of common stock to Kay and Lauder.
b. Journalize the issuance of stock to the outsiders wider both plans.
c. Net income for the first year is $180,000 and total dividends are $30,000. Prepare the stockholders' equity section of the corporation's balance sheet under both plans.

Answer 1

a. The journalizing of the issuance of common stock to Kay and Lauder is as follows:

Debit Patent $100,000

Credit Common Stock $100,000

• Issuance of 100,000 shares at $1 each.

b. The journalizing of the issuance of stock to the outsiders under both plans is as follows:

Plan 1:

Debit Cash $150,000

Credit 6% Preferred stock $150,000

• Issuance of 1,500 shares at $100 par.

Plan 2:

Group 2:

Debit Cash $100,000

Credit Preferred stock, 1,000 shares at $5, $5,000

Credit Additional Paid-in Shares: Preferred $95,000

• Issuance of 1,000 shares at $5 each for $100,000.

Debit Cash $70,000

Credit Common Stock $70,000

• Issuance of 70,000 shares at $1

c. The Stockholders' Equity Section of the Kay and Lauder Corporation is as follows:

Stockholders Equity:

Plan 1:

6% Preferred stock, 1,500 shares at $100,   $150,000

Common stock                                                $100,000

Plan 2:

Preferred stock, 1,000 shares at $5,                $5,000

Additional Paid-in Shares: Preferred             $95,000

Data and Calculations:

Value of Patent = $100,000

Authorized preferred stock =  5,000 shares

Authorized common stock = 500,000 shares at $1 par value

Plan 1:

Group 1:

6% Preferred stock, 1,500 shares at $100 par = $150,000

Plan 2:

Group 2:

Preferred stock, 1,000 shares at $5 = $5,000

Additional Paid-in Shares: Preferred = $95,000 ($100,000 - $5,000)

Common Stock, 70,000 shares at $1 = $70,000

Voting shares = 50,000 (1,000 x 50)

Net income                             $180,000

Plan 1: Dividends:

Preferred dividend $9,000

Common stock        21,000

Total dividends                     ($30,000)

Retained earnings               $150,000

Learn more about the issuance of shares to preferred and common stockholders at brainly.com/question/17134082