Question

PRACTICE CASE Corporations: Paid-in capital (L.C 1-3, 5, 6) As the manager of the interior design department of a large furniture store, Jennifer Sweeney has also had a very successful career as a poet. Jennifer now wishes to open her own home interior design store in Norman, Oklahoma. To attract sufficient capital, she forms the new company as a corporation named Tranquility Designs Company. The following transactions involving the common stock of the company took place during August 2011, the first month of operations:

2011

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Aug. 1 Received a charter authorizing the issuance of 500,000 shares of $1 par value common stock. 

       6 Issued for cash 150,000 shares of common stock at $2.60 per share. The shares were purchased by Jennifer (100,000 shares) and her husband Chad (50,000 shares). 

       20 Issued for cash 30,000 shares of common stock at $4 per share to Noah O'Neil. 

       21 Exchanged 10,000 shares of common stock for equipment having a fair market value of $48,000. 

       29 Noah O'Neill sold 1,500 of his shares of common stock to a business associate named Robert Frost for $5.80 per share. 

REQUIRED 

 1. Journalize the transactions in general journal form. 

 2. Prepare a classified balance sheet for Tranquility Designs Company as of August 31, 2011.

 3. Describe some of the advantages that Jennifer will gain by using the corporate form of organization and some of the disadvantages she will experience.

 4. What other sources of equity will Jennifer have in the future that have not been used so far?

Answer 1

1. General Journalform Amountin S Credit Debit No. Date Account Title 1 Aug 06 Cash 390,000 Common stock 150,000 240,000 Paid-in capital, Common 2 Aug 20 Cash 120,000 30,000 90,000 Common stock Paid-in capital, Common 3Aug21Equipment 48,000 10,000 38,000 Common stock Paid-in capital, Common

2. Clasified Balance Sheet Tranquility Designs Company Statements of Assets, Liabilities and Equity August 31, 2011 Assets Amount in S Cash TotalCurrent Assets 510,000 510,000 Property, plant and equipments Total Long Term Assets 48.000 48,000 TotalAssets 558.000 Liabilities and Equitv Amount in S Shareholders' equ Equity shares Paid-in capital, Common 190,000 368,000 Total shareholders' equity 558,000 TotalAssets 558.000

3.

Advantage of Corporate form of business Owners have limited liability. The owners' assets are protected from the debts and liabilities of the corporation. Shareholders are not heldliable for business losses. Easier to raise capital. It is easier to attract capital with the sale of stocks and bonds. A corporation can have an unlimited number of investors Easy to transfer ownership. Shares of stock can be sold. Corporations have perpetual lifetimes. The entity continues to exist beyond the deaths of the owners. Certain expenses are tax deductible. Owners can receive tax-free benefits such as deductions for retirement plans and insurance. . Disadvantages of C Corporations Forming a corporation costs more. Attomeys charge more to fom a corporation States have higher fees. States charge annual franchise fees for corporations More state and federal regulations and oversight. Tax filings are more complicated for corporations. States require the filing of Articles of Incorporation, corporate bylaws and annual reports. Corporations must

4. The number of authorized shares may be kept substantially higher than the number of outstanding shares, so that the organization has the flexibility to sell more shares at any time.