Reference no: EM13341209

Comprehensive Problem 4

You are an accountant and have two clients you'll be dealing with during this assignment.  JumpinJehosaPhats is a haberdashery (Google it!), and is owned by J.J. Phats.  JJ is expanding the company and is in need of advice.  He has come to you to discuss the future of the company.

Part 1 - Incorporating

Discuss in detail the requirements of incorporating the business, the advantages and disadvantages, and provide JJ with recommendations.

Part 2 - Account Prep

Using the data provided, create the owner's equity accounts and the shareholder's equity section of the balance sheet after the incorporation of JumpinJehosaPhats.

JumpinJehosaPhats is a small business owned by JJ Phats as the sole proprietor.  JJphats is incorporating the business.

On January 1, 2012 JumpinJehosaPhats Inc. has been authorized to issue 1,000,000 common shares with a Par Value of $1.   In the process of incorporating, the sole proprietor owner's equity accounts must be closed and the equity must now reflect a corporate stockholders' equity account. 

The books for the Sole Proprietorship indicate the following:

JJ Phats deposited $35,000 to start JumpinJehosaPhats

JJ Phats contributed $50,000 of equipment to start JumpinJehosaPhats

Retained Earnings December 31, 2011  = $150,000

 

Prepare the Stockholder's Equity Portion of the Balance Sheet on January 1, 2012.

 

Part 3 - Expansion Considerations

JJ is in need of raising money to expand the company and has identified the methods that he is considering.  Using the information provided, calculate any burden to the corporation and provide recommendations to JJ concerning his options. 

JumpinJehosaPhats was incorporated on January 1, 2012 and a year later it needs $10,000,000 to expand operations.   JJ Phats is the sole shareholder of the corporation.

The corporation is considering three methods to raise the capital:

• issuing common shares at FMV
• issuing preferred stock with par = $1000
• issuing 10 year bonds with par = $1000

You have been hired to determine the best way for the company to obtain the funds needed which might be a single method or combination of methods.   Using the following information, discuss the pros and cons of each method and provide necessary calculations to support the position you recommend.

• The company is authorized to issue 1,000,000 shares with a par value of $1.00
• On January 1, 2013 an appraisal of the company indicates that it has a current value of $25,000,000.
• On January 1, 2013 current interest rates are 3.5% APR and rising.
• On December 1, 2012 the competition (LeapinLizards Inc) issued 10,000 ten year cumulative preferred shares with par = $1000 at 3.4%

Part 4 - Cash Flow

Your second client, Bailey's Chocolates, is asking you to produce a Cash flow from Operating Activities.  Using the Indirect Method and the information provided, calculate the cash flow from Operating Activities. 

 

 

Attachment:- Problem.xlsx