Case :
Ray Link and Sam Chain have written a spreadsheet program (Link Chain) rival Excel. They need additional capital to market the product, 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. Link and Chain plan to invest the software program and receive 100,000 shares of the corporation's common stock. The partners have been offered $100,000 for the rights to the software program.
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. Link and Chain are uncertain about the most desirable features for the preferred stock. Prior to incorporating, the partners 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 $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 stockholders.
• Plan 2. Group 2 will invest $150,000 to acquire 1,500 shares of 6%, $100 par nonvoting, noncumulative preferred stock.
Required:
Assume that the corporation is chartered.
1. Journalize the issuance of common stock to Link and Chain. Explanations are not required.
2. Journalize the issuance of stock to the outsiders under both plans. Explanations are not required.
3. 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.
4. Recommend one of the plans to Link and Chain. Give your reasons.