Scenario: Matthew Mulatto and his brother John Mulatto plans to open a business. The major decision they face is how to organize the business. They expect to generate a massive profit during the first...

Scenario:

Matthew Mulatto and his brother John Mulatto plans to open a business. The major decision they face is how to organize the business. They expect to generate a massive profit during the first year. Although they have enough to start the business now as a partnership, they believe cash flow may be an issue as they grow. They believe that the corporate form of operation will be best option. They have hired you as a consultant and seek your advice.

Requirements:

1. Answer the following questions for the Mulatto brothers.

1. How are paid-in-capital and retained earnings:

• Similar?


• Different?

1. What are the main categories of paid-in capital?

1. When does a company declare a cash dividend?

1. Which characteristic of a corporation limits a stockholder's loss to the amount of his or her investment in the stock of the corporation?

1. What does the term par value of stock mean?

1. The owners are desirous of comparing serval financial transactions and possible outcomes to assist in guiding their decision-making process. They assume that the company will be formed on January 1, 2020 and that Mulatto Company’s charter will authorize 1,000,000 shares of common stock and 400,000, $100 par value, 5% cumulative preferred stock.

• Issued 80,000 shares of common stock. Stock has par value of 0.50 per share and was issued at $30.00 per share.

• Issued 12,000 shares of preferred stock at par value as payment in exchange for legal services.

• Exchanged 220,000 shares of common stock for land with an appraised value of $600,000.00 and a building with an appraised value of $350,000.00

• Earned Net income $820,000.00

• Paid dividends to preferred shareholders as well as $2 per share to common stockholders.

Using the info above and as a guide:

1. Prepare the journal entries with narrations to record the following:

• The issuances of stock.


• Close out net income to retained earnings.


• Dividend paid.


• Close out dividend to retained earnings.

1. Prepare Mulatto Company’s Stockholders equity section of the balance sheet at December 31, 2020. The following information must be clearly stated/shown:
   
   
   
   • information on par values,
   
   
   • the number of shares authorized and issued where necessary.
   
   
   • the sub total for the total paid in capital.
   
   
   • Retained earnings.
   
   
   • total stockholders’ equity.