Mindy Feldkamo and her two colleagues, Oscar Lopez and Lori Melton, are personal
ID: 2436157 • Letter: M
Question
Mindy Feldkamo and her two colleagues, Oscar Lopez and Lori Melton, are personal trainers at an upscale health spa/resort in Tampa, Florida. They want to start a health club that specializes in health plans for people in the 50+ age range. The growing population in this age range and strong consumer interest in the health benefits of physical activity have convinced them they can profitably operate their own club. In addition to many other decisions, they need to determine what type of business organization they want. Oscar believes there are more advantages to the corporate form than a partnership, but he hasn’t yet convinced Mindy and Lori. They have come to you, a small business consulting specialist, seeking information and advice regarding the choice of starting a partnership versus a corporation.After deciding to incorporate each of the three investors receives 20,000 shares of $2 par common stock on June 12, 2007, in exchange for their co-owned building ($200,000 market value) and $100,000 total cash they contributed to the business. The next decision that Mindy, Oscar, and Lori need to make is how to obtain financing for renovation and equipment. They understand the difference between equity securities and debt securities, but do not understand the tax, net income, and earnings per share consequences of equity versus debt financing on the future of their business.
Problem [C]:
During the discussion about financing, Lori mentions that one of her clients, Roberto Marino, has approached her about buying a significant interest in the new club. Having an interested investor sways the three to issue equity securities to provide the financing they nee. On July 21, 2007, Mr. Marino buys 90,000 shares at a price of $10 per shares.
The club, LifePath Fitness, open on January 12, 2008, and after a slow start begins to produce the revenue desired by the owners. The owners decide to pay themselves a stock dividend, since cash has been less than abundant since they opened their doors. The 10% stock dividend is declared by the owners on July 27, 2008. The market value of the stock is $3 on declaration date. The date of record is July 31, 2008 (there have been no changes in stock ownership since the initial issuance), and the issue date is August 15, 2008. By the middle of the fourth quarter of 2008, the cash flow of LifePath Fitness hs improved to the point that the owners feel ready to pay themselves a cash dividend. They declare a $0.05 cash dividend on December 4, 2008. The record date is December 14, 2008, and the payment date is December 24, 2008.
c). Record all of the transactions related to the common stock of LifePath during the years 2007 and 2008. 2). Include how many shares are issued and outstanding after the stock dividend is issued.
Explanation / Answer
DR Cash 100,000 DR Fixed Assets- Building 200,000 CR Common Stock 120,000 CR Paid In Capital 180,000 DR Cash 900,000 CR Common Stock 180,000 CR Paid In Capital 720,000 DR Retained Earnings 45,000 CR Common Stock 30,000 CR Paid In Capital 15,000 (165,000 shares issued and outstanding after the stock dividend) DR Dividends 8,250 (165,000* .05) CR Dividends Payable 8,250 (When dividend is declared) DR Dividends Payable 8,250 CR Cash 8,250 (When dividend is paid).