Individual and Group Projects

Background: You and several friends from UA have recently graduated and decided to go into business together designing, building, and selling high-end headphones. Your company is called Mr.Speakers, a small company with a great reputation for quality products in the high-end headphone world. Your goal is to develop the company and eventually take it public while maintaining high-quality products with great sound. You graduated with a degree in accounting and will be the CFO, and for the time being, the sole bookkeeper. Luca graduated from law school, and will act as general counsel for your new business. Avelia graduated from engineering school with specialties in electrical and mechanical engineering and designs and helps build the headphones. Corrine specializes in marketing strategy, planning, sales, and logistics and will be the COO. Mollena is the CEO in charge of long-term planning, vision, and administration. Mollena is also an audio aficionado and makes the final call on whether Avelia’s designs and builds sound right and will appeal to “audiophiles”. When hard decisions have to be made, she makes them.

You have an existing business that is informally organized as a partnership. Formally, Mollena owns all of the existing assets. However, in order to gain flexibility and ease the transition to an eventual public offering, you (all of the partners) have decided to re-organize the company into a corporation to which you will all contribute.

Your first order of business is to determine how to become a corporation in the state of Alabama.

Required: What is the total minimum fee required to file articles of incorporation in the state of Alabama?

$150

Required: What word(s) must your official business name include?

The name of a stock corporation must include the word "company," "corporation," "incorporated," or "limited," or the abbreviation “Co.,” “Corp.,” "Inc." or "Ltd."

Required: What two forms must you file and where must you file them?

Now that you know what you have to do, and how much it will cost, you proceed with forming the corporation by doing the following:

Required: Journalize the following transactions:

1/4/2016: Using Luca’s expertise at crafting incomprehensible legalese documents, your group writes and agrees upon a corporate charter. You also unanimously vote to authorize 1,000,000,000 (yes, that’s “billion”) shares of $0.10 par value common stock and 1,000 shares of non-voting, 5% cumulative preferred stock with a $100 par value.

1/4/2016: Luca’s legal services in developing the articles of incorporation and eventually filing for incorporation in Alabama are worth $4,000. He also contributes $6,000 cash in exchange for 1,000 shares of common stock.

1/4/2016: Mollena contributes $3,000 (cost) of finished headphone inventory worth $5,000 (FMV – 10 headphones at $500 apiece) to the new company. She also contributes $5,000 cash. In exchange, she receives 1,000 shares of the $0.10 par value common stock.

1/4/2016: You contribute $8,000 cash and bookkeeping services (what you are doing right now…) worth $2,000 in exchange for 1,000 shares of common stock.

1/4/2016: Avelia contributes a headphone patent worth $40,000 with a remaining life of 10 years in exchange for 3,000 shares of common stock and 10 shares of preferred stock.

1/4/2016: Corrine contributes $50,000 in cash (every team needs a member with a rich uncle) in exchange for 5,000 shares of common stock.

1/4/2016: Luca files the required paperwork and pays the company’s filing fees as required in the State of Alabama.

1/25/2016: During the first month of existence, Corrine manages to sell 5 pairs of headphones for $550 each, all for cash. She sells 3 more pairs to distributors on account at $525 apiece.

The team members have agreed upon a salary for each member of $250 per 5-day work week until business really picks up. Salaries are paid every Friday starting on January 8. Record all necessary entries through 1/31.

1/31/2016: The team decides that there is too much cash in the business at the moment, and that Corrine has too many voting shares of stock. Therefore, they decide the company will re-purchase 1,000 shares of Corrine’s common stock for $10 per share.

During the month of January, the team continued to build and sell headphones directly to customers for Cash. The team spent $36,000 in cash expenses to produce 120 pairs of headphones. They sold 110 pairs for $550 each (all in cash). Prepare two journal entries for this activity – one summary for the production of the headphones and one for the sale of the headphones. Date each 1/31/2016. Note, Mr.Speakers uses the FIFO accounting method for inventory.

At the end of the Month Mr.Speakers declares a $10,000 dividend payable 2/1/2016. Record the journal entry for 1/31/2016. On 2/1/2016, how much will each owner receive?

You:

Luca:

Avelia:

Mollena:

Corrine:

On 1/31/2016 Mr.Speakers also declares a 5% common stock dividend. The team members estimate the fair value of the stock at $12 per share.

On 2/1/2016, Corrine decided she needed some cash for a personal emergency. The company agreed to buy back 500 shares at $12 per share.

Record the other necessary journal entries for 2/1/2016.

What is the weighted average cost of a share of treasury stock?