The waitress set down a plate of nachos and two pints of beer in front of Stan and his old college buddy, Ron Ebbers. Ever since they’d run into each other at Stan’s Subway restaurant, the two had rekindled their friendship over beer and nachos at a local restaurant.
“Sales still on the up and up?” Ron asked Stan. “Yep. It just doesn’t seem to matter how weak the economy is,” said Stan. “People will always want a sandwich that’s healthy, great tasting, and a good value.”
And now,” Stan lifted a glass, ” salu—a toast—because as of today I’m a corporation!” “Cheers, Stan the Man!” exclaimed Ron and clinked Stan’s beer mug. “But doesn’t incorporating cost you more money in legal fees and taxes?” “Well, that may be true, but if I don’t incorporate and anything goes wrong or some wacko sues me, it could cost me my shirt! Now I have limited liability, but I still pay wages to my employees, send in my royalty fees to Subway, and muchos profits still go to me.”
“Maybe I should buy stock in Subway,” Ron interrupted. “I’ve been dabbling in the market lately and Subway seems like a good bet!” “Unfortunately, you can’t buy stock in Subway,” said Stan. “Doctor’s Associates, the corporation that owns the Subway brand, is privately owned by the founders Fred DeLuca and Dr. Peter Buck.
“Doctor’s Associates?” Stan exclaimed. “That’s strange. I know the food has helped people lose weight and eat healthy, but is Subway run by a health-care outfit?”
“No, it’s actually kind of interesting. In 1965 Fred DeLuca was just a teenager who wanted to go to college and become a doctor, but he didn’t have enough money.
Then his family friend, Peter Buck, loaned him the money to start a submarine sandwich joint. DeLuca, of course, never did become a doctor, but Peter Buck holds a Ph.D. in nuclear physics, so they called themselves Doctor’s Associates—they’re the ‘doctors’ and we franchisees are the ‘associates.'”
“I guess we all have dreams that we don’t carry out,” Ron mused. “Hey, don’t look so triste, amigo. I know you’re stuck in a dead-end job now, but maybe now is the time to think about new opportunities.”
“Whaddaya mean?” Ron asked.
“There’s a great space on Alameda Avenue on the other side of Los Palmos—near that fancy new apartment complex. I’ve been thinking of eventually opening up another store, but I don’t want to go it alone. However, I might consider going into a partnership with you to own Subway number 2.”
“Well, given the liability risks you just mentioned—which I assume apply to partnerships as well as sole proprietorships, what about a corporation?” said Ron eagerly. “You could be the majority shareholder and I could have a smaller interest in the restaurant until I learn the ropes and eventually buy you out.”
“Whoa there. Let’s not talk about buying anyone out just yet,” laughed Stan. “Before anything—if you’re serious about being a Subway owner—you’ll need to go to Subway University.”
Ron raised his glass, “Salute.”
“No man, salud,” corrected Stan. “A toast. To opportunidades del futuro y amistad. To future opportunities and friendship.”
Tasks
- What are all the advantages and disadvantages of forming a corporation?
- What do you think is the best way for Stan and Ron to own a Subway restaurant jointly? Partnership or corporation? Why?
- From the following partial mixed list, select the appropriate titles and create a stockholders’ equity section using the source-of-capital approach as shown in the Blueprint example for Ununoctium Corporation on July 31, 201X.
Office Equipment
$110,000
Land
215,000
Paid-In Capital in Excess of Par Value-Preferred Stock
85,000
Building
70,000
Accounts Receivable
135,000
Notes Receivable
38,000
Organization Costs
10,500
Common Stock, $8 par value (60,000 shares issued and outstanding; 85,000 shares authorized)
81,000
Retained Earnings
200,000
Subscriptions Receivable-Common Stock
81,000
Patents
12,000
Preferred 17% Stock, $49 par value (6000 shared issued; 8,500 shared authorized)
294,000
Common Stock Subscribed at Par
240,000
Paid-In Capital in Excess of Par Value-Common Stock
17,000
Figure 6
4. Perform the following:
a. Journalize the entries to record the stock subscription plan for Orange Co. On June 1, Orange received subscriptions for 500 shares of $24 par value common stock at $48 per share. The buyer will pay two equal installments on August 31 and November 30.
b. From the following, calculate the dividends for common and preferred stock:
- 8% fully participating preferred stock.
- The board declared a $210,000 dividend.
- Preferred stock 5,000 shares, $50 par value; common stock 10,000 shares, $100 par.
5. The partnership of Jackson, Rackley, and Surber is being liquidated. All gains and losses are shared in a 3:2:1 ratio. Before liquidation their balance sheet looks as follows:
Cash
$23,000
Liabilities
$7,700
Other Assets
15,000
A. Jackson, Capital
11,000
C. Rackley, Capital
18,100
J. Surber, Capital
1,900
Total Assets
38,700
Total Liability + Equity
$38,700
Figure 7
Journalize the entries needed in the liquidation process under the following independent situations and assume a date of July 1, 201X, for sale of assets and a date of July 15 to pay off liabilities and distribute cash to partners:
a. Situation 1: Sold other assets for $33,900.
b. Situation 2: Sold other assets for $6,900.
c. Situation 3: Sold other assets for $2,100. Surber cannot cover his deficit.
