Scenario : On October 1, 2015, Santana Rey launched a computer services company,

Question

Scenario: On October 1, 2015, Santana Rey launched a computer services company, Business Solutions, that is organized as a proprietorship and provides consulting services, computer system installations, and custom program development. Rey adopts the calendar year for reporting purposes and expects to prepare the company’s first set of financial statements on December 31, 2015.

Please complete the following:

Santana Rey created Business Solutions on October 1, 2015. The company has been successful, and Santana plans to expand her business. She believes that an additional $86,000 is needed and is investigating three funding sources.

Santana’s sister Cicely is willing to invest $86,000 in the business as a common shareholder. Since Santana currently has about $129,000 invested in the business, Cicely’s investment will mean that Santana will maintain about 60% ownership, and Cicely will have 40% ownership of Business Solutions.

Santana’s uncle Marcello is willing to invest $86,000 in the business as a preferred shareholder. Marcello would purchase 860 shares of $100 par value, 7% preferred stock.

Santana’s banker is willing to lend her $86,000 on a 7%, 10-year note payable. She would make monthly payments of $1,000 per month for 10 years.

Required

Prepare the journal entry to reflect the initial $86,000 investment under each of the options (a), (b), and (c).

Evaluate the three proposals for expansion, providing the pros and cons of each option.

Which option do you recommend Santana adopt? Explain

Explanation / Answer

Option A

For Investment of Cicely

$

$

Bank A/C

Dr

86000

Equity Share A/C

Cr

86000

Option B

Bank A/C

Dr

86000

7% Preferred Stock A/C

Cr

86000

option C

Bank A/C

Dr

86000

7% Note A/C

Cr

86000

For Option A,40% ownership have to sacrifice

For Option B, if you don’t have a profit .Then you did not required to dividend

For Option C ,Whether or not any earning of the business Santana have to pay $ 1000 per month.

Option B is the best option

Option A

For Investment of Cicely

$

$

Bank A/C

Dr

86000

Equity Share A/C

Cr

86000

Option B

Bank A/C

Dr

86000

7% Preferred Stock A/C

Cr

86000

option C

Bank A/C

Dr

86000

7% Note A/C

Cr

86000

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