[GiannaD]

Hey everyone,

I have a question about incorporating a business for homework and am struggling. Here it is.

Jon decided to incorporate his sole proprietorship into a corporation. His business, JonnyC's, has been authorized to issue 1,000,000 common shares with a par value of 5 dollars on January 1, 2000. The sole proprietors owners equity account should be closed, and a corporate stockholders equity account should now be shown. Also, give the stockholders equity portion of the balance sheet on January 1, 2000. The sole proprietor books show the following:

Jon put in 150,000 to start the company
Retained earnings on December 31, 2000= 100,000


My biggest problem right now is what to do with the unissued shares. Should I include them or not. Would the balance sheet be the following.

Common stock, $5 par value (1,000,000 shares authorized, 0 issued... 0
retained earnings... 100,000

Also, is there anything that should be done to change the sole proprietor's stockholders equity portion to a corporation's.

Thanks in advance,
Gina

[pready]

You will have to account for the amount in the Owner's Capital account when the company changed from the sole proprietorship to a corporation.

The way I would account for this based only on the information provided is to issue enough shares of the stock at par value to equal the amount of your owners capital account.

So: $150,000 owners capital divided by $5 par value equals 30,000 shares of common stock issued and outstanding.

Your common stock section will be:

Common Stock: ($5 par value;1,000,000 shares authorized, 30,000 shares issued and outstanding) and the amount will be $150,000

I would use the format that is used in your accounting textbook for the format of your common stock section.

Note: A sole proprietorship's equity section will only be the owner's capital and owner's drawing accounts. When the company changes to a corporation these two accounts will no longer be used because you will use common stock and retained earnings instead.

[GiannaD]

Thanks for the help pready