Quick Fix- it Corporation was organized in January 2015 to operate several car repair businesses in a large metropolitan area. The charter issued by the government authorized the following no par value shares:
Common shares, 200,000 shares
Preferred shares, 50,000 shares
During January and February 2015, the following transactions were completed:
a. Collected $ 80,000 cash from shareholders and issued 4,000 common shares.
b. Issued 2,000 preferred shares at $ 25 per share; collected the cash.
c. Issued 500 common shares to a new investor at $ 25 per share; collected the cash. The company’s operations resulted in net earnings of $ 40,000 for 2015. The board of directors declared cash dividends of $ 25,000 that were paid in December 2015. The preferred shares have a dividend rate of $ 1 per share.
Required:
1. Prepare the shareholders’ equity section of the statement of financial position at December 31, 2015.
2. Why would an investor prefer to buy a preferred share rather than a common share?
3. Is it ethical to sell shares to outsiders at a higher price than the amount paid by the organizers?