Michael Lee has been operating Lee Management Consulting as a proprietorship but is planning to expand operations in the near future. In Chapter 12, Michael had considered taking on a partner, but decided not to form a partnership after all. To raise cash for future expansion, he has now decided to incorporate and create Lee Consulting Corporation. He has gone through all the legal steps to incorporate his business; as of August 1, 2016, Lee Consulting Corporation is authorized to issue an unlimited number of common shares and 50,000 $2.00 preferred shares.
The Lee Management Consulting July 31, 2016, balance sheet appears below, adjusted to reflect all amounts at current market value:
Lee Management Consulting
Balance Sheet
July 31, 2016
Assets
Cash .................................................................... $21,650
Accounts receivable .................................................. 5,900
Inventory .............................................................. 2,713
Supplies ............................................................... 100
Prepaid rent ............................................................ 6,000
Equipment ............................................................ 1,000
Accumulated amortization-equipment ............................ (75)
Furniture ............................................................... 5,000
Accumulated amortization-furniture ............................. (267)
Total assets ............................................................. $42,021
Liabilities and Equity
Accounts payable ..................................................... $ 9,600
Salary payable .......................................................... 1,000
Unearned service revenue .......................................... 1,200
Notes payable ...................................................... 0
Michael Lee, capital .................................................. 30,221
Total liabilities and capital ........................................... $42,021
Required
1. Create the journal entry to record the incorporation of the business on August 1, 2016. To do this, you need to record each asset and liability account at its current market value. For equipment and furniture, this would be the net book value of each-there would not be any accumulated amortization accounts at the beginning of the new corporation's life. The Michael Lee, Capital balance would become the value of the 20,000 common shares Michael issues to himself.
2. To raise $50,000 in additional cash, Lee Consulting Corporation issued 1,000 of the preferred shares for $50.00 per share on August 2, 2016. Journalize this transaction.
3. Lee Consulting Corporation incurred $1,500 in legal fees and incorporation fees to organize the corporation under the Canada Business Corporations Act in Ontario. Prepare the journal entry for these organization costs paid on August 5.