Southwest Corporation is authorized to issue an unlimited amount of common shares, and as at December 31, 2013, has 9,000 shares issued. Manji and MacDonald each own 4,500 of these shares. On December 31, 2013, the balances in Southwest's shareholders' equity are as follows:
Common Shares...............................$18,000
Retained Earnings..............................35,000
On January 1, 2014, Mah bills Southwest Corporation $5,000 for legal services. As Southwest Corporation has a limited amount of cash, Manji and MacDonald suggest to Mah that the corporation issue shares in exchange for the legal services instead of paying the bill in cash. After a series of negotiations, Mah agrees but wants a 10% ownership interest in the corporation.
Instructions
(a) How many shares would Southwest Corporation need to issue to Mah in order for Mah to have a 10% ownership interest?
(b) Assuming Southwest uses ASPE, prepare the journal entry to record the issue of shares. Include an explanation for the value used in the journal entry.
(c) Why might Manji and MacDonald not want to issue shares to Mah?