Case 1. (Learning Objective 2: Evaluating alternative ways of raising capital) Nave Smith and Darla Jones have written a computer program for a video game that may rival Playstation and Xbox. They need additional capital to market the product, and they plan to incorporate their business. Smith and Jones are considering alternative capital struc- tutes for the corporation. Their primary goal is to raise as much capital as possible with- out giving up control of the business. Smith and Jones plan to receive 50,000 of the corporation's ordinary shares in return for the net assets of their old business. After the old company’s books are closed and the assets adjusted to current market value, Smith's and Jones’ capital balances will each be $25,000. The corporations plans for a constitution inclucle an @@ihorizatiSDto issue 10,000 pref- erence shares and 500,000 shares of $1 pat Gidinary shares>Smith and Jones are uncertain about the most desirable features [or the preference SHares. Prior to incorporating, Smith and Jones are discussing their plans with two investment groups. The corporation can obtain cap- ital from outside investors under either of the following plans, ™ Plan 1. Group 1 will invest $80,000 to acquire 800 shares oo) $100 par non- voting, preference shares. ™ Plan 2. Group 2 will invest $55,000 to acquire 500 shares of 3) no-par preference shares and $35,000 to acquire 35,000 ordinary shares, Each prelerence share receives 50 votes on matters that come before the shareholders | Requirements Assume that the business is now incorporated. 1, Joummalize the issuance of ordinary shates to Smith and Jones, Debit each person’ capital account for its balance. 2. Journalize the issuance of shares to the outsiders under both plans. 3. Assume that net income for the first year is $120,000 and total dividends are $30,000. Prepare the shareholders’ equity section of the corporation’ balance sheet under both plans. 4. Recommend one of the plans to Smith and Jones. Give yout reasons. (Challenge)