Youdecide - a. Should Mr. Jones purchase the stock of Smith...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
a. Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith company- would that raise debt to equity issues? I would recommend Mr. Jones to purchase the stock Of Smith outright, leaving Smithon intact. This purchase will give profit to Mr. Jones. But buying it would incur a heavy investment of money in the manufacturing equipment. This implies that Smithon will incur losses for 2-3 years. But if we see in the long term Smithon proves to be a profitable corporation which will conduct a lot of benefits. So Mr. Jones should purchase the stock of smith outright. Mr. Jones should issue shares of stock from Johnson Services to the shareholders of Smithon in an exchange of shares. That way, the current Smithon owners would become new shareholders but not owners of Johnson Services and he would get all the shares of Smithon. Doing so, this could probably offset Smithon's profits with the losses from Johnson Services. Thus it should issue debt in the Johnson Services company to pay for the Smith Company. Initially it will raise the debt to equity issues which will imply that a company has been aggressive in financing its growth with debt. This can also result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations, the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. Issuing debt in Johnson Services Company to pay for the Smithon Company would raise debt equity ratio issues. Issuing debt would increase the amount of liabilities owed by the organization to compound the fact that it is already operating at a loss. Issuing debt would result in ratio that is over or close to unity indicating that the company's assets are being financed by debt. High debt equity ratio indicates that the organization is risky and is financially weak. b. Should Mr. Jones convert Smithon to an S corporation and change the fiscal year- end to a calendar year-end? In my opinion, Mr. Jones should convert Smithon to an S corporation to avoid double taxation.“ In an S corporation, the corporation in general will pay no tax, whereas the shareholders must include in gross income their proportionate share of corporate income whether or not the corporate earnings are distributed to them.” Mr. Jones should convert it to an S corporation. An S corporation is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the internal revenue code. In general, S corporations do not pay any federal income taxes. Instead, the corporation's
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/21/2012 for the course ACCOUNTING 553 taught by Professor James during the Spring '12 term at DeVry Phoenix.

Page1 / 5

Youdecide - a. Should Mr. Jones purchase the stock of Smith...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online