Johnsons PL Manufacturing Company - Case Study Example

Corporate Accounting Name: Lecturer: Course name: Course code: Date: Report Johnsons P/L manufacturer is a medium sized company with high potential market oversees. The company manufactures quality furniture’s that has increase the demand of their products overseas. The company experiences financial problems in meeting the expected gradual demand of their products and expansion of their market environment. Johnsons P/L Company should vest in financiers to meet their financial obligation. The below sources can be used by the company to raise $60million required for the expansion and increasing demand of their products. Sources of finances Venture Capital This is a private equity capital that endows financial supportive to high potential growth business. Capital venture offers finances to very risky for ordinary investments that cannot be finance by the conventional banks or the capital markets (Sheffrin, 2011). The main principle of this venture capital is accelerating the growth of established firms to Initial Public Offering (IPO) requirements. Johnsons P/L manufacturing company shall consider venture capital to finance the market expansion and meet it operation growth since the venture also after financing services. The advantages of this type of financing is that it provide the company with advises regarding achievement of the company’s objectives. It also strategically introduces the business to the association of related partners and businesses for possible structural needs (Strumeyer, 2011). Venture financing leads the company activities towards preparation of the Initial Public Offering (IPO). This source of finance is generally facilitating the company activities hence lowering the business risk exposures. Although this source of finances is shows potential gains, it can also mislead the company’s goals and objectives as it can redress the company’s favorable opportunities and strategies for success. Commercial Financing This includes loans from financial institutions issued on with guaranteed securities. Company is required to issue securities such as asset to be allowed to borrow loans from the financial institutions. Commercial financing is majorly offered to continuing business operation since the business assets will be used as security. In case of failure or defaults to comply with lending rules the securities will be sold to the amount borrowed. This type of financing is considered appropriate to the low risk ventures in operation that shows a trend of high profits thus it is not prescribed to a startup business. The main benefit of borrowing finances from commercial financing is that lenders have no right of ownership (Previts, 2009). However the borrower company is obliged with repayment of loan and the interest where any default will lead to consequential agreements between the lender and the borrower. Also the interest on borrowing is tax deductable expenses. This financing source has now any financial advice that reduces the risk to investment thus failure will lead to auctioning of the security assets. Capital Markets Funding Government and the independent companies can be source of funding through the issue of debt finance such as bonds and the equities such as stocks (V. K. GOYAL, 2012). Debt funding involves a model of issuing bonds such that the company takes the liability without surrendering the shares for ownership. Bonds give the borrower an obligation of paying back the principal amount and the interest according to the schedule in the agreement. The advantage of this financing concept is that there is no transfer of ownership to the borrower. The liability of settling the interest and amount borrowed remains until the full amount is settled (Howard, 2007). The disadvantage of bonds is that government should approve the financing request thus this becomes inaccessible to many companies as many requirement should be gathered. Equity financing involves auctioning of the company’s stock so as to share the ownership with the buyer company. This type of financing is more suitable for expansion of current activities since the stocks are traded publicly and finances are use to venture the company’s activities (Earl K., 2009). Equity financing is more disadvantageous as compared to the bonds since the ownership is transferred and the owners has right of voting and making firm’s decision thus lowering decision making process. Other sources of financing are use of bootstrapping which involves mechanism that result to internal funding. Bootstrap includes: a) Factoring- this is a financing method that involves sell of the accounts receivable to the buyers at a discount. Buyers will take the responsibility of collecting cash from the debtors. Factoring reduces internal cost that receivable could have withheld and thus making the company more liquid to meet its financial obligations. b) Trade Credit – this is a funding mechanism that involves increasing the creditor collection period to allow the company utilize the amount that he could have utilize in settling creditors to meet its financial obligations (Curtis L. Norton, 2006). For example if the creditor’s collection period was 30 days the business and the supplier can negotiate to pay the supplies in 90days. The amount withheld will be used in funding the company. c) Ledger Accounts Application A/Cwk1 Application A/CWK1 Bank A/cWK2 Ordinary Shares A/cWk3 Allotment AccountWK4 Calls Account WK5 Johnsons P/L Statement of financial position Ordinary shares $ 60,000,000 wk3 Share premium $- 0 Total $60,000,000 Bank balance $ 60,000,000 wk2 Question two Johnsons P/L a) Journal Entries Date Particulars Debit Credit 18-Apr-13 Bank $24,320,000 18-Apr Application $24,320,000 Being amount received on application 18-Apr-13 Application $320,000 18-Apr-13 Bank $320,000 Being amount refunded on excess application 18-Apr-13 Application $24,000,000 18-Apr-13 Ordinary Share Capital $24,000,000 Being amount receivable on application 13-May-13 Allotment $15,000,000 13-May-13 Ordinary Share Capital $15,000,000 Being amount receivable on allotment 13-May-13 Bank $15,000,000 13-May-13 Allotment $15,000,000 Being amount receivable on allotment 30-Jun-13 Bank $21,000,000 30-Jun-13 Calls $21,000,000 Being amount receivable on calls 30-Jun-13 Calls $21,000,000 30-Jun-13 Ordinary Share Capital $21,000,000 Being amount received on calls b) Apart from refunding oversubscription of shares, the company can choose to exercise the excess amount and applied in allotment (Cecilia, 2007). The excess application is used to allot members applied for shares. Allotment of excess shares can be by use of prorate basis or allotment on the basis of largeness of the shares applicants. Reference List Cecilia, D., 2007. Corporate Accounting in Austalia. UNSW Press. p.639. Curtis L. Norton, M.A.D.D.P.P., 2006. Intermediate Accounting:Financial Reporting and Analysis. Cengage Learning. p.696. Earl K., J.D., 2009. Accounting: Concepts & Application. Cengage Learning. p.402. Howard, M., 2007. Accounting and Business Valuation Methods: how to interpret IFRS accounts. Elsevier. Previts, G., 2009. Research in Accounting Regulation. Elsevier. p.286. Sheffrin, S.M., 2011. Financial Accounting: Accounting for Investment Securities. Wisley & Sons. p.147. Strumeyer, G., 2011. Investing in Fixed Income Securities: Understanding the Bond Market. Wiley & Sons. pp.50 - 143. V. K. GOYAL, R.G., 2012. CORPORATE ACCOUNTING. PHI Learning Pvt. Ltd. Read More