Coffee Plus, Inc.: understanding the accounting cycle and preparation of financial statements.
INTRODUCTION
At the start of the academic year, 9/1/14, you decide to enter (in the corporate form) the specialty coffee business outside Bunce Hall.
Business Formation: (All of these transactions occur on 8/31/14)
1. To get started, you contribute $10,000 that you earned over the last four summers and the corporation issues 1,000 shares of common stock with a par value of $5.00 each to you in return for your $10,000 equity contribution. The shares are issued to you as the sole shareholder, chairman of the board and CEO.
2. The corporation also borrows $15,000 on a 5-year note from your parents/grandparents to provide additional financing. Interest payable annually at 5%. Total principle not payable till end of 5 year term.
3. The corporation uses the money to buy a coffee stand and equipment for $5,000 and $1,000 to buy inventory (cups, food and kitchen supplies.)
Use the information above to create the corporation's beginning balance sheet AS OF SEPTEMBER 1, 2014. Unless told differently, all business transactions are for cash.
First Year of Operations:
4. During the year the corporation buys $30,000 of inventory. Costs remain unchanged. Inventory is valued by LIFO inventory accounting.
5. During the first year (i.e., 9/1/14 to 8/31/15) you sell 30,000 coffees for $2.00 each. It costs .90 per cup (coffee, sugar, cream, water, filters, etc. to produce one cup).
6. Cash dividends of $1,500 are declared and paid.
7. Other expenditures totaling $12,000 that were paid during the year includes insurance, payroll & payroll taxes, and supplies as well as interest (paid at year end at a 10% interest rate). (all supplies were used up at end of fiscal year)
8. Depreciation on the coffee stand will be straight line toward an assumed zero salvage value over 5 years.
9. Corporate income taxes are assessed at a rate of 20%. The actual payment of the tax liability (if owed) will not be remitted until October 15, 2015.
Use the information presented so far to create the corporation income statement for the first year of operation, 9/1/14 through 8/31/15.
Potential Expansion:
You are excited about the coffee business as the year progresses and you decide that at year end (8/31/15) the corporation will buy an enhanced coffee stand for $8,000 that will allow expansion to another location on campus. To pay for it the corporation plans to use all of its cash, except for the minimum required cash of $1,500 needed to run the business, and it will borrow the rest, if needed, from the bank or family if necessary.
Develop a pro-forma Balance Sheet as of 8/31/15 reflecting the plans above and state whether this is feasible for the company to do.
Exercise Recap:
Therefore at the end of this exercise you will have completed the following:
1. Prepared the transactions, posted the transactions to the appropriate accounts.
2. Prepared the COFFEE PLUS, INC. beginning balance sheet dated 9/1/14.
3. Prepared the COFFEE PLUS, INC. income statement for the first year of operation, i.e. 9/1/14 through 8/31/15.
4. Prepared the COFFEE PLUS, INC. ending balance sheet dated 8/31/15.
5. Created the COFFEE PLUS, INC (expanded) pro forma balance sheet as of 8/31/15 and give your opinion on the expansion.
To document the transactions that occurred during the first year of operations provide the journal entries.
JOURNAL ENTRIES: For each transaction that you journalize below list, give description, and number. Reference the number of the journal entry when you post to the general ledger (t-accounts).
Ref # Journal Entry Accounts Debit Credit
1. Cash
Capital Stock
Paid in Capital
To record the investment and the issuance of common stock
2. Post transactions to update General Ledger Accounts. Using Excel spreadsheet will be helpful.