Ernest Fung is a recent business school graduate and budding entrepreneur. Ernest thinks that hot, fresh, and delicious cookies available all day long on university campuses is a surefire way to make money. Ernest had been toying with this idea for a couple of years and recently he finalized what he thinks is the perfect chocolate chip cookie recipe. His friends think the cookies are the best they ever tasted. Ernest has also developed a couple of other equally delicious varieties of cookies. Ernest wants to test his business idea so he decides to incorporate a company called Cookie Dough, Inc. (Cookie) and arranges to set up a shop in the food court on the university campus.

It's now December 27, 2017 and Cookie has closed for the winter break. Ernest has been working almost continuously since Cookie opened its doors. He's had no time to keep any accounting records and he's asked you to "pull things together" for him. After summarizing the data Ernest provided, you have the following information for 2017:

i. July 4: Ernest incorporates Cookie and contributes $20,000 in cash in exchange for Cookie shares.

ii. August 1: Signs a two-year lease with the university for a small space in the food court. Monthly rent is $1,000. In addition, Cookie must pay 2 percent of sales in additional rent at the end of the year. No rent is required for August. Cookie writes a cheque for $3,000 for rent for September through November.

iii. August 4: Purchases a cookie oven, refrigerator, display cases, cash register, and other required items from a distributor for $22,000. Pays $12,000 in cash and agrees to pay the remainder on February 15, 2018. Ernest estimates that all the equipment will have a useful life of five years. Cookie begins using the equipment on September 1.

iv. August 10: Cookie arranged a $20,000 loan from David Dragon, a rich investor who likes to invest in new small businesses. The interest rate on the loan is 9 per cent, payable on December 31 of each year. $10,000 of the loan must be repaid on August 1, 2018 and the remainder on August 1, 2019.

v. During August: Renovates and repairs the shop. A contractor is paid $7,000 in cash.

vi. October 1: Cookie purchases a one-year insurance policy for $1,600.

vii. December 1: Cookie writes a $3,000 cheque to the university for rent for December through February.

viii. December 18: Caters a holiday party for one of the faculties. Bills the faculty $300 and expects to be paid in early January.

ix. During 2017: Purchases ingredients for cookies, drinks, etc. for $18,000. On December 27, there is inventory on hand that cost $800.

x. During 2017: Sells cookies and drinks to customers for $42,000. All sales were for cash.

xi. During 2017: Pays employees $11,200. As of the end of December, employees are owed $500.

xii. During 2017: Pays utilities of $1,200. Utilities are paid in full to the end of December.

xiii. During 2017: Cookie incurred other expenses amounting to $9,500. All were paid in cash.

xiv. During 2017: Ernest took $5,000 to meet his personal needs.

Required:

a. Record Cookie's economic activity for the period in an accounting equation spread sheet. Don't forget the adjusting entries. You can use a computer spreadsheet program or create a spreadsheet manually. Create a separate column on the spreadsheet for each account. State and explain any assumptions you make.

b. Provide explanations for each of your entries. You should explain why you have treated the economic events as you have (that is, why you have recorded an asset, liability, etc.).

c. Prepare a balance sheet as of December 31, 2017 and an income statement for the period ended December 31, 2017 from your spreadsheet. Make sure to make the closing entry.

d. Compare Cookie's net income with the amount of cash that was generated by the business. Which is a better indicator of how Cookie did? Why are they different? (When looking at the cash flow, consider the cash flows after Ernest made his initial $20,000 investment.)

e. If Ernest asked you to evaluate Cookie's financial situation using the financial statements, what would you be able to tell him?