Mei-ling and her friend Curtis Lesperance decide that they can benefit from joining Match a Creations and Curtis’s coffee shop. In the first part of this problem, they come to you with questions about setting up a corporation for their new business. In the second part of the problem, they want your help in preparing financial information following the first year of operations of their new business, Matcha & Coffee Creations.

Part 1

Curtis has operated his coffee shop for 2 years. He buys coffee, muffins, and cookies from a local supplier. Mei-ling’s business consists of giving cookie-making classes and selling fine European mixers. The plan is for Mei-ling to use the premises Curtis currently rents to give her cookie-making classes and demonstrations of the mixers that she sells. Mei-ling will also hire, train, and supervise staff to bake the cookies and muffins sold in the coffee shop. By offering her classes on the premises, Mei-ling will save on travel time going from one place to another. Another advantage is that the coffee shop will have one central location for selling the mixers.

The current market values of the assets of both businesses are as follows.

Curtis’s Coffee Match Creations

Cash NT$7,500 NT$11,630

Accounts receivable 100 800

Inventory 450 1,200

Equipment 2,500 1,000*

*Matcha Creations decided not to buy the delivery van considered in Chapter 9.

Combining forces will also allow Mei-ling and Curtis to pool their resources and buy a few more assets to run their new business venture.

Curtis and Mei-ling then meet with a lawyer and form a corporation on November 1, 2018, called Matcha & Coffee Creations Inc. The articles of incorporation state that there will be two classes of shares that the corporation is authorized to issue: common shares and preferred shares. They authorize 100,000 no-par ordinary shares, and 10,000 no-par preference shares with a NT$0.50 noncumulative dividend.

MC11 (Continued)

The assets held by each of their businesses will be transferred into the corporation at current market value. Curtis will receive 10,550 or dinary shares, and Mei-ling will receive 14,630 ordinary shares in the corporation.

Therefore, the shares have a fair value of NT$1 per share.

Mei-ling and Curtis are very excited about this new business venture. They come to you with the following questions:

1. “Curtis’s dad and Mei-ling’s grandmother are interested in investing NT$5,000 each in the business venture. We are thinking of issuing them preference shares. What would be the advantage of issuing them preference shares instead of common shares?”

2. “Our lawyer has sent us a bill for NT$750. When we discussed the bill with her, she indicated that she would be willing to receive ordinary shares in our new corporation instead of cash for her services. We would be happy to issue her shares, but we’re a bit worried about accounting for this transaction. Can we do this? If so, how do we determine how many shares to give her?”

Instructions

(a) Answer their questions.

(b) Prepare the journal entries required on November 1, 2018, the date when Mei-ling and Curtis transfer the assets of their respective businesses into Matcha & Coffee Creations Inc.

(c) Assume that Matcha & Coffee Creations Inc. issues 1,000 NT$0.50 noncumulative preference shares to Curtis’s dad and the same number to Mei-ling’s grandmother, in both cases for NT$5,000. Also assume that Matcha & Coffee Creations Inc. issues 750 ordinary shares to its lawyer. Prepare the journal entries for each of these transactions. They all occurred on November 1.