Lotus Coffee Inc.

Background Information

Larry owns a coffee roasting business - Lotus Coffee Inc. He has been doing the bookkeeping for the business, but he has very little accounting experience. Larry is very grateful that you agreed to help him with his 2022 accounting questions.

Lotus Coffee imports raw specialty coffee beans from growers in Dak Lak, a province of Vietnam. Specialty coffee is considered to be Arabica coffees highest standard. To be recognized as specialty coffee, the beans must undergo strict evaluation: the growers must fully comply with the prescribed production process, from the stage of cultivation, to harvesting, preliminary treatment, preservation, etc.

Once receiving the coffee bean shipment, Lotus Coffee implements strict standards in the roasting process. It then packages these fabulous beans for sale to consumers across Canada. Lotus Coffee packages all its beans into 454-gram packages.

1) Lotus Coffee owns the building where it operates. Larry is unsure of how to properly record the property taxes. The property tax bill of $4,200 for the calendar year 2022 arrived on March 31, 2022 and is payable on June 30, 2022. How should he record the entry for March 31, June 30, and December 31 given that the business is doing annual adjusting entries? The company fiscal year-end is also December 31.

2) Lotus Coffee Inc. is a private corporation that is authorized to issue 300,000, $2.5 non-cumulative preferred shares and an unlimited number of common shares.

Larry provides you with the following information about Lotus Coffee Inc.'s equity at January 1, 2022:

Preferred shares (1,000 shares issued) $20,000

Common shares (11,500 shares issued) $115,000

Retained earnings $126,000

On January 1, 2022, Larry owns all of the Common shares and his Uncle Stan owns the Preferred shares. When the corporation was created, the lawyer suggested setting up two types of shares. Larry doesn't know how Preferred shares are different than Common shares. Explain to Larry what the differences are, including what make Preferred shares preferred.

3) Lotus Coffee Inc. needed some extra cash to repair one of the broken roasters. On May 18, 2022, Lotus Coffee Inc. issued, to Uncle Stan, 500 Preferred shares for $10,000 and 1,000 Common shares for $12,000. The $22,000 was e-transferred to Lotus' bank account on the same day. Larry asks you to prepare the journal entry related to issuing these shares.

4) After getting multiple estimates to repair the broken roaster, Larry decides it is too expensive to repair, so the company will have to purchase a new one. A quality roaster is quite costly, and Larry doesn't want to go to his uncle for more money. He looks into using debt financing. Larry is thinking that issuing a bond would be a good way to borrow the money. Explain to Larry what advantages using a bond has over issuing more shares to pay for the roaster.

5) Larry has made his decision and Lotus Coffee Inc. issued $50,000 of 4%, 3-year bonds on July 1, 2022. The bonds are dated July 1 and pay interest semi-annually on June 30 and December 31. The market interest rate was 5% for these bonds. Larry is surprised that the amount of cash Lotus will receive for the bonds will be different than $50,000. Why is this the case? How much cash will he be able to borrow? Larry thinks it would be very helpful if you could show him an effective-interest amortization table for the life of these bonds. Also, he asks you to record the issuance of the bonds and the December 31 payment. (Round all your calculations to the nearest dollar.)

6) Larry would really like to thank his uncle for investing in his company, and would like to take a little money out for himself. On October 5, 2022, he declares a cash dividend of $40,000 to the shareholders of record on October 31, 2022, payable on November 14, 2022. Larry asks you to prepare the journal entries to record the dividend. He would like you to show a calculation of how much he and Uncle Stan will receive from this dividend.

7) It is now year-end December 31, 2022. Larry was able to prepare the Income Statement and was pleased with the Net Income of $91,375. He asks you for a last bit of help to prepare the Statement of Retained Earnings and the Shareholders' Equity section of the Balance Sheet.