Natalie’s parents, Janet and Brian Koebel, have been operating Koebel’s Family Bakery Ltd., a private corporation, for a number of years. They have decided to get Natalie involved with the operation of the family business.

In the hope of spending a little more time away from the bakery, they have discussed with Natalie the possibility of her becoming one of the shareholders of Koebel’s Family bakery Ltd. Natalie would assume the fill-time position as administrator. Natalie could continue to provide cookie-making lessons and sell mixers; however, that would now be done by the Koebel’s Family Bakery rather than by Natalie’s Cookie Creations.

These are balances extracted of Koebel’s Family bakery Ltd as at August 1, 2013:

$6 cumulative preferred shares, 10, 000 shares authorized, none issued

Common shares, unlimited number of shares authorized, 200 shares issued $ 200

Retained earnings $ 116,251

Profit before income tax for the year ended July 31, 2014, was $255,823.

The company has an 18% income tax rate. A cash dividend of $85, 000 was declared on July 15, 2014, to common shareholders of record on July 20, 2014, and was paid on July 30, 2014.

Based on the bakery’s success, the Koebels would like to issue 10 shares to Natalie for $1, 200 per share. Natalie would contribute the fair value of Cookie Creations’ assets in exchange for the shares of Koebel’s Family Bakery as follows:

Cookie Creations

Cash $8,050

Accounts Receivable $ 800

Merchandise Inventory $1,200

Supplies $ 450

Equipment $1,500

The sale of shares by Koebel’s Family Bakery to Natalie is expected to take place on August 1, 2014. Currently, Janet and Brian each own 100 shares. Assume Koebel’s family bakery reports using ASPE.

Instructions:

1. a). Prepare the journal entries required for the cash dividend declared on July 15 and payment on July 30, 2014.
2. b). Prepare the statement of retained earnings for the year ended July 31, 2014.
3. c). Prepare the shareholder’s equity section of the balance sheet at July 31, 2014.
4. d). How do you think the value of $1,200 per share was determined when Janet and Brian were attempting to come up with the number of shares to be sold to Natalie? Do you think that the number of shares Natalie received in exchange for the assets of Cookie Creations is fair? Why or Why not?